Circular 4/2016 of the CNMV on the functions of depositaries of collective investment institutions and entities regulated by Law 22/2014

OFFICIAL STATE GAZETTE No. 167 Tuesday, July 12, 2016 Sec. I. Page 48471 I. GENERAL PROVISIONS SPANISH NATIONAL SECURITIES MARKET COMMISSION (CNMV) 6646 Circular 4/2016, of June 29, of the Spanish National Securities Market Commission (CNMV), on the functions of depositaries of collective investment institutions and entities regulated by Law 22/2014, of November 12, which regulates venture capital entities, other closed-end collective investment entities and management companies of closed-end collective investment entities, and which amends Law 35/2003, of November 4, on Collective Investment Institutions.

The figure of the depositary for the different types of collective investment institutions (both UCITS and alternatives) is a crucial element in their regulation to guarantee legal certainty for investors. Both the functions of custody or registration of assets, and the functions of monitoring and supervision of certain aspects of the functioning of management companies, are very relevant issues to achieve effective regulation of the CII figure from the point of view of investor protection. This Circular completes the regulation of CIIs depositaries by developing certain technical aspects.

The legal regime of the depositary is provided for in Title V of Law 35/2003, of November 4, on Collective Investment Institutions, and is also included in Title V of Royal Decree 1082/2012, of July 13, approving the Regulation of said Law. With regard to entities regulated in Law 22/2014, of November 12, which regulates venture capital entities, other closed-end collective investment entities and management companies of closed-end collective investment entities, and which amends Law 35/2003, of November 4, on Collective Investment Institutions, the legal regime of the depositary is collected in Article 50 of said Law. Furthermore, where applicable, the applicable European Union legislation applies to them.

In this sense, non-harmonized Spanish collective investment institutions must comply with Commission Delegated Regulation (EU) No 231/2013 of December 19, 2012, supplementing Directive 2011/61/EU of the European Parliament and of the Council as regards exemptions, general conditions for the exercise of the activity, depositaries, leverage, transparency and supervision, which establishes at European level, extensively and in detail, the functions and responsibility of depositaries. Similarly, Spanish UCITS must comply with what is provided in Commission Delegated Regulation (EU) 2016/438 of December 17, 2015, which supplements Directive 2009/65/EC of the European Parliament and of the Council, with respect to the obligations of depositaries.

Royal Decree 1082/2012, of July 13, approving the Development Regulation of Law 35/2003, of November 4, on Collective Investment Institutions, empowers in paragraph 4 of its single final provision the Spanish National Securities Market Commission (CNMV) to develop the legal regime of the depositary provided for in Title V of Law 35/2003, of November 4; in particular, to determine the specificities and exceptions applicable to the depositary of venture capital entities, closed-end collective investment entities and free-investment collective investment institutions.

Likewise, the CNMV is empowered to develop, among others, the technical aspects of the monitoring function regarding the elements referred to in Article 134 of Royal Decree 1082/2012, of July 13, including monitoring of eligible assets and matters relating to the balances of participants or shareholders of Collective Investment Institutions (CIIs); to develop the technical aspects of the liability regime referred to in Article 136 and of the obligations on asset segregation; to develop the content of the agreement between the management company and the depositary referred to in Article 138; to determine the scope of the depositary function according to the type of assets and the type of accounts used, the scope of the depositary's duties in relation to the calculation of the net asset value and the valuation of participations, and the scope of the control of cash flows.

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OFFICIAL STATE GAZETTE No. 167 Tuesday, July 12, 2016 Sec. I. Page 48472 On the other hand, Royal Decree 83/2015, of February 13, amending Royal Decree 1082/2012, of July 13, approving the Development Regulation of Law 35/2003, of November 4, on collective investment institutions, repeals by virtue of its single repealing provision, Order EHA/596/2008, of March 5, regulating certain aspects of the legal regime of the depositary of collective investment institutions, and specifies the content of position statements. This Order regulated in detail the manner in which the depositary had to carry out its custody, supervision and monitoring functions. According to the transitional provision of said Royal Decree 83/2015, of February 13, the repeal of Order EHA/596/2008, of March 5, will take effect when the CNMV approves the provisions developing the legal regime of the depositary by virtue of the aforementioned empowerment. This Circular partially collects the content of Order EHA/596/2008 and develops the legal regime of the depositary, deepening in the approach marked by Commission Delegated Regulation (EU) No 231/2013 of December 19, 2012, which regulates in detail the functions and responsibilities of depositaries of non-harmonized collective investment institutions. Likewise, some of the contents appearing in the recently published Commission Delegated Regulation (EU) 2016/438 of December 17, 2015, which regulates in detail the functions and responsibilities of depositaries of UCITS, are incorporated.

