ESMA has now finalized its advice to the Commission on two aspects of the depositary provisions that are additional to AIFMD: the necessary steps to ensure that in the event of insolvency of a third party, undertakings for the collective investment in transferable securities (UCITS): assets are ring-fenced; and the conditions for fulfilling the requirement that the management company and depositary must act independently. The Commission will now consider the advice and draft the “delegated acts” of final rules.
On the first point, ESMA’s final advice is little amended from the proposal on which it consulted. Its advice relates to non-EU parties and the measures should be based on the IOSCO. Recommendations regarding the Protection of Client Assets. The final advice introduces some additional clarifications and we would not expect this to be contentious for firms.
On the second point, ESMA has dropped the option of requiring the manager and the depositary to be in different groups, but the proposed governance arrangements remain very significant for bank-owned managers where the depositary is in the same group. No person can be on the management board of both companies or a member of one and an employee of the other, and at least one-third or two (whichever is the lesser) of their management boards must be independent. The choice of depositary must be based on a robust and objective decision-making process, and if the affiliated depositary is chosen, this decision must be disclosed and justified to the national regulator and the fund’s investors. Therefore, bank-owned fund managers will have to undertake a thorough review of their governance structures and conflicts policies, and be able to justify the choice of the in-house depositary and its fee.
The Level 2 measures will be a copy-out of the relevant articles in the AIFMD Level 2 Regulation. Therefore, they will not be new to firms that are AIFMs, but UCITS-only managers and depositaries will need to review their policies and processes.