During the discussions between the European ("EU") legislative authorities on the UCITS V Directive(1), a mandate was granted to the EU Commission to specify the conditions to be fulfilled in order to comply with the independence requirement between a management company and a depositary.
As part of the work to be done on the UCITS V Level 2 measures, the EU Commission requested the European Securities and Markets Authority ("ESMA") to provide it with technical advice on the content of the delegated act on depositaries(2).
In its advice to the EU Commission (the "Final Advice")(3), ESMA envisages two situations which may jeopardise the independence of the management company/investment company and the depositary (the management company/investment company and the depositary are hereafter each referred as a "Relevant Entity" and together as the "Relevant Entities"):
- Common management/supervision
- Cross-shareholdings/group inclusion
a) Common management/supervision
In relation to common management and/or supervision, ESMA recognises that the independence could be lost if any of the Relevant Entities, by means of executive power or supervision, could control the action of the other Relevant Party and suggests various means in order to ensure the separation of the management bodies of the Relevant Entities.
In its Final Advice, ESMA prohibits any member of the management body of the management company/investment company from being a member of the management body of the depositary and no member of the management body of one of the Relevant Entities can be an employee of the other Relevant Entity. In addition, certain restrictions apply at the level of the members of the body in charge of the supervision of the Relevant Entities in order to ensure their effective and impartial supervision.
b) Cross-shareholdings/group inclusion
In relation to cross-shareholdings, ESMA refers to the notion of ‘qualifying holding'(4). Two options were initially detailed in the first ESMA draft advice(5) and the second option was finally retained.
The first option was to consider that the Relevant Entities are not independent when they are linked by a qualifying holding or when they are part of the same group.
The second option which has been selected by ESMA in its Final Advice has more nuance and requires, in the case where the Relevant Entities are (i) linked by a qualifying holding or (ii) part of the same group, specific governance and organisational arrangements and measures to be set up.
Amongst the measures to be taken in order to preserve the independence of the Relevant Entities, ESMA's recommendations include the obligation to put in place:
- a robust decision-making process for choosing the depositary; and
- specific arrangements in the case where (i) one of the Relevant Entities has a direct or indirect holding in the other Relevant Entity which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over this other Relevant Entity, or (ii) where the Relevant Entities are part of the same group. These arrangements include conflict of interest provisions, transparency towards the investors as regards the link between the management company/investment company and the depositary, justification of the choice of the depositary to investors and the demonstration to competent authorities that the appointment of the depositary is made in the sole interests of the UCITS and the investors of the UCITS.
In addition, in the case where the Relevant Entities are part of the same group, ESMA requires a certain percentage of independent members at the level of the management body of the Relevant Entities:
- at least one-third (33%) or two (persons), whichever is the lesser, of the members of the management body of the Relevant Entities must be independent;
- where the management body of the Relevant Entities is not in charge of the supervisory functions, at least one-third (33%) or two (persons), whichever is the lesser, of the members of the body in charge of the supervisory function must be independent.
ESMA's Final Advice clarifies the notion of "independent": members of the management body of the Relevant Entities shall be deemed independent where they are not members of the management body or the body in charge of the supervisory function nor employees of any of the other undertakings within the group and are free of any business, family or other relationship with Relevant Entities and any of the other undertakings within the group that creates a conflict of interest so as to impair their judgment.
The EU Commission will now finalise and adopt its delegated act on the Level 2 UCITS V Directive measures. It must be noted that the ESMA Final Advice is not binding to the EU Commission and that it may, therefore, define other criteria and/or add other requirements in order to preserve the independence of the Relevant Entities.
In terms of timing, the EU Commission has indicated that the delegated act was expected to be adopted in April 2015, i.e. well before the end of the transition period. The UCITS V Directive must indeed be implemented and shall apply as from 18 March 2016.
(1) UCITS V Directive refers to Directive 2014/91 of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions.
(2) The EU Commission mandate is broad and covers also other requirements of UCITS V Directive. This note focuses on the independence requirement between management company/investment company and the depositary only.
(3) Final Report - ESMA's technical advice to the European Commission on delegated acts required by the UCITS V Directive, ESMA/2014/1417, dated 28 November 2014.
(4) According to Article 2(1)(j) of UCITS IV Directive (Directive 2009/65/EC), a qualifying holding is defined as a direct or indirect holding in a management company which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of the management company in which that holding subsists.
(5) Consultation Paper - ESMA's technical advice to the European Commission on delegated acts required by the UCITS V Directive, ESMA/2014/1183, dated 26 September 2014.