ESMA Consults On Future AIFM Rules
Thursday, August 25, 2011

The European Securities and Markets Authority (ESMA) has released for consultation new rules for alternative investment fund managers (AIFMs) and the treatment of third country entities.

These rules, the ESMA said in a statement on August 18, reflect the global nature of the alternative investment management industry and the need to put in place a framework for entities outside the European Union.

The consultation complements the draft advice published for consultation in July and is in response to the European Commission’s request for assistance to ESMA’s predecessor, the CESR, in December 2010. The consultation period closes on September 23 and the ESMA has to deliver its final advice to the Commission by 16 November 2011.

“The third country and supervisory co-operation aspects of the AIFMD are a key element in the overall framework," commented Steven Maijoor, Chair of the ESMA. "It is important that the co-operation arrangements with authorities outside the EU work smoothly and allow for a comprehensive exchange of information, both from the perspective of day-today supervision by competent authorities as well as systemic risk."

"We particularly look forward to receiving input from third country authorities in response to our proposals," Maijoor added.

The proposals published in the ESMA’s consultation paper cover three broad areas, including supervisory co-operation and exchange of information, delegation of portfolio or risk management functions to third country entities and assessment of equivalence of third country depositary frameworks.

Under the AIFM directive, the depositary of the fund may be established in a third country subject to certain conditions. In this section of the advice, the ESMA sets out its proposals on the elements to be taken into account when 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; and can be considered as effectively enforced.

The ESMA said that it 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, equivalence of capital requirements and the existence of sanctions in the case of violations.

Concerning the arrangements to be put in place with third country authorities in general, the ESMA notes its preference for a single agreement to be negotiated by the Authority in each case in order to ensure consistency and avoid a proliferation of bilateral agreements. The ESMA has also identified two documents produced by the International Organization of Securities Commissions as benchmarks for the written agreements.

The AIFM directive was agreed by the European Parliament and the European Council last October and will impose registration, reporting and initial capital requirements on a financial industry sector which until now has been subject only to "light touch" regulation. It is hoped that, following its introduction, the enhanced regulatory oversight over AIFM will enhance investor protection and financial stability.

Under the directive, a European AIFM with a portfolio of more than EUR100m (USD140m) will be required to obtain an authorization from national authorities to operate. This permit will entitle them to market funds throughout the EU single market.

The most controversial proposal in the directive has been that AIFMs from 'third countries' would be able to obtain that EU permit, or ‘passport’, to sell their funds within the EU without first having to seek permission from each member state and comply with different national laws - a stipulation the terms of which have been widely awaited, for instance, by US funds wanting to continue to operate in Europe.