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AIMA, a global organisation representing members of the hedge fund industry including managers and service providers, highlights a number of “unintended consequences” of the changes proposed by the Commission, which it says cannot be attributed to the restatement of technical recommendations into legal language to provide greater clarity or legal certainty.
The association says that in fact in a number of cases, the changes introduce new policies that either have not been recommended by ESMA, ignore ESMA’s advice completely, or reconfigure the parameters that ESMA put forward following industry consultation and technical discussions with experts.
AIMA says the changes comprise the addition of new legal obligations to those proposed by ESMA, the deletion without replacement of entire policy areas within ESMA’s advice, subtle drafting modifications that result in potentially large policy changes, the alteration or replacement of technical parameters proposed by ESMA, the restriction of the provision of certain services to EU entities only, the deletions of proportionality or materiality provisions, and the replacement of clear provisions with ambiguous language.
The differences between the Commission draft regulation and the ESMA advice, which AIMA says appear to be “both significant and wide-ranging”, cover areas including the definition of assets under management, own funds, leverage, professional indemnity insurance, organisational requirements, delegation, risk management, transparency, depositaries and third countries.
New legal obligations
As an example of the addition of new legal obligations, AIMA cites the Directive’s prohibition on managers outsourcing their tasks to the extent of becoming a letterbox entity that can no longer be considered to be managing the fund portfolio. ESMA was asked to clarify the meaning of this requirement, carried over from the UCITS and MiFID Directives.
Deletion of entire policy areas
Regarding the deletion of entire policy areas, AIMA points to ESMA’s clarification of which assets are capable of being held in custody by the depositary, which states that assets subject to security and title-transfer collateral arrangements cannot be considered to be in the depositary’s custody since it no longer has any control over these assets.
Alteration or replacement of technical parameters
An example of the alteration or replacement of technical parameters relates to the insurance regime applicable to managers desiring to cover through professional indemnity insurance any risks to investors arising from their professional activity.
Limiting the provision of services to EU entities
ESMA advised that managers should select counterparties and appoint prime brokers that are subject to ongoing supervision by a public authority, are of financial soundness and have the necessary organisational structure to provide the services in question to the manager or fund. The Commission’s draft regulation states that in appraising the financial soundness of counterparties or prime brokers, the manager must take into account whether they can comply on an ongoing basis with prudential requirements under EU law.