For this purpose, the Circular establishes in the first section the scope of application, which covers both depositaries of CIIs and the depositaries of entities regulated by Law 22/2014, of November 12.

In the second section, the functions of custody and administration and control of cash are regulated, as well as the specificities and exceptions in the performance of these functions, applicable to the depositary of entities regulated in Law 22/2014, of November 12, and of free-investment collective investment institutions.

In the third section, technical aspects relating to the general regime applicable to the depositary's supervision and monitoring function are specified, taking into account again the specificities presented by the performance of this function in entities regulated in Law 22/2014, of November 12. Furthermore, with the aim of simplifying and unifying the depositary regulations, the requirements collected in Circular 3/2009, of March 25, of the CNMV, on the content of the semi-annual report on the compliance of the supervision and monitoring function of depositaries of collective investment institutions, are incorporated in this section, in order to proceed to its repeal. Models that appeared in said Circular and that collect the form and content of the report of incidents by depositaries of CIIs are attached as Annex A.

Likewise, the additional rule contained in said Circular 3/2009, of March 25, of the CNMV, relating to the report model for investment funds collected in Annex 1 of Circular 4/2008, of September 11, of the CNMV, on the content of quarterly, semi-annual and annual reports of collective investment institutions and the position statement, is incorporated into this Circular, so that said model is replaced by the model contained in Annex B of this Circular.

On the other hand, in the first final rule, with the aim of clarifying the legislation and by virtue of the empowerment included in paragraph 3 of the single final provision of Royal Decree 1082/2012, of July 13, the content of rule 7th of Circular 4/2008, of September 11, of the CNMV, is modified and the model of its annex 8 is replaced.

Finally, Royal Decree 1082/2012, of July 13, empowers the CNMV in its article 53.2, to determine the procedure for calculating the minimum liquidity coefficient of 1% on the equity that CIIs must maintain as well as the categories of liquid assets in which it can be materialized. Making use of this empowerment, in the second final rule, Circular 6/2008, of November 26, of the Spanish National Securities Market Commission, on the determination of the net asset value and operational aspects of Collective Investment Institutions, is modified, with the object of specifying these aforementioned aspects.

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OFFICIAL STATE GAZETTE No. 167 Tuesday, July 12, 2016 Sec. I. Page 48473 By virtue of the empowerment received, the Council of the CNMV, prior to the report of its Advisory Committee, in its meeting of June 29, 2016, has approved the following Circular:

First Section. General Provisions First Rule. Scope of application. This Circular shall apply to the depositaries of Collective Investment Institutions, hereinafter CIIs, referred to in Title V of Law 35/2003, of November 4, on CIIs. It shall also apply to the depositaries of those entities regulated in Law 22/2014, of November 12, which regulates venture capital entities, other closed-end collective investment entities and management companies of closed-end collective investment entities, and which amends Law 35/2003, of November 4, on Collective Investment Institutions.

Second Section. Deposit functions, asset administration and cash control Second Rule. Custodial and non-custodial financial assets.

