On 10 January 2011, the Irish Commercial Court issued a decision regarding the obligation for a depository to account directly to investors in a UCITS in respect of its accounting and reporting obligations.

The judgment was the first relating to a substantive issue in the Madoff related proceedings instituted in the Irish High Court as a result of the Madoff fraud.

One argument submitted in support of there being a broad obligation to account was that, as a natural consequence of the legal relations in place pursuant to the UCITS Directive (as amended), the UCITS Regulations (as amended) and contractual relations, a fiduciary relationship was created pursuant to which the depository had an obligation to provide detailed information, accounting for its activities, to all parties with a direct or beneficial interest in a fund.

Accordingly, there was the potential for a ruling stating that a depository either did or did not owe fiduciary duties to a fund and/or investors. That point was of relevance to all parties in the Madoff-related proceedings and so interested parties involved were invited to make submissions.

It was noted in the ruling that there is previous authority for the proposition that a fiduciary relationship could arise pursuant to the implementation of an EU Directive in a common law jurisdiction.

However, consideration was also given to a depository’s specific reporting obligations pursuant to the UCITS Directives and the UCITS Regulations. In that context, the fact that the UCITS Directives were aimed at harmonising the provisions of investment funds within the European Union was referenced. Therefore, it was noted that, whilst Member States were permitted to adopt additional measures not inconsistent with a Directive, to provide greater protection for investors, courts should be slow to interpret legal rights and obligations in a manner that would create significant differences in the application of the Directive, thus preventing clarity and uniformity for investors.

As such, it was noted by Mr. Justice Clarke that a feature of the UCITS Directives was to establish;

common basic rules in respect of the information which collective investment undertakings must publish”;

And, in keeping with that position, it was stated that;

it does not seem to me that, even if a trustee/beneficiary relationship is said to exist between the parties, that obligation could carry with it a duty to account which went beyond the duty specified in Regulation 39(d) [where a trustee is required to enquire into the conduct of the investment company in each annual accounting period and report thereon to the shareholders] insofar as the obligations of the depository/trustee are concerned.”

However, it was highlighted that UCITS Regulation 39(d) requires that a trustee reports to the shareholders. Further, it was noted that a trustee must deliver its report to the investment company in time for it to include the trustee’s report in the investment company’s report, which has to be published subject to the relevant time-limits.

Accordingly, as the UCITS Regulations impose an obligation on a trustee (which it was noted is, for the purposes of the Regulations, how a “depository” in the terms referenced in the Directives is described) to furnish a report to the investment manager in time for inclusion in its report then, if the investment manager’s report is not made available to investors, it was noted that the trustee could still meet its obligation by making the report directly available.

Therefore, if a report is not circulated by an investment company, there is a resultant obligation on the depository to make the report directly available to relevant investors. In that latter respect, on the basis that the intention of the Directives is to ensure transparency, it was indicated that a wide definition of investors should be adopted.

In light of the above, the issue as to what extent there might be a fiduciary relationship between a depository and another party was not considered further.

Whilst the ruling gives useful guidance in respect of a depository’s obligation to provide a report to shareholders pursuant to the UCITS Directives and UCITS Regulations, the extent of a fiduciary relationship, if any, between a depository and another party remains an issue for another day.