Interview with Joëlle Hauser, Kremer Associés & Clifford Chance

Joëlle Hauser worked for Arendt & Medernach, UBS Luxembourg and Clearstream International before being appointed as Partner at Clifford Chance in Luxemburg in 2001. She is specialising in investment funds including the set-up and structuring of funds which includes retail, real estate, private equity and hedge funds. Furthermore being a member of the “Comité OPC” (UCI Committee) of the CSSF it was obvious for us that she would have the answers regarding the upcoming changes caused by the implementation of UCITS IV which is due by the middle of 2011.

Dennis Drenjovski: What will be the biggest changes under UCITS IV, for both investors and asset managers?

Joëlle Hauser: The biggest changes that the UCITS IV, as opposed to the UCITS III Directive, will bring about may be summarised as follows:

The establishment of an effective management company passport. The institution of specific regime on mergers of UCITS, both for domestic and cross-border mergers, which takes into account the interests of third parties and of the investors; the possibility to create UCITS master-feeder structures (with a minimum of 85% to be invested in a master UCITS). The replacement of the current simplified prospectus with the Key Investor Information Document (KID). A streamlining of the notification procedure for the cross-border marketing of UCITS in the EU, through a clarification of the assignment of the responsibilities between the competent authorities of the home Member State and of the host Member State; the removal of ex ante controls in the host Member State; a regulator-to-regulator communication; and the use of electronic communication, leading to a substantial reduction of administrative barriers, delays and costs. An enhanced cooperation between the supervisory authorities of the different Member States.

DD: You mentioned the KID that will replace the simplified prospectus under UCITS IV. Please point out the major modifications.

JH: The KID is intended to be a very short (maximum two „A4“ pages) and more comprehensible disclosure document than the simplified prospectus that will help investors understand the key features of the proposed UCITS investment. Implementing measures will be adopted, which are to cover the detailed and exhaustive content of the KID, as well as the form and presentation of the information it contains. Amongst others, detailed rules will be issued on the presentation of past performance and on the inclusion of risk and reward profiles concerning the UCITS. This will allow for a more efficient cross-border marketing of UCITS and easy comparability for investors between UCITS of various Member States.

DD: What benefits can be expected by the new Master-Feeder provisions and the management passport under UCITS IV?

JH: Insofar the master-feeder provisions are concerned, among other benefits, we may mention (i) economies of scale when pooling the assets at the level of the master UCITS; (ii) the centralisation of investment management; (iii) the comingling of similar funds designed for different types of investors; and (iv) the local presence of each feeder UCITS. The provisions of the UCITS IV Directive relating to master-feeder structures should allow these benefits to be enjoyed with a minimal additional administrative burden and relatively straightforward ongoing supervision.

Concerning more particularly the management company passport, these provisions will allow management companies authorised in their Home Member State to provide management company services not only to UCITS from their Home Member State, but also to UCITS from other Member States. This will for example allow fund promoters to centralise their management companies‘ functions in one single Member State while having UCITS in various Member States.

DD: From a portfolio construction perspective: What will be different under UCITS IV in comparison to UCITS III? Will it be more difficult or easier in that regard to replicate an off-shore hedge fund strategy in a UCITS vehicle?

JH: Besides the establishment of a legal regime for UCITS master-feeder structures, the rules relating to eligible assets under the UCITS IV regime basically remain the same as under the UCITS III regime. Hence, the CESR „Guidelines concerning eligible assets for investment by UCITS“ dated March 2007 and September 2008 as well as CESR‘s Guidelines relating to „the classification of hedge fund indices as financial indices“ dated July 2007 remain applicable. However, insofar the risk management of UCITS is concerned, and in particular as regards the assessment of UCITS‘ exposure to derivatives, UCITS IV must comply with more stringent rules than UCITS III, in particular deriving from CESR‘s „Guidelines on risk measurement and the calculation of global exposure and counterparty risk for UCITS“ dated 28 July 2010.

DD: UCITS IV still has to be implemented into national laws. Do you expect any differences in the outcome between the jurisdictions?

JH: Some of the grounds to adopt the new UCITS IV Directive were specifically to minimise such differences between Member States and to correct the negative effects thereof on the UCITS market and on investor protection. Nevertheless, differences between the concrete national laws may still appear, such as concerning the detailed rules applicable to the depositaries (see also the CESR‘s „mapping of duties and liabilities of UCITS depositaries“, dated January 2010). This is also why the EU has already started working on the next UCITS „V“ Directive which might specifically address such issues.

DD: Do you have the impression that the uncertainty about the AIFM directive has driven some managers into UCITS although they first didn‘t want to? If yes: do you think this is a dangerous development or does this in the end lead to more benefits for the investors as the regulation requirements are stricter?

JH: Although currently there is a lot of uncertainty surrounding the final text of the AIFM Directive, we are not aware of a very noticeable trend to „transform“ all existing (on-shore or off-shore) hedge funds into so-called „newcits“. Indeed, the rules applicable to UCITS, even in case of sophisticated UCITS, are still much more burdensome than those applicable to non-regulated funds or to funds reserved to well-informed investors. In particular, all constraints relating to the eligibility of assets, the risk management functions and the depositary functions do not make it possible for every hedge fund to become a UCITS (newcits).

DD: Are there growing concerns about the suitability of UCITS hedge funds for retail investors and will the authorities take measures to protect the unsophisticated investors more in the future?

JH: Concerns may indeed exist, and in particular in view of the recent financial crisis. One of the results thereof is that the EU has decided to implement more stringent rules regarding for example the way in which the risk management and measurement must be effected when UCITS invest in derivative instruments (see the CESR Guidelines of 28 July 2010 in that respect). But as a general rule, these rules and regulations are specifically intended to ensure adequate protection of retail investors and therefore may be seen as satisfactory, be it that additional regulation by the national authorities or the EU institutions cannot be excluded.

DD: Thank you for the interview.