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UCITS IV – Rules of Conduct and the Challenges Facing Management Companies and Self-Managed Investment Companies

Elaine Keane, Senior Associate
Maples and Calder
July 2011

Under the auspices of UCITS III, management companies (“ManCos”) and self-managed investment companies (SMICs) have been organised and maintained in accordance with the requirements of the Management Directive (Undertaking for Collective Investment in Transferable Securities Directive 2001/107) such that the board of directors are required to carry out eight key functions, being: decision taking, monitoring compliance, risk management, monitoring investment performance, financial control, monitoring capital, internal audit and supervision of delegates in the course of their management of the relevant UCITS.

UCITS IV seeks to build upon this governance framework, requiring ManCos and SMICs to have sound administrative procedures; safeguard arrangements for electronic data processing; and adequate internal control mechanisms to include: (i) rules for personal transactions by employees; (ii) rules for investing on own account; (iii) documenting transactions so that they may be reconstructed according to their origin, parties, nature, time and place; and (iv) establishing assets of a fund are invested in accordance with fund rules, instruments of incorporation and legal provisions in force. The net effect of these new requirements is to elaborate on the existing eight key functions under UCITS III and to impose two additional functions (being complaints handing and accounting policies and procedures). The UCITS IV Directive (Article 14) also provides for the implementation of rules of conduct by the ManCo/SMIC to cover the following key areas: due diligence requirements in respect of the appointment of third parties, handling of orders, best execution, complaints handling, inducements, fees, rebates and soft commissions, voting rights, malpractices, conflicts of interest, personal transactions and records and business continuity.

Given the breadth of these rules of conduct, this article seeks to focus on three key areas which have provoked the greatest degree of interest from the industry.

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