The information contained in this Newsletter is of a general nature
and does not constitute legal advice
BANKING & FINANCIAL LAW
PRINCIPAL DEVELOPMENTS OF THE NEW REGULATIONS ON
UNDERTAKINGS FOR COLLECTIVE INVESTMENT
Royal Decree 1309/2005, of November 4, approving the
Regulations of Law 35/2003, of November 4 on Undertakings for Collective
Investment (the “LIIC”) and
adapting the tax regime of Undertakings for Collective Investment (the “RIIC”) has been published today in
the Spanish Official Gazette (“Boletín
Oficial de Estado”). The RIIC develops the LICC and replaces in its
entirety the regulations of the former law on undertakings for collective
investments which continued to be in force in so far as it did not contradict
In our opinion, the new RIIC will imply a
significant development in the future of the Spanish collective investment
sector as it will imply a modernization of the sluggish Spanish legal regime
making it comparable in some aspects to the legal regimes of other European
jurisdictions. In some instances, the Spanish legal regime will become more
developed than its European counterparts. The reform will affect significant
aspects of Undertakings for Collective Investment (“UCIs”) such as the rules governing suitable assets,
diversification, hedge funds, omnibus accounts and many other matters.
The RIIC will enter into force tomorrow and the UCIs
authorised prior to its entry into force will have one year to adapt to the
In view of the interest spurred by the new RIIC, we
thought it would be interesting to carry out a preliminary analysis, which
does not intend to be exhaustive, in order to provide our clients with an
outline of the main developments.
1. DEVELOPMENTS INTRODUCED BY THE RIIC
The entry into force of the RIIC will bring with it
several developments into the legal regime applicable to UCIs for various
The RIIC introduces several
developments that had already been included in the LIIC and which could not
be applied, in the opinion of the CNMV, as they needed to be developed by the
relevant implementing regulations. The entry into force of the RIIC means the
beginning of the application of the UCITS III Directive to Spanish UCIs.
Some examples of these
developments of the LIIC which may be applied from now on are the following:
The possibility for UCIs to
invest in certain new suitable assets.
The incorporation of “umbrella”
UCIs (with compartments or portfolios).
The introduction of different
classes of units or series of shares within a UCI.
The abolition for SICAVs of the
requirement of being admitted to trading.
The possibility to carry out a
merger and split-off of certain UCIs (for example between funds and SICAVs).
The extension of the activities
of the management companies of UCIs.
The delegation by Spanish UCI
management companies of the management of the Spanish assets.
The RIIC refers to several
matters referred to in the LIIC which needed further development and brings
the rigid administrative procedure to an end. We highlight, among others, the
The specific characteristics of
the suitable assets for investments.
The mechanism for the
publication of the liquidity value of UCIs.
The liability regime and the
authorisation procedure for the umbrella UCI portfolio compartments.
The operating rules for SICAVs.
The number of investors and the
minimum assets portfolio.
The threshold giving rise to the
obligation for UCIs to attend and vote at the general meeting of the
companies in which they have invested.
The conditions for the
delegation of asset management.
The RIIC introduces novelties in
addition to the developments of the LIIC and to the rules included in the
The introduction of a new open
variety of financial UCI and new types of Spanish UCIs: free investment UCIs
(“IICIL”), UCIs of free investment UCIs (“IICIICIL”), or the funds admitted
to trading or ETFs.
The authorisation for financial
UCIs to invest in other financial assets and the introduction of new
Permission to use global or
The introduction of the “high watermark” practice in connection
with the profits fees and of limits to the management fees of real estate
The flexibilisation of the
investment regime of real estate UCIs.
From among these changes, we will focus on the most
significant based on the interest they have spurred, in particular, the
developments referred to in sections b) and c) above. As regards the
developments introduced by the LIIC, please see our Newsletter dated November
5, 2003 on the Uría Menéndez web page.
Finally, we analyse the amendments for foreign UCIs
which are intended to be marketed in Spain.
