On January 30th 2017 ESMA issued an Opinion on share classes for UCITS (the “Opinion”) addressed to national competent authorities (“NCAs”) which follows the issuance of two discussion papers.
ESMA points out in its Opinion that the absence of a common regulatory framework for UCITS share classes has led to diverging national practices as to the types of share classes that are permitted; some jurisdictions do not allow at all the set up of share classes while others do, but the degree of flexibility varies with regard to their features or the requirement for prior approval by the NCAs.
Share classes attribute different rights or features among investors e.g. in terms of fees, minimum investment amounts, distribution of revenues or currency. However, there is no legal segregation of assets between the share classes as it is the case between sub-funds of the same UCITS.
In order to ensure a harmonised approach across European Member States, ESMA has introduced a set of four high-level principles which UCITS must follow when setting up share classes:
Share classes of the same fund should have a common investment objective reflected by a common pool of assets. ESMA has taken the position that hedging arrangements at share class level – with the exception of currency risk hedging – are not compatible with the requirement for a fund to have a common investment objective;
UCITS management companies should implement appropriate procedures to minimise the risk that features specific to one share class could have a potentially adverse impact (spill-over) on other share classes of the same fund. ESMA highlights that the risks introduced to a fund due to the use of derivatives in a currency risk hedged share class shall be appropriately mitigated and monitored at share class level in accordance with a set of minimum requirements such as limitation of potential loss, counterparty risk limits, operational and accounting segregation and stress tests;
All features of the share class shall be pre-determined before the share class is set up; ESMA notes however that this requirement does not limit UCITS management companies as to the type of derivatives used to hedge currency risk or its operational implementation; and
The existence and nature of all the share classes of the fund shall be disclosed via the UCITS prospectus to all investors of the fund, whether they participate in the share class or not. Moreover, UCITS management companies should provide all investors with a list of share classes with a contagion risk.
ESMA considers that in order to mitigate the impact on investors in share classes established prior to the Opinion, share classes not complying with the above principles should close for investment by new investors within 6 months of publication of the Opinion (i.e. by July 30th, 2017), and for additional investment by existing investors within 18 months of its publication (i.e. by July 30th, 2018).
The CSSF has not yet taken an official position whether it will adhere or not to the Opinion.