EUROPE: Brussels to tighten UCITS Depository rules

Thursday May 28 2009

A key issue falling out of the Madoff Affair is the question of whether the Depositary has strict liability for safekeeping of the assets of the scheme where sub-custody is delegated.

As we have previously reported, the Paris Appeals court has recently held that strict liability does apply – a position broadly disputed by Depositories across Europe.

There has been a development today on this issue, which raises the prospect of the EC following up their ill-considered draft proposal for Alternative Investment Fund Managers (AIFM) with similarly ill-considered proposals for UCITS.

Following a CESR review commissioned by Charlie McCreevy, EU Internal markets commissioner which revealed that UCITS rules regarding the liability of depositories were not being applied consistently across the 27 member states, Commissioner McCreevy has announced the EC `s intention to clarify and strengthen UCITS rules.

The outcome is an “unlevel playing field in the application of rules to protect UCITS investors. This means that some EU investors in UCITS funds are better protected than others,” the Commission said.

Whilst it is not clear that strict-liability is on the cards, the Commission will start to review rules governing retail investment funds by the end of June as a way to increase guarantees for savers, who suffered the blow of the Madoff scandal.

In April 2009, the commission had published a draft proposal for Alternative Investment Fund Managers (AIFM) containing stringent proposals on the regulation of depositories, their liability, eligibility etc. Mr. McCreevy wants to extend such provisions to UCITS funds.

The draft AIFM proposals require depositories to be credit institutions that are based, authorised and supervised in the EU.

“The new proposal should at least cover what the AIFM proposal covers. It would not be appropriate to have a less stringent approach for retail investors than for professional investors,” the commission said.

The current AIFM proposed directive is already subject to immense debate with concerns that it will constrict hedge funds, when mirrored to UCITS will significantly increase depositories liabilities towards the safekeeping of investor `s assets as the onus of proving that everything possible was done to safeguard assets will be on the Depository.