EU regulator offers guidance for third-party fund managers

ESMA publishes today a consultation paper (ESMA/2011/270) setting out its proposals for the detailed rules on supervision and third country entities underlying the Alternative Investment Fund Managers Directive (AIFMD). These rules reflect the global nature of the alternative investment management industry and the need to put in place a framework for entities outside the EU. Today’s publication, which complements the draft advice published for consultation in July (ESMA/2011/209), is in response to the European Commission’s request for assistance to ESMA’s predecessor, CESR, in December 2010. ESMA has to deliver its final advice to the Commission by 16 November 2011.

Steven Maijoor, Chair of ESMA, said:

“The third country and supervisory co-operation aspects of the AIFMD are a key element in the overall framework. 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.”

The proposals published in ESMA’s consultation paper today cover three broad areas.

Supervisory co-operation and exchange of information
With a view to ensuring the smooth functioning of the new requirements, the AIFMD puts in place an extensive framework regarding supervisory co-operation and exchange of information. ESMA’s draft advice focuses on the relationships between EU competent authorities and third country authorities.

ESMA envisages that the arrangements should take the form of written agreements allowing for exchange of information for both supervisory and enforcement purposes. The agreements should also impose a duty on the third country authority to assist the relevant EU authority where it is necessary to enforce EU or national legislation. Finally, ESMA considers it important that the arrangement make provision for exchange of information for the purposes of systemic risk oversight.

Delegation of portfolio or risk management functions to third country entities
This part of the advice sets out ESMA’s proposals on the additional requirements to be applied when alternative investment fund managers delegate the portfolio or risk management functions to an undertaking in a third country. The proposals focus on the content of the written agreement to be put in place with the competent authority of the third country, which under ESMA’s proposals would have to allow for access to information, the possibility of on-site inspections of the entity to which functions are delegated and the carrying out of enforcement actions in the case of a breach of the regulations.

Assessment of equivalence of third country depositary frameworks
Under the AIFMD, the depositary of the fund may be established in a third country subject to certain
conditions. In this section of the advice, 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:

i) has the same effect as the provisions of the AIFMD; and
ii) can be considered as effectively enforced.

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, 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, ESMA notes its
preference for a single agreement to be negotiated by ESMA in each case in order to ensure consistency
and avoid a proliferation of bilateral agreements. ESMA has also identified two documents produced by
the International Organization of Securities Commissions (IOSCO) as benchmarks for the written agreements.

Next steps
Responses to the consultation are requested by 23 September, in order to ensure ESMA can finalise its
advice to the Commission by the deadline of 16 November.

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