On January 30, the European Securities and Markets Authority (ESMA) issued an opinion (Opinion) on share classes within Undertakings for Collective Investment in Transferable Securities (UCITS) funds. The Opinion sets out high-level common principles for setting up and operating share classes.

Currently there is no common uniformity within the UCITS framework applicable to the use of share classes in UCITS, with some countries prohibiting a fund/sub-fund from having different share classes altogether, while others permit share classes with varying degrees of flexibility. ESMA has issued the Opinion to seek to correct this diversity in application and ensure a harmonized approach across the European Union. The Opinion contains four principles designed to achieve these objectives:

  • Common investment objective: share classes of the same fund/sub-fund should have a common investment objective with a common pool of assets. ESMA considers that hedging arrangements at share class level—with the exception of currency risk hedging—are not compatible with this objective, in particular, as such UCITS that use derivative overlays and other techniques to protect investors in a share class from certain types of risk should be set up as separate funds/sub-funds;
  • Non-contagion: UCITS managers should implement appropriate procedures to minimize the risk that features specific to one share class could have a potentially adverse impact on other share classes (for example, hedging arrangements for a share class should ensure that the notional of a derivative should not lead to a payment or delivery obligation exceeding the value of that share class);
  • Pre-determination: all features of the share class should be pre-determined before the share class is set up; and
  • Transparency: differences between share classes should be disclosed to investors when they have a choice between two or more classes.

To mitigate the impact on investors in share classes established prior to the Opinion, which may not comply with the principles, ESMA states that they should be allowed to continue for now. However, such share classes should be closed to new investors within six months of the publication of the Opinion (i.e., July 30), and for additional investment by existing investors within 18 months (i.e., July 30, 2018).

The Opinion is available here.