LE MINISTRE DE L’ECONOMIE DE L’INDUSTRIE ET DE L’EMPLOI
XXX January 2009
Dear Commissioner McCreevy, Developments in the Madoff case have brought to light a particular problem. Member States appear to have different transpositions and interpretations of the role and liability of fund depositaries, as set forth in Articles 7 and 14 of Directive 85/611/EEC ("UCITS Directive"). As a result, the protection afforded to investors differs from one country to another. Such differences may also exist within the same country because investment funds can be marketed across borders following a simple notification procedure. Article 71 of the UCITS Directive states: "A unit trust's assets must be entrusted to a depositary for safekeeping". Following the transposition of this article into French law, depositaries are under a strict obligation to return all the assets entrusted to them. Directly pursuant to Article 7(2) of the directive, "A depositary's liability […] shall not be affected by the fact that it has entrusted to a third party all or some of the assets in its safekeeping". It would appear that the main aim of separating the depositary from the management company was to effectively guarantee investor security. Furthermore, because depositaries are obliged to return the assets they hold, they pay particular attention to the choice of subcustodian. Not all Member States have followed down that path. Some have confined the depositary's liability to a bestefforts obligation, without actually requiring it to return assets in subcustody2. In consequence the substance of the depositary's role changes because it incurs a lesser level of liability as regards its oversight duties. These interpretational differences also concern the way in which management is delegated: even though delegation is covered by Article 5g of the directive, there are countrytocountry differences in implementation. The Commission had already identified this lack of harmonisation when it issued its White Paper on enhancing the single market in investment funds. Now, in the aftermath of the Madoff case (and whatever the outcome), the situation is harming the image of the "UCITS" mark. The success of these funds, both in the European Union and elsewhere, is rooted in a secure, harmonised framework in which the functions of the management company and the depositary are segregated3 and where the depositary is liable both to the management company and to investors4.
Charlie McCreevy Member of the European Commission Internal Market and Services Rue de la Loi, 200 1049 Brussels 1
Article 14 sets the same requirements for investment companies Under Articles 9 and 16, the depositary is liable "in accordance with the national law" 3 Articles 10 and 17 of the UCITS Directive 4 Articles 9 and 16 of the UCITS Directive 2
Belgium
In my opinion the security of the UCITS mark needs to be reasserted by applying a simple principle: any investor who entrusts his or her securities to a bank, or to the regulated financial sector in general, must be sure of recovering them. The Commission could launch a legislative project to that effect in the very near future. More generally the Madoff case has shown the difficulty in locating securities, identifying their owners, and determining the respective responsibilities at each stage of ownership. It highlights the overarching need for a body of common rules that govern the effects of holding and transferring securities and that guarantee the final investor's rights by imposing obligations on depositaries. Global action needs to be taken. Priority should be given to a directive on securities law, which would either include a section on the liability of UCITS depositaries or be supplemented by an initiative in this regard. In addition, an official request coordinated at European level could be sent to the SecretaryGeneral of Unidroit calling for the reopening of talks on the draft convention aimed at strengthening investor guarantees and the integrity of the international financial system. This course of action would be consistent with the conclusions of the December 2008 ECOFIN meeting on posttrade infrastructures. The council upheld the principle of a European instrument to harmonise securities law and called for closer scrutiny of the Unidroit international convention in light of the financial crisis. * * * The internal market in financial services has been rocked by the current crisis. To ensure that it emerges stronger from the ordeal, Europe must respond quickly and in coordinated fashion in order to preserve investor confidence in a context where financial products can be marketed freely throughout Europe. I am certain that we both share these goals. I would therefore be grateful firstly if you would quickly initiate discussions with ECOFIN on a securities law directive that addresses, inter alia, the issue of UCITS depositary liability, and secondly if would ask the SecretaryGeneral of Unidroit to revisit the draft convention. I am copying this letter to JeanClaude Juncker, Chair of the Eurogroup and Prime Minister of Luxembourg, and to Miroslav Kalousek, Chair of the Ecofin council and Minister of Finance of the Czech Republic. Yours truly,
Christine Lagarde