On 1 February 2016, the European Securities and Markets Authority (ESMA) published a new Q&A document on the application of the UCITS Directive, as most recently revised by UCITS V.

The Q&A includes the following new Q&A on the documentation updates which UCITS funds need to provide to meet the remuneration and depositary requirements of UCITS V. Key points are;

  • On remuneration disclosures in KIIDs and Prospectus, UCITS may update their KIIDS (on or after 18 March 2016)  when the KIID is next revised or replaced for another purpose (if the information is then available) and in any event no later than its next annual update (19 February 2017). Similarly, UCITS may update their prospectus when it is next revised for another purpose (if the information is then available) and in any event by 18 March 2017. In the meantime, the additional information on remuneration arrangements should be made available (on or after 18 March 2016) on a relevant website as soon as it becomes available.
  • On remuneration disclosures in annual reports, it is not necessary to include the remuneration-related information in annual reports for periods ending before 18 March 2016. For annual reports relating to periods ending on or after 18 March 2016, but before the UCITS management company has completed its first annual performance period, the remuneration-related information should be included on a best efforts basis and to the extent possible, explaining the basis for any omission.
  • On timing of updates of depositary contracts. UCITS depositary contracts should be revised promptly in accordance with any transitional arrangements outlined in the delegated acts.  As reported in our December Front Page, the European Commission published the first official draft of the UCITS V level 2 Regulation in December and we await its publication in the Official Journal. It will come into force 20 days after that date and (based on that draft) it will apply from a date 6 months after the entry into force of the Regulation. However ESMA note that any provisions in existing contracts concerning depositary liability which conflict with the UCITS V depositary liability provisions will be void with effect from 18 March 2016 and the UCITS V depositary liability provisions will apply instead. ESMA point out that the liability provisions in existing depositary contracts should be amended to reflect the UCITS V depositary liability provisions when those depositary contracts are revised to comply with the delegated acts as detailed above. We expect that many UCITS funds and depositaries will wish to update the depositary contracts by 18 March so as to ensure that the depositary contract correctly reflects the legal position.

The new Q&A also repeals and replaces four Q&A on UCITS that ESMA has previously issued:

The Q&A mechanism is a practical convergence tool used to promote common supervisory approaches and practices. ESMA commits to review the Q&A on a regular basis to identify if, in a certain area, there is a need to convert some of the material into ESMA guidelines. The document is intended to be continually edited and updated as and when new questions are received. The date each question was last amended is included after each question for ease of reference. Questions on the application of any of the UCITS requirements may be emailed to investment.reporting@esma.europa.eu.

The new Q&A are as follows;

Timing of remuneration disclosure in the KIID

Question 1a: UCITS V requires (i) the KIID to include a prescribed statement in relation to remuneration policy and (ii) the prospectus to include some remuneration-related information. UCITS are required to make an updated KIID available within 35 days of 31 December each year, while the ‘essential elements’ of the prospectus must be kept up to date at all times. Will UCITS be required to issue a further KIID and a revised prospectus on 18 March 2016 to reflect the UCITS V requirement?

Answer 1a: No: except where a UCITS is subject to national laws and regulations in its home Member State that require updates to be made by 18 March 2016, the UCITS will be allowed to update the KIID with this information at the next annual update after 18 March 2016, or on the first occasion after 18 March 2016 on which the KIID is revised or replaced for another purpose, if the information is available at that point in time. Similarly, a UCITS will be allowed to add the relevant information to the prospectus at the next occasion it is revised for another purpose or in any event by 18 March 2017 at the latest.

In the meantime, UCITS management companies should make available on a relevant website the additional information about the management company’s remuneration arrangements as soon as it becomes available.

Timing of remuneration disclosure in the annual report

Question 1b: UCITS V requires the annual report to include some remuneration-related information. The annual report shall be published within four months from the end of the period to which it relates. Does the UCITS V requirement apply to all annual reports published on or after 18 March 2016?

Answer 1b: No, it is not necessary to include the remuneration-related information in any annual report relating to a period that ended before 18 March 2016. For annual reports relating to periods that end on or after 18 March 2016, but before the UCITS management company has completed its first annual performance period in which it has to comply with articles 14a and 14b of the Directive, the UCITS management company should include the remuneration-related information in the report on a best efforts basis and to the extent possible, explaining the basis for any omission.

Timing of updates of depositary contracts

Question 1c: When must existing UCITS depositary contracts be updated in order to meet the requirements under Directive 2014/91/EU (UCITS V)?

Answer 1c: UCITS V will start to apply on 18 March 2016. Under Article 22(2) of the UCITS Directive, introduced by UCITS V, the appointment of the depositary shall be evidenced by written contract, while the delegated acts required under Article 26b will set out the particulars that need to be included in that written contract. UCITS depositary contracts should be revised promptly in accordance with any transitional arrangements outlined in the delegated acts. UCITS V contains provisions which prescribe in law the liability of depositaries. While there is no requirement to include those liability provisions in depositary contracts, in practice existing depositary contracts will contain liability provisions which will not be consistent with the depositary liability provisions set out in UCITS V. In accordance with Article 24(4), those provisions of a contract which set out the parties’ agreement on depositary liability and which conflict with the UCITS V depositary liability provisions will be void with effect from 18 March 2016. The UCITS V depositary liability provisions will apply instead. The liability provisions in existing depositary contracts should be amended to reflect the UCITS V depositary liability provisions when those depositary contracts are revised to comply with the delegated acts.