Ethics and governance in the European Financial centers

The CSSF today issued two press releases that are worth commenting.

The first press release is in English French, and German. It states in English: “UBS and the CSSF have met on February 5, 2009 to discuss the circumstances of Luxalpha SICAV – American Selection and Luxembourg Investment Fund - US Equity Plus, two Luxembourg funds which have been hit by the Madoff scandal. Pursuant to those discussions, UBS and CSSF have agreed to cooperate in their efforts to determine the relevant facts and define the way forward in close conjunction with all others who are affected by the events in order to find a solution as soon as possible.”

“to determine the relevant facts and define the way forward in close conjunction with all others who are affected by the events “ What a wooden language. I cannot include/understand such tergiversations for a situation that is clear enough. The jurisdiction should answer honestly 4 simple questions to face its responsibilities:

1. Was UBS both the depositary and the management company? If that is proven, it does not comply with the European directive that states that “No single company shall act as both management company and depositary “ (article 10 of the UCIT Directive dated 20 December 1985) and the Luxembourg law of 20 December 2002 seems to have removed the requirement in its article 20. This would mean that by not transposion the important requirement the legislative power would have failed in its duty to protect the investor.

2. Did UBS transfer the role of depositary? If that is proven, it is the result of a lax wording on the depositary in circular IMF 91/75 that 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. “. This would mean that by using a lax wording the CSSF would have failed in its duty to protect the investor.

3. Did the auditor as individual demonstrate a superficial behaviour that does not comply with what is expected from such professional who certifies the accounts (posing in a leisure magazine with a glass of wine...)? If that is proven it would mean that by not controlling the staff the auditor as legal person would have failed in its duty to protect the investor.

4. Did the auditor as legal person demonstrate affinities with UBS management which may reveal a breach in the independence of the audit firm? If that is proven it would mean that by not assuring the independance of the registered firms the IRE (Institute of Registered Auditors) would have failed in its duty to protect the investor.

I am looking forward to reading the official answers.


The second press release is only in French. It states only : “Comme annoncé dans le communiqué du 3 février 2009, la CSSF a remis le résultat de son enquête sur les différentes responsabilités, en application des textes légaux et réglementaires, qui incombent à la banque UBS (Luxembourg) S.A. dans sa fonction de dépositaire du fonds d’investissement LUXALPHA SICAV. La CSSF a demandé à la banque de prendre position par écrit » (free translation: As announced in the official press release of February 3, 2009, the CSSF gave the result of its investigation on the various responsibilities, pursuant to the legal and regulatory texts, which fall on bank UBS (Luxembourg) S.A. in its function of depositary of the funds of investment LUXALPHA SICAV. The CSSF required that the bank take written position.)

To whom the result was given? It is not specified. The report should be published.

The CSSF has today published a press release only in French to inform of the withdrawal of Luxalpha Sicav from the official list.
It explains that the conclusions on the depositary's liability are commung soon.

Read Press Release (french)

The ALFI published last 29 January on its website the document giving ALFI’s views on the Madoff affair and its implications for the Luxembourg fund industry that was presented at the EFAMA Management Committee meeting held on Tuesday, 20 January.

The text is pure Luxembourg wooden language and unfortunately corroborate that leaders in the financial center of Luxembourg are far away from what is to be done prisoners of there insulated business culture.

Let's comment a few paragraphs :


Luxembourg regulation on the responsibility the depositary of an investment fund complies with the UCITS Directive and is equivalent to regulation in France

It is not true. Let’s compare the European directive with the Law of transposition dated 20 December 2002.
There is one critical provision that seems to be missing in the Luxembourg text.
Article 10 of the UCIT directive states that “ 1. No single company shall act as both management company and depositary”. Such provision is not in the Luxembourg text.
Paragraph one of Article 10 the UCIT directive was purely 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.”.
What is not prohibited by the law is possible. When one knows that Luxembourg is a small jurisdiction where there are many conflicts of interests, requiring acting independently and solely with no requirement of being distinct legal entities is a beginning of problem. It is exactly like the law firm in Luxembourg that is both UBS and HSBC’s lawyers and provides the Chairman of the ALFI.

