Regulation on the Performance of Duties, Conditions and Procedures for Selection and Withdrawal of Approval for Depositories of Voluntary Pension Funds

UNOFFICIAL CONSOLIDATED TEXT NN 63/2014 of 23.05.2014. NN 41/17 of 27.04.2017. (effective from 01.05.2017.) CROATIAN AGENCY FOR FINANCIAL SERVICES SUPERVISION Pursuant to Article 246(3), Article 247(2), Article 248(4), Article 249(4), Article 253(6) and Article 265(3) of the Voluntary Pension Funds Act (Official Gazette No. 19/2014), the Croatian Agency for Financial Services Supervision, at its Administrative Board meeting held on 16 May 2014, adopted REGULATION ON THE PERFORMANCE OF DUTIES, CONDITIONS AND PROCEDURES FOR SELECTION AND WITHDRAWAL OF APPROVAL FOR THE PERFORMANCE OF DUTIES BY DEPOSITARIES OF VOLUNTARY PENSION FUNDS

I. GENERAL PROVISIONS Article 1. Certain terms used in this Regulation have the following meanings:

1. Agency means the Croatian Agency for Financial Services Supervision.
2. Act means the Voluntary Pension Funds Act (Official Gazette No. 19/2014).
3. Pension management company means a pension management company for managing voluntary pension funds.
4. Fund means a voluntary pension fund.
5. Depository means a credit institution or a branch of a credit institution to which the duties prescribed by Article 247 of the Act have been entrusted.

Article 2. This Regulation prescribes:

1. the conditions and procedures for selecting a fund depository, as well as the documentation to be submitted with the application for approval issuance;
2. special rules for performing depository duties, as well as the mandatory content and form of the depository services agreement concluded between the depository and the pension management company;
3. the procedures and timeframes within which the depository notifies the Agency of identified irregularities in fund operations;
4. the method for storing fund assets with the depository;
5. the scope and content of the audit report on the performed review of depository obligations fulfillment;
6. the procedures to be followed by the pension management company and depository in cases where the depository's approval is revoked or annulled, or when the approval for selecting a depository is revoked or annulled.

II. CONDITIONS AND PROCEDURES FOR SELECTING A DEPOSITORY Application for Issuance of Approval for Selecting a Depository Article 3. (1) The pension management company must submit a written application to the Agency for issuance of approval for selecting a depository, which shall contain:

1. for a depository under Article 245(2)(1) of the Act – the company name and registered office of the depository in the Republic of Croatia;
2. for a depository under Article 245(2)(2) of the Act – the company name and registered office of the parent institution in the member state, as well as the company name and registered office of the branch in the Republic of Croatia (head office and all other branches, if any);
3. the name and surname, OIB (Personal Identification Number), and educational level of the depository manager;
4. contact details of the depository;
5. the date of application submission;
6. signatures of persons authorized to represent the pension management company and the seal of the pension management company. (2) In addition to the application under paragraph 1, the following must be attached:
7. the depository services agreement and a price list for performing depository duties, if not part of the agreement;
8. for a depository under Article 245(2)(1) of the Act – a copy of the court register extract and a copy of the operational approval issued by the Croatian National Bank;
9. for a depository under Article 245(2)(2) of the Act – a copy of the court register extract for the branch, a copy of the extract from the relevant registry of the member state for the parent institution, and an original or certified copy of the operational approval issued by the competent authority of the member state;
10. a declaration by the depository that there are no legal impediments within the meaning of Article 251(4) and (5) of the Act;
11. a certificate from the depository demonstrating that the depository manager meets the conditions under Article 245(5) of the Act regarding relevant experience;
12. evidence of compliance with organizational and technical requirements for performing depository duties in accordance with the Act and Articles 5 and 6 of this Regulation;
13. a copy of the audit opinion on the depository's financial statements for the last three business years, in accordance with regulations governing financial reporting, or shorter if the depository has been operating for less than three years;
14. proof of paid fee and administrative charge;
15. additional documentation upon request by the Agency. (3) Relevant experience under Article 245(5) of the Act means that the depository manager must hold a master's degree in accordance with regulations governing scientific activities and higher education, possess relevant professional qualifications, competence, and at least three years of experience in depository or similar duties. (4) The pension management company shall submit the depository services agreement electronically, in addition to paper form, on an appropriate medium in a clear and legible format. (4) If the pension management company submits the depository services agreement in paper form, it must also be submitted electronically on an appropriate medium in a clear and legible format. (5) All foreign documents under paragraph 2 must be translated by an authorized court interpreter into Croatian, and the original operational approval under paragraph 2(3) must be certified in accordance with laws and international regulations (Apostille – Hague Convention of 5 October 1961). (6) The application and documentation under paragraphs 1 and 2 may be submitted by the pension management company to the Agency in accordance with the Technical Instruction for Using the WEB Form Entry Service and Electronic Document Submission, and the Instructions for Filling Out WEB Forms for Pension Management Companies. (7) The pension management company is deemed to have submitted the documentation prescribed by this article at the moment it is recorded on the server for sending such documentation.

