ESMA Q&A on application of AIFMD

On 16 November 2016, ESMA published an updated version of its Q&A on the application of the AIFMD with new Q&As on notifications and delegation.

New Question; An AIF is marketed in a host Member State by way of the AIFMD marketing passport (Article 32 of AIFMD). A new share class of the AIF is set up, which will be marketed in the host Member State. Should this be regarded as a material change, which would require a new notification pursuant to Article 32?

Answer: No. The creation of a share class, which is to be marketed cross-border within an already notified (sub-) fund, does not constitute a material change of the notification.

New Question: An AIFM wishes to notify a material change to a notification made to the competent authorities in its home Member State to manage or market an AIF on a cross-border basis (Articles 32(7) or 33(6) of AIFMD). Does the AIFM have to include the full set of documentation required by Articles 32 or 33 in the notification letter?

Answer: Yes. Material changes to existing notifications require the AIFM to hand in a full set of documentation with the revised notification letter. AIFMs are asked to highlight any amendment to the original notification letter and accompanying documentation.

New Question: Where the AIFM does not itself perform the functions set out in Annex I of the AIFMD, does this release the AIFM from its responsibility to ensure compliance of the relevant function(s) with the AIFMD?

Answer: No. Where a third party performs a function stated in Annex I of the AIFMD, this function should be considered as having been delegated by the AIFM to the third party. Therefore, the AIFM should be responsible for ensuring compliance with the requirements on delegation set out in Article 20 of the AIFMD and the principle expressed in Article 5(1) of the Directive according to which the single AIFM appointed for an AIF is responsible for ensuring compliance with the AIFMD. For the avoidance of doubt, this applies to all functions stated in point 1 and point 2 of Annex I of the AIFMD.

New Question: Can an externally-managed AIF itself perform the investment management functions set out in point 1 of Annex I or functions set out in point 2 of Annex I of the AIFMD or would it be possible that the external AIFM delegates the performance of these functions to the governing body or any other internal resource of the externally-managed AIF?

Answer: No. Externally-managed AIFs are not regulated as AIFM. The performance of the functions stated in Annex I of the AIFMD is only permitted for AIFs which are internally-managed pursuant to Article 5(1)(b) of the AIFMD. Where the AIF appoints an external AIFM pursuant to Article 5(1)(a), the external AIFM is through its appointment as AIFM of the AIF responsible for providing the functions stated in Annex I of the AIFMD. The external AIFM may delegate to third parties the task of carrying out functions on its behalf in accordance with Article 20 of the AIFMD. The AIF is, however, not a 'third party' in accordance with Article 20(1) of the AIFMD.

ESMA Q&A on application of UCITS Directive

On 21 November 2016, ESMA published an updated version of its Q&A on the application of the UCITS Directive.

Two new answers have been included on how investment limits should be applied where a UCITS wants to invest in an umbrella fund. The answers focus on the limits set in Articles 55(1) and 56(2)(c) of the Directive.

New Question: Pursuant to Article 56(2)(c) of the UCITS Directive, a UCITS may acquire no more than 25% of the units of any single UCITS or other collective investment undertaking. Where the underlying UCITS or other collective investment undertaking is an umbrella fund, should this limit be applied at the level of the umbrella or at the level of the individual sub-funds within the umbrella?

Answer: The limit set out in Article 56(2)(c) should be applied at the level of the individual sub-funds in the UCITS or collective investment undertaking of which the units are to be acquired, to ensure the principle of risk-spreading within the investing UCITS. Where an investment company or a management company is currently applying a different interpretation of this limit, it must at the earliest convenience adjust the funds' portfolios whilst acting with due skill, care and diligence in the best interest of the UCITS it manages.

New Question: Pursuant to Article 55(1) of the UCITS Directive, a UCITS may acquire the units of UCITS or other collective investment undertakings referred to in Article 50(1)(e), provided that no more that 10% of its assets are invested in units of a single UCITS of other collective investment undertaking. Where the underlying UCITS or other collective investment undertaking is an umbrella fund, should this limit be applied at the level of the umbrella or at the level of the individual sub-funds within the umbrella?

Answer: The limit set out in Article 55(1) applies at the level of the individual sub-funds in the UCITS or collective investment undertaking of which the units are to be acquired. Where an investment company or a management company is currently applying a different interpretation of this limit, it must at the earliest convenience adjust the funds' portfolios whilst acting with due skill, care and diligence in the best interest of the UCITS it manages.

PRIIPs Regulation

The European Parliament's Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposed Regulation which will amend the date of application of the Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs Regulation). Assuming the Commission proposal is passed, the PRIIPs Regulation will then apply from 1 January 2018. The European Parliament will consider the proposed Regulation in its plenary session to be held on 30 November and 1 December 2016.

On 29 October 2016, Commission Delegated Regulation ((EU) 2016/1904) supplementing the PRIIPs Regulation with regard to product intervention, was published in the Official Journal of the EU. The PRIIPs Regulation gives national competent authorities (NCAs) and EIOPA the power to monitor financial products under their supervision and, subject to certain conditions, to prohibit or restrict temporarily the marketing, distribution or sale of insurance-based investment products, financial activities or practices. The Delegated Regulation sets out criteria and factors to be taken into account by the NCAs and EIOPA when intending to use their product intervention powers.

