UCITS V: Who needs to do what by when?

UCITS V: Who needs to do what by when? Andrea Finn Viviane de Moreau Neil Simmonds Mahrie Webb 07 & 08 October

Agenda Summary of changes being introduced under UCITS V Impact on remuneration structures and disclosure Impact on fund contracts and other documents Who needs to do what by when? Luxembourg Ireland UK 1 / B_LIVE_EMEA1:2816021v1

Background to UCITS V: UCITS V: Lehman Brothers collapse Madoff Scandal bring UCITS regime in line with AIFMD and CRD Cross-border harmonisation Depositary function Remuneration Sanctions Entry into force Implementation 18 March 2016 UCITS to appoint depositary on compliant terms by 18 March 2016. If existing depositary ineligible, a new eligible depositary must be appointed by 18 March 2018 2 / B_LIVE_EMEA1:2816021v1

Key areas covered by UCITS V The role of the depositary Appointment and eligible entities; Independence; Conflicts of interest; Oversight duties; Cash monitoring duties; Safekeeping duties; Delegation; Liability; Reporting. Manager remuneration policies and practices Discouraging disproportionate risktaking; Identifying material risktakers; At least 50% variable remuneration to consist of units in the UCITS; At least 40% variable remuneration to be deferred in line with UCITS investment horizon (at least 3 years). Sanctions regime and whistleblowing Harmonisation of sanctions; Fines to amount to at least EUR 5 million or 10% of annual turnover; Central database accessible by competent authorities; Mechanisms to encourage whistleblowing. 3 / B_LIVE_EMEA1:2816021v1

Level 1 UCITS V Timeline 28 August 2014 UCITS V published in Official Journal 17 Sept 2014 UCITS V formally enters into force You are here 18 March 2016 UCITS V applies across EU Q3 2014 Q4 2014 Q1 Q2 Q3 Q4 Q1 2016 Level 2 Depositaries 26 Sept 2014 ESMA consultation period opens Sanctions 24 Oct 2014 ESMA consultation period closes. Responses received 28 Nov 2014 ESMA publishes Final Report 18 Sept ESMA publishes Final Report Q4 EU Commission to adopt Level 2 depositaries measures Q4 EU Commission to adopt Level 2 measures on sanctions 18 March 2016 Level 2 measures come into force Q3 2014 Q4 2014 Q1 Q2 Q3 Q4 Q1 2016 Level 3 Remuneration Q3 2014 Q4 2014 Q1 Q2 23 July ESMA publishes Consultation Paper on sound remuneration policies Q3 23 Oct Consultation closes Q4 Q1 2016 ESMA to publish final remuneration guidelines Q1 2016 18 March 2016 Level 3 measures come into force 4 / B_LIVE_EMEA1:2816021v1

Remuneration structures and disclosure UCITS V text: General principles of risk alignment and process aligned to AIFMD to note consideration of interests of investors, multi-year framework appropriate to the holding period recommended to the investors of the UCITS managed by the management company Material risk takers include: any employee and any other member of staff at fund or sub-fund level who are decision takers, fund managers and persons who take real investment decisions, persons who have the power to exercise influence on such employees or members of staff, including investment policy advisors and analysts, senior management Application to delegates (recitals) Disclosure in prospectus, annual report, website and KIID 5 / B_LIVE_EMEA1:2816021v1

Remuneration structures and disclosure II ESMA draft guidelines under consultation 23 October deadline: proportionality may allow disapplication of payout process rules implementation by March 2016 sectoral rules implications for CRD4 groups in particular equivalence provisions for delegates CRD4 or AIFMD National implementation: UK (SYSC 19E proposed 2017 performance year and anticipated proportionality guidance following final ESMA/EBA guidelines) Luxembourg Ireland 6 / B_LIVE_EMEA1:2816021v1

Implications for fund contracts and other documents Is your depositary eligible? Minimum requirements set out in Article 23 Member States able to specify which categories of institutions shall be eligible UK bank and certain non-bank depositaries (IFPRU investment firms and investment management firms that meet IPRU (INV) 5)) UK registered office or a branch with Part 4A permission to be depositary/trustee of a UCITS All new funds after 18 March 2016 must appoint eligible depositary Existing funds must appoint eligible depositary by 18 March 2016 7 / B_LIVE_EMEA1:2816021v1

