ESMA published its final report on 28 November 2014, setting out its technical advice to the European Commission as to the content of delegated acts proposed to be adopted under UCITS V.
The technical advice covers:
Insolvency protection
ESMA’s technical advice provides as follows: all third-party delegates to whom UCITS assets are entrusted for safe-keeping will be required to:
In addition, ESMA’s advice provides that third-party delegates, if safe-keeping UCITS assets outside of the EU, must make all reasonable efforts, including the receipt of independent legal advice, to verify that the applicable insolvency laws of the relevant jurisdiction:
Such third-party delegates must also ensure that the legal conditions ensuring or underpinning these requirements in the relevant non-EU jurisdiction are met both at the time of agreement with the depositary and for the duration of the delegation, and must immediately inform the depositary in circumstances where any of the conditions in question cease to be met.
The depositary itself must, in turn, consider the following matters when selecting and appointing any third-party delegate to safe-keep UCITS assets:
Where delegating functions to a third party located outside the EU, the depositary must additionally adopt the following measures:
It should also be noted that ESMA’s advice provides for exceptions, whereby either the depositary or the non-EU third party would be absolved from the requirement to obtain independent legal advice in circumstances where the advice obtained by one or other of the parties is made available to the other and meets the relevant requirements.
Independence requirement
ESMA considers that the independence of the management company/self-managed investment company and the depositary (relevant parties), may be jeopardized by the existence of the following links between these parties:
Common management/supervision
ESMA’s advice includes rules preventing the management bodies of the relevant parties from having members in common and or from including employees of the other.
Cross-shareholdings
ESMA has, significantly, chosen not to adopt the more controversial of the two options proposed at consultation stage: that relevant parties connected by a qualifying holding or included in the same group for the purpose of consolidated accounts would not be considered as independent from each other for the purpose of the UCITS V requirements.
Instead, ESMA’s technical advice permits UCITS management companies/investment companies to be considered independent of their depositaries despite being linked by ‘qualifying holdings’ or forming part of the same group provided certain additional safeguards, such as robust conflicts of interest procedures, are put in place. Additionally, in cases where the management company/investment company and the depositary are part of the same group for consolidated accounts purposes, at least one-third of the members of the management bodies of both entities will be required to be independent of the group.
Next steps
Delegated Acts, otherwise known as “Level 2” measures, will now be prepared by the European Commission, taking into account ESMA’s advice. It is currently proposed that Level 2 measures implementing UCITS V will be formally adopted by the Commission by April 2015. UCITS V itself must be transposed into the national law of all Member States by 18 March 2016.