Exchange-traded funds may become the future of listed asset funds. They have more than $700 billion in assets under management. Despite the world financial situation, they are expected to have $2 trillion by 2011. The next boom will be in Europe, where only 10% of investors invest in ETFs. The same rationale applies to France and NextTrack, the market segment dedicated to trackers where ETFs have quintupled over the past three years. It is likely that foreign ETFs (that is, non-French) will explore offering their shares to French and other European investors. What are the applicable listing procedures and how can obstacles be avoided?
French approval
Under French law, ETFs are characterised as collective investment schemes, or OPCVM. As such they must obtain the approval of the Autorité des marches financiers (AMF) before any marketing of their shares in France.
To determine which procedure is applicable to foreign ETFs, the funds have been divided into two types: (i) harmonised European ETFs, which are incorporated in the EU and are eligible for the mutual authorisation recognition procedure provided by Directive 85/611/EEC; and (ii) non-harmonised ETFs, which are other European and foreign ETFs.
Harmonised European ETFs benefit from a European passport. The AMF relies on other European regulators to authorise them. In practice, though, harmonised European ETFs must provide a certain number of documents to the AMF, such as a certificate from the competent authority of the original member state indicating that the fund has been incorporated and approved in accordance with the directive requirements, along with the fund's last full prospectus translated into French. Harmonised European ETFs must also name one or more French correspondents that will be liable for processing subscription requests, paying dividends and making offering circulars available to investors.
As soon as these documents are filed with the AMF, the French regulator has two months to send its comments to the fund. In the absence of observations within that period, the marketing of fund units is deemed to be authorised in France.
The time to obtain the AMF's approval is likely to decrease soon, since the European Commission planned to propose a simplification of the European passport process by April 2008. Such a proposal, which has not been released yet, would oblige local regulators to exchange all fund-related documents with each other if a fund wishes to benefit from the European passport process, exempting harmonised European ETFs from communicating all the documentation to the AMF.
Poor treatment
In Europe, non-harmonised ETFs receive much worse treatment than harmonised European ETFs. Since they do not benefit from the passport rules, non-harmonised ETFs must comply with all the local rules of the jurisdictions in which they intend to market their shares. In France they must comply with the requirements for new collective investment schemes.
First, an application file, including a full French prospectus, will need to be prepared in French, reviewed and approved by the AMF. It must include (i) a simplified prospectus presenting the key information needed for the investors' decision making; (ii) a detailed memo giving an exact description of the investment and operating rules; and (iii) the rules or articles of association of the ETF.
The prospectus should specifically show that the fund complies and will comply with all the rules applicable to French collective investment schemes – asset allocation, and yearly and half-yearly reports. The AMF's approval is deemed in the absence of a response within one month of receipt of the application file. However, it is rare for the AMF not to require additional information, which automatically extends the one-month review.
Second, even though it is not expressly provided in the AMF's general regulation, non-harmonised ETFs might be required to set up management portfolio companies, which are subject to strict conditions of incorporation under French law. This is because they are mandatory for all mutual funds that are not corporate entities, and the AMF could impose a correspondent for liability purposes.
The stringent conditions mean that no AMF approval for non-harmonised collectives has ever been requested.
NextTrack
Once the AMF's authorisation is granted, ETFs can apply to list their shares or units on NextTrack. The procedure is the same for all ETFs, whether French, harmonised or non-harmonised.
The procedure is simple. It consists of providing Euronext NYSE with documents including a declaration that the competent authorities authorised the fund, and the fund's fully approved prospectus.
NextTrack also requires two additional documents: a liquidity agreement between Euronext NYSE and at least two liquidity providers, and an inclusion agreement with Euronext NYSE, in which the ETF commits to comply with the general terms and conditions of the NextTrack segment. The deadline for Euronext NYSE to make its decision about the admission to listing is 90 days after the application, in a first admission to listing, and 30 days after the application in all other cases.
It would therefore be unwise for non-European ETFs to follow the stringent rules applicable to newly incorporated collective investment schemes in France. The procedure is costly and time-consuming, and they will be subject to the local requirements of each European jurisdiction in which they market their shares.
Foreign ETFs would be far better off using the passport rules, which allow them to easily market and sell their shares all over Europe. Non-European ETFs should set up a sub-ETF in France (or elsewhere in the EU), then obtain the AMF's (or any other EU local regulator's) prior approval, third, obtain admission for listing of the sub-ETF shares on NextTrack (or on any other local ETF exchange in the EU); and last, obtain the approval of the local regulators in the countries in which they intend to market their shares, based on the European passport rules. There may be hurdles to listing a foreign ETF in France, but that is just the price to pay for success.
By partner Nicolas de Witt and Claire Gamain of Aramis Société d'Avocats