Implications for fund contracts and other documents II Depositary Agreement(s) Article 22(2) appointment to be evidenced by a written contract Article 26b(a) Level 2 Regulation will specify the particulars that need to be in the written contract - parallels with AIFMD Level 2 will also set out detail on safekeeping and oversight duties, asset segregation, insolvency protection + due diligence Depositary liable for loss of financial instruments (no discharge of liability on appointment of third party) Depositary liable for all other losses as result of its negligence or intentional failure to fulfill obligations Liability of the depositary cannot be excluded or limited or agreement shall be void Process to be driven by depositaries engage early! 8 / B_LIVE_EMEA1:2816021v1

Implications for fund contracts and other documents III Prospectuses Article 69(1) - Remuneration policy (summary and reference to website for full disclosure) Article 69(2) Information provided for in Schedule A of Annex I Identify the depositary and describe duties and conflicts of interests that may arise Describe safekeeping functions delegated and list the delegates and subdelegates and any conflicts of interests Statement that up-to-date information on the above available on request Additional disclosures where third country laws require FIs to be held by local custodian and no local custodian satisfies the delegation requirements (See Article 22a(3) Risk warnings consequence of depositaries due diligence on laws of third countries 9 / B_LIVE_EMEA1:2816021v1

Implications for fund contracts and other documents IV KIIDs Article 78(3)(a) identification of the UCITS and of the competent authority of the UCITS Article 78 (4) a statement to the effect that details of the remuneration policy are available and reference to website and that paper copy will be made available free of charge on request. Other documents to consider: Impact on custody agreements Instruments/Trust Deeds powers and liability provisions IMAs Depositary access and, as necessary, to ensure compliance with remuneration requirements Annual Report remuneration disclosure Administration agreements supervision powers over subs/reds? 10 / B_LIVE_EMEA1:2816021v1

Who needs to do what by when? Luxembourg According to the draft law transposing UCITS V, the depositary regime of Part II UCIs will be aligned with the regime for UCITS No definitive position of the CSSF waiting for Level 2 Regulations and the Luxembourg transposing law CSSF will adopt a practical and pragmatic approach Prospectus: non fixed deadlines, compliance with UCITS V at the next update of the prospectus CSSF should be provided with a clear and fixed timeframe for modifications without undue delay (must be a realistic short term timeframe) Implementing circular from CSSF might be issued in a second step when Luxembourg laws will be enacted 11 / B_LIVE_EMEA1:2816021v1

Who needs to do what by when? Luxembourg Other contracts and specifically depositary agreements concerns only the parties of the contracts: Sanctions: Obligation to submit contracts to the CSSF for information but minimal control and no approval required Review of the CSSF based on legal constraints only Already applicable in Luxembourg through civil and penal provisions The existing regime is reinforced with UCITS V Whistleblowing: New regime in Luxembourg Not in the culture, no precedent Set-up to be discussed and developed on a practical way 12 / B_LIVE_EMEA1:2816021v1

Who needs to do what by when? Ireland Central Bank have yet to finalise process (due to Level 2 delay). Discussions ongoing with Irish Funds on behalf of industry. Query as to whether the Central Bank will follow the UK approach/timing which is recognised as helpful. Current industry expectations are: As a practical response to UCITS V and the issue with late Level 2, the Central Bank will stand back from the usual full review of the depositary contracts. There will be one filing of each depositary contract (when the Level 2 text is available) and certification will be required that the contract is fully in compliance with UCITS V. Any nuances or clarifications that do not conform to process will be subject to review. Filings subject to spot checks. Clarification on Prospectus and KIID process expected to follow as part of industry Q&A (UK process seen as a good model). The application form driving approval process will issue when Level 2 issues. 13 / B_LIVE_EMEA1:2816021v1

Who needs to do what by when? UK New/amended depositary agreements to be reviewed/replaced - 18 March 2016 no need to file new/amended agreement with FCA. According to FCA s CP 15/27: Update the prospectus with relevant information at the next planned update and, in any event, within six months from 18 March 2016 file with FCA Update to the KIID at the next annual update after 18 March 2016 file with FCA Until such updates are made, FCA recommends publishing relevant information on website (as far as it is available) FCA approval required? Reg 21 (for ICVCs)/Section 251 (for unit trusts)? Notice to investors? 14 / B_LIVE_EMEA1:2816021v1

Any questions? 15 / B_LIVE_EMEA1:2816021v1

Contacts Andrea Finn T +44 20 7825 3915 E andrea.finn@simmons-simmons.com Viviane de Moreau, Partner T +352 26 21 16 15 E viviane.demoreau@simmons-simmons.com Neil Simmonds, Partner T +44 20 7825 3151 E neil.simmonds@simmons-simmons.com Mahrie Webb, Partner T +44 20 7825 2077 E mahrie.webb@simmons-simmons.com 16 / B_LIVE_EMEA1:2816021v1

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