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 the LIIC.
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 RICC.
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 different reasons:
a) 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:
1. The possibility for UCIs to invest in certain new suitable assets.
2. The incorporation of “umbrella” UCIs (with compartments or portfolios).
3. The introduction of different classes of units or series of shares within a UCI.
4. The abolition for SICAVs of the requirement of being admitted to trading.
5. The possibility to carry out a merger and split-off of certain UCIs (for example between funds and SICAVs).
6. The extension of the activities of the management companies of UCIs.
7. The delegation by Spanish UCI management companies of the management of the Spanish assets.
b) 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 following:
1. The specific characteristics of the suitable assets for investments.
2. The mechanism for the publication of the liquidity value of UCIs.
3. The liability regime and the authorisation procedure for the umbrella UCI portfolio compartments.
4. The operating rules for SICAVs.
5. The number of investors and the minimum assets portfolio.
6. 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.
7. The conditions for the delegation of asset management.
c) The RIIC introduces novelties in addition to the developments of the LIIC and to the rules included in the former regulations:
1. 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.
2. The authorisation for financial UCIs to invest in other financial assets and the introduction of new diversification rules.
3. Permission to use global or omnibus accounts.
4. The introduction of the “high watermark” practice in connection with the profits fees and of limits to the management fees of real estate UCIs.
5. 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:
d) 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 flexible.
e) Financial UCIs subject to special regimes:
1. Harmonized UCIs (UCITS)
2. Free investment UCIs (IICIL).
3. UCIs of free investment UCIs (IICIICIL).
4. UCIs the investment policy of which is based upon the investment in a single investment fund (Feeder funds).
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 UCIs (UCITS)
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.
The restrictions 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)
Free investment 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 investors.
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 UCIs.
The following characteristics of free investments UCIs should be highlighted:
a) The initial minimum subscription amounts to Euro 50,000.
b) 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.
c) 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.
d) 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 applicable.
e) The minimum number of investors is 25.
f) 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 kind.
g) They are not subject to fee limits.
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 retail investors)
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:
a) They shall invest at least 60% of its assets in:
1. Spanish free investment UCIs.
2. Similar foreign UCIs domiciled in OECD countries.
3. Foreign UCIs not domiciled in OECD countries but managed by a management company subject to supervision with domicile in an OECD country.
b) They may not invest more than 10% in any of such UCIs.
c) 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.
d) They are not subject to fee limits.
e) 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 financial UCIs.
2.1.4 UCIs with an investment policy based on the investment in a single investment fund (Feeder funds)
Feeder funds 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 rules
Among the developments of the RIIC on new financial assets and new diversification rules, we would highlight the following:
a) Suitable non-harmonized UCIs shall comply, among others, with the following requirements:
1. 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.
2. The periodic publication of the liquidity value shall be enough to comply with the valuation and redemption obligations of the UCI.
3. 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.
b) Financial UCIs are authorised to enter into derivatives transactions over credit risk and volatility the underlying of which is suitable asset for the UCIs.
c) The following suitable assets are authorised up to a limit of 10% of the UCIs’ assets:
1. shares and fixed income assets admitted to trading on secondary markets which do not comply with the general requirements.
2. 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.
3. Non-traded securities.
4. Shares or units of Spanish Private Equity Entities (Entidades de Capital Riesgo).
5. Any deposits in credit entities which do not comply with the general requirements.
d) 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.
e) The diversification rules are very similar to the rules included in the UCITS III Directive. However, the following rules should be highlighted:
1. There are more flexible special diversification rules relating to UCIs which track the evolution of a stock index or use it as benchmark.
2. 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:
a) The omnibus account shall only be used by distributors domiciled abroad for the purposes of marketing of the UCIs outside Spain.
b) 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).
c) 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 purposes.
The other development is the introduction of maximum fees for real estate funds.
Finally, although 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 custody fee.
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:
a) The flexibilisation of the administrative procedure has been culminated by simplifying the administrative steps.
b) The characteristics of the suitable assets have been specified in detail..
c) 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.
d) 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
e) 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.
f) The RIIC details the rules of conduct, the supervision obligations and separation rules of the custodian of UCIs.
4. FOREIGN UCIs
The main developments for foreign UCIs are the following:
a) The marketing of foreign UCIs shall be carried out through authorised distributors.
b) 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 Lluis (firstname.lastname@example.org, phone number +34.93.416.51.56) in our Barcelona office or Juan Carlos Machuca (email@example.com, phone number +44.20 7.645.02.80 ) in our London office.
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The information contained in this Newsletter is of a general nature and does not constitute legal advice