Preliminary remarks. From a general perspective, EFAMA wishes to highlight the following key points:

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1 EFAMA Reply to the ESMA Consultation Paper on technical advice to the European Commission on delegated acts required by the UCITS Directive ( UCITS V ) (ESMA/2014/1183) EFAMA is the representative association for the European investment management industry. EFAMA represents through its 27 member associations and 63 corporate members about EUR 17 trillion in assets under management of which EUR 10.6 trillion managed by over 55,000 investment funds at end June Just under 36,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds. For more information about EFAMA, please visit: Preliminary remarks EFAMA welcomes the opportunity to respond to the ESMA Consultation Paper on technical advice to the European Commission on delegated acts required by the UCITS Directive ( UCITS V ) (ESMA/2014/1183). Once again, however, we deeply regret that industry stakeholders have been given such an extremely tight deadline (i.e. one month) within which to provide ESMA the valuable information that is sought in the consultation paper. Although we are conscious of the European Commission s calendar for implementing the Level 1 text of the UCITS V Directive review, it is our and our entire Membership s view that the narrow timelines given to ESMA for the purpose of preparing its draft advice ultimately and seriously compromise what should be for the Commission an objective fact-finding effort on which justify its policy choices in line with its internal impact assessment guidelines. For these choices to be evidence-based and contribute to an effective and efficient regulatory environment, as well as to informed policy-making that is both justified and proportionate, we would like to stress the importance of providing industry stakeholders with adequate time to formulate their replies, so as to also provide the necessary granularity as often called for by the EU s legislators and regulators when responding to their consultations. This should be true especially when some of the proposed policy options - as in the present consultation could have far-reaching consequences. From a general perspective, EFAMA wishes to highlight the following key points: Regarding the first issue presented in the consultation paper - i.e. that of the necessary steps to be taken by the depositary and by the third party to whom the safekeeping of assets has been delegated to ensure that in the event of insolvency of the third party, assets of a UCITS held by the third party in custody are unavailable for distribution among or realisation for the benefit of creditors of the third party - EFAMA is of the view that consistency with the corresponding measures under the AIFM Directive s implementing measures remains rue Montoyer 47, B-1000 Bruxelles Fax info@efama.org

2 paramount. Our more detailed opinion on some of the relevant and more specific features of the draft advice are presented in the replies to the questions further below; As to the second issue presented in the consultation paper - i.e. the conditions for fulfilling the independence requirement referred to in Article 25(2) of the UCITS V Directive EFAMA would like to draw ESMA s attention to the precise wording of above-cited L1 text provision as one requesting that the Relevant Entities act independently of each other, as opposed to any provision that may call for their full structural or legal separation according to our reading of the Commission s mandate to ESMA to provide technical advice (enclosed as Annex II to the consultation paper). In this regard, we acknowledge that this issue is new in the sense that was not part of the previous AIFM implementing framework and would hence require additional caution by EU legislators given its far-reaching, disruptive and potentially disproportionate consequences on corporate group structures. Moreover, we see a risk that the ESMA draft advice specifically, concerning Option 1 in the second part of the consultation - would go beyond the text of the UCITS V Level 1. EFAMA s preferred option would consist in an amended version of Option 2, one emphasising the identification, management and disclosure of conflicts of interests to investors, as well as their effective, proportionate and dissuasive sanctioning. Our more detailed opinion on the relevant two main suggested policy options are presented in the replies to the questions further below. As a more general remark, with regard to the definition of management body under Article. 2 of the UCITS Directive and the use of this notion throughout ESMA s draft advice, the advice should better distinguish between executive and non-executive functions within the management body. In this regard, EFAMA would like to point out that, for instance, a universal banking model may allow for executive board members of a banking business to sit as non-executive directors on the board of the corporate group s asset management arm. Regardless of whether such members are in charge of supervisory functions elsewhere within the same group, the distinction between executives and nonexecutives present on the Relevant Entities boards should be accounted for in the draft advice, especially in the light of avoiding or managing conflicts of interest. In addition, to ensure the development of a common, uniform and consistent application of the UCITS requirements across the Single Market, it will be important that any Level 2 measures are applied in the same way throughout the Union. As different domestic requirements would potentially lead to different outcomes for investors, depending upon the jurisdiction in which the UCITS is domiciled, national competent authorities should refrain from imposing stricter requirements in their respective jurisdictions (i.e. gold-plating ). Finally, EFAMA would urge ESMA to please consider the general and preliminary orientation of IOSCO on the matter of ensuring adequate separation in the activities of the Relevant Entities, as recently published in the form of a consultation report on Principles regarding the Custody of Collective Investment Schemes Assets 1. With regard to issue of guaranteeing functional in lieu of structural 1 Please refer to the Consultation Report Principles regarding the Custody of Collective Investment Schemes Assets, as published by the IOSCO Secretariat on 10 October 2014 and available on the relevant website at 2

