On November 16, the European Securities and Markets Authority (ESMA) published its final advice to the European Commission on possible implementing measures under the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).
The rules proposed by ESMA are designed to establish a comprehensive framework for alternative investment funds (AIFs), their managers and depositaries and to help achieve the AIFMD’s objective of increased transparency and tackling systemic risk. ESMA’s advice, which runs to 500 pages, responds to a request by the European Commission, originally sent in December 2010 to ESMA’s predecessor organization requesting the delivery of final advice by November 16 2011.
The advice covers four broad areas:
1. General provisions for managers, authorization and operating conditions
This clarifies the operation of the thresholds that determine whether an alternative investment fund manager (AIFM) 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. A substantial number of the rules in this part of the advice, such as those on conflicts of interest, record keeping and organizational requirements are based on equivalent provisions of the EU’s Markets in Financial Instruments Directive (MIFID) and Directives on Undertakings for Collection Investment in Transferable Securities (UCITS).
This part of the advice sets out the framework governing AIFs’ depositaries. Key issues include the criteria for assessing whether the prudential regulation and supervision applicable to a depositary established in a third country is equivalent to the AIFMD. These include 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.
3. Transparency requirements and leverage
The advice clarifies 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.
4. Third countries
The AIFMD requires co-operation and exchange of information between EU and third country regulators. ESMA’s advice envisages that the arrangements between EU and non-EU authorities will 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. It is anticipated that these will be based on ESMA’s advice. In a letter from ESMA to the Commission published with the advice, ESMA indicates that it is currently working on or will start working on a number of supplemental issues and guidelines and technical standards including guidelines on remuneration policies.
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