The European Securities and Markets Authority has published on October 1^st the final guidelines on the reporting obligations for alternative fund managers under Articles 3 and 24 the European Union’s Alternative Investment Fund Managers Directive, which took effect on July 22, after incorporating changes arising from a consultation exercise with market stakeholders in June.
The guidelines set out how managers of alternative investment vehicles including hedge funds, private equity and real estate funds will be required to report certain information regularly to national regulators. They clarify provisions of the AIFM Directive on the information required, which aims to provide supervisors with a more comprehensive and consistent oversight of managers’ activities.
At the same time, ESMA has published an opinion on transparency issues in which it proposes introducing additional periodic reporting, including information such as value at risk measures for alternative funds, or the number of transactions carried out using high-frequency algorithmic trading techniques.
ESMA chairman Steven Maijoor says that now the directive has come into force, both alternative fund managers and national supervisors need to prepare for the introduction of regulatory filings that will enable supervisors to monitor the systemic risks engendered by alternative funds.
Majoor says the authority’s guidelines and its opinion on future steps will contribute to the standardisation of reporting throughout the EU and facilitate exchange of information between national regulators, ESMA and the European Systemic Risk Board.
The AIFM Directive requires managers to report on their investment strategies, exposure and portfolio concentrations to national regulators. The guidelines specify that key elements of the information that must be provided for each alternative fund include the breakdown of investment strategies followed by the fund, the principal markets and instruments in which it trades, its total value of assets under management of each fund, its turnover, and – most importantly – its principal exposures and portfolio concentration.
In addition, the opinion issued by ESMA proposes that managers be required to report additional information on the risk profile of each fund that they manage, including its risk measures, liquidity profile and leverage.
The guidelines document incorporates ESMA’s response to the consultation feedback. For instance, it has taken note of industry members who disagreed with its recommendation that existing managers of alternative funds should report for the first time by January 31, 2014 for the period between July 23 and December 31 this year, and by February 15 for managers of funds of funds.
The respondents argued that this prescription was not consistent with the transitional provisions laid down in Article 61(1) of the directive, which allow existing alternative fund managers up to one year to come into compliance, depending on the arrangements set out by their national legislation and regulators.
ESMA says it is now adopting a more principles-based approach and recommends that the nature and timing of existing managers’ reporting obligations for the period beginning on July 2013 should take into account the directive’s transitional provisions, the European Commission’s interpretation of Article 61(1) as set out in its Q&A document, and their authorisation status.
In response to requests from industry members, ESMA has clarified its position on when the period on which managers start reporting to their national regulators should begin, recommending the first day of the quarter after they have information to report until the end of the first reporting period. So a manager required to report half-yearly and that has information to report as from February 15 would start reporting information to its regulator from April 1 to June 30.
The authority has also clarified that managers should report to their regulators only once per reporting period, for the entire period. And it recommends that if managers do not have any information to report on their funds, for example if there is a delay between the authorisation or registration of a new manager and its actual start of activity, or between the creation of a fund and its first investments, managers should still report, indicating that no information is available.
ESMA has also taken into account the views of respondents who disagreed with its proposal to apply the reporting obligations of Article 24(2) of the directive to non-EU master funds not marketed in the union when a feeder fund to the master is domiciled or marketed in the EU. This article deals with reporting of funds’ liquidity issues, risk profile and management, asset types and stress test results. The respondents argued that through this position, ESMA was modifying the scope of the directive through guidelines, which it should not do.
In response, ESMA has omitted this recommendation from the final guidelines. However, it says it remains concerned by the risk in regulators not receiving the information covered in Article 24(2) for non-EU master funds in these circumstances. It therefore has included this information in its separate opinion to regulators on collection of information under the AIFM Directive, with the proviso that ESMA does not expect this information if the non-EU master fund and the feeder funds do not have the same manager.
Most respondents disagreed with ESMA’s introduction of reporting of further measures of risk for both legal and operational reasons, saying this would be an additional burden for managers that already face significant reporting obligations.
A number of respondents argued that if ESMA insisted on the reporting of VaR as an additional measure of risk, managers should be able to report other types of VaR, and that ESMA should consider further alignment with the risk measurement methods prescribed under the UCITS regime. The authority has therefore limited the guidelines to the measures of risk set out in the Commission’s Level 2 regulation.
