AIFMD and UCITS V:
A Comparison
MUFG Investor Services
About us
Mitsubishi UFJ Financial Group (MUFG) is one of the world’s leading financial
groups. Headquartered in Tokyo and with over 350 years of history, MUFG is a
global network with 1,100 offices and 140,000 employees in over 40 countries.
The Group offers services including retail and commercial banking,
investment banking, securities services, credit cards, consumer finance,
asset management and leasing.
MUFG is driven by the vision to “be the world’s most trusted financial group.”
This is backed by an unyielding focus on lasting relationships, as reflected in
MUFG’s consistent delivery of solutions that exceed the expectations of
clients worldwide.
As the fifth largest bank in the world with $2.5 trillion in assets, a common
equity tier 1 ratio of 11.3% and a market capitalization of over $80 billion –
MUFG is truly a partner with exceptional financial strength.
From fund administration and custody to FX, trustee, depository, securities
lending, banking services and a broad range of regulatory solutions – MUFG
provides clients comprehensive solutions tailored to their specific needs from
a partner they can trust.
$2.5 trillion in assets
140,000 employees
40 countries
A global partner you can trust
3
AIFMD and UCITS V: A Comparison
Table of Contents
4What does AIFMD and UCITS V mean for
fund managers?
4How does AIFMD and UCITS V impact fund
manager remuneration?
5What are the regulatory sanctions for fund
managers under AIFMD and UCITS V?
5 Going forward
6 MUFG Solutions
7 Contact MUFG
4
AIFMD and UCITS V: A Comparison
WHAT DOES AIFMD AND UCITS V MEAN FOR
FUND MANAGERS?
HOW DOES AIFMD AND UCITS V IMPACT
FUND MANAGER REMUNERATION?
ŸŸ The introduction of the Alternative Investment Fund
Managers Directive (AIFMD) on July 22, 2014 initiated
a number of changes on the alternative investment
management industry, which encapsulated any fund
management house that did not adhere to UCITS.
ŸŸ There is significant overlap between the remuneration
provisions contained within UCITS V and AIFMD. AIFMD
requires AIFMs to ensure personnel whose roles may
have a material impact on the firm’s risk profile to defer
between 40 per-cent and 60 per-cent of their variable
remuneration over three to five years, and make sure a
substantial portion of their pay package is paid out in
shares or some other form of approved equity.
ŸŸ While a number of firms expressed concern about the
costs and operational challenges the Directive imposed,
most fund managers appear to have coped well.
ŸŸ However, there is debate as to whether non-EU
managers of non-EU funds will embrace AIFMD.
There are strong hopes that conservative institutional
investors within the EU – most notably pension funds
and insurers – will increasingly invest in what they view
to be more rigorously regulated alternative investment
funds. This could serve as an impetus for non-EU
managers to conform to the Directive.
ŸŸ The UCITS V Directive was formally published in the
EU’s Official Journal on August 28, 2014, and came into
force less than a month after. EU member states will be
obligated to impose the new rules from March 18, 2016.
UCITS V initiates a number of new changes on the fund
management industry although these are by no means
as extensive as to what was introduced through its
predecessor UCITS IV.
ŸŸ The implications of both Directives have been welldocumented, but it is important to note there are a
number of convergences and arbitrages between the
two in several areas, particularly around fund manager
remuneration policies and the obligations surrounding
depository banks.
“WHILE FUND MANAGERS ARE
STILL GETTING TO GRIPS WITH
THEIR AIFMD COMPLIANCE
REQUIREMENTS, THERE IS
ANECDOTAL EVIDENCE TO
SUGGEST A SECOND ITERATION
OF AIFMD COULD EMERGE.”
5
AIFMD and UCITS V: A Comparison
ŸŸ The rationale behind this is a regulatory ambition to
align fund managers’ interests with those of their firms
and their end clients, while dis-incentivising excessive
short-term risk-taking. Most AIFMs already have “skin in
the game” and pay-outs are correlated to performance,
so there was some resentment about having such
requirements being imposed.
