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22 August 2008
Mr. Carlo Comporti
The Committee of European Securities Regulators
11-13 Avenue de Friedland
CALL FOR EVIDENCE ON THE MANAGEMENT COMPANY PASSPORT
Please find attached the Investment Management Association’s (IMA) 1 response to
the call for evidence. We are very pleased that CESR has offered the industry the
opportunity to contribute at an early stage of this important exercise.
In IMA’s view management company passport is one of the measures needed to
enhance the efficiency of the UCITS framework. We therefore very much support
CESR’s work to advise the Commission, which will enable including management
company passport during the current legislature to the so-called UCITS IV package
proposed by the Commission in last July.
The IMA calls on CESR to provide the Commission with pragmatic solutions on how
the supervisory issues raised by some regulators especially regarding contractual
type of UCITS can be solved. We believe that the management company passport
should cover all kinds of UCITS funds, even though the detailed solutions can slightly
differ between the different legal structures in which UCITS can operate.
We believe that CESR needs to analyse what should be the division of duties
between the management company supervisor and the fund supervisor, and what
will be the real and sensible needs of information for these two regulators to be able
to properly conduct their respective duties.
The IMA represents the asset management industry operating in the UK. Our Members include independent fund
managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational
pension schemes. They are responsible for the management of £3.4 trillion of assets, which are invested on behalf of
clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private
client accounts and a wide range of pooled investment vehicles. In particular, our Members represent 99% of funds
under management in UK-authorised investment funds (i.e. unit trusts and open-ended investment companies).
65 Kingsway London WC2B 6TD
Tel:+44(0)20 7831 0898 Fax:+44(0)20 7831 9975
Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number 4343737. Registered office as above.
The IMA wants to stress that by no means can the solution be a double-authorisation
or control of the management company’s systems and operations by the
management company supervisor and the fund supervisor. This would be too
burdensome a solution which would do away any cost efficiencies aimed at with the
Given the vast number of UCITS funds and management companies already in
operation, structured to apply their respective legislative and regulatory regimes,
CESR’s deliberations should also aim to change only what is really necessary in the
current UCITS framework. We understand that a further detailed harmonisation of
aspects of the UCITS activity might help some regulators to accept the management
company passport more easily. Such a radical step would, however, generate
significant work for all firms and regulators concerned and the costs of this would in
the end be paid by the investors.
It will therefore be important that the scale and costs of such further harmonisation
measures are fully taken into consideration before CESR proposes any further
detailed harmonisation. The starting point of CESR’s work prior to aiming for further
harmonisation of the technical details should be rather to ensure that the necessary
investor protection outcomes to the end investor will be achieved also in cross-
border fund management. As has been shown during the 20 years of the UCITS
Directive in operation, high level of investor protection can be achieved in different
regulatory ways regarding many of the details of the activity. Accepting this fact
requires of course trust between the national regulators but without it a real and
efficient Single Market cannot be achieved.
We also note that the Commission has asked CESR to advise them on the required
Level 1 provisions “while indicating the fields that could be addressed through Level
2 implementing legislation”. So not all the details need to be solved by the deadline
of 1 November 2008, which the Commission has given to CESR’s advice.
We have seen the draft response of the European Fund and Asset Management
Association (EFAMA) of which we are members and we support their position.
Please find below IMA’s detailed responses to the questions raised in the mandate.
1 Definition of the domicile
The IMA believes that the domicile of both the fund and the management company
would logically be defined on the basis of where they are respectively authorised.
This is already reflected regarding the fund in Art. 2(1)(e) of the proposed Directive,
according to which “UCITS home Member State means the Member State in which
the UCITS is authorised pursuant to Art. 5.” The same principle could be applied to
We believe that the existence of the fund and its depositary in the same Member
State is a crucial element making the management company passport possible. We
accept that the depositary should be regulated in the same Member State as the
UCITS which it oversees because the depositary, in some sense, ‘stands in’ for the
regulator of the UCITS. In many countries the depositary can be compared to a
gatekeeper, i.e. a “first line of defence for the investor”. We therefore believe that
whilst a UCITS and its depositary should be subject to unitary regulation, this is not
true of the management company.
Therefore, under the operation of the management company passport, a fund’s
depositary would remain physically located in the Member State where the fund is
authorised (i.e. remote to the management company). Depositaries have varying
responsibilities in different Member States, but CESR could examine the degree to
which depositaries can provide fund compliance oversight and assist the regulators.
2 Applicable law and allocation of supervisory responsibilities
• Double-control is not the solution
The cornerstone of a well-functioning management company passport will be a clear
division of duties between the two supervisors concerned, and mutual trust between
them. A supervisor needs to be able to trust the supervisory work conducted by the
other supervisor across the border.
