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16 June 2014

Hedgeweek: Countdown approaches for UCITS V implementation

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The approval of the UCITS V directive by the EP shortly before its dissolution for elections ensured that the latest iteration of the European legislative framework for the cross-border marketing and distribution of retail investment funds will not depend on the assembly’s new membership.

The directive approved by the parliament in plenary session on April 15 is relatively limited in scope, covering depositary functions, remuneration policies and sanctions. More fundamental changes may come in the future from what will become UCITS VI. The directive is expected to be published in the EU Official Journal around September or October. It will enter into force 20 days following the date of publication, after which member states will have 18 months to transpose it into national law. The likely go-live date should therefore be some time during the second quarter of 2016. In the meantime, ESMA is expected to issue guidelines toward the end of this year, in particular offering help in interpreting aspects of the directive’s provisions on manager remuneration, one of three areas addressed by UCITS V along with the role of the fund’s depositary and harmonisation of regulatory sanctions regimes.

The UCITS V depositary measures contain several pages of rules. The draft directive imposes limitations on the kinds of entity that are eligible to perform the role of a depositary to national central banks, credit institutions and regulated firms with sufficient capital and adequate infrastructure. It is argued that even before any changes of the eligible asset rules is introduced in UCITS VI, the depository requirements in UCITS V may have the practical effect of imposing more conservative management policies toward assets and strategies because of the detailed rules setting out the depositaries’ responsibility for oversight of compliance with the rules. This is enforced by the depositary’s strict liability for loss of assets, which could make institutions less willing to tolerate the holding of assets or following of investment strategies that might be perceived as breaching the UCITS rules.

In line with the provisions of the AIFMD, UCITS V will require that remuneration practices affecting all ‘risk-takers’ involved in managing UCITS funds do not encourage excessive risk-taking and instead promote sound and effective risk management. The forthcoming directive will stipulate that at least 50% of any variable remuneration (i.e. bonuses) consists of shares or units of the UCITS concerned, or equivalent instruments, unless the management of UCITS accounts for less than 50% of the total portfolio managed by the management company, in which case the minimum of 50% does not apply. The directive also seeks to ensure more effective and harmonised administrative sanctions, including action under criminal law, which is covered by co-operation between national authorities.

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