1. The following shall be considered custodial financial assets, for the purposes of Article 129 of Royal Decree 1082/2012, of July 13, approving the Development Regulation of Law 35/2003, of November 4, on Collective Investment Institutions, among others: a) Financial instruments capable of being physically delivered to the depositary. b) Financial instruments that are transferable securities, according to what is established in Article 2.1 of the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of October 23. c) Financial instruments when they are recorded in an account directly or indirectly in the name of the depositary or a sub-custodian expressly designated by it. Among others: i. Participations and shares of CIIs, entities regulated in Law 22/2014, of November 12, and foreign entities of a similar nature. ii. Financial instruments issued by vehicles or special purpose entities.
2. The following are considered non-custodial assets for the purposes of Article 131 of Royal Decree 1082/2012, of July 13: a) Participations and shares of CIIs, entities regulated in Law 22/2014, of November 12, and foreign entities of a similar nature, which are registered directly in the management company or entity delegated to keep the register of participants or shareholders, in the name of the investing CII. b) Financial derivative instruments, except those collected in letter j of Article 2 of the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of October 23. c) Securities not traded on a regulated market or a multilateral trading facility, other than those collected in letters a) and c) of paragraph 1. d) Investment in movable and immovable property and rights thereto. e) Loans, invoices, commercial effects and other assets of a similar nature. f) Deposits in credit institutions. g) Any other non-financial assets not collected in the preceding letters.

Third Rule. Custody function.

1. For the purposes of complying with the obligations established in Article 129 of Royal Decree 1082/2012, of July 13, relating to the custody function, the depositary must, at least: a) Register the custodial financial assets in separate accounts opened in the name of the CII in the depositary's books, so that they can be clearly identified as belonging to the CII, in accordance with the principles established in Article 16 of Commission Directive 2006/73/EC of August 10, 2006, implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms, and the terms defined for the purposes of said directive. b) Perform periodic reconciliations with sub-custodians, which will be at least weekly. c) Implement, together with the management entity, the adequate mechanisms and procedures to guarantee that, in no case, the disposal of assets is made without its consent and authorization, so that the ownership of the CII over the custodial assets can be verified.
2. The custody function will apply to underlying assets susceptible to custody, held by financial vehicles that are under the direct or indirect control of the CII. The foregoing shall not apply to funds of funds or principal-subordinated structures when the underlying funds have a depositary designated that performs the custody function. The provisions of Article 42 of the Commercial Code will be followed, for the purposes of presuming the existence of control.

Fourth Rule. Registration function of other non-custodial assets.

1. For the purposes of complying with the obligations established in Article 131 of Royal Decree 1082/2012, of July 13, relating to the registration function of other non-custodial assets, the depositary must, at least: a) Establish, together with the entity manager, and incorporate them into the internal procedures manual, referred to in Article 127.3 of Royal Decree 1082/2012, of July 13, the mechanisms and adequate procedures to guarantee their intervention and control in the contracting processes promoted by the CII, provided for in Article 128.1 of Royal Decree 1082/2012, of July 13, so that it can be verified that the ownership of the assets corresponds at all times to the CII and guarantee that, in no case, the disposal of flows derived from said contracts or the cash derived from the alienation or termination of said contracts is carried out without its consent and authorization. To this end, the depositary may intervene in the corresponding purchase and/or sale contract and/or purchase or sale orders, subscription or redemption, or establish another alternative mechanism or procedure. b) Ensure that third parties provide them with certificates or other documentary evidence at least once a month and each time there is a purchase or sale of assets or any event affecting the ownership of the assets. However, in the case of immovable property, assets subject to investment by entities regulated in Law 22/2014, of November 12 or other assets of a similar nature, this periodicity may be annual.

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OFFICIAL STATE GAZETTE No. 167 Tuesday, July 12, 2016 Sec. I. Page 48474 c) Keep an updated register of non-custodial assets. For this purpose, it must at least: i. Register in a register, in the name of the CII, all non-custodial assets for which ownership has been verified. This register must at least include an identifying element of the asset and the number of titles or participations or notional value, if applicable. ii. Perform monthly reconciliations with the positions held by third parties. However, this periodicity may be annual considering the nature of the assets. iii. Be able to provide, at any time, an updated inventory of the CII's assets, containing at least the information collected in item i). 2. The registration function of other non-custodial assets will apply to non-custodial underlying assets, held by financial vehicles that are under the direct or indirect control of the CII. The foregoing shall not apply to funds of funds or principal-subordinated structures when the underlying funds have a depositary designated that performs this registration function. The provisions of Article 42 of the Commercial Code will be followed, for the purposes of presuming the existence of control.

