The European Securities and Markets Authority (ESMA) has published its final report on its technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive (AIFMD).
ESMA’s advice follows a 2010 request for technical advice by the Commission, originally sent to ESMA’s predecessor, the Committee of European Securities Regulators (CESR), asking ESMA to deliver its final advice by 16 November 2011.
The final report is accompanied by a press release and copies of the same letter to:
- Michael Barnier, Commissioner for Internal Market and Services, European Commission;
- Sharon Bowles, Chair, Committee on Economic and Monetary Affairs, European Parliament; and
- Jonathan Faull, Chair, European Securities Committee.
The report sets out ESMA's advice regarding the specific issues identified in the European Commission's request, divided into four sections:
- Section I - General provisions, authorisations and operating conditions; the advice clarifies the operation of thresholds that determine whether a manager is subject to the AIFMD. ESMA also proposes to require AIFMs to have additional own funds and/or professional indemnity insurance (PII) to cover risks arising from professional negligence. The advice includes the possibility for AIFMs to combine additional own funds and PII, subject to certain conditions, and will develop detailed guidelines on this issue.
Many of the provisions in Section I are based on the equivalent provisions of the MiFID and UCITS frameworks.
- Section II - Depositaries; key issues in Section II include the criteria for assessing whether the prudential regulation and supervision applicable to a depositary established in a third country has the same effect as the provisions of the AIFMD. ESMA has identified a number of criteria for this purpose, such as independence of the relevant authority, the requirements on eligibility of entities wishing to act as depositary and the existence of sanctions for violations.
In respect of liability for financial instruments held in custody which are considered 'lost', ESMA's advice proposes three conditions, at least one of which must be fulfilled in order for an asset to be considered lost. These are that (i) a stated right of ownership of the AIF is uncovered to be unfounded because it either ceases to exist or never existed; (ii) the AIF has been permanently deprived of its right of ownership over the financial instruments; or (iii) the AIF is permanently unable to directly or indirectly dispose of the financial instruments.
ESMA's advice also aims to clarify which events would constitute external events beyond the reasonable control of the depositary, and also the objective reasons that would allow a depositary to contractually discharge its liability.
- Section III - Transparency and leverage; in respect of leverage, ESMA's advice clarifies the definition of leverage, how it should be calculated and in what circumstances a competent authority should be able to impose limits on the leverage a particular AIFM may employ. ESMA considers it appropriate to prescribe two different forms of calculation methodologies for the calculation of the 'exposure of an AIF' (commitment and gross methods) and a further option (the advanced method) which can be adopted by an AIFM at its request and subject to certain criteria. The approach was developed so as to permit more than one method of calculation, taking into account the broad range of entities covered by the AIFMD. ESMA intend to develop detailed guidelines on the advanced method for the calculation of leverage.
In respect of transparency, the advice specifies the form and content of information to be reported to competent authorities and investors, and also the information to be included in the annual report.
- Section IV - Supervision - third country arrangements; ESMA's advice sets out the minimum information that is to be exchanged between EU competent authorities. The advice also clarifies that more detailed provisions (such as the data format and conditions of secured data transmission) will be developed. In respect of the co-operation agreements between EU and non-EU competent authorities which are required under certain provisions of the AIFMD, ESMA states that it is ready to lead the work on negotiating such agreements in order to allow for the adoption of a memorandum of understanding covering all EU competent authorities.
The report follows two consultations processes; a consultation published on 13 July 2011 (ESMA/2011/209) which covered sections I to III of the advice and a further consultation published on 23 August 2011 (ESMA/2011/270) which covered Section IV (and also included third country aspects of the requirements on delegation and depositaries).
In terms of future streams of work, ESMA has stated that it will start work shortly on drafting regulatory technical standards to determine types of AIFM (as ESMA is required to do under Article 4(4) of the AIFMD) and will publish a consultation relating to the same. ESMA will also start work on developing guidelines on sound remuneration policies with the European Banking Authority (as ESMA is required to do under Article 13(2) of the directive).
It is important to bear in mind that the advice remains in a non-binding form at this stage. The Commission will now digest the advice and use it as basis to introduce level 2 measures, which are due during the course of 2012. The final measures may therefore differ in some ways from the ESMA advice. No indications have been given to date as to a timetable for implementation nor whether the measures will be in the form of further directives (which would then require member state transposition) or regulations (which would be immediately enforceable in all member states simultaneously).
We will off course continue to keep you updated. If you would like to discuss how the proposals may affect your business, please get in touch with your usual Herbert Smith contact.