Law 31/2011 of 4 October amending Law 35/2003 on Collective Investment Institutions

OFFICIAL STATE GAZETTE No. 240 Wednesday, October 5, 2011 Sec. I. Page 104537 I. GENERAL PROVISIONS HEAD OF STATE 15621 Law 31/2011, of October 4, amending Law 35/2003, of November 4, on Collective Investment Institutions. JUAN CARLOS I KING OF SPAIN To all who see and understand this. Know: that the General Courts have approved and I come to sanction the following law.

PREAMBLE I Directive 2009/65/EC of the European Parliament and of the Council of July 13, 2009, coordinating the laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), consolidates in a single text Council Directive 85/611/EEC of December 20, 1985, coordinating the laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, and its subsequent amendments. In addition to carrying out this consolidation, the directive simplifies the regime for the cross-border marketing of Collective Investment Institutions (hereinafter, IIC), provides for a cross-border activity regime for IIC management companies, strengthens the supervisory powers and cooperation mechanisms between competent supervisory authorities, regulates a new informational instrument for IICs called the "key investor information document" and provides for a regime for IIC mergers and master-feeder structures.

On the other hand, Article 11 of Directive 2010/78/EU of the European Parliament and of the Council of November 24, 2010, amending Directives 98/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC, 2005/60/EC, 2006/48/EC, 2006/49/EC and 2009/65/EC as regards the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority), partially amends Directive 2009/65/EC. The modifications refer to the configuration of the European Securities and Markets Authority as the authority to which the National Securities Market Commission (hereinafter, CNMV) must send it certain information, not only within the framework of cooperation between supervisors but also information regarding refusals of authorizations for certain Collective Investment Institutions and authorizations granted to management companies. The directive also incorporates the possibility of binding mediation by the European Securities and Markets Authority in certain cases of convergence of competent authorities from different Member States.

This law aims to initiate the transposition of these directives, transposition which will be completed with the development regulations, and for this purpose it amends Law 35/2003, of November 4, on Collective Investment Institutions.

Furthermore, the mandatory amendment of Law 35/2003 in compliance with our obligations regarding European Union law is used to introduce other modifications with the aim of strengthening the competitiveness of our industry in a context of greater integration and competition, and to establish measures for the improvement of the supervision of IICs and management companies by the CNMV.

With these objectives, this law consists of a single article that introduces modifications to Law 35/2003, of November 4, on Collective Investment Institutions throughout 71 sections, three additional provisions, one repealing provision and eight final provisions.

II Within a first set of novelties, this law introduces into Law 35/2003 the necessary provisions (applicable legal regime and supervisory powers) for the correct functioning of the management company passport for the management of funds.

First, from the entry into force of the rule, Spanish management companies will be able to manage funds domiciled in other Member States, and management companies from other Member States will be able to manage Spanish funds.

In this regard, it must be taken into account that harmonized management companies and investment funds and investment companies already enjoy a passport for the cross-border marketing of their shares and units. The novelty consists in introducing the passport for the cross-border management of funds itself. This makes necessary a greater degree of trust between the home supervisor (primarily responsible for supervising compliance with organizational rules and conduct rules when the IIC management company acts under the freedom to provide services) and the host supervisor (under whose responsibility fall the conduct rules when the IIC management company acts through a branch, and the organizational and operational rules of the fund).

Second, the cross-border marketing regime is simplified. Under current regulations, cross-border marketing requires informing the competent authority of the Member State of origin, as well as presenting a series of documentation before the competent authority of the Member State of destination, which considerably delays this procedure. With the new wording given to the law, the procedure for the cross-border marketing of funds or investment companies will involve notification between competent authorities of the management company's request and the exclusive verification by the competent authority of the Member State of origin of compliance with the necessary requirements to sell shares or units of IICs to investors in Member States other than that in which the fund or company is domiciled. Access to other markets is thus expedited, mainly through a reduction in the time limits available for competent authorities to carry out these notifications and with the elimination of the need for communication of the IIC with the competent authority of the Member State of destination.

III A second set of modifications included in this law is directed towards strengthening investor protection.

First, this increase occurs through the strengthening of cooperation, consultation and information exchange mechanisms between competent supervisory authorities. The broader possibilities for cross-border activity of IICs and their management companies also lead to equipping national and European supervisory authorities with instruments that guarantee the adequate balance with the other fundamental legal interest at stake, namely, investor protection.

Second, investor protection regarding their information rights must be increased. In this sense, it is necessary to modify Article 17 of Law 35/2003 – in addition to including some technical improvements – fundamentally to introduce a new informational document: "the key investor information document", which replaces the previous simplified prospectus and presents two substantial novelties with respect to it, in order to help the investor make informed decisions. On the one hand, this document is completely harmonized with the objective of making funds and harmonized companies perfectly comparable from any Member State. Secondly, the data will be presented in an abbreviated and easily understandable form for the investor, and in this instrument only essential data for making such decisions must be contained. By virtue of the introduction of this new informational document, it is necessary to establish a series of other eminently technical modifications in Law 35/2003.

