The post Proposed changes to the AIFM and UCITS Directives first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>| Of relevance to: | All UCITS Management Companies, AIFMs and those managing AIFs |
| Key date: | Adoption planned by May 2019 |
The European Commission (“EC”) has published a proposed directive and a proposed regulation amending Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMs”) and Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (“UCITS”) to facilitate cross-border marketing of funds, including pre-marketing under the AIFM Directive.
The EC has adopted a package of measures to deepen the Capital Markets Union (“CMU”), along with publishing the Communication “Completing Capital Markets Union by 2019 – time to accelerate delivery“. The EC is committed to put in place all building blocks of the CMU by mid-2019. The measures presented here and the remaining CMU proposals that will be presented by May 2018 make it possible that legislation can be adopted before European Parliament elections in mid-2019.
The package includes:
This article will concentrate on the first bullet point; please contact Complyport should you require further information on the other four bullet points. We note there is no mention of the Markets in Financial Instruments Directive (“MiFID”) in the package.
The EU have recognised that regulatory barriers, namely EU Member States’ marketing requirements, regulatory fees and administrative and notification requirements, currently represent a significant disincentive to the cross-border distribution of investment funds in the EU.
The proposed Directive amends certain provisions in the AIFM Directive and the UCITS Directive with the purpose of reducing those barriers. The new measures are expected to reduce the cost for fund managers of operating cross-border and should support more cross-border marketing of investment funds.
The EC also recognise that such provisions have been identified as burdensome or insufficiently clear and allowed the creation of additional requirements (‘gold plating’) when transposed by Member States. These amendments are consistent with the objectives of the AIFM Directive and the UCITS Directive, which aim to establish a single market for investment funds and facilitate the cross-border distribution of investment funds. The proposal also aligns the rules between the different legislative frameworks for investment funds. The EC believes consistency with existing policy provisions is therefore safeguarded and that increased competition will help to give investors more choice and better value, while safeguarding a high level of investor protection.
The EC states that investment funds are an important tool to channel private savings into the economy and increase funding possibilities for companies; the EU investment funds market amounts totals EUR 14.3 trillion. However, the EC believes this market has not yet achieved its full potential.
Only just over a third (37%) of UCITS funds and around 3% of AIFs are registered for sale in more than three Member States. This appears to be due to regulatory barriers that currently hinder the cross-border distribution of investment funds.
The proposed changes aim to remove these barriers for all kinds of investment funds; making cross-border distribution simpler, quicker and cheaper.
A pre-marketing definition is added to Article 4(1): ‘a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established’.
A new Article 30a lays down the conditions under which an EU AIFM can engage in pre-marketing activities as the EC considers it important to provide sufficient safeguards against potential circumvention of the requirements of the AIFM Directive that apply when marketing AIFs in the home Member State or across a border in another Member State. An AIFM is therefore allowed to test an investment idea or an investment strategy with professional investors but may not, as prescribed by the new Article 30a, promote an established AIF without notification. Moreover, when professional investors revert to the AIFM following their pre-marketing activities, a subscription to the units or shares of an AIF that is ultimately established or of a similar AIF managed by that AIFM will be considered the result of marketing.
Article 32a is inserted to complement the notification procedures with the procedure and conditions for AIFMs who wish to discontinue their marketing activities in a particular Member State. An AIFM can be authorised to de-notify the marketing of an EU AIF it manages only if there are a maximum of 10 investors who hold up to 1% of assets under management of this AIF in an identified Member State. The AIFM must notify competent authorities of its home Member State how it fulfils the conditions for de-notification and for a public notice of the de-notification. The AIFM must also notify the authorities of the offers presented to the investors to repurchase units and shares of the AIF that is no longer going to be marketed in their Member State. All transparency requirements that investors must fulfil pursuant to the AIFM Directive will continue to apply to investors who retain their investment after de-notification of the marketing activities in the selected Member State.
Article 43a is inserted to ensure a consistent treatment of retail investors regardless of the type of fund in which they decide to invest. Where Member States allow AIFMs to market units or shares of AIFs in their territories to retail investors, those AIFMs should also make facilities available to retail investors to serve situations such as making subscriptions, making payments or repurchasing or redeeming units. For this purpose, AIFMs will be able to use electronic or other means of distance communication.
Article 77 to be deleted as the enhanced requirements for the marketing communication are laid down in the proposed Regulation on facilitation of cross-border distribution of funds. The principles established for marketing communications will apply to all asset managers who market their funds, irrespective of their type; thus ensuring a level playing field and the same level of investor protection across all Member States.
Article 91(3) to be deleted as the proposed Regulation provides for specific rules on the transparency of national laws and requirements applicable to marketing communications with respect to all collective investment funds, thereby ensuring comprehensive, clear and up-to date information is collected and published by ESMA.
