Role of the depositary in a Luxembourg UCITS fund

This article intends to provide general guidance as to the role of a depositary in a Luxembourg investment fund (and more particular in relation to a UCITS fund (part I of the Law of 2002) in the form of a SICAV (“hereafter referred to as the “fund”), and does not purport in any manner to give any opinion or advice on any cases set out hereunder or any other cases related to the Madoff case.
The effect of the alleged Ponzi scheme in which Bernard Madoff was implicated – involving losses of more than $50 billion – are already widespread. The CSSF has recently announced in its press release of 23 January 2009 that a number of funds and sub-funds (as set out hereunder) have decided to suspend their NAV as well as redemptions, subscriptions and conversions of shares/units. A consequence of the Madoff case is that the liability of the main actors of the investment funds involved is called into question.
Any finding of liability in the forthcoming litigations is likely to involve thorny issues. Indeed a fund requires the services of a large number of actors (the board of directors of the funds, the promoter, the depositary, the central administration agent, the auditor, etc.) and it is unclear how far in the hierarchy the (potential) liability shall extend. In any case, the diversity of the regimes of responsibility under which each actor is subject (whether it is contractual liability or not) will probably cloud the issue. Matters will also be made more complex by the wide variety of legislations that come into play as a result of the internationalization of investments.

(I) Duties of the depositary

The role of the depositary bank is set out in the Luxembourg law of 20 December 2002 as amended (the “Law of 2002”), and in the circular of the IML (currently named the CSSF) 91/75 (as amended by the circular 05/177). The Law of 2002 provides that the custody of the assets of the fund must be entrusted to a depositary. However, a crucial clarification by the CSSF in Circular 91/75 provides that: “the concept of custody used to describe the general mission of the depositary, should be understood not in the sense of ‘safe-keeping’ but in the sense of ‘supervision’, which implies that the depositary must have knowledge at any times of how the assets of the UCI have been invested and where and how these assets are available”. The physical deposit of all or part of the assets may be made either with the depositary itself or with any professional designated by the fund in agreement with the depositary. The general mission of a depositary is threefold, encompassing the preservation of the assets of the UCI, the control of some of its operations, and the day-to-day administration of the assets of the fund.
This means that the depositary must inter alia process the receipt of dividends, interests, etc.. However, the depositary does not have to execute itself all the duties incumbent upon it and can be assisted by third parties in the execution of transactions or can delegate to third parties the execution of transactions. However, this cannot lead to a situation where all duties are concentrated in the hands of one and the same party. The depositary must – in order to satisfy its obligation of supervision – organise its relations with the third parties in such way that it is immediately informed of all the transactions that the third parties execute in relation to the day-to-day administration of the assets which they hold.
The depositary must also:
-                     ensure that the sale, issue, redemption and cancellation of units effected on behalf of the fund are carried out in accordance with the law and the articles of incorporation;
-                     ensure that in transactions involving the assets of the fund, the consideration is remitted to it within the customary time limits; and
-                     ensure that the income of the fund is applied in accordance with the articles of incorporation.
The CSSF has argued that the term “ensure” as used in the Law of 2002 implies that the depositary must not “execute” itself the tasks but must verify the execution of the tasks imposed on it. It is important to note the difference between the duties of the depositary of, on the one hand a FCP (fonds commun de placement) subject to part I of the Law of 2002 and, on the other hand a SICAV or any other UCI which has not been constituted as a collective investment fund. In case of a FCP (part I of the Law of 2002), the depositary has two additional specific supervisory and monitoring duties such as (1) carrying out the instructions of the management company, unless they conflict with the law and the management regulations and (2) ensuring that the value of units is calculated in accordance with the law and the management regulations.

