On August 28, the final text of a Directive to update Directive 2009/65/EC (UCITS IV Directive) on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) in relation to depositary functions, remuneration policies and sanctions (UCITS V) was published in the Official Journal of the European Union.   The depositary rules will bring UCITS funds more in line with the requirements for depositaries of alternative investment funds (AIFs) under the AIFM Directive. The requirements include, among other tasks, that the depositary should:  

  • Ensure that the sale, issue, re-purchase, redemption and cancellation of units of the UCITS are carried out in accordance with applicable national laws and the fund rules or instruments of incorporation.  
  • Ensure that the value of the units of the UCITS is calculated in accordance with applicable national laws and the fund rules or the instruments of incorporation.  
  • Ensure that the income of the UCITS is applied in accordance with applicable national laws and the fund rules or the instruments of incorporation.  
  • Ensure that the cash flows of the UCITS are properly monitored.  
  • Ensure the safekeeping of the UCITS’ assets.  
  • On a regular basis, provide the management company or the investment company with a comprehensive inventory of all of the assets of the UCITS.  

The remuneration rules will bring UCITS management companies more into line with alternative investment fund managers (AIFMs) managing AIFs under the AIFM Directive. UCITS management companies are required to establish and apply remuneration policies and practices that promote sound and effective risk management and do not encourage risk-taking that is inconsistent with the risk profiles, rules or instruments of incorporation of the UCITS they manage. UCITS management companies must have remuneration policies and practices for staff whose professional activities have a material impact on the risk profiles of the management companies or of the UCITS they manage, including senior management, risk takers, control functions and any employees receiving total remuneration that falls within the remuneration bracket of senior management and risk takers. As with AIFMs under the AIFM Directive, there is also a requirement to balance salaries and bonuses so that applicable staff are not remunerated for taking excessive risk, with a requirement for up to 50 percent bonuses for such staff to be paid in units of the UCITS, subject to deferrals and clawback requirements. As with the AIFM remuneration rules, it remains to be seen whether some EU regulators (such as the UK Financial Conduct Authority or the Irish Central Bank) will eliminate the more onerous elements of the remuneration rules for smaller UCITS management companies (in the way that they have for smaller AIFMs). It is anticipated that the European Securities and Markets Authority will publish guidelines for the remuneration of applicable staff at UCITS management companies in due course, after which EU national regulators will implement their own UCITS remuneration rules on a country-by-country basis. 

The sanctions requirements in UCITS V are intended to achieve a harmonization of UCITS sanctioning rules across the European Union by requiring EU countries to implement a minimum catalogue of administrative sanctions and measures (including administrative fines), as well as whistle-blowing mechanisms. 

UCITS V contains amendments to the current UCITS IV Directive (which itself recasts the preceding UCITS Directives), but does not recast the UCITS IV Directive. UCITS IV and UCITS V directives must therefore be read together for a full understanding of the EU UCITS rules. 

UCITS V will become effective on September 17. However, given it is an EU Directive and it is not binding upon market participants until it is implemented into national law, EU countries have until March 18, 2016 to transpose UCITS V into national law, at which time the national implemented rules will become binding upon UCITS managers. 

The final text of UCITS V is available here.