Leg. Dev: Directive 2001/107/EC on the Coordination of Laws, Regulations and Administrative Provisions Relating to Undertakings for Collective Investment in Transferable Securities (UCITS) With a View to Regulating Management Companies and Simplified Prospectuses

8 Colum. J. Eur. L. 557 (2002)

David A. Kanarek.

The European Union’s Council of Finance Ministers passed Directive 2001/107/EC (the Directive) on December 4, 2001, with the intention of promoting a single market for capital and financial services and of harmonizing investor protection regulations, a goal the European Union (EU) aims to reach by 2005. The passage of the Directive along with its sister provision, Directive 2001/108/EC, will be instrumental in encouraging and facilitating cross-border marketing and operations of management companies. These two Directives amend Directive 85/611 (1985), which coordinates the laws and regulations of the European Community countries relating to “undertakings for collective investment in transferable securities” (UCITS). UCITS are similar to American mutual funds, pooling shareholders’ money in a common fund invested by professional managers in certain areas of the market and allowing investors to withdraw their investments according to the rules of the fund. Directive 85/611 allows a UCITS to operate throughout the EU with the approval of one Member State but requires that notifications be given to the authorities of the other Member States. Additionally, the UCITS must abide by the local rules of each Member States in which it operates.

Directive 2001/107/EC targets the activities of management companies and is therefore known as the “management directive”, while Directive 2001/108/EC, which focuses on the scope of investment funds, is known as the “product  directive”. The management directive was crafted to give management companies a so-called “European passport”, that is, to make the boundaries between Member States virtually invisible to management companies. Member States are encouraged to grant authorizations to management companies to ensure investor protection, with the overall goal that each State will have adequate regulation to make the mutual recognition system a desired reality. Once a management company receives authorization in its home country and notifies the appropriate authorities in the host country, it will be able to establish branches and provide services in other Member States.

According to the European Commission, there are three additional major initiatives in Directive 2001/107/EC. The first expands the types of activities management companies are allowed to pursue, including individual portfolio management, the management of pension funds and certain non-core activities. The second initiative seeks to equalize the competition among intermediaries in the financial services industry by applying the same regulations to “self-managed investment companies”, which have not designated a management company.9 This is meant to ensure a minimum degree of investor protection and to create an internal market for the intermediaries.’0 Finally, the third initiative allows management companies to publish a simplified prospectus in addition to the full prospectus. According to the European Commission, a prospectus is “a disclosure document containing all the necessary information to enable investors to make a correct assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of the rights derived from securities being offered to the public or admitted to trading.”” The simplified prospectus is designed to deliver information about the UCITS to the average investor as well as to act as a marketing tool.