On 16 November 2011 the European Securities and Markets Authority (ESMA) published its final advice on the detailed rules that will underlie the Alternative Investment Fund Managers Directive (AIFMD). ESMA’s final advice (500 pages) and the accompanying press release can be accessed here.
The AIFMD has to be implemented into the national law of the EU member states by 22 July 2013. The AIFMD’s objective is to create a comprehensive regulatory and supervisory framework for alternative investment managers - private equity firms, hedge funds, real estate funds, commodity funds and all other funds that are not covered by the UCITS Directive – at European level. ESMA has drawn up its detailed technical advice at the request of European Commission. For more on the AIFMD generally, see our “Private equity” category and particularly this post.
ESMA’s advice covers four main areas, as summarised in its press release:
“1. General provisions for managers, authorisation and operating conditions
The first part (p.16-135) of the advice clarifies the operation of the thresholds that determine whether a manager is subject to the Directive. ESMA proposes to require AIFMs to have additional own funds and/or professional indemnity insurance to cover risks arising from professional negligence. Many of the rules in this section, such as on conflicts of interest, record keeping and organisational requirements are based on the equivalent provisions of the MiFID and UCITS frameworks.
2. Governance of AIFs’ depositaries
This part of the advice (p. 136-187) sets out the framework governing depositaries of AIFs. Key issues 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 the independence of the relevant authority, the requirements on eligibility of entities wishing to act as depositary and the existence of sanctions in the case of violations.
Another crucial point is the liability of depositaries, the first element of which relates to the circumstances in which a financial instrument held in custody should be considered as ‘lost’. This assessment is crucial in determining whether a depositary must subsequently return an asset. ESMA’s advice proposes three conditions, at least one of which would have to be fulfilled in order for an asset to be considered lost. These are that a stated right of ownership of the AIF is uncovered to be unfounded because it either ceases to exist or never existed; the AIF has been permanently deprived of its right of ownership over the financial instruments; or the AIF is permanently unable to directly or indirectly dispose of the financial instruments. Another important concept which ESMA’s advice aims to clarify relates to which events would constitute external events beyond the reasonable control of the depositary. Finally, the advice clarifies the objective reasons that would allow a depositary to contractually discharge its liability.
3. Transparency requirements and leverage
One of the key objectives of the AIFMD is to help prevent the build-up of systemic risk. To help achieve this aim, ESMA’s advice clarifies (p. 188-239) 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 calculation methodologies for the leverage (commitment and gross methods) as well as a further option (the advanced method) that can be used by managers on request and subject to certain criteria. The AIFMD also aims to increase transparency of AIFs and their managers. In this context, ESMA’s advice specifies the form and content of information to be reported to competent authorities and investors, as well as of the information to be included in the annual report.
4. Third countries
With a view to ensuring the smooth functioning of the new requirements with respect to third countries, the AIFMD puts in place an extensive framework regarding supervisory co-operation and exchange of information. ESMA’s advice (p. 240-246) envisages that the arrangements between EU and non-EU authorities should take the form of written agreements allowing for exchange of information for both supervisory and enforcement purposes.”
The European Commission will now prepare implementing measures based on ESMA’s advice. The Commission’s webpage on the AIFMD is here.
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