EUROPE: Commission to clarify the responsibilities of UCITS depositaries

Monday January 26 2009

The infamous Madoff Scandal has revealed many gaps in the regulatory structures of various regimes, with UCITS regime also coming under scrutiny .

In a statement made on the 26th of Janauary 2009, the European Commission accepted that some €1.6 billion in funds entrusted to 4 UCITS funds had been invested, and apparently lost, in entities controlled by Bernard Madoff. The Commission also stated the different ways in which member states have been implementing the UCITS Directive, has resulted to different expectations as to whether the depositary is required to keep assets under its control so as to be able to return them to investors, or whether its responsibilities are confined to monitoring the security of the assets.

As for the European Commission’s position in relation to the UCITS Directive and the basic responsibilities and liabilities of a depositary, it is states the directive clearly assigns responsibility for safe-keeping fund assets to the depositary and imposes liability on the depositary in the event of wrongdoing or negligent performance of its duties. Determination of liability and its extent must be established in accordance with the relevant national civil law.

The Commission notes that it is premature to conclude that investors in the UCITS funds concerned will not be indemnified for losses incurred under the law of the Member States where the depositaries concerned were domiciled. However, given that the depositary is a critical component of the UCITS regulatory system, the Commission is determined to ensure that national laws and practices transcribing depositary responsibilities and liabilities do not blur the responsibilities and liabilities enshrined in the Directive.

Next Steps:

Responding to the above situation, the Commission, along with CESR, are to review the manner in which Member States have implemented the relevant provisions of the Directive, and evaluate how responsibilities and liabilities of depositaries are defined having regard to national civil law.

The review will be driven by the objective of identifying any practices or provisions which dilute the basic responsibilities and liabilities of the Directive. It will seek to clarify the responsibilities of UCITS depositaries for safe-keeping, and the modalities by which depositaries can exercise those responsibilities (including use of sub-custodians).

It is expected that should the review indentify practices or outcomes that are inconsistent with over-arching principles of the directive, necessary steps would be taken by the commission to address the short comings. At this stage, a number of options could be envisaged – ranging from legally binding clarification of the responsibilities implied by asset safe-keeping supported by convergence of national practice, to more far-reaching legislative harmonisation.

Internal Market Commissioner McCreevy said: “The Commission will take the lead in ensuring that the principles enshrined in the directive are upheld – starting with a review of how member states give concrete expression to these provisions to identify any practices that might blur the basic responsibilities foreseen in the directive. On the basis of that review, the Commission will take the lead in bringing forward any actions needed to codify depositary responsibilities”.

The commission has also published a FAQ piece answering some common questions on Responsibilities of UCITS depositaries.

Click on the above link for further details.