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Investment Funds Update: ESMA Clarifies UCITS V Deadlines
AUTHOR(S): Tara Doyle, Michael Jackson, Dualta Counihan, Joe Beashel, Anne-Marie Bohan, Shay Lydon, Liam Collins, Philip Lovegrove, Elizabeth Grace, Oisin McClenaghan, Michelle Ridge
PRACTICE AREA GROUP: Asset Management and Investment Funds
The European Securities and Markets Authority (“ESMA”) has published a questions and answers document on the application of the UCITS Directive (“UCITS Q&A”), providing keenly awaited clarification relating to deadlines for updating fund documentation to comply with the new requirements introduced by UCITS V.
The UCITS V Directive, prescribing new rules relating to UCITS manager remuneration, depositaries and administrative sanctions, will apply across all EU member states from 18 March 2016. Detailed implementing measures (“Level 2”), providing further detail on the rules applicable to UCITS’ depositaries, are expected to apply from September 2016.
The UCITS Q&A provides welcome guidance regarding the deadlines for updating fund documentation to reflect the new requirements, particularly in light of the different dates for the application of the UCITS V Directive and the Level 2 measures and the consequences for updating depositary agreements.
The UCITS V Directive requires the Key Investor Information Document (“KIID”) to include a prescribed statement in relation to remuneration policy. However, ESMA has now clarified that UCITS will not be required to update their KIIDs (in addition to the annual update required by 19 February 2016) on 18 March 2016. The KIID may be updated to include the statement in relation to remuneration policy at the next annual update after 18 March 2016 (ie, in February 2017), or on the first occasion after 18 March 2016 on which the KIID is revised or replaced for any other purpose.
A number of remuneration related disclosures must be included in the prospectus under the UCITS V Directive, but ESMA has now clarified that UCITS will not be required to issue a revised prospectus on 18 March 2016 to reflect these new disclosures. The prospectus may be updated with the necessary disclosures on the next occasion it is revised for any other purpose, or in any event by 18 March 2017 at the latest.
The UCITS Q&A does not refer to the updated disclosures required relating to the depositary agreement. The question as to when prospectuses should be updated to include the depositary related disclosures may require further clarification by the Central Bank of Ireland (the “Central Bank”) in circumstances where the Level 2 measures specifying the content of depositary agreements will not apply until September 2016. Matheson is involved in ongoing engagement with the Central Bank to obtain this clarification and we will keep our clients informed.
ESMA has indicated that, before the KIID and prospectus are updated with the relevant remuneration information, UCITS management companies should make the additional information about the management company’s remuneration arrangements available on a relevant website as soon as it is available.
The UCITS V Directive requires the annual report to include certain remuneration related information, but ESMA has now clarified that it is not necessary to include the remuneration related information in any annual report relating to a period that ended before 18 March 2016. For annual reports relating to periods that end on or after 18 March 2016 but before the UCITS management company has completed its first annual performance period in which it has to comply with the remuneration rules, the UCITS management company should include the remuneration related information in the report on a best efforts basis and to the extent possible, explaining the basis for any omission.
ESMA has stated that UCITS depositary agreements should be revised promptly to meet the UCITS V requirements in accordance with any transitional arrangements outlined in the Level 2 measures. The Level 2 measures are stated to apply from six months after their entry into force, currently anticipated to be September 2016. This therefore suggests that the transitional period for updating depositary agreements will run to September 2016.
However, the UCITS Q&A states that, as the UCITS V Directive prescribes new rules relating to depositary liability that apply from 18 March 2016, the liability provisions in existing depositary agreements that conflict with the UCITS V depositary liability provisions will be void with effect from 18 March 2016. The UCITS Q&A states that the liability provisions in existing depositary agreements should be amended to reflect the UCITS V depositary liability provisions when those agreements are revised to comply with Level 2. Accordingly, we expect that depositaries and UCITS will look to amend their existing agreements to reflect the UCITS V depositary liability provisions by 18 March 2016.
ESMA’s clarifications regarding updates to the KIID and the prospectus and relating to the inclusion of remuneration related information in annual reports afford useful flexibility to UCITS in implementing the UCITS V requirements.
There remains, however, an open issue as to whether the requirement for an Irish UCITS to update its prospectus to reflect the provisions of the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Investor Money Regulations 2015 by 1 April 2016 will trigger a requirement to include the UCITS V remuneration disclosures, thus significantly curtailing the flexibility offered by ESMA. Matheson is involved in an ongoing engagement with the Central Bank on this matter and we will keep our clients updated.
In relation to updating depositary agreements, we expect depositaries to require updates to their depositary agreements to reflect the new UCITS V requirements including the draft Level 2 measures as from 18 March 2016 in the interests of certainty of terms rather than to avail of the transitional period offered. We understand that the Central Bank has written to depositaries to advise them that a fast-track filing and review procedure will apply to depositary agreements updated to reflect the UCITS V requirements.
The ESMA UCITS Q&A is available here.