I will quote again Circular IMS 91/75 (as amended by Circular CSSF 05/177) dated 21 January 1991 that 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. “

Additionally the ALFI states that Luxembourg regulation on the responsibility the equivalent to regulation in France. I am afraid this is not true. As far as the provision Luxembourg removed is concerned France has transposed it with a rephrasing. Art. L. 214-16. of the French UCIT Code states that « Les actifs de la SICAV sont conservés par un dépositaire unique distinct de cette société et choisi sur une liste de personnes morales arrêtée par le ministre chargé de l'économie » (free translation : "The assets of the UCIT are preserved by depositary distinct from this [management] company and chosen on a list of legal persons stopped by the minister in charge for the economy")


The Luxembourg government and the country’s applicable regulatory and supervisory bodies acted as soon as the scandal broke to analyse and manage the consequences of the Madoff affair

The French regulator issued its first press release on 17 December 2008.
The Luxembourg regulator issued its first press release on 22 December 2008, 5 days later.
Additionally the French regulator issued on 18 December 2008 pedagogic material to explain the situation.


The first court ruling in Europe concerning the Madoff affair was given by a court in Luxembourg and was in the interests of investor protection

It is true. But the ALFI admits itself infra page 3 that “the legal basis in this specific case does not apply to all investors (ODDO had asked to redeem its shares before the fraud was uncovered).”


Luxembourg is in favour of a constructive process of reflection on investor safety in Europe and would like to see a debate based on an objective analysis of the situation

It is exactly like for other topics: for banking secrecy, for AML… Luxembourg always supports any a constructive process of reflection in Europe, which is mean to save time.
The objective situation is clear enough and may be summarized by a Fault Tree Analysis.

Large picture

I am afraid those that are responsible for investigating the issue (the European Commission and the Luxembourg regulator) are part of the problem and not of the solution.


The letter [of Ms Lagarde] has also met with a very muted reception both from sector professionals and investors affected by the Madoff affair because it casts doubt on the effectiveness and even the existence of investor protection measures currently in place under European law. There is a real danger that this declaration of uncertainty could continue to shake the confidence of investors in Europe (and the world) in the UCITS brand.
At the same time, we wish to congratulate the Commission for opening an inquiry on the transposition of the UCITS Directive in various countries of the EU because it will answer the French criticisms of Luxembourg in this case.
The letter will certainly re-open the debate on European harmonisation of rules concerning fund depositaries. This is nothing new and has already been covered by a European Commission report in 2004. ALFI welcomes with interest this re-examination of current regulation and believes the first question to be asked should be what the status of the depositary is. Depositories in Luxembourg must be banks.


The first paragraph is the typical Luxembourg attitude when there are issues or dysfunctions. There is the will to hush up issues in the name of making money instead of tighten up the ship.
Such attitude is no longer acceptable all the more than despite a reassuring speech the transposition of the UCIT Directive in Luxembourg is lax and the European commission did not do its job.
This is by the way what stated the ALFI at the end by underlining that “This is nothing new and has already been covered by a European Commission report in 2004. ALFI welcomes with interest this re-examination of current regulation”.
The first question to be asked is not the status of the depositary (One might think that Luxembourg is willing to eliminate the foreigner nonbanking competitors as circular IMF 91/75 states that “The admission to the activity of depositary of a UCITS subject to Part I of the Law of 30th March, 1988 is exclusively limited to banks incorporated under Luxembourg Law or Luxembourg branches of banks established in an EU Member State. This also applies to the depositary of a UCI subject to Part II of the Law of 30th March, 1988 save that such depositary may also be a Luxembourg branch of a bank established in a non Member State of the EU”). The French code requires that the depositary have his head office in France (Art. L. 214-16 of the UCIT Code).

The first question to be asked is definitely the risk of conflict of interests that are visible in Luxembourg and at the EU level in the decision-making process.




To conclude I will quote Fernand Grulms, who is head of Luxembourg For Finance.

He explains that Luxembourg wants “To be better known and recognized like a credible and reliable partner”. It is not by going on denying the poor governance in the jurisdiction that it will reach its objective.