The European Securities and Markets Authority has issued a consultation paper setting out draft technical advice to the European Commission on the detailed Level 2 rules that will underlie the Alternative Investment Fund Managers Directive. Esma is asking for feedback from industry members by September 13, allowing it to finalise its advice to the Commission in time for submission by the deadline of November 16.
The proposals published in Esma’s consultation paper cover three broad areas: general provision for managers, authorisation and operating conditions; governance of depositaries to alternative investment funds; and transparency requirements and leverage.
The first section seeks to clarify issues regarding the thresholds determining whether managers are subject to the directive as well as areas such as valuation and delegation. Esma’s draft advice on criteria for the proper valuation of assets identifies general principles that should guide managers in developing and implementing policies and procedures, and that can be adapted to the various types of asset in which alternative funds may invest.
Regarding the criteria justifying delegation, Esma sets out two proposals, one taking a flexible approach under which delegation can be justified where the manager can demonstrates that delegation will result in more efficient management of the fund, the other setting out a proposed list of criteria to be used when making the assessment.
Esma’s proposals on the framework governing depositaries of alternative funds include advice on the content of the written contract appointing the depositary and clarification of the depositary’s oversight duties. It also makes proposals on the key issue of depositary liability including three conditions to be used in determining whether a financial instrument held in custody should be considered as lost and therefore whether the depositary should be required to return an asset.
The advice also seeks to define what would constitute external events causing loss of assets that are beyond the reasonable control of the depositary, and considers options for objective reasons that would allow a depositary contractually to discharge its liability, such as legal constraints that oblige the depositary to delegate custody to a third party.
Bearing in mind the core aim of the directive to help prevent systemic risk, the proposals include consideration of how leverage should be defined and calculated, and under what circumstances regulators may impose limits on the leverage a manager may employ. Given the wide variety of funds and assets covered by the scope of the directive, Esma proposes commitment and gross methods for calculation of leverage as well as a further option available to managers on request subject to certain criteria.
On transparency, Esma specifies the form and content of information to be reported to regulators and investors, and of the annual report to be prepared for each fund, developing a framework compatible with existing national and international accounting standards.
The AIFM Directive was first proposed by the European Commission in April 2009 and agreed by the European Parliament and EU member states in November 2010. On December 2 last year the Commission formally sent a request for technical advice on Level 2 measures to the Committee of European Securities Regulators, Esma’s forerunner. The directive was formally signed on June 8 this year and will come into force on July 21.
The request for technical advice is 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. The consultation paper covers Esma’s draft advice on most of the elements in the first three parts.
Some of the measures covered in the fourth part relate to the proposed passport for non-EU managers and funds, which will not be established for at least two years after the directive takes effect on July 22, 2013. However, Esma is working on draft proposals for implementing measures on co-operation arrangements in certain circumstances with non-EU regulators and will publish these in a separate consultation paper later this summer.
The circumstances in question, which will require implementing measures to be in place by July 22, 2013, involve authorised EU-domiciled managers of non-EU funds that are not marketed within the EU, and the marketing under national private placement rules of non-EU funds managed by EU-based managers as well as of funds managed by non-EU managers.