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UCITS investment limits to be applied to umbrella funds on look-through basis

December 2016 - Finance. Legal Developments by Chevalier & Sciales .

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The European Securities and Markets Authority has updated its Q&A documents on details of the UCITS rules in November of this year with two additional queries regarding the interpretation of investment limits when a UCITS invests in an umbrella fund.

  • 25% rule to be applied at underlying fund level

The first Q&A clarifies that the provisions of Article 56(2)(c) of the UCITS Directive, under which “a UCITS may acquire no more than 25% of the units of any single UCITS or other collective investment undertaking”, should be applied to the underlying sub-funds when the UCITS invests in an umbrella fund.

  • 10% rule also looks through the umbrella fund

Similarly, the provisions of Article 55(1) of the UCITS Directive, according to which “a UCITS may acquire the units of UCITS or other collective investment undertakings referred to in Article 50(1)(e), provided that no more that 10% of its assets are invested in units of a single UCITS or other collective investment undertaking”, should apply to the individual sub-funds when the UCITS invests in an umbrella fund, not to the umbrella fund itself.

If a management company or self-managed UCITS currently applies a different interpretation of these limits, it must as soon as possible adjust any UCITS portfolios affected to comply with ESMA’s stipulations, while remaining bound to act with appropriate skill, care and diligence in the best interest of the UCITS it manages.

The full text of the updated Q&As regarding UCITS published by ESMA can be accessed here.