Investment Funds Update: Europe - Issue 5, 2016

June 01, 2016

Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles.



AMF Doctrine – STFR Implementation

The Autorité des Marchés Financiers (the “AMF”, the French financial markets regulator) updated several of its instructions to reflect the application of the Regulation (EU) No 2015/2365 (Transparency of Securities Financing Transactions and of Reuse) which provides for disclosure obligations for UCITS and AIFs on the use of certain securities financing transactions, including: Instruction No 2011-19, Instruction No 2011-20, Instruction No 2011-21, Instruction No 2011-22, Instruction No 2012-06 and Instruction No 2014-02.

AMF Doctrine – UCITS and AIFs Custodian Authorization Process

The AMF published an Instruction No 2016-01 providing the requirements for entities wishing to act as custodian of UCITS and AIFs. The Instruction details:

  • the authorization process for custodian of UCITS funds;
  • the submittal of performance signification (cahier des charges) for custodians of UCITS and AIFs; and
  • the content of the programme of activity of such custodians.

AFG Publications

Pursuant to the publication by the Association Française de la Gestion Financière (the “AFG”, the French professional association representing management companies) of its February 2016 guide on cash management issues, the AFG has published in April the English version of that guide which can be found on the AFG’s website.

Autorité des Marchés Financiers’ Annual Report

The AMF published on 17 May 2016 its 2015 Annual Report. In addition to the presentation of the AMF activity in 2015, the Annual Report highlights goals of the AMF for 2016 (prevent risk and protect investors, convergence in European supervision and competitively of the French financial market). The Annual Report also provides several statistics (i.e., number of management companies and funds existing in France, total AuM, passports requests).



BaFin Identifies Faults in Financial Product Advertising

The BaFin examined online sales documents and adverts for investment products that target retail investors and the websites of investment management firms at the end of 2015 BaFin has identified 74 potential breaches of advertising rules for financial products aimed at retail investors as part of this analysis.

The BaFin wanted to determine whether product providers comply with advertising regulations for financial products and to uncover cases of violations. The analysis, which is designed to improve investor protection, covered 82 investment managers and 162 investment portfolios aimed at retail investors.

BaFin stated it is “encouraging” that 92 per cent of the retail investment portfolios it analysed complied with advertising regulations but notes that it found 74 cases of potential breaches.

The majority of violations affected companies that are not under constant BaFin supervision.

The German regulator identified 13 cases where sales documents were incomplete or where firms failed to properly direct investors to sales documents and essential investor information.

The analysis also uncovered 10 cases where investment managers supplied incomplete or no information on their supervision by BaFin.

New Investment Ordinance (“Anlageverordnung”) Enters Into Force

The updated German Investment Ordinance entered into force on 22 April 2016. The changes incorporated in the Investment Ordinance mostly result from amendments due to an update of the German Insurance Supervisory Act (“Versicherungsaufsichtsgesetz”) as a consequence of the transformation of the Solvency II Directive and include several editorial adjustments. The new Investment Ordinance is not directly applicable to insurance companies with a gross premium income of over EUR 5 Million which is in line with the Insurance Supervisory Act.

BaFin Simplifies Notification Process for Changes of Fund Rules of Special AIF

From 2 May 2016 onwards, the BaFin will accept a simplified notification process in case of changes of the fund rules of Special AIFs (according to section 273 sentence 2 of the German Investment Code): if changes do not have an impact on the investment principles of the fund (but affect, e.g., investor rights or costs) the changes and data can now be submitted to BaFin electronically. 

Investment Statistics as of 31 March 2016

In May 2016, the German Investment Fund Association BVI has issued its latest investment statistics report dated 31 March 2016, providing an overview of the net assets and net sales within the German investment fund and asset management markets. The statistics are broken down by asset class and provider. They provide information on net assets and net inflows of investment funds and assets outside investment funds.



