Esma's consultation paper of July 13, 2011 on AIFM Directive proposals
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.
AIFM Directive to come into force on July 21
The European Union’s Directive on Alternative Investment Fund Managers will come into force on July 21 following its publication in the Official Journal of the European Union on July 1.
The directive received formal approval by the EU Council at a meeting of transport, telecommunications and energy ministers on May 27. It was formally signed at Strasbourg on June 8 by Jerzy Buzek, the president of the European Parliament, and Enikő Győ, Hungary’s minister of state for European affairs, on behalf of the EU Council.
The formal title of the legislation is now Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.
The finalisation of the legislation, which was agreed by EU economic affairs and finance ministers and then by the European Parliament last November, was delayed by the extended process of legal and linguistic revision to correct any typographical or drafting errors in the text and to ensure the internal consistency of the directive’s provisions, followed by translation into the various official languages of the European Union.
The final version of the directive was published on May 13. EU member states will now have until July 22, 2013 to transpose the directive into their national legislation. This is one day longer than the two-year period allocated for transposition, apparently because July 21, 2013 falls on a Sunday.
Detailed regulations and subsidiary legislation to implement the AIFM Directive, so-called Level 2 measures, will be drawn up by the European Commission over the next two years on the basis of advice provided by the European Securities and Markets Authority, which is due to report back in November. In April Esma issued a discussion paper on its proposals for implementing measures, soliciting views from market participants.
Under the legislation, EU-domiciled funds run by managers also based within the union will benefit from a ‘passport’ enabling them to be marketed to sophisticated investors throughout the union two years after the legislation comes into force, from July 22, 2013.
According to the timetable set out in the directive, Esma is due to report on the functioning of the passporting system and advise the Commission on its extension to non-EU managers and funds by July 22, 2015.
Three years after access is extended, presumably some time in the second half of 2018, Esma is due to publish its advice to the Commission on the planned abolition of current national regimes permitting distribution of alternative funds through private placement arrangements.
AIFM Directive set to come into force following approval by EU Council
The European Union’s Directive on Alternative Investment Fund Managers is set to come into force next month following formal approval by the EU Council at a meeting of transport, telecommunications and energy ministers on May 27, 2011.
The finalisation of the legislation has taken at least three months longer than originally expected. This follows delays resulting from the process of legal and linguistic revision to correct any typographical or drafting errors in the text approved by the European Parliament on November 11 last year and to ensure the internal consistency of the directive’s provisions.
Following revision by lawyer linguists appointed by the EU Council and the Parliament, the finalised text had to be translated into the various official languages of the European Union. The final version of the directive was published on May 13.
The directive will now be published in the Official Journal of the European Union within the next few days and will enter into force on the 20th day following publication. EU member states will then have two years to transpose the directive into their national legislation.
Detailed regulations and subsidiary legislation to implement the AIFM Directive, so-called Level 2 measures, will be drawn up by the European Commission on the basis of advice provided by the European Securities and Markets Authority.
Last month Esma issued a discussion paper on its proposed approach to the drafting of implementing measures, soliciting views from market participants on the policy options it proposes to recommend to the Commission. Following the delays to the finalisation of the directive’s text, the deadline for Esma to submit its advice has been put back to November 26.
The finalised version of the directive makes clear that the passporting arrangements for EU-domiciled funds run by managers also based within the union will take effect two years after the legislation comes into force, that is, around mid-2013.
According to the timetable set out in the directive, non-EU managers and funds should be able also to gain access to the passport some time after mid-2015, while the current national regimes permitting distribution of alternative funds through private placement arrangements are set to be abolished three years later, from mid-2018 onward.
Use of Luxembourg management companies to access the AIFMD passport
The European Union’s Directive on Alternative Investment Fund Managers is expected to be formally adopted in the coming weeks and to take effect from around June 2013.
The directive will have extensive implications for managers based outside the EU. They will not be able to benefit from the directive’s passporting arrangements for at least another two years, mid-2015 at the earliest, a period during which their only option will be distribution under national private placement rules.
This raises the question of whether non-EU managers of European-domiciled funds such as Luxembourg Specialised Investment Funds could gain access to sophisticated investors in Europe by using a management company established in Luxembourg and able to benefit from the directive’s provisions from 2013.