However, ESMA remains convinced that where relevant, depending on the predominant type of the fund in question (for instance hedge funds), information on their VaR should be collected by regulators. It also believes that, where relevant to the investment strategy, further information such as the portfolio’s sensitivity to change in exchange rates or commodity prices would be useful to regulators. These additional measures of risk are therefore included in the separate opinion.
ESMA has also published on its web site at http://www.esma.europa.eu/page/Investment-management-0 addition technical supporting material, comprising a consolidated reporting template and detailed IT guidance for filing of the XML and the XSD schema, which will facilitate managers’ reporting to their local regulators.
The guidelines are now in the process of being translated into the EU’s official languages. National regulators will have two months from the date of the publication of the translations on ESMA’s web site to confirm to the authority whether they are already complying with the guidelines or intend to do so by incorporating them into their supervisory practices.
The CSSF has announced in press release of 8 October that it will soon publish a circular that includes practical aspects of reporting and clarification on the information to be reported to the Luxembourg regulator, as well as the timing of reporting via the reporting template stipulated in Appendix IV of the European Commission’s Level 2 regulation of December 19, 2012. The CSSF invites remarks, questions and contributions from industry members and other interested parties at aifm@cssf.lu.

The European Securities and Markets Authority has published on August 1 an opinion on what rules should apply to alternative fund managers and their cross-border marketing of funds where this might be affected by the failure of European Union member states to adopt the Alternative Investment Fund Managers Directive into national law on time.
According to a survey by Ernst & Young and the Alternative Investment Management Association, only 12 out of 27 member states had transposed the directive into their national legislation by July 29, a week after the formal deadline of July 22 for all countries to do so and the date of entry into effect of the AIFMD’s provisions.
ESMA was obliged to take the same course two years ago in order to offer guidance to fund managers and regulators affected by the failure of several member states to adopt the UCITS IV directive on time, a particular problem given the widespread cross-border marketing of retail funds throughout the EU.
Essentially, ESMA argues that managers should not be impeded from managing or marketing funds in other EU member states simply because those countries have failed to meet their obligation to transpose the AIFMD into national law within the deadline.
ESMA notes that the failure of some member states to transpose the directive by the deadline can create difficulties where national regulators do not have the legislative framework in place to allow proper implementation of the rights and obligations conferred under the directive.
Without prejudice to any initiatives that may be taken by the European Commission regarding late transposition of the AIFMD, ESMA says its aim is to address the situation at an operational level to minimise as far as possible the impact on the fund industry and investors that might result from some countries having adopted the legislation and others not.
Specifically, it proposes practical arrangements for activities under articles 31 and 32 of the directive, covering cross-border marketing of funds by a manager with an AIFMD passport, and Article 33, regarding the management company passport, involving one member state that has not transposed the AIFMD.
ESMA acknowledges that not all situations arising from non-transposition can be accommodated by way of practical arrangements that are legally sound, but it has identified various issues that can be addressed through practical arrangements between regulators.
The first problem it highlights is where a manager in an EU member state where the directive has been transposed may not be able to manage a fund established in another member state that has not adopted the directive.
Secondly, managers and regulators in members states that have transposed the AIFMD may face difficulties notifying the marketing of EU-domiciled funds, whether or not set up in the manager’s own home member state, to regulators in countries that have not adopted the directive.
ESMA says the arrangements proposed are based on the jurisprudence of the EU Court of Justice regarding the direct effect of provisions contained in relevant directives. According to Article 288 of the Treaty on the Functioning of the European Union, a directive “is binding as to the result to be achieved, on each member state to which it is addressed, but shall leave to the national authorities the choice of form and methods”.
Member states are obliged, through the transposition process, to create a legal framework under which the rights and obligations arising from a directive may be recognised with sufficient clarity and certainty to enable citizens to invoke them.
This means EU countries are legally obliged to reconcile their legal order with the objectives of a directive at the end of the transposition period. The EU Court of Justice has ruled that member states are liable for damages in the event of loss resulting from failure to transpose a directive in whole or in part.
Regarding the marketing of EU alternative funds in countries that have not adopted the directive, with respect to articles 31 and 32, ESMA’s opinion is that if the manager’s home member state has transposed the AIFMD, neither the home regulator of the manager nor the regulator of the country in which the fund is to be marketed may refuse marketing notification because the directive has not been adopted in the latter member state, irrespective of whether the marketing is carried out under freedom of cross-border service provision or via a branch.
