UCITS - ESMA publishes Q&As on updating documents under UCITS V

On 01 February 2016, the European Securities and Markets Authority (ESMA) published a consolidated set of Q&As (the Q&As) on the application of the UCITS Directive.

The Q&As offer some sensible advice as to when a UCITS must update its Key Investor Information Document (KIID), prospectus, annual report and depositary contract in light of the changes brought about by UCITS V.

On the other hand, they offer little in the way of comfort to those hoping that ESMA (and/or the European Commission) would publish guidance to industry as to what steps it should be taking between 18 March 2016 (when the Level 1 of UCITS V comes into effect) and an unknown date in the future when the Level 2 measures on depositaries and sanctions are finalised. In the case of the depositaries measures, it is possible that these will not be in effect until as late as Q3 or Q4 2016.

KIID / Prospectus

Under UCITS V, a UCITS’s KIID must include a prescribed statement in relation to the UCITS’s remuneration policy, while the prospectus must also include certain specified remuneration-related information.

Updated KIIDs must be made available within 35 days of 31 December each year, while the "essential elements" of a prospectus must be kept up to date at all times.

The Q&As confirm that, unless its home Member State requires otherwise, the UCITS would not be expected to update its KIID immediately on 18 March 2016. Instead, the required additional information can be included at the next annual update after 18 March 2016, or on the first occasion after 18 March 2016 on which the KIID is revised or replaced for another purpose (if the information is available at that point in time).

Likewise, a UCITS will be allowed to add the relevant information to the prospectus at the next occasion it is revised for another purpose or, in any event, by 18 March 2017 at the latest.

In the meantime, ESMA advises that a UCITS Management Committee (ManCo) make available the additional information about its remuneration arrangements "on a relevant website" as soon as this information becomes available.

Annual report

Following implementation of UCITS V, a UCITS’s annual report must also include certain specified remuneration-related information. The annual report must be published within four months from the end of the period to which it relates.

ESMA’s Q&As confirm that it is not necessary to include remuneration-related information in an annual report which relates to a period that ended before 18 March 2016.

For annual reports relating to periods ending on or after this date, but before the UCITS ManCo has completed its first annual performance period under UCITS V, the ManCo should include the remuneration-related information in the report ‘on a best efforts basis’ and, as far as possible, explain the basis for any omission.

Depositary contract

Under UCITS V, a UCITS must appoint a single depositary and this appointment must be evidenced by written contract, the particulars of which are to be specified at Level 2. The Level 2 measures (or "delegated acts"), though, have only been published in draft form and require endorsement by the European Parliament and Council, before being published in the Official Journal. Even then, there would be a six month wait following publication before they actually came into force - it could be late in Q3 2016, then, before the Level 2 measures are binding.

Without explaining how it expects firms to deal with this gap between 18 March 2016 and Level 2 coming into effect, ESMA merely notes that UCITS depositary contracts “should be revised promptly in accordance with any transitional arrangements outlined in the delegated acts”.

Finally, the Q&As highlight that UCITS V contains provisions prescribing depositary liability. In practice, current depositary contracts will contain liability provisions which will not be consistent with those under UCITS V. Contractual provisions which set out the parties’ agreement on depositary liability but which conflict with the provisions under UCITS V will, the Q&As state, be void with effect from 18 March 2016 and the UCITS V provisions will apply instead.

What the Q&As fail to address, though, is that several issues around the depositary liability provisions (such as what financial instruments can be held in custody, when an instrument is deemed to have been lost and when the limited exclusion of liability provisions would apply) remain to be finalised and will only be known once the European Parliament and Council have indicated whether or not they accept the Commission’s draft delegated acts - Parliament and Council have three months from 17 December 2015 (extendable to six if they choose) in which to make this decision.

In the meantime, liability provisions in existing depositary contracts should, according to the Q&As, “be amended to reflect the UCITS V depositary liability provisions when those depositary contracts are revised to comply with the delegated acts”.