Will EU rules kill UCITS?

February 25, 2014 06:19 AM

Fund managers will face tougher European Union pay rules as part of a deal on a draft law that also seeks to prevent fraud similar to the Ponzi scheme orchestrated by Bernard Madoff.

European Parliament lawmakers and Greece, which holds the rotating presidency of the EU, agreed on the measures for funds known as UCITS, or Undertakings for Collective Investment in Transferable Securities today, according to Arlene McCarthy, a legislator who led work on the measures for the parliament’s Socialist group.

Under the toughened pay rules “there will be no guaranteed bonuses for fund managers and 40 percent of bonuses must be deferred,” McCarthy said in an e-mailed statement. This deferral would be for a minimum of three years, according to the EU parliament.

European Union legislators have clashed over how far the bloc should go in transferring pay rules for bankers to managers of investment funds. Lawmakers last year rejected a push by Sven Giegold, the European Parliament’s lead negotiator on the draft UCITS law, for the bill to include a ban on fund manager bonuses worth more than fixed pay.

The European Commission, the 28-nation EU’s executive arm, proposed in 2012 to toughen the bloc’s rules for UCITS in order to curtail the risks of Madoff-style fraud. Madoff pleaded guilty in 2009 to orchestrating what prosecutors called the biggest Ponzi scheme in history and is serving a 150-year sentence in U.S. federal prison. The fallout of the fraud included the liquidation of four UCITS funds, a type of retail investment vehicle allowed to operate across the EU.

Fraud Prevention

The new rules, scheduled to apply starting in 2016, will “ensure that the abuses seen at the time of the Madoff scandal cannot be repeated,” Michel Barnier, the EU’s financial services chief, said in a statement.

The accord today still requires approval from the full parliament and national governments to take effect.

Under the draft law, banks and other institutions that act as so-called depositaries for UCITS would face limits on their ability to delegate away responsibility for the safekeeping of assets. The measures also clarify the custodian bank’s liability in the event that assets are misused by fund managers, and firm up rules requiring banks to keep the fund’s asset pool segregated from their own investments.

The Madoff case saw courts in the EU take “different approaches” when deciding whether depositary funds should be held liable in situations where they had delegated responsibilities to other lenders, and assets had been lost, according to the commission.

Lenders that provide safekeeping services for UCITS and other types of assets include Bank of New York Mellon Corp., State Street Corp. and BNP Paribas SA.

BNY Mellon, the world’s largest custody bank, had $25.5 trillion of “client assets under custody” in 2010, according to a report published by the commission.

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