Article 92 to be amended. The current Article 92 does not impose the obligation on UCITS to have local facilities in each Member State where UCITS are marketed but many Member States require facilities on their territory for ‘making payments to unit-holders, repurchasing or redeeming units and making available the information which UCITS are required to provide’. A few Member States also require these local facilities to perform additional tasks, like handling complaints or serving as a local distributor or being the legal representative (including dealing with the national competent authority).
Requirements to have local facilities are costly and have limited added value given the use of digital technology. Therefore, this proposal bans the imposition of physical presence. While requiring that facilities are established in each Member State where marketing activities are carried out and which serve situations such as making subscriptions, making payments or repurchasing or redeeming units, this proposal allows fund managers to use electronic or other means of distance communication with investors and the information and means of communication should be available to investors in the official language(s) of the Member State where the investor is located.
The insertion of new paragraph 8a in Article 17 and replacement of paragraph 8 in Article 93 aim to align notification procedures for UCITS across funds types and across Member States by introducing a precise time frame for communicating the competent authorities’ decisions. A precise time frame is also deemed necessary to ensure that procedures governing changes to the information provided by AIFMs in the notification process are aligned with the AIFM Directive.
A new Article 93a is added to complement the notification procedures with the conditions for UCITS who decide to stop their marketing activities in a Member State. Asset managers are allowed to de-notify the marketing of their UCITS only if a maximum of 10 investors who hold up to 1% of assets under management of the UCITS have invested in the UCITS in an identified Member State. The competent authorities of the home Member State of the UCITS will verify the compliance with this requirement, including the transparency and publication requirement for investors and the repurchase offer. All obligations to inform will continue to apply to remaining investors after de-notification of the marketing activities in a Member State.
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]]>The post UCITS and AIFs: Transparency Requirements first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>A reminder to UCITS management companies and AIFMs that certain transparency obligations arising under the Securities Financing Transactions Regulation (“SFTR” – 2015/2365) apply from 13 January 2017 – see Regulatory Roundup 76.
A SFT is defined as:
a margin lending transaction.
The effect is that affected firms will need to include in their periodic reports (half-yearly and annual for UCITS and annual for AIFs) the information as set out in section A of the Annex to the SFTR, although this is copied out in the Handbook as to:
The above obligations arise from Article 13 of the SFTR which extends transparency to the use of SFTs and to total return swaps.
For the record, Article 14 requires transparency in pre-contractual documentation (content based upon section B of the Annex to the SFTR) although this does not come into force until 13 July 2017 for those funds constituted before 12 January 2016. Interested firms can find these requirements in the Handbook now as to:
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]]>The post Investment Firms: New Prudential Regime Discussion Paper first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>In December 2015 a joint ESMA/EBA report was published on the suitability, or otherwise, of the prudential regime for investment firms.
The paper recommended a new categorisation of investment firm which distinguishes between systemic and ‘bank-like’ investment firms (to which the full CRD IV framework would apply) and those which are non-systemic for which there would be a more limited set of prudential requirements – see Regulatory Roundup 72 and “EBA: Report on Investment Firms and Prudential Requirements”.
The EBA backed-up this recommendation by declaring that it “stands ready to complete” the necessary data collection in order to calibrate this new regime.
One ‘Call for Advice’ later, the EBA has published a Discussion Paper (EBA/DP/2016/02) on the design of a new prudential regime for investment firms. Although the paper is aimed at MiFID investment firms it will also be relevant to UCITS management companies and AIFMs that conduct permissible MiFID activities.
Aside from the handful of investment firms that fall within the EBA’s earlier Opinion, and so would be subject to the full CRD (see below), the Discussion Paper proposes a prudential regime focussing on the risks to customers and markets and risks to the firm itself (what is referred to as the K-factor approach).
These K-factors can be attributed to ‘risk to customers’ (“RtC”) and ‘risk to market access, liquidity or integrity’ (“RtM”) which would need to be accompanied by appropriate scalars – with acknowledgement of the extent such risks are amplified by the risk to the firm itself (“RtF”).
Possible RtC and RtM K-factors identified so far include, but are not limited to, Assets under Management, Client Money held and (number of) Customer orders Handled. As an alternative to creating specific K-factors for RtF the use of an ‘uplift’ is considered i.e. a firm’s capital requirement would be the sum of the RtC and RtM K-factors as above multiplied by an appropriate ‘uplift factor’.
The Discussion Paper also gives consideration to a different prudential regime, based mainly upon the fixed overheads requirement for “very small and non-interconnected” firms (referred to as “Class 3” investment firms).
