Collective Investment Schemes (CIS) in Spain, France, the US, the UK and India
Collective Investment

CIS in Spain: Main players


A Collective Investment Scheme, called Instituciones de Inversión Colectiva (IICs) in Spain, is an investment vehicle that sets up an investment or mutual fund that invests in assets, such as bonds, equities or cash. Due to the favorable tax treatment that these IICs receive, they have become a very integral part of the financial market system in Spain.

There are two main legal forms that these schemes can take—Investment Companies and Investment Funds. Investment Companies are IICs that take the form of a corporation, meaning they have legal personality, and have the corporate purpose of raising funds or assets from the general public to invest in assets or other instruments. These companies are managed by a board of directors, but their assets are often managed by Management Companies of Collective Investment Schemes (Sociedades Gestores de Instituciones de Inversión Colectiva, or SGIICs). These Financial Investment Companies are created as open-ended investment companies with variable capital (Sociedades de Inversión de Capital Variable, or SICAV), as their capital can be increased or decreased depending on the sale or acquisition of shares. The requirement for the total number of shareholders is a minimum of 100. There is also a company called a depositary, which is responsible for the liquidity of the securities and is obligatory for all SICAVs.

On the other side there are Investment Funds, which are pools of assets, without legal personality, divided into transferable units belonging to a group of investors. Once again, the requirement for the total number of shareholders is a minimum of 100. These funds are managed by Management Companies of Collective Investment Schemes (SGIICs), which have the power to dispose of assets. These funds also have a Depositary, which once again is responsible for the liquidity of the securities.

In addition to the legal forms and structures that these investment schemes can take, there are also 3 main types of investment schemes. The first type of investment is Financial, whose main activity is to invest in or manage transferable securities. These types of investments can be registered as either an open-ended company with variable capital (SICAV) or as an investment fund. The second type of investment is Non-financial, which deal mainly with real estate assets for operational purposes. These can take the form of either a closed-ended real estate investment company or a real estate investment fund.

The third type of investment scheme, unlike Financial and Non-financial, does not fall under the categories of the previously mentioned investment companies and investment funds. This type of scheme is known as private equity, and is registered as either a private equity investment company or a private equity investment fund. As the name suggests, these types of investments are not on the public exchange, but instead invest directly in private companies or engage in buyouts of public companies (which results in the delisting of public equity). Private equity is mainly owned by Limited Partners, but there are also a few General Partners who tend to be responsible for executing and operating the investment.

As a way to regulate the Spanish IICs, the National Securities Market Commission (CNMV) was created. The CNMV is the body responsible for the supervision and inspection of the Spanish security markets and for the activities of all of the people who operate them, overseeing market transparency, investor protection and proper price formation. Its main functions include: (1) Supervising and inspecting the Spanish securities market and the activity of all market players. (2) Exercising sanctioning powers. (3) Advising the government on securities and market-related matters. And, (4) Legislative power (through circulars) for the proper functioning of the markets. In addition to following their rules and regulations, all investment companies and investment funds require prior authorization from the CNMV for their formation (although the registration of investment funds at the Spanish Commercial Register is optional). In order to gain approval from the CNMV, it is required that investment funds have at least €3,000,000 of assets, that Open-End Investment Companies (SICAVs) have at least €2,400,000 of capital, and real estate investment companies have at least €9,000,000 of capital stock.



CIS (IICs) in France


The management of collective Investment Schemes in France generally follows the guidelines set by a European directive defining UCITS (Undertaking for Collective Investment Schemes in Transferable Securities). While not all funds are required to conform to these guidelines, which have not been altered to adjust to new trends in asset management (e.g. hedge funds), most funds do conform. There are 4 main classifications for mutual funds by their legal structure:

  • SICAVs (Société d’Investissement à Capital Variable, or Investment Company with Variable Capital), which have legal personality
  • FCPs (Fonds Commun de Placement, or Open-Ended Collective Investment Funds), which do not have legal personality and have lower minimal capitalizations
  • FCPE (Fonds Commun de Placement d’Entreprise, or Company Employee Savings Plan), which are used for employee savings
  • FCPRs (Fonds Commun de Placement à Risques, or French Venture Capital Fund) and FCPI (Fonds Commun de Placement dans L’innovation, or Tax-Incentive High-Tech Venture Capital Funds), which are both partially invested in unlisted companies

In addition to these forms of classification by legal structure, mutual funds can also be classified by their investment focus. These focuses include shares (may be specialized by regional area, size of companies, sector), money market (invested in negotiated instruments and deposits, known as debt instruments), bonds, diversified instruments, formula funds (the management target backed up by a guarantee on the capital invested), and fund of funds (multi-management funds that invest in other funds’ units).

