The Impact of the New AIFM Regime on Third Country Entities
Sarah Jane Leake | Bloomberg Law
ESMA’s draft technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive in relation to supervision and third countries – European Securities and Markets Authority Consultation Paper ESMA/2011/270 of 23 August 2011
The Alternative Investment Fund Managers Directive (AIFM Directive),1 which came into force on 21 July 2011, will allow EU alternative investment fund managers (AIFMs) to market EU-domiciled alternative investment funds (AIFs) on a cross-border basis within the EU. The Directive must be transposed into the national law of all Member States by 22 July 2013.2
The regime will be reviewed in 2015 by the European Securities and Markets Authority (ESMA).3 At this point, ESMA will make recommendations as to whether the regime should be extended to the promotion of non-EU AIFs and to marketing by non-EU AIFMs. It is anticipated that any extension to the passporting regime would take effect in 2015. Meanwhile, non-EU AIFMs may market EU AIFs and non-EU AIFs by virtue of national private placement regimes (PPRs). PPRs may also be used by EU AIFMs wishing to market non-EU AIFs within the EU. Should the passporting regime be extended to non-EU entities, PPRs will probably be extinguished in 2018.
Under the Directive, the European Commission has been delegated the power to adopt subordinate measures to the legislation. In December last year, the Commission issued a request for advice to CESR4 on their content, with a focus on, amongst other issues, the treatment of third country entities.
Last December, CESR launched a debate on various policy options identified in relation to certain parts of the Commission’s request.5 In view of feedback received, ESMA, this July, published a consultation paper6 covering the bulk of issues raised in the Commission’s request: authorisation and operating conditions,7 the role of the depositary,8 and leverage and transparency.9
The implementing measures on third countries were, however, considered less urgent. This is because they relate to the introduction of a passporting regime for non-EU entities, which will not be operational until at least 2015. ESMA’s proposals on this subject were finally published on 23 August 2011,10 with a view to submitting its advice to the Commission ahead of the 16 November 2011 deadline.
Where an AIFM delegates functions such as portfolio management or risk management to an undertaking established outside the EU, it is necessary to ensure that appropriate co-operation channels exist with the third country supervisory authority.11
ESMA is requested to advise the Commission on how co-operation between authorities of the home Member State of the AIFM and the third country supervisory authority should be ensured in the event of delegation or sub-delegation.
To maximise investor protection and minimise systemic risk, ESMA considers that co-operation should be based on written arrangements put in place before the delegation (or sub-delegation) starts. It should be centrally negotiated by ESMA in order to help create a level playing field. In ESMA’s view, the detailed content of such an arrangement should be based on existing international standards, in particular the Multilateral Memorandum of Understanding established by the International Organization of Securities Commissions (IOSCO) in May 2002.
Where the delegation (or sub-delegation) concerns portfolio management or risk management, the delegates in question must be authorised or registered for the purpose of asset management and subject to supervision or, where this is not possible, subject to prior approval by the AIFM’s home Member State’s competent authorities.12 A third country entity will, however, will be deemed to satisfy this requirement where it is: 1) authorised or registered for the purpose of asset management based on local criteria which are equivalent to those prevailing in the EU; and, 2) supervised by an independent competent authority. Independence, opines ESMA, should be based on the criteria set out in Part II of IOSCO’s Objectives and Principles for Securities Regulation and Methodology and the Basel Committee’s Core Principles for Effective Banking Supervision and Methodology. These criteria should be used as a reference point only – the third country authority may meet other relevant criteria.
Under the Directive, AIFMs will be required, subject to a limited number of exemptions, to appoint a single depositary for each AIF they manage.13 For non-EU AIFs, depositaries appointed may be established in a third country, subject to certain conditions.14
ESMA has been asked to advise the Commission on what factors should be taken into consideration when assessing whether the prudential regulation and supervision applicable to a third country depositary: 1) has the same effect as the provisions set out in the AIFM Directive; and, 2) can be considered as effectively enforced.
ESMA has identified a number of criteria for these purposes, primarily relating to the local regulatory and supervisory climate, the independence of the relevant authority, eligibility requirements, the equivalence of capital requirements and operating conditions, the existence of sufficiently dissuasive sanctions in cases of regulatory misconduct, and depositary liability.
A number of preconditions must be met before appointing a third country depositary. One such precondition is that the depositary in question must be subject to equivalent prudential regulation and supervision and that the regulatory regime is effectively enforced. In ESMA’s view, this objective is only achievable if the local regulation guarantees that regulations of a public nature exist and if the local competent authority performs ongoing supervision and has investigative and sanctioning powers. Once this requirement has been met to the Commission’s satisfaction, the Commission may then declare the third country jurisdiction equivalent.
ESMA’s chairman, Steven Maijoor, has stressed the importance of ensuring that co-operation arrangements with third country authorities “work smoothly and allow for a comprehensive exchange of information, both from the perspective of day-to-day supervision by competent authorities as well as systemic risk.”15
To ensure an ongoing flow of information, the AIFM Directive establishes an extensive framework for supervisory co-operation and the exchange of information. Specifically, ESMA has been asked to advise the Commission on the objectives and scope of the co-operation agreements required under the Directive in numerous circumstances.16
EMSA considers that these arrangements should be formalised in writing, to expressly facilitate the exchange of information for supervisory and enforcement purposes. In ESMA’s view, the agreement, signed by the European competent authorities and the third country local competent authority should take the form of a Multilateral Memorandum of Understanding centrally negotiated by ESMA. In view of the fact that “the Directive itself does not allow for a more lenient approach in the case of third country entities,” . . . “the detailed content of the agreement should duly take this into consideration.”17
To enable a European competent authority to exercise the powers conferred upon it by the Directive, the agreement should impose a duty on the third country authority to assist the relevant European EU authority where it is necessary to enforce EU or national legislation. In particular, ESMA considers it important that the arrangements make provision for the exchange of information for the systemic risk oversight purposes. Given that, in certain circumstances, information regarding systemic risk oversight may need to be passed on to other EU competent authorities, to ESMA, or to the European Systemic Risk Board, ESMA opines that the agreement should include an ad hoc clause allowing for the transfer of information received from a third country to such European entities.
The consultation closes for comment on 23 September, some 10 days after the consultation period closes for ESMA’s July Consultation. Working within a tight timeframe, ESMA will then finalise its advice to the Commission before the mid-November deadline.
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