A Guide to Undertaking for Collective Investment in Transferable Securities (UCITS)

Introduction

An Undertaking for Collective Investment in Transferable Securities (a UCITS) is a type of investment fund. A UCITS must be regulated in the European Economic Area (EEA) and must be suitable for retail investors.

Once authorised in one EEA member state, a UCITS can be “passported” into any other EEA country where local investors can buy units or shares in the UCITS. UCITS are also globally recognised and sold in many countries outside the EEA, including the US, the UK, Canada, Chile, Hong Kong, Singapore, Japan, Taiwan, Peru and South Africa, subject to local registration requirements.

As it is a retail product, there are a number of restrictions applied to UCITS, including the types of assets in which it may invest and limits in terms of diversification/concentration.

In Ireland, the regulator for all regulated funds, including UCITS, is the Central Bank of Ireland (the Central Bank).

FACTS AND STATS

The total value of UCITS funds as at 31 December 2023 was €15.2tn. Ireland is the 2nd largest domicile for UCITS, with 5,531 UCITS currently operating with total assets of €4.04tn as of 31 December 2024.

KEY FEATURES AND BENEFITS

Global product

The UCITS brand is recognised globally. Investors into a UCITS know that they are investing in a well-regulated product that offers sufficient comfort due to the guardrails and protections that are in place. A UCITS may be sold anywhere in the world, subject to local registration requirements – as set out below, this is a reasonably straightforward process within the EEA.

UCITS passport

One of the main advantages of a UCITS is the UCITS passport. As noted above, a UCITS authorised in one member state can be sold to investors in any member state of the EEA. The EEA consists of the member states of the EU, as well as Norway, Iceland and Liechtenstein. The passport process involves a simple notification procedure, which takes 10 business days and is harmonised across all Member States. Additional local marketing requirements may apply in certain jurisdictions (such as having documents in a local language).

The manager of a UCITS can also avail of what is known as the “management company passport”. This enables a UCITS manager (see below under “Service Providers”) located in one member state to act as a manager of UCITS authorised in other members states.

Flexible Structures

A UCITS can be housed in a corporate vehicle, such as an Irish Collective Asset-management Vehicle; a contractual fund; or a trust-based structure.

UCITS funds may be established as standalone funds, or as an “umbrella” fund, where there are a number of sub-funds housed within the one vehicle, each with its own investment objective, policy and restrictions. In an umbrella structure, there is segregated liability between sub-funds, meaning that the assets of each sub-fund are ring-fenced. In turn, sub-funds may issue shares in different classes, which may be distinguished based on, for example, currency or whether the class distributes or re-invests profits.

Taxation

With the exception of UCITS structured as common contractual funds (CCFs), all Irish UCITS are subject to the same favourable Irish taxation regime referred to as the “Investment Undertaking” regime. This favourable taxation regime essentially provides that UCITS themselves are not chargeable to Irish tax in respect of their relevant income and gains and, furthermore, non-resident investors are not taxed in Ireland on either (i) a disposal of their shares/units in the UCITS, or (ii) distributions from the UCITS.

However, to the extent there are Irish resident investors (other than certain exempt Irish investors e.g., Section 110 companies, pension schemes, charities, other Investment Undertakings, etc.), tax must, generally, be deducted by the UCITS on distributions made to such Irish resident investors.

Any gain arising to such Irish resident investors on a disposal of their shares/units is also chargeable to tax.

UCITS that are structured as CCFs are treated as Irish tax transparent. Therefore, income and gains are treated as arising (or accruing) to the investors as if the income and gains did not pass through the CCF.

Following authorisation by the Central Bank and launch, UCITS must register for investment undertaking tax with the Irish Revenue Commissioners. A similar tax registration procedure applies in the case of UCITS that are structured as CCFs. A more detailed analysis of the Irish tax registration and filing requirements of Investment Undertakings and CCFs is available here.

ELIGIBLE ASSETS

As its name might suggest, a UCITS may invest in “transferable securities.” This includes shares, bonds/fixed income securities, financial derivative instruments, money market instruments, and shares in other funds, all subject to certain investment restrictions, as detailed below.

There are certain types of assets in which a UCITS may not invest, including commodities and illiquid assets such as real property.

INVESTMENT RESTRICTIONS

UCITS are subject to a number of investment restrictions and constraints, as set out below.

Concentration and diversification limits apply to UCITS, including:

• What is commonly referred to as the “UCITS 5/10/40 rule”: a maximum of 5% of assets may be invested in any one issuer, which may be extended to 10% provided the aggregate of those issuers in which the UCITS holds more than 5% does not represent more than 40% of the assets of the UCITS;

• A UCITS may not invest more than 20% of its assets in deposits made with the same body;

• The risk exposure of a UCITS to a counterparty to an OTC derivative may not exceed 5% of net assets (this may be raised to 10% in respect of certain counterparties);

• Exposure to a single body under these restrictions may not exceed 35% (though exceptions apply for certain public and transnational bodies);

• Unless it is a feeder fund, a UCITS may not invest more than 20% of its net assets in another fund and the aggregate of investments in non-UCITS funds may not exceed 30%;

• The funds in which a UCITS may invest must not be able to invest more than 10% in other funds and a UCITS may not own more than 25% of the shares of another fund;and

• A UCITS may invest up to 20% (or 35% in certain circumstances) of its net assets in shares and/or debt securities issued by the same body where the investment policy of the UCITS is to replicate an index.

Use of derivatives – The use of derivatives by UCITS is subject to regulatory constraints (including with respect to type of eligible counterparties, counterparty exposure limits, global exposure limits), reporting requirements to the Central Bank as well as the requirement to have a risk management process in place.

