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The European Commission has published a call for evidence regarding the functioning in EU Member States of private placement regimes, under which securities can be sold privately to a limited number of eligible investors. The Commission White Paper on investment funds identified the absence of a common approach to private placement as a possible stumbling block to mutually beneficial transactions between financial professionals.
A first discussion on these issues will be held on the occasion of the UCITS (Undertakings for Collective Investment in Transferable Securities) open hearing on Thursday. Responses to this consultation are supposed to contribute to the Commission's assessment on the need and potential options for a European private placement regime scheduled for end 2007.
In its White Paper on enhancing the single market framework for investment funds (IP/06/1569), the Commission committed to "undertake a systematic analysis of national barriers to private placement."
The White Paper proposes targeted changes to the current EU framework for investment funds (the "UCITS Directive"), which does not adequately reflect the challenges facing the industry today and can give rise to unnecessarily high compliance costs and missed investment opportunities. The changes are hoped to simplify the notification procedure, create a framework for the cross-border merger of funds, create a framework for asset pooling, enable fund managers to manage funds domiciled in other Member States, improve the quality and relevance of the key disclosure documents to the end investor and strengthen supervisory cooperation to monitor and reduce risk of cross-border investor abuse. The White Paper also proposes to review options for establishing a European "private placement regime," allowing financial institutions to offer investment opportunities to qualified investors across the EU.
The Commission reportedly has developed the White Paper on the basis of extensive consultation and debate with consumers, industry practitioners and policymakers over a period of two years. It builds on responses to the Green Paper of July 2005 (IP/06/152), and on three reports from specially constituted expert groups (IP/06/915).
The body of material has been prepared as the basis for public consultation on the form of future possible adjustments to the UCITS Directive. The basic case for introducing these changes was analyzed in the Commission's White Paper on investment funds and the supporting impact assessment.
The White Paper set out the Commission's view that changes to the UCITS Directive were urgently needed:
(1) To remove administrative obstacles and delays to the cross-border marketing of funds through overhaul of the current UCITS notification procedure.
(2) To allow fund managers to manage funds that are domiciled in other Member States (management company passport).
(3) To facilitate consolidation through fund mergers.
(4) To provide for centralized management of assets gathered through local funds by allowing master-feeder structures.
(5) To refocus and improve the quality and usefulness of product disclosures provided to retail investors when considering investment in UCITS (reworking of Simplified Prospectus).
(6) To strengthen supervisory powers and supervisory cooperation to ensure effective oversight of the increasingly integrated European fund market.
The changes are desperately needed considering that assets under management by the EU industry have grown four-fold over the last decade. The importance of investment funds is set to grow as many European investors use them as a means to save for a prosperous retirement. The market is increasingly organized on a pan-European basis. Cross-border fund sales represented some 66% of the total net industry inflows in 2005. The "UCITS" model is considered as a "gold standard" both inside and outside the EU. With â‚¬ 5.5 trillion under management - equivalent to more than 50% of the EU gross domestic product - "UCITS" represent 75% of the investment funds market in Europe.
Interestingly 54% of European funds manage less than â‚¬ 50 million of assets. The average European fund size is less than one-fifth of that of an American fund. The cost of running and selling these micro-funds is significantly higher than for larger funds. Recent research found that, in a leading European fund domicile, the average TER of a fund with assets under $5m. was more than double that of a fund with over $250m. Annual scale savings of up to â‚¬6b. have identified by other studies in this area. In order to facilitate the rationalization of the fund landscape and to foster economies of scale the exposure draft includes provisions to create a framework for fund mergers.
Proper arrangements for private placement could be particularly helpful in freeing up cross-border transactions in non-harmonized investment funds or institutional products such as private equity investments that are not suitable for the retail investor. Legal uncertainty and barriers to cross-border business with regard to private placement are considered as factors that increase the costs of raising money, particularly by inflating legal and advisory fees. These higher organizational costs, in turn, impact negatively on the returns available to investors.
As a first step in preparing its report, the Commission is currently gathering information and views on the need for and possible design of a European private placement regime. With this call for evidence, interested parties are invited to express their views and to submit relevant evidence.
The call for evidence requests input on three issues. First, it seeks quantitative or qualitative material to determine whether the absence of a common approach to private placement constitutes a material impediment to cross-border financial investments. Second, it invites comments on the appropriate parameters of a possible private placement regime - in terms of the boundary between public and private offer, eligible participants and enforcement issues. Third, it opens discussion on whether and how a private placement regime could be established at European level. The Commission requested that replies be as fully evidenced as possible and be supported by examples of best practice from national level within or outside the EU.
In the context of this consultation, the Commission scheduled one panel to a first exchange of ideas on this topic during the open hearing on investment funds which will be held in Brussels on Thursday.
The author is head of the International Department at the Joseph Shem-Tov Law Firm.