Investment Funds

From Max-EuP 2012

by Markus Roth

1. Meaning and development of investment companies

Investment funds serve as legal entities for joint investment, especially in securities. They enable investors to spread the investment risk by investing small amounts. At the end of 2007, almost €8 trillion (€7,909 billion) were held by European investment funds. Due to the financial crisis, this value was reduced by almost two trillion Euros to €6.088 trillion in 2008, while by the end of 2010 the amount had risen again to €8.025 trillion. Equity was the class of assets that experienced the sharpest decline, although it still remains the most important investment type. Quite remarkably, a truly European market for investment funds has emerged. The largest European market for investment funds is in Luxembourg, followed by France, Germany, Ireland and the United Kingdom. In 2006, Luxembourg ranked as the world’s second largest location for investment funds, trailing only behind the United States. The bulk of the investment funds in Europe are subject to the European directive relevant in this regard.

The origins of the investment business go back to the 19th century. As early as the first half of the 19th century, business trusts in the United States were in practice closely linked to the insurance business and many banks were founded as ‘Trust & Banking Companies’. In Europe, the first investment companies emerged in the second half of the 19th century in Scotland and England. They shared many characteristics with the Anglo-Saxon trust. Later, in the 19th century, the idea of collective investment in investment companies spread to continental Europe, namely to Switzerland and the Netherlands. It seems that in Germany, two entities existed in the 1920s which could be classified as investment funds. At the beginning of the 1930s, an attempt was made to establish so-called capital management companies. Ultimately this led to the tax obstacles for investment funds merely being relaxed rather than abolished, and investment funds only asserted themselves in Germany after World War II. Investment funds were codified for the first time in the United States with the Investment Company Act of 1940, which heavily influenced the German Investment Companies Act of 1957.

2. European regulations

At the European level, investment funds have since 1985 been subject to the directive on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS Directive, Dir 85/611), which was revised several times before being substituted recently by Dir 2009/65. The UCITS Directive was one of the first directives to achieve the desired internal market and, in particular, provides for a European passport for investment funds. In November 2006, the European Commission issued a White Paper as part of a fundamental review of the UCITS Directive. One question currently under review is whether to harmonize investment funds not currently covered by the UCITS Directive, such as open-ended real estate investment funds. This would make all investment funds subject to common rules, thus entitling them to a European passport. A further proposition is to facilitate the investment by professional investors in non-mutual funds and to liberalize such cross-border transactions. Finally, new rules are being put forward to facilitate cross-border merger of funds.

Directive 2009/65 consolidates the text of the UCITS Directive and carefully develops the UCITS Directive itself. The numerous amendments to the UCITS Directive in 1985 are integrated in the new UCITS Directive. Furthermore, the new directive includes provisions for national and cross-border mergers of investment funds. Also included are new provisions for master/ feeder structures, in which a UCITS (feeder-UCITS) invests all or almost all assets in another UCITS (master-UCITS). Another focus is on the provisions of investor information. The reporting requirements, which make possible the European-wide distribution of UCITS, have been simplified and improved.

Undertakings for the collective investment in transferable securities (UCITS) have the sole purpose of investing and managing joint accounts with funds that have been raised from the public. Under national law, the collective investment in transferable securities may assume a contractual form (managed by the management fund), a trust form (unit trusts) or the form of an investment company. The principle of risk diversification is essential. The investment policies and barriers are included in the UCITS Directive as well as in an implementing directive. Securities within the meaning of the UCITS Directive are shares and other securities equivalent to shares, bonds and other forms of securitized debt, and all other marketable securities that authorize the acquisition of securities within the meaning of the directive by subscription or exchange. UCITS are subject to approval and the approval is valid for all Member States. The safekeeping of the assets of a UCITS is transmitted to a depositary.

3. Historical development of selected national rules

The German law of investment, which was initially contained in the Investment Company Act of 1957 and is now found in the Investment Act, is characterized by the management of several investment funds through one company and, especially, the so-called investment triangle. In addition to the investment fund and the investor, the deposit bank is a compulsory part of the investment triangle. The investment company instructs the custodian with the safekeeping of the fund and the issuance and redemption of units on the subject. The involvement of a custodian is modelled on the US Investment Company Act of 1940, in terms of which the unit investment trusts must install a bank as trustee or custodian. According to the German legislation on investment companies, the UCITS Directive requires a depositary, which also has supervisory tasks. The redemption obligation and the prohibition on borrowing were also based on the US model and are now subject to the UCITS Directive.

In England, the UCITS Directive constituted an impetus for the creation of investment companies. The traditional unit trust schemes, in which the assets are held for the investors in trust, were also further developed. For unit trust schemes to participate in the European market using the single passport, special provisions for authorized unit trust schemes have been created. In order to comply with the rules of the UCITS Directive, the Financial Services Markets Act of 2000 prescribes that the functions of the trustees and the managers of unit trusts be separated.

Luxembourg’s first investment fund was founded in the 1950s. Investment funds are now regulated by the Loi du 20 décembre 2002 concernant les organismes de placement collectif. The companies covered by the UCITS Directive are described as OPCVM (organisme de placement collectif en valeurs mobilier soumises à la Directive 85/611). Investment companies, described as SICAF (société d’investissement à capital variable), have been regulated since 1980 and are thus the oldest of their kind in the European Union.

