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Letter to Commissioner McCreevy

I wrote yesterday an article to explain why it is not very probable that the light is made on the responsibility for the depositary within the framework of the EFAMA.

I took again these arguments to send the following mail to Commissioner McCreevy:



Dear Mr McCreevy


Further to Niall Bohan’s answer on your behalf last 20 March 2009 (Cf. my query dated 13 February on "The UCITS Directive and its transposition in Luxembourg and Ireland in the context of the Madoff case"), I would like to share with you my views on the way the EFAMA is handling the issue, which is worrying for the credibility of the UCITS.


The reading of the EFAMA annual report 2008-2009 (pdf file created on 16 June 2009 and modified on 17 June 2009) allows to concluding that it does not seem aware of the stake of the truth on the depositary’s liability.


There is a development about the depositary’s liability, which wants commenting (pages 18 and 19):


1. Your conclusion dated 28 May (the minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States. The outcome is an unlevel playing field. This means that some EU investors in UCITS funds are better protected than others) (Source: Midday Express EXME09 / 28.05) is ignored. This opinion was however known when the EFAMA report was written and should have been taken into account.


2. The CSSF statement dated 27 May (As the CSSF has previously noted, UBSL shall have to indemnify a UCI depositor according to its obligations as a Luxembourg depositary bank, subject to valid and opposable contractual clauses to the contrary and, as the case may be, to a court decision in such matter) is ignored. This press release that made investors upset was however known when the EFAMA report was written and should have been taken into account.


3. The EFAMA bet that the European commission will do nothing: it states in its report that “signals seem to indicate that the Commission itself is not keen to “tighten up” the rules in the UCITS Directive regarding the responsibility of the depositary for safekeeping and the conditions for delegation of custody and would prefer to resort to other means rather than re-opening the Directive to achieve clarification on these issues.”


4. Above all, the EFAMA admits that it wants to hush up the issue of the transposition of the UCITS directive in Luxembourg in a manner that opened the drift. In other words the EFAMA does not want to tighten up the ship and sanction failures.

The EFAMA states that its “position in this discussion has been very clear from the beginning: contribute to making the discussion more objective and to putting an end to reciprocal incrimination, meet the concerned competent authorities to hear about the progress of their research and to remind them that the issue is urgent as the UCITS brand and investors’ trust are at risk, underline that investor protection remains EFAMA’s top priority, draw attention to the fact that the mechanism of the UCITS Directive provides for a high level of investor protection and that it is not yet clear that any investor in a UCITS will lose money, support the Commission in its view that a fundamental analysis is needed before discussing new or additional legislation.”

“Contribute to making the discussion more objective and to putting an end to reciprocal incrimination” is its first goal and is more important than “investor protection”, which is in third position. As far as competent authorities are concerned, the Luxembourg regulator (the CSSF) was disappointing: it did not sanction UBS (there would have been a sanction in any seriously regulated jurisdiction), and should have been any sanction, the amount would have been anyway ridiculous compared to what is done in any seriously regulated jurisdiction. This was admitted by the former head of the CSSF who just retired (See Paperjam, 20 mars 2009: http://www.paperjam.lu/archives/2009/03/2003_schaus/index... )

The appointment of Claude Kremer, chairman of the the ALFI (the official representative body for the Luxembourg investment fund industry) as EFAMA Vice-President makes difficult even impossible the principle of calling into question in the framework of the EFAMA the Luxembourg legal and regulatory framework.


I am afraid that investors and the European Commission cannot rely on the EFAMA, which seems much more business-oriented than client-oriented.


Two relevant questions should actually be answered:


Who (individual and/or legal person) introduced Madoff in Luxembourg (Europe)?


Probably someone that has/had an office in New York and that condoned red flags (See Greg N. Gregoriou and François-Serge Lhabitant, Madoff: A Riot of Red Flags. EDHEC, 16 February 2009).


Who (individual and/or legal person) support (in an opinion, in a committee…) the remove of two critical provisions of the Directive in the Luxembourg law of transposition, which opened the drift?


As I said, there are actually two critical provisions that are clearly missing in the Luxembourg text but that can be found in the Irish text or the French text:

  • On the one hand, article 7 of the UCITS directive that states that “1. A unit trust's assets must be entrusted to a depositary for safekeeping”. The word “safekeeping” (that is missing is the French version of the article) was removed in the transposition (Cf. article 17 of the Luxembourg Law of 20 December 2002). Additionally, Circular IMS 91/75 (as amended by Circular CSSF 05/177) dated 21 January 1991 states that “The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” (…) The depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources.“ Madoff was reputable and competent and had sufficient financial resources.
  • On the other hand, Article 10 of the UCIT directive that states that “ 1. No single company shall act as both management company and depositary”. This provision is not in the Luxembourg text. This first paragraph was removed to only transpose literally paragraph 2 that states that “2. In the context of their respective roles the management company and the depositary must act independently and solely in the interest of the unit-holders.” (Cf. article 20 of the Luxembourg law of 20 December 2002). What is not clearly prohibited by the law is possible and it seems that UBS acted both as Management Company and depositary.


The European Commission has just referred Luxembourg to the European Court of Justice over its incorrect application of the Savings Directive. In my opinion, the European Commission should refer as well Luxembourg to the European Court of Justice over its incorrect application of certain provisions of the UCITS directive. There must be no tolerance for those so-called pragmatic professionals that caused prejudice to investors, and put the European fund industry at risk by harming its credibility.



Best regards.



Jérôme Turquey

Consultant in Business Ethics and Reputational Risk



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