BUSIneSS
UCITS V
MADoFF FAlloUT
Luxembourg was blasted by Brussels in a leaked draft of new cross-border investment rules. Fund managers eagerly await the official first draft-expected this month--to see if the Grand Duchy is still singled out. Text: Aaron Grunwald
34 - delano - May 2012
The paper posits that “the large scale of the Madoff fraud essentially went undetected for a long period because UBS [Luxalpha’s depositary bank] had delegated custody over the Luxalpha assets to an entity run by Bernard Madoff ” himself, instead of an independent party. The document later says that in contrast to the Grand Duchy, “other member states impose an obligation to return the assets irrespective of whether a monitoring duty was breached. The Madoff case demonstrated the fundamental difference between strict liability and negligence standards: French investors in Luxembourg funds--Luxembourg applies a negligence standard, France a strict liability standard--are faced with a liability standard less protective than the one they would encounter in France.” The document then suggests that the French approach should be implemented EU-wide. A spokeswoman for Barnier did not return Delano’s messages requesting comment. However, the head of a major consumer protection group did voice his support for the draft. “European Financial Services Users support the UCITS V proposals made by the European Commission in order to clarify and strengthen investors’ protection in case of a fund’s failure in safekeeping its assets,” says Guillaume Prache, managing director of Eurofinuse in Brussels. “The Luxalpha case indeed showed that European investors in the fund were insuf-
ficiently protected when the depositary successfully claimed he was not liable for the sub-depositaries’ failures under Luxembourg law. We believe the UCITS V proposal, if adopted, will clarify this issue and make the fund’s depositary and sub-depositaries clearly liable in this case.” Such critiques have not gone down well in the Grand Duchy. In the wake of the Madoff case, CESR--the former pan-EU financial regulator which was
Council of the European Union
While investment managers are still busily implementing the fourth version of UCITS--the EU regulatory regime on which Luxembourg’s cross-border funds sector is built--Brussels is expected to publish a preliminary draft of its fifth iteration shortly after Delano goes to press. But an early internal version of the draft caused a storm when it circulated among industry players and the financial press after being leaked in late March. Being prepared by the office of the European commissioner for internal markets, Michel Barnier of France, the draft contains harsh words about Luxembourg’s regulatory environment that essentially repeat the criticisms French government has levelled against the Grand Duchy since 2009. Specifically the document--seen by Delano--cites Bernard Madoff ’s 65 billion US dollar Ponzi scheme to point out the differences in how rules on depository banks-who are chartered with safeguarding investors’ money after it is handed over to a fund company--are applied in different member states, suggesting that standards are lower in the Grand Duchy. “The consequences of the Madoff fraud have been particularly acute in Luxembourg,” the leaked document says. “The Luxembourg-based UCITS-compliant Luxalpha fund recorded losses of around 1.4 billion due to Madoff investments which turned out to be fictitious.”