In France, investment funds are regulated in the Code monétaire et financier, Art L 214-1-146. Much emphasis in French legal literature is placed on the regulation by the Financial Supervision Authority, the Autorité des Marchés Financiers (AMF). As is the case in Luxembourg, the investment companies are called SICAF. Other investment funds exist by the name of FCP (Fonds Commun de Placement).

4. Public and special funds

The European UCITS Directive regulates only those investment funds that raise money from the public. In principle, two types of investment companies exist, namely investment funds and special funds. Management in mutual funds is a sub-form of standard asset management. In Germany, special funds which are subject to the Investment Act are used particularly by private pension institutions as a special investment vehicle for pooled assets. These investment vehicles are thus aligned with a particular investment strategy. Since no investment in securities occurs in real estate investment funds, the latter are not subject to the UCITS Directive.

5. Use of investment funds for occupational and individual pensions

The use of investment funds as a vehicle for occupational and individual pensions has thus far not been regulated at the European level. The Pension Funds Directive regulates only pension funds as vehicles for occupational pensions. In its White Paper, the Commission nevertheless recognizes the importance of greater investment for retirement as a means of expanding the single market for investment funds. Internationally, the investment in investment funds is widespread in the context of individual and occupational pensions since no (biometric) guarantees must be given for preferred tax treatment. Based on this phenomenon, the European investment community has provided a study of defined contributions for occupational pensions. In Germany, in order to obtain preferred tax treatment, the contributions made must be guaranteed. This also applies to an individual retirement under the Riester pension regulation as well as cum grano salis for occupational pensions. A pure defined contribution provision is not possible in Germany as both the Occupational Pensions Act and the related tax provisions in the German Tax Act require guarantees.

In Germany, since the Riester pension reform, individual pension investment companies (Altersvorsorge-Sondervermögen) are regulated in a special part of the Investment Act. Individual pension investment companies are barred from being used for a limited duration and from distributing their income. They are subject to specific investment provisions. The investment provisions set limits on investment in shares and property funds, although it is required that more than half the assets be invested in these two asset classes. The individual pension investment company has to offer the individual investor a retirement-savings plan. As with other descriptions in investment law, the description of the individual pension investment company is specially protected. In German practice, individual pension investment companies play only a minor role. They are not accepted as pension vehicles under the German Occupational Pension Act.

6. Publicity

Under the UCITS Directive, prospectuses and periodic reports are to be published. Investment funds are to inform potential and actual customers as well as the market by making available simplified and full prospectuses, as well as annual and semi-annual reports. The simplified prospectus is to be handed over to potential subscribers before the conclusion of the contract. The essential elements of the simplified and the full prospectus are to be updated. Unlike the European insurance regulation, the UCITS Directive requires information regarding the investment policy of the investment fund to be made available. The revised UCITS Directive also provides for a revised version of the information requirements.


Bevis Longstreth, Modern Investment Management and the Prudent Man Rule (1986); Kam Fan Sin, The Legal Nature of the Unit Trust (1997); Klaus Ulrich Schmolke, ‘Institutional Investors’ Mandatory Voting Disclosure. The Proposal of the European Commission against the Background of the US Experience’ (2006) 7 EBOR 767; Claude Kremer and Isabelle Lebbe, Organismes de placement collectif et véhicules d’investissement apparantés en droit luxemburgeois (2nd edn, 2007); Alain LeClair, Karel Lannoo and Jean-Pierre Casey, Pouring Old Wine into New Skins? UCITS and Asset Management in the EU after MiFID: A CEPS-ECMI Task Force Report (2008); Alice Pezard, Code monétaire et financier (4th edn, 2009); Markus Roth, Private Altersvorsorge: Betriebsrentenrecht und individuelle Vorsorge—Eine rechtsvergleichende Gesamtschau (2009); Michael Blair, George Walker and Robert Purves (eds), Financial Services Law (2nd edn, 2009); Markus Roth, ‘Employee Participation, Corporate Governance and the Firm, A Transatlantic View Focused on Occupational Pensions and Co-Determination’ (2010) 11 EBOR 51; Christian Szylar, Risk Management Under UCITS III/IV—New Challenges for the Fund Industry (2010); EFAMA, Trends in the European Investment Fund Industry in the Fourth Quarter of 2010 and Results for the Full Year 2010, Quarterly Statistical Release, March 2011, no 44 (2011).

Retrieved from Investment Funds – Max-EuP 2012 on 14 July 2024.

Terms of Use

The Max Planck Encyclopedia of European Private Law, published as a print work in 2012, has been made freely available in 2021 as an online edition at <>.

The materials published here are subject to exclusive rights of use as held by the Max Planck Institute for Comparative and International Private Law and the publisher Oxford University Press; they may only be used for non-commercial purposes. Users may download, print, and make copies of the text files being made freely available to the public. Further, users may translate excerpts of the entries and cite them in the context of academic work, provided that the following requirements are met:

  • Use for non-commercial purposes
  • The textual integrity of each entry and its elements is maintained
  • Citation of the online reference according to academic standards, indicating the author, keyword title, work name, and date of retrieval (see Suggested Citation Style).