UCITS V and Level 2 Measures
Are you ready ?
Following the issuance of Level 2 measures of the Directive 2014/ 91/EU of 23 July 2014 as regards depositary fuctions, remuneration policies and sanctions “Directive UCITS V”, the timelines are now clear:
- UCITS V Level 2 measures as regards depositary functions (“proposed Delegated Regulation”):
A draft of the Delegated Regulation has been submitted on 17 December 2015 to the European Parliament and the European Council. By the next three months, the European Parliament and the European Council have to review the text and provide their comments.
By 17 March 2016, the text will be voted or rejected.
Delegated Regulation will be published on April 2016 and in force six months later, on September 2016.
- Directive UCITS V will be in force on 18 March 2016
- CSSF Circular 14/587 as amended by CSSF Circular 15/608 (“Circular on depositaries” ) will be in force on 18 March 2016.
The CSSF has issued this Circular in order to anticipate the implementation of the obligations for depositaires in Luxembourg. We will have an overlap between the CSSF Circular 14/587 and Level 2 measures as regards depositary functions.
The CSSF will issue a revised version of the Circular by September 2016 amending Circular 14/587, including Level 2 measures and specific aspects for Luxembourg depositaries.
If you are a Depositary Bank:
Which measures do you have to put in place in your Bank for the implementation of UCITS V and Level 2 measures?
- Asset liability & segregation of the assets
- Cash flows' monitoring
- Information rights on the sub-custodians/delegates and proper oversight (including legal advice on insolvency rules of new markets)
- Restriction in the re-use of assets
- Board composition & independence requirement for depositaries of the same Group as the Management Company and/or the Investment Manager
You will have also to redefine through Agreements, your duties towards counterparties such as the Management Company (due diligence & information rights); your delegates (sub-custodians) as above-mentioned; towards the Transfer Agent of Target funds (delegation controls, information sharing & oversight) and other counterparty such as prime broker.
If you are a Management Company,
Which measures do you have to put in place in your Company for the implementation of UCITS V and Level 2 measures?
In order to comply with UCITS V Directive:
- Gap analysis on remuneration between AIFM and UCITS V requirements
- Compliance updates of the Remuneration Policy; Conflicts of Interests Policy...etc.)
- Proper assessment of sanctions regime and breaches
- Adjustment on the Directors and Officers' Insurance liabilities
In order to comply with Level 2 measures/depositaries:
- Amendment/update of the Agreements with depositaries & of the Fund documentation (prospectus, KIID)
- Information disclosure (to investors) & risk disclosure in the prospectus
- Information duties & due diligence of the depositaries
- Board independence & remuneration: the independence requirement applies to Management companies/ Investment companies and depositaries. It regards common management/supervision (Board members, Managers) and cross-shareholdings/group inclusion (part of the same group).
Measures need to be taken in order to ensure the independence in the Board composition. Directorships, contracts of the managers and mandates of such persons involved at Group level have be reviewed in detail.
On 28 January 2016, during the ALFI UCITS V seminar, Mr. Laurent van Burik, Head of the Division/International affairs, Regulation and Enforcement of the CSSF detailed the view of the regulator:
- The CSSF is confident that the Delegated Regulation will be voted by 17 March 2016.
- The CSSF will issue a letter on February 2016 to the attention of the Funds and the Management Companies in order to inform about new regulations in force that they have to comply with, Directive UCITS V, CSSF Circular 14/587 and Level 2 measures.
Mr. van Burik confirmed the following points:
- The financial institutions concerned have to comply with CSSF Circular 14/587 by 18 March 2016.
- The financial institutions concerned have to comply with remuneration aspects of Directive UCITS V by 18 March 2016 (ESMA Guidelines on Remuneration will be issued on March 2016).
- The Central Securities Depositaries (Clearstram, Euroclear...etc.) benefit from an exemption on the obligation of the segregation of assets.
- Amendment of the Board composition by end of September 2016: the independence requirement applies to Groups and the 1/3 rule means : one independent director has to be appointed for a Board of three, four even five Directors.
- Amendment of the Agreements with the depositaries (accordingly with CSSF Circular 14/587 and Level 2 measures).
- Update of the Fund documentation (prospectus and KIID) has to be performed on the first occasion of an update with following deadlines:
- KIID: deadline on 31 December 2016
- Prospectus: deadline on 18 March 2017
- The set up of new funds after 18 March 2016 has to comply with Directive on UCITS V and on September 2016 with Delegated Regulation (Level 2 measures).