3 independence as introduced above, we would draw ESMA s attention to the relevant draft Principle 4 contained in the IOSCO consultation report, where accordingly, the custodian should be functionally independent from the responsible entity, thereby suggesting that the custodian ensure its independence in the way it carries out its obligations 2. Bearing these preliminary remarks in mind, we are glad to provide ESMA with our answers to the consultation questions below. Once again, because of the tight deadlines, we as EFAMA have attempted with our Members to answer these on a best efforts basis and remain at ESMA s disposal for eventual further queries and information requests. QUESTIONS REGARDING THE ADVICE ON THE INSOLVENCY PROTECTION OF UCITS ASSETS WHEN DELEGATING SAFEKEEPING Q1: Do you agree that the steps to be taken by the third party are ultimately intended to ensure that the level of segregation foreseen under 22a(3)(d) of the UCITS Directive is recognised in the context of an insolvency proceeding involving the third party? EFAMA agrees that the steps to be taken by the third party are intended to ensure that the level of segregation, as foreseen under Article 22a(3)(d) of the UCITS Directive, is recognised in an insolvency proceeding involving the third party. As for the third party s duties vis-à-vis other sub-custodians as indicated in sub-paragraph 1(b)(iv) of the draft advice, although coherent with the legal requirements to ensure that the quality of the necessary due diligence is not weakened further down the custody chain, EFAMA observes that from a more practical perspective, such in-depth assessment may be impossible to conduct. Regarding the duties of the delegating depositary where the third party is located outside the Union, the draft advice requires under sub-paragraph 2(b)(i) that the depositary make all reasonable efforts to understand the material effects of the contractual provisions governing the delegation, including the receipt of independent legal advice. Alternatively, according to the letter of the following the sub-paragraph 3, such independent legal advice may be provided by the third party as well, thereby relieving the depositary from this obligation. Although EFAMA welcomes the fact that the provision of such legal advice is expected only from one of the entities (i.e. either the depositary, or alternatively, the third party), we would caution ESMA on requesting such advice as a mandatory requirement against which a firm s best efforts can be assessed for the purpose of ascertaining eventual liabilities. Please see our answer to Question 5 below for further details relating to the nature of legal advice for the purpose of the draft advice. Q2: Do you consider that the level of segregation foreseen under Art. 22a(3)(d) of the UCITS Directive should protect UCITS assets from claims by creditors of an insolvent third party which had been delegated the safekeeping of the assets by the UCITS depositary? 2 For further considerations, please refer to our answer to Question 13 et seq. 3