ŸŸ Some regulators have adopted a proportional approach
– most notably the Malta Financial Services Authority
and the Financial Conduct Authority (FCA) in the UK.
The FCA – for example – said firms managing less than
£1 billion leveraged or £5 billion unleveraged in Assets
under Management (AuM) will not be impacted. While
this is less than what some industry associations had
requested, it was a welcome development from the
regulators.
ŸŸ Earlier drafts of UCITS V’s remuneration provisions
originally presented challenges for fund managers.
The European Parliament had favoured a bonus cap
on UCITS managers of one times their salary, but this
did not garner the required political support.
ŸŸ The latest remuneration proposals under UCITS V
stipulate individuals’ pay must be paid in UCITS assets
although firms where UCITS account for less than
50 per-cent of the overall portfolio are excused. Like
AIFMD, between 40 per-cent and 60 per-cent of variable
remuneration must be deferred for a minimum of three
years, and must be contingent on solid performance.
In addition, managers of AIFMs and UCITS alike will be
required to disclose the remuneration they pay their
senior personnel.
ŸŸ Firms operating both UCITS and AIFs will therefore
be required to identify areas where remuneration
procedures need to be brought into line as well as
finding out which individuals are ensnared.
ŸŸ Perhaps one of the biggest changes to affect fund
managers under AIFMD is the obligation to appoint
a depository bank to provide safekeeping of assets,
cash-flow monitoring and oversight. Full scope AIFMs
taking advantage of the pan-EU marketing passport are
required to appoint a depository bank subject to strict
liability for loss or misappropriation of assets under
Article 21 of the Directive.
ŸŸ For fund managers utilising the various national private
placement regimes, Article 36 of the AIFMD permits
them to appoint a depository-lite, which fulfils all of the
necessary obligations of a full-scope depository but is
not subject to strict liability for loss or misappropriation
of assets.
ŸŸ The European Securities and Markets Authority (ESMA)
is currently reviewing the rules surrounding private
placement. Were it to scrap private placement,
AIFMs would be forced to appoint a full scope
depository, rendering depository-lite obsolete.
ŸŸ Using a depository bank has long been a requirement
for UCITS although there are new obligations such as
cash-flow monitoring that have been introduced through
AIFMD. Broadly, the regimes governing depositaries
under AIFMD and UCITS V are similar but there are some
potentially significant divergences. It is also important to
note that depository-lite is not permitted under UCITS.
ŸŸ UCITS V and AIFMD have considerable overlap around
depositaries’ delegated acts, although UCITS V – given
that it is aimed at retail investor protection – goes
further than AIFMD. Should a depository delegate
custody to a third party, the depository must do its best
to ensure that any UCITS assets are not accessible to
creditors should the third party enter into a major credit
event. It also requires the depository and management
company to act independently of each other.
ŸŸ Depository liability has long been a frustration associated
with AIFMD, although this fear has largely subsided as
depository banks have been able to discharge the liability
or indemnify themselves against making right those
losses, were they to arise due to an “external power”.
UCITS V imposes similar standards on depository banks
although it prohibits depositaries from contractually
discharging liability to their sub-custodians. In other
words, if a depository’s sub-custodian – such as an
agent bank or central securities depository (CSD) – was
holding UCITS assets and were to enter into insolvency,
the depository would have to make right those losses.
However, as UCITS tend to be invested in more liquid
assets and markets due to their investment restrictions
(something which is not imposed on AIFs), the likelihood
of this occurring is far lower with a UCITS than an AIF.
WHAT ARE THE REGULATORY SANCTIONS
FOR FUND MANAGERS UNDER AIFMD AND
UCITS V?
ŸŸ While AIFMD affords regulatory agencies powers to
impose punishing fines and investigations on fund
managers in breach of the rules, the specifics have
not yet been laid out or formulated in immense detail.
This is not the case with UCITS V, which imposes
administrative sanctions with maximum penalties
of €5 million (or 10 per-cent of annual turnover) for
companies. Individuals found to be in breach of the
rules can also be fined €5 million or be temporarily or
permanently banned from managing money.
