Consultation Paper: ESMA's technical advice to the European Commission on delegated acts required by the UCITS V Directive (ESMA/2014/1183)

The Swedish Investment Fund Association (SIFA) would like to give its opinion to the consultation.

Common management/supervision

Q4: Do you agree with the steps to be taken by the third party as identified above? If not, please explain the reasons.

SIFA believes that the wording “steps to be taken by the third party” is unclear. It gives the impression that it is the responsibility of the third party to comply with the rules. If instead it is a condition for delegation for which the depositary is responsible it should be reflected in the text.

Q5: Do you consider that there are any specific difficulties that may arise in verifying the applicable insolvency regime that makes the proposed rules difficult to be complied with? In particular, do you consider the requirement for the third party located in a jurisdiction outside the Union to obtain independent legal advice could give rise to specific issues?

Obtaining many legal advices would surely be costly. Overreliance in such advices should also be avoided and other means of verifying for example applicable insolvency laws should not be excluded.  

Q9: Do you agree with the steps to be taken by the depositary as identified above? If not, please explain the reasons.

The proposed steps to be taken by the depositary are very far-reaching, especially when it comes to analyzing the effects of local insolvency law on an ongoing basis. This raises the question of the depositary’s liability. The detailed and far-reaching provisions could give the impression that where compliance with the provisions is ensured the depositary should not be held liable for losses (since they could not reasonably have been avoided). SIFA thinks it should be made clear how the provisions interact with the depositary’s liability.

Common management/supervision

Q13: Do you agree with the identified links that may jeopardise the independence of the Relevant Entities? If not, please explain the reasons.

SIFA is of the opinion that the identified links are relevant for the independence of the Relevant Entities. However, for example, the category common supervision would not be relevant in all jurisdictions.

Q14: Do you consider that any additional links should be taken into account such as, for instance, the existence of any contractual commitment or other relationship which would affect the independence of the Relevant Entities? If yes, please provide details.

No, SIFA is of the opinion that there are many links or conditions that might raise the issue of independence or conflicts of interest. However, such conflicts of interests should be handled in accordance with rules already in place. It would be difficult to foresee all potential future conflicts of interests that might arise. Therefore, SIFA is of the opinion that the commission should not regulate independence further.

Q15: Do you consider that the cumulative presence of all or some of the identified links is necessary to jeopardise the independence of the Relevant Entities or the presence of any of these links is sufficient to determine a lack of independence?

SIFA is of the opinion that this has to be evaluated on a case by case basis by the entities themselves. If there is a link it has to be taken into account and potential conflicts of interests must be handled.

Q16: Do you agree with the proposed option to ensure the separation of the management bodies/bodies in charge of the supervisory functions of the Relevant Entities?

Do you have any alternative options to suggest, taking into account those identified under paragraph 47?

Shared management can be present for fully relevant reasons.  For example, the legislator regularly emphasizes the need for group companies to maintain a high level of control throughout the group which is why board representation in group companies is necessary.  This is the case for example in CRD IV. In addition to the existing rules on conflict of interests SIFA therefore suggests a less stringent approach which would allow some common board representation:

(a) No more than half of the members of the management body of the management company/investment company shall be a member of the management body of the depositary.

Through such an arrangement board members that are independent are given a better position and it is not as easy for board members that are not independent to overrule them.

Q17: Do you consider that the cap of one third of members of the body in charge of the supervisory functions of one of the Relevant Entities to also be members of the management body, the body in charge of the supervisory functions or employees of the other Relevant Entity is appropriate? Would you suggest any alternative percentage? If yes, please provide the reasons why.

A separation of the body in charge of the supervisory function and the management body would not be relevant for Swedish conditions.

Q18: Do you have knowledge of any restructuring in the composition of the management bodies/bodies in charge of the supervisory functions of any Relevant Entities that would be triggered by the identified option? If yes, please provide data and an estimation of the one-off and ongoing costs that would be incurred.

There would be a need to restructure the boards of some major fund companies in Sweden. There are no available calculations of the cost of such a restructuring but in order for large groups of companies to maintain a relevant level of control required in other legislation the companies affected would have to reorganize their entire operation or stop providing depository services. It should be recognized that on a small market such as the Swedish market access to local depositary services is crucial.

The Swedish Code of Conduct for management companies requires at least half of the board to be independent. This self regulation is adhered to by the majority of Swedish management companies. SIFA believes this best practice has successfully addressed issues of conflicts of interest.

Cross shareholdings

Q19: Which of the two identified options do you prefer? Would you suggest any alternative option? If yes, please provide details.

SIFA would prefer option 2. Option 2 is a proportionate proposal taking into account the specific conditions that arise when choosing a depositary. It recognizes measures already used to address conflicts of interest and provides for an extra safeguard through the requirement to nominate independent members of the board.

Option 1, on the other hand, would have a large impact on the market and is disproportionate since  no market failure has been demonstrated. If a ban were to be introduced it would, in SIFA:s opinion,  have to be decided on level 1 due to its market impact.

On a small market such as the Swedish there is a risk that some of the local providers find it  less attractive to provide depositary services if they are not allowed to provide the services within their own group and the ban would thus be harmful to competition.

Q20: Under the second option, do you consider that it would be appropriate to require that – whenever the Relevant Entities are part of the same group – at least one third of the members of the management body of the management company/investment company and depositary should be independent? Would you suggest any alternative percentage? If yes, please provide the reasons why.

SIFA considers the requirement to be appropriate and would not suggest an alternative percentage.

Q21: Do you agree that the concept of independence should be understood as requiring that independent directors should not be member of the management body or the body in charge of the supervisory function nor employees of any of the undertakings within the group?

Yes, SIFA agrees with the suggested definition. In fact, the definition provided in the Swedish Code of Conduct would cover even a wider group. Please refer to http://fondbolagen.se/en/Regulations/Guidelines/Code-of-conduct/

Q22: Do you have knowledge of the impact that each of the two options identified would have in terms of restructuring the shareholding of any Relevant Entities or finding alternative service providers? If yes, please provide data and an estimation of the one-off and ongoing costs that would be incurred.

Since corresponding rules are already in place in Sweden we do not foresee any major impact from the suggested option 2.

Option 1 on the other hand would have a large impact on the few companies that provide depositary services on the Swedish market today.

 

Swedish Investment Fund Association

Lena Falk
Legal counsel

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