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The European Securities and Markets Authority (ESMA) has issued an Opinion on the extent to which different types of units or shares (share classes) of the same UCITS fund can differ from one another, having found diverging approaches in different EU countries.
UCITS can be sold to retail investors throughout the EU. However, there is currently no common EU framework for share classes, with some countries prohibiting the set-up of different share classes within a single fund and others permitting it with varying degrees of flexibility. While all investors in a UCITS fund invest in a common pool of assets, share classes attribute different rights or features to sub-sets of investors although there is no legal segregation of assets between the share classes.
In its Opinion, addressed to national regulators, ESMA sets out four high-level principles which UCITS must follow when setting up different share classes in order to ensure a harmonised approach across the EU:
- Common investment objective: Share classes of the same fund should have a common investment objective reflected by a common pool of assets. ESMA considers 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;
- Non-contagion: UCITS management companies should implement appropriate procedures to minimise the risk that features specific to one share class could have a potentially adverse impact on other share classes of the same fund;
- Pre-determination: All features of the share class should be pre-determined before the fund is set up; and
- Transparency: Differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.
Impact on share classes
ESMA is aware that these principles will have an impact on investment fund markets in countries where share classes can currently be set up which do not comply with them. Therefore, to mitigate the impact on investors in share classes established prior to this Opinion which do not comply with these principles, ESMA is of the view that they should be allowed to continue. However, such share classes should be closed for investment by new investors within 6 months of publication of the opinion, and for additional investment by existing investors within 18 months of publication.