We are pleased to provide you hereunder with our link to our latest publication, Use of Luxembourg Management Companies to access the AIFMD Passport, which outlines the key issues regarding the establishment or adoption of a Luxembourg management company for SIFs and the delegation of investment management functions to a non-EU manager once the directive comes into effect.
We will continue to cover new developments in the implementation of the directive and the drafting of subsidiary legislation, as well as analyse key aspects of the new rules and their practical application in our AIFM Directive blog.
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Esma seeks market views on AIFM Directive implementation
The European Securities and Markets Authority has issued a discussion paper on its proposed approach to implementing measures of the European Union’s Alternative Investment Fund Managers Directive.
Esma is soliciting views from market participants on the policy options it is proposing to recommend to the European Commission, which is responsible for drafting so-called Level 2 regulations and subsidiary directives setting out the details of how the AIFM Directive should be applied.
Last December the Commission requested advice on Level 2 measures from Esma’s predecessor body, the Committee of European Securities Regulators. Following delays to the finalisation of the directive’s text, the deadline for Esma to submit its advice to the Commission has been put back to November 26.
Due to the broad scope of the directive, the Commission’s request for advice has been divided into four parts. Part I covers general provisions, authorisation and operating conditions, Part II the role of the depositary, Part III transparency requirements and leverage, and Part IV supervision.
The discussion paper notably asks for stakeholders’ views on how to identify the portfolios of alternative investment funds under management by a particular fund manager and the calculation of the total value of assets under management, how leverage influences assets under management, how to determine the value of a fund’s assets under management for a given calendar year, and how to treat potential cases of crossholding among funds.
It seeks the industry’s views on how to treat managers whose total assets occasionally exceed and/or fall below the relevant threshold for authorisation under the directive, and what registration requirements should exist for entities falling below the threshold.
The paper also invites comment on how the obligation on managers to register with national authorities should be implemented, suitable mechanisms for gathering information, and what procedures should exist for small managers to opt in to regulation under the directive.
Market participants have until May 16 to respond to the discussion paper. Contributions should be submitted online at www.esma.europa.eu under the heading ‘Consultations’.
Esma says the responses it receives will help to narrowing down its policy approach and develop a formal proposal for possible implementing measures for the AIFM Directive in the summer of 2011. This proposal will be subject to a public consultation, whose results will be used by Esma to finalise its advice to the Commission.
AIFM Directive set for delay until June
The European Union’s Directive on Alternative Investment Fund Managers is now unlikely to enter into force before June, according to Jonathan Faull, director general of the Directorate General for Internal Market and Services at the European Commission.
In a letter to Carlos Tavares, acting chairman of the newly-established European Securities and Markets Authority (Esma), Faull has indicated that the delay has arisen during the process of finalisation of the legislation.
At the end of 2010, following approval of the legislation by the European Parliament at first reading on November 11, it appeared that the directive would become law in February or March. However, Faull has written that “we have learned from the lawyer linguists of Council and European Parliament that the AIFM Directive will most likely not enter into force before June 2011”.
As a result of the finalisation of the legislation being “considerably later than originally expected”, the Commission has extended the deadline for Esma to provide technical advice on level 2 measures under the directive by two months, until November 16 this year.
AIFM Directive guide - a new environment for alternative funds in Europe
The European Union’s Directive on Alternative Investment Fund Managers, which was given a first reading by the European Parliament in November, is now completing the final stages of the legislative process and is set to become law during the first quarter of this year.
It will take effect following the two-year period given to EU member states to transpose the directive into national law. Over that period various pieces of subsidiary legislation will be drawn up to add detail to the framework agreed by the EU.
We are pleased to provide you hereunder with our guide to the directive, A new environment for alternative funds in Europe, which seeks to highlight the motivations behind the legislation and the key provisions it contains.
We believe that the introduction of the directive, which will cover all management and marketing of alternative funds of all kinds within the European Union, will open up new opportunities for managers, particularly through the establishment of a Ucits-style passport that will enable them to target sophisticated investors throughout the 27-member EU.
Over the coming months we will cover new developments in implementation of the directive and subsidiary legislation and analyse in greater depth various aspects of the new rules in our AIFM Directive blog. In the meantime, please contact us if you would like to discuss in greater detail elements and issues regarding the directive and how it may affect your business.
