The final text of the UCITS V Directive is now agreed. Managers of UCITS can start making preparations by amending their remuneration policies and reviewing depositary arrangements in order to comply with these new rules. The rules are expected to be implemented by mid-2016.
UCITS V aims to amend current legislation in order to address discrepancies between national provisions regarding remuneration policies, depositaries’ duties and liability and sanctions.
The provisions on remuneration policy, eligible depositaries and depositaries’ duties will especially influence the day-to-day practice of UCITS and their managers. In addition, UCITS V unifies the sanctions for breaches.
An extensive set of rules regarding the remuneration of UCITS managers is included in UCITS V in order to mitigate risks taken by UCITS managers and investors in UCITS and to increase transparency. We commented on some developments in these rules on remuneration in our February In context.
Restrictions on variable remuneration for identified staff
A UCITS manager must adopt a remuneration policy and apply the policy to identified staff: senior management, risk takers, control functions and employees receiving the same remuneration.
The following restrictions will apply:
- at least 50% of the variable remuneration must consist of units in the UCITS (or equivalent instruments) unless the management of UCITS accounts for less than 50% of the total portfolio managed by the management company
- at least 40% of the variable remuneration must be deferred for at least three years; if the variable remuneration is extraordinarily high, the percentages increase to 60%.
UCITS V does not introduce a bonus cap and – according to the legislative proposals which to date have been published – a bonus cap for UCITS managers will not be introduced in the Netherlands at a national level.
In addition to disclosure requirements included in previous drafts of UCITS V, such as the obligation for the manager to disclose in the annual report
- the amount of remuneration (divided into fixed and variable remuneration) paid by the UCITS manager
- the number of beneficiaries and
- possible carried interest paid by the UCITS,
a last minute amendment of UCITS V also provides for details on the remuneration policy to be included in the key investor information (KIID) of the UCITS (a two-page document containing information on the UCITS for potential investors). The KIID must include a statement that the details of the remuneration policy are available on a website, with a reference to that website, and that a hardcopy version is available free of charge upon request.
AIFMD rules The UCITS V rules on remuneration are similar to the rules that apply to managers of non-UCITS, also referred to as managers of alternative investment funds (AIF managers). The European authority, ESMA, will draw up additional guidelines regarding identified staff which the remuneration rules will apply to. This may lead to some differences with the remuneration rules following the directive regarding managers of alternative investment funds (AIFMD). Furthermore, it is still not clear whether the UCITS V remuneration rules will extend to third-party service providers to which UCITS managers have delegated certain tasks and advisors (as is the case with AIF managers).
UCITS V defines the tasks and duties of depositaries, designates the legal entities that may act as a depositary and clarifies the liability of depositaries in cases where
- assets of a UCITS are lost in custody, or
- the depositary performs its oversight duties improperly.
Again, these rules are similar to the AIFMD rules.
UCITS are required to appoint a single depositary that will have general oversight over the UCITS’ assets. UCITS V introduces additional requirements for depositaries relating to minimum capital (at least EUR 730,000 and possibly more based on an extensive set of calculation requirements), organisational and administrative arrangements and appropriate and proportionate systems, resources and procedures. Currently, the requirements for Dutch depositaries are less strict; a minimum capital requirement of EUR 112,500 applies. In addition, under UCITS V member states should ensure that in the event of insolvency of the depositary, the assets of the UCITS are unavailable for the depositary’s creditors. This requirement could trigger legislative changes to the effect that depositaries no longer will be allowed to be the legal owner of the assets of a UCITS. Existing UCITS depositaries can benefit from a transitional regime that allows for a two-year grandfathering period.
National central banks have been added to the entities that may act as depositaries.
Liability of depositaries
While performing its duties, the depositary should act in the interest of the UCITS as well as of the investors of the UCITS (and not in the interest of just one of these parties). To further protect the interests of the parties involved, the liability of the depositary will be extended to offer the same liability regime as is the case under the AIFMD. However, unlike the AIFMD regime, a depositary cannot discharge itself of liability in the case of delegation to a sub-custodian.
Re-use of assets The re-use of assets (e.g. securities lending) by the depositary or a sub-custodian will become subject to additional rules. Re-use should be for the benefit of the UCITS and the transaction should be covered by high quality and liquid collateral received by the UCITS under a title transfer arrangement. The market value of the collateral at all times has to amount to at least the market value of the re-used assets plus a premium.
The implementation of UCITS V into national law is expected by mid-2016. UCITS managers will likely have to amend their remuneration policies.
UCITS V requires UCITS managers to revise agreements currently in place with their depositary. As the tasks of the depositary will extend beyond safe-keeping duties, and will also include oversight and cash-monitoring, existing agreements will have to be amended or new agreements will have to be concluded which include these extended duties of depositaries.
Some Dutch – special purpose – depositaries will have to investigate whether they will be able to meet the strict requirements under UCITS V, and whether they wish to continue to act as depositaries.