4 EFAMA shares ESMA s assertion that the provision of Article 22a(3)(d) on segregation of assets by the third party is naturally linked with the provision of Article 22a(3)(e), which foresees that the UCITS assets should be unavailable for distribution among, or realisation for the benefit of, creditors of the third party, in case of insolvency of the third party. Indeed, the segregation requirement aims to protect the UCITS assets from claims by creditors of an insolvent third party delegate of the depositary, thus, supporting the policy objective of the provisions. Q3: Are there other measures which could also help achieve this objective? Please refer to our reply to Question 12 further below. Q4: Do you agree with the steps to be taken by the third party as identified above? If not, please explain the reasons. EFAMA agrees with the steps to be taken by the third party, as identified by ESMA and in line with IOSCO s Recommendations Regarding the Protection of Client Assets published in January 2014, subject to our observations as presented above. We would however like to point out that third parties active outside the EU are not bound by the requirements of the UCITS Directive, beyond the degree to which such requirements are introduced in the appointment contract as signed and agreed with the UCITS depositary. Q5: Do you consider that there are any specific difficulties that may arise in verifying the applicable insolvency regime that makes the proposed rules difficult to be complied with? In particular, do you consider the requirement for the third party located in a jurisdiction outside the Union to obtain independent legal advice could give rise to specific issues? By its very nature, legal advice is never black or white, in the sense that, although it may present a third country (non-eu) jurisdiction s valid insolvency requirements in great detail and as regularly as possible, it will hardly benefit the depositary or its third-party delegate with a clear legal opinion on the basis of which its best efforts can be ensured in the context of a local insolvency proceeding. Moreover, we note that legal practictioners issuing such advice are wary of accepting any liability stemming from what de facto is a mere legal opinion. To the extent that such legal advice has not been previously tested in a court, it should thus not be construed as a necessary requirement, but rather as an additional mean to prove the good faith of the parties in adhering to the relevant requirements of the directive. Moreover, due to the fact that requiring such legal advice inevitably bears significant additional costs, EFAMA would suggest that either the depositary, or alternatively, the third party, first seek to leverage on existing advice that may prove to be more accessible (e.g. industry associations, ISDA legal opinions) before requesting an ad hoc opinion from a legal practitioner. Reducing the number of legal opinions to be required can usefully contribute to a reduction of costs, ultimately for the benefit of investors. Where legal opinions are e.g. obtained by industry associations and distributed amongst their members, requiring legal opinions ex novo can be avoided. In addition, ESMA should note that from a content perspective, this also does not over-burden investors with excessive information, given that 4

5 the content of such legal opinions is considered to be the same irrespective of whether it is originally obtained by the third party, the depositary or any industry association. In this regard, we would like to suggest that the following new paragraph (5) be included in the draft technical advice: 5. Whenever the independent legal advice referred to under point (a)(i) of paragraph 1 or point (b)(i) of paragraph 2 is made available by an industry association, both the third party and the depositary shall be absolved of the obligation to obtain independent legal advice set out under point (a)(i) of paragraph 1 or point (b)(i) of paragraph 2, provided that the relevant independent legal advice obtained by the industry association covers all relevant elements. Finally, the one-size-fit-all approach recommending that legal opinions always be sought under the ESMA draft advice would also be disproportionate in that it disregards key differences in non-eu jurisdictions as to the degree of advancement of their respective domestic laws and regulations to protect client assets, as well as natural developments in the relevant local insolvency laws. It should therefore be up to the depositary, or alternatively, the third party to ask for such legal advice while exercising its prudence and discretion on a case-by-case basis. Q6: Do you expect a significant increase in terms of costs that would be faced by the third party delegated entities located in jurisdictions outside the Union in order to obtain independent legal advice on the applicable insolvency regime? Please see our reply to Question 5 above. Q7: Would you suggest requiring the third party to take any further steps which are not foreseen in the draft advice? No, we do not recommend any further steps outside the draft advice. Q8: Should any specific consideration be given to the scenario where the third party further subdelegates the safe-keeping of the UCITS assets in accordance with Article 22a(3), last sub-paragraph of the UCITS Directive (as inserted by UCITS V)? Should the third party take any additional/different steps or measures in this case? For avoidance of any doubt, it should be made clear that in case of a sub-delegation by a sub-custodian of its custody functions to another third party and where practicable depending on the type of segregation applied at the local third country level (including ones of an omnibus client account kind as also recognised in the Level 1 text under recital 22 3 ), the requirements apply mutatis mutandis to all the relevant parties of the custody chain. In this regard, we would encourage ESMA to re-affirm the statement provided for in recital 22 of the directive in its final technical advice to the Commission, where a third party to which the safekeeping of assets is delegated should be able to maintain an omnibus account as a common segregated account for multiple UCITS. 3 Recital 22 of the UCITS V Level 1 text reads: A third party to which the safekeeping of assets is delegated should be able to maintain an omnibus account, as a common segregated account for multiple UCITS. 5

