Sunday, April 20, 2014

European Parliament Enhances Mutual Fund Regulation with Passage of UCITS V

Small investors will be better protected against mutual funds and other investment funds that take excessive or unnecessary risks with their money under legislation approved by the European Parliament. Amendments to the Undertakings for collective investments in transferable securities (UCITS V) Directive clarify who is liable for mismanagement of funds and tailor the compensation of fund managers to encourage them to take reasonable risks and a long-run view. Funds that gather assets from small investors and pool them to buy bonds, shares or other financial products currently manage around 85 percent of the European investment fund sector's assets. The legislation was approved by 607 votes to 28, with 34 abstentions.

E.U. Commissioner for the Internal Market said that the legislation will considerably strengthen the protection of investors vis-à-vis managers of UCITS funds and their depositaries. It will also ensure that managers who break the law will be sanctioned in an appropriate way.

To clarify who is responsible for small investors' funds, the legislation requires UCITS fund or UCITS fund managers to appoint a single independent depositary with sufficient funds of its own to oversee investor payments to the fund and act as a custodian of its assets. No management company should act as both a management company and depositary.

Depositaries will be required not to act without authorization and will have to keep investors' money clearly separate from their own assets. They will be barred from investing these funds on their own account. Depositaries will also be deemed liable for any loss of assets, even if they delegate custody of them to a third party.

Fund managers will be required not to take investment risks beyond what is accepted by their UCITS investors. At least half of the variable part of their remuneration will be paid in the assets of their UCITS, unless the management of UCITS accounts for less than half of the total portfolio.

Payment of at least 40 percent of variable remuneration will be deferred for at least 3 years. Where the variable share of remuneration is particularly high, at least 60 percent of this share is to be deferred, to encourage managers to take a long-run view.

The measure directs the European Securities and Markets Authority (ESMA) to issue guidelines on to whom in the company the pay policy applies.