By no means can the solution be a double-authorisation or control of the
management company’s systems and operations by the management company
supervisor and the fund supervisor. This would be too burdensome a solution which
would do away any cost efficiencies aimed at with the passport.
As a result, a management company should for example not be obliged to report the
same information to both the management company supervisor and the fund
supervisor, but only to one of them. The supervisors can then exchange information
based on their actual supervisory needs. As the supervisors have not harmonised
reporting requirements, reporting by applying two different sets of rules would be
burdensome and costly.
Likewise it must be clear that the management company supervisor sets out the
requirements for risk management for the management company. Member States’
implementation of the Directive’s requirements differs in the detail, which would
make it very costly if not impossible to apply requirements of both domiciles at the
Enabling a fund manager with operations in many domiciles to have a centralised risk
management, a centre for excellence for this, has been one of the key aims of the
passport. A centralised risk management by a passporting management company
provides much stronger management of risk than small local operations in each of
the domiciles to nominally apply with the requirement to have the operation based in
the fund domicile. One of our members, an internationally active bank, put it to us
like this: “Who would you rather have overseeing the risk management processes of
a UCITS – a locally resident director, or a global, specialised risk management team
back in head office?” The result of CESR’s work should therefore not be a split risk
• Flow of information between the supervisors is a key issue
In our view, CESR needs to start by analysing what is the division of duties between
the management company supervisor and the fund supervisor, and what are the real
and sensible needs for information for them to conduct their respective duties. It has
to be stressed that these duties will be fulfilled in a modern financial services
environment based on extensive use of IT systems. Physical presence has in many
ways lost its meaning or at least needs to be redefined, as data is saved in servers
and can be transmitted cross borders without limits or delay. In practice nowadays
many parts of the value chain in fund management are conducted cross-border, and
management companies are yet able to fulfil their responsibilities.
The two supervisors involved in a remote management scenario need to be prepared
to exchange information between them speedily and efficiently. Here the Directive
should set the main requirements for a basis for the exchange of information, as it
already largely will do after the proposed amendments to Chapter XII.
The exchange of information could be further facilitated by MOUs between the
relevant supervisors, if necessary also using the college of supervisors structure
which is currently being discussed for banking and insurance sectors.
• Division of competences
The starting point at Level 1 of the Directive should be that the management
company supervisor authorises the management company and is responsible for
ongoing supervision of the requirements regarding the management company
including conditions for authorisation, capital requirements, rules of conduct etc. The
fund supervisor will be responsible for authorising the fund and ongoing supervision
of compliance with rules relating to the fund, especially eligible assets and
investment limits. Further specification of duties could be done at Level 2.
3 Authorisation procedure for UCITS funds whose management company
is established in another Member State
When a foreign management company requests a fund supervisor to authorise a new
fund, the fund supervisor has some justified needs for information regarding the
management company, including:
- The authorisation of the management company in its home Member State
- The risk management system of the management company
- Contact details of the management company
The list of the information a foreign management company needs to submit to the
fund supervisor with the application to approve fund rules should be maximum
harmonised at Level 1. Further details on the content of the documents to be
provided should be developed on Level 2. Maximum harmonisation of the documents
needed would make the fund authorisation process easier and quicker and would
prevent from any discrimination against foreign management companies.
If in some exceptional circumstances the fund supervisor does not want to proceed
with authorising the fund despite the management company having submitted all the
necessary documentation with its application, the fund supervisor should raise the
issue for mediation at CESR.
4 On-going supervision of the management of the fund
We refer to our response under item 2 and believe that the proposed Art. 93 already
provides a good basis for the fund supervisor to be able to conduct its supervisory
duties. According to Art. 93 “Competent authorities shall be given all supervisory and
investigatory powers that are necessary for the exercise of their functions. Such
powers shall be exercised in any of the following ways…b) in collaboration with other
authorities.” Proposed Art. 100 provides for a basis for adoption of implementing
measures in this regard. We believe that CESR should analyse whether these
provisions are not already adequate as Level 1 provisions.
5 Dealing with breaches of rules governing the management of the fund
In IMA’s view CESR should look carefully at the proposed measures at Chapter XII.
These proposals extend significantly the duties and possibilities of national regulators
to cooperate. CESR should indicate what requirements, if anything, would be needed
in addition for a well-functioning remote fund management.
In case of any breaches of rules either regarding the fund rules or the rules
impacting the management company, the two supervisors need to be able to keep
each other informed so that proper supervisory action can be taken without delay. In
case the breach of rules is with the remote management company, the management
company supervisor must take appropriate supervisory measures when reported
breaches by the fund supervisor. The supervisory measures will be the same as
applied by the management company supervisor to management companies
operating only domestic fund ranges, up to withdrawing the authorisation of the
management company if the breaches are of that severe nature.
Please do not hesitate to contact us with any queries you may have on our
submission or points you would like to follow up.
Director, International Relations