AIMA’s Caveats to the UCITS V Proposal

In July 2012, the European Commission proposed an updated UCITS framework, with especial attention to a clarification of the roles and responsibilities of depositaries in a way that will be consistent across borders.

The proposal may be found here.

Andrew Baker, chief executive of the Alternative Investment Management Association (AIMA), said in a statement that AIMA welcomes “much that is contained in the [EC’s] proposal to amend the UCITS Directive,” but he went on to mention a caveat. The time, he said, has come for “a proper discussion about introducing a depositary passport,” something the proposal lacks. AIMA’s position paper contains other important qualifications to its welcoming attitude toward this proposal.


The unified European system for Undertakings for Collective Investment in Transferable Securities (UCITS) dates to 1985. It has become a valuable European brand, and has inspired the creation of Newcits; that is, funds working with the benefit of that brand that employ hedge fund style strategies.

But over the subsequent incarnations of UCITS, the parts of the original Directive relating to Depositaries have remained the same. All assets of a UCITS fund must be entrusted to a depositary, and this entity must be liable for losses suffered as a consequence of negligence on its part, though the laws of the member state in which the entity is domiciled determine the specifics of that liability. Also, the depositary institution must be in the same member state as the fund.

In 2001, the EU adopted the so-called UCITS III, allowing management companies to operate anywhere in the EU under the same set of rules (the management passport), and expanding the range of investments allowed to them. As a result, UCITS managers invest in a wider and a more complicated range of instruments than they did in the 1980s or 1990s, and there is a greater necessity to appoint sub-custodians in third-party countries.

As the EC says in its explanatory memorandum accompanying the proposed UCITS V, the Lehman bankruptcy and the Madoff fraud, both of 2008, have brought to prominence the “potential consequences of national divergences in the liability standard.” Lehman Brothers International Europe, a UK entity, was the sub-custodian of some of the assets of collective investment schemes. They were non-UCITS schemes, but with a “regulatory model … similar to that of UCITS in terms of depositary rules,” the memorandum says.


In order to produce consistency among EU states, as well as in order to adapt to changes in the financial world, the EC is proposing the following:

  • A list of the oversight duties of depositaries;
  • Detailed provisions on cash monitoring;
  • Delegation to the EC hereafter of the power to adopt acts that will define the depositary’s initial and ongoing due diligence duties vis-à-vis a sub-custodian;
  • A strict liability standard in the case of the loss of fund assets to replace the negligence standard of liability created in 1985; and
  • An exhaustive list of entities eligible hereafter to act as depositaries, with transitional provisions for UCITS that have contracted with entities that are no longer eligible.

AIMA’s responsive position paper welcomes the attention bestowed upon “the coordination of laws, regulations, and administrative provisions … as regards depositary functions,” but states certain qualms.

AIMA is concerned that if the new proposal leads to a regime of strict liability for losses by the depositary or its sub-custodians, so that for example a loss/liability for the depositary would be triggered by an accounting failure at a sub-custodian, the result would be “very disruptive to the industry” and would discourage investment in markets where such situations are a threat, or lead to an increase of fees to compensate for the increased risk of being liable for such losses.

Instead it proposes that UCITS might be harmonized with the analogous rules within the Alternative Investment Fund Managers’ Directive (AIFMD), which allows the discharge of depositary liability where certain conditions are met, regarding the contractual relationship between the depositary and the fund or fund management.

AIMA also proposes, as noted above, that UCITS V introduce a UCITS depositary passport; that is, institutions authorized by one EU country to act as a UCITS depositary entity should automatically be granted rights to provide the same services throughout the whole of the EU.

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