There is an extensive set of rules aimed at ensuring investor protection within the financial area including investment management. This holds true in relation to products but also in relation to marketing and sales.
Investors' investments in UCITS are protected by a detailed regulation that applies to the entire value chain from the establishment and launch of the individual UCITS to marketing and sales.
Most of the protection rules are laid down in:
- The Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (the UCITS Directive)
- Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (MiFID).
The rules are supplemented by the Danish rules on good business practice for financial enterprises, transparency in connection with a UCITS being admitted to trading in a regulated market as well as the industry's self-regulation.
Overall, the UCITS Directive is regulating the investor protection in connection with the administration and investment, while the MiFID Directive is regulating the investor protection within the distributive trades.
In adopting the UCITS IV Directive, EU regulation is based on the following protection principles:
- Alone in the interest of the investors - investment management is to be performed on behalf of and alone taking into consideration their interest. Conflicts of interests are to be handled to the benefit of the investors
- Separate depositing - securities, etc. and liquid funds which belong to a UCITS are to be deposited on separate custody accounts and accounts and checked by a custodian bank. The depositing of securities is thus separated from the portfolio management and administration of same
- Risk diversification - any UCITS is to place investments based on a principle of risk diversification
- Equal treatment - all investors are to be treated equally
- Right of redemption - at all times investors have a right to have the value of their investments redeemed
- Supervision and control - on a regular basis, the national supervisory authorities perform supervision and control with both UCITS and investment fund management companies
- Key investor information - overview to investors in a uniform and accessible manner.
In the AIFM Directive, Kapitalforeninger (AIFs) are basically targeted at professional investors. However, the AIFM Directive does provide for nation states to give permission to sell Kapitalforeninger (AIFs) to retail investor, however, subject to specific requirements. The Danish Financial Supervisory Authority can give permission to market units in alternative investment funds, including AIFMs, to retail investors in Denmark subject to the following requirements:
- A Kapitalforening (AIF), which receives funds from retail investors, shall inform about the available unit classes and their characteristics
- The articles of association shall contain the requirement that an open-ended alternative investment fund shall at a minimum every second week publish emission and redemption prices and give access to redemption once a month
- The manager shall provide a document containing material investor information regarding the Kapitalforening (AIF)
- The manager shall have a representative office for international alternative investment funds marketed in Denmark
- Retail investors shall be informed about risk limits, changes hereto and about excess risk within 8 days.
The MiFID Directive contains detailed regulation of the investor protection within the distributive trades.
The MiFID Directive contains the following key protection rules:
- Investment advice in the form of recommendations shall rest upon an assessment of the investor's investment knowledge and experience based on information from the investor
- Information requirements implying that the investor shall receive information about the investment company and about the securities that the company is offering
- Best execution ensures that the investor obtains the best possible result giving the actual circumstances, as the execution shall be based on factors relevant to the investor, including price, costs and promptness, etc.
- The correct handling of and sufficient information about conflicts of interests shall be ensured, as all securities traders shall have internal rules and procedures for the handling of conflicts of interests
- UCITS providers shall only make payments to distributors, if such payments be deemed to increase the quality of the offered service. The distributor shall inform the investor about the existence and size of the payment.
As from 1 January 2013, investors in UCITS and Kapitalforeninger (AIFs) managed by an investment fund management company shall have access to appointing an investor representative for the investment fund management company's board of directors.
In addition to the investors in the UCITS and Kapitalforeninger (AIFs) managed by the investment fund management company, investors with whom the investment fund management company has made an agreement about discretionary portfolio management also have a right to participate in the investor forum.
The investor representative appointed by the investors participates in board meetings on an equal basis with the other board members. This implies that the investor representative shall meet the usual requirements as to board members' experience and integrity and be subjected to the same obligations as the other board members.