Sunday, January 08, 2012

ESMA Planning Guidance on Hedge Fund Regulation and Proposed Regulations on ETFs in 2012

Having proposed regulations under the Alternative Investment Fund Managers (AIFM) Directive last year, the European Securities and Markets Authority plans to issue guidance on the regulation of hedge fund and private equity fund managers under the Directive in 2012, according to ESMA Chair Steven Maijoor. In remarks at the EFAMA investment management forum, the Chair also said that ESMA plans to propose regulations under the UCITS Directive that are specific to exchange traded funds, such provisions ensuring an adequate level of protection of retail investors dealing on the secondary market. EFAMA is the European Fund and Asset Management Association.

The AIFM Directive introduced an entirely new regulatory landscape for managers of hedge funds and other alternative investments. By the end of 2011, ESMA delivered to the European Commission proposed implementing regulations on the AIFM Directive. The proposals were the result of two separate consultation papers and two open hearings that led to the receipt of a considerable amount of responses from a wide range of stakeholders, including valuable input from EFAMA. Despite a very tight time constraint and the significant amount of topics covered by the mandate, ESMA delivered its advice by the mid-November deadline set by the Commission.

Chairman Maijoor believes that it is generally recognized that ESMA’s proposals represent a reasonable balance between the need to introduce an adequate level of investor protection within the alternative investments framework and the constraints of the Level 1 Directive, on one hand, and the concerns expressed by the industry, on the other. He noted that ESMA introduced very important clarifications on some of the core elements of the AIFMD which are linked to investor protection, such as the transparency requirements, the duties of the depositary and its liability regime, and the rules applying to the delegation to third country managers and depositaries. The Commission will now analyze the proposals ESMA made to assist them in developing the AIFMD Level 2 measures.

But ESMA’s work on the AIFMD is not done, emphasized the Chair. Indeed, ESMA has already determined areas in which it will complement the proposals through the development of further guidelines, for example on the advanced method of calculation of leverage, and is willing to lead the negotiation of the co-operation agreements with the non-EU competent authorities which are foreseen by the AIFMD provisions on third countries. Further, ESMA is progressing with its work on the regulatory technical standards on the types of AIFM, which should be adopted in parallel with the Level 2 implementing measures, and will start working shortly on the other measures foreseen by the Directive, such as the guidelines on sound remuneration policies.

Separately, ESMA is also developing guidelines on exchange traded funds and structured UCITS designed to ensure a better regulatory framework for investors. The rationale here is the well-known issue of the retailization of complex products. Taking that into account, ESMA is determined to introduce new rules which will reduce risk and deliver more transparency for retail investors exposed to such products. The regulations will be specific to exchange traded funds, such as a requirement for such funds to use an identifier, as well as new provisions ensuring an adequate level of protection of retail investors dealing on the secondary market.

The Chair is aware of concerns that the guidelines would create an ETF-specific regime focusing on this category of product only and not imposing equivalent requirements on other UCITS that are exposed to indices or that carry out investment activity using techniques which are very similar, if not identical, to the ones used by ETFs. But he assured that ESMA intends to identify clearly those provisions which are relevant to all UCITS funds, with only some rules being specific to ETFs and reflecting their characteristics, for example, issues relating to the secondary market trading.

For issues arising from securities lending activities, for instance, ESMA will cover all kinds of UCITS, including exchange traded funds, engaging in such activity. In particular, ESMA aims to deliver more transparency for investors by requiring funds to disclose in their prospectuses the fact that they make use of securities lending, and setting out some specific rules on the disclosure of collateral and its quality.

Finally, the Chair emphasized that the packaged retail investment products (PRIPs) initiative remains a central piece of work in terms of investor protection. The range of products to be covered is quite broad and potentially includes collective investment undertakings, structured products and derivatives, and he knows there are MiFID II proposals to extend selling standards to structured deposits.

A goal of the PRIPs initiative is to apply consistent rules to similar investment product. It is essential for investor protection to ensure that similar, competing retail investment products are subject to the same requirements. The Commission clearly defined that approach in the consultation it launched last year where it proposed to apply consistent standards across the market by setting the Key Investor Information Document (KIID) as a benchmark for all PRIPs as far as the disclosure requirements are concerned, and the MiFID rules as a benchmark for all PRIPs as regards selling practices.

ESMA fully supports the creation of a level regulatory playing field for all retail investment products in terms of disclosure and selling practices. For selling practices in particular, ESMA is aware of the fact that a horizontal legislative approach may raise some issues in relation to the areas of competence of securities and insurance regulators in those EU Member States where they are not integrated and that the Commission has already presented a proposal for the review of the MiFID rules.

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