6 Q9: Do you agree with the steps to be taken by the depositary as identified above? If not, please explain the reasons. EFAMA welcomes the choice made by ESMA in favor of a principle-based approach rather than a template and a list of tasks to perform. This will indeed give the depositary the required flexibility to adapt the tasks to the specific circumstances of each delegation scenario and will also avoid a boxticking exercise which would be detrimental to the protection of the investors. As for the proposed draft advice with regard to sub-paragraph 2(b)(ii), EFAMA believes that the presence of contractual provisions in the agreement between the depositary and the third party allowing for the termination of such agreement without undue delay in case the applicable insolvency laws and jurisprudence no longer guarantee the segregation of the UCITS assets in the event of insolvency of the third party, or when the conditions set out under these laws and jurisprudence are no longer fulfilled, does not provide for a real solution in case of insolvency of the third party to ensure the assets held by the third party are unavailable for distribution among or for the realisation for the benefit of creditors of the third party. In this regard, the termination without undue delay of the delegation agreement would definitely sever the contractual relationship between the depositary and the third party, thus also complicating the eventual recovery of the UCITS assets during the third party s insolvency proceedings. EFAMA would therefore advocate the removal of sub-paragraph 2(b)(ii) from the draft advice. Moreover, concerning the reasonable efforts to be taken by the depositary when appointing a third party outside the Union, EFAMA believes in line with our reply to Questions 5 and 6 - that the receipt of independent legal advice to ensure that UCITS assets are ring-fenced under local law should not be a mandatory requirement and should rather be sought when necessary to complement the depositary s due diligence in view of demonstrating that it has taken all reasonable efforts to the contrary to avert a loss of the relevant instruments at the level of the third party delegate once the latter s involvency proceedings in the third country jurisdiction have terminated. As further reasonable efforts to be made by the depositary in the above instance to discharge itself wholly or partially of its liability, after notifying the management/investment company of the UCITS, EFAMA would recommend that a) the management/investment company, together with the depositary, assess the extent of the risks and outline steps to mitigate them; and b) communicate the outcome of the above to the competent authority of the UCITS for an action plan to be agreed. It would be beneficial for investors if these steps and their consequences were adequately outlined in the fund s prospectus so as to be better aware of potential risks at the sub-custody level. Q10: Do you expect any significant one-off and ongoing compliance costs for depositaries in order to take the steps identified above? If yes, please provide any available data and/or estimation. Given the very diverse nature of the funds covered by the UCITS Directive, it is nearly impossible to quantify both one-off and ongoing compliance costs for depositaries servicing these funds on the basis of their appointment mandate. Bearing in mind the comparable requirements under the AIFM 6

7 Directive and their impact on the alternative asset management industry, these costs have increased substantially. Q11: Would you suggest requiring the depositary to take any further steps which are not foreseen in the draft advice? No, to the extent that the depositary diligently and correctly implements all the steps foreseen in the draft advice to control the sub-custody chain when delegating its tasks in line with the revised directive and subject to our earlier observations. When delegating, depositaries could additionally also envisage appropriate clauses in the delegation contracts granting them access to the books and records of the sub-custodians to monitor compliance in line with the directive s requirements. Q12: Which measures do you think should be taken by the depositary and/or the investment company/management company in the best interest of the investors once the depositary has informed the investment company or the management company on behalf of the UCITS that the segregation of the UCITS assets in the event of insolvency of the third party is no longer guaranteed in a given jurisdiction located outside the Union? Would the transfer of the relevant UCITS assets held by the third party in a non-eu jurisdiction to another (EU or non-eu) jurisdiction which recognises the segregation of the UCITS assets in the event of insolvency of the third party/depositary be a possible measure? In line with our reply to ESMA s Consultation Paper on draft technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive (ESMA/2011/209) - measures that could potentially be taken by the depositary to mitigate the risks related to the insolvency of a sub-custodian in jurisdictions that do not recognise the effects of segregation could be the following: Disclosure to the UCITS management/investment company so that this aspect of custody risk can be taken into account in the investment decision; Depositaries taking such measures in the local jurisdictions to make the assets as insolvency-proof as possible and eventually based on local law advice; Depositaries might undertake appropriate levels of on-going monitoring to ensure that the relevant sub-custodian continues to comply with the criteria and requirements set out in the draft advice this may involve an enhanced level of credit monitoring or frequent reconciliations to detect early warning signals of potential problems; The depositary should be bound to notify the UCITS management/investment company when it becomes aware that the segregation of assets is not (or no longer) sufficient to ensure protection from insolvency of a sub-custodian in a specific jurisdiction. A notification process to the competent authority for the UCITS could follow in line with our reply to Question 9 above; Crucially, foreign large UCITS management/investment platforms can be a powerful voice to incentivise legislators, regulators, as well as local market participants, in a jurisdiction to improve their client asset protection regimes or processes. 7