GOING FORWARD
ŸŸ UCITS VI is still in its embryonic stages although there
are a few areas it is likely to touch on that could have a
substantial impact on the European fund management
industry. Perhaps the most significant involves the rules
around the eligibility of assets permitted within a UCITS
framework. There is speculation that some of the
more esoteric products that have occasionally been
shoehorned into UCITS could be banned as regulators
seek to distinguish institutional AIFs from retail UCITS.
ŸŸ Another possibility could see the introduction of a
pan-EU depository passport whereby a fund manager
can appoint a depository outside of the EU jurisdiction
it is domiciled. Such a scenario could mean the rules
governing depositaries under AIFMD and UCITS would
have to be harmonised even further if a passport were
to come into being. Any headway on UCITS VI, however,
is unlikely to be forthcoming before 2017 at the earliest,
although fund managers should start to consider its
potential implications.
ŸŸ While fund managers are still getting to grips with their
AIFMD compliance requirements, there is anecdotal
evidence to suggest a second iteration of AIFMD could
emerge. Quite what an AIFMD II will look like is yet to
be determined.
MUFG SOLUTIONS
ŸŸ MUFG provides full administration solutions for UCITS
and AIFMD regulated funds including investment
restrictions and limit monitoring.
ŸŸ MUFG has a fully licensed UCITS and AIFMD-compliant
Super ManCo based out of Luxembourg. This company
may be appointed the AIFM to a fund, and then subdelegate the trading decisions to our clients’ existing
management company. MUFG’s Super ManCo is the
second largest in Luxembourg by number of funds.
ŸŸ MUFG can assist with Annex IV reporting to the
applicable member state regulator or to the applicable
local authority for those using private placement.
ŸŸ MUFG provides a Depository function for UCITS and
AIFs and Depository-lite function for AIFs.
6
AIFMD and UCITS V: A Comparison
FOR FURTHER INFORMATION PLEASE CONTACT:
Blair Henderson
Managing Director – Global Head
Business Development & Marketing
+44 (0) 20 3195 0336
[email protected]
ASIA
Akira Iwamoto
General Manager
AMERICAS
Amy Francisco
Director, Business Development
+81 3 3287 9422
[email protected]
+1 646 676 5582
[email protected]
Phil Niles
Director, Business Development
Scott Lederman
Director, Business Development
+1 519 896 5714
[email protected]
+1 646 676 5573
[email protected]
EMEA
Thomas Erichsen
Director, Business Development
+44 (0) 20 3195 0337
[email protected]
www.mufg-investorservices.com
This document is for general information purposes only and should not be used as a substitute for consultation
with professional advisors.
MUFG Investors Services is a service brand name. Please refer to the following for details on contracting entities.
All entities listed are a wholly owned member of MUFG, a global financial group.
Mitsubishi UFJ Global Custody S.A., 287-289, route d’Arlon L-1150, Luxembourg, Grand Duchy of Luxembourg,
T +352 445 1801.
Mitsubishi UFJ Trust and Banking U.S.A., 420 Fifth Avenue, 6th Floor, New York, NY,10018, U.S.A, T +1 212 915 0100.
MUFG Fund Services Limited, The Belvedere Building, 69 Pitts Bay Road, Pembroke HM 08, Bermuda, T +1 441 299 3882.
MUFG Fund Services (Bermuda) Limited, The Belvedere Building, 69 Pitts Bay Road, Pembroke HM 08, Bermuda,
T +1 441 299 3882.
MUFG Fund Services (Cayman) Limited, Strathvale House, 2nd Floor, 90 North Church Street, George Town, P.O. Box 609,
Grand Cayman KY1-1107, Cayman Islands, T +1 345 745 7600.
MUFG Fund Services (Ireland) Limited, Ormonde House,12/13 Lower Leeson Street, Dublin 2, Ireland, T +53 01 647 0500.
Mitsubishi UFJ Trust International Limited, 24 Lombard Street, London EC3V 9AJ, U.K., T +44 207 929 2866.
7
AIFMD and UCITS V: A Comparison
www.mufg-investorservices.com
MUFG Investor Services