In a recent Legal and Regulatory Update we outlined the proposals contained in the European Securities and Markets Authority’s (“ESMA”) consultation paper on implementing measures for the Alternative Investment Fund Managers Directive (“AIFMD”) issued on 13 July 2011. ESMA stated at that time that the issues surrounding non-EU AIFM and non-EU AIF, which have proved to be the most controversial, would be subject to further consultation. On 23 August 2011, ESMA issued its second consultation setting out its proposals for detailed rules on supervision and third country entities under the AIFMD.
The proposals cover three broad areas:
Supervisory Co-operation and Exchange of Information
The draft advice focuses on the relationship between EU competent authorities and third country authorities and envisages that the co-operation arrangements required by the AIFMD should take the form of written agreements which:
- allow for exchange of information for both supervisory and enforcement purposes;
- impose a duty on the third country authority to assist the relevant EU authority where it is necessary to enforce EU or national legislation; and
- make provision for exchange of information for the purposes of systemic risk oversight.
Delegation of portfolio or risk management functions to third country entities
Where the portfolio or risk management functions are delegated or sub-delegated to an undertaking in a third country, the proposals focus on the content of the written agreement to be put in place between the competent authorities in the home member state of the AIFM or ESMA and the supervisory authorities of the third country, which would allow for:
- access to information and documents;
- the possibility of onsite inspections of the entity to which functions are delegated;
- receiving information from the third country supervisory authority in the case of a breach of regulations; and
- the carrying out of enforcement actions in the case of a breach of the regulations.
The AIFMD requires that the delegation of portfolio management or risk management can only be to an undertaking authorised or registered for the purpose of asset management. Where that condition cannot be met there must be prior approval by the competent authorities of the home member state of the AIFM. ESMA proposes that the third country undertaking should be deemed to satisfy the requirement when it is authorised or registered for the purpose of asset management based on local criteria which are equivalent to those established under EU legislation and it is effectively supervised by an independent competent authority.
ESMA suggests that the detailed content of the arrangements should be based on existing international standards. The arrangements could take the form of a multilateral memorandum of understanding centrally negotiated by ESMA which would obviate the need for third country regulators to conclude different bilateral co-operation arrangements and would ensure a level playing field.
Assessment of equivalence of third country depositary frameworks
The AIFMD permits the depositary of a fund to be established in a third country subject to certain conditions. ESMA sets out proposals on the elements to be taken into account when assessing whether the prudential regulation and supervision applicable to a depositary in a third country has the same effect as the AIFMD, and can be considered as effectively enforced. ESMA identifies a number of criteria including:
- the independence of the relevant authority;
- the requirements on eligibility of entities wishing to act as depositary, which must be equivalent to those set out for the access to the business of a credit institution or investment firm;
- equivalence of capital requirements;
- equivalence of operating conditions; and
- the existence of sanctions in the case of violations.
ESMA has suggested that the co-operation arrangements for supervisory co-operation and exchange of information might be based on the IOSCO MMoU concerning consultation and co-operation and the exchange of information of May 2002. Some jurisdictions, such as the Cayman Islands and the British Virgin Islands, which are signatories to the MMoU and have a number of tax information exchange agreements in place, may therefore meet these requirements in relation to supervision and exchange of information. However, the requirement that portfolio management and risk management may only be delegated to third country undertakings which are registered for the purpose of asset management may present difficulties for such countries, as it remains to be seen how they will meet the standard that the undertaking be "authorised or registered for the purpose of asset management based on local criteria which are equivalent to those established under EU legislation". At present, most EU jurisdictions that apply a similar requirement do not recognise such jurisdictions as having equivalent criteria. Authorisation and registration procedures in the US and Hong Kong, on the other hand, could be deemed equivalent to EU requirements. Ireland already applies a requirement that the entity to which these functions are delegated be authorised or registered for the purpose of asset management and subject to prudential supervision. This is a further indication that Ireland is well placed in the lead up to the implementation of the AIFMD.
Responses to the consultation are requested by 23 September 2011. ESMA is to provide its final advice to the Commission by 16 November 2011. The partners in the Asset Management and Investment Funds Group will be making a submission in response to ESMA’s consultations, as will the Irish Funds Industry Association. We would welcome input from our clients in this regard.
The Consultation Paper dated 23 August 2011 is available at the following link: ESMA Consultation Paper.
If there are any particular aspects of the AIFMD which you would like clarification or advice on, please get in touch with your usual Asset Management and Investment Funds Group contact or any of the contacts listed in this email.
The material is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute, legal or any other advice on any particular matter.