Good Governance. Keeping the Board Informed About UCITS EU Cross-Border Registrations.

Good Governance. Keeping the Board Informed About UCITS Cross-Border EU Registrations

In the EU domiciles with the most evolved fund governance standards, the board of directors of UCITS management companies plays a pivotal role with regards to UCITS Cross-border EU registrations. The board of directors, in fact, will have a say ex-ante on distribution, to approve any strategy proposed by UCITS promoters, but also ex-post, to make sure that distribution plans, so approved, are implemented correctly.

In this article, we look at the fund governance implications of UCITS Cross-border EU registrations. Also, we will briefly discuss some of the implications that the directive on Cross-Border Distribution of Investment Funds will have on the maintenance of UCITS Cross-border EU registrations. Readers will also be able to claim a free copy of the template for board reporting on UCITS Cross-border EU registration here.

Reporting to the Board on UCITS Cross-Border EU Registrations

UCITS promoters involved at various title with UCITS Cross-border EU Registrations get acquainted at some stage with the fact that the board of directors maintains an overarching control over the distribution of UCITS funds, amongst other vital functions. This is particularly the case for the EU fund domiciles with the most evolved standards for fund governance, where distribution is one of the management functions assigned to the board of directors of management companies. Mutatis mutandis, we can extend the same logic also to the board of directors of the few UCITS that are still self-managed and don’t use an external management company to oversee operations. Whilst the board of directors can delegate practical execution of the various tasks related to the operation of a UCITS, implementation of distribution strategy included, nevertheless it retains the ultimate decision-making power on all strategic and operational matters related to the UCITS they manage.

UCITS Cross-border EU registrations are amongst the tasks related to implementation of distribution strategies proposed by UCITS promoters and approved by the board of directors. In fact, when proposing a distribution strategy, UCITS promoters will have to be specific to the point of listing the various jurisdictions where the UCITS will have to be registered for offer. Also, once a distribution strategy has been approved, UCITS promoters will have to provide the board of directors on an ongoing basis also with different reports on distribution, including reports on how distribution plans are implemented in practice. This means that UCITS promoters will have to report to the board of directors on whether their UCITS have been registered in the specific domiciles identified in the initial distribution strategy, as well as how registrations in these countries are maintained over time. As part of the ongoing reports owed to the boards of directors by UCITS promoters, it will also be required to demonstrate how different requirements imposed by local laws and regulations are being dealt with on an ongoing basis for the various domiciles where the UCITS are registered for offer.

Looking at UCITS distribution from the perspective of the board of directors makes its implementation a matter of good governance. UCITS promoters should pay particular attention to how they carry out their UCITS EU Cross-border registrations and ensure that related board reports are made at a sufficient granular level. These reports will also have to encompass all the information required in order to allow boards of directors to check the box of good governance on distribution strategies and their implementation plans. Click here for a free example of board report on UCITS EU Cross-border registration.

What Does it Mean to Maintain a UCITS Cross-Border EU Registrations? The Hidden Changes in the Cross-Border Distribution of Investment Funds Directive

Maintaining UCITS Cross-Border EU Registrations once obtained in specific domiciles is a matter of good governance. In fact, once a UCITS is registered for offer, a set of obligations arise for the UCITS to discharge vis-à-vis the so-called host state regulatory authorities. These are the financial or market supervisory authorities of the EU domiciles where the UCITS is authorised for marketing.

Whilst some specific EU domiciles impose also gold-plating rules, consisting in additional reporting obligations to be discharged via specific reporting platforms, most typically the idea is that once registered, a UCITS will have to keep its host regulators updated on each and every change made to the information provided as part of the initial registration package submitted. This is not only limited to the fund documentation that is updated in the course of the year, but goes on to include also changes to marketing arrangements. In fact, when applying for a UCITS Cross-border EU registration, the UCITS promoter will also have to specify the exact unit or share classes intended to be marketed in that domicile and provide a Key Investor Information Document translated in the local language of that domicile for each of these unit or share class. If during the course of the year it is intended to start offering new unit or share classes in a specific domicile, that counts as a change to marketing arrangements, for instance, requiring notification to the host state regulatory authorities.

In the UCITS ecosystem, all these changes were required to be notified as part of the routine maintenance of UCITS Cross-border EU registration only ex post and within a reasonable timeframe from the date of the changes coming into effect. The only exception being for the marketing arrangements, which require notification immediately before any change takes place. This approach would make it easy for UCITS promoters to check the box on good governance. However, the Cross-border Distribution of Investment Funds Directive, to be applied sometime in 2021 will change this approach and require that all changes are notified in advance of being applied, including changes to marketing arrangements. The new regime on maintenance of UCITS EU Cross-border Registrations will pose some significant challenges to UCITS promoters, which will be required to synchronize their marketing, sales and legal departments even more in order to maintain standard levels of good governance going forward.

Delegation of Tasks. Choosing your UCITS EU Cross-Border Registrations Provider

We thought it was a good way to close this article also discussing briefly the issue of delegation of the task of obtaining and maintaining UCIT EU Cross-Border Registrations. Most typically, this is where costly mistakes are made by UCITS promoters, which hinder for different reasons their ability to be truly pan-European in their EU distribution endeavors.

Whilst there is not a universal solution, or root cause for the failure, we have seen over time UCITS promoters having less than exciting results with their EU distribution endeavors also because of the choice of providers for UCITS EU Cross-Border Registrations. This is where particular attention will have to be paid to the type of provider and the service it is intended to receive.

Whilst big fund houses might find that an equally big provider, perhaps heavily technology driven, might be best suited, this might be the wrong choice in case there is no heavy internal supervision of the service delivered. In fact, technology driven providers tend to fare rather poorly on the good governance aspect for the very reason that technology is used to shuffle around huge amounts of documents, without having the ability to provide the level of details required when approaching host authorities with describing the reason for the changes of documentation. This shows that there is no internal control and is a red flag for good governance purposes.

At the opposite side of the spectrum, we have other UCITS promoters taking a more conservative approach and using law firms for their UCITS EU Cross-border Registrations. Whilst it is agreed that those tasks are better performed with a fair amount of legal skills involved, which should ensure at least in principle the attention to certain details, the majority of UCITS promoters faring less than successfully at EU Distribution are the ones which employ traditional law firms to deal with these tasks. And whilst some might argue that a law firm performing those tasks will help with checking the box of good governance, the service comes most often with a considerably rich price tag. In a moment where promoters are asked to deliver value for money to their investors, the high costs for this service provided by law firms, coupled with a not wide enough pan-European reach is something to consider carefully when making the decision of the service provider to appoint for UCITS EU Cross-border Registrations.