ESMA updates its guidance on AIFMD and the UCITS Directive

Update to ESMA’s Q&As: Application of the AIFMD

The AIFMD document contains one new Q&A, in a new Section XIV (Branches).

This examines the issue of which competent authority (that of the AIFM’s home Member State or that of the host Member State) has supervisory responsibility where an AIFM provides Markets in Financial Instruments Directive (MiFID) services, under Article
6(4) of the AIFMD, through a branch established in a different (host) Member State.

The general position is that, where a branch of an AIFM is established in a Member State other than the AIFM’s home Member State, the competent authorities concerned share supervisory powers - the competent authority of the host Member State (where the branch is located) supervises the branch’s compliance with conduct rules under Article 45(2) of the AIFMD, while that of the AIFM’s home Member State has responsibility for the supervision of the AIFMD’s other requirements.

However, where an AIFM is authorised, under Article 6(4) of the AIFMD, to carry out MiFID investment services and does so via a branch in another Member State, the AIFMD does not explicitly provide for the allocation of supervisory responsibilities and powers in respect of such services.

ESMA’s view is that the responsibilities of the home and host competent authorities should be identified “similarly to, and consistently with, the general framework established for the provision of activities pursued by […] AIFMs through branches as well as with the MiFID II framework regulating the supervision on the provision of investment services across the EU”.

Under Article 35(8) of MiFID II, the competent authority of the host Member State is responsible for ensuring that the services provided by the branch of an investment firm in its territory comply with the MiFID II requirements under Article 24 (general principles and information to clients) and Article 25 (assessment of suitability and appropriateness and reporting to clients) of MiFID II, which also apply to AIFMs providing investment services.

Update to ESMA’s Q&As: Application of the AIFMD

Three new Q&As have been added to the UCITS Q&A document, under Section I - General.

Branches

A new Q&A (Q7: Supervision of branches) replicates the AIFMD Q&A on branches, summarised above. Where the summary refers to an AIFM, read "UCITS ManCo" where it cites Article 6(4) and Article 45(2) of the AIFMD, replace these with Article 6(3) and Article 17(5) of the UCITS Directive respectively.

Issuer concentration

In a new Q5b, European Securities and Markets Authority (ESMA) notes that only netting arrangements in accordance with the definition and conditions set out in Committee of European Securities Regulators (CESR) Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS (CESR/10-788) (28 July 2010) may be taken into account when calculating issuer concentration limits pursuant to Article 52 of the UCITS Directive.

UCITS ability to invest in other UCITS with different investment policies

In a new Q6a, ESMA considers the extent to which (if at all) a UCITS is permitted to invest in other UCITS or collective investment undertakings which have different investment strategies or investment restrictions. For example, where a UCITS’s fund rules and prospectus do not permit it to invest in certain assets, or prohibit the use of derivatives other than for hedging, can that UCITS invest in other UCITS or collective investment undertakings which are not subject to the same investment restrictions?

ESMA’s view is that the prospectus of a UCITS should clearly disclose whether, in the case of investment in a fund of funds, the target fund(s) can have different investment strategies or restrictions.

Where the UCITS’s fund rules and prospectus expressly rule out certain types of assets or use of derivatives without any reservations, the UCITS ManCo (or self-managed UCITS) should “carry out proportionate due diligence” to ensure that investment in a fund of funds do not result in the investing UCITS’s investment strategies or restrictions being circumvented.