MMF Regulation

On 16 November 2016, the Council of the EU issued a press release announcing that its Presidency has reached provisional agreement with representatives of the European Parliament on the proposed Regulation on Money Market Funds (MMF Regulation) and that a number of technical issues relating to the MMF Regulation are to be finalised "in the coming days". The EU Parliament also issued a press release describing the MMF Regulation as one of the most contentious and complex pieces of legislation.

Benchmarks Regulation

ESMA published its final report to the European Commission setting out technical advice under the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Benchmarks Regulation) ESMA also issued a press release highlighting the following key elements in the advice:

  • How benchmarks’ reference values can be calculated by using data reporting structures under existing EU rules such as MiFID II and EMIR.  
  • Some of the criteria for deciding whether third country benchmarks can be endorsed for use in the EU.  
  • What constitutes making a benchmark figure available to the public.

Securities Financing Transaction Regulation (SFTR) and EMIR

On 4 November 2016, ESMA updated its webpage on its consultation paper on draft regulatory technical standards and draft implementing technical standards implementing SFTR. ESMA identified a number of mistakes in the consultation paper, including errors relating to the deadline for reporting of the collateral component of an SFT and the timeline for reporting of the details of the collateral component of an SFT.

Anti-Money Laundering/Combating the Financing of Terror/Corruption

Joint Committee of ESAs final version of guidelines on risk-based supervision under 4AMLD

On 16 November 2016, the Joint Committee of the ESAs published the final version of guidelines on risk-based supervision under the Fourth Anti-Money Laundering Directive (4AMLD).

The guidelines apply a year from the date they are issued. The guidelines aim to provide a common EU basis for the application of the risk-based approach to AML / CTF supervision set out in both 4AMLD and the Financial Action Task Force (FATF) standards. They build on the committee's October 2013 preliminary report on AML / CTF risk-based supervision. They are addressed to NCAs which are responsible for supervising the compliance of credit and financial institutions with AML / CTF obligations. The guidelines set out the characteristics of a risk-based approach to AML / CTF supervision, and require NCAs to identify and assess the ML / TF risk to which the sector is exposed, and adjust the focus, intensity and frequency of supervisory actions in line with the risk-based approach. As part of an effective risk-based approach to AML / CTF supervision, NCAs should have suitably qualified staff to carry out risk-based AML/ CTF supervision in an informed and consistent manner. The size or systemic importance of a credit financial institution may not, by itself, be indicative of the extent to which it is exposed to ML/ TF risk. Small firms that are not systemically important can pose a high ML/ TF risk.

EU Commission roadmap on a proposal for a Directive on the Criminalisation of Money Laundering

On 25 October 2016, the European Commission published a roadmap on its proposal for a Directive on the criminalisation of money laundering. The aim of the proposal is to introduce minimum rules regarding the definition of the criminal money laundering offences and to approximate sanctions. This is designed to bring the EU legal framework in line with the FATF recommendations.

Compromise proposals on 5AMLD

On 28 October 2016, the Presidency of the Council of the EU published its first compromise proposal on the proposed Fifth Ant- Money Laundering Directive (5AMLD), which will amend 4AMLD. The cover note states that amendments to the European Commission's 5AMLD legislative proposal are marked in underlined bold text and deletions are highlighted in strikethrough. On 14 November 2016, the Presidency of the Council of the EU published its second compromise proposal on 5AMLD. Again, the cover note states that amendments to the first Presidency compromise proposal are marked in underlined bold text and deletions are highlighted in strikethrough.

ECON draft report on 5AMLD

On 10 November 2016, the European Parliament published a draft report prepared by its Committee on Economic and Monetary Affairs (ECON) and its Committee on Civil Liberties, Justice and Home Affairs (LIBE) on the proposed 5AMLD. The draft report contains a European Parliament legislative resolution, the text of which sets out suggested amendments to the European Commission's original proposal.

Tax authorities to gain access to beneficial ownership information

On 8 November 2016, the Council agreed on a proposal for a draft directive amending Directive 2011/16/EU on administrative cooperation in the field of taxation) as regards granting access for tax authorities to information held by authorities responsible for the prevention of money laundering. The directive will require member states to enable access to information on the beneficial ownership of companies. It will apply as from 1 January 2018. The proposal is one of a number of measures set out by the Commission in July 2016, in the wake of the April 2016 Panama Papers revelations.

Delegated Regulation amending list of high-risk third countries under 4AMLD

On 28 November 2016, the Council of the EU published a cover note attaching a Commission Delegated Regulation amending Commission Delegated Regulation (EU) 2016/1675 supplementing 4AMLD by identifying high-risk third countries with strategic deficiencies. The Commission adopted Delegated Regulation (EU) 2016/1675 in July 2016, which identified for the first time high-risk third countries with strategic AML/ CTF deficiencies and confirmed that it would review the list, as appropriate. The new Delegated Regulation updates the list of high-risk third countries by deleting Guyana on the basis that Guyana has made significant progress on AML/ CTF matters. The new Delegated Regulation will enter into force the day after it is published in the Official Journal of the EU. FATF has similarly removed Guyana from its equivalent listing.