2. ADDITIONAL DEVELOPMENTS INTRODUCED BY THE RIIC
2.1. The new open variety of Spanish financial UCIs
The LIIC abolished
the former variety of specialised financial UCIs of the previous legal regime
(FIM, FIAMM, FIMF, FIMP, FIMS, FIME, etc.). This change was mainly required
by the UCITS III Directive and was also needed taking into account that it
became obvious that the rigid regime of product variety specifically designed
by the regulatory authorities caused an unnecessary and harmful restraint for
the development of the collective investment in Spain.
The RIIC has once
again established a new variety of UCIs. However, unlike the variety provided
under the former law this variety is very open:
Financial UCIs subject to the
general regime and to rules which are very similar to the rules of the UCITS
III Directive although they have certain differences making the former more
Financial UCIs subject to
Harmonized UCIs (UCITS)
Free investment UCIs (IICIL).
UCIs of free investment UCIs
UCIs the investment policy of
which is based upon the investment in a single investment fund (Feeder
There are other
types of UCIs which have different characteristics as regards the investment
rules, diversification and others (for example, UCIs with other UCIs as only
investors also called Master Feeder, UCIs that track stock indexes or traded
UCIs or ETFs) which formally are not deemed as financial UCIs subject to
special regimes but as financial UCIs subject to the general regime with a
certain particularity. Notwithstanding the above, we will also refer to them
in this section.
2.1.1. The harmonized
The harmonized UCIs
are financial UCIs subject to certain additional restrictions in order to
obtain the UCITs III passport. Such additional restrictions are included in
the UCITS III Directive and do not apply to other types of financial UCIs.
relate to the diversification in offerings made by EU Members States and
certain public authorities and institutions, certain diversification rules
applicable to investments in UCIs and certain percentage limits to the
securities issued by some issuers.
2.1.2. Free investment
UCIs (hedge funds)
UCIs are, together with the UCIs of free investment UCIs (funds of funds),
one of the most expected developments of the RIIC. In fact, free investment UCIs
are not defined as hedge funds, nor does the RIIC intend to create a hedge
fund figure. Free investment UCIs are simply UCIs that, in practice, are not
subject to any investment rule and that may only be marketed to qualified
Thus, free investment
UCIs are the suitable vehicle to incorporate hedge funds domiciled in Spain.
However, the alternatives for the free investment UCIs are nearly unlimited
as they may be used as hedge funds single strategy or multistrategy and also
as funds of hedge funds not subject to the rules for UCIs of free investment
characteristics of free investments UCIs should be highlighted:
The initial minimum subscription
amounts to Euro 50,000.
They only may be marketed to
qualified investors as defined in the regulations on admissions to trading
also approved last Friday by the Spanish Government.
They may invest in any type of
financial asset or instrument and in financial derivative instruments with
any type of underlying asset (including commodities) and are only subject to
the general rules of liquidity, diversification and transparency but not to
the general rules applicable to financial UCIs.
They shall include in the
Prospectus the limit to their indebtedness which shall not exceed five times
their assets portfolio. The limits for the pledge over assets are not
The minimum number of investors
The liquidity and the
publication of the liquidity value may be calculated quarterly or even
biannually and the subscription and redemptions of shares may be made in
They are not subject to fee
On the other hand,
free investment UCIs will be subject to stricter rules in connection with the
control of conflicts of interest and related transactions and risk control
including recurrent drill exercises and information to investors on the risks
of the products.
It is expected that
the CNMV will provide a draft set of rules (Circular) for public information
within two-weeks that will develop all these matters on free investment UCIs.
2.1.3. UCIs of free
investment UCIs (funds of hedge funds for
UCIs of free
investment UCIs are UCIs which majority invest in free investment UCIs or in
similar foreign UCIs. In fact, as referred to above, free investment UCIs are
UCIs which may freely invest and thus, may invest in other UCIs. That is to
say, UCIs of free investment UCIs may be funds of hedge funds.