8 With regard to the last point more generally, international work on cross border securities creates more certainty about the nature of the interests in securities, how client asset protection regimes might apply when assets pass from one jurisdiction to another and on the resolution of conflicts of laws issues. So, generally it should be a priority for all stakeholders to progress this international work. Examples include the work of the Convention on the law applicable to certain rights in respect of securities held with an intermediary (Hague Convention)signed in 2006, the Final Report of the IOSCO Survey of Regimes for the Protection, Distribution and /or transfer of Client Assets of 2011, as well as the recent IOSCO Recommendations Regarding the Protection of Client Assets referred to above as well as in the ESMA consultation paper. 8

9 QUESTIONS REGARDING THE ADVICE ON THE INDEPENDENCE REQUIREMENT Q13: Do you agree with the identified links that may jeopardise the independence of the Relevant Entities? If not, please explain the reasons. In line with our general remark made in the introduction of our reply, EFAMA does not agree that the links identified in the draft advice (i.e. common management/supervision and cross-shareholdings) may jeopardise the independence of the Relevant Entities. In particular, according to the letter of Article 25(2) of the UCITS V Level 1 text, In carrying out their respective functions, the management company and the depositary shall act independently [ ]. In the light of this Level 1 provision, ESMA should bear in mind that the requirement to act independently should not coincide with requiring the structural independence of the Relevant Entities as apparent in the draft advice. In this sense, and to avoid the risk that the future delegated act go beyond the Level 1 text, the conditions and criteria for fulfilling the independent action requirement mentioned therein should not be construed as ones requiring profound changes in corporate and group governance, structure, organisation and internal processes, or shareholder links. Rather, the focus of ESMA s advice to the Commission in this regard should be made on conduct rules (including possible sanctions), aimed at identifying, managing and disclosing eventual conflicts of interest to investors. We would therefore advocate that the wording of Option 2 in the consultation be revised to stress the following two sub-paragraphs regarding the necessary arrangements to be put in place by the Relevant Entities: (i) all reasonable steps to avoid conflicts of interest arising from the shareholding or group structure shall be taken and, when they cannot be avoided, conflicts of interest shall be identified, managed and monitored and, where applicable, disclosed, in order to prevent them from adversely affecting the interests of the UCITS and their investors; and (ii) the choice of the depositary shall be justified to investors upon request; ( ). In this sense, EFAMA does not deem it appropriate to provide indications as to the composition of the management body of the management company/investment company and the depositary. As previously highlighted, the provision requiring the Relevant Entities to act independently should not be interpreted as requiring more structural or far-reaching independence requirements for the Relevant Entities. We, therefore, suggest the removal of the last sub-paragraph (g) of Option 2 in the draft advice, and in line with the same rationale, also the preceding sub-paragraphs (c) and (d) related to the common management/supervision structures. It is our view that distinctions between executive and non-executive members of Relevant Entities management bodies should be taken into account by the wording of the draft advice. For instance, sub-paragraphs (a) and (b) relating to the common management/supervision structures should ackowledge that executive members of the management/investment company management body be allowed to occupy non-executive roles in the management body of the depositary and vice-versa. We would therefore advocate that executives of one Relevant Entity be allowed to occupy non-executive roles in the management of, or be the 9