There are also different management styles that are used that can differentiate specific mutual funds. One of these styles is active management, in which the manager chooses from a large selection of securities that meet the requirements of the fund’s profile. Managers will often times use derivative products to hedge against portfolio risk. Another style is passive or index management, in which a benchmark index is mimicked. The reasoning for this style is that it has been found over time that managers will not outperform the market. Another different style is called Exchange-Traded Funds (ETFs), which are funds that index-trackers listed on the stock market and are negotiable, unlike typical funds. Finally, there are alternative or hedge funds, which apply a very targeted strategy with a specific performance goal.



CIS (IIC) in the US


Collective Investment Schemes in the United States, referred to as investment companies, are regulated mainly by the Investment Company Act of 1940. This act establishes a comprehensive framework of federal regulation to protect U.S. investors, alongside the Investment Advisors Act of 1940, which regulates investment advisors. Both of these acts are administered by the Division of Investment Management of the U.S. Securities and Exchange Committee (SEC). Under the Investment Company Act, these investment companies may be formed as corporations, joint-stock companies, trusts, associations, and other forms. They typically are responsible for managing natural investors assets, corporate investors assets, pensionary savings, mortgage credit pools, and other material pools.

The Investment Company Act regulates three main types of organizational structures for funds: trusting properties (trusts), open-end or mutual funds, and closed-end funds. All mutual funds are required to register with the SEC and face very strict regulations under four federal laws (the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisors Act, all overseen by the SEC). Some of these regulations include requirements regarding a fund’s portfolio diversification, the distribution of earnings, advertisements, and sales materials. Furthermore, mutual funds must have directors, a majority of whom have to be independent from the fund’s management, who are responsible for extensive oversight of the fund’s policies and procedures.

A Collective Investment Fund (CIF) is a bank-administered trust that holds commingled assets that meet specific criteria. The bank acts as a fiduciary for the CIF and holds legal title to the fund’s assets. Participants in a CIF are the beneficial owners of the fund’s assets and own an undivided interest in the aggregate assets, but they do not own any specific asset help by the fund. There are two main types of CIFs. The first type is known as a “common trust fund” or A1. This fund is maintained exclusively for the collective investment and reinvestment of money contributed to the fund by the bank (or banks) in its capacity as trustee(s).

The second type of CIF is a collective investment fund, or A2. This fund consists solely of assets of retirement, pension, profit sharing, stock bonus, or other trusts that are exempt from federal income tax. Banks have a different role when it comes to A2 funds, as they are not required to be a fiduciary in order to commingle assets into an A2 fund and they do not have to act as the trustee for the underlying tax-exempt trust. They may, however, serve as a directed agent for an employee benefit (EB) plan account and may invest plan assets into its A2 fund, as long as the fund qualifies for an exemption from federal taxation. Under the scope of both A1 and A2 funds also exists an important subset known as short-term investment funds (STIFs). STIFs offer liquidity, an optimal return, and a stable value, and are allowed to have a primary objective beyond just maintaining stable assets or prices.

In addition to A1 and A2 funds, the Office of the Comptroller of the Currency (OCC), responsible for supervising the fiduciary activities of national banks, recognizes other specific arrangements by which a national bank may collectively invest assets that it holds as a fiduciary. These arrangements include a single real estate loan, a direct obligation of the United States, an obligation fully guaranteed by the United States, or a single fixed amount security, obligation, or other property, either real, personal, or mixed, of a single issuer. The main function of these banks is to serve as an administrator, investment advisor, or investment manager of a pooled income fund, for which they are authorized to collectively invest the trust assets that it holds as a fiduciary in any authorized investment. These pooled funds are maintained by a third-party organization and are not governed by OCC regulation. Instead, the banks comply with the Employee Retirement Income Security Act of 1974 (ERISA), which prohibits a fiduciary (such as a bank trustee) from making fiduciary decisions from which it might benefit or from engaging in certain transactions with parties in interest.