IV A third block of matters included in this law is that of reforms aimed at increasing the competitiveness of the sector. Among these, an essential novelty for strengthening the competitiveness of our investment industry in this context of greater openness at the European level, is the possibility of using global accounts for the marketing in Spain of funds domiciled in our country, through the modification of section 3 of Article 40 of Law 35/2003. The introduction of these global accounts into our legislation is essential to eliminate the discrimination that Spanish management companies of Collective Investment Institutions (hereinafter, SGIIC) face for the marketing of Spanish funds in our country through global accounts, compared to foreign IICs that have been using this marketing mechanism. This is, ultimately, to eliminate a fundamental commercial disincentive that hinders SGIICs from concluding these marketing contracts with resident entities in Spain, which foreign SGIICs can conclude easily. This reform does not affect the remaining protected legal interests in the regulation of IICs, especially investor protection.

The possibility of using global accounts in section 34 of this law is accompanied by minor adaptations in other provisions of Law 35/2003.

In this line of reinforcing the competitiveness of our industry and increasing the capacity to attract investment of our sector, Law 35/2003 is modified to grant the possibility for IICs to pledge part of the assets included in their assets as collateral, thereby improving their financing possibilities, especially through framework agreements for contractual compensation. Throughout the articles, other measures to promote the competitiveness of our industry are established, reducing administrative burdens and flexibilizing procedures.

V Finally, the law includes a series of other matters. To expand on what has been said above, and beyond investor protection, the law also introduces additional mechanisms to facilitate and reinforce the supervisory activity of the CNMV. Likewise, the law introduces various technical improvements to achieve greater legal certainty that facilitates economic transactions.

The law concludes with three additional provisions, one repealing provision, which expressly repeals the fifth transitional provision of Law 35/2003, and eight final provisions, relating to the marketing of the investment funds referred to in Article 40.3, compliance with certain tax obligations, the incorporation of European Union law, the declaration of events of exceptional public interest, the modification of the Consolidated Text of the Corporate Tax Law, the enabling for regulatory development and the determination of the date of entry into force of the rule.

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OFFICIAL STATE GAZETTE No. 240 Wednesday, October 5, 2011 Sec. I. Page 104540 Single Article. Modification of Law 35/2003, of November 4, on Collective Investment Institutions. Law 35/2003, of November 4, on Collective Investment Institutions, is modified as follows:

One. Letters a), b) and c) of Article 2.1 are worded as follows: "a) To Collective Investment Institutions that have their registered office in Spain in the case of investment companies, or that have been authorized in Spain, in the case of funds. b) To Collective Investment Institutions authorized in another Member State of the European Union, in accordance with Directive 2009/65/EC of the European Parliament and of the Council of July 13, 2009, coordinating the laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (hereinafter, Directive 2009/65/EC), and that are marketed in Spain. In this case, only the rules referred to in Article 15 shall apply to them in their activity in Spain. c) To Collective Investment Institutions authorized in another Member State of the European Union not subject to Directive 2009/65/EC, and to Collective Investment Institutions authorized in non-member States of the European Union, in both cases when they are marketed in Spain."

Two. Section 2 of Article 2 is worded as follows: "2. Furthermore, this law shall apply to the management companies referred to in Title IV, to the depositaries provided for in Title V, as well as to other entities providing services to IICs, under the terms established in this law and its development regulations."

Three. Section 1 of Article 7 is worded as follows: "1. The participation in each of the aliquot parts into which the assets of a fund are divided. The participations shall have no nominal value, shall have the status of negotiable securities and may be represented by registered certificates or by book entries. Within the same fund, or if applicable, the same compartment, different classes of participations may exist which may differ, among other aspects, by the denomination currency, by the profit distribution policy or by the commissions applicable to them. Each class of participations shall receive a specific name, which shall be preceded by the name of the fund and, if applicable, the compartment."

Four. Article 8 is modified as follows: "Article 8. Commissions. Management companies and depositaries may receive management and deposit commissions from the funds, respectively, and management companies may receive subscription and redemption commissions from the participants; likewise, subscription and redemption discounts may be established in favor of the funds themselves. These commissions, which shall be fixed as a percentage of the fund's assets or performance, or a combination of both variables, or if applicable, on the net asset value of the participation, shall not exceed the limits that, as a guarantee of the participants' interests and depending on the nature of the fund and the maturity of the investments, are established by regulation. In the prospectus and in the key investor information document, the method of calculation and the maximum limit of the commissions, the commissions actually charged and the entity benefiting from their collection must be included. Different commissions may be applied to the different classes of participations issued by the same fund. In any case, the same management and depositary commissions shall be applied to all participations of the same class."

