Amendments on Spanish Collective Investment

Law 31/2011, of 4 October 2011, which amends Law 35/2003 of 4 November, on Collective Investment Schemes (“CIS Law”), was published in the Spanish Official Gazzette on 5 October 2011.

The main purpose of this amendment is to implement in Spain Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS IV Directive”).

In addition to the rules introduced as a result of the implementation of the UCITS IV Directive, several amendments have been made to the CIS Law for the purposes of improving the competitiveness of the Spanish Collective Investment Schemes (“CIS”) industry.

We set out below the main new features resulting from the amendment of the CIS Law:

1 Amendments resulting from the implementation of the UCITS IV Directive

1.1 Crossborder marketing of CIS (UCITS passport)

1.1.1 Marketing in Spain of units in foreign UCITS

The notification process to be followed in order to market unit in foreign CIS harmonised under UCITS IV Directive (“UCITS”) has been simplified and depends now on the home Member State of the relevant UCITS rather than on the host Member State. The competent authority of the home Member State will have to submit to the Spanish competent authority, the Comisión Nacional del Mercado de Valores (“CNMV”) the required documentation within 10 days after having received it from the UCITS, so that subsequently the CNMV registers the foreign UCITS in Spain (the timeframe for this process is shortened since previously the CNMV had up to 2 months to register the foreign UCITS). Additionally, translation requirements are limited to the Key Investor Information Document (“KIID”), which is the only one that needs to be in Spanish (not being necessary for it to be a sworn translation).

1.1.2 Marketing in the EU of units in Spanish UCITS

The marketing in a EU Member State of units in Spanish UCITS is also simplified. The notification process is carried out with the home Member State regulator, the CNMV, which once it has verified that the documentation provided by the Spanish UCITS is complete, will issue a certificate that must be submitted to the host Member State competent authority within 10 days of receiving such documentation. Once the CNMV has notified the Spanish UCITS that notification between regulators has taken place, the Spanish UCITS can be marketed in the relevant host EU Member State.

1.2 Passport for management companies

Management companies domiciled in a EU Member State can set up or manage the assets of UCITS established in another EU Member State, thus introducing a true “European passport” for management companies. Spanish CIS Management Companies (“SGIIC”) who intend, either by setting up a branch or on a cross-border basis, to set up or manage the assets of a UCITS in another EU Member State, will have to give prior notice to the CNMV, who will have a two month period in the event of branches (the period was of three months before the amendment of the CIS Law) and a one month period in the event of cross-border services, to communicate this to the host Member State competent authority.

Those management companies authorised in another EU Member State intending, either through a branch or on a cross-border basis, to carry out in Spain the activities of administration, representation, investment management or management of subscription and redemption of units of UCITS, will also be able to benefit from this “management passport” in relation to Spanish UCITS. However, they will have to comply with applicable Spanish legislation in relation to the setting up and operation of CIS and, additionally, those management companies authorised in another EU Member State operating in Spain through a branch will also be subject to applicable Spanish conduct of business rules.

1.3 Key Investor Information Document

The KIID is the document that replaces the simplified prospectus as principal document in which the investor will have to base its investment decision and which will allow investors to make comparisons between UCITS in any Member State. The KIID is required since 1 July 2011 for UCITS. However, UCITS have a period of one year (until 1 July 2012) to adapt their simplified prospectus to the KIID.

The content of the KIID is regulated in Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing UCITS IV Directive and will provide the following information: (i) identication of the CIS; (ii) short description of the investment objectives and policy; (iii) historical performance or, if applicable, profitability scenarios; (iv) costs and expenses associated; and (v) risk/reward profile of the investment.

The KIID will be considered as pre-contractual information and will have to be drafted in a concise way, in non-technical language, follow standardised format, and be easily understandable by investors. Civil liability could be incurred in as a result of a KIID or its translation including information which is misleading, inexact or inconsistent with the prospectus.

2 Other relevant amendments

2.1 CIS assets as guarantee in OTC derivative transactions

CIS will be able to enter into OTC derivative transactions secured with a two-way collateral over the assets which comprise the portfolio of the CIS (until now collateral could only be one-way, provided by the counterparty to the CIS in the OTC derivative). Collateral will be limited to an amount not exceeding the daily settlement of profits and losses generated as a result of the changes in the valuation of such derivative transactions, and provided that such transactions are covered by financial collateral and contractual netting arrangements regulated under Royal Decree-Law 5/2005, of 11 March (which implemented in Spain the Financial Collateral Directive). This possibility, which was already contemplated for pension funds, will increase the number of counterparties for CIS in OTC derivative transactions and will reduce their cost.

2.2 Use of omnibus accounts for the marketing of investment funds and creation of a centralised registry of unitholders

Spanish investment funds marketed in Spain will be able to use omnibus accounts. This possibility already existed for Spanish investment funds marketed outside Spain (note that it is not possible for Spanish CIS with a corporate form, (e.g. SICAVs)). The unitholders registry of the management company will have to include, at least, the tax identification number of the unitholders and the identity of the marketing entity through which the units have been acquired. Additionally, the marketing entity must keep a registry identifying those unitholders who have acquired units through such entity.

In relation to foreign UCITS marketed in Spain and distributed through more than one marketing entity, the CIS Law allows the possibility of designating an entity in charge of keeping a centralised registry of unitholders which have been channelled through marketing entities in Spain. Such entity will be subject to compliance with the tax obligations of withholding and supplying information to the Spanish tax authorities. The purpose of this measure is to give the same tax treatment to foreign UCITS marketed in Spain and to Spanish UCITS.

2.3 Powers of the CNMV to suspend the issuance, redemption or repurchase of units or shares in CIS

In those cases in which it is not possible to determine the price of the units or shares or in which a “force majeure” event occurs, the CNMV may require, in the interest of unitholders or shareholders, or in the public interest, the temporary suspension of the issuance, redemption or repurchase of units or shares of CIS authorised in Spain.

2.4 CIS Merger

In the case of mergers of CIS taking the form of corporate, the authorisation of the CNMV to the merger procedure must be requested after such merger has been passed by the Board of Directors and prior to the merger project being deposited with the Mercantile Registry. The authorisation to the merger will have to be communicated to shareholders of the relevant entities merged once the merger project has been deposited with the Mercantile Registry. The final exchange ratio will be established on the basis of the net asset values and number of shares outstanding on the day prior to granting the public deed of merger.

In relation to investment funds mergers, the new regulation clarifies that the publication of the authorisation to the merger by the CNMV must be posted in the webpage of the management company or companies (in case of choosing this way of publication) at least during one month. In addition, the period for executing the merger is extended from one month to 40 days from the notification to unitholder.

Download entire issue (as pdf)