Short positions – this may only be done synthetically via derivatives.

Borrowing – A UCITS may only borrow up to 10% of its net assets for short-term liquidity purposes.

PRODUCT DESIGN

Before bringing a new UCITS to market, the product design stage will help to determine key aspects of the UCITS, such as its investment objective and policy, investment strategy, distribution plan, service providers and applicable fees and charges.

Liquidity

A UCITS must permit subscriptions and redemptions at least twice per month. In practice, most UCITS permit subscriptions and redemptions on a daily basis. The assets of the UCITS are required to be sufficient liquid in order to be able to be meet any redemption requests.

Service providers

UCITS will generally operate a delegated model, whereby the board retains certain powers and responsibilities but appoints service providers to carry out many of the functions of the fund, such as management, investment management, marketing/distribution and administration/transfer agency.

• Manager – A UCITS is required to appoint a manager to carry out the management, administration, investment management and marketing/distribution. It used to be common for UCITS to be “self-managed” but this is now very rare due to the regulatory burden on UCITS managers. The manager will then typically delegate the administration, investment management and distribution function (but cannot do so to the extent that the manager becomes a letter-box entity).

• Administrator – The manager will usually appoint another entity to provide transfer agency services and administration services such as calculating the net asset value of the portfolio and preparing accounts.

• Investment manager – The manager will also usually appoint another entity to act as discretionary portfolio manager of the UCITS.

• Distributor – The manager will also usually appoint another entity to market/distribute the shares of the UCITS. Often, the Investment Manager is appointed as lead Distributor and will appoint sub-distributors to sell the UCITS in different jurisdictions.

Separately, the UCITS is required to appoint an external depositary to provide custody/safe keeping of its assets. The manager, administrator, investment manager(s), distributor(s) and depositary must all be appropriately authorised and regulated in order to be eligible to be appointed by a UCITS.

BOARD OF DIRECTORS

A UCITS established using a corporate vehicle (such as an ICAV) will be required to appoint a board of directors to oversee its operations. The directors must be natural persons and the board should comprise of at least three individuals (who should have the necessary experience and expertise, including any required training), including at least two independent directors and two individuals who are reasonably available to meet the Central Bank at short notice, if required.

A director must be approved in advance by the Central Bank to be appointed as a director of a UCITS. As part of the approval process, each director is required to comply with the Central Bank’s fitness sand probity requirements, which includes submitting responses to an online individual questionnaire and carrying out searches (including in respect of bankruptcy, director restrictions and adverse media).

In addition to being collectively responsible for actions that the Board may take, Directors are required to adhere to a set of conduct standards set out under the Central Bank’s “Individual Accountability Framework” and may be held personally responsible for their failure to do so in certain circumstances.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FUNDS

A UCITS may be set up as an ESG fund or a non-ESG fund. ESG funds are classified under the SFDR as either an Article 9 Fund (which has sustainable investment as its objective) or an Article 8 Fund (which promotes, among other characteristics, environmental or social characteristics). Managers of UCITS funds (whether ESG or non-ESG funds) are required to take sustainability risk into account in the investment due diligence process and to have a framework in place to manage sustainability risks.

FUND DOCUMENTATION

Prospectus

The principal document for any UCITS is its prospectus. This is a form of “pre-contractual” document, which is required to disclose certain minimum information to enable investors to make an informed judgement as to the nature of their investment. The prospectus sets out information in respect of the UCITS, including its investment objective, policy and restrictions, risk warnings, dealing arrangements, descriptions of the service providers and all fees and expenses payable out of the assets of the UCITS, taxation implications as well as information in respect of any sub-funds, which is typically set out in a supplement to the prospectus.

Other documentation

Among the other documentation to be put in place, are the following:

• Material contracts: There will be agreements in place with each of the services providers listed above, which should be supported by service level agreements between the parties.

• Key Information Document(s): Each share class of a UCITS must have a two or three page document that summarises key information for investors in a prescribed format, known as a “UCITS KIID” or a “PRIIPs KID”.

• Policies and procedures: While the bulk of the required policies and procedures will be at manager-level, it is necessary for the board of the UCITS to have various policies, including policies in respect of anti money-laundering, cybersecurity, conduct standards and conflicts of interest.

APPLICATION FOR AUTHORISATION

It is important that all of the proposed service providers to the UCITS are appropriately authorised and regulated in order to be eligible to be appointed by a UCITS. Typically, the proposed manager, administrator and depositary will already have the necessary authorisation. However, it may be the case that the proposed investment manager has not previously been authorised by the Central Bank to act for Irish UCITS. In this scenario, an application will need to be made in advance to the Central Bank to seek approval for the investment manager to act for an Irish regulated fund.

Before applying for authorisation, it is necessary to submit the prospectus to the Central Bank for review. The Central Bank may raise comments, which must be addressed in an updated version of the prospectus. This iterative process continues until the prospectus has been cleared of comment by the Central Bank.

In terms of timeframes, the Central Bank aims to issue its first round of comments within 20 working days, and aims to respond to any subsequent submissions within 10 working days. These timeframes may be disapplied where a proposed UCITS is unusual, for example if it may be highly leveraged or if it is proposed to invest in certain assets (including CoCos, CFDs and CLOs).

Once the prospectus is cleared of comment by the Central Bank and provided the proposed services providers and director approvals are in place, an application for authorisation may be submitted to the Central Bank, which will include a number of documents, including the prospectus, executed versions of the material contracts with each of the service providers listed above, and the relevant key information document(s).