As regards the management passport provisions in Article 33 of the directive, ESMA’s opinion is that managers established in a member state that has transposed the AIFMD should be able to manage an EU-domiciled fund via the management passport, either on a freedom of services basis or through a branch, in a member state where the directive has not been transposed.
This principle should apply irrespective of the provisions currently in place in the jurisdiction in the country where the fund is to be managed, since the relevant provisions of the directive are of a self-executing nature, provided the manager is authorised to manage the particular type of fund in accordance with Article 33(1) of the AIFMD. Any local restrictions on managers that are not in accordance with the directive should not apply.

 Luxembourg’s financial regulator, the Financial Sector Supervisory Authority, has published practical guidance for alternative fund managers on how they should approach the issue of becoming registered or authorised under the Alternative Investment Fund Managers Directive, which was transposed into Luxembourg law through legislation that came into force on July 15.
The CSSF says any entity established in Luxembourg that could potentially be categorised as an alternative manager under the new law must conduct a self-assessment of whether it qualifies, and if so, whether it will be subject to a requirement for registration or authorisation.
The Luxembourg legislation stipulates that the external manager of an alternative fund, or where relevant a self-managed fund itself, must be registered or authorised. Non-regulated alternative funds, vehicles structured as Part II funds under the grand duchy’s 2010 investment funds law, Specialised Investment Funds and SICARs must all conduct a self-investment process to determine whether they qualify as self-managed funds (internal AIFMs) subject to registration or authorisation.
An entity that requires registration under the directive, falling outside the asset thresholds for full authorisation, must register with the CSSF immediately. Managers subject to authorisation must apply to the CSSF by July 22, 2014. Forms for registration or authorisation can be downloaded from the CSSF website at http://www.cssf.lu/aifm/.
All managers must comply with the reporting requirements set out in Article 3 of the Luxembourg law (for entities subject to registration) or Article 22 (those subject to full authorisation).
The CSSF says practical aspects of reporting and clarification on the information to be reported to the regulator as well as its timing, via the reporting template promised by Annex IV of the European Commission’s Level 2 regulation published last December, are currently being finalised by the European Securities and Markets Authority. They should be made public before the end of the year.
Once Luxembourg-based alternative managers have conducted their self-assessment, they must report back to the CSSF at the latest by August 16 with information comprising the name and address of the manager, whether it is an external fund manager or a self-managed fund, and whether it is required to be registered or authorised by the CSSF, by e-mail to aifm@cssf.lu.

The European Securities and Markets Authority has approved seven further framework agreements for co-operation arrangements between European Union securities regulators and global counterparts with responsibility for oversight of alternative investment funds including hedge funds, private equity and real estate funds.
ESMA’s Board of Supervisors has approved additional memorandums of understanding with regulators from five countries, including the US Commodity Futures Trading Commission, ahead of the introduction of the Alternative Investment Fund Managers Directive, which takes effect on Monday, July 22.
ESMA has now negotiated a total of 38 co-operation agreements on behalf of the 31 EU and European Economic Area national regulators responsible for securities markets supervision, after approving 31 MoUs in May. The agreements provide for the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of each jurisdiction’s supervisory laws.
The agreements cover third-country alternative fund managers that market funds in the EU and EU-based managers that manage or market funds outside the EU. The agreements also cover co-operation in the cross-border supervision of depositaries and other providers of outsources services to alternative managers.
EU national securities regulators are in the process of signing MoUs with outside jurisdictions relevant to their market. The existence of co-operation arrangements between EU and non-EU regulators is a precondition for allowing managers from third countries access to EU markets or to perform fund management tasks delegated by EU managers under the AIFM Directive.
Applicable from July, the agreements will allow the cross-border marketing of alternative funds to professional investors in other jurisdictions jurisdictions. In addition, non-EU jurisdiction must not be classified by the Financial Action Task Force as unco-operative on efforts to combat money laundering and the financing of terrorism, and must have co-operation agreements in place with EU member states enabling the exchange of information on tax matters.
The ESMA MoUs follow the IOSCO Principles on Cross-Border Supervisory Co-operation and complement the terms and conditions of the 2002 IOSCO Multilateral MoU Concerning Consultation and Co-operation and the Exchange of Information.
ESMA originally contacted all the regulators that had signed the IOSCO Multilateral MoU and has now approved MoUs with the 42 bodies that responded. It continues to negotiate with the Chinese securities market regulator authority.
