Royal Decree 1180/2023 modifying investor compensation systems and collective investment scheme regulations

I. GENERAL PROVISIONS MINISTRY OF ECONOMY, COMMERCE AND ENTERPRISE 26463 Royal Decree 1180/2023, of December 27, modifying Royal Decree 948/2001, of August 3, on investor compensation systems, and the Regulation developing Law 35/2003, of November 4, on collective investment institutions, approved by Royal Decree 1082/2012, of July 13.

PREAMBLE I

Law 6/2023, of March 17, on Securities Markets and Investment Services, and Royal Decree 813/2023, of November 8, on the legal regime of investment service firms and other entities providing investment services, incorporate into Spanish law the main aspects of Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms, amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU.

One of the novelties of the new prudential regime for investment service firms is the modification of initial capital requirements. Thus, Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 establishes harmonized requirements among investment service firms to avoid fragmentation at the European Union level and regulatory arbitrage between jurisdictions.

Under the new prudential regime, financial advisory firms (FAFs) will have an initial capital of 75,000 euros. Previously, the initial capital requirement was 50,000 euros or the possession of a civil liability insurance policy allowing them to undertake financial advisory activities. However, Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 does not allow investment service firms to subscribe to insurance as an alternative to the payment of initial capital.

In Spain, FAFs constitute a highly atomized subsector, in which a small number of companies concentrate a large part of the activity. The modification in the initial capital requirement with the entry into force of Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 could have a significant impact on this subsector, as many small-sized FAFs will not be able to meet this increase in initial capital. FAFs, like investment service firms (ISFs) in general in Spain, are small companies with a very low nature and risk profile, facing difficulties competing in the current context following the implementation of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (hereinafter, MiFID II or MiFID II), as they are subject to excessively demanding requirements for their size and whose impact on financial stability is practically nil.

Since Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 does not offer room to grant flexibility to these companies, a national regime has been established, without European passport and without the third-country regime being applicable, which allows FAFs to continue operating with insurance. This possibility is contemplated in Article 3 of the Directive.

According to what is provided in Law 6/2023, of March 17, on Securities Markets and Investment Services, and in Royal Decree 813/2023, of November 8, on the legal regime of investment service firms and other entities providing investment services, the regime for adherence to the Investment Guarantee Fund (FOGAIN) is developed for all FAFs, regardless of whether they are subject to the national regime without European passport or not.

Royal Decree 813/2023, of November 8, states in its statement of reasons: "Financial advisory firms and national financial advisory firms will not have to comply with their obligation to adhere to the Investment Guarantee Fund until the contribution regime applicable to them is established in accordance with Article 188 of Law 6/2023, of March 17. Thus, to comply with said legal provision and with the objective of guaranteeing a greater degree of equity in the distribution of annual contributions carried out by adhering entities, this royal decree modifies the legal contribution regime contemplated in Royal Decree 948/2001, of August 3, on investor compensation systems.

This modification seeks a greater degree of linkage between each entity's contribution to the Fund and the risk it could pose to the system as a whole. Likewise, in the search for sector stability, two additional modifications are introduced: first, a formula is introduced through which the volume of assets from which the progressive reduction of contributions to be made by adhering entities will occur is determined; second, an adjustment is made to the formula used to calculate the assets that will trigger the suspension of certain contributions. Likewise, and with the objective of facilitating the adequate application of these modifications, a voluntary and progressive adaptation regime for entities to the new legal contribution regime is introduced.

II

On the other hand, this royal decree, of a modifying nature, incorporates into the Regulation developing Law 35/2003, of November 4, on collective investment institutions, approved by Royal Decree 1082/2012, of July 13, a set of normative changes oriented to improve the competitiveness and functioning of collective investment institutions in Spain, thus completing the reforms in this area initiated by Law 18/2022, of September 28, on the creation and growth of enterprises, and Law 6/2023, of March 17, on Securities Markets and Investment Services.

Specifically, the royal decree introduces additional improvements in the legal regime of collective investment institutions (CIIs) seeking to boost and improve collective investment, a sector that in recent years has experienced notable acceleration and dynamism, and whose correct functioning benefits the entire economic activity. Correct functioning must necessarily be linked to investor protection, and specifically retail investor protection. In this sense, modifications are introduced in Articles 5, 6, 73 and 74 of the Regulation developing Law 35/2003, of November 4, on Collective Investment Institutions, to adapt the success fee regime to the recent guidelines of the European Securities and Markets Authority (ESMA). Changes are also introduced in this article regarding the charging of custody and administration fees for participation units in the case of marketing of investment funds through omnibus accounts, and changes are introduced in the fee regime to establish mechanisms guaranteeing that marketing costs are rebated to the investment fund if they are incorporated into the management fee of the underlying fund. Finally, Article 23.1(q) is amended to eliminate the obligation to require the publication in the prospectus of an indicator of current expenses, given that Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 does not require it.

Article 35 is also modified to explicitly state that in cases of dissolution and liquidation of an investment fund, it is possible, while maintaining the suspension of the participant's right to request redemption, to structure installment payments through the redemption of participation units.

