UCITS IV is a European Union initiative under the Lamfalussy Process. The European Parliament and the Council of the EU adopted the new European UCITS IV directive known as UCITS (DIR 2009/65/EC), on June 22, 2009. EU member States must transpose the directive into national legislation by July 1, 2011.
In fact, Luxembourg became the first EU jurisdiction to adopt UCITS IV at the end of December 2010, and as a major domicile for both conventional and Islamic investment funds has a first mover advantage.
According to Marc Theisen, senior partner at Theisen Law in Luxembourg, which has a partnership agreement with Al-Shoaib Law firm in Alkhobar and Riyadh, stressed that UCITS IV fits in well with investor protection and transparency and disclosure requirements in Islamic asset management. “UCITS IV has clearly defined regulations and disclosure requirements in the prospectuses. It will definitely be the trend for the future in investment funds. I would strongly advise promoters wishing to launch new Islamic equity funds to use the UCITS IV structure. Initially there will be extra costs because it is a new start-up structure which requires new expertise. But over the medium to long term the UCITS IV structure would prove very cost-effective,” added Theisen.
The UCITS IV directive seeks to update and harmonies the regulatory framework applicable to European investment funds and to improve their distribution within the European Union. The European investment fund market is estimated at 5 trillion euros. Perhaps more importantly it deals with the management company passport; cross-border mergers; asset grouping by means of joint structures (master-feeders); simplified authorization procedures, replacement of the simplified prospectus with key investor information (KII) and/or Key Investor Disclosure (KID) structures; and measures concerning implementation.
The KII is a standardized summary information document aimed at making it easier for the consumer to understand the product offering.
In terms of the management company passport, for instance, stressed Theisen, a fund management company which is licensed in Ireland and which wishes to enter the Luxembourg market does not need to file a new license application with the regulatory authority and needs only to inform the authority. This he stressed will save fund promoters costly fees. This he added would create a genuine European passport for UCITS management companies; should lead to substantial economies of scale and ensure greater transparency for consumers as to the location of the management company.
UCITS IV will also help in cross border marketing and monitoring of products by simplifying administrative procedures; in cross border mergers of UCITS, which will make it possible to increase the average size of European funds; in asset pooling by creating a framework for the system of "master-feeder" arrangements whereby a fund invests more than 85 percent of its assets in another fund; and in strengthening the supervision of UCITS IV based funds and of their management companies through enhanced cooperation between supervisory and regulatory authorities
The directive, says Theisen, would modernize the regulatory framework applicable to investment fund products by offering investors a greater choice of products at lower cost through better integration of the internal market; by providing investors with adequate protection through better and more accurate information and by maintaining the competitiveness of the European investment fund industry by adjusting the regulatory framework to developments in the market.
The financial services industry is very important to Luxembourg; it employs 78,000 people. Luxembourg, Theisen added, is a world leader in wealth management, asset management, corporate finance and fund management. It is also a major center for cross-border offerings. Islamic finance, he added, is a natural extension of the product and services offerings in Luxembourg given its rapid global growth in the last few years. It also completes and complements the product offerings in the financial services industry in Luxembourg.
The move comes at a time when Luxembourg has been proactively promoting the Duchy as another EU hub for Islamic finance. Luxembourg is already a major domicile for sukuk listing and the registration of Islamic funds. Currently, there are some 16 sukuk listed on the Luxembourg Stock Exchange with a combined value of 5.5 billion euros; and over 45 Islamic investment funds, largely equity funds domiciled in Luxembourg.
Luxembourg is the only EU country which is a member of the Islamic Financial Services Board (IFSB) the prudential and supervisory standards setting body for the global Islamic finance industry. Perhaps equally important, it was a founder member of the newly-established International Islamic Liquidity Management Corporation (IILM), once again being the only EU member country to do so.
Only last week the CSSF, the Luxembourg banking and securities regulator issued a statement regarding the latest developments in sukuk issuance in the Duchy.
"Issuers of sukuk have recognized the attractiveness of the Luxembourg legal framework for Islamic finance" said the CSSF.
In order to strengthen further the legal security of sukuk issuers, while ensuring adequate investor protection, the CSSF has clarified certain rules applicable to sukuk, in particular as regards the annexes to the prospectus regulation.
Sukuk may be treated as asset backed securities pursuant to the provision of Article 2.5 of the prospectus regulation or, subject to certain conditions, as guaranteed debt securities pursuant to Article 23.2 and Annex VI of the prospectus regulation.
Indeed, provided that the payments of principal and the periodic revenues under the securities are guaranteed on a contractual basis by one or more underlying entities. In other words, if the payment of principal and the periodic distributions are independent from the performance of the underlying asset, the CSSF considers that the underlying entities may be described in accordance with the provisions of annex VI of the prospectus regulation.
Market players however privately stress that further clarification may be needed especially in defining "subject to certain conditions."