UCITS V Regulations Update

Following the transposition of the European Communities (Undertaking for Collective Investment in Transferable Securities) (Amendment) Regulations 2016 (S.I. 143 0f 2016 ) “UCITS V” into Irish law on 21 March 2016, the Irish Funds UCITS V Working Group is in the process of assessing the impact of the ESMA guidelines on sound remuneration policies under the UCITS V regime particularly in the context of the look-through requirement for non-EU investment managers. Further clarity in relation to the UCITS V remuneration regime in Ireland is expected from the Central Bank.

Read the UCITS V Regulations in full.

Latest Irish Funds Statistics

The latest Irish Funds Statistics published by the Central Bank are now available.

Anti-Money Laundering Update

Following the publication of the Central Bank Report on Anti-Money Laundering/Countering the Financing of Terrorism and Financial Sanctions Compliance in the Irish Funds Sector in November 2015, the Irish Funds AML/CTF Working Group is liaising with the Central Bank in order to clarify the meaning of “discontinue the business relationship”. Further guidance on this is expected.

Investor Money Regulations Update

The Investor Money Regulations (IMR) become effective on 1 July 2016.

The Irish Funds IMR Working Group is in the process of making a submission to the Central Bank in respect of the treatment of retrocession and rebate accounts under IMR.



Luxembourg Law of 10 May 2016 Implements UCITS V Directive

The Luxembourg law of 10 May 2016 (the “UCITS V Law”) was published in the official journal on 12 May 2016. The UCITS V Law will enter into force on 1 June 2016.

The UCITS V Law implements Directive 2014/91/EU (the “UCITS Directive”) of 23 July 2014 amending Directive 2009/65/EC on the coordination of the laws, regulations and administrative provisions relating to Undertakings for Collective Investment in Transferable Securities (“UCITS”) as regards depositary functions, remuneration policies and sanctions.

More specifically, the UCITS V Law implements the rules for depositaries as foreseen under the UCITS V Directive in relation to Luxembourg UCITS and modifies the provisions in relation to Undertakings for Collective Investment (“UCIs”) subject to Part II of the Luxembourg law of 17 December 2010 concerning undertakings for collective investment. The UCITS V Law also contains provisions impacting AIFMs, for instance in relation to the accounting documents of AIFMs and cross-border provisions of MIFID Investment services by AIFMs.

In addition, the UCITS V Law implements provisions relating to remuneration policies for those persons managing UCITS or having an impact on the UCITS’ risk profile. The UCITS V Law furthermore harmonizes administrative sanctions that may be undertaken by the Commission de Surveillance du Secteur Financier (CSSF).

Please see for an upcoming Dechert Onpoint on UCITS V.

Read the accompanying press release 'Publication of the Law of 10 May 2016 Transposing Directive 2014/91/EU (UCITS V)' 

Entry into Force of Amendments to Capital Markets Transparency Legislation

The Luxembourg law which amends the Luxembourg transparency law for issuers of securities, dated 10 May 2016 and published in the official journal on 12 May 2016, entered into force on 15 May 2016 (the “Amending Transparency Law”).

The Amending Transparency Law implements Directive 2013/50/EU of 22 October 2013 and Article 1 of Directive 2014/51/EU of 16 April 2014 and amends the Luxembourg law of 11 January 2008 on transparency requirements of issuers and the Luxembourg law of 10 July 2005 on prospectuses for securities. As a consequence, the Grand Ducal Regulation dated 11 January 2008 on transparency requirements of issuers of securities is amended by the Grand Ducal Regulation dated 10 May 2016.

The principal changes introduced by the Amending Transparency Law include a reduction of administrative requirements in respect of issuers for which Luxembourg is the home Member State, with certain transparency requirements being removed. In respect of certain foreign issuers for which Luxembourg is the home Member State, the Amending Transparency Law foresees new requirement to publish a report on payments to governments.

Furthermore, notification obligations are imposed on investors taking exposure on shares via a much wider range of financial instruments. The definition of financial instruments is significantly broadened. The Amending Transparency Law also introduces aggregation rules and changes with respect to the disclosure of the home Member State.

With the Amending Transparency Law, the Commission de Surveillance du Secteur Financier (CSSF) receives significant new injunction and sanction powers.

