First, management and investment companies of UCITS are responsible for the oversight of the fund’s activities and the safeguarding of investors’ interests. They must have a supervisory and governance framework for taking decisions, hold regular board meetings, and appoint officers responsible for operation of the fund. They must have and employ efficiently the resources and procedures necessary for the proper conduct of its activities. The fund must be managed in accordance with the management regulations and in the exclusive interests of the investors. It also should be noted that a management company is liable to the fund’s investors for any loss resulting from failure to carry out its obligations.
An important role belongs to the depositary, which under Luxembourg law must be a bank approved by the CSSF and must be registered in Luxembourg or have a branch there if based in another EU country. The assets of the fund must be entrusted to a depositary for safekeeping.
The depositary must at all times keep the assets of a UCITS fund segregated from its own and the manager’s assets. The strict separation of the management company and the depository bank and their obligation ensures, for example, that the fund’s assets – which belong to its investors – cannot be seized to pay creditors should the management company run into financial difficulty.
The depositary has additional important monitoring functions. It must ensure that the sale, issue, repurchase and cancellation of fund units or shares are carried out in accordance with the law or the management regulations. It oversees the collection and deployment of the fund’s income from investments such as dividends. Finally, it ensures that the NAV calculation is carried out according to the fund’s own rules.
The depositary is also liable to the management company and the fund’s investors for any loss suffered as a result of its unjustifiable failure to perform its obligations or negligent performance of them.
One of the foundations of the UCITS investor protection principles is that the depositary and the management company – in the context of their respective roles – must act independent and solely in the interest of investors.
To ensure compliance with all the rules, Luxembourg-based managers and providers of certain services to UCITS funds as well as funds themselves and their depositaries are licensed and supervised by their home regulator, the CSSF, and must provide information to the regulator regularly. In addition they are subject to internal and external audits, whose reports are made available to the regulator.