Conditions for Performing Depository Duties Article 4. Persons under Article 245(2) of the Act may perform depository duties if they meet the organizational and technical conditions necessary for fulfilling depository duties according to the Act and this Regulation.

Organizational Conditions Article 5. (1) The depository must prescribe, apply and regularly update internal acts governing:

1. the internal organizational structure of the unit performing depository duties, as well as the mutual relationship and methods of communication, information flow and data exchange between that organizational unit and other parts of the depository;
2. job classification of the organizational unit performing depository duties with specific work tasks, responsibilities and authorities;
3. physical separation of the organizational unit performing depository duties from other organizational units of the depository;
4. methods for performing depository duties under Article 247 of the Act;
5. an internal control system ensuring compliance with internal decisions and procedures;
6. methods for ensuring data security, integrity and confidentiality, taking into account their type. (2) The depository must notify the Agency of any change in the depository manager, no later than 7 days from the date of such change, in the manner prescribed by Article 31a of this Regulation.

Technical Conditions Article 6. A depository is considered to meet technical conditions for performing depository duties if it minimally possesses:

1. an adequate information system;
2. software support for performing depository duties;
3. established communication links for receiving instructions and general client communication via SWIFT, fax, telephone and Internet;
4. established written procedures and processes for receiving client instructions for the disposal of financial instruments and monetary funds.

III. SPECIFICS OF THE AGREEMENT BETWEEN DEPOSITORY AND PENSION MANAGEMENT COMPANY Article 7. (1) This section regulates the mandatory content and form of the depository services agreement concluded between the depository and the pension management company. (2) The agreement under paragraph 1, as well as subsequent amendments and supplements, must be concluded in written form. (3) The agreement under paragraph 1, as well as subsequent amendments to elements defined in Articles 8 to 11 of this Regulation, enter into force on the day the Agency's approval under Article 246(1) of the Act is obtained. (4) The agreement between the depository and the pension management company applies to all funds managed by the pension management company, which must be explicitly stated in the agreement.

Procedures of Contracting Parties Article 8. The agreement between the depository and the pension management company must contain at least the following details regarding services provided and procedures to be followed by contracting parties:

1. description of processes, including those related to storage, to be applied for each type of fund asset entrusted to the depository, and the depository's obligation to notify the pension management company of an updated list of countries where assets can be held in custody;
2. description of methods and processes by which the depository transfers all relevant information to the pension management company necessary for performing fund management duties, including exercising rights related to financial instruments in the fund's assets, and methods/processes enabling timely and correct access by the pension management company to data relating to fund accounts;
3. description of methods and processes by which the depository has access to all information necessary for performing depository duties;
4. description of processes enabling the depository to review the pension management company's operations, assess the quality of transferred information, either by reviewing records or visiting the pension management company;
5. description of processes enabling the pension management company to evaluate the depository's effectiveness in fulfilling its contractual obligations;
6. list of the depository's procedures for handling irregularities/illegal acts identified in performing depository duties, including identification of the person within the pension management company to be contacted in such cases;
7. obligation of the depository to notify the pension management company when it becomes aware that asset segregation is or is no longer sufficient to ensure protection against insolvency of sub-depositaries in third countries.

Information Exchange, Data Confidentiality and Anti-Money Laundering Article 9. (1) The agreement between the pension management company and depository must contain at least the following elements regarding information exchange, data confidentiality and anti-money laundering:

1. list of all information to be exchanged between the pension management company and depository, related to acquiring fund shares, transferring accounts and paying out total accumulated funds to a fund member under Article 128 of the Act;
2. obligation to protect data confidentiality of contracting parties;
3. information on obligations and responsibilities of contracting parties regarding anti-money laundering and counter-terrorist financing, where applicable. (2) The obligations under paragraph 1(2) must not restrict the Agency's access to relevant documents and data.