Read the accompanying press release 'Entry into Force of the Amended Transparency Law'

Luxembourg Legal Publication Regime Becomes Fully Digitalized: RESA Replaces the Mémorial C

The Luxembourg Parliament voted on draft Bill Nr. 6624, on 10 May 2016, which reforms the legal publication regime in relation to companies and associations and will be applicable from 1 June 2016. The modernized legal publication process will have an immediate impact on the fund industry by creating a new requirement for Luxembourg common funds (fonds communs de placement or FCP) to be registered with the Luxembourg trade and companies register (Registre de commerce et des sociétés or RCS).

FCPs benefit from a six month transition period, starting from the entry into force of the law, to complete their registration at the RCS.

Read the Dechert OnPoint ''Luxembourg Legal Publication Regime Becomes Fully Digitalized: RESA Replaces the Mémorial C'

The CSSF communication of 17 May 2016 (“Reform of the legal publication regime”) and the RCS information brochure are available in French.

CSSF Press Release 16/20 Summarizing the Global Situation of UCIs and SIFs at the End of March 2016

CSSF press release 16/20 of 29 April 2016 summarizes the global situation of Undertakings for Collective Investment and Specialised Investment Funds at the end of March 2016 and contains an indication of the number of net assets of Undertakings for Collective Investment in accordance with, respectively, part I and II of the 2010 Law and the 2007 Law.

CSSF Newsletter – April 2016

The CSSF published its April 2016 newsletter (number 183), which provides updates in relation to recent national regulation and statistics.



FCA Consults on Rule Changes for UCITS V and SFT Regulation

The FCA published a consultation paper (CP16/14) on 19 May 2016, containing proposals to amend its rules and guidance in the Client Assets sourcebook (CASS) and the Collective Investment Schemes sourcebook (COLL) following the adoption and publication of the UCITS V Level 2 Regulation. The proposed changes affect UCITS depositaries and seek to amend relevant FCA rules and guidance for consistency with the UCITS V Level 2 measures. Affected firms must comply with the new requirements by 13 October 2016.

This consultation also includes minor proposed changes to the FCA’s Senior Management Arrangements Systems and Controls sourcebook (SYSC), COLL and the Investment Funds sourcebook (FUND), to reflect certain requirements of the EU Regulation on reporting and transparency of securities financing transactions ((EU) 2015/2365) (SFT Regulation).

The proposed changes include:

  • Amendments to CASS 6.6: the FCA proposes to disapply certain CASS rules and guidance to ensure consistency with the requirements under the Level 2 Regulation;
  • New guidance in COLL 6.9: highlighting the conditions for meeting the independence requirements introduced by the Level 2 Regulation;
  • Amendment to SYSC 19E.2.9R(1): setting out the circumstances in which a UCITS management company must appoint a remuneration committee; and
  • Copying out into COLL, the provisions of the SFT Regulation that require managers of UCITS and alternative investment funds to disclose details of their use of securities financing transactions and total return swaps in the funds' pre-contractual documents and periodical reports to investors.

Comments can be made until 19 July 2016 and a policy statement is expected in the third quarter of 2016.

FCA Staff Comments on Best Execution Duties for FX Spot and Derivative Transactions

The PRA published the minutes of a meeting of the Foreign Exchange Joint Standing Committee on 22 April 2016, that include a summary of a presentation by Edwin Schooling Latter, FCA Head of Markets Policy, on the FCA's views on the application of best execution to FX derivative and spot transactions.

Mr Schooling Latter stated that all FX derivative transactions and those FX spot transactions that are ancillary to transactions in MiFID financial instruments are within the scope of the best execution requirements set out in the Markets in Financial Instruments Directive (MiFID). He noted that best execution would still apply when the firm was dealing as principal, including where dealing with a professional counterparty, where the counterparty was placing legitimate reliance on the firm.

