The European Securities and Markets Authority (ESMA) published its long-awaited final report (the Report) on 1 October 2013, setting out detailed guidelines relating to (i) the reporting obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the Alternative Investment Fund Managers Directive (AIFMD) and (ii) how certain parts of the European Commission’s AIFMD regulatory reporting template form should be completed. The reporting itself was mandated in Annex IV of the European Commission’s AIFMD “Level 2” Regulation, which has direct effect in all member states of the EEA1.
The delay in issuing the Report, which comes more than four months after ESMA’s 24 May consultation paper, has caused much frustration in the alternative investment management community. The regulatory reporting obligations are one of the key remaining operational parts of the AIFMD which the industry will need to understand and get to grips with quickly – both the timelines for the coming into force of the reporting regime, and the speed with which alternative investment fund managers (AIFMs) will need to report following the end of relevant reporting periods, pose considerable time, cost and organizational challenges.
In this update, we provide a brief reminder of the key provisions of the AIFMD reporting obligations and set out some of the key points on which the Report offers some clarity.
What is this reporting regime about?
One of the key themes of the AIFMD is the requirement for AIFMs to provide regular and detailed reporting both in relation to themselves and the alternative investment funds (AIFs) that they manage. The AIFMD contains a number of other reporting regimes, such as those applying to AIFs that acquire a certain level of voting rights in an underlying portfolio company, and requirements to provide ongoing information to national regulators in relation to operational matters affecting the AIFM itself.
The reporting obligations that are covered by the Report deal, broadly, with investment strategies, exposure and portfolio concentration of reportable AIFs, total value of assets under management and turnover of reportable AIFs and the principal markets and instruments in which investments are made, along with detailed information on the risk profile (including risk measures, liquidity profiles and leverage levels) of reportable AIFs. The guidelines contained in the Report are described by ESMA itself as helping to “standardise the reporting across the EU. It will also facilitate the exchange of information between national regulators, ESMA and the ESRB”.
To whom does this apply?
The exact extent to which these reporting obligations apply depends on a number of factors, but the following AIFMs will become subject to some or all of the reporting obligations described in the Report:
- Authorised AIFMs.
- Non-EEA AIFMs which market EEA or non-EEA AIFs in the EEA.
- “Small” AIFMs which qualify for exemption under Article 3 of the AIFMD as managing AIFs below the €100mm/€500mm thresholds.
Which AIFs does an AIFM need to report on?
Authorised AIFMs (currently, only EEA AIFMs can be authorised) must report on all AIFs that they manage (including non-EEA AIFs not marketed in the EEA) to their home regulator.
Non-EEA AIFMs marketing under Article 42 of the AIFMD (i.e. using a national private placement regime, where available) must report only on each of the AIFs that they are marketing. However, this reporting obligation is owed to each Member State in which Article 42 marketing is being conducted – meaning that a non-EEA AIFM may need to comply with multiple (and possibly differing) reporting obligations to a number of national regulators. There is speculation that ESMA may offer a form of centralised reporting which could be used on a voluntary basis by EEA national regulators, but it has not yet done so.
Additional reporting obligations apply to AIFs that use substantial amounts of leverage (“substantial” for these purposes means leverage of greater than three times NAV calculated using the commitment method).
What does the Report give clarity on?
The 24 May draft guidelines gave rise to a number of practical and operational concerns around the speed and frequency with which AIFMs are required to report. The key issues on which the Report now gives some clarification are as follows:
- Reporting periods will be aligned with the calendar year (that is, quarterly reporting periods will end on the last business day of March, June, September and December, half-yearly reporting periods on the last business day of June and December, and annual reporting periods on the last business day of December).
