The European Securities and Markets Authority (Esma) has published a consultation paper on August 23 setting out its proposals for the detailed Level 2 rules on supervision and third-country entities underlying the Alternative Investment Fund Managers Directive.
According to Esma, the proposed rules have been drafted to reflect the global nature of the alternative investment management industry and the need for a framework covering entities outside the European Union.
The consultation paper, which follows an earlier document published in July inviting comment on its Level 2 proposals for other aspects of the directive, is Esma’s response to the European Commission’s request for technical assistance from the organisation’s predecessor, the Committee of European Securities Regulators (Cesr).
Esma is due to deliver its finalised advice to the Commission by November 16 this year, and it requests responses to the consultation to be delivered by September 23 in order for it to meet the deadline.
Admission of third-country managers and funds to EU markets through national private placement regimes or, after 2015, a passporting regime for alternative funds will involve a framework of supervisory co-operation and exchange of information between EU regulatory authorities and their counterparts in non-EU countries.
According to Esma’s proposals, these co-operative arrangements should be organised through written agreements allowing for exchange of information for both supervisory and enforcement purposes. The agreements should impose a duty on the third-country authority to assist the EU regulator in question where it is necessary to enforce EU or national legislation, and provide for exchange of information for the purposes of systemic risk oversight.
The 30-page paper also invites comment on Esma’s proposals for the additional requirements to be applied when alternative fund managers delegate portfolio or risk management functions to a provider based in a third country. They cover the content of the written agreement to be concluded with the regulator of the third country, which would have to allow for access to information, the possibility of on-site inspections of the entity to which functions are delegated and enforcement actions in the event of a breach of the AIFM Directive rules.
Under the directive, a fund’s depositary may be established in a third country subject to certain conditions. Esma sets out its proposals on the elements to be taken into account when assessing whether the prudential regulation and supervision applicable to a third-country depositary is equivalent to the AIFM Directive provisions, and whether it can be considered to be effectively enforced.
Esma lists a number of criteria such as the independence of the third-country regulator, its eligibility requirements for depositaries, the equivalence of capital requirements and the existence of sanctions in the case of violations.
Regarding the co-operation arrangements with third country regulators in general, Esma expresses a preference for a single agreement to be negotiated by itself in each case to ensure consistency and avoid a proliferation of bilateral agreements. It has also identified documents produced by the International Organisation of Securities Commissions as benchmarks for the written agreements.
The AIFM Directive was first proposed by the European Commission in April 2009 and agreed by the European Parliament and EU member states last November. On December 2 last year the Commission formally sent a request for technical advice on Level 2 measures to Cesr, Esma’s forerunner. The directive was formally signed on June 8 this year and came into force on July 21; the deadline for transposition into the national legislation of EU member states is July 22, 2013.
The Commission’s request for technical advice has been divided into four parts covering general provisions, authorisation and operating conditions, implementing measures regarding the depositary, transparency requirements and leverage, and implementing measures on supervision. Esma’s proposed advice on Parts I to III was covered by a consultation paper published on July 13, responses to which are due by September 13.