Caught in the EU FINREG WAKE

23 22 Citi Custody & Fund Services – Caught in the EU FinReg Wake SEAN TUFFY Head of Market and Regulatory Intelligence, EMEA, Custody & Fund Services UCITS & AIFMD: Checking the Hull This year the regulatory frameworks that govern EU investment funds, Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive (AIFMD), will be reviewed by EU policymakers. These reviews offer potential opportunities and pitfalls for the asset management industry. The following items will be crucial for the industry to watch. The EU’s review of AIFMD and UCITS offers potential opportunities and pitfalls for the asset management industry. CROSS-BORDER DISTRIBUTION ISSUES A major policy initiative in the EU is the Capital Markets Union (CMU) project. The CMU’s objective is to strengthen the EU’s capital markets to encourage more cross-border activity. As part of the CMU work, the European Commission has been looking for ways to encourage more cross-border sales of UCITS and AIFMD funds. Despite its global success, there are still challenges in selling UCITS across the EU due to a number of local barriers. These include fees imposed by local regulators, additional national requirements around selling financial products, and local paying agent requests to process subscriptions and redemptions. AIFMD funds face these challenges and more. For example, the local language requirements for documentation, such as applications or prospectuses, vary by country. A further complication is that the timeline for passport approvals is not uniform. The cumulative effect of these rules is additional costs for investors and less efficient distribution across the EU for both UCITS and AIFMD funds. To remedy these issues, the Commission has proposed a mix of regulatory and legislative changes to both the UCITS and AIFMD rules. The Commission’s proposals include: • Harmonizing the local fund marketing requirements and fees across the EU member states • Allowing use of electronic communication with investors • Removing physical presence requirements for marketing • Introducing a mechanism that allows UCITS funds to discontinue marketing • Harmonizing the pre-marketing for AIFMD EU member states UCITS DELEGATION RULES A potential flashpoint in the UCITS review is the substance requirements in the framework. Currently, the UCITS framework does not contain delegation rules. Instead, the requirements are determined by the local regulators, which