Shedding Light on Non-Financial Risks – a European Survey

Shedding Light on Non-Financial Risks – a European Survey — January 2012

1. Introduction

investments were judged at odds with the duties of clear and not misleading information, vigilance, diligence and competency. At the same time, UBS, Luxalpha’s fund manager and depositary and the main link to Madoff, was not fined by the CSSF, which instead ordered an improvement in their procedures and structures (and the case was naturally brought before the courts by the liquidator). When it comes to protecting the final investor, distribution certainly has a major role to play. After all, mis-selling is a large source of risk, and resellers of funds should therefore provide accurate and not misleading information to their clients. However, who does what due diligences is still a valid question, as one cannot expect the distributor to have access to the full set of information as investment processes become more complex. Another theme we investigate, underlined by Madoff, is the responsibility of restitution of assets. The responsibility for restitution can either be defined in law or by contract between depositaries, sub-custodians and asset managers. Whether it is conditional and must happen with “reasonable delay” must be defined accurately. The depositary is responsible for restitution of assets in its custody, but until recently, sub-custody has been an important issue that is subject to national disparities, as illustrated by the demise of Lehman Brothers International (Europe). In France, the AMF vs. RBC Dexia and Société Générale case sheds some light on restitution of assets in sub-custody at bankrupt institutions. In April 2009, the French Cour d’Appel rejected the appeals formed by RBC Dexia and Société Générale for an injunction by the AMF to make restitution of assets to

three funds for which they were depositaries. Conservation of these assets had been delegated to Lehman Brothers International (Europe), which collapsed in the meantime. This added to the jurisprudence that the depositary, rather than the sub-custodian, is responsible for restitution of assets in its custody. There are, however, inconsistencies in country regulations such as bankruptcy laws, which create a legal maze even within Europe: “In France, where depositaries had an immediate and unconditional obligation of restitution, depositaries had to compensate investors in some ARIA EL funds for assets that had been posted as collateral to Lehman, but the order of 23 October 2008 and the decree of 24 July 2009 allow a depositary’s liabilities to be contractually lowered for OPCVM ARIA and OPCVM contractuel (which use the prime broker to borrow assets)“ (Amenc and Sender, 2010b, p. 20). Regulators have not been inactive since last year. The level I AIFMD directive (European Union, 2011a) had been voted by the time the paper was finished; since then, the debate on the regulation of non-financial risks has been lively, notably with proposals for level II implementing measures proposed by the European Securities and Markets Authority (ESMA, 2011a and 2011b), and a great participation of many industry group and firms to the consultation process (see EDHEC response: Amenc and Sender, 2011). The proposed implementing measures would reinforce the responsibilities of depositaries. Regulation of depositary duties, first set within the AIFMD, are expected to be transposed into UCITS V (an EU proposal is expected for summer 2012). 2

2 - See page 32 for an extended description.

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An EDHEC-Risk Institute Publication