The new agreements approved by ESMA are with the Financial Services Agency, Ministry of Economy, Trade and Industry and Ministry of Agriculture, Forestry and Fisheries in Japan, the Securities Commission (Malaysia), National Banking and Securities Commission (Mexico), Securities Commission of the Bahamas, and the CFTC.

The draft legislation transposing the European Union’s Alternative Investment Fund Managers Directive into Luxembourg law was approved by the grand duchy’s Chamber of Deputies on the morning of Wednesday, July 10.
With the deadline of July 22 for member states to adopt the directive into national law approaching fast, Luxembourg is now set to become one of a minority of EU countries to implement the AIFM Directive on time.
The government has requested a dispensation from proceeding with the optional second vote on the legislation in the Chamber of Deputies. According to the expected timetable, the legislation will receive the assent of Grand Duke Henri and be published in the official gazette, the Mémorial, on July 17, after which it will become law.
Bill of law no. 6471 not only incorporates the directive but introduces into national law a new regime to be known as the société en commandite special, or special limited partnership. It also provides greater clarification on the taxation of carried interest.
It also contains assorted measures revising and updating various elements of Luxembourg’s investment fund regulation in line with the AIFM Directive provisions, notably the 2010 legislation adopting the Ucits IV directive into national law. In total 14 existing laws will be amended, including the legislation governing Specialised Investment Funds (SIFs) and Risk Capital Investment Companies (Sicars).
The timing of the Chamber of Deputies is critical since the governing coalition is expected to resign over an unrelated issue, resulting in the dissolution of parliament and the calling of an early general election probably in October.
The original draft of the law provided that it would come into force on the first day of the month following its publication of the Mémorial, but it was amended on June 28 to change the date of entry into force to the day of publication, to ensure that the July 22 deadline for transposition of the deadline would not be missed.
The approval of the legislation means that Luxembourg will join Ireland, Malta, European Economic Area member Liechtenstein and possibly a few others in meeting the deadline. The UK and France are also close to finalising the legislation; Germany has done so but a critical related tax law has been held up by deadlock between the Berlin government and federal states.

Luxembourg’s financial regulator, the Financial Sector Supervisory Authority (CSSF), has published a series of Frequently Asked Questions (FAQs ) regarding the draft legislation that will implement the European Union’s Alternative Investment Fund Managers Directive into national law and the European Commission’s implementing regulation.
The CSSF has decided to publish the FAQs to provide managers with greater clarity on the impact of the directive, and especially provisions regarding the transitional period of a year up to July 22, 2014, even though Luxembourg’s Chamber of Deputies has not yet voted the draft legislation into law.
The CSSF says the FAQs will be regularly updated and that it may if need be change its approach to some of the issues they deal with. This emphasises that the document is purely designed to provide guidance and does not offer managers legal certainty, especially before the draft bill is enacted into law.
The Commission’s ‘Level 2’ delegated regulation, No 231/2013, was issued on December 19, 2012 and will have effect from July 22 this year, the deadline for transposition of the directive into the national law of EU member states.
Bill of law no. 6471, which transposes the AIFM Directive and also introduces the new Special Limited Partnership into Luxembourg law, was placed before parliament on August 24, 2012. The regulator says it expects the legislation to be adopted “in a near future”, which is understood to mean before July 22, 2013.
When can managers start applying for authorisation under the AIFMD?
The CSSF has announced that it has been open to the submission of applications for authorisation as an alternative investment fund manager under the directive since March 1. It has provided details on its web site of the procedure for submission of an authorisation file at http://www.cssf.lu/en/forms/. Managers in activity before July 22 this year have until July 22, 2014 to submit an application for AIFMD authorisation to the CSSF.
Who qualifies for the CSSF’s transitional provisions?
The regulator says in its FAQs that transitional provisions apply only to managers in existence and carrying out management of alternative funds before July 22, 2013. Managers that have not yet launched management activities must complete authorisation (or registration, if they are below the asset thresholds set out in the directive) before doing so.
Existing managers are required to take “all necessary measures” – that is, “expend their best efforts” – to comply with the provisions of the Luxembourg draft law regarding general principles, operating conditions, organisational requirements, conflicts of interest, remuneration, risk management, liquidity management rules, securitisation rules, valuation and delegation rules by July 22, 2014, or from the moment of authorisation by the CSSF if earlier.
Do the transitional provisions work differently for managers and funds?
The regulator draws a distinction with regard to the transitional provisions between the regime applicable to managers and the impact of this on alternative investment funds set up under one of Luxembourg’s ‘product laws’ – the 2010 (UCITS IV) investment fund legislation for Part II funds, the SIF law of 2007 and the SICAR law of 2004.
