The Summer that Changed UCITS Cross Border Distribution 

Summer arrived and with it the long-awaited introduction of the Cross Border Distribution of Investment Funds Directive. The main European hubs for fund domiciliation have been of course at the forefront in the implementation of the new rules applicable to UCITS Cross Border Distribution. Yet, it will take longer to get a full picture of implementation of the new rules across Europe. 

Conceived by the European Commission as part of a broader endeavour to streamline European fund distribution, the new rules on UCITS cross border distribution have been designed mainly to reduce the costs and hurdles faced by fund managers when dealing with European distribution of their funds. However, despite the aims of the regulation, it seemed rather obvious pretty quickly how – instead of more efficiency – the outcome will be an increased administrative burden, especially in the post-notification phase for UCITS cross border distribution.  

Get in touch here with your contacts at Veneziano & Partners to see how we can help with post-notification for UCITS Cross Border Distribution. 

A simple yet very dangerous detail 

Whilst the majority of the industry focussed on whether the so-called premarketing rules applied also to non-EU AIFM – the wrong way to look at the issue in our view – very few paid attention to a simple, yet very dangerous, detail introduced with the new rules on UCITS cross border distribution.  

Article 1.5 of the Cross Border Distribution of Investment Funds Directive subtly introduced under article 93 UCITS directive an additional layer of administrative burden for the maintenance of UCITS marketing authorisations in Europe. Going forward, according to the new version of article 93 UCITS, changes to the information communicated with the notification letter for an initial marketing authorisation under the UCITS passport will require a distinct notification also to the home state authority of the UCITS, in addition to the usual direct notification made to the relevant host state national competent authorities, where UCITS are authorised for marketing.  

This separate additional notification to the UCITS home state authorities will be required also for the changes consisting in additional share classes to be authorised for marketing.  On a related noted, any such changes will now have to be notified with at least one month in advance. 

Adjustments driven by the new rules on UCITS Cross Border Distribution 

Whilst neglected by most, the newly introduced rules on UCITS Cross Border Distribution will call for adjustments at different levels in the operations underpinning European distribution.  

From an administrative perspective, UCITS fund managers will have to factor the additional maintenance work – and the cost alike – that will go in the separate notification requirement owed directly to their UCITS competent home state authority.  

It helps to clarify the type of changes that require a notification now also to the UCITS home state authorities. Most typically, these are changes made to the UCITS prospectus or other documents part of the suite of offering documents, like updated KIIDs or new sets of financial reports. Same notification letter will be used also for changes in the so-called marketing arrangements, including changes to facilities agents appointed as well as additional share classes to be authorised for marketing.  

In practice and for the time being, it seems that in the event of changes a distinct notification letter and a separate email notification to the UCITS home state authorities will be required for each of the domiciles where UCITS are authorised for marketing. This will result in an exponential increase of the administrative burden for UCITS with a large distribution footprint across Europe, unless practice of home state UCITS regulators opens up to single notification of changes for multiple EU domiciles of distribution.  

The new UCITS Cross Border Distribution rule and effects on marketing operations 

From an operational perspective, the new rules pose a challenge with regards to the introduction of a new extended timeline for the notification of changes, now set to be notified a month in advance of the change taking place. Whilst technically this is a mere notification, not requiring in principle an express acknowledgment or authorisation by home or host state authorities, it is expected that the timing of the advance notification be honoured. Such extended timeline will disperse as such its effects on the existing dynamics of the entire marketing and sales operations of fund managers across Europe.  

More coordination, for instance, will be required in the preparatory work preceding the launch of new fund products. We take the view that it will be the most helpful to have a clear picture of the potential audience of a fund with the most time in advance of the actual launch of the product. The introduction of premarketing – which in principle should be applicable also to UCITS – should facilitate this task and make sure that new UCITS funds or compartments, for instance, are set up from the outset with the required number and type of share classes, leaving the need to add share classes an exception to the process rather than the rule. On the flip side, knowing the audience in advance, with as much detail as possible, will also reduce instances where a deregistration is required, whose process, also for share classes, will be now governed by new rules, imposing as well also a notification to the UCITS home state authorities as part of the process.  

Conclusions 

We notice that the new mechanism introduced for UCITS post-notification is an interesting hybrid between the former UCITS and the current AIFM process. UCITS home state authorities will now receive notification of changes, similar to the dynamic for post-notification in the AIFM environment. However, whilst in the AIFM environment home state regulators have to notify changes themselves to host state authorities, the new UCITS post-notification rules leave on UCITS managers the burden of the notification to host state authorities.  

Also, when looking at the changes brought about by the Cross Border Distribution of Investment Funds Directive as a whole, we realise that premarketing – once again in principle applicable also to UCITS funds – is a very powerful tool, which, when used intelligently, could significantly reduce some of the increased administrative burden imposed by the new rules on post-notification for UCITS cross border distribution.  

Get in touch here with your contacts at Veneziano & Partners to see how we can help with post-notification for UCITS Cross Border Distribution.