Legal Briefing

UCITS funds get a facelift in the Czech Republic

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Eastern Europe | 01 December 2011

Undertakings for Collective Investment in Transferable Securities (UCITS), are open-ended, regulated investment funds.

Since their inception in 1985, UCITS have been regulated by Directive 85/611/EEC, known as UCITS I. UCITS I has been substantially amended several times, most importantly by Directive 2001/107/EC and Directive 2001/108/EC, these amendments generally being known as UCITS III.


In 2009 a new UCITS regulatory regime was introduced with Directive 2009/65/EC. Generally referred to as UCITS IV, the new regime aimed to modernise the UCITS legal framework for the 21st century and, at the same time, to eliminate the glaring deficiencies of the previous UCITS framework.

RECENT DEVELOPMENTS

On 15 July 2011, the Czech Republic adopted an amendment to Act No 189/2004 Coll, on Collective Investment (the Act), whereby it transposed UCITS IV into Czech law. Other Czech laws were subsequently amended to reflect the transposition of UCITS IV, however, these are of less importance, as the vast majority of regulations relating to UCITS appear in the actual Act itself, or the relevant decrees issued under the Act.

The Czech approach to the transposition of UCITS IV into Czech law was generally based on the concept of maximum harmonisation and thus the Act as a whole does not extend beyond the requirements set out in UCITS IV. However, where permissible under UCITS IV, the Czech legislators implemented the minimum requirements set out in UCITS IV and introduced additional requirements in the Act.

While the implementation deadline set by UCITS IV was 1 July 2011, the Czech Republic was still among the first member states of the European Union to adopt UCITS IV.

KEY AREAS COVERED

The Act covers the following key areas.

Key investor information

Key investor information (KII) replaces the current simplified prospectus by standardising and harmonising the content to provide investors with pre-defined key information.

KII must include the essential characteristics of the UCITS concerned, plus a host of obligatory information, which is to be provided to investors so that they are reasonably able to understand the nature and the risks of the investment that is being offered, and to enter into investment decisions on an informed basis.

KII must contain brief (maximum two pages), clear, fair and understandable non-technical information, which must be available in hard or electronic copy in the language of the country of UCITS distribution. The form, content, language and publication of KII are further specified in Regulation No 583/2010.

Master-feeder structures

In general, setting up a master-feeder fund structure is an asset-pooling technique that makes it possible to harness the efficiencies of larger pools of assets while still fashioning investment funds for different markets and market niches. By using master-feeder fund structures, investment companies may benefit from the possibility of tailoring investment products (UCITS funds) to market needs.

Master-feeder fund structures, introduced under UCITS IV and transposed by the Act into Czech law, are being viewed as the first real step in providing proper protection to investors in master-feeder fund structures, irrespective of whether the master-feeder structures are established in the same EU member state or whether they are established in different EU member states.

To be deemed a master-feeder structure under the Act, the feeder fund (in Czech podrízený fond) must have at least 85% of its assets invested in a single master fund (in Czech rídící fond) and both feeder and master fund will have to agree on the administrative arrangements of the master-feeder fund structure. In addition, the custodians and auditors must formalise their agreement for the organisation and processing of the master-feeder structure.

Merger between UCITS

As the original legal and administrative system of UCITS consolidations was fraught with many legal and administrative difficulties under UCITS III, UCITS IV and the Act contain a new unified cross-border merger system as well as a national level merger system for UCITS (and their investment compartments), which should ease the process of UCITS mergers.

In order to safeguard investors’ interests, any proposed domestic or cross-border merger between UCITS under the Act is now subject to authorisation by the Czech National Bank, the local UCITS regulator. The receiving UCITS authorities no longer need to approve the merger. If, however, the merger involves more than one merging UCITS and such UCITS are domiciled in the Czech Republic and in another member state, the Czech National Bank and the home member state of the other UCITS will need to authorise the merger in close co-operation.

The merging UCITS must provide the relevant authorities with various information and documents necessary for merger approval such as, among other things:

  • the common draft terms of the proposed merger duly approved by the merging UCITS and the receiving UCITS;
  • an up-to-date version of the prospectus and KII;
  • statements issued by the custodians confirming the compliance of certain elements of the common draft terms of the proposed merger with the Act; and
  • the information on the proposed 
merger that the merging and receiving UCITS will provide to their respective unit-holders.

The Czech National Bank, or authorities of other member states, will approve the merger, providing all relevant conditions have been met, within 20 days.

The unit-holders of both the merging 
and receiving UCITS have the right to redeem their units, or convert them into another UCITS with similar investment policies and managed by the same management company or by a related company free of charge.

Since it is particularly important that the unit-holders are adequately informed about the proposed merger and that their rights are sufficiently protected, the information on the proposed merger must be provided to the unit-holders of both the merging and receiving UCITS at least 30 days before the deadline for redemption.

Management company passport

Asset management companies may benefit from the so-called ‘full’ management company passport and carry out activities in other member states for which they 
have been authorised in their country of origin either by application of the freedom of services principle or by establishing a local branch.

Accordingly, under the Act it will now be possible for an asset management company from within the EU to perform, in the Czech Republic, the activities for which it has been authorised in its home member state, including the managing, distributing and administering of UCITS, either through the free provision of services or by establishing a branch. Such activities of the management company will not be subject to any authorisation requirements under the Act.

An asset management company from within the EU intending to carry out activities in the Czech Republic must notify its intention to do so to its home member state authority and provide it with all relevant information, including: its planned programme of operations in the Czech Republic, measures for dealing with investors’ complaints and the risk management processes established for its operations in the Czech Republic.

The management company’s home 
member state authority will communicate all relevant information to the Czech National Bank, the local regulator, within one month in the case of the free provision of services and two months in the case 
of activities to be carried out through 
local branches.

The management company may launch its activities without establishing a branch in the Czech Republic as soon as the relevant information has been communicated to the Czech National Bank. If the management company plans to carry out activities in the Czech Republic via local branches, it may launch such activities on receipt of a communication from the Czech National Bank, or the expiry of a further two-month period.

CONCLUSION

The transposition of UCITS IV into the Act and other relevant laws brings the Czech Republic into line with the general reshaping of the UCITS sector in the EU and introduces changes that significantly reshape not only the UCITS sector but also the whole financial sector in the Czech Republic. By the timely enactment of the Act the Czech Republic has clearly shown its willingness to support the UCITS sector and asset management businesses in the future.

The opportunity to passport UCITS under simplified notification procedures, the asset management company passport procedure, the domestic and cross-border consolidations of UCITS and the introduction of new master-feeder fund structures will play a key role in providing the necessary flexibility and efficiency to the UCITS sector.

Finally, the new regulations under the Act not only add to the protection of unit-holders, the ultimate beneficiaries of the regulation, making sure that they are provided with relevant information and data, which will help them to reach informed investment decisions, but gives them the opportunity to shop easily and efficiently for a vast variety of UCITS within the whole EU from the comfort of their homes.