ESMA's Letter To The European Commission On Its Review Of AIFMD

• Published date: 03 September 2020
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Fund Management/ REITs, Professional Negligence
• Law Firm: Dillon Eustace
• Author: Mr Cillian Bredin and Shane Coveney

Background

On 18 August 2020, ESMA issued a letter to the European Commission (the "Commission") highlighting nineteen (19) areas where, in ESMA's opinion improvements could to be made to the regulatory framework currently in place for alternative investment funds ("AIFs") and which ESMA believes the Commission should consider as part of the Commission's scheduled review of the Alternative Investment Fund Managers Directive ("AIFMD") (the "Letter")¹. The Letter was issued to assist the Commission in its review of AIFMD with its recommendations based on ESMA's experiences with national competent authorities ("NCAs") on the operation of AIFMD since it was first published in 2011.

It is worth noting at the outset that while the Letter was issued in light of the impending review by the Commission of AIFMD ESMA's recommendations may, if implemented, have significant implications not only for the AIFMD framework but also the UCITS framework.

In this briefing, we consider a number of the key points raised by ESMA in the Letter.

Delegation and substance

Delegation

ESMA has once again highlighted concern with the existing legislative provisions governing delegation and substance and has recommended that both the AIFMD and UCITS legislative frameworks are revised in line with its Opinion which it issued in July 2017 following the United Kingdom's decision to withdraw from the European Union.

Noting the current practice of AIFMS and UCITS management companies delegating collective portfolio management functions to third parties and the likely increase of such delegation arrangements to non-EU entities in light of Brexit, ESMA highlights the operational and supervisory risks associated with such delegation arrangements. It suggests that the legislative frameworks be updated to provide further clarification on the maximum extent of delegation to ensure that sufficient substance remains in the EU. In this regard, it proposes that existing legislative provisions in AIFMD be revised to include quantitative criteria which must be complied with when delegating functions to a third party or a list of "core" or "critical" functions which cannot be delegated to third parties and must be performed internally².

In order to address regulatory arbitrage and possible circumvention of AIFMD/UCITS regulatory standards which may arise in delegation arrangements by virtue of the fact that the delegate is not directly subject to the AIFMD or UCITS frameworks, ESMA also recommends that legislative amendments be adopted to ensure that the management of AIFs and UCITS is subject to the regulatory standards set out in the AIFMD and UCITS framework, irrespective of the regulatory license or location of the delegate.

Third Party Management Companies

ESMA's letter also raises concerns regarding "white-label service providers" (typically referred to in Ireland as "third party management companies") which is a model used in certain EU jurisdictions such as Ireland and Luxembourg under which a promoter which...