The difference of
UCIs of free investment UCIs is that they are funds of hedge funds that may
be marketed to any type of investors, even to individuals. The general rules
are the following:
They shall invest at least 60%
of its assets in:
Spanish free investment UCIs.
Similar foreign UCIs domiciled in OECD
Foreign UCIs not domiciled in OECD countries
but managed by a management company subject to supervision with domicile in
an OECD country.
They may not invest more than
10% in any of such UCIs.
The liquidity and the
publication of the liquidity value is calculated quarterly or even biannually
and the subscription and redemptions of shares may be made in kind.
They are not subject to fee
On the other hand, free
investment UCIs will be subject to stricter rules in relation to information
to investors on the risks of the products.
It is necessary to
mention that UCIs of free investment UCIs are subject, save as expressly set
forth in its rules, to general investment and diversification rules of
2.1.4 UCIs with an
investment policy based on the investment in a single investment fund (Feeder
already existed with the former regulations and the RIIC mainly maintains the
same regime. Notwithstanding this, there is an important matter which is
subject to amendment. Article 45 of the RIIC does not expressly refer to the
type of fund in which the Feeder may invest. However, on the contrary, it
seems that Article 38.7 of the RIIC sets forth that investment policy of
Feeder funds shall be based on the investment in a single financial fund from
those referred to in Article 36.1. c) (harmonized UCIs) and d)
(non-harmonized UCIs subject to similar rules to the Spanish financial UCIs.
Article 49 of the
RIIC approves for the first time Traded Investment Funds or ETFs which shall
have as objective of its investment policy the reproduction of an index that
complies with certain requirements.
2.2. New financial assets and new diversification
developments of the RIIC on new financial assets and new diversification
rules, we would highlight the following:
Suitable non-harmonized UCIs
shall comply, among others, with the following requirements:
Rules on the investments regime,
assets segregation, indebtedness, leverage and short selling (uncovered
sales) shall be similar to the general rules applicable to financial UCIs.
The periodic publication of the
liquidity value shall be enough to comply with the valuation and redemption
obligations of the UCI.
They shall be domiciled in an
OECD Country excluding such countries which do not have a cooperation and
exchange of information mechanism with Spanish supervisory authorities.
Financial UCIs are authorised to
enter into derivatives transactions over credit risk and volatility the
underlying of which is suitable asset for the UCIs.
The following suitable assets
are authorised up to a limit of 10% of the UCIs’ assets:
shares and fixed income assets
admitted to trading on secondary markets which do not comply with the general
Non-harmonized UCIs, free
investment UCIs, UCIs of free investment UCIs and similar foreign UCIs. The
reference to the existence of periodic publication of the liquidity value
included in other drafts has been deleted.
Shares or units of Spanish
Private Equity Entities (Entidades de
Any deposits in credit entities
which do not comply with the general requirements.
In addition, it is clarified
that UCIs may invest in structured transactions and will not be able to
invest in derivatives or structures transactions with an unsuitable
underlying asset or component.
The diversification rules are
very similar to the rules included in the UCITS III Directive. However, the
following rules should be highlighted:
There are more flexible special
diversification rules relating to UCIs which track the evolution of a stock index
or use it as benchmark.
The 45% investment limit in the
same UCI has been maintained.
2.3. Abolition of the obstacle for marketing Spanish
UCIs abroad (acceptance of omnibus accounts)
The RIIC has
eliminated the main obstacles to market Spanish UCIs abroad, namely (1) the
prohibition for Spanish management companies to use omnibus accounts for the
registration of investors; and (2) the obligation to prove its non-resident
status. The main problem was that it meant that the distributors were obliged
to provide the management company (which usually belongs to a competitor
group) with such information.
The RIIC allows
foreign distributors to use omnibus accounts so that the registry of the UCI
only refers to such distributors. The latter maintain an individual registry
in the name of the investors and final clients. There are certain requirements
as regards omnibus accounts that ought to be highlighted:
The omnibus account shall only
be used by distributors domiciled abroad for the purposes of marketing of the
UCIs outside Spain.