From the moment a manager is authorised under the AIFMD implementation law, it must ensure that the funds it manages take all necessary measures to comply with the rules introduced by the respective product law regarding the annual report, valuation rules, disclosure to investors and depositary rules.
Luxembourg’s AIFMD implementation law modifies these product laws to bring them into line with the requirements of the directive. All funds set up under one of these laws before July 22, 2013 and that qualify as alternative investment funds under the directive, and any such funds established over the subsequent 12 months to July 22, 2014, can appoint a manager that benefits from the transitional arrangements – that is, they do not need to seek authorisation before July 22, 2014.
Once a fund has appointed a manager authorised as AIFM by the CSSF, it must take all necessary measures to comply with the product law rules on the annual report, valuation rules, disclosure to investors and depositary rules.
When do funds covered by the transitional arrangements have to comply in full?
All qualifying alternative funds benefiting from the transitional provisions must submit to the CSSF by April 1, 2014 information regarding its compliance with the AIFMD product rules as of July 22, 2014, as opposed to the previously applicable product law rules.
The transitional rules also apply to any new sub-fund created as part of an umbrella fund established under one of the product laws before July 22, 2013.
What is the situation regarding private placement distribution in Luxembourg?
The CSSF also notes that managers established in both EU and non-EU countries will remain able to market their funds in Luxembourg under the country’s existing private placement regime, unaffected by the provisions of the AIFMD implementation law, until July 22, 2014.
After this date, all managers and funds must comply with the directive from the moment of their establishment. The directive excludes EU managers marketing in member states through private placement arrangements from this point on.
What does all this mean for Luxembourg-based managers and funds?
• Alternative managers that already exist and are managing funds as of July 22 this year, including self-managed alternative funds, have a further 12 months to apply for authorisation from the CSSF.
• Any such managers or alternative self-managed funds established or beginning activity after July 22 this year must be authorised and comply with the directive immediately.
• Regulated alternative funds with an external manager – SIFs, SICARs and Part II Funds – in existence and regulated before July 22 are only required to comply with the AIFMD product rules once their manager has obtained authorisation under the AIFM Directive, or by July 22, 2014 at the latest.
• Funds established on or after July 22 but that have external managers in existence and active before that date need to comply with the product rules only once the manager is authorised, or by July 22, 2014 at the latest.
• All other externally managed alternative funds established after July 22 – i.e. those whose managers do not enjoy an extra year’s transitional period to obtain authorisation – must comply with the AIFMD product rules immediately.

The European Securities and Markets Authority published on May 24 its final report on guidelines for key concepts under the Alternative Investment Fund Managers Directive (please see below for a copy under related PDFs). The report reflects feedback received by ESMA following its publication of a discussion paper on key concepts and types of alternative fund managers on February 23 last year, and in particular a consultation paper issued on December 19.
The consultation paper, which received 37 responses from asset managers, banks, law firms, industry associations, a private equity administrator and public authorities, set out formal proposals for guidelines ensuring common, uniform and consistent application of the concepts in the definition of alternative investment funds in Article 4(1)(a) of the directive by providing clarification on each of these concepts. An important factor is avoiding regulatory arbitrage resulting from national regulators interpreting terms used in the directive in different ways.
A cost-benefit analysis conducted by ESMA estimates that the introduction of the guidelines will make relatively little impact on the number of EU-domiciled funds that will fall under the directive according to the definition in the legislative text, estimated at between 25,650 and 28,975. The authority believes there will be “no material impact” on the Luxembourg-domiciled funds affected, which it says number at least 2,000.
ESMA believes 50 additional funds may fall under the directive as a result in Finland, around 1,600 in France on top of up to 12,000, and no more than 33 in Italy. Up to 150 funds could be captured in or excluded from the scope of the directive in the Netherlands, and about 50 could be excluded in Portugal.
The authority says the guidelines should bring clarity to national regulators and to managers, prevent managers falling outside reporting obligations on leverage used to assess systemic risk, enable smoother application of the AIFMD passport for both EU and (after July 2015) non-EU managers, and minimise the risk on entities not targeted by the legislation falling under its scope.
The new report sets out the final form of the guidelines to be issued to national regulators. These will be translated into the official languages of the EU and the final texts be published on the ESMA website. The deadline for reporting requirements will be two months following the publication of the translations and the guidelines will apply from this date.