UCITS V becomes ‘live’ on 18 March 2016.  Of particular concern to UCITS and UCITS service providers alike has been clarification on the timeline for updating UCITS documentation. This issue has been compounded by the expected 6 month time lag between the operative date of UCITS V Level 1 (18 March 2016) and the operative date of the delegated regulation relating to depositary issues (Level 2 – likely operative date September 2016).

On 1 February 2016, ESMA issued a consolidated Q&A on the application of the UCITS Directive dealing with three new questions on the updating of documentation under UCITS V.

1. The first question related directly to disclosures regarding remuneration policy in both the Prospectus and the KIID.  ESMA indicated that unless a UCITS is subject to national laws and regulations in its Home Member State which require updates to be made by 18 March 2016, the UCITS will be allowed to update the KIID with this information at the next annual update after 18 March 2016 (February 2017), or, if the information is available, on the first occasion after 18 March 2016 on which the KIID is revised or replaced for another purpose. Similarly, the Prospectus does not need to be updated until the next time it is revised for another purpose or, in any event, by 18 March 2017 at the latest.  However, UCITS/UCITS management companies should provide the additional information about their remuneration arrangements on a relevant website as soon as it becomes available (in accordance with Articles 69 and 78 of the Directive).
2. The second question concerned the remuneration related information to be included in the annual report. ESMA indicated that it is not necessary to include remuneration related information in any annual report concerning a performance period ending before 18 March 2016.  Where annual reports relating to periods that end on or after 18 March 2016, but before the UCITS/UCITS management company has completed its first annual performance period in which it has to comply with the new remuneration requirements of the Directive, the UCITS/UCITS management company should include the remuneration related information in the annual report on a best efforts basis and, to the extent possible, explaining the basis for any omission.
3. The third question related to the timing of the updating of UCITS depositary contracts.  The more onerous UCITS V liability regime for depositaries will come into effect on 18 March 2016.  However, since UCITS V Level 2 deals in detail with depositary related issues, including the minimum contents of the contract, ESMA indicates that the liability provisions in existing depositary contracts should be amended to reflect the UCITS V depositary liability provisions by the time those depositary contracts are required to be revised to comply with Level 2 (presumably the estimated September date).  In the meantime, ESMA suggests that the new UCITS V depositary liability provisions will automatically apply to UCITS contracts from 18 March 2016.

The inferences to be drawn from the ESMA Q&A appear to be that unless the Central Bank of Ireland requires Irish UCITS documentation to be updated earlier under UCITS V, revised depositary agreements do not have to be in place until the Level 2 operative date (September 2016). Further, unless Prospectuses or KIIDs need to be updated for purposes other than UCITS V, KIIDs will not need to be updated until the annual update in February 2017, and Prospectuses will not have to be updated until 18 March 2017.

UCITS/UCITS management companies should however bear in mind that, regardless of regulatory latitudes, it is their obligation under the UCITS Directive to ensure that a depositary is appointed in accordance with the Directive by 18 March 2016, and that the depository contract regulate the flow of information deemed necessary to allow the depositary to perform its depositary functions. Most depositaries are also likely to want to have a UCITS V depositary contract in place by 18 March 2016.

It should also be noted that the ESMA Q&A mechanism is a practical convergence tool used to promote common supervisory approaches for EU member state competent authorities and practices and to help UCITS by providing clarity as to the contents of the UCITS Directive. It is not, however, a formal ESMA Guideline.

Contributed by Patricia Taylor