Whilst the paper effectively proposes designing a tailored regime for investment firms – and so reflects the EBA’s preferred approach – it also acknowledges that there is also the alternative option of applying the current prudential regime to such firms, but in a more proportionate and targeted manner.
The Discussion Paper follows on from a short (four page) EBA Opinion paper published in October which concentrated on the identification of those investment firms for which CRD IV is appropriate and which rules should apply. In brief, the recommendation was that the full CRD and CRR should apply to those investment firms that meet the identification standards and guidelines applicable to Global Systemically Important Institutions (“G-SIIs”) and Other Systemically Important Institutions (“O-SIIs”) – although the Opinion advises that there are only eight such firms in the EU.
Comments on the Discussion Paper are invited by 2 February 2017 with a view to the EBA submitting an Opinion to the European Commission by 30 June 2017.
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]]>The post EuVECA & EuSEF: Update first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The concept of a European Venture Capital Fund (“EuVECA”) and a European Social Entrepreneurship Fund (“EuSEF”) has been in existence for around three years – see e.g. Regulatory Roundup 47 for an overview of these funds.
A EuVECA or a EuSEF is effectively a fund designation which EU managers can apply to qualifying portfolios (as defined in the respective Regulations) whose total AuM do not exceed €500m. That figure is, of course, the exemption threshold in Article 3(2)(b) of the AIFMD, below which a lighter touch AIFMD regime applies (small AIFM).
The designations are optional rather than compulsory but those small AIFMs whose AIFs meet the qualifying requirements and do so elect for the designation benefit from being able to market those funds across the EU, both to professional investors and to other investors that meet certain requirements (including a minimum investment of €100,000).
The European Commission (“EC”) has proposed a Regulation to amend the Regulations governing EuVECAs and EuSEFs.
Interesting statistics from the Explanatory Memorandum associated with the proposed Regulation show that as of the beginning of April 2016 there were 70 EuVECA funds registered in the ESMA database, but only four EuSEF funds (one in France and three in Germany).
The EC proposes three main amendments:
Highlights from the proposed Regulation include:
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]]>The post EMIR: Further Clearing Requirements first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Those entities subject to EMIR
Article 4 of EMIR (648/2012) imposes a clearing obligation on all OTC derivative contracts meeting the conditions therein, with ESMA being charged with proposing the particular classes of OTC derivatives that will require clearing.
Previous Delegated Regulations have been published which impose the clearing obligation on certain interest rate derivative contracts (see Regulatory Roundup 71) and on certain classes of credit default swaps (Regulatory Roundup 74).
A third tranche of derivative classes subject to the clearing obligation has now been announced by way of a final draft Delegated Regulation (and Annex) published on 10 June.
The following classes of contracts (denominated in Norwegian Krone, Polish Zloty and Swedish Krona) will fall within scope:
The clearing obligation will be phased in over a period of time depending upon the categorisation of the counterparties – the time period mentioned below after each category definition is when the clearing obligation applies after entry into force (which will be the twentieth day following publication of the Regulation in the Official Journal).
Where counterparties fall into different categories then the clearing obligation will take effect from the later date.
The above is a summary – see Articles 2 and 3 of the Delegated Regulation for the finer detail.
Where the counterparties are AIFs or UCITS then the €8bn referred to in Category 2 above applies individually at fund level.
A reminder that the clearing obligation in respect of the first tranche of OTC derivatives mentioned above (and as detailed in 2015/2205) took effect on 21 June 2016 but only for ‘Category 1’ counterparties, which includes counterparties that are clearing members for at least one of the OTC contracts set out that Annex of at least one of the Central Counterparties authorised or recognised to clear one of those classes.
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]]>The post Securities Financing Transactions Regulation: ESMA Discussion Paper first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>As advised in Regulatory Roundup 72, reporting and transparency obligations will arise in respect of securities financing transactions (“SFT”) – for the definition of a SFT, the timetable and overview of the requirements please refer to the above mentioned article.
To support the Regulation (“SFTR”) ESMA is required to develop draft regulatory technical standards (“RTS”) and implementing technical standards (“ITS”) for submission to the European Commission by 13 January 2017.
With this in mind ESMA has published an initial discussion paper – as a preliminary approach prior to drafting ITS/RTS for consultation – inviting feedback to in excess of 140 questions appearing therein (the questions are collated in Annex II of the discussion paper). Firms that will be subject to the SFTR will be interested in Annex I which contains tables of fields requiring completion in respect of:
The above data is sub-divided between the various types of SFT:
Apart from reporting obligations, the SFTR also imposes transparency requirements in respect of the use of SFTs on both UCITS Investment Companies/Management Companies and AIFMs which will appear in the half yearly/annual reports as well as the prospectus (UCITS) and the pre-investment disclosure (AIFMs). However the discussion paper does not provide any further expansion of these transparency requirements. Given the discretionary nature of the wording in Articles 13 and 14 of the SFTR (“ESMA may …. develop …”) ESMA believes that the wording in the Annex to the Regulation is sufficiently clear and that further specifying the contents of the said Annex by drafting regulatory standards would not be the best approach at this stage (but will monitor developments in market standards).
