On 19 August 2020, in a letter to the European Commission, ESMA published recommendations for the forthcoming review of the AIFMD. The proposals, which cover a wide range of both fundamental and rather technical issues, also extend to the UCITS Directive and MiFID II.
ESMA’s letter includes recommendations for changes in no less than 19 areas. The overall theme of the letter is the importance of achieving a level playing-field, both with regard to different EU Member States and the treatment of management companies of AIFs and UCITS. ESMA also points out the necessity of improving clarity of the AIFMD and UCITS-Directive. Furthermore, Brexit and the treatment of third-country management companies also is a major topic of ESMA’s letter.
I. Our client briefing
In our 7 September 2020 client briefing, we discuss and assess the following of ESMA’s proposals, which we consider to be highly relevant in terms of their potential impact on the fund industry in Europe:
- amendments to definitions;
- delegation and substance;
- reverse solicitation;
- semi-professional investors;
- harmonisation of supervision of cross-border entities;
- loan origination in AIFMD;
- scope of application of additional MIFID services and application of rules;
- availability of additional liquidity management tools; and
- depositary passport.
The following proposals are particularly noteworthy:
1. Amendments to definitions
Under the less prominent title ‘amendments to definitions’, ESMA addresses several issues that may potentially have a far-reaching impact, as they may affect the scope of the AIFMD and the UCITS Directive. In particular, ESMA proposes to clarify the definition of AIFs along the lines of its 2013 Guidelines on key concepts of the AIFMD and to address the distinction between holding companies and PE funds. With respect to PE funds, however, ESMA does not address important issues, such as transparency requirements and rules on asset-stripping, both in relation to acquisitions of non-listed companies and issuers.
2. Delegation and substance
Perhaps the most controversial proposals in ESMA’s letter to the Commission concern the delegation and substance requirements. While the Commission has stated in the Staff Working Document published in June 2020 that ‘AIFMD rules regarding delegation arrangements are proportionate within the imposed limitations’ and has not identified any need for change, ESMA seems to be of the opinion that delegation requirements should not only be clarified, but also tightened.
For example, ESMA proposes to introduce quantitative criteria for the permitted extent of delegation or to add a list of critical functions that cannot be delegated to article 82 of the AIFMD Commission Delegated Regulation (EU) No. 231/2013, which regulates delegation for AIFMs. ESMA also proposes to review the use of secondments and notes, in the context of regulation of white-label service providers, that if the Commission permitted such business models, then more specific regulatory provisions would be advisable. Especially the proposal regarding white-label service providers comes as a surprise, as ESMA itself notes that white-label service providers have been in the market for many years.
Overall, ESMA’s proposals to provide more clarity to the AIFMD and UCITSD, to promote a level playing field between EU Member States and to harmonise, where appropriate, rules applicable to AIFMs and to UCITS management companies are helpful. It is also commendable that ESMA addresses many aspects that are relevant to the industry.
However, ESMA’s letter touches a number of important and complex issues that will require further thorough analysis in order to identify suitable legislative measures (if any). In some areas, ESMA’s suggestions risk overshooting where a reasonable approach with a sense of proportionality might be preferable. This is particularly true for white-label asset managers. It remains to be seen to what extent, if at all, the Commission will adopt these suggestions and include them in its proposal for the AIFMD review.
ESMA also proposes to review the use of secondments and notes, in the context of regulation of white-label service providers, that if the Commission permitted such business models, then more specific regulatory provisions would be advisable.