1. New CSSF Circular on UCITS depositaries
More detailed information on the subject and an English translation of this new Circular will soon be available on our website (www.ehp.lu).
2. UCITS V in a nutshell
In April 2014, the European Parliament finally approved the new UCITS directive following the agreement reached with the Council last February ("UCITS V"). UCITS V will amend the current EU Directive 2009/65. It will enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. UCITS V is not yet published as it is being translated into all the relevant EU languages.
UCITS V focuses on 3 main pillars:
- revision of the depositary regime;
- introduction of rules on remuneration;
- harmonisation of administrative sanctions.
- Prior to UCITS V, the UCITS rules gave a certain degree of discretion to the EU Member States in relation to the types of entities eligible to act as a depositary of a UCITS. Now UCITS V sets out eligibility criteria and provides that (i) national central banks (ii) EU authorised credit institutions or (iii) entities (a) authorised under the laws of the Member State to carry on UCITS depositary activities; (b) subject to specific capital requirements; and (c) subject to prudential regulation and ongoing supervision and (d) satisfying minimal requirements (in terms, inter alia, of infrastructure sound management and control, various procedures and policies) are eligible to act as depositary.
- UCITS V requires that the depositary shall properly monitor the cash flows of the UCITS and ensure subscription monies are properly received by the UCITS. Additionally, the depositary shall ensure that all cash is properly booked in accounts opened with eligible banks in the name of the UCITS, the management company of the UCITS acting on its behalf or in the name of the depositary acting on its behalf. Where assets are held in the name of the depositary acting on the UCITS behalf, they must be segregated and held in an account separate from that of its own cash.
- UCITS V aligns the liability of a depositary with the higher standard of liability of a depositary under AIFMD.
The depositary of a UCITS will be liable for any losses of financial instruments held in custody suffered by the UCITS or its investors, unless it can prove that the loss has arisen as a result of an external event beyond its reasonable control (the consequences of which would have been unavoidable despite all reasonable efforts to the contrary). In addition, the depository will be liable for all other losses suffered by the UCITS or its investors as a result of the depositary’s negligent or intentional failure to properly fulfill its legal obligations.
Depositaries will remain liable for the loss of assets, even where part or all of its safekeeping tasks have been delegated to a third party. Their liability cannot be excluded or limited by agreement. No liability discharge is allowed unlike in the AIFMD regime.
UCITS V provides that the safekeeping functions (not the oversight functions) can be delegated by the depositary to third parties (including to a Central Securities Depository to the extent that it is has been entrusted with the safekeeping of the securities of the UCITS) subject to certain conditions. Among these conditions there is a requirement for (i) an objective reason for the delegation and (ii) adequate initial due diligence by exercising due skill, care, and diligence in the selection of the delegates. In addition, the depositary is also subject to ongoing due diligence duties and must ensure that the delegate meets a range of conditions when exercising its functions. The segregation of assets must be ensured even in the case of delegation. Depositories and their delegates will not be allowed to reuse assets of the UCITS except if it is executed on behalf of the UCITS and provided other specific conditions are met.
UCITS V requires that the prospectus of a UCITS must contain, amongst other information relating to the depository, the list of its delegates and sub-delegates which may be difficult to manage in practice.
On 11 July 2014, the Commission de Surveillance du Secteur Financier issued a circular on the rules applicable to UCITS depositaries (Circular CSSF 14/587; see point 1) which anticipates the application of UCITS V in relation to certain aspects, mainly rules relating to (i) the segregation of UCITS’ assets throughout the delegation chain, (ii) the initial and ongoing due diligence in case of delegation, (iii) the identification, resolution and avoidance of conflicts of interest, (iv) adequate booking and monitoring of cash flows. It also details organisational rules and rules of conduct that a credit institution should comply with to be approved as a UCITS depository.
2.2 Management company remuneration
UCITS V introduces a requirement that UCITS management companies put in place remuneration policies and practices broadly for senior management and persons whose professional activities have a material impact on the risk profile of the management company or the UCITS. Such policies and practices must be consistent with and promote sound and effective risk management and discourage disproportionate risk-taking by the UCITS. The remuneration policy requirements are very detailed on variable remuneration and broadly replicate the corresponding provisions in AIFMD.
Certain disclosures will be required to be made in the UCITS annual report in relation to fixed and variable remuneration paid by the management company or the self-managed UCITS to its staff.
In addition, the key investor information shall include a statement that the details of the up-to-date remuneration policy are available by means of a website (including a reference to that website) and that a paper copy will be made available free of charge upon request.
ESMA shall draw up guidelines to support its remuneration requirements and UCITS V stipulates that such guidelines should, where appropriate, "be aligned, to the extent possible" with the ESMA AIFMD remuneration guidelines.
UCITS V also imposes common standards for the administrative sanctions which should be published (save in certain specific circumstances) and reported to ESMA with maximum penalties of €5 million (or 10% of annual turnover) for a company or €5 million for individuals. UCITS V sets out a detailed list of breaches of the UCITS Directive which will trigger sanctions including non-compliance with provisions relating, inter alia, to (i) authorisation of UCITS or their management company, (ii) delegation, (iii) rules of conduct, and (iv) rules on investment policies, etc. If Member States already have criminal sanctions in place for the same breaches they may not apply these administrative sanctions under certain conditions.
2.4 Implementation and transitional provisions
In terms of timing, UCITS V is expected to be published in the Official Journal of the EU shortly, following Council approval, and it will come into force 20 days thereafter. Member States will then have a period of 18 months to introduce implementing legislation. However, UCITS which have not appointed a depositary in line with the eligibility criteria set forth by UCITS V will have a grandfathering period of 42 months to ensure compliance with UCITS V.