Individuals or entities resident
in Spain for tax purposes, permanent establishments of non-residents in Spain
and other intermediary entities acting on behalf of third parties shall not
be included in the omnibus account (the account of the distributor cannot
include omnibus accounts).
Distributors shall provide the
Spanish Tax Authorities with a detailed list of investors (either on
subscription or redemptions) and with an annual list of their clients
detailing their investments in the UCI at the date specified by the Economy
and Tax Ministry.
These rules are
still pending to be developed in detail and thus it is not certain that the
content of the information obligations set forth in the RIIC will be deemed
reasonable enough for foreign distributors to begin marketing Spanish UCIs, more
so taking into account that the marketing of UCIs from other jurisdictions does
not entail such information obligations.
2.4. Developments in connection with fees
The high watermark
practice in connection with the fees over the profits has been introduced as
an obligation. The RIIC sets forth that no profit fee shall be charged until
the higher liquidity value of the investment fund during the last three years
has been exceeded. The calculation shall be made on an individual basis (the
highest liquidity value of the UCI since the date of subscription by a
certain investor) or on a global basis (the historic highest liquidity value
of the UCI of the last three years). This rule is pending to be further
developed and it is expected to include other situations in which the
liquidity value of such moment shall start being calculated for these
development is the introduction of maximum fees for real estate funds.
former drafts of the RIIC did not allow for such possibility, the custodians
may charge a fee for the liquidation of a transaction in addition to the
2.5. Development for Real Estate UCIs
The investment and
diversification rules of Real Estate UCIs have been relaxed. In particular,
the limits to investments in purchases over the design plan and to the
options to purchase have been placed together in a single limit of 40% of the
assets of the UCIs.
3. DEVELOPMENT OF THE NOVELTIES CONTAINED IN THE LIIC
As it is impossible
to mention all the novelties included in the RIIC within the framework of
this Newsletter, we will only highlight the following:
The flexibilisation of the
administrative procedure has been culminated by simplifying the
The characteristics of the
suitable assets have been specified in detail..
The publication mechanism of the
liquidity value has been modified. From now on, the liquidity value may be
published either in the Stock Markets Official Gazette (Boletines de Bolsa) or in the management company’s web page.
The liability and authorization
procedure for the compartments or portfolios of the UCIs with compartments or
portfolios has been further specified. In particular, it should be
highlighted that the liability regime between compartments or portfolios is
different for funds and SICAVs
SICAVs may choose between being
admitted to trading in a Stock Market or in an organised market or not being
admitted to trading in such markets and offering investors a redemption right
as if they were an investment fund.
The RIIC details the rules of
conduct, the supervision obligations and separation rules of the custodian of
4. FOREIGN UCIs
developments for foreign UCIs are the following:
The marketing of foreign UCIs
shall be carried out through authorised distributors.
The information and
documentation of the UCI to be filed with the CNMV may be directly filed by
the foreign UCI or its management company or by the distributor or company so
appointed. Thus, the obligation to appoint a distributor to file the
documentation with the CNMV has been removed.
With regard to the
marketing of non-harmonized UCIs, although technically the rules for
registration at the CNMV have not changed, as the main condition for its
authorisation is that the foreign UCI is subject, in its Home Member State to
similar rules on investors protection as the rules applicable in Spain which
have recently been relaxed, it is reasonably to expect that the registration
of non-harmonized UCIs becomes a more straightforward procedure. We have formed
this impression after conducting several conversations with the CNMV.
November 8, 2005
For further information, please contact
Salvador Ruiz Bachs (firstname.lastname@example.org) or Marta Oñoro Carrascal (email@example.com)
(número de teléfono 915860696) in our Madrid office, Juan Velayos
phone number +34.93.416.51.56) in our Barcelona office or Juan Carlos Machuca
(firstname.lastname@example.org, phone number +44.20
7.645.02.80 ) in our London office.
--------------------------------- Fin del texto explicativo
The information contained in this
Newsletter is of a general nature and does not constitute legal advice