CARMIGNAC GESTION COMMENTS COMMISSION GREEN PAPER ON THE ENHACEMENT OF THE EU FRAMEWORK FOR INVESTMENT FUNDS

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1 CARMIGNAC GESTION COMMENTS COMMISSION GREEN PAPER ON THE ENHACEMENT OF THE EU FRAMEWORK FOR INVESTMENT FUNDS Carmignac Gestion welcomes the publication of the Green Paper and congratulates the European Commission for a high quality and wide ranging report on the state of the investment fund industry. We appreciate the possibility to contribute our views regarding the future regulatory environment for our industry, as our industry is called to play a fundamental role in securing the savings of European citizens and providing for their future retirement benefits. Moreover, as being an active member of the French Asset Management Association (AFG) and the European Fund and Asset Management Association (EFAMA), we support both comments. 1/ GENERAL BACKROUND Founded in 1989 by Edouard Carmignac, a stockbroker since 1984, Carmignac Gestion has become one of the leading independent management companies in France. The shareholding structure reflects the independence of the company and the entrepreneurial spirit of the staff. Approved by the French Financial Markets Authority, Carmignac Gestion guarantees its clients objectivity and transparency as regards its investment decisions. Its share capital is entirely held by its managers and employees, and amounts over Eur 50 million. Carmignac Gestion manages over Eur 4 billion on behalf of 8,000 European retail investors, asset managers and institutional clients, which is invested outside of France in 40 financial centres around the world. The international distribution of its product ranged is managed through the Luxembourg subsidiary which has been operating since January Highly internationalised, the company maintains close, steady relations with the managers of companies whose stocks are included in the funds portfolio and with the foreign correspondents, brokers and institutional managers allowing it to cover all foreign stock markets, particularly New York, Tokyo, London, Hong Kong and Sydney. Carmignac Gestion is distinguished by its original management style: our international, nonbenchmarked, active management, based on our best ideas and an opportunistic approach, aims to achieve absolute return, or more specifically, the best possible performance in light of the investor s appetite for risk. Since 2003 Carmignac adopted a policy of cross-border distribution in line with the objectives of UCITSIII. Our funds are now approved for distribution in Germany, Italy, Switzerland, Luxembourg, Belgium and Spain. and this process will continue. As an independent French fund management company we have worked through with varying degrees of difficulty the registration process in 7 European countries. Our experience, whilst not unique, is the foundation for our evolvement and desire to see Pan European Fund distribution a reality not only on paper but an effective part of investment possibilities within Europe, working in a pragmatic and efficient manner.

2 2/ GENERAL COMMENTS We strongly support the series of actions already undertaken by the Commission and CESR to find a path for more consistent and harmonised implementation of the UCITS Directive. We are already grateful to the Commission and CESR for these restless efforts. And we would be extremely pleased if we were able to notice that they reached their goals. Unfortunately, our experience is that, although progress has been and can still be made, many difficulties have their roots in the wording of the Directive itself but also in the system it has devised. Apart from the EFAMA and the AFG answers to the 19 questions posed by the Commission that we support, in a short term perspective, we would like to put the emphasize on several issues, that from our recent practical experience, should be solved by the Commission and would help in the reach the aim of a single market while maintaining the current high levels of investor protection. Definition of a simple, harmonised format for the Simplified prospectus Despite the provision of Schedule C from the amended Directive 85/611 concerning the short prospectus, the short prospectus still contains too much information and prospectuses from different countries are no longer comparable for the investor. Regarding transitional issues and Commission s Recommendations on the simplified prospectus, consistent implementation across Europe is crucial. The absence of consistency in implementation will unavoidably lead to new cross-border barriers. In this context we would like to point out that the Commission should pro-actively accompany implementation with a more precise advice and in a text of binding nature (as compared to the non-binding Recommendations it adopted). In particular, we can already acknowledge today that the Recommendation on the Simplified Prospectus - because of its non-binding nature notably - fell short of achieving its goal to create a fully harmonised marketing tool to the benefit of European household investors and the fund industry. In assessing the implementation of its Recommendation, the Commission should reconsider it and remember that the simplified prospectus was aimed at both: easing cross-border distribution in using a European single harmonised document on the basis of which units of UCITS may be purchased without any possible request by the host country s competent authority for additional information; providing European investors for simple, reliable and comparable information about the essentials of a fund before investing in this fund. In practice, simplified prospectuses are often as long as the full prospectus, look very different from one country to the other and include more or less diverging information. TER s in particular do not have the same scope and hence differ for the same fund.

