A UCITS depositary must be: a national central bank; a credit institution; or a legal entity authorised by its national competent authority to carry on depositary activities under the UCITS Directive, subject to the fulfilment of certain capital, prudential and organisational requirements. UCITS V clarifies that a UCITS may only appoint a single independent depositary which has general oversight over all assets entrusted to it. The depositary must be appointed by way of a written contract. That contract must also regulate the flow of information deemed necessary for the depositary to perform its depositary functions.
UCITS V establishes “an exhaustive list” of entities eligible to act as depositaries:
- a credit institution authorised in accordance with the Capital Requirements Directive IV (CRD IV);
- a national central bank; or;
- another legal entity authorised by a Member State competent authority under UCITS V, subject to capital adequacy and own funds requirements equivalent to those under CRR and CRD IV, respectively (along with certain other prudential regulation and on-going supervision requirements).
UCITS V introduces a uniform list of oversight duties that are incumbent on depositaries in relation to UCITS with a corporate form (an investment company) and UCITS in a contractual form. This includes ensuring that:
- sale, issue, re-purchase, redemption and cancellation of units of the UCITS are carried out in accordance with applicable national laws and fund rules;
- value of the units of the UCITS is calculated in accordance with applicable national laws and fund rules;
- income of the UCITS is applied in accordance with applicable national laws and fund rules;
- cash flows are properly monitored; and
- all payments made by, or on behalf of, investors upon the subscription of units of the UCITS have been received, and that all cash of the UCITS has been booked in cash accounts that are opened in the name of the UCITS, of the management company acting on behalf of the UCITS, or of the depositary acting on behalf of the UCITS; and maintained accordingly.
Any asset held in custody for a UCITS must be distinguished from the depositary’s own assets, and should at all times be identified as belonging to that UCITS. Further, assets that are capable of being held in custody should be differentiated from those that are not, to which record-keeping and ownership verification requirements apply instead.
Those assets held in custody by the depositary should not be reused by the depositary, or by a third party to which the custody function has been delegated, for their own account. The reuse of assets held in custody by the depositary or its delegate is only permitted if certain criteria are satisfied; and in the event of its insolvency, assets held by the depositary or its delegate for the UCITS must be unavailable for distribution to creditors of the depositary.
As with the AIFMD UCITS V introduces new requirements regarding depositary liability which distinguish between:
- financial instruments that may be held in custody by the depositary; and
- all other assets, which are subject to recordkeeping and ownership verification duties.
The Directive also widens the circumstances in which a depositary’s liability may arise and explicitly includes loss resulting from the depositary’s negligent failure or intentional failure to properly fulfil its obligations. Thus the depositary’s liability will not be affected by the fact that it has entrusted to a third party all or some of its custody tasks. In the event of loss by the depositary or its delegate of financial instruments held in custody, the depositary will need to ensure the return of a financial instrument of an identical type or the corresponding amount without undue delay.
UCITS V aligns the requirements regarding delegation of custody with the AIFMD. Under UCITS V the provisions regulating the delegation by a UCITS depositary are considerably stricter than under the UCITS Directive and a depositary will only be permitted to delegate all or part of its safekeeping tasks to a sub-custodian subject to fulfilling certain conditions:
- the tasks are not delegated with the intention of avoiding the UCITS V requirements;
- there is an objective reason for the delegation;
- the depositary has exercised all due skill, care and diligence in the selection and appointment of any sub-custodian; and also
- such delegation must be subject to periodic review and ongoing monitoring.
The delegate, (whose appointment must be evidenced in writing) must comply at all times with certain requirements, including ensuring that its structure and expertise is in line with the nature and complexity of the assets received in custody, segregation obligations and ensuring that, in the event of its insolvency, the assets held in custody are unavailable for distribution to creditors.
UCITS V provides for several empowerments for the Commission to adopt delegated acts relating to the new depositary requirements. These requirements are meant to broadly align the provisions of the UCITS Directive with those of the AIFMD in terms of rules on depositaries’ duties, delegation, eligibility to act as custodian, and liability.
Two empowerments to adopt delegated acts not covered by the AIFMD depositary rules relate to the provisions of the Directive on:
- the insolvency protection of UCITS assets when the depositary delegates safekeeping duties to a third party, and
- the requirement for the management company and depositary to act independently.
ESMA issued a consultation paper on these requirements in September 2014.
In line with the approach adopted under the AIFMD, management companies will be obliged to implement remuneration policies that are consistent with and promote sound and effective risk management, discourage risk taking that is inconsistent with the risk profiles and fund rules or instruments of incorporation of the UCITS managed and do not impair compliance with the management company’s duty to act in the best interests of the UCITS.
UCITS V compliant remuneration policies will need to cover fixed and variable components of salaries and discretionary pension benefits. They will apply to those categories of staff whose professional activities have a material impact on the risk profiles of the UCITS that they manage.
Such categories of staff include decision takers, senior management, risk takers, control functions and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and decision takers.
Of particular note is;
- guaranteed variable remuneration is exceptional, and occurs only in the context of hiring new staff and is limited to the first year of engagement;
- subject to the legal structure of the UCITS and its fund rules, a substantial portion, and in any event, at least 50% of any variable remuneration, must consist of units of the UCITS concerned, equivalent ownership interests or share linked instruments or equivalent non-cash instruments with equally effective incentives as any of the instruments referred to in this point unless the management of UCITS accounts for less than 50% of the total portfolio managed by the management company; and;
- a substantial portion - at least 40% - of the variable remuneration component must be deferred over an appropriate period (at least 3 years), and in the case of a variable remuneration component of a particularly high amount, at least 60 % of the amount must be deferred.
Significant management companies are required to establish a remuneration committee which is responsible for preparing decisions regarding remuneration for the preparation of decisions regarding remuneration, including those which have implications for the risk and risk management of the management company or the UCITS concerned and which are to be taken by the management body in its supervisory function.
ESMA is required to provide guidelines on the persons to whom remuneration policies and practices apply and on the adaptation of the remuneration principles to the size of the management company or the investment company, the size of the UCITS that they manage, their internal organisation and the nature, scope and complexity of their activities.
UCITS V also requires the prospectus, the KID and the annual report to include details of the up-to-date remuneration policy.
UCITS V sets down an exhaustive list of breaches which require sanctions by competent authorities In order to harmonise the application of sanctions across member states. Such breaches include include breaches of the main investor protection safeguards, including those relating to authorisation and organisation requirements, and non-compliance with cross-border marketing notifications. UCITS V also sets out a minimum list of administrative sanctions and measures which may be applied in the event of any such breach, including prescriptive limits on fines which may be imposed by competent authorities.
Furthermore, there is also a requirement for Member State competent authorities and management companies to establish whistle-blowing mechanisms to encourage reporting of potential or actual infringements, including protection for whistle-blowers who report breaches committed by the UCITS to their competent authority. Competent authorities are required to report to ESMA aggregated information on measures and sanctions imposed and any individual measures and sanctions they have published, on a yearly basis.