ESMA Opinion

On 20 November 2012, the European Securities and Markets Authority ("ESMA") issued an opinion in relation to a UCITS' ability to invest 10% of its assets in unregulated collective investment schemes. Article 50(2)(a) of the UCITS Directive permits1 a UCITS to invest no more than 10% of its assets in transferable securities and money market instruments other than those referred to in Article 50(1) of the UCITS Directive. This is commonly known as the "10% unlisted bucket".

ESMA, in its opinion, has confirmed that Article 50(2)(a) of the UCITS Directive refers only to investments in transferable securities and money market instruments and not to units or shares of collective investment undertakings. Therefore, ESMA's opinion is that UCITS may only invest in units or shares of collective investment undertakings as defined in Article 50(1)(e) of the UCITS Directive.

Article 50(1)(e) provides that a UCITS can invest in:

(e) units of UCITS authorised according to this Directive or other collective investment undertakings within the meaning of Article 1(2)(a) and (b), whether or not established in an EU Member State, provided that:

(i) such other collective investment undertakings are authorised under laws which provide that they are subject to supervision considered by the competent authorities of the UCITS home Member State to be equivalent to that laid down in Community law, and that cooperation between authorities is sufficiently ensured;

(ii) the level of protection for unit-holders in the other collective investment undertakings is equivalent to that provided for unitholders in a UCITS, and in particular that the rules on asset segregation, borrowing, lending, and uncovered sales of transferable securities and money market instruments are equivalent to the requirements of this Directive;

(iii) the business of the other collective investment undertakings is reported in half yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period; and

(iv) no more than 10% of the assets of the UCITS or of the other collective investment undertakings, whose acquisition is contemplated, can, according to their fund rules or instruments of incorporation, be invested in aggregate in units of other UCITS or other collective investment undertakings.

ESMA expects that any portfolio adjustments required to ensure compliance with its opinion will be made taking into account the best interests of investors by 31 December 2013.

Current Position In Ireland

ESMA's opinion is entirely contrary to the Central Bank of Ireland's (the "Central Bank") current interpretation of Article 50(2)(a) of the UCITS Directive allowing investment in unregulated schemes to fall within this "10% unlisted bucket". On 7 August 2008, the Central Bank confirmed in a letter to the Irish Funds Industry Association that it interpreted this Article as permitting a UCITS to invest up to 10% of its net assets in aggregate in unlisted securities and unregulated investment funds, including hedge funds, provided the investment complies with the eligibility criteria for UCITS. ESMA's contrary interpretation means that UCITS will no longer be permitted to include any investment in an unregulated scheme in this "10% unlisted bucket". UCITS can now only invest in collective investment schemes which are UCITS or equivalent to UCITS as set out in Article 50(1)(e) outlined above.

Implications For Irish UCITS

Given this change in interpretation, any UCITS that invests in unregulated collective investment schemes will have to redeem or dispose of such holdings by the deadline imposed by ESMA of 31 December 2013 and, in due course, amend their investment policies if those policies contemplated investment in unregulated collective investment schemes.

Footnote

1 Directive (2009/65/EC) on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable searches (UCITS).

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.