From March 18 this year, Ucits V’s provisions on depositaries, remuneration and sanctions will align Ucits with the EU’s post-crisis financial regimes – in particular that for alternative funds.
However, ‘Level 1’ merely provides the new regime’s framework – the details are contained at Levels 2 and 3.
The European Securities and Markets Authority’s (Esma) remuneration guidelines become effective on March 18, while the Commission’s measures on sanctions may also be in place in time (just).
The situation regarding depositaries is less clear. The Commission published a Delegated Regulation last December, containing its proposed Level 2 measures. The European Parliament and Council have, at latest, until June 2016 to endorse them. The provisions must then be published in the Official Journal, coming into effect six months later. The current best guess is that the depositaries measures will not apply until late in the third quarter, 2016.
So, for several months, the Ucits industry will have to comply with the new rules without fully knowing what these are.
This can cause practical difficulties.
Under Ucits V, a depositary’s appointment must be “evidenced by a written contract”. The contents will, doubtless, be the subject of detailed negotiations but must comply with the – as yet unfinalised – Level 2 requirements. Esma advises merely that contracts be revised ‘promptly’ in accordance with any transitional arrangements in the Delegated Regulation.
The depositary will be essentially strictly liable for loss (by itself or its delegate) of financial instruments held in custody. Level 2 will clarify what instruments can be held in custody, when instruments are considered lost, what are “external events beyond reasonable control” (a possible basis for excluding liability) and what due diligence a depositary must conduct before delegating to a third party.
With time running out, this lack of certainty is a concern – and has a fundamental impact on the depositary’s contractual negotiations, looking both to the Ucits and to its own delegates.
Unfortunately, it seems the Commission will not comment publicly on how it expects Ucits to navigate the ‘gap’ between Level 1 and Level 2 coming into force. On February 1, ESMA published Q&As, though these were limited to queries on updating documentation.
Each national regulator, then, must decide how to bridge the gap. The FCA’s approach, set out in PS 16/2, follows a pragmatic course, expecting firms to attempt to comply with Ucits V from March 18 even in the absence of detailed Level 2 measures but showing flexibility by, for example, allowing Ucits time (subject to long-stop dates) to amend key investor information documents or KIIDs, prospectuses and annual reports in the normal course of business rather than immediately after March 18.
READY TO RENEGOTIATE
Depositaries currently negotiating with their custody chain must assume that the draft measures in the Delegated Regulation will be adopted without major change. Since most are a copy of the Alternative Investment Fund Managers Directive measures, Brussels is unlikely to oppose what it previously agreed. Nevertheless, parties should provide for the possibility of renegotiating terms where changes are made to the proposals prior to finalisation.
Meanwhile, firms should do what they can to comply with Ucits V, make assumptions about Level 2 measures and record such decisions. If necessary, this can evidence the firm’s efforts to meet its regulatory obligations. Finally, keep an eye open for the publication of the definitive Level 2 measures (on depositaries and sanctions) and analyse any gap between the interim and final requirements.
Neil Simmonds, financial services partner at Simmons & Simmons
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