On November 28th 2014 the European Securities and Markets Authority ("ESMA") released its final report ("Final Report") in respect of the delegated acts which shall be adopted by the European Commission within the context of Directive 2014/91/EU ("UCITS V Directive") amending Directive 2009/65/EC ("UCITS Directive").
"The UCITS V Directive entered into force on September 17th 2014 and shall be implemented by national parliaments on or before March 18th 2016."
As a reminder, the UCITS V Directive focuses on the remuneration of management bodies, the role of the fund depositaries and on regulatory sanctions.
The UCITS Directive, as amended by the UCITS V Directive, empowers the European Commission to adopt delegated acts in respect of:
i) the insolvency protection of fund assets when delegating safekeeping tasks and
ii) the independence requirement.
The aim of the Final Report is to set out ESMA's opinion on the future delegated acts regarding the above issues.
Insolvency protection of fund assets when delegating safekeeping
The principle of insolvency protection, as stated in article 22a(3)(d) of the UCITS Directive, consists in ensuring that "all necessary steps to ensure that in the event of insolvency of the third party, assets of a UCITS held by the third party in custody are unavailable for distribution among, or realisation for the benefit of, creditors of the third party".
In this respect, the Final Report proposes, among other things, that the delegated act requires such third party (the "Sub-Custodian") and the main depositary to gather proper legal advice on the jurisdiction where the Sub-Custodian is located, whenever such Sub-Custodian is located outside of the European Union.
In any case, the relevant legal regime, to which the fund assets are subject, must guarantee the proper segregation of assets in case of insolvency of the third party acting as sub-custodian.
The proposed delegated act would also require the Sub-Custodian to report the information in respect to the insolvency protection to the main depositary.
In addition, the investment company or the management company acting on behalf of the fund, would also be required to immediately notify their supervisory authority whenever the jurisdiction of the Sub-Custodian no longer recognises the concept of asset segregation.
In respect of the independence requirement stated in article 25(2) and 26(b)(h) of the UCITS Directive, as amended by the UCITS V Directive, it is required that the members of the investment company/management company and of the depositary respectively are "independent" from each other within the meaning of the UCITS Directive.
In order to enforce such independence, the proposed delegated act, as suggested by the Final Report, prohibits certain compositions of the management board of the investment company/management company and of the depositary. For example, a member of the management body of the depositary cannot be appointed as a member of the management body of the investment company or the management company acting on behalf of a fund.
In addition, situations of cross-shareholdings between the investment company/management company and the depositary will also be regulated in order not to challenge the above principle of independence.