Ucits IV on the Horizon


Those firms taking a wait-and-see-approach to what the new Ucits IV directive has to offer should beware, says Stewart, lest they end up playing a tricky game of catch-up as next summer’s deadline approaches.

Among the increasing regulatory issues warranting attention among buy-side and hedge fund managers, the latest iteration of the European Union’s Undertakings for Collective Investments in Transferable Securities (Ucits), Ucits IV, goes into effect next summer.

Although investment management industry attitudes toward Ucits IV-compliance remain in wait-and-see mode, getting a jump on what the revised rules mean for firms’ technology infrastructures would be a good idea—and free up efforts to focus on more prescriptive financial regulations coming down the pike.

Established to foster greater efficiencies for fund managers offering investment products in EU markets, Ucits has proven highly successful in attracting participants: since its introduction in 1985, it has attracted more than $6 trillion in assets.

Ucits has won over both long-only and hedge fund members, enabling institutional and mutual fund managers to pursue more exotic strategies with less constraint, and providing hedge funds with more cost-effective access to multiple European markets in exchange for a degree of operational transparency other regulatory efforts have thus far failed to attain from these managers.

The key elements of Ucits IV, meant to facilitate greater defragmentation of European markets, include a “passport” allowing firms domiciled in one EU state to manage funds in other states; greater coordination between national regulators for easier cross-border distribution of investment products; and a key investor information disclosure requirement in lieu of the simplified prospectus required of funds by Ucits III.

Lost in Translation

How those guidelines translate to specific steps for managers when updating their Ucits compliance, however, has yet to be fully worked out. As such, buy-side firms have yet to make any significant technology or operational changes, which for now seems a prudent approach. But firms with a wait-and-see stance could find themselves playing catch-up if they’re not careful.

At least according to one industry source, that does not seem to be the case. Hilary Martin, consultant at London-based buy-side consultancy Investit, discussed efforts between her firm and its investment management clients to digest Ucits IV requirements with me last month. While managers haven’t taken any concrete steps yet, the new framework is very much on their compliance radar, she reported.

“We’ve been working with our clients to look at each topic related to Ucits IV compliance and its impact,” Martin said. “July 1 was the date for final implementation measures, followed by a year of interpretation by local regulators. So managers have until July 2011 to fully comply, and it’s still a wait-and-see approach in terms of how firms will line themselves up operationally.”

Investit and its clients have examined the key investor information, management passport and fund-merger elements of Ucits IV, said Martin. Thus far, the focus has been more on broader operational impacts rather than compliance and risk ramifications. “How to transmit the right information to the right people is still being worked out,” she said.

Third-party service and technology providers have also begun jockeying for position to capitalize on Ucits IV requirements, Martin added, particularly regarding the framework’s management passport component.

“The service providers are very much trying to position themselves, because under Ucits IV you can have your management company in a different country than where your investment is taking place,” she said. “A particular manager’s domicile of choice may well impact the service providers it would use. So the providers are trying to push this more and find out what their clients want and need under the directive.”

That sounds like a promising start, at least for Investit’s buy-side clients. To be sure, Ucits’ appeal has expanded beyond its European origins, attracting adherents from North America and Asia eager to tap into EU markets. Whether these managers have also begun seriously examining what Ucits IV compliance means for them has yet to be seen. These days, though, a little proactivity can go a long way.

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