For other FX spot transactions, he said the FCA considered that the obligations arising would vary according to the nature of the relationship between market participants:

  • Acting as agent. This scenario relates to a firm that acts on behalf of a client and executes transactions in line with their mandate, with a responsibility to use the firm's efforts to secure an optimal outcome. In this case, best execution would be an appropriate benchmark, even if, for transactions not within the scope of MiFID, there was not a MiFID best execution requirement.
  • Acting as principal. This scenario involves a firm acting on its own behalf, providing two-way quotes to clients with no obligation to execute the order until both parties are in agreement, where the client has the flexibility to seek other quotes. In this scenario, the principal has no best execution requirements.
  • Acting as principal with some discretion. This scenario relates to circumstances where a client could be considered to have placed some legitimate reliance on the principal. In this scenario, the principal has obligations to try and achieve an optimal outcome for the client, for example when managing stop-loss orders.

Bank of England Staff Comments on Cyber-Risk

Tthe Bank of England (BoE) published a speech by its Chief Information Security Officer, Will Brandon, on the approach financial institutions should take to managing cyber-risk on 10 May 2016.

Mr Brandon indicated that cyber-risk can be managed like anything else that can damage a firm's business, by understanding it and balancing investment in mitigation against similar investments needed in the business.

He said that addressing this risk is a leadership and a management issue, rather than an issue simply for the IT department. Firms should use the same governance approaches as they use in other areas of their business, and require clear policies and standards, good management information and a sensible approach to compliance. Firms' managers should take ownership of information security risk as they would any other risk and, consequently, should have a formal means to assess and manage it.

Mr Brandon suggested that firms can balance cyber-risk against other risks through quantifying it. This involves breaking the risk down into:

  • Threats: outlining the types of people that might want to launch a cyber-attack on a financial institution and their likely motives.
  • Vulnerabilities: Weaknesses that can be exploited by attackers, including outdated operating systems, poor patching, untrained staff, unsegregated networks and weak security monitoring. A firm should treat any failings in its ability to respond to a critical incident as a vulnerability.
  • Assets: Systems or information that underpins firms' critical business processes. These assets should be identified and firms should have a clear view on the impact of their business if they are compromised. Mr Brandon emphasised that the owners of the business processes that these assets support must be accountable for the cyber-risk relating to these assets.
Mr Brandon said that if firms take this approach, they will be able to assess the likelihood and impact of cyber-risk crystallising and have a better understanding of the controls they need to reduce vulnerabilities or to mitigate the impact.


EMIR – Credit Derivatives on Public Register and CCP Stress Tests Reports

ESMA added certain credit derivatives to its public register of derivatives subject to the EMIR clearing obligation on 19 April 2016.

Read the associated press releasse 'ESMA Adds Credit Derivatives to its Public Register on EMIR'

ESMA also published the results of stress test modelling carried out 17 CCPs on 29 April 2016. The results of the test shows that the system of EU CCPs can overall be assessed as resilient to the stress scenarios used to model extreme but plausible market developments.

Read the associated press release 'ESMA Publishes Results of EU Central Counterparties Stress Test'

Access the associated ESMA Q&A.

MiFID II – Delay Confirmed, Amendments to Standards on Non-Equity Transparency and Position Limits and Transaction Reporting Exclusions

The European Parliament published its report  on 25 April 2016, proposing a regulation to delay the implementation of MiFID II until 3 January 2018.

ESMA proposed to amend draft MiFIR standards on transaction reporting, taking collateral transfers out of the scope the transaction reporting obligation in Article 26 MiFIR. ESMA issued a report on 4 May 2016.

EMSA issued two opinions proposing amendments to its draft Regulatory Technical Standards (RTSs) on 2 May 2016. ESMA proposes to revise the RTS on non-equity transparency – which includes requirements in respect of bonds, structured finance products, emission allowances and derivatives – and the RTS on the methodology for the calculation and application of position limits for commodity derivatives. These opinions have been issued following the initial rejection of ESMA’s RTS’ by the European Commission on 20 April.

Read the associated press release 'ESMA Amends MiFID II Standards on Non-Equity Transparency and Position Limits'

Other EU Developments – European Commission Lists “Equivalence” Decisions Taken

The European Commission released a table setting out those jurisdictions that it has issued an equivalence decision in the context of EMIR, MiFID and other EU regulations on 19 April 2016.

An explanation and analysis from the European Commission is also available. 





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