CIS vs CITs in the US


In defined contribution (DC) retirement plans in the US, the more traditional mutual funds (CIS) are starting to get replaced by Collective Investment Trusts (CITs). CITs, like mutual funds, are pooled investment vehicles managed collectively and following a common investment strategy. Both serve similar functions, as they provide participants with professionally managed investments that offer daily valuation and liquidity and a variety of pricing structures. They also both have very similar reporting requirements (DOL and ERISA), fee structures (multiple share classes) and trading policies (NSCC trading, daily valuation). However, there are also some differences between the two that has caused a change in their usage in recent years. A 2017 study found that 65% of the surveyed DC plans offered at least one CIT, and the percentage is continuing to grow.

Despite their many similarities in structure, there are a few key differences between mutual funds and CITs that separate them. While mutual funds are maintained by an asset management company and are available for almost all retirement plans, CITs are typically maintained by a bank or trust company and are only offered to retirement plans that meet certain qualifications (tax exemptions). Also, unlike mutual funds, CITs are restricted from making their fund information available to the general public. So, instead of looking online, CIT participants use designated web portals to views their records.

Another key difference between CITs and mutual funds is the regulatory structure that they follow. Mutual funds are regulated by the Securities and Exchange Committee (SEC) under the Investment Company Act of 1940. CITs, on the other hand, are regulated by the Office of the Comptroller of Currency (OCC), the IRS and the DOL. Many of the managers are also bound to ERISA fiduciary standards, meaning that they must manage the accounts solely in the interest of the participants.

One of the main reasons that CITs are becoming more popular is due to the fact that they typically have lower costs than mutual funds. There are many reasons for these lower costs, including but not limited to: (1) Lower overhead. (2) No SEC filings requirements (they are usually exempt from SEC registration). (3) Lower retail marketing expenses. (4) Internal cross-trading securities among a manager’s investment strategies (lowers potential transaction and trading costs). (5) Tax advantages for international funds due to qualified investor base. And (6) More flexibility in prices, which allows for customized pricing arrangements based on overall plan size. By lowering these fund costs, CITs can potentially provide greater retirement savings to the participants.



CIS in the UK


In the UK, the Financial Services and Markets Act 2000 (FSMA 2000) defines a collective investment scheme (CIS) in Section 235: “any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.” In short, it is an investment fund used for collective investment by investors, in which the money is invested on a pooled basis in return for a fee.

There are three different classifications for CIS: Regulated schemes, Recognized schemes and Unregulated schemes. The first classification that we will discuss is the Regulated collective investment schemes. In the UK, regulated CIS are schemes that can be promoted to the company. This includes both authorized funds (constituted in the UK) and recognized schemes (see below).

There are two different types of authorized CIS in the UK. First, there are authorized unit trusts (AUTs), in which the property is held on trust for the participants by the trustee. These types of schemes must be authorized by the Financial Conduct Authority (FCA). The other type of authorized CIS is called an investment company with variable capital (ICVC), which is the UK based form of an open-ended investment company (OEIC). An ICVC is constituted by an instrument of incorporation and must have at least one director. In cases where the company only has one director, that director must be a body corporate with a permission to act as a sole director of an ICVC.

There are three different legal forms of regulated CIS in the UK: (1) undertakings for collective investment in transferable securities (UCITS). (2) Non-UCITS retail schemes (NURS). And (3) qualified investment schemes (QIS). While these legal forms may vary, they are all regulated by the FSMA. One of the main restrictions has to do with the financial promotions of the CIS. According to FSMA regulation, only authorized people may promote them. Any unauthorized person is not allowed to promote the CIS unless a special exemption applies or the promotion is approved by an authorized person.

The other form of regulated scheme is known as Recognized collective investment schemes. These are schemes that are constituted in a place outside of the UK, but still recognized by the FCA. This legal and official recognition comes from various sections of the Financial Services and Markets Act 2000 (FSMA).

