In today’s evolving financial environment, investment managers are always looking for new ways to find alpha, but undertakings for collective investment in transferable securities (“UCITS”) must carefully navigate eligibility rules when considering new asset types, such as structured debt instruments issued by special purpose vehicles (“SPVs”).
By way of background, Article 50(1) of Directive 2009/65/EC (“UCITS Directive”) permits UCITS to invest only in certain asset classes. In principle, any proposed investment would need to fall under one of the asset categories listed in Article 50(1)-(2) in order to qualify as an eligible investment for a UCITS. Directive 2007/16/EC (the “Eligible Assets Directive”) further clarifies these requirements.
While this framework appears straightforward in theory, in practice, the analysis for certain instruments, such as structured notes, requires a detailed, multi-layered legal and regulatory assessment. UCITS eligibility assessments must always be carried out on a case-by-case basis. This ensures that the specific investment meets all requirements under the UCITS Directive and is fully aligned with the fund’s strategy, liquidity profile, risk management processes, and disclosure obligations.
Zeidler has found that numerous investment managers determine the required eligibility assessment to be overly burdensome and simply block their UCITS from investing in more complex asset classes, effectively eliminating a potential return source for their funds.
A Complex Case in Point
Zeidler advised on a UCITS investing in notes issued by a Luxembourg SPV under a secured note issuance programme and performed the complex eligibility assessment on the notes. In addition to the legal and regulatory eligibility assessment, Zeidler provided its client a risk-based assessment and highlighted various initial and ongoing considerations in order for the client to be able to make a comprehensive and holistic decision to permit its UCITS to invest in these notes.
This matter highlights that UCITS eligibility is rarely a simple “tick-the-box” exercise, particularly when dealing with complex structured instruments, embedded derivative components, or bespoke issuance structures. Each investment must be reviewed against the UCITS framework and the fund’s own operational and strategic parameters.
Zeidler provides tailored UCITS eligibility assessments for a wide range of asset types. Our dedicated team of lawyers are always keen to assist you with any questions or support you may need and ready to deliver the required tailored case-by-case analysis for your project. If you need further information and assistance on this or any other topic, please do not hesitate to contact us.
