This update summarises current regulatory developments in the European Union and certain member states including the UK, focussing on the investment funds and asset management and related sectors, during the past month. We also include in this update a longer summary in the UK section of the Independent Commission on Banking's Final Report on 12 September 2011 and the Coalition Government's initial reaction to it.
EU REGULATORY DEVELOPMENTS
The AIFM Directive
Readers will remember that this Directive was the subject of a record several thousand amendments during the legislative process in Brussels before it was finally published in the Official Journal on 1 July 2011. During the process on 9 November 2009, the UK's Treasury Minister Lord Myners stated:
"This is a very dodgy Directive that's been poorly constructed. It was produced in a hurry. It's a process that makes those who support the European Union embarrassed"
and Patrice Berge-Vincent of the French financial regulator, the AMF, stated on 9 October 2009:
"Almost all of the Directive's provisions need to be redrafted to make them appropriate, proportionate and adequate".
Against this background, on 23 August 2011, ESMA published a further consultation on possible level 2 implementing measures under the AIFM Directive relating to future rules for alternative investment fund managers ("AIF managers") and the treatment of third-country entities. ESMA's proposals set out in this consultation paper include:
Supervisory co-operation and exchange of information. ESMA's draft advice to the European Commission focuses on the relationships between the EU and third-country competent authorities. ESMA envisages that the arrangements between competent authorities should take the form of written agreements allowing for exchange of information for the purposes of supervision, enforcement and systemic risk oversight. ESMA considers that the agreements should also impose a duty on the third-countries competent authorities to assist the relevant EU competent authorities, to enforce either EU or national legislation. It proposes that the agreements take the form of a multilateral memorandum of understanding (a "MMoU") centrally negotiated by ESMA itself. Delegation of portfolio or risk management functions to third-country entities. ESMA's draft advice sets out the additional requirements to be applied when AIF managers delegate portfolio or risk management functions to an undertaking in a third country. The draft advice focuses on the content of the written agreement to be put in place between the competent authorities of the home member state and the third country concerned. ESMA considers that the detailed content of these agreements should be based on existing international standards. Assessment of equivalence of third-country depositary frameworks. 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 has the same effect as the AIFM Directive. This consultation paper is in effect ESMA's draft advice on Part IV of the Commission's December 2010 request for advice on the AIFM Directive implementing measures. It also summarises feedback received to the former Committee of European Securities Regulators' December 2010 call for evidence on the AIFM Directive implementing measures.
European Commission Consultation on a New EU Regime for Venture Capital
The Investment Management Association (the "IMA") has published its response dated 10 August 2011 to the European Commission's June 2011 consultation on a new European regime for venture capital. The IMA strongly supports a wide-ranging review of the AIFM Directive, rather than a stand-alone initiative relating to venture capital funds. It is of the view that the Commission should assess the proportionality of the AIFM Directive's requirements for all professional and non-systemically important funds (in addition to focusing on venture capital funds).
The IMA also calls on the Commission to align its venture capital work with the Markets in Financial Instruments Directive (2004/39/EC) ("MiFID"). This is because MiFID will govern trading in publicly listed securities of small and medium sized enterprises ("SMEs") at a later stage of their growth.
The City of London Law Society (the "CLLS") also published its response on 10 August 2011 to the European Commission's June 2011 consultation and included the following comments on the Commission's proposals:
the Commission should clarify that the passport regime will only apply to the ability to raise funds and will not require venture capital funds, or any other investors, to obtain a licence to invest in European companies; firms that are outside the scope of the AIFM Directive should continue to be able to make use of national private placement regimes, and the proposed passport regime should be an additional option for firms, rather than a requirement; the CLLS is concerned that the proposal refers to "professional investors as defined by MiFID" as it believes the MiFID definition is not appropriate to either private equity or venture capital investment, and suggests that the UK concept of "business angel" investors (as reflected in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (S1 2005/1529)) would be a better model; and the Commission should review and clarify the definition of a small and medium enterprise (a "SME") and the CLLS prefers the approach taken in the AIFM Directive, which applied a more limited definition of SME. (A separate DechertOnPoint on the European Commission's consultation is currently in preparation).
A Common Definition of EU Money Market Funds
The European Securities and Markets Authority ("ESMA") published a Q&A paper on a common definition of EU money market funds ("MMFs") on 26 August 2011.
The Q&A paper relates to the guidelines on a commons definition of EU MMFs published by the former Committee of European Securities Regulators ("CESR") in May 2010. The guidelines apply only to collective investment undertakings authorised under the UCITS Directive (2009/65/EC) ("UCITS IV") and collective investment undertakings regulated under the national law of a member state which are subject to supervision, comply with risk-spreading rules and label or market themselves as MMFs.
The Q&A paper provides answers to questions on the guidelines that ESMA has received from both the competent authorities and the public. The aim of the Q&A paper is to promote common supervisory approaches and practices among competent authorities in the application of the guidelines. However, it is also intended to help management companies by providing clarity on the guidelines. The Q&A paper is not designed to create an extra layer of requirements in this area, although it may be converted into formal ESMA guidelines and recommendations in due course.
The MiFID Review
Revision of the Markets in Financial Instruments Directive ("MiFID") (which is now four years old), is a part of the European Commission's attempt to strengthen the rules governing financial markets in light of the financial crisis and to introduce additional rules relating to practices that were not widespread at the time of the original Directive. In December 2010 the Commission published a consultation paper on the review of MiFID. The consultation paper stated that technological advances, the complexity and changing make-up of financial markets, and the lessons of the financial crisis call for an extensive review targeted at addressing the areas where shortcomings have been revealed or improvements are needed. The paper argued that significant changes to MiFID are required as regards the organisation, transparency and oversight of various markets segments, especially in those instruments traded mostly over-the-counter ("OTC").
A widely-leaked draft copy of the MiFID Review due to be released next month now reveals that the European Commission will publish the MiFID reform in two parts—the first will be a regulation covering market infrastructure while the second part focuses on transparency issues and will be introduced as a directive. The draft regulation will mandate open access to clearing and expand current equities transparency regulation competition in the derivatives industry by allowing derivatives trading platforms access to existing derivatives clearing pools. The rules will also force widely traded derivatives out of the over-the-counter market and onto trading platforms. The Commission would also like to bring down the fees exchanges and trading platforms charge for data on share trades. Exchanges and other trading platforms would have to make all data free within fifteen minutes of a trade, with live data sold on what the Commission defines as a "reasonable commercial basis". Platforms would also have to store order data for at least five years to improve market abuse monitoring by supervisors.
The draft directive which accompanies the regulation contains proposals central to High Frequency Trading. ESMA has launched a preliminary consultation into high frequency trading, and the European Commission will now aim to bring all entities engaged in High Frequency Trading under MiFID. Tougher scrutiny of computerised trading programs is planned. The Commission will also start to regulate broadly defined Organised Trading Facilities ("OTFs"), (a trading system operated by an investment firm that is not already a regulated...