Committee Reports::Report No. 54 - Transferable Securities, Collective Investment Undertakings for (Unit Trusts)::23 March, 1977::Report


1. Introduction

The Joint Committee has examined a proposal for a draft Directive for the co-ordination of laws and administrative provisions regarding collective investment undertakings for transferable securities (CIUTS). The version of the draft Directive examined by the Joint Committee is the revised one [R/1095/1/76] issued by the Commission on 14th September, 1976. An earlier version [R/1095/76] had been sent by the Commission to the Council on 29th April, 1976.

The legal basis of the proposed Directive is Article 57 paragraph 2 of the Treaty of Rome. The Directive in its present form will apply to certain unit trust schemes in Ireland and the United Kingdom and to the continental equivalents, viz. open ended investment companies or, as they are sometimes called, companies with variable capital. The essential difference between the two types of CIUTS is that, in a unit trust scheme the public participate as beneficiaries under a trust and the units which they buy represent their degree of participation. They can sell back their units to the managers of the scheme (a company) if they wish to opt out of the investment. In contrast, participants in an open ended investment company actually buy shares in the company and if they wish to opt out, they sell their shares back to the company. The investments which the company makes constitute the assets of the company and are not held in the form of a trust as in the case of a unit trust scheme.

In several Member States these institutions are subject to special rules which are designed to protect the savings of the small investors for whom they cater primarily. As these rules vary considerably from state to state it is thought necessary to issue a Directive for their co-ordination in accordance with the provisions of Article 57 (2) of the EEC Treaty which deals with “the taking up and pursuit of activities by self-employed persons”. [In Ireland the relevant statute is the Unit Trusts Act, 1972]. The above-mentioned proposal has this object and, if adopted, it would, in the Commission’s opinion, provide more uniform safeguards for savers, improve competition between CIUTS and make easier the free movement of investment units (or shares) throughout the Community. The latter purpose is regarded as one of the preliminaries which will pave the way for a further Directive regarding freedom of movement for investment units or shares.

The European Parliament in a Resolution of 8th February, 1977 has welcomed the proposal. However, it regards the provisions as incomplete because “each Member State will continue to apply its own marketing arrangements to the units of CIUTS marketed in its territory” and the question of fees and charges is inadequately dealt with.

2. Contents of Proposal

The draft Directive contains common rules which each Member State will be required to apply to CIUTS situated within its own territory. Each state would have the option of applying stricter or additional rules to these institutions as well but in relation to any CIUT based outside its own territory it would not be allowed to apply any provision whatsoever apart from its rules relating to marketing arrangements and capital movements. A CIUT authorised to carry on business in one Member State would therefore be able to promote its activities in the other Member States without further approval.

The common rules proposed concern the approval and supervision of CIUTS, their structure and operation (including functions and constraints), their investment policy, and the information to be made available about them.

The proposed Directive would apply only to CIUTS whose investments in transferable securities and liquid assets comprise at least 80% of the total investment; transferable securities are defined as securities quoted on an official stock exchange or traded in on another regulated market. It is proposed that these CIUTS would have to increase their proportion of investments in such securities and assets to at least 95%. However, they would be allowed to invest up to 10% of their assets in other transferable securities provided they are easily realisable. Member States would be empowered to permit CIUTS to hold illiquid assets up to a maximum of 5%. Contrary to present Irish statutory requirements investment of a proportion (up to 10%) of assets in other CIUTS would be permitted. The proposal would not allow a CIUT to hold more than 5% of the securities of one issuer though Member States could, in exceptional cases, permit a holding not in excess of 10%.

3. Implications for Ireland

The Joint Committee is advised that the proposed Directive would apply in Ireland only to certain unit trusts which are registered under the Unit Trusts Act, 1972. At present there are only two of these, one based on equities and one on Government stock. There are also a number of internal funds run on similar lines operated by insurance companies but the Joint Committee understands that these will not be affected by the proposed Directive. Furthermore, a number of other unit trusts which are not open to the public operated by other companies which are not registered under the Unit Trusts Act, 1972 will not be affected by the proposed Directive.

Adoption of the Directive would necessitate amending the Unit Trusts Act, 1972 to bring it into line with the common rules proposed. From its examination of the matter the Joint Committee believes that the common rules should not prove too strict from an investment point of view and that, in general, their incorporation in Irish law should not be too difficult. However, the Joint Committee believes that if the draft Directive were amended in certain respects, the transition would be smoother from the Irish viewpoint. These amendments are specified in section 6 of this report. The most important aspect of this matter from an Irish viewpoint is the possible effect on unit trusts registered here of the competition to which the adoption of the Directive would expose them. The First General Unit Managers Ltd., which manages the two existing Irish registered unit trusts, considers that with some relaxation of the rules laid down in the 1972 Act, Irish concerns could gain more for the Irish capital market than might be lost to foreign competition if they were not subject to heavier taxation than their foreign counterparts as they are at present.

It should be noted that if and when the Directive is implemented there could be available to Irish investors four analogous funds or trusts, namely (a) registered unit trusts which come within the scope of the Directive, (b) registered unit trusts which do not comply with the Directive, (c) CIUTS established in other Member States, and (d) funds operated by Insurance and other Companies.

