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ESMA Updates UCITS Q&A
AUTHOR(S): Tara Doyle, Michael Jackson, Dualta Counihan, Anne-Marie Bohan, Shay Lydon, Liam Collins, Philip Lovegrove, Elizabeth Grace, Oisin McClenaghan, Michelle Ridge, Barry O’Connor, Donal O’Byrne
PRACTICE AREA GROUP: Asset Management and Investment Funds
On 25 May 2018, ESMA published an updated version of its questions and answers document on the application of the UCITS Directive (“ESMA UCITS Q&A”) to include one new question and answer on the application of remuneration disclosure requirements to staff of the delegate of an UCITS management company to whom investment management functions have been delegated.
ESMA has clarified that the remuneration related disclosure requirements set out in article 69(3)(a) of the UCITS Directive also apply to staff of the delegate of a management company to whom investment management functions (including risk management) have been delegated. In line with the approach followed under the UCITS Remuneration Guidelines, management companies can ensure compliance in one of two ways:
- where the delegate is subject to regulatory requirements on remuneration disclosure for its staff to whom investment management (including risk management) activities have been delegated that are equally as effective as those under the UCITS Directive, the management company should use the information disclosed by the delegate for the purposes of fulfilling its obligations under the UCITS Directive; or
- in other cases, appropriate contractual arrangements should be put in place with the delegate allowing the management company to receive (and disclose in the annual report for the relevant UCITS that it manages) at least information on the total amount of remuneration for the financial year, split into fixed and variable remuneration, paid by the management company, the investment company and, where relevant the UCITS itself to the identified staff of the delegate – and number of beneficiaries, and, where relevant, performance fee – which is linked to the delegated portfolio. This means that the disclosure should be done on a prorated basis for the part of the UCITS’ assets which are managed by the identified staff within the delegate.
In both situations set out above, the disclosure may be provided on an aggregate basis ie, by means of a total amount for all the delegates of the management company in relation to the relevant UCITS.
ESMA has therefore adopted the same position in relation to the application of remuneration disclosure requirements to staff of the delegate of an UCITS management company as that taken in relation to the delegation by an alternative investment fund manager ("AIFM").
The ESMA UCITS Q&A was further updated on 23 July 2018 to include the clarifications set out below.
Calculating issuer concentration limits
Only netting arrangements in accordance with the definition and conditions set out in the Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS may be taken into account when calculating issuer concentration limits under the UCITS Directive.
UCITS investing in other UCITS with different investment policies
The prospectus of a UCITS should clearly disclose whether in the case of fund of fund investments, the target fund(s) may have different investment strategies or restrictions. Where the constitutional documents and prospectus of a UCITS expressly rule out certain types of assets or derivative use without any reservations, UCITS management companies / self-managed investment companies should carry out proportionate due diligence to ensure that fund of fund investments do not result in a circumvention of the investment strategies or restrictions set out in the constitutional documents and prospectus of the investing UCITS.
Supervision of branches
The updated ESMA UCITS Q&A provides clarification as to the nature of the supervisory responsibilities of competent authorities in host member states when a UCITS management company provides investment services through a branch established in the host member state. ESMA is of the view that responsibilities of home and host member states should be identified similarly to, and consistently with, the general framework established for the provision of activities pursued by UCITS management companies and alternative investment funds managers (“AIFMs”) through branches as well as with the Marketing in Financial Instruments Directive (“MiFID II”) framework regulating the supervision on the provision of investment services across the EU. (ESMA has also updated its questions and answers document on the application of the Alternative Investment Fund Managers Directive (“AIFMD”) to this effect.)
Depositaries as counterparties in a transaction of assets that they hold in custody
Under the UCITS Directive, the depositary or its delegate may not reuse the assets they hold in custody for their own account. ESMA has clarified that this does not mean that a depositary or its delegate should never act as counterparties in a transaction of assets that they hold in custody. A depositary or its delegate should be able to act as counterparties in a transaction of assets that they hold in custody, provided that:
- the four conditions relating to reuse of assets set out in the UCITS Directive are complied with, that is: that the reuse is executed on the account of the UCITS; the depositary is carrying out the instructions of the management company on behalf of the UCITS; the reuse is for the benefit of the UCITS and in the interests of the unit holders; and the transaction is covered by high-quality and liquid collateral received by the UCITS under a title transfer arrangement;
- conflicts of interest are properly managed; and
- the transaction is conducted on an arm’s-length basis.
The latest version of the ESMA UCITS Q&A (dated 23 July 2018) may be accessed here.