Ethics and governance in the European Financial centers

The European Commission has launched a wide-ranging public consultation on the UCITS depositary Function. This consultation will play an important role in identifying and shaping the European response to vulnerabilities emanating from the UCITS depositary sector, with a view to improving the level of protection for UCITS investors.

Commissioner Charlie McCreevy said: " The Madoff fraud has revealed that the requirements of the UCITS Directive have been transposed in very diverging ways creating an unlevel playing field in the protection of retail investors. Also, the Commission's recent proposal for an Alternative Investment Fund Managers Directive includes stronger requirements governing depositories and their liability. It is not acceptable to have a less stringent regulation for retail investors than for professional investors. Therefore, UCITS requirements need to be harmonised and strengthened."

This public consultation is part of a comprehensive review of the existing European regulatory principles which are applicable to depositary functions. It will make an important contribution to clarifying and strengthening the regulation and supervision of UCITS depositaries, in particular in the light of recent Madoff fraud.

Commissioner McCreevy announced his intention to launch the consultation in the press statement released on the 28th June (Midday Express EXME09 / 28.05 ).

Issues addressed by the consultation

In particular, views and evidence are sought in the following areas, to serve as guidelines for appropriate initiatives that might be taken:

• Depositary’s duties: The consultation invites views on how depositary safe-keeping and supervisory duties should be better harmonised. It seeks clarification on the depositary safe-keeping duties for each class of assets that are eligible within a UCITS portfolio and invites views on whether supervisory duties should also be further clarified and harmonised, and if so how to do so.

• Responsibility regime: The consultation invites views on how to improve UCITS investors' protection if a depositary performs its duties improperly or if it becomes insolvent. To that end, it attempts to identify the relevant risks that might materialise. The Commission considers that the burden of proof should be borne by the depositor. The Commission also proposes that there should be additional requirements where assets are entrusted for safe-keeping through a network of sub-custodians. It also seeks views on the form of a liability regime which would allow investors to adequately mitigate losses.

• Organisational requirements: The consultation invites views on the introduction of rules on organisation and conflict of interests based on existing rules (the Markets in Financial Instruments Directive).

• Eligibility criteria and supervision: According to the AIFM proposal depositories should be credit institutions based, authorised and supervised in the EU. The consultation asks whether a similar approach should be adopted for UCITS depositaries and how supervisory rules might be strengthened.

The consultation also covers issues which are not directly linked with depositaries duties but which are particularly relevant for ensuring an increased level of investor protection within the UCITS framework (for example valuation).

The consultation is available at:

http://ec.europa.eu/internal_market/investment/depositary_en.htm

The deadline for responses to this consultation paper is 15th September 2009.

Responses should be addressed to: markt-depositary-consultation@ec.europa.eu

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