10 employee of, the other Relevant Entity. In turn, we invite ESMA to amend these sub-paragraphs accordingly and refrain from further proposing hard legal limits to management body members between the Relevant Entities - as under the aforementioned sub-paragraphs (a) and (b) - as well as under sub-paragraphs (g)(i) and (ii) in the proposed wording for Option 2, where the latter concern the one-third minimum required when the Relevant Entities are part of the same consolidated group. Further to our general introductory remarks, EFAMA would like to draw ESMA s attention to the recently published IOSCO consultation report on Principles regarding the Custody of Collective Investment Schemes Assets, in particular the draft Principle 4 thereof, where it is recognised that the notion of independence may vary largely among jurisdictions and that all regulatory regimes should seek to ensure that the custodian is independent in the way it performs its obligations, i.e. a custodian should be functionally independent of the responsible entity. To be considered functionally independent, the IOSCO consultation report suggests that there be controls in place to ensure this, i.e. that conflicts of interests between the custodian, the collective investment scheme, the clients of the latter and the management company are properly identified, managed, monitored and, possibly, disclosed to the investors of the CIS 4. In addition, to ensure the development of a common, uniform and consistent application of the UCITS requirements across the Single Market, it will be important that any Level 2 measures are applied in the same way throughout the Union. As different domestic requirements would potentially lead to different outcomes for investors, depending upon the jurisdiction in which the UCITS is domiciled, national competent authorities should refrain from imposing stricter requirements in their respective jurisdictions (i.e. gold-plating ). Q14: Do you consider that any additional links should be taken into account such as, for instance, the existence of any contractual commitment or other relationship which would affect the independence of the Relevant Entities? If yes, please provide details. In EFAMA s view, the functional independence of the Relevant Entities is best served through the consistent implementation of the UCITS Directive s own conflict of interest rules (as recently amended) across jurisdictions. This action carried out by national competent authorities, as well as within a corporate group, remains the most effective mean to discipline the different kinds of links between the Relevant Entities, thus ensuring the required degree of independence. Additional measures to ensure that the Relevant Entities remain functionally independent could include any of the following: Independent oversight over the management company and depositary by control functions such as IA, Risk and Compliance; Clear separation reporting lines and other Chinese walls; Requirement to ensure arm s length dealing at all times and similar commercial approaches. 4 In this regard, please also refer to paragraphs 56 to 61 of the IOSCO consultation report in their elaboration of the relevant Principle 4. 10

11 Q15: Do you consider that the cumulative presence of all or some of the identified links is necessary to jeopardise the independence of the Relevant Entities or the presence of any of these links is sufficient to determine a lack of independence? Please refer to our reply to Question 14 above. Q16: Do you agree with the proposed option to ensure the separation of the management bodies/bodies in charge of the supervisory functions of the Relevant Entities? Do you have any alternative options to suggest, taking into account those identified under paragraph 47? For our answer to the first part of this question, please refer to our answer to Questions 13 and 14 above. As to whether there would be alternative options to suggest, we do not foresee any that would fit within the confines of the Level 1 text. Q17: Do you consider that the cap of one third of members of the body in charge of the supervisory functions of one of the Relevant Entities to also be members of the management body; the body in charge of the supervisory functions or employees of the other Relevant Entity is appropriate? Would you suggest any alternative percentage? If yes, please provide the reasons why. Please refer to our reply to Questions 13 and 14 above. Q18: Do you have knowledge of any restructuring in the composition of the management bodies/bodies in charge of the supervisory functions of any Relevant Entities that would be triggered by the identified option? If yes, please provide data and an estimation of the one-off and ongoing costs that would be incurred. EFAMA and its Members wish to point out that certain data and cost estimates (e.g. tied to infrastructure changes, massive transfers of UCITS assets to other depositories, the remuneration of more independent board members 5, new filings and printing of prospectuses, etc.) implied by the choice of the envisaged policy options especially Option 1 - are difficult, if not impossible to obtain. Those few possible estimates are rendered more arduous by the very tight deadlines conceded by ESMA to industry stakeholders with an interest in this consultation. Although we are glad to see that ESMA has factored in the related significant costs behind the proposed options in its impact assessment (see paragraph 41 of the cost-benefit analysis provided under Annex III to the consultation paper) and that the input from stakeholders will be therefore a key element in this evaluation, we regret that we are unable to provide ESMA with further elements in this regard for the aforementioned reasons. 5 From both a practical and economic perspective, requiring independent members to staff individual UCITS fund boards would prove difficult in terms of finding individuals that are at the same time independent and knowledgeable enough to sit on such boards. In all likelihood, the same individuals would be occupying a place across many boards, costing investors inter alia a considerable amount in terms of salary and raising rightful questions with regard to their factual independence when earning such considerable figures. 11

