This time last year European ministers were attempting to reach agreement on the ability of Alternative Investment Fund Managers (“AIFMs”) based outside the EU (ie in a “third country”) to market Alternative Investment Funds (“AIFs”) in the EU. The position finally reached was that EU Member States are allowed, at least in the short term, to retain their own individual existing private placement laws.
The compromise is that from July 2013 reliance on these laws will be subject to certain conditions, including:
- the non-EU AIFM must comply with those provisions of the Alternative Invetsment Fund Managers Directive ("AIFMD") relating to reporting, the publication of an annual report, disclosure to investors and control of non-listed companies;
- co-operation arrangements for the purpose of systemic risk oversight must be in place between the competent authorities of the Member States where the AIFs are marketed and the supervisory authorities of the third country where the AIFM is established; and
- the third country where the AIFM is established must not be on the Financial Action Task Force (“FATF”) blacklist.
The focus has now turned to the form and content of the required co-operation arrangements. Under the AIFMD the European Commission is required to design a common framework to facilitate the establishment of these co-operation arrangements and at the end of last year this was one of the various items under the AIFMD which the Commission sent a request for assistance to the Council of European Securities Regulators (now replaced by the European Securities and Markets Authority “ESMA”). Last month ESMA published a consultation paper1 seeking comments on the draft advice it intends to provide to the Commission in November later this year.
The consultation paper sets out ESMA’s draft advice for all topics dealing with third countries in the AIFMD and is divided into three broad areas:
- supervisory co-operation and exchange of information;
- delegation of portfolio or risk management functions to third country entities; and
- assessment of equivalence of third country depositary frameworks.
Supervisory co-operation and exchange of information
Under the AIFMD co-operation arrangements between the supervisory authority of a third country and the relevant competent authority of an EU Member State are required in a number of different circumstances. Initially this includes where an EU AIFM manages a non-EU AIF which is not marketed in the EU, an EU AIFM markets a non-EU AIF into the EU without a passport and a non-EU AIFM markets an EU or non-EU AIF in the EU without a passport.
In the consultation paper ESMA sets out that it believes:
- the co-operation arrangements could take the form of a Multilateral Memorandum of Understanding (“MMoU”) centrally negotiated by ESMA and signed by the European competent authority(ies) and the local third country supervisory authority; and
- the detailed content would be established by ESMA taking into account the IOSCO Multilateral Memorandum of Understanding with respect to co-operation for enforcement purposes (“IOSCO MMoU”)2 and, for supervisory purposes, the IOSCO Technical Committee Principles for Supervisory Co-operation (“IOSCO Principles”).3
These two proposals have increased hopes that all the necessary co-operation arrangements will be in place by July 2013 as required, which some had previously doubted. As for the specific content of the co-operation arrangements ESMA states in the consultation paper that the co-operation arrangement should not only provide for the exchange of information for supervisory and enforcement purposes but also, perhaps more notably:
- the right to perform or request the performance of an on-site inspection;
- that the third country supervisory authority should assist the EU competent authorities where it is necessary to enforce EU legislation breached by the entity established in the third country; and
- allow the transfer of information received from a third country authority to other EU competent authorities, to ESMA or to the European Systemic Risk Board (“ESRB”).
What is not immediately clear is whether the supervisory authorities in a third country such as Australia would need to enter into a separate MMoU (in the form agreed by ESMA) with their counterpart in each individual EU Member State (making 27 MMoUs in total) or whether the third country supervisory authority will enter into just one MMoU to which additional Member States can become parties to from time to time (in a style similar to the IOSCO MMoU). Interestingly the consultation paper states that, “where marketing … is envisaged in a country other than that of the EU competent authority which is the reference authority, the agreement could be signed as a joint agreement between all the authorities involved”. In any event, respondents in relation to a previous consultation have suggested that there should be a central public database of details of the co-operation arrangements which have been entered into to allow easy identification by AIFMs of relevant jurisdictions.
Delegation of portfolio or risk management functions to third country entities
Under the AIFMD certain conditions must be met before an AIFM can delegate various functions to third parties. When the delegation concerns portfolio management or risk management and the delegation is conferred on a party in a third country then one of these conditions is that “co-operation between the competent authorities of the home member State of the AIFM and the supervisory authority of the undertaking must be ensured”.
In the consultation paper ESMA proposes that in order for the condition to be satisfied there would need to be a MMoU (in very similar form to the MMoU described above) between ESMA or the competent authorities of the home Member State of the AIFM and the supervisory authorities of the undertaking to which delegation is conferred. If the undertaking sub-delegates any of the functions then a similar MMoU would need to be in place with the supervisory authorities of the sub-delegate.
Again ESMA suggests that the MMoU be “centrally negotiated by ESMA which would obviate the need that third country regulators conclude different bilateral co-operation arrangements and would ensure a level playing field”. However what is not immediately clear is whether the MMoU in the form agreed by ESMA will be designed to cover both the marketing of AIFs (as discussed above) and the delegation of functions, or whether a separate MMoU will be needed (potentially between exactly the same supervisory and competent authorities) for both.
Assessment of equivalence of third country depositary frameworks
The AIFMD requires an AIFM to appoint a depositary for each AIF it manages and sets out rules as to which entities an AIFM can appoint as a depositary and where the depositary must be established. In the case of an EU AIF the depositary must be established in the home Member State of the AIF. In the case of a non-EU AIF the depositary can be established in:
- the home Member State of the AIFM managing the AIF;
- the Member State of reference of the AIFM managing the AIF (which is determined under the AIFMD depending on where it has the closest connection); or
- the third country where the AIF is established provided certain conditions are satisfied. These conditions include that the depositary is subject to effective prudential regulation in the third country (including minimum capital requirements) and supervision, which have the same effect as EU law and are effectively enforced.
In the consultation paper ESMA sets out various criteria it proposes to recommend for the purposes of determining whether the regulation and supervision of a depositary in the third country are equivalent. These include:
- the independence of the relevant supervisory authority;
- the requirements on eligibility of entities wishing to act as a depositary;
- the equivalence of capital requirements; and
- the existence of sanctions in the case of violations.
However the question of equivalence would only really appear to become relevant if the passporting provisions are extended in order to allow an EU or non-EU AIFM managing a non-EU AIF to market that fund in the EU with a passport.
Several of the issues raised are essentially ones for the relevant supervisory authorities in non-EU jurisdictions and whether they would have any concerns or practical suggestions in relation to entering into arrangements (albeit not legally binding arrangements) in the form proposed. It is therefore not surprising that in the press release accompanying the consultation paper the chairman of ESMA understandably commented that “we particularly look forward to receiving input from third country authorities in response to our proposals”. Following the consultation ESMA intends to submit its final advice to the European Commission by 16 November 2011.
The good news is that if the authorities are already signatories to the IOSCO MMoU, as both ASIC and the SFC are, and have separately entered into bilateral arrangements similar to the sample MoU annexed to the IOSCO Principles then the proposed co-operation arrangements should not go beyond any principles which they are already comfortable with.
To put the consultation in context set out below is a quick reminder of the timetable for implementation of the new marketing regime under the AIFMD:
Click here to see table