- Whether reporting is required during the transitional period that commenced on 22 July 2013 will depend on the way in which transitional provisions have been implemented in each Member State, the Commission’s view of transitional provisions and the authorisation status of the AIFM concerned. This removes – albeit in a somewhat convoluted way – the confusion around when reporting is required to start, and whether there is a reporting requirement for AIFMs otherwise able to use the transitional period. For UK transitional AIFMs, this means that they will only need to report as of the end of the first quarterly reporting period (regardless of whether they ultimately report quarterly, half-yearly or annually) starting after (i) the date on which they vary their FCA permissions to become either full-scope UK AIFMs or small authorised UK AIFMs (if they are for FCA authorised firms) and (ii) the date of their first notification to the FCA for marketing under AIFMD Article 42 (if they are non-EEA AIFMs). In other words...
Reporting will need to cover the first day of the quarter following that in which the obligation to report arises – for instance
- An AIFM that is subject to half-yearly reporting and whose reporting obligation starts on, say, 15 February, would report for the second quarter only (commencing on 1 April), and then on a half-yearly basis thereafter.
- An AIFM that is subject to annual reporting and whose reporting obligation starts on, say, 15 February, would report for the three quarters commencing on 1 April (and ending on 31 December) together, and then on an annual basis thereafter.
- The Report sets out (in section XI. Procedures when AIFMs are subject to new reporting obligations) how the reporting obligations change for AIFMs that move between quarterly, half-yearly and annual reporting obligations part way through a reporting period. Annex I of the Report contains a series of flow charts that provide an analysis of the frequency and content of reporting based on whether the AIFM is authorised, registered or a non-EEA AIFM using the Article 42 national private placement marketing regime.
- Reporting should be made once per reporting period; if no information is to be reported in relation to a given AIF (for instance because that AIF has not yet raised any capital), then a report will still need to be made.
- Where there is a change in AIFM, the new AIFM should report for the entire reporting period during which the change of AIFM occurred.
- Liquidated or merged AIFs should provide “the last report” once they have been liquidated or merged (there appears to be no prescriptive content on what this report should contain).
- Feeder AIFs will – notwithstanding responses to the draft guidelines to the contrary – need to be reported individually, rather than being aggregated with the underlying master fund. The report for a feeder fund should not look through to the master fund and report on the master fund’s underlying investments (although were a feeder AIF to invest outside the master, those investments would be subject to reporting).
- Fund of Fund AIFs should not, as is the case with feeder AIFs, look through underlying funds when reporting.
- Master AIFs whose feeders are either (i) EEA AIFs or (ii) marketed in the EEA may need to be reported separately, regardless of whether or not the master AIF is itself an EEA AIF or marketed in the EEA. ESMA has asked national regulators for their views on the need to report on non-EEA master AIFs in master-feeder structures that are not themselves marketed in the EEA and in which the master AIF has a separate AIFM to its feeder AIFs (this would be the case, for instance, where the master AIF is a self-managed AIF).
- Umbrella AIFs should be reported on a sub-fund by sub-fund or compartment by compartment basis.
In a change of position from its 24 May consultation paper, ESMA has moved certain matters from the guidelines to an accompanying “opinion” to EEA national regulators. Specifically, ESMA opines that national regulators “could require” AIFMs to report these items of information on a periodic basis pursuant to AIFMD Article 24(5). The proposed guidelines moved to the opinion include:
- The use of value at risk (VaR) reporting.
- Reporting for a non-EEA master AIF that is not marketed in the EEA, where one or more of its feeder AIFs is an EEA AIF or is marketed in the EEA.
- Information on high frequency trading.
- Information on geographical focus.
Along with the Report, ESMA also published technical supporting material (covering a consolidated reporting template, detailed IT guidance for filing of the XML and the XSD files) that will facilitate the reporting by AIFMs to regulators.
What are the next steps?
The Report will now be translated into each official EU language and published on ESMA’s website. This will trigger the commencement of a two-month period by the end of which national Member State regulators must notify ESMA whether they comply, or intend to comply, with the guidelines set out in the Report (on the same day on which ESMA published the report, it also published the translations of MiFID guidelines on remuneration policies and practices - these took just under four months to translate).