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AIFM Directive expected to become law in March
The EU’s Directive on Alternative Investment Fund Managers, which was given a first reading by the European Parliament on November 11, is set to become law in February or more probably March.
The text agreed by the European Parliament has first undergone a process of legal and linguistic revision to correct any typographical or drafting errors and to ensure the internal consistency of its provisions. The next step is translation of the finalised text into the various official languages of the European Union.
Once this is completed the directive will be formally adopted by the EU’s Economic and Financial Affairs Council. The Ecofin Council is scheduled to meet under the presidency of Hungary on January 18, but according to a council spokesman the AIFM Directive is more likely to be adopted at the body’s next meeting, on February 15.
A few days after its adoption the directive will be published in the Official Journal of the European Union, and will enter into force on the 20th day following publication. EU member states will then have two years to transpose the directive into their national legislation.
European Parliament votes overwhelmingly to enact AIFM Directive
Meeting in Brussels, the European Parliament has voted on 11 November to give a first reading to the Directive on Alternative Investment Fund Managers in the form agreed last month by representatives of the Parliament, the European Commission and EU member states. The directive was approved by 513 votes to 92, with three abstentions.
The accord by the so-called ‘trialogue’ meeting on October 26 followed a compromise drawn up by Belgium, which holds the rotating presidency of the EU Council, and approved by EU economic affairs and finance ministers on October 19.
The legislative process has taken more than 18 months since the European Commission published the first proposal for the directive on April 30, 2009, and has required a succession of drafts. The process was temporarily stalled in May when the Parliament’s Economic and Monetary Affairs Committee and the Council of EU Economic affairs and Finance Minister approved conflicting versions of the directive.
The compromise text introduces an EU marketing ‘passport’ for alternative fund managers based within the 27-member union. After a two-year transition period, managers and funds based in non-EU countries will also be able to obtain a passport, subject to their adherence to the terms of the directive and regulatory co-operation on the part of their host jurisdictions as well as compliance with international standards on money-laundering prevention and tax transparency.
It also preserves the existing system of country-by-country private placement rules for distribution of alternative funds by non-EU managers for at least five years, or until the Commission and the new European Securities and Markets Authority determine that the passport system is operating satisfactorily.
The agreed version of the directive also imposes strict rules on the responsibility of depositories providing custody services to alternative funds, introduces measures designed to prevent ‘asset stripping’ by private equity firms, and sets new requirements on remuneration of alternative managers. It will come into force by 2013 once transposed into national law by EU member states.
A guide to the AIFM directive compromise text – update on third country rules
Luxembourg’s fund industry is looking forward to the finalisation of the proposed Directive on Alternative Investment Fund Managers, which will create a single market for the marketing of alternative funds to professional investors throughout the European Union. Agreement on the directive after some 18 months of debate and negotiation is set to open up new opportunities for Luxembourg as a domicile and servicing centre for alternative funds, now that EU and institutions have resolved a number of outstanding issues, notably the treatment under the directive of managers and funds based in countries outside the union.
Following the publication of a first draft of the directive by the European Commission on April 30, 2009, the directive has been subject to repeated redrafting. In May this year the European Parliament and the European Council approved versions of the text that differed significantly on various issues, which required representatives of the Parliament, Council and Commission to conduct ‘trialogue’ discussions on a compromise version to the Parliament for a first reading.
Two-year transition period for non-EU managers and funds
The text agreed by the trialogue meeting on October 26 is largely based on a series of proposals from Belgium, which holds the presidency of the Council of Ministers. The new text meets concerns on the part of some member states about access to their markets for non-EU managers and funds by introducing a two-year transition period before such access is granted and by giving the future European Securities and Markets Authority (Esma, successor to the Committee of European Securities Regulators) oversight authority, power to decide authorisation questions on which regulators from different EU member states disagree, and a co-ordinating role in the exchange of information between national regulatory authorities within the EU.
The draft directive now states that a review mechanism has been introduced to reflect the “uncertain and difficult to predict … practical consequences and possible difficulties” of offering a harmonised regulatory framework and European internal market for non-EU alternative fund managers performing management and/or marketing activities within the EU, and for EU managers of non-EU funds.
