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Directive 2014/91/EU of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions (UCITS V Directive) and Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (AIFMD), transposed into national law and complemented by the respective delegated acts, redefined the depositary’s role and responsibilities. Henceforth, the depositary is not only in charge of the safekeeping and administration of assets, but it also ensures that all transactions made by or on behalf of the fund are carried out in accordance with the law, the regulation and the fund documentation. Above all, depositaries shall act in the best interest of investors and in an independent way.
The depositary duties may be summarised as follows:
Entities acting as depositaries of Luxembourg domiciled UCIs are authorised by the CSSF in relation to the type of legal form of the UCIs (UCITS or AIFs) and the status of their AIFM (fully authorised or registered).
Luxembourg domiciled UCITS or AIFs need to appoint a single depositary among the eligible entities to act as UCITS or AIF depositaries: credit institutions, investment firms and professional depositaries of assets other than financial instruments (PDAOFIs), established in Luxembourg and covered by the Law of 5 April 1993 on the financial sector (LFS), but also Luxembourg branches of credit institutions and investment firms originating from a Member State of the European Union.
Prior to starting any depositary business activities for Luxembourg domiciled UCIs, an administrative authorisation has to be obtained from the CSSF.
New UCI depositary applications are to be submitted via a specific online questionnaire.
Any major subsequent change of the elements underlying the initial approval as a UCI depositary (e.g. extension of initial approval to other investment vehicles and/or any major change in the operational model) must be submitted to the CSSF for approval by means of this questionnaire.
UCITS V Directive and AIFMD set out strict restrictions under which depositaries are allowed to delegate the safekeeping of assets of the UCITS or the AIF, whereas the delegation of the other depositary functions (i.e. monitoring of the cash flows and oversight functions) is not permitted, except for the outsourcing of supporting tasks, such as administrative or technical functions.
Any material outsourcing is subject to the CSSF’s prior authorisation in accordance with point 182 of Circular CSSF 12/552, as amended, as well as mentioned in point 16 of Circular CSSF 16/644, respectively point 43 of the CSSF Circular 18/697.
A specific questionnaire is applicable in case of outsourcing of material tasks which so far have been carried out by the entity in Luxembourg and/or in case of a change of the outsourced entity.
UCITS V Directive amended Directive 2009/65/EC of 13 July 2009 (UCITS Directive) in order to enhance investor protection and align the duties of the UCITS depositaries with those of the AIF depositaries.
The UCITS Directive reinforced the depositary obligations regarding custody, record-keeping and ownership verification, as well as the third parties diligence. It also introduced the monitoring of UCITS cash flows, rules of independence and conflict of interest management.
The EU delegated regulations further clarified the tasks and responsibilities of the UCITS depositary banks.
The AIFMD was transposed into the Luxembourg Law of 12 July 2013 on alternative investment fund managers (“AIFM Law”). Its main objective is to enhance investor protection by increasing the depositary missions and responsibilities.
The AIF Directive reinforced the depositary obligations regarding custody, record-keeping and ownership verification, as well as the due diligence and oversight on third parties. It also introduced the monitoring of AIF’ cash flows, rules of independence and conflict of interest management.
The EU delegated regulations further clarified the tasks and responsibilities of the AIF depositaries.
Some AIFMs make use of exemptions according to Article 3 of the AIFM Law. The duties and responsibilities of the depositary are also reduced for the UCIs managed by these AIFMs.
Depositaries of Reserved Alternative Investment Funds (RAIFs), under the Law of 23 July 2016 on reserved alternative investment funds, are also qualified as AIF depositaries and shall respect the same legal requirements as for all other AIFs.