On March 24th 2016 the European Commission Delegated Regulation (EU) 2016/438 supplementing Directive 2009/65/EC of July 13th 2009 (the “UCITS Directive”) as amended by Directive 2014/91/EU of July 23rd 2014 (the “UCITS V Directive”) with regard to the obligations of depositaries was published in the Official Journal of the European Union (the “Regulation”).
The Regulation does not differ from the official draft that was adopted by the European Commission on December 17th 2015. Reference to the official draft has been made in our previous article.
For UCITS, be they structured as investment companies or mutual funds (in which case the requirements set out in the Regulation apply to their management company) (the “Funds”), the Regulation clarifies:
- that a written contract shall be entered into between the Fund and the depositary. In this respect the Regulation specifies that a management company which manages several common funds is also allowed to enter into a single contract with the depositary, in respect of all of the common funds it manages,
- the minimum requirements that shall be included in depositary contracts,
- the duties of depositaries in relation to the performance of their functions (safekeeping duties with regard to assets held in custody and other assets, cash monitoring...). Further, the Regulation sets out the due diligence procedure to be followed with respect to the selection of third parties to whom safekeeping functions are to be delegated,
- that the depositary shall ensure that in case of insolvency of a third party located in a third country to whom custody functions have been delegated, UCITS assets will be unavailable for distribution to or realisation for the benefit of, creditors of that third party,
- the conditions under which financial instruments held in custody are deemed to be lost as well as the conditions under which the depositary is allowed to discharge its liability in case of such loss,
- the independence requirements for UCITS and depositaries by laying down detailed rules which do not allow UCITS and depositaries to be under common management. In addition, it clarifies that employees of UCITS shall not be at the same time members of the management body of the depositary and that inversely, employees of depositaries shall not hold such positions in UCITS,
- the requirement to have in place a decision-making process for choosing the depositary so as to meet the sole interest of the UCITS and its investors. Additional requirements apply in case a link or group-link exists between a UCITS and its depositary,
- the requirement to manage conflicts of interests. In case of the existence of a link or group-link between the depositary and the Fund, conflicts of interests shall be identified and shall be further managed and disclosed in case they cannot be avoided.
The Regulation entered into force on April 13th 2016 and will apply directly in all Member States of the European Union from October 13th 2016.
Existing depositary agreements shall be revised promptly in order to comply with the Regulation and the UCITS V Directive as it will be shortly transposed into Luxembourg law.