Delegation of Duties to Third Parties Article 10. When the depository intends to delegate performance of certain duties and responsibilities to a third party in accordance with Article 257 of the Act, or when the pension management company intends to delegate certain administrative duties to a third party in accordance with Article 76 of the Act, the agreement between the depository and pension management company must contain the following elements:

1. obligation of contracting parties to regularly provide each other with details about the appointed third party that will perform certain depository or pension management company duties on their behalf;
2. obligation of contracting parties to provide each other, upon request, information on criteria for selecting the third party to whom certain depository or pension management company duties are delegated, as well as on actions taken to monitor the work of the selected third party;
3. declaration that delegating asset storage duties to a third party will not affect the depository's responsibilities prescribed by the Act and this Regulation.

Amendments and Termination of Agreement Article 11. The agreement between the depository and pension management company must also contain:

1. a provision on the duration of the agreement;
2. assumptions and conditions under which the agreement may be amended or terminated;
3. assumptions and conditions under which duties may be transferred to a new depository, as well as procedures for the depository to submit all relevant data and documentation to the new depository.

Electronic Information Exchange Article 12. Contracting parties may agree that information or part of the information is transmitted electronically, if the agreement defines an appropriate method for storing such information.

IV. DEPOSITORY DUTIES Article 13. (1) Transaction accounts for business purposes and other accounts of the pension fund under Article 155(1)(8) of the Act must meet the following conditions:

1. opened in the name of the pension management company or depository, for the account of the pension fund;
2. opened with a credit institution or bank headquartered in a third country with operational approval issued by the competent authority, on markets where such transaction accounts are necessary for fund operations and subject to regulations having the same effect as Croatian law, with effective supervision;
3. maintained in accordance with principles of client asset protection prescribed by the capital market law and regulations adopted under it, regarding client asset protection. (2) The pension management company shall open a transaction account for business purposes of the pension fund with the depository. The depository may open such accounts for the account of the pension fund with persons under paragraph 1(2) on markets where such accounts are necessary for fund operations and subject to regulations having the same effect as Croatian law, with effective supervision. (3) To access all information related to transaction accounts for business purposes of the pension fund and clearly track fund cash flows, the depository shall receive at least daily or have access to information related to balances and changes in transaction accounts for business purposes of the pension fund opened with persons under paragraph 1(2) directly from those persons. To access all information related to other accounts of the pension fund under Article 155(1)(10) of the Act and clearly track fund cash flows, the pension management company is obliged to ensure that the depository receives at least daily or has access to information related to balances and changes in those accounts.

Article 14. The depository is obliged to ensure effective and appropriate monitoring of fund cash flows, specifically:

1. ensuring that all monetary funds of the fund are recorded in accounts under Article 13(1);
2. when a transaction account for business purposes is opened with persons under Article 13(1)(2) in the name of the depository but for the fund's account, taking necessary measures to ensure that monetary funds are held in accounts different from those of the persons where fund transaction accounts are opened, and different from the depository's own account opened with those persons;
3. adopting effective and appropriate procedures for reconciling all fund cash flows, performing reconciliation daily, and auditing procedures at least once a year;
4. verifying consistency between fund monetary balances in its own records and records of persons under Article 13(1)(2), with fund monetary balances in the pension management company's records;
5. in case of record inconsistencies under paragraph 1(4), monitoring measures taken to resolve inconsistencies, and notifying the Agency in the manner prescribed by Article 31a if they are not or cannot be resolved.

Financial Instruments Held in Custody Article 15. (1) The depository shall hold dematerialized financial instruments from the fund's portfolio in custody when all of the following conditions are met:

1. they are transferable securities, including transferable securities with embedded derivatives, money market instruments and undertakings for collective investment;
2. they can be registered or held on an account directly or indirectly in the name of the depository. (2) Financial instruments that can only be registered directly for the fund's account shall not be held in custody. (3) The depository shall hold materialized financial instruments from the fund's portfolio in custody.

Storage Duties Related to Financial Instruments Held in Custody Article 16. (1) Regarding financial instruments held in custody under Article 249(1)(1) of the Act, the depository is minimally obliged to:

1. ensure that financial instruments are recorded in accordance with Article 249(2) of the Act;
2. regularly and accurately maintain records and accounts in a manner that allows distinguishing at any time without delay the assets held for the fund from other clients' assets and the depository's own assets;
3. adopt effective and appropriate procedures for reconciling financial instrument balances in the fund's portfolio in its own records with balances in third-party records where instruments are held, and with the pension management company's records;
4. regularly reconcile balances of financial instruments on internal accounts and in the depository's data with balances on sub-depositaries' accounts and in their data;
5. continuously monitor reconciliation results and measures taken as a result of identified deviations, notify the pension management company if irregularities are not resolved on time, and notify the Agency in the manner prescribed by Article 31a if irregularities are not or cannot be clarified and corrected;
6. take necessary measures to ensure that fund financial instruments held with sub-depositaries are separated from depository financial instruments,