New Law on Undertakings for Collective Investments
By Juan Martín Perrotto. Published in Butterworths Journal of International Banking and Financial LawJune 1, 2004
A New Law on Undertakings for Collective Investments (the “NUCIL”) has come into force on February 5, 2004. The existing Undertakings for Collective Investments (“UCIs”) will have one year from that date to adapt their by-laws and management regulations to the significant changes introduced by the NUCIL.
The NUCIL replaces a variety of regulations that rather dispersedly and sometimes confusingly or incompletely, regulated UCIs in Spain. While the NUCIL intends to regulate UCIs with a comprehensive, far reaching regulation, it also recognises the complexity and ever-changing nature of the market and, therefore, provides that several important matters are to be covered by the NUCIL’s implementing regulation. The drawback of this legislative approach may (or may not) be that the much welcomed flexibility granted by the NUCIL is undermined by an unbecoming implementation of the new law.
With the implementing regulation yet to come, and as the NUCIL stands today, the UCI’s new regime has been well received by the Spanish business and legal community. The NUCIL has introduced significant and valuable innovations. While some of these changes are driven by the implementation of EU legislation (i.e. Directives 2001/107/CE and 2001/108/CE), many others are a genuine effort from the Spanish Government to go beyond its EU commitments and improve the Spanish investment and operating environment for UCIs. As stated by the NUCIL, the new regime is driven by the Government’s intention of liberalising UCIs investment policies, strengthening investors’ rights and reinforcing prudential supervision.
KEY AMENDMENTS TO THE REGIME APPLICABLE TO UCIs
Categories of UCIs
Under the previous regulation, by the time a UCI was incepted, it had to define the category of assets it planned to invest and adopt the corresponding category provided by law (FIM, FIAMM, FIME, FIMP, FIMS, etcetera). Each category was separately regulated and had its own strict restrictions on permitted investments and prudential limits.
As a first step towards investment liberalisation, the NUCIL derogates all of such categories and classifies UCIs simply as financial or non-financial UCIs (the latter containing specific regulations on Real Estate UCIs, still to be implemented). As a consequence thereof, under each of the NUCIL’s new broad categories, the investment activities of any given UCI are only limited by the prudential limits and the investment profile adopted by the UCI.
Eligible Assets for Financial UCIs
Consistent with Directive 2001/108, the new law expands the assets in which financial UCIs may invest. Together with publicly traded securities and subject to certain prudential limits, UCIs are now allowed to invest in units issued by other UCIs (whether harmonised or not), deposits (on demand and short term), derivatives (market traded and OTC), money market instruments, and, going beyond EU legislation, in “any other securities and financial instruments”. On the other hand, the NUCIL seconds the restrictions provided in the UCITS Directive banning UCIs from investing in precious metals, commodities and movable and immovable property except, in respect to the latter, when its essential for the business of the Investment Company.
Prudential Limits for Financial UCIs
The NUCIL states that UCIs’ investments shall abide by the principles of sufficient liquidity, risk diversification and “transparency” (i.e. consistency with the investor profile which shall be clearly defined in the information materials). Further, the NUCIL contains certain general restrictions relating to credit exposure (maximum of 5% of assets invested with a single issuer, and 15% with issuers belonging to the same group), granting of credit facilities (generally prohibited), short selling (generally allowed except in the case of other UCIs units and bank deposits), borrowing (not to exceed 10% of their assets except in certain cases), encumbrance of assets (generally prohibited except for collateral required by securities’ settlement systems) and deposit taking (prohibited). While most of these prudential regulations are yet to be implemented, they all seem to be far more flexible than the ones contained in the current Spanish law and in the EU legislation (i.e. short selling and borrowing).
Other amendments to the Legal Regime of Financial UCIs
UCIs can take the form of Investment Companies or Investment Funds. While Investment Funds must always be open ended, Investment Companies may be open or close ended. In this respect, the NUCIL provides two significant modifications. On the one hand, financial Investment Companies are not allowed any more to be close ended and, thus, must necessarily be open ended (SICAV). On the other hand, SICAVs are no longer required to be publicly listed and, instead, they may choose to provide for investors liquidity by means of issuing and repurchasing their own shares at liquidation value. Moreover, SICAVs are excluded by the NUCIL from tender offer regulations.
Another important development of the NUCIL is the admission of multiple investment “compartments”: any given Investment Company or Investment Fund may have two or more “compartments” (i.e. sub-funds) to which certain type of investments are allocated and are isolated from any other “compartment” of the Investment Company or Investment Fund. All legal requirements applicable to any Investment Company or Investment Fund shall be applicable to each “compartment” or sub-fund (i.e. minimum number of investors, regulatory ratios, etcetera).