4. Taxation

Unit trusts based on securities other than Government securities are subject to capital gains tax and unitholders are similarly liable on realisation of their holdings. This tax is levied on gains in excess of £500 in any year at a rate of 26% (subject to certain adjustments in the case of the trust and individuals).

The introduction of capital gains tax has had a marked effect on the two registered unit trusts in Ireland. In the case of the trust subject to the tax, aproximately 15% of the units have been withdrawn and its fund has decreased from its peak of £1,200,000 to £980,000. There has been a 20% increase in the units held in similar British trusts over the same period. In the case of the trust not subject to the tax the fund has increased from £800,000 to £2,700,000 since 1973.

The Joint Committee is informed that in none of the other Member States except the United Kingdom are unit trusts or their counterparts subject to capital gains tax. In the United Kingdom gains are charged at half the normal rate (i.e. 15%) and unitholders on selling their units receive a credit at half the basic income tax rate (i.e. 17½%) whether the unit trust has realised or been taxed on any gains. More precise information on the taxation of CIUTS in the other Member States is contained in the Appendix to this report. It is true as pointed out in the Appendix that U.K. trusts (unlike Irish) are subject to Corporation Tax but as the unit trust receipts from investment in Corporations are franked from Corporation Tax an effect of this is that it has prevented the U.K. industry from forming Bond or Government Stock Funds which in Ireland would be obviously undesirable. For the information given in the Appendix the Joint Committee is indebted to Mr. T. C. F. Whitton, Director/ Manager, First General Unit Managers, Limited.

It seems obvious to the Joint Committee that if the Directive is to be adopted, the liability of Irish unit trusts to capital gains tax must be reviewed if the existing one based on equities is to survive and the establishment of others to take advantage of the larger market is to be encouraged. The Joint Committee believes that, provided the registration of trusts remains within the control of the Minister for Industry and Commerce, it should be possible to relieve registered unit trusts from liability to capital gains tax without permitting rich investors to use the device to evade tax. Moreover, the Joint Committee is advised that the high management charges tend to make unit trusts unattractive for the rich investors.

If the Irish unit trust industry is to withstand the competition envisaged and to be given a fair chance of expanding the Joint Committee believes that its liability to capital gains tax needs to be reviewed before the proposed Directive is implemented. At least as a first step the tax liability should, in the Joint Committee’s view, be reduced to the British level.

5. Amendment of Irish Law

It has been suggested to the Joint Committee that apart from the changes necessitated by adoption of the Directive, the following further changes in our statutory provisions would improve the position of Irish unit trusts in the new circumstances:-

(a) The rule that 50% of the assets of each registered unit trust should be Irish assets should be changed to provide that 50% of all such trusts managed by a single management company should in aggregate be Irish assets.

(b) Investment in other CIUTS should be allowed up to the maximum permitted by the Directive.

(c) Section 1 (1) of the Unit Trusts Act, 1972 should be amended to ensure that the reference to “participation by the public” is not capable of being interpreted so as to prohibit an offer to a section only of the public, e.g. retired persons.

These amendments seem reasonable to the Joint Committee.

6. Amendment of draft Directive

The Joint Committee recommends that favourable consideration be given to the following suggested amendments to the proposed Directive:—

(i)Article 5

The Directive would require alterations of a trust deed to be approved by the competent authority who would presumably be the Minister for Industry and Commerce in Ireland. It should suffice to maintain the present Irish requirement whereby alterations have merely to be deposited with the registrar of companies.

The trust deeds of the two registered unit trusts provide that any change in the deed must be approved by an extraordinary resolution of certificate holders, i.e. unit holders. However, changes which do not affect holders can be approved by the trustees.

(ii)Articles 7 and 11

The draft Directive requires a management company and a depository company (which correspond respectively to the the manager and trustee in Ireland) to “have sufficient paid up capital to enable it to carry on its business effectively and to meet its liabilities”. It would seem preferable, in the interests of the investors, if minimum capital requirements similar to those provided for in the Unit Trusts Act, 1972 were specifically laid down.

(iii)Article 13

The proposed Directive would prohibit the same company acting as management company and depository company. This prohibition should be extended to a company which is a subsidiary of another and effective control over whose affairs is not shown to the satisfaction of the competent authority to be exercised independently of that other.

(iv)Article 36

Member States are to be required to “specify the independent persons or the bodies whose duty it is to verify the financial data contained in the annual reports”. It should be permissible to specify only professionally qualified auditors or accountants.

(v)Schedule B

It seems desirable that specific provisions should be included relating to the calculation of values in relation to different currencies (i.e. conversion rates etc.).

7. Movement of Capital

To put the scope of the proposed Directive in its proper perspective it is necessary to have regard to the restrictions on the movement of capital which are still being maintained by Member States.

As far as Ireland is concerned, an investor in foreign securities must purchase at an investment rate of exchange. This involves paying a variable premium (at present about 30%) over and above the official market rate of exchange. When he sells the securities he can convert the net proceeds into sterling at the higher investment rate of exchange only to the extent of 75%. The remaining 25% attracts only the ordinary official market rate of exchange.

8. Acknowledgement

The Joint Committee wishes to record its appreciation of and its thanks for the considerable assistance which it received from the First General Unit Managers Ltd. in considering this proposal.


Chairman of the Joint Committee.

23rd March,1977.