Managers in either of these cases are intended to benefit from a harmonised European passport regime following the two-year transition period, after the entry into force of a Commission ‘delegated act’. The draft directive says the harmonised regime will coexist for a further period of three years with existing national regimes that allow alternative funds to be distributed through private placement arrangements on a country-by-country basis and permit non-EU managers to manage funds and/or market them to investors within their territory, subject to certain minimum requirements. The stated intention is that the Commission will terminate these national regimes at the end of this total period of five years.
In addition, four years after the final deadline for transposition of the directive into the national law of member states, which is expected to be in early 2013, the Commission is to review that application and scope of the directive in the light of its stated objectives and will assess whether this harmonised approach to regulation of alternative funds has caused any major ongoing market disruption and whether it is operating effectively in terms of the principles of the EU single market and the goal of creating a level playing field for EU and non-EU managers and funds.
Application to all non-Ucits funds
The directive will apply to managers of all funds not covered by the successive Ucits directives governing retail funds eligible for cross-border distribution, whether open- or closed-ended, whatever their legal form and whether or not they are listed. Its remit excludes managers of private wealth such as family offices and of holding companies (although this does not exempt private equity firms or managers of listed fund vehicles), pension funds or employee benefit schemes, supranational institutions, central banks, public social security and pension bodies, securitisation SPVs, insurance contracts and joint ventures.
Subject to various exemptions and restrictions, the AIFM Directive will apply to all European-based managers of alternative funds, irrespective of whether the funds are domiciled within the EU or outside and whether they are marketed within the EU or not; non-EU managers of EU-domiciled funds; and non-European managers marketing EU or non-EU funds within the union.
EU-based managers of non-EU funds
The rules relating to third-country managers and funds are set out in Chapter VII of the directive, articles 34 to 40. Article 34 stipulates that an EU manager may manage non-EU funds that are not marketed within the union as long as the manager complies with the terms of the directive apart for its depositary and annual report requirements in relation to those funds.
In addition, co-operation arrangements must be in place between the supervisory authorities of the manager’s home member state and the regulator of the jurisdiction in which the fund is domiciled in order to ensure “at least an efficient exchange of information” to facilitate regulation of the manager at home. As with other provisions regarding non-EU domiciled funds, the directive requires the Commission to enact measures setting out a common framework for the establishment of co-operation arrangements with third countries, and Esma to draw up guidelines for the application of these measures adopted by the Commission.
EU managers authorised under the directive may market non-EU funds (or EU-domiciled feeder funds investing with non-EU master funds) under Article 35. In addition to complying with all the terms of the directive apart from Chapter VI, which governs the pan-European marketing of EU-domiciled funds by EU managers, the conditions include co-operation arrangements between the manager’s home regulator and that of the fund domicile, certification that the fund jurisdiction meets Financial Action Task Force standards on countering money laundering and terrorist financing, and OECD-standard tax information exchange agreements between the fund domicile and the manager’s home member state as well as all other EU countries in which the fund is to be marketed.
Notification of marketing intentions
If an EU country targeted for marketing of the fund disagrees with the manager’s home regulator on the fund domicile’s co-operation arrangements or money laundering compliance, the issue may be referred to Esma for adjudication.
An EU manager seeking to market a non-EU fund at home may only be refused if the manager or its management of the fund fails to comply with the terms of the directive, otherwise it may begin marketing on receipt of confirmation from the local regulator (a decision is due within 20 working days of the submission notifying its intention to the regulator).
Similarly, the home regulator must transmit notification of marketing intentions to other EU member states within 20 working days of reception and the manager may begin marketing once it has been notified of the transmission. Marketing in EU countries outside the manager’s home state is subject to national rules on marketing and distribution including measures to prevent the fund being marketed to retail investors. Managers should give notice in advance where possible of any change in the information provided in marketing notifications. If the changes mean the management of the fund no longer complies with the directive, marketing authorisation may be withdrawn.
Member states may also – temporarily – continue to allow non-EU funds to be marketed on their territory without a passport (Article 36) as long as depository arrangements are in place equivalent to those stipulated by the directive for EU funds, as well as co-operation arrangements with the fund domicile and certification of AML compliance. These funds may be subject to stricter rules than those for equivalent EU funds.
Non-EU managers of EU-domiciled funds
Under Article 37, non-EU managers intending to manage EU-based alternative funds or market funds they manage within the EU must receive prior authorisation from a “member state of reference”, which plays the same role as the home state of EU managers. They must appoint a legal representative in the member state of reference to act as a contact point in the EU and conduit for any official correspondence with EU regulators and investors, as well as carrying out compliance functions relating to fund management and marketing together with the manager. The member state of reference may be changed if the manager’s marketing strategy changes within two years in a way that would have resulted in a different designation.
