On 30 January 2017, the European Securities and Markets Authority (ESMA) published an opinion setting out common principles for setting up and operating share classes within UCITS funds.

The opinion paper follows ESMA’s previous discussion papers on share classes, issued in 2014 and 2016. We provided an update on the 2016 paper in April.

The UCITS Directive is silent on the definition and scope of share classes, so national practice diverges greatly as to the types of share classes which are permitted – ranging from no share classes to sophisticated classes which potentially have different investment strategies. ESMA is of the view that a common framework is required to protect investors and ensure a harmonised approach.

The opinion, which is addressed to national regulators, focuses on four high-level principles which must be followed when setting up and operating share classes in a UCITS. These principles closely follow the proposals of the 2016 paper, so there should be little of surprise for the industry.

Nevertheless, all hedged share classes will be impacted and so it is important that management companies take notice. Further, although the ESMA opinion applies only to UCITS, it remains to be seen whether the FCA will extend its application to non-UCITS.

In addition to the principles, ESMA states that share classes should never be set up to circumvent the rules of the UCITS Directive, particularly those on diversification, derivative eligibility and liquidity.

Principle One: Common investment objective
Share classes of the same fund should have a common investment objective reflected by a common pool of assets.

ESMA is of the view that share classes of a fund have a common investment objective where their characteristics do not modify the performance of the investment.