Interview with Freddy Brausch, Linklaters

Freddy BrauschFreddy Brausch is the Managing Partner of Linklaters LLP in Luxembourg and has been a partner in the Investment Management Group since 1985.
He sits on several advisory committees and is a permanent member of the “Haut Comité de Place”, a think tank set up by the Luxembourg Ministry of Finance. As the implementation of UCITS V is getting closer: what are the relevant dates and key areas to keep an eye on?
Freddy Brausch: As you may know, the UCITS V Directive was published in the Official Journal on 28 August 2014 and became effective from 17 September 2014. It will have to be implemented before March 2016 and Luxembourg is intending to be a fast mover in that area as in previous cases. A draft law is already available. The law should be adopted by the end of this year. It is presently held back by the delays encountered in respect of Level 2 measures.
Greater harmonisation should allow to further improve investor protection and investor confidence as a consequence of the enhancement of the depositary responsibility and liability regime, of the introduction of remuneration rules and the introduction of specific provisions on regulatory sanctions. Do fund managers need to act regarding the enhanced responsibilities of the depositaries or will the depositaries take care of the issue proactively?
Brausch: A piece of advice would, definitely, be to get ready before March 2016 and that both asset managers and depositaries agree on the terms of the depositary contract well in advance of UCITS V becoming effective. The new remuneration rules are definitely something that fund managers will be interested in. Could you sum up what the rules are and if they also apply to managers based outside the EU?
Brausch: The underlying principles of UCITS V rules on remuneration are broadly in line with the AIFMD provisions but the expected implementing rules may be more stringent in a UCITS context. The idea to bear in mind is that the UCITS regime seeks to eliminate or reduce perverse incentives for employees to follow excessively risky behaviour that can yield short term profits and bonuses but lead to subsequent losses for investors or shareholders.
There is a concern outside the EU that these new remuneration rules apply to non EU managers, typically Asian or US managers who make investment decisions impacting the risk profile of the UCITS because of management functions which have been delegated to them.
At present, ESMA guidelines on UCITS V remuneration rules have not been published yet. They are expected to be released in draft form at the beginning of July. However, ESMA could take the approach followed under the AIFMD Remuneration Guidelines. If so, when delegating investment management activities, management companies should ensure that the entities to which investment management activities have been delegated are subject to regulatory requirements on remuneration that are equally as effective as those applicable under the Guidelines; or that appropriate contractual arrangements are put in place with entities to which investment management activities have been delegated. “Equally as effective” under the guidelines should be understood as “equivalence of effect” rather than “equivalence of legislation. For Luxembourg Management Companies, the CSSF has been pragmatic when implementing these rules in an AIFMD context. In a UCITS context, we will see which flexibility is left to the CSSF when ESMA guidelines come out. Last but not least the sword of Damocles hanging over the asset management industry: sanctions. What sanction provisions under UCITS V are new for UCITS fund managers?
Brausch: Provisions on sanctions should not be underestimated as these days regulators do not shy away from sanctioning and sanctioning heavily.
Generally speaking, the amendments to the UCITS Directive in this field seek to enhance the tools available to regulators and to harmonise the application of sanctions among member states: this includes an exhaustive list of breaches which call for sanctions (e.g. when a UCITS pursues its activities without authorisation or when a depositary fails to comply with its obligations) and a minimum list of administrative sanctions that apply to such breaches (e.g. a public statement which identifies the person responsible and the nature of the breach, pecuniary penalties). Thank you for the interview