In addition, the non-EU manager’s home jurisdiction must have concluded co-operation arrangements with the member state of reference, the EU fund domicile and the EU countries where the fund(s) are to be marketed, meet FATF money laundering and terrorist finance standards, and have in place a Tiea with the member state of reference. Again, any dispute over compliance with these conditions may ultimately be decided by Esma.
The member state of reference is determined according to where the manager’s funds are domiciled (if within the EU) or where they will be marketed. If there are several possibilities, the manager may submit a request to all the member states that would qualify, which will determine the choice between them within a month (or the manager can choose if they fail to do so). A member state that disagrees with the manager’s determination with its member state of reference can refer the matter to Esma for review.
Articles 38 and 39 set out the conditions for non-EU managers seeking to market EU and non-EU funds respectively within the European Union with a passport. In each case, the regulator of the member state of reference is subject to the same 20-working day deadline for a decision on marketing within the member state of reference or transmission of a notification to other EU member states. Non-EU funds are subject to the fund domicile having co-operation arrangements with the member state of reference, AML and terrorist financing compliance, and Tieas with the member state of reference and all EU target markets. Again, managers should give advance notice of any change in the information in marketing notifications.
Article 39bis of the directive sets out the requirements for non-EU managers to manage funds domiciled in EU countries other than their member state of reference either directly or through establishment of a branch. Finally, under article 40 EU member states may allow non-EU managers to market non-EU funds on their territory subject to co-operation arrangements, AML compliance and the directive’s disclosure and reporting rules.
Implications for non-EU managers targeting EU investors
What do these proposals mean for managers based outside the EU that currently access European investors through national private placement regimes? They can continue to do so, subject to certain minimum EU requirements and local rules, for at least five years, or until the European Commission decides to terminate this channel after reviewing the effectiveness of the passport regime and its ability to create a level playing field for managers and funds inside or outside the EU.
The compromise version of the directive upholds the principle that the European marketing passport should be available to non-EU managers and funds as long as they are subject to the same or equivalent regulatory requirements as their EU counterparts and that the jurisdiction in which they are domiciled meet FATF money laundering standard and set up regulatory co-operation agreements as well as conclude OECD-standard tax information exchange agreements with relevant EU countries.
However, there is much about the way the directive is to be implemented that is unclear, notably the mechanisms for establishing and operating co-operation agreements between EU member states and outside jurisdictions. These will be drawn up by the European Commission and Esma, the latter a body that does not yet exist.
In addition, the Commission ‘delegated acts’ required to open up the passport to non-EU managers and to abolish national private placement regimes are subject to vetoes, in theory at least, by the European Council and European Parliament. Unlike previous drafts, the compromise text makes no mention of “passive marketing”, but the preamble to the document sets out the principle that EU professional investors should remain free to invest on their own initiative in alternative funds regardless of where the manager or fund is based.
Implications of an EU or non-EU fund domicile
Take the example of a Brazilian manager seeking to market its fund to French pension schemes. If the fund were domiciled in the Cayman Islands, this would require that the manager comply with the directive and probably in this case adopt France as its member state of reference, in charge of regulating the manager’s compliance with the directive. In addition the Brazilian regulator, the CVM, would need a co-operation agreement with France’s AMF, as would Cima, the Cayman regulator, and both Brazil and Cayman would need to satisfy France of their compliance with FATF standards as well as having Tieas in place with France.
Were the manager to offer French institutions a Luxembourg-domiciled SIF, for example, rather than a Cayman fund, these additional conditions regarding the fund domicile would not be necessary, but in this case the member state of reference – the manager’s de facto regulator for funds offered within the EU – might instead be Luxembourg. Seeking to access investors in additional EU markets would be easier using a Luxembourg fund because no additional agreements between those regulators and the fund domicile would be necessary.
The current timetable for the directive envisages that the legislation would come into force at the beginning of 2011. Now that the final stages of the legislation procedure seem to be underway, non-EU managers can start examining the best methods of accessing European investors up to 2018 and beyond, and the potential role for Luxembourg in the creation of a level playing field for managers and funds both within and outside Europe.