Likewise, to align Spanish regulation with European legislation, Article 51 of the Regulation developing Law 35/2003, of November 4, on Collective Investment Institutions, is modified, eliminating the quantitative limits imposed on CIIs to invest in financial instruments incorporating voting rights on an issuer, leaving the reference to the possibility of exercising significant influence on the issuer, as reflected in the wording of Article 56.1 of Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 coordinating the laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).

The new wording given to Article 53 is also noteworthy, eliminating the requirement of a 1% liquidity coefficient for collective investment institutions, given that the legislation already provides sufficient mechanisms for liquidity management and this is also a requirement not included in European Union law.

On the other hand, some provisions applicable to free investment CIIs and free investment CII of CIIs, regulated respectively in Articles 73 and 74, are modified. First, the minimum holding periods are adjusted, eliminating the maximum quantitative limit linked to the initial moment when the participant subscribed to their participation, which was currently fixed at one year, to instead fix a holding limit linked to the period foreseen for the liquidation of investments made in the free investment CII. Second, it is established that the pro-rata distribution of redemptions will be carried out without conditioning it to the liquidation on the next redemption date, but rather to the availability of necessary liquidity. This will allow aligning the liquidity of Spanish CIIs investing in foreign CIIs that establish pro-rata distributions of redemptions on these same terms. Finally, the marketing regime for non-professional investors in free investment CIIs is relaxed to assimilate it to the regime introduced by Law 18/2022, of September 28, on the creation and growth of enterprises, for venture capital entities and other closed-type collective investment entities. Thus, as an alternative to the requirement of a 100,000 euro investment, marketing to non-professional clients is allowed provided they access the investment through the recommendation of an entity authorized to provide the advisory service, and, in the case where the client's financial assets do not exceed 500,000 euros, that an initial minimum investment of 10,000 euros is made and does not represent more than 10% of said assets.

This royal decree also modifies the regulation of special purpose compartments regulated in Article 75 and Article 78.7 to address some technical adjustments aimed at improving their functioning. First, the possibility of these compartments being carried out through a company is eliminated, given that supervisory practice advises using a fund as the vehicle, whose constitution is more immediate and appropriate when short-term solutions are needed. Second, the minimum CII assets necessary for the creation of these compartments is reduced from 5% to 1%, which must be affected by circumstances preventing valuation or sale at a reasonable value. The manner in which redemptions must occur as the special purpose compartment obtains liquidity is also regulated in detail. Finally, stricter limits are established on the management and deposit fees from the second year, understanding that most actions oriented towards the liquidation of assets have already been carried out.

Likewise, Article 78.3 is modified to provide greater flexibility in the calculation of the net asset value, maintaining that subscriptions and redemptions can be attended to at least biweekly, as well as in paragraph 6 to allow that the management regulations of funds foresee notice periods adjusted to the maximum period to attend to subscription and redemption requests, in order to facilitate the management of funds with strategies focused on less liquid assets.

Additionally, the limits on risk diversification of the Management Company (SGIIC) in Article 104 are reinforced to include within the 25% concentration limit in the same entity or entities belonging to the same group not only issued securities, but all types of financial instruments and also cash. Adjustments are also made regarding the policy on the exercise of voting rights, to adapt Spanish regulation to second-level European legislation, specifically Article 21 of Delegated Directive (EU) 2010/43 of the Commission of 1 July 2010 establishing requirements for organization, conflicts of interest, business conduct, risk management and the content of agreements between depositaries and management companies, and Delegated Regulation (EU) No 231/2013 of the Commission of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council regarding exemptions, general conditions for the exercise of activity, depositaries, leverage, transparency and supervision.

III

This royal decree responds to the principles of necessity, effectiveness, proportionality, legal certainty, transparency and efficiency.

With regard to the principle of necessity, the royal decree contributes to keeping the legislation applicable to fund and investment company management up to date, which is an activity in permanent development and evolution. Likewise, the royal decree determines an adequate regime for compliance with what is provided in Article 188 of Law 6/2023, of March 17, on Securities Markets and Investment Services. As for the principle of effectiveness, this royal decree is the ideal instrument to introduce the modifications described above in the Regulation developing Law 35/2003, of November 4, on Collective Investment Institutions. In effect, the changes through this royal decree are the appropriate instrument to fulfill the pursued objectives of increasing the attractiveness of the Spanish legal regime for collective investment institutions and reinforcing investor protection in collective investment institutions. Regarding the new contribution regime to the Investment Guarantee Fund, this royal decree does not impose any burden that is not justified to achieve the pursued ends, that is, primarily, investor protection and the proper functioning of markets.

With regard to the principle of proportionality, the measures to promote the attractiveness of the collective investment regime in Spain are introduced guaranteeing at all times that adequate investor protection is not undermined. The update of the contribution regime to the Investment Guarantee Fund is also framed in the search for greater guarantee in investor protection, which will result in greater confidence in the financial sector and better performance by it of the functions it must perform in the Spanish economy as a whole.

The principle of legal certainty is safeguarded, insofar as the changes in this royal decree guarantee coherence with higher-ranking legal norms, in particular with Law 35/2003, of November 4, and with Law 6/2023, of March 17.