KEY AMENDMENTS TO THE REGIME APPLICABLE TO MANAGEMENT COMPANIES
Management Companies’ EU Passport
The NUCIL implements in Spain the harmonised legal regime applicable to Management Companies covered by the UCITS Directive (as amended by Directive 2001/107/EC). As a consequence thereof, a Management Company authorised by the competent authorities of Spain or of another Member State (provided that it is covered by the UCITS Directive) may carry out in any other Member State or in Spain, the activity for which it has been authorised, either by establishing a branch or under the free provision of services principle.
The NUCIL provides minimum host regulator interference with the supervision of harmonised EU UCIs covered by the UCITS Directive. In an attempt to safeguard the home country supervision principle, the NUCIL provides that, within certain limits, it would only apply to rules of conduct, disciplinary regime and other specific topics (e.g. payments to investors, investment redemption, information on investors, etcetera).Authorised Activities for Management Companies
The new law expands the scope of activities which Management Companies may engage in to encompass all the activities permitted by the UCITS Directive (as amended by Directive 2001/107). The NUCIL states that UCIs may be authorised to discretionally manage investment portfolios (including pension funds), to manage, represent and market venture capital funds, to render investment advice on financial instruments, and to carry-out custody and administration of UCI units.
Delegation of Management Companies’ Duties
The previous legislation only allowed Management Companies to delegate to third party investment managers the administration of foreign investments. The NUCIL also liberalises this area: as it stands today, Management Companies are allowed to delegate generally the administration of their whole investment portfolio.
Management Companies’ Voting Rights
The NUCIL provides that Management Companies shall exercise, for the sole benefit of the investors, all the investments’ ancillary rights. In particular, the new law provides that the implementing regulation may impose the obligation to attend and to vote at the issuers’ shareholders meetings in certain cases (e.g. long-term and financially relevant investments).
While the investors’ rights in Investment Companies are regulated by Spanish Company Law, a new feature introduced by the NUCIL is a list of minimum rights that should be granted to any investors in Investment Funds which were only implicitly recognised or, in the best of cases, scattered among several legal provisions: redemption, transfer investments to other UCIs, information, Management Companies Depositaries’ liability, etcetera.
Among these rights the NUCIL places special emphasis on information rights. It provides, inter alia, a variety of documents that shall be furnished to investors: quarterly report, six-monthly report, annual report, prospectus and simplified prospectus provided in Directive 2001/107.
The NUCIL ensures the enforcement of investors rights by means of strengthening the authority of the Spanish Securities and Exchange Commission (CNMV) and offering investors alternative ways to claim protection (i.e. Customer Service Department, Investor’s Ombudsman, etcetera).
Rules of Conduct
Management Companies, Depositaries and Investment Companies, and their respective managers, employees and agents, must abide by the Securities Exchange Act, the NUCIL and their own rules of conduct.
Besides the reinforcement of the duties and responsibilities of the UCIs bodies, the NUCIL establishes mechanisms to avoid conflicts of interest. The NUCIL states that certain transactions entered by Investment Companies, Management Companies and Depositaries with persons who are “related” to such parties (i.e. their Depositaries, Management Companies, Investment Companies, managers, etcetera) shall comply with certain special requirements, namely, conflict of interest checking, disclosure of periodic information, etcetera.
The NUCIL reinforces the separation between Depositaries and UCIS’s managers and reaffirms the Depositaries’ supervisory role. The NUCIL imposes new duties on the Depositaries (notifying the CNMV of any anomaly in the management of a UCI) and ownership restrictions (the Depositary shall not be part of the same group of companies as the Management Company/Investment Company’s group, unless adequate measures are implemented to identify and prevent conflict of interest).
SUMMARY AND PROSPECTS
The NUCIL significantly improves the legal framework of collective investment schemes in Spain by means of simplifying and liberalising UCIs’ investment and operational rules, strengthening investor rights and implementing the UCITS Directive. For the sake of flexibility, significant elements of the new legal regime have been referred to pending implementing regulations. While the general policy that the NUCIL embodies is to be much applauded, its implementation shall be closely scrutinized to ensure that its principles are fully developed. The recent elections in Spain that have turned the Government over to a new political party is likely to delay the new implementing regulations until no sooner than the summer of 2004. In the meantime, the principles of the NUCIL are in effect, can be invoked and must be complied with by Spanish Investment Funds and Companies.