Fifth Rule. Cash control function.

1. In order to guarantee that the CII's cash flows are properly controlled, in accordance with what is stipulated in Article 132 of Royal Decree 1082/2012, of July 13, the depositary will be the only authorized person to dispose of the CII's cash account balances, following the instructions of the management company or, where applicable, the administrators of the investment company.
2. For the purposes indicated in the previous paragraph, the depositary must have established, together with the management entity, and incorporated into its manual, the procedure for formalizing the opening of cash accounts in third-party entities that explicitly determines, among other aspects, the identification of the person with sufficient powers representing the depositary.
3. In addition, the depositary will perform periodic reconciliations of cash flows in third-party entities, whose periodicity will be established in the procedures manual.

Sixth Rule. Asset administration function.

1. The depositary must collect the corresponding returns of the deposited assets on their maturity or payment dates, as well as carry out any acts necessary for these assets to preserve the value and rights corresponding to them according to legal provisions and other applicable rules. In cases where it is necessary, the assistance of the management company or, where applicable, the administrators of the investment company, will be sought.
2. The depositary must carry out the settlement of operations on financial instruments, directly or through another entity participating in the clearing, settlement and registration systems in the markets where they will operate. Likewise, and when required by the nature of the assets or the rules of the system or market in question, the depositary may also intervene in the execution of operations, in accordance with the instructions sent to it for this purpose by the management company, or, where applicable, the administrators of the investment company.
3. When the CII invests in assets not traded on regulated markets or multilateral trading facilities, the depositary will comply with the settlement instructions sent by the management company or the administrators of the investment company.
4. The depositary must ensure that it receives the settlements of securities and cash within the time limit determined by the settlement rules governing the corresponding markets. The depositary must inform the manager without delay of any incident that occurs.

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OFFICIAL STATE GAZETTE No. 167 Tuesday, July 12, 2016 Sec. I. Page 48475 In any case, the depositary will urge the adoption of appropriate measures, including the termination of the operation when possible, in order to remedy delays in settlement.

Seventh Rule. Delegation of the deposit function.

1. For the purposes of Article 135.2.b) of Royal Decree 1082/2012, of July 13, it is considered that there is an objective reason for the delegation to third parties of the custody function of the CII's financial instruments, among others, when the depositary does not directly participate in any of the clearing, settlement and registration systems of the assets in which CIIs invest.
2. The depositary must assess and supervise, throughout the entire custody chain, the inherent risks, at least once a year or with greater frequency when there are market turbulence or when significant risks have been identified that so advise.
3. In the selection and appointment of a third party to whom part of its custody functions are delegated, and at least with an annual periodicity, the depositary must, at least, assess and ensure: a) That the legal and regulatory framework, including country risk, custody risk, asset segregation and the enforceability of contracts signed with the third party are adequate. This assessment cannot be based on reports from the third party itself. In the case of UCITS, the depositary must receive legal advice from an entity not affiliated with itself or the sub-custodian, regarding the enforceability of the contract in the event of insolvency of the sub-custodian when it is located in a third country and the implications for the assets and rights of the CII. Likewise, the depositary must ensure that the sub-custodian, located in a third country, receives legal advice from an entity with which it has no affiliation, for the purpose of verifying that insolvency rules recognize the segregation of assets belonging to the CII and that these will not form part of the sub-custodian's bankruptcy estate in the event of its insolvency. In addition, it must ensure that the sub-custodian informs it immediately in the event that these conditions have been modified. b) That the third party has structures, procedures, practical knowledge and internal controls adequate and proportionate to the nature and complexity of the entrusted assets. c) That the solvency and reputation of the third party is adequate. d) That the third party is subject to effective prudential regulation and supervision, including a mandatory minimum capital, as well as periodic external audits that allow verifying that financial instruments and other securities are in its possession. e) That there is absolute separation between the entity's own account in which custody is delegated and the third-party account, positions of the entity and its clients cannot be registered in the same account and allowing the identification of the depositary's own account. The denomination of the client account will expressly reflect the character of a third-party account. The depositary will establish an internal procedure that allows accounting individualization of each client's position. f) That the third party will respect the

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