The third classification of CIS is Unregulated CIS (UCIS), which are neither authorized nor recognized by the FCA in the UK. This includes unregulated UK vehicles such as unauthorized unit trusts and permitted partnerships, as well as vehicles established outside of the UK, such as SICAV (Société d’Investissement À Capital Variable) and FCP (Fonds commun de placement). In June of 2013, the FCA published a set of rules that banned the promotion of UCISs and certain closed substitutes (known together as non-mainstream pooled investments (NMPIs)) to retail investors in the UK. In the retail sector, the promotion of NMPIs is now restricted to only sophisticated investors and high-net worth individuals, including the following: units in qualified investor schemes (QIS), traded life policy investments, units in UCIS, and securities issued by special purpose vehicles (SPV) pooling investments in assets other than listed or unlisted shares or bonds.

Since the promotions of UCIS were mostly banned by the FCA, the restrictions placed on promotions by the FSMA 200 are much stricter than that of regulated CIS. Even an authorized person is restricted from promoting a UCIS unless an exemption is made available. As for unauthorized people, they are restricted from promoting as well unless, once again, an exemption is available or the communication is approved by an authorized person.



CIS in India


In India they use Collective Investment Vehicles (CIVs), which are entities that allow investors to pool their money and invest in the pooled funds, instead of buying securities directly as individuals. There are five distinct categories of CIVs in India: mutual funds (MFs), index funds, exchange traded funds, CIS, and venture capital funds (VCFs).

A mutual fund is a company that pools money from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. There is typically a fund manager who is responsible for investing the pooled money into specific securities. Mutual funds are considered a good investment technique as they allow the investor to earn returns with reasonable safety. Some of the other main benefits include the ability to invest in various schemes, diversification, professional management, liquidity, effective regulations, transparency, tax benefits, and affordability.

In India, these investment vehicles are regulated by the Securities and Exchange Board of India (SEBI), which was established in 1992. There are many different ways in which SEBI regulates the MF market. First is by facilitating the merger of schemes. SEBI decided that a merger will not be seen as a change in the fundamental attributes of the scheme if (a) the MF can demonstrate that the situation merits a merge and the interests are the same and (b) the fundamental attributes remain the same. Second, it facilitates the transferability of mutual funds through an addendum made in 2010. This addendum requires all Asset Management Companies (AMCs) to clarify that the units of all mutual fund schemes are freely transferable. Third, it closely monitors and reviews the norms for investment and disclosure by mutual funds in derivatives. And, finally, it establishes exposure limits for the MFs, for example requiring that the cumulative gross exposure not exceed 100% of the net assets of the scheme.

The next type of CIV is an index fund, which replicates the portfolio of a particular index. They invest in all of the stocks that make up the index in proportions that equate to their weightage so that the value of the funds will rise or fall with the index. Unlike most mutual funds, index funds do not actively trade stocks throughout the year. They are passively managed, and are more appropriate for long-term investors looking for a diverse portfolio with moderate risk and moderate return.

The next category is Exchange-Traded Funds (ETFs), which are diversified security baskets that are traded in real time. Unlike most MFs, ETFs can be bought and sold throughout the trading day just like any other stock. While they are similar to the structure of an index fund, ETFs can choose to invest in either all of the securities or just a representative sample of the securities included in the index. Also, like index funds, ETFs are passively managed and offer a structure that protects long-term investors. Since they are exchange traded, the require much lower distribution cost and have a much wider reach, making them highly flexible and a good way to gain instant exposure to equity markets.

The fourth type is a collective investment scheme (CIS), which is any scheme or arrangement made or offered by any company that pools the contributions made by investors. Its structure is very similar to that of mutual funds, but their investment objectives are very different. While a mutual fund will only invest in securities, a CIS sticks to plantations and real estate. In order to become a Collective Investment Management Company (CIMC), an entity must apply for and obtain a registration certificate from SEBI. Once registered, a CIS must conform to all SEBI regulations, including minimum net worth, proper disclosure of information, adequate insurance policy, advertising code, scheme development, and more.

Lastly, there are venture capital finds (VCFs), which are established in the form of a trust company, including a corporate body, that has a pool of capital invested in venture capital undertakings (VCUs). A VCU is a domestic company whose shares are not listed on the stock market, and whose business involves providing services, production, or the manufacture of articles. In order to become a VCF, a company must receive an official certificate from SEBI and comply with all of their regulations for raising funds and their investment conditions and restrictions.

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