Feedback on the discussion paper is invited by 22 April 2016. An ESMA consultation paper is expected “early in Q3 2016”.
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]]>The post UCITS V first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The FCA has released Policy Statement PS16/2 “Implementation of the UCITS V Directive”. Despite its title, the paper is not only of importance to UCITS Management Companies but also to Alternative Investment Fund Managers (“AIFMs”) of non-UCITS retail schemes (“NURS”) and, of course, to the relevant depositaries and custodians. The reason for the inclusion of NURS is not because of UCITS V but rather because the FCA has taken the opportunity to extend some of the requirements to NURS.
As a reminder, UCITS V has to be implemented by 18 March 2016 – see Regulatory Roundup 68. UCITS V amends, rather than rewrites, UCITS IV and so both have to be read together. As might be expected, ‘UCITS V’ consists of not only a Directive (2014/91) but also a Regulation which will be binding within all Member States. The Regulation is currently only in draft form as it still has to be agreed by the European Council and European Parliament.
Fortunately the Regulation will apply 6 months after entering into force and so does not have to be in place by this coming 18 March. However, on the other hand, this does leave firms with the problem of legal uncertainty – which is recognised by the FCA – in the period between UCITS V applying and the Regulation applying. The message from the FCA is that it “expects firms to make efforts to comply with the UCITS V requirements as of 18 March 2016 …. even if detailed requirements under the Level 2 Regulation are not yet applicable at this date”.
Perhaps the major change under UCITS V is the introduction of the need for UCITS Management Companies to establish and apply remuneration policies and practices.
The nine principles of the UCITS Remuneration Code appear in SYSC 19E. They are broadly similar to the nine principles of the AIFMD Remuneration Code (SYSC 19B), although not a mirror match.
Article 14b(1) of the UCITS Directive advises that UCITS Management Companies shall comply with the remuneration principles “in a way and to the extent that it is appropriate to their size, internal organisation and the nature, scope and complexity of their activities”, which is captured in SYSC 19E.2.4. Note that whilst ESMA has consulted on Remuneration Guidelines (see ‘Useful Links’), they have yet to be finalised. At that time the FCA “may consider” giving further guidance on proportionality.
Where a UCITS Management Company is a UCITS investment firm subject to BIPRU then it will meet its obligations under SYSC 19C (BIPRU Remuneration Code) and SYSC 19E by complying with SYSC 19E. The FCA is unable to apply a similar approach where the UCITS Management Company is subject to IFPRU as the latter derives from CRD IV. One ray of hope is that the FCA “may” provide further guidance on this once the above mentioned Remuneration Guidelines have been finalised.
By virtue of SYSC TP3, a UCITS Management Company need not apply the UCITS remuneration principles to any awards of variable remuneration until it commences its first full performance year starting on or after 18 March 2016.
The prospectus will need to be expanded to include relevant details of the firm’s remuneration policy; provide information on the potential conflicts of interest that may arise between the depositary and other parties, including the scheme; and, where relevant, a description of any safekeeping functions delegated by the depositary. The table in COLL 4.2.5 sets out the additional details required. Note that COLL 4.2.5 also applies to a NURS, although, following feedback from the earlier consultation, some of the expanded requirements will not be applied to a NURS.
The annual long report of a UCITS scheme must include details of remuneration paid split between the fixed and variable components. Please see COLL 4.5.7(7) (and the guidance in COLL 4.5.7A) for details of the enhanced disclosure requirements.
Key investor information will need to identify the FCA as the competent authority of the scheme; a statement that details of the up-to-date remuneration policy are available on a website; and confirm that a paper copy of that website is available free of charge (COLL 4.7).
UCITS Management Companies are required to have appropriate ‘whistleblowing’ procedures in place (SYSC 4.1.1E).
The (single) appointed depositary must be a national central bank or a credit institution. A full-scope IFPRU investment firm or an investment management firm to which IPRU(INV) 5 applies may also be appointed provided that they meet required minimum own funds and satisfy certain organisational requirements. The UCITS Management Company must ensure that the appointment of the depositary is evidenced by a written contract. Reference should be made to COLL 6.6A.7 – 13 for further details.
The revised Handbook Rules can be found in Appendix 1 of PS16/2.
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