Five. Sections 2 and 3 of Article 9 are worded as follows: "2. Investment companies shall be governed by the provisions of this Law and, in matters not provided for therein, by the provisions of the Consolidated Text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of July 2 (hereinafter, the Capital Companies Law) and Law 3/2009, of April 3, on structural modifications of commercial companies. 3. The capital of investment companies must be fully subscribed and paid up from their incorporation, and shall be represented by shares. Different series of shares may be issued which may differ, among other aspects, by the denomination currency, by the profit distribution policy or by the commissions applicable to them. Shares belonging to the same series shall have the same nominal value and confer the same rights. Likewise, each of these series shall receive a specific name, which shall be preceded by the name of the company and, if applicable, the compartment. These shares may be represented by registered titles or by book entries."

Six. Section 2 of Article 10 is worded as follows: "2. The application for authorization must include, in any case, a memorandum, the accreditation of honorability and professionalism, under the terms set out in this Law, of those holding administrative and management positions in the IIC, and in general, any data, reports or background information considered appropriate to verify compliance with the conditions and requirements established in this article. Likewise, such application must include, in the case of investment funds, the prospectus and the key investor information document referred to in Article 17 of this law and, in the case of companies that have not appointed a management company, an activity memorandum showing the organizational structure. In the case of funds, the application must include the management regulations thereof, and in the case of companies, the articles of association. The National Securities Market Commission (hereinafter, CNMV) shall establish the standardized models for all documentation referred to in this section."

Seven. Section 3 of Article 10 is worded as follows: "3. In the case of investment funds and investment companies that have appointed a management company, the CNMV authorization must be notified within two months following receipt of the application, or at the moment when the required documentation is completed. In the case of investment companies that have not appointed a management company, the CNMV authorization must be notified within three months following receipt of the application, or at the moment when the required documentation is completed. If five months pass without an express resolution being issued, the application may be deemed granted by administrative silence, with the effects provided for in Article 43 of Law 30/1992, of November 26, on the Legal Regime of Public Administrations and Common Administrative Procedure."

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OFFICIAL STATE GAZETTE No. 240 Wednesday, October 5, 2011 Sec. I. Page 104542 Eight. Section 4 of Article 10 is worded as follows: "4. The CNMV may only deny, by reasoned resolution, the authorization for the creation of an IIC when the legal and regulatory requirements are not met. In the case of investment companies, the authorization may also be denied in the following situations: a) Lack of transparency in the structure of the group to which the entity may eventually belong, b) in the case of companies that have not appointed a management company, when it maintains close links with other entities that do not allow for the adequate and effective exercise of supervisory functions entrusted to the CNMV, c) when it can be deduced that there may be serious difficulties in inspecting it or obtaining the information that the CNMV deems necessary for the adequate development of its supervisory functions, d) when the legal, regulatory or administrative provisions of a non-member State of the European Union governing the natural or legal persons with which the investment company maintains close links, or the difficulties arising from their application, prevent the effective exercise of the aforementioned supervisory functions. For the purposes of this Law, close links shall be understood to exist when two or more natural or legal persons are united by:

1. A control link, under the terms provided in Article 4 of Law 24/1988, of July 28, on the Securities Market (hereinafter, the Securities Market Law),
2. The fact of holding, directly or indirectly, or through a control link, 20 percent or more of the capital or voting rights of a company or entity. In the case where the management company is authorized in another Member State of the European Union pursuant to Directive 2009/65/EC, the authorization for the creation of an IIC in Spain may only be denied in the following situations: a) When the management company does not respect what is provided in the first two paragraphs of Article 55.2.bis. b) When the management company is not authorized by the competent authorities of its Member State of origin to manage IICs of the type for which it seeks authorization. c) When the management company has not provided the documentation referred to in Article 11.4. Before rejecting an application, the CNMV shall consult the competent authorities of the Member State of origin of the management company. The CNMV shall annually inform the European Commission and the European Securities and Markets Authority of the number and nature of these denials."

Nine. Section 6 of Article 10 is worded as follows: "6. IICs may not begin their activity until they have been registered in the CNMV administrative register and the corresponding informational prospectus and the key investor information document for the Institution have been registered. The registration of investment funds in the Mercantile Registry shall be optional."

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OFFICIAL STATE GAZETTE No. 240 Wednesday, October 5, 2011 Sec. I. Page 104543 Ten. Letter e) of Article 11.1 is worded as follows: "e) In the case of investment funds, appoint a management company that complies with what is provided in Article 43.1.c) of this Law if it is an SGIIC authorized in Spain, or that complies with what is provided in Article 11.4 if it is a management company authorized in another Member State of the European Union pursuant to Directive 2009/65/EC. In the case of investment companies, if the minimum initial social capital does not exceed 300,000 euros, appoint a management company under the terms previously stated."

Eleven. Section 2 of Article 11 is worded as follows: "2. In the case of investment companies, the following requirements must also be met: a) Have an administrative and accounting organization, as well as adequate internal control procedures that guarantee, both those and these, the correct and prudent management of the IIC, including risk management procedures, as well as control and security mechanisms in the IT field and bodies and procedures for the prevention of money laundering. b) That its registered office, as well as its effective administration and management, is located in Spanish territory. c) That all administrators or, if applicable, members of its board of directors, including natural persons representing legal persons on boards, as well as those holding management positions in the entity, have recognized business or professional honorability."

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