In application of the principle of transparency, during the public hearing phase held between July 1 and 16, 2020, and the second public hearing held between September 20 and 28, 2023, interested parties had access to the draft regulation on the website of the Ministry of Economic Affairs and Digital Transformation (currently Ministry of Economy, Commerce and Enterprise). A part of the content of that draft was approved in Royal Decree 816/2023, of November 8, modifying the Regulation developing Law 35/2003, of November 4, on Collective Investment Institutions, approved by Royal Decree 1082/2012, of July 13, while the rest of its content is incorporated in this royal decree.

On the other hand, from February 10 to 25, 2020, the public consultation on the transposition of Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms was carried out. During the public hearing phases held from May 5 to May 25, 2021, and from September 20 to September 28, 2023, interested parties had access to the draft royal decree on the website of the Ministry of Economic Affairs and Digital Transformation (currently Ministry of Economy, Commerce and Enterprise). A part of its content has been incorporated in Royal Decree 813/2023, of November 8, on the legal regime of investment service firms and other entities providing investment services, except for what relates to the modifications of the Investment Guarantee Fund, which are incorporated in this royal decree.

During the processing of the complete draft royal decrees, reports were requested from the General Technical Secretariats of the Ministry of Justice, the Ministry for Ecological Transition and the Demographic Challenge, the Council of Consumers and Users, as well as from the Ministry of Economic Affairs and Digital Transformation, while reports were also received from the CNMV (National Securities Market Commission) and the Bank of Spain. Subsequently, between September 19 and 28, 2023, a second hearing was held where interested parties had access to the draft of this regulation on the website of the Ministry of Economic Affairs and Digital Transformation. New reports were also requested from the Bank of Spain and the CNMV, and reports from the Ministry of Economic Affairs and Digital Transformation were received.

Finally, regarding the principle of efficiency, this law does not impose any additional administrative burden.

In virtue thereof, upon proposal of the Minister of Economy, Commerce and Enterprise, with the prior approval of the Minister of Finance and Public Function, in accordance with the Council of State, and after deliberation of the Council of Ministers in its meeting on December 27, 2023,

I HEREBY ORDER:

Article 1. Modification of Royal Decree 948/2001, of August 3, on investor compensation systems.

Royal Decree 948/2001, of August 3, on investor compensation systems, is modified as follows:

One. Paragraph 1 of Article 3 is drafted as follows: "1. Adhering entities to the Investment Guarantee Fund shall be investment service firms and national financial advisory firms contemplated in Article 188.1 of the Securities Markets and Investment Services Law."

Two. A new letter n) is incorporated into paragraph 4 of Article 4, drafted as follows: "n) Professional investors referred to in Article 194 of Law 6/2023, of March 17, and in Article 112 of this royal decree."

Three. Paragraphs 2, 3, 4 and 7 of Article 8 are drafted as follows: "2. Adhering entities must make an annual contribution equivalent to the sum of the following amounts: a) A fixed amount based on the list of services and investment activities they perform, according to the following detail: i) Portfolio management: 2,700 euros. ii) Proprietary trading: 2,700 euros. iii) Receipt and transmission of client orders (including placement of financial instruments without a firm commitment): 1,000 euros. iv) Investment advice: 800 euros. v) Other investment services: 2,700 euros. vi) Auxiliary service of custody and administration on behalf of clients: 2,700 euros. b) 2 per mille of cash, with a limit of 100,000 euros per covered client, and 0.08 per mille of the cash value of securities and financial instruments deposited or managed by them, corresponding to clients covered by the guarantee.

3. The Minister of Economic Affairs and Digital Transformation, and with their express authorization the CNMV, shall determine the accounting items and statistical data that must be included in the calculations of annual contributions. Likewise, the Minister of Economic Affairs and Digital Transformation may, upon proposal of the CNMV, agree on the reduction of the amounts and percentages referred to in this article when the assets of the fund reach a sufficient amount for the fulfillment of its purposes.

When the uncommitted assets in operations proper to the object of the fund exceed the amount resulting from multiplying the average coverage per client by 2 percent of the number of clients covered by the guarantee of the total adhering entities to the Fund in the previous exercise, the amount of contributions to be made by each adhering entity to the fund shall be reduced by 40 percentage points.

To this effect, the assets of the Fund shall be considered as the Own Funds appearing in the annual accounts formulated by the corresponding Council for the previous exercise.

When said assets exceed the amount resulting from multiplying the average coverage per client by 2.5 percent of the number of clients covered by the guarantee of the total adhering entities to the Fund in the previous exercise, the amount of contributions to be made by each adhering entity to the fund shall be reduced by 50 percentage points.

Contributions shall be suspended when the uncommitted assets in operations proper to the object of the fund exceed the amount resulting from multiplying the average coverage per client by 5 percent of the number of clients covered by the guarantee of the total adhering entities to the Fund in the previous exercise.

However, both the reduction and the suspension provided for in the previous paragraphs will only reach the contributions linked to cash and client securities."