December 2015
corporate & commercial LAW
COMMISSION DELEGATED REGULATION SUPPLEMENTING UCITS V DIRECTIVE
On 17 December 2015, the European Commission published the delegated acts of UCITS V, which take the form of a regulation. The Regulation is subject to a three-month scrutiny period by the European Parliament and the Council, after which it will be published in the Official Journal of the European Community, which will determine its date of entry into force.
The Regulation’s main purpose is to develop the depositary’s legal regime. The main provisions are summarized below:
Particulars that need to be included in the contract with the depositary
The Regulation sets out the minimum requirements for the contractual arrangement between the management or investment company and the depositary, like (i) the categories of financial instruments in which the UCITS may invest, as well as the geographical regions in which it plans to invest; or (ii) the internal proceeding to report to higher levels of the organization, or even to the management or investment company, the relevant issues related to the exercise of its functions.
Duties
The Regulation provides rules on the depositary’s duties in relation to oversight of the management company, subscription and redemption, valuation of units, carrying out the UCITS’ instructions, settlement of transactions, UCITS’ income distribution, custody of financial instruments that can be held in custody and ownership verification and record keeping of financial instruments that cannot be held in custody.
Delegation of safekeeping duties
The Regulation details certain (non-exhaustive) requirements related to the delegation of safekeeping duties. When selecting and appointing a third party, the depositary must comply with due diligence requirements and assess the regulatory legal framework, including country risk and custody risk, particularly in case of insolvency. If the third party is located in a third country, the assessment must be based on the legal advice from an independent source.
The third party must be monitored on an ongoing basis to verify that it correctly carries out all the delegated functions, especially the separation between UCITS’ assets and any others. The Regulation also regulates the depositary’s duties to ensure that the UCITS’ assets are protected against the insolvency of the third party.
Independence requirement
The Regulation allows for cross-shareholdings and for the management company and the depositary to belong to the same group, but the precautions on preventing conflicts of interest and appointing depositaries have been tightened when both of them belong to the same group or the cross-shareholding is 10% or higher. In addition, when the management company and the depositary form part of the same group, one third of the Board of Directors of both companies, or two members if the former percentage is higher, must be independent.
Moreover, the Regulation expressly prohibits the management bodies of the management company and depositary having members of the other company’s management body or employees of the other company.
Liability regime
The Regulation details the depositary’s liability regime for the loss of financial instruments held in custody, including loss of an instrument held in custody by the sub-custodian. It also details the conditions under which a loss of a financial instrument will be deemed to have taken place and the circumstances out of the reasonable control of the depositary, which, in consequence, would exonerate it from liability.
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