BRUSSELS, Jan 20 (Reuters) - European Union mutual fund rules may be tightened in light of the Madoff scandal to ensure investors can recover their assets held by custodians, EU diplomats said on Tuesday.
French Economy Minister Christine Lagarde asked EU finance ministers on Tuesday to review the rules, known as undertakings in collective investment in transferrable securities or UCITS.
They oversee the EU's 6 trillion euro ($7.8 trillion) mutual funds sector.
'Developments in the Madoff case have brought to light a particular problem,' she said in a letter to the ministers.
Prosecutors say Bernard Madoff of the United States ran a $50 billion Ponzi scheme, paying off earlier investors with money from later ones, in a scam that has devastated investors including European banks.
Lagarde said protection afforded to investors differed from one country to another in the EU due to different ways the UCITS rules were being applied.
The French call is widely seen as an attack on the application of the UCITS rules by neighbouring Luxembourg, a major funds centre in Europe.
'There is no difference between the French and Luxembourg legislation as far as this point is concerned,' Luxembourg's prime minister and finance minister, Jean-Claude Juncker, told reporters on Monday evening.
Under EU law, assets in a fund must be entrusted for safekeeping to a depository, which is under strict obligation to return them when requested.
In some EU states, such an obligation has not been made explicit on sub-custodians or banks that are allowed to play the role of custodian, Lagarde said.
'There is a need to harmonise the interpretation of this obligation to reimburse depositors,' a French diplomat said on condition of anonymity.
EU Internal Market Commissioner Charlie McCreevy told finance ministers he would not 'sit idly by' and would supplement the rules, if needed, his spokesman said.
'If there is a need to supplement the principles or provide greater clarity, the (European) Commission will take the lead and move forward with the necessary actions,' the spokesman added.
McCreevy will consult national market watchdogs, in the first instance, before deciding what changes are needed.
The EU has just adopted a reform of UCITS dealing with its fund management aspects.
Lagarde said the Madoff case had 'highlighted the difficulty of locating securities, identifying the owners and determining the respective responsibilities to each link in the chain of ownership'.
The Commission will propose a draft law at the end of 2009, known as the directive on legal certainty of securities holdings and transactions, as a further step to safeguard investor funds.
An international convention aimed at protecting individual titles to assets could also reflect lessons learned from the Madoff scandal, EU diplomats said.
In December, French market regulator Autorite des Marches Financiers (AMF) said French mutual funds had incurred losses of about 500 million euros due to Madoff's scheme.
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