3 In some Member States, the so-called simplified prospectus became even longer than its predecessor document, without any added value for the investor. It was recognised by some national regulators which have now to consider setting up super-simplified prospectuses. Due to the lack of legal certainly coming notably from the non-binding nature of the Recommendation on the simplified prospectus, cross-border distribution has become more complicated and more expensive than before. The Commission should reconsider the approach taken by the UCITS Contact Committee, which ended in the above-mentioned Recommendation and consider returning to the way shown by the FEFSI/EFAMA model for instance. A European harmonised simplified prospectus becoming mandatory in a precise format through a European binding text (European Regulation) following the principle of maximum harmonisation would solve the issue. Simplification of notification and registration procedures The existing regimes remain very different from a Member State to another one. The documents to be provided for the registration of a fund are very different from one country to another, one country requiring constitutive documents duly apostilled with a sworn translation whereas other countries simply accept an English translation of these documents. Regarding simplification of notification procedures, the current Articles 44, 45 and 46 of the UCITS Directive prevent a true product passport. Even if CESR were able to find an agreement among regulators on the process to follow regarding cross-border notification, the UCITS Directive leaves some significant powers of interpretation of the relevant Articles in the hands of the host Member State, in particular as marketing and advertising have not been harmonised by the Directive. A true product passport is not possible in practice as long as the existing wording of the relevant Articles of the Directive remains. The asset management industry need a lighter regime for notification procedure through lighter powers for the Host Member State authorities (in line with the general country of origin principles of the Treaty). This can be achieved only if the Directive does not allow national regulators to reject funds domiciled in another Member State on the ground of the existing Directive provisions. Moreover, the list of documents to be submitted should be shortened (e.g. annual report). We have estimated the average UCITS III registration cost of one fund between and Euros. To illustrate the Commission the expensive costs induced by the registration process, our asset management company has spent in 2004, euros in legal and translation costs (which represents 1,3% of its turnover) for the registration of 10 funds in Germany, Italy, Luxembourg, Belgium and Spain (registration which has not been yet fully completed). Fund mergers and master feeder

4 Fund mergers and the creation of feeder funds investing in a master funds situated in another European country are not possible today from a practical point of view. However, in the numerous existing cases of the same fund pattern currently offered locally under different national domiciles, we consider that cross-border mergers of funds should be facilitated within the Union. At domestic level, mergers of funds have already been tested successfully (e.g. around fund mergers in France, out of fund mergers in the EU). This success shows the need for mergers. First, these mergers offer economies of scale. Second, these mergers offer an opportunity to rationalise the range of products, making it easier to be understood by investors. From a pragmatic point of view, the easiest and hence quickest measures for cost efficiency would be to authorise European cross-border master-feeders. The master-feeder architecture does not conflict with the Commission s and Member States legitimate concerns on investors protection, because both the master fund and the feeder funds will have to be UCITS managed by UCITS management companies. Master-feeders lead to a reduction of costs and, at the same time, ease the access to harmonised products by investors. Lastly, from an investor protection perspective, master-feeders are totally transparent and probably easier to explain than other pooling techniques (in particular, virtual pooling which might raise questions about the operational risks involved, the need for complex contractual arrangements and valuation processes). In France, domestic master-feeders have had a very significant success: the French master-feeder fund market represents more than 7% of general UCITS AUM, through 577 master funds/. 3/ PRIORITY ACTIONS While monitoring the consistent and efficient implementation of existing rules, the Commission intends to: publish in the autumn of 2005 an interim report on how national authorities have implemented the CESR guidelines on transitional provisions regarding UCITS III; encourage CESR to adopt by the autumn of 2006 guidelines on how to simplify notification procedures; publish in the autumn of 2005 an assessment of how Member States have implemented the Commission s two Recommendations of April 2004 on the use of derivatives and the simplified prospectus; adopt in the second half of 2006 implementing legislation on eligible assets of UCITS. This issue is currently dealt with by CESR, which will deliver its advice to the Commission in January While fully supporting these four priority actions, we would like to make the following comments:

5 Firstly, notification procedures degenerated during the past 15 years to extremely burdensome multiple registration procedures, and they must be brought back to what they should be, i.e. notification. However, simplification and harmonisation of notification procedures can only be a first measure. Ultimately, a passport must allow for border-crossing free of notification. This, however, would require new regulation making it a longer term issue. Secondly, assessments and reports on how CESR s guidelines on transitional issues and the Commission s Recommendations on derivatives and the simplified prospectus are implemented at national level are an important step. However, assessments and reports are not enough. If necessary, action must follow to provide for consistent implementation across Europe. Any absence of consistency in implementation unavoidably leads to new crossborder barriers. In this context we would like to point out that the Commission should not wait until bad implementation of EU legislation has happened, but should pro-actively accompany implementation with more precise advice. Regarding the Simplified Prospectus, and without anticipating the Commission s assessment, we must state today that it has fallen short of achieving its goal to create a fully harmonised marketing tool to the benefit of the fund industry and European household investors. Worse still, we now have an additional layer of superfluous, if not confusing information:(i) in many cases the Simplified Prospectus contains too much information, lacks focus and (ii) prospectuses from different countries are no longer comparable. Finally, instead of becoming cheaper and easier, cross-border distribution has become more expensive and more complex. A very good example of how a good piece of legislation can turn to bad as a result of institutionalised gold-plating. In assessing the implementation of its Recommendation, the Commission should reconsider it and remember what the simplified prospectus was aimed at: making cross-border distribution easier by using one single harmonised document on the basis of which units of UCITS may be purchased while the host country s competent authority may no longer ask for additional information; providing European household investors with simple, reliable and comparable information he/she should know before investing in a fund. The Commission should reconsider the approach taken by the UCITS Contact Committee which resulted in the above-mentioned Recommendation, and consider returning to the way shown by the FEFSI model. We support the initiative of the EFAMA which will finalize the update of its model prospectus in the near future and thus it is hoped contribute to more clarity. Finally, the announced MiFID Level 2 regulation is not to be forgotten. Without modification to the UCITS Directive, the Commission should use the section on distribution and suitable advice to bring the single market for investment funds one step closer, thereby largely solving the two key problems, that of quality distribution and good advice. and that of the creation of a level playing field between funds and other retail saving products at the point of sale. Yours sincerely,

6 Carmignac Gestion