Interview with Claire Cummings, Cummings Law

Claire Cummings qualified as a solicitor in 1996 and since then has specialised in the legal issues surrounding both funds and fund management.
As a solicitor in private practice, Claire has acted for a number of clients in the alternative investment arena and built up experience of a wide range of legal and regulatory matters. Claire has acted as in-house counsel and director of legal and compliance for a fund manager, where she was involved in the running and growth of a fund management business and worked closely with other directors, the trading and operations departments and brokerage counterparties.
In July 2002 Claire established Cummings and draws on her experience as both a lawyer and a director of a fund management company to work with her clients as they establish and build their businesses. Ms. Cummings, why don’t we start at the beginning: Could you as an expert explain our readers briefly what the UCITS Directive is?
Claire Cummings: Starting with a legislative answer, the Undertakings for Collective Investment in Transferable Securities (UCITS) Directives are a set of EU Directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state.  In practice, many EU Member States have imposed additional regulatory requirements which has impacted  the ability to operate freely.The first UCITS Directive was adopted in 1985 and the current and consolidated Directive which governs UCITS is UCITS IV 09/65/EC], as amended by UCITS V [2014/91/EU], which came into force on 17 September 2014.  We are not at UCITS V, which came into force on 18 March 2016.  UCITS V amends the parts of UCITS IV which deal, amongst others, with depositary functions, remuneration policies and sanctions for failure to comply with the Directive.
As for the actual purpose of the UCITS Directive, its aim  is to facilitate the cross-border marketing within the EU of open-ended investment funds which are available to the general public, while incorporating certain investor protection mechanisms. The UCITS Directive thus establishes common basic rules for the authorisation, supervision, structure and activities of UCITS schemes in the EU.
This means that while a UCITS scheme must be authorised by the Member State in which it is established,   once it is authorised it may be promoted in every other Member State, provided it complies with the local marketing regulations, without needing further re-authorisation. What are the matters within the UCITS Directive which make it suitable for the general public?
Cummings: One of the main characteristics of a UCITS scheme is that it must meet certain thresholds and certain investment restrictions.
Looking first at the necessary conditions a fund must meet in order to qualify as a UCITS scheme, these are:

  1. the sole object of the fund must be to invest capital collected from the public in transferable securities and other liquid assets based on the principle of risk spreading;
  2. units or shares issued by the fund must be directly or indirectly redeemable out of the fund’s assets at the request of the unitholders/shareholders  i.e.  a UCITS fund must be open-ended; and
  3. the head office of the fund must be situated in the same Member State as the registered office.

AnkerIn addition, certain types of structure may not be UCITS schemes and these are: closed-ended funds; funds not directly available to the general public; funds sold only in non-Member State; and funds investing in physical assets such as property or commodities.Anker
As regards investments, the UCITS Directive imposes several restrictions on the investment policies of a UCITS scheme, including:
(i)              in general, it may invest no more than 10% of its assets in transferable securities or approved money-market instruments which are issued by any single body and all holdings in excess of 5% of its assets may not, in aggregate, ex
ceed 40% of the assets;
(ii)            no more than 20% of scheme property may be in transferable securities or approved money-market instruments issued by entities in the same group;
(iii)          no more than 20% of assets may be invested in any one single collective investment scheme (both UCITS and non-UCITS schemes) with a general restriction of a maximum of 30% of assets invested in non-UCITS schemes;
(iv)           maximum over-the-counter counterparty exposure is limited to 5% (10% in the case of approved banks);
(v)            no more than 20% of assets may be invested in a combination of transferable securities and approved money-market instruments issued by, and deposits or OTC derivative transactions made with, a single body;
(vi)           no more than 35% of assets may be invested in the government or public securities of a single body (subject to (vii) below); and
(vii)         over 35% of scheme property may be invested in a single government or public securities body, but there is a restriction that no more than 30% of the scheme property consists of securities of any single issue and a requirement that the securities must come from at least six different issues. Can you tell us more about the changes which came into force on 18 March 2016 for UCITS V?
Cummings: The changes set out in UCITS V were prompted by the financial crisis and the subsequent need to secure stable financial markets. The Madoff fraud and Lehman in particular highlighted the fact that the UCITS Directive has been transposed into national laws in divergent ways and failed to secure the safe and level playing field that the European Commission had planned. The depositary provisions of the AIFMD influenced the Commission’s thinking in the area of depositary responsibilities and liability and the Commission recognised that the protection offered to retail investors in UCITS should, as a minimum, be equivalent to the protection offered to institutional investors under the AIFMD.
In reality, the standard of conduct imposed on depositaries under UCITS V is more stringent that the equivalent provision under the AIFMD, in that the UCITS depositary is required to act ‘solely’ in the interests of the UCITS and its investors.
In drawing up the amendments, the Commission engaged in an impact assessment focusing on five main areas, namely:
(i)            eligibility to act as a depositary;
(ii)           delegation of depositary functions;
(iii)          liability of depositaries;
(iv)          remuneration; and
(v)           sanctions. Will there be any more UCITS directive changes or updates?
Cummings: In 2012 the European Commission has released a paper outlining further ideas as to how the UCITS Directive can be improved, which bec ame known as UCITS VI.  The focus of UCITS VI centred on proposals concerning areas other than those addressed by UCITS V and raised issues including  eligible assets and
the use of derivatives, OTC derivative and limits on counterparty risk,  liquidity management rules and improvements to the UCITS IV framework, for example how to inform investors when  a feeder UCITS converts into an ordinary UCITS. Such conversions may lead to a significant change in the investment strategy. Is there any indication of timing on UCITS VI?
Cummings: No, at present there is no indication as to when UCITS VI will be introduced and it is no longer clear whether a UCITS VI legislative proposal will be published at all . Steven Maijoor, ESMA chairman, has said that he would favour first taking some time to ensure that the UCITS framework, as amended most recently by UCITS V, is implemented correctly and that national regulators are applying it in a convergent manner.  And, as often with directive, it will probable take more time than first intended. Thank you for the interview.