Following the feedback received from industry representatives, institutional investors and depositaries on the discussion paper ESMA/2014/1577 on UCITS share classes dated December 22nd 2014, in which ESMA had identified diverging practices as to the types of share classes that are permitted across the various jurisdictions of the European Union, ESMA has published on April 6th 2016, an updated Discussion Paper ESMA/2016/570 on the topic (the “Discussion Paper”).
UCITS market participants expressed their desire for a harmonised framework for share classes throughout the EU having in mind the diverging national practices as to the types of share classes that are permitted, ranging from very simple share classes (e.g. with different levels of management fees) to much more sophisticated ones (e.g. with potentially different investment strategies). This divergence arises due to the lack of definition and scope of share classes at the level of the UCITS Directive. In addition, there are some uncertainties regarding the line that has to be drawn between the activities which could be permitted at share class level and the ones which should only be limited to the level of the UCITS or sub-fund. From a practical perspective, in order to meet investor’ customisation needs, UCITS promoters will tend to create an additional share class rather than a new sub-fund or UCITS for various reasons, such as reduced costs, economies of scale and shorter authorisation periods for launch. Therefore, it is of paramount importance to define what is allowed under a share class and what would require the creation of an additional sub-fund or UCITS.
The aim of the Discussion Paper is to provide ESMA additional feedback which will be used as a basis for future regulatory provisions on share classes, which will likely take the form of an ESMA opinion.
It appears from the discussions led by ESMA that four cumulative key features have to be retained as a common definition of what a share class is:
- “Common investment objective”: Share classes of the same fund should have a common investment objective reflected by a common pool of assets. However, hedging arrangements applying to some of the share classes and not to others shall be accepted (especially for currency hedging purposes) provided that the below “Non-contagion” principle is complied with ;
- “Non-contagion”: UCITS or their management companies should implement appropriate procedures to minimise the risk that features that are specific to one share class could have a potentially adverse impact on other share classes of the same fund (in particular the hedging arrangements which may benefit to some of the share classes but could have a negative impact on the whole structure) ;
- “Pre-determination”: All features of the share class should be pre-determined before it is set up;
- “Transparency”: Differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.
ESMA will consider the feedback it receives on the Discussion Paper until June 6th 2016, and also intends to take further steps in this matter by the end of the year.