Although the UCITS regulatory framework has proved to be very resilient during the current crisis, the depositaries of 4 UCITS funds who entrusted fund assets worth 1.6bn€ to Madoff entities, have not yet been recovered. The Commission considers that it is still premature to conclude if investors will not be indemnified, but will ensure that MS have dully implemented the provision of the Directive.

Despite very difficult market conditions, asset illiquidity and investor redemptions, no more than a handful of funds have been forced to suspend trading or close. The regulatory safeguards embedded in the regulatory model have been instrumental in helping UCITS funds to weather this crisis.

However, some UCITS funds have been caught in the turbulence following the Madoff scandal. Losses have been incurred by investors and other funds across the EU that invested in these funds. The Member States supervising these depositaries have stated that the responsibility and liability of the depositaries set out in the UCITS Directive are faithfully implemented in their law.

The incident has nevertheless revealed differences in the way that the requirements of the Directive are given expression in national law, and has revealed different expectations as to whether the depositary is required to keep assets under its control so as to be able to return them to investors, or whether its responsibilities are confined to monitoring the security of the assets. It also suggests differences as to where the burden of proof lies in establishing responsibility and liability.

Early this year French Minister for finance and economy, Mme Lagarde, addressed a letter to Commissioner McCreevv highlighting the diverging approaches that Member states have taken on the role and liability of UCITS funds' depositaries, and that this situation could imply intolerable differences in investor protection depending on the domicile of fund depositaries.

This matter was further discussed by EU Finance Ministers at ECOFIN Council on January 20th, where Commissioner McCreevy explained the steps that the Commission will take to respond to these concerns.

The Commission considers that the Directive clearly establishes the basic responsibilities and liabilities of the depositary, clearly assigning responsibility for safe-keeping fund assets to the depositary and imposing liability on the depositary in the event of wrongdoing or negligent performance of its duties. Determination of liability and its extent must be established in accordance with the relevant national civil law.

The Commission notes that it is premature to conclude that investors in the UCITS funds concerned will not be indemnified for losses incurred under the law of the Member States where the depositaries concerned were domiciled. However, given that the depositary is a critical component of the UCITS regulatory system, the Commission is determined to ensure that national laws and practices transcribing depositary responsibilities and liabilities do not blur the responsibilities and liabilities enshrined in the Directive.

To this end, the Commission will, along with CESR, review the manner in which Member States have implemented the relevant provisions of the Directive, and evaluate how responsibilities and liabilities of depositaries are defined having regard to national civil law. This review will be driven by the objective of identifying any practices or provisions which dilute the basic responsibilities and liabilities of the Directive. It will seek to clarify the responsibilities of UCITS depositaries for safe-keeping, and the modalities by which depositaries can exercise those responsibilities (including use of sub-custodians).

To the extent that this review identifies practices or outcomes that are not consistent with the over-arching principles of the Directive, it will take the necessary steps to correct shortcomings. At this stage, a number of options could be envisaged – ranging from legally binding clarification of the responsibilities implied by asset safe-keeping supported by convergence of national practice, to more far-reaching legislative harmonisation.

Undertakings for Collective Investment in Transferable Securities (UCITS)

UCITS (Undertakings for Collective Investment in Transferable Securities) are investment funds that have been established in accordance with UCITS Directive (adopted in 1985). Once registered in one EU country, a UCITS fund can be freely marketed across the EU.

Managing over €5 trillion in assets UCITS have proven to be successful and are widely used by European households. UCITS are also regularly sold to investors outside the EU where they are highly valued due to the high level of investor protection they embody.

In July 2008, the European Commission proposed an important revision of the EU framework for investment funds, which would provide consumers with access to professionally managed investments on affordable terms, increasing the efficiency of the current legislative framework in a number of key areas.