SCANNING 7

UCITS - ESMA submits final technical advice on delegated acts required by the UCITS V Directive

In particular, ESMA clarifies the concept of ‘inde- pendent legal advice’, which may be sought by the third party and the depositary in their effort to assess to what extent the applicable non-EU insol- vency law recognises the segregation of the UCITS’s assets from the assets of the third party and the depositary. According to ESMA, legal advice is con- sidered to be independent if received from an indi- vidual or legal person not affiliated to the third party or the depositary, as the case may be. Furthermore, ESMA saw merit in inserting a new paragraph setting out the duty of the investment company or the management company on behalf of the UCITS to immediately notify their competent authorities and consider all appropriate measures in relation to the UCITS’s assets (including their dis- posal), where the segregation of the UCITS assets in the event of insolvency of the third party is no longer recognised by the applicable non-EU insol- vency law or where the applicable legal conditions are no longer fulfilled (on receipt of such information by the depositary). Finally, ESMA clarifies in a new paragraph that, where the third party sub-delegates safekeeping, contractual arrangements shall be put in place to ensure that the provisions applying to the third party apply mutatis mutandis to the sub-delegate. II. Advice on the independence requirement With regard to the independence requirement, ESMA identifies two types of link between the management company/investment company and the depositary that may jeopardise their in- dependence: (1) common management/supervi- sion; and (2) cross-shareholdings. This approach remains unchanged in ESMA’s final advice. Moreover, ESMA clarifies that the presence of any of the identified links would be sufficient to jeopardise independence. Common management/supervision ESMA does not deviate from its original proposal in the Consultation Paper in this regard. It confirms, in particular, the maximum number of members of the supervisory body of the management company/ investment company that may be members of the management body, supervisory body or employees of the depositary: one third (1/3). The same rule (maximum 1/3) applies to the members of the su- pervisory body of the depositary. As regards the definition of ‘management body’, ESMA states that the relevant definition is provided in Article 2(1)(s) of the UCITS Directive and that even non-executive members may exercise influence that may jeopardise independence.

the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (“PRIIPs”), which forms part of a package of measures that have been adopted in order to boost consumer trust in financial markets and in- surance products in particular. The regulation requires key information documents for PRIIPs to be produced, and which have to be compliant with the stipulated format and content requirements in order to maximise understanding of the information and therefore aim at increasing security for retail investors. What’s in there? On 9 December 2014, the Regulation was published in the Official Journal of the European Union (“OJ”). The Regulation lays down uniform rules on the for- mat and content of the key information document to be drawn up by PRIIP manufacturers and on the provision of the key information document to retail investors in order to enable retail investors to un- derstand and compare the key features and risks of the PRIIPs.

Background Directive 2014/91/EC (the “UCITS V Directive”) was published in the Official Journal of the EU on 28 Au- gust 2014 and entered into force on 17 September 2014. On 3 July 2014, the European Commission man- dated ESMA to provide technical advice on the content of two of the delegated acts on depositaries required by the UCITS V Directive. Following the Commission's request and in order to collect feedback from all interested stakeholders, ESMA published a Consultation Paper on 26 Sep- tember 2014 ( AVAILABLE HERE ), including draft technical advice on those delegated acts. The consultation closed on 24 October 2014. What’s in there? On 28 November 2014, ESMA published its Final Report containing ESMA’s final technical advice to the European Commission on the basis of the stake- holder feedback collected. The technical advice provided covers the following two topics: (I) Advice on the insolvency protection of UCITS as- sets when delegating safekeeping (Articles 22a(3) (e) and 26b(e) of the UCITS V Directive); (II) Advice on the independence requirement (Arti- cles 25(2) and 26(b)(h) of the UCITS V Directive). I. Advice on the insolvency protection of UCITS assets when delegating safekeeping The basic principle enshrined in the UCITS V Di- rective as regards the delegation of safekeeping is that, in the event of insolvency of the third-party delegate, assets of a UCITS held in custody must be unavailable for distribution among or realisation for the benefit of creditors of the third party. ESMA’s final technical advice lays down a set of du- ties for both the third party and the depositary and includes only minor changes to the original Consul- tation Paper.

THE TEXT OF THE REGULATION IS AVAILABLE HERE.

Please refer to previous editions of Scanning for fur- ther information. What’s next? The Regulation shall enter into force on the twen- tieth day following that of its publication in the OJ.

It shall apply as from 31 December 2016.

Scanning - January 2015 - page 7