12 Q19: Which of the two identified options do you prefer? Would you suggest any alternative option? If yes, provide details. A large majority of EFAMA Members has a clear preference for a revised version of Option 2. As highlighted in our reply to Question 13, it is not for the independent action provision to intervene in governance issues relating to group structure, organisation, internal processes or shareholder links. Option 2 provides for a more balanced, and above all, proportionate approach to ensure the Relevant Entities act independently by emphasising the importance of managing conflicts of interest and that these be disclosed (e.g. by disclosing the relevant composition of the Entities boards, as well as of the crossed shareholdings). In this regard, domestic corporate governance codes have an important role to play in supplementing the UCITS Directive s own conflict of interest rules as recently amended and in holding board members accountable possibly via the application of the comply or explain principle. However, the reference to the composition of the management body of the management company/investment company and the depositary in case the Relevant Entities are included in the same group should be removed from the draft advice - i.e. sub-paragraphs (g) under Option 2, as well as sub-paragraphs (c) and (d) in the previous section pertaining to common management/supervision structures. For more detailed comments, please also refer to our answer to Question 13. In addition, to ensure the development of a common, uniform and consistent application of the UCITS requirements across the Single Market, it will be important that any Level 2 measures are applied in the same way throughout the Union. As different domestic requirements would potentially lead to different outcomes for investors, depending upon the jurisdiction in which the UCITS is domiciled, national competent authorities should refrain from imposing stricter requirements in their respective jurisdictions (i.e. gold-plating ). Q20: Under the second option, do you consider that it would be appropriate to require that whenever the Relevant Entities are part of the same group at least one third of the members of the management company/investment company and depositary should be independent? Would you suggest any alternative percentage? If yes, please provide the reason why. As explained in our reply to Question 13 and to Question 19 above, governance issues should not be tackled as part of the criteria for fulfilling the requirement for the management company and the depositary to act independently. Q21: Do you agree that the concept of independence should be understood as requiring that independent directors should not be member of the management body or the body in charge of the supervisory function nor employees of any of the undertakings within the group? EFAMA wishes to refer ESMA to our earlier replies, adding that the fact of having independent directors on the boards of the relevant entities is not a panacea. Directors are first and foremost legally bound to solely act in the interest of the single company they represent and have to comply with the respective rules governing conflicts of interest, regardless of whether they serve as independent directors on boards of other entities within the same group. 12

13 Q22: Do you have knowledge of the impact that each of the two options identified would have in terms of restructuring the shareholding of any Relevant Entities or finding alternative service providers? If yes, please provide data and an estimation of the one-off and ongoing costs that would be incurred. Please refer to our answer in Question 18. In addition, EFAMA would observe that by forcing the restructuring of shareholdings of any of the Relevant Entities, or of alternative options requiring structural changes to governance and ownership structures, the most likely outcome will necessarily entail higher costs for UCITS investors, accompanied by less choice on offer, as a direct result of the splitting-up of businesses and related upfront costs for appointing new and external depositaries to service entire ranges of funds, consultancy charges, legal and tax advisory fees, management s time across all concerned entities, transition costs linked to IT and for the overhaul of data sharing protocols, etc. Looking at the increased ongoing costs, these are expected to come from the loss of economies available through the use of common infrastructure, from access and understanding of new systems, as well as from a time-consuming need to identify and reappoint responsible persons. In essence, it remains difficult to see how reordering the affairs of all affected UCITS could be justified, if at all, in terms of the practical benefits brought from the perspective of investor protection. A second effect is likely to be the gradual withdrawal of smaller, affiliated custody banks who derive the bulk of their revenue streams from servicing ranges of UCITS funds. The consequent further consolidation will inevitably benefit larger groups, but particularly those non-eu global depositary institutions that would capitalise from the transfer of EU domiciled UCITS assets. The proposed Option 2 (as amended according to our proposal outlined above) would also bear costs, although these are deemed to be significantly lower than those implied under Option 1 as outlined above. Q23: Do you agree with ESMA s approach to discard the second and third options described above? EFAMA notes that in the explanatory text, under paragraph 47 of the consultation paper, a second option (ii) and third option (iii) were considered. We understand these options have been deliberately omitted from the draft advice, further to ESMA s reasoning (respectively under the following paragraphs 49 and 50) and further impact assessment as annexed to the consultation paper. We agree with ESMA s analysis and in this respect wish to refer back to our replies to Question 13 et seq. 24 October 2014 [ ] * * * 13