(II) Liability of the depositary

If anyone suffering damage must prove the depositary’s negligence in respect of its duty of supervision and the causal relationship thereof, the duty of supervision of the assets of the fund and consequently the liability for such supervision always resides with the depositary. As laid down in the Circular IML 91/75 (as amended by Circular CSSF 05/177), the depositary may, in no case, release itself from the duty of supervision and hence any provision of the articles of incorporation or any other agreement aiming to exclude or limit this liability are null and void, and under Article 34 (2) of the Law of 2002, the depositary’s liability shall not be affected by the fact that it has entrusted all or some of the assets in its custody to third parties. This has also been repeated in a press release issued by the CSSF on 2 January 2009 as a result of the Madoff case. The depositary may only be discharged from its duty of supervision when it is satisfied from the outset and during the whole duration of the contract that the third parties with which the assets of the fund are on deposit are reputable and competent and have sufficient financial resources. Importantly, the CSSF stated that it would not limit its analysis to the depositary banks concerned but would verify that all the parties involved acted with the diligence imposed by Luxembourg law.
The above elements are likely to be crucial in the litigations flowing from this groundbreaking swindling. The current regime governing the liability of a depositary is likely to be subject in the forthcoming months to substantial reforms, involving the enactment of more stringent – and probably more precise – investor protection rules. Indeed France, backed by Mr. Luc Frieden, the Luxembourg Minister for the Treasury and Budget, is currently calling for legislation to strengthen the protection of investors across Europe.
Funds mentioned in the press release of the CSSF of 23 January 2009
- Herald (Lux)
- Sub-fund US Absolute Return Fund
- Luxembourg Investment Fund
- Sub-fund U.S. Equity Plus
- Luxalpha Sicav
- Sub-fund American Selection
- Norvest
- Sub-fund Arbitrage
- Global Fund Selection Sicav
- Sub-fund Balanced Sub-fund
- Sub-fund Growth Sub-fund
- Sub-fund X-tra Alternative Investments Sub-fund
- Carat (Lux) Sicav
- Sub-fund Global One
- LRI Invest Alpha Stable €
- BG Umbrella Fund
- Sub-fund BG Global Classic
- Sub-fund BG Global Dynamic
- Sub-fund BG Global Challenge
- Sub-fund BG Global Balance
- Sub-fund BG Global Discovery
- Sub-fund BG Stable Value
- M.A.R.S. Fund
- Sub-fund One (c)
- Pareturn
- Sub-fund Best Selection

Luxembourg - Investment Funds - Impact of the Madoff fraud case

The Luxembourg regulator (CSSF) has on 22 December 2008 issued a press release analysing the impact of the Madoff fraud case on the Luxembourg investment funds.
The CSSF noted that the impact on Luxembourg investment funds which are directly or indirectly exposed to the Madoff case amounts to 1.9 billion Euro which represents only 0.15% of the total net assets of undertakings of collective investment as at 30 November 2008. The CSSF furthermore noted that it does not imply that this amount is entirely lost but that it represents the maximum responsibility at stake.

Investment Funds - CSSF Circular - Clarification of the relationship between the custodian and the prime broker in case of a SIF

In a Circular issued on 5 September 2008, the CSSF clarified the interaction between the prime broker and the custodian of a SIF. In Luxembourg, the prime broker must be a financial institution subject to the control of a supervisory authority of a State with a supervisory regime recognised to be equivalent to that provided by EU legislation. Prime brokers are essential to SIFs that implement a hedge fund strategy or that make use of derivatives. By setting up four guidelines, the Circular should facilitate the use of prime brokers by SIFs.


Those rules are exclusively applicable to specialized investment funds, i.e. funds set up under the 2007 Law on Specialized Investment Funds (the ‘SIF Law’) and hence the provisions of this Circular do not cover funds set up under the 2002 Law.


Acceptance of the prime broker by the custodian

The custodian has to approve the SIF’s choice of prime broker given the fact that the custodian has to arrange its relationship with the SIF and the prime broker so as to be able to fulfil its duty of supervision of assets. The approval by the custodian of the SIF’s choice of prime broker is limited to ensuring that the prime broker fulfils the following criteria:

  • The prime broker is a financial institution regulated by a supervisory authority in a state in which the supervisory regime is recognised as being equivalent to the regime provided ofr by Community law;
  • The prime broker is a financial institution which is recognised and specialized in this type of transactions.

Relationship between the prime broker and the custodian

The custodian has the right to information and a right of intervention concerning the composition of the portfolio of the SIF. It must also have access to the assets that are entrusted to the prime broker. The contractual relationship between the SIF and the prime broker or between the custodian and the prime broker will contain the required procedures to that effect. However, the custodian does not need to have information about the correspondents to which the prime broker has entrusted the SIF's assets.

General administration tasks

In the case of a SIF having the form of a fond commun de placement (commun fund), the prime broker might be contractually required to carry out all operations concerning the day-to-day administration of the SIF's assets.


The sales documents of a SIF using a prime broker must contain an accurate description of the implications of such use and the related risks.