Luxembourg’s Chamber of Deputies has approved legislation incorporating the European Union’s UCITS V directive into national law, following a legislative odyssey lasting just over nine months. Bill of law no. 6845 amends the grand duchy’s fund legislation of December 17, 2010, which transposed UCITS IV, and was finalised by publication on May 12 in the Mémorial, the country’s official journal, as the Law of May 10, 2016, the day it was signed by Grand Duke Henri. The legislation will come into force at the beginning of June.
The main changes brought by the new legislation affect depositary functions, remuneration policies and sanctions applicable to the management of UCITS funds, bringing the UCITS regime into line with that governing alternative funds.
It enshrines the responsibility of depositaries for the assets they oversee, sets out rules to ensure that remuneration structures do not incentivise portfolio managers or other key employees to take inappropriate risks, and sets out a framework of sanctions for breach of the rules.
In addition, the law makes non-UCITS funds established under Part II of the fund legislation also subject to the UCITS V depositary requirements, rather than the rules applicable to alternative fund managers under Luxembourg’s law of July 12, 2013, which transposed the Alternative Investment Fund Managers Directive, or those set out in Circular 91/75 issued by the grand duchy’s financial regulator, the Financial Sector Advisory Authority (CSSF).
Part II funds are now subject to the more stringent UCITS depository rules irrespective of whether the assets overseen by their managers are above or below the threshold set out in the AIFMD. The Law of May 10, 2016 also amends the 2013 legislation by requiring an independent audit of alternative investment fund managers’ accounting documents and providing clarification on rules governing the provision of non-core services on a cross-border basis.
The passage of the Luxembourg law follows the issue by the European Commission on March 24 of a level 2 delegated regulation supplementing the UCITS V directive. The key provisions include:
• The regulation sets out minimum requirements for written agreements between the investment company or management company and the depositary for each fund run by the management company.
• It adds details regarding duties of the depositary including oversight, cash monitoring, safekeeping of custody and other assets, due diligence in selecting and appointing third parties, and segregation and insolvency protection of UCITS assets when delegating custody. The insolvency protection requirement, new to EU fund rules, requires the depositary to obtain legal assurance that in the event of insolvency of a third-country custodian, the UCITS assets may not be used to pay the custodian’s creditors.
• The regulation defines the conditions and circumstances, first set out in the AIFMD, in which financial instruments held in custody are considered lost and what constitutes a force majeure event that would relieve the depositary of liability.
• It clarifies independence requirements for management companies, investment companies, and depositaries, including rules on composition of the management body of the management or investment company as well as the depositary and any sub-custodians. Additional rules apply when an ownership link exists between the management or investment company and the depositary.
The Commission’s delegated regulation came into force on April 12 and will be applicable from October 13 this year.
The full text of the Law of May 10, 2016 can be viewed at: http://www.cssf.lu/fileadmin/files/Lois_reglements/Legislation/Lois/L_100516_OPCVM.pdf
The Commission’s delegated regulation is available at:
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ%3AJOL_2016_078_R_0004&from=EN
