Investment Funds Europe - Issue 9, 2018

November 07, 2018

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



Monitoring of promotional documentation: the AMF changes its approach regarding various financial products for private individuals 

The Autorité des Marchés Financiers (the AMF, the French financial markets authority) announced a change in the organization of controls on promotional documents relating to UCITS and alternative investment funds (AIFs), as well as for titres de créances structurés (structured debt securities) issued by banks and fonds à formule (structured funds), when these financial instruments are marketed to the public in France. The AMF will cease to carry out systematic controls of the promotional documents before their communication to the public and will henceforth favor ex-post controls. Consequently, the obligation to attach promotional documents to the fund’s authorization application is now circumscribed to a limitative list of AIFs presenting a greater risk of wrongful marketing to the public. The AMF provides that promotional documents must be sent by the portfolio management companies on their GECO extranet, so that it can carry out the ex-post controls. 

These changes in the monitoring of promotional documents are applicable as from October 8, 2018, even if the AMF instructions relating to the concerned products (and in particular the annexes setting out the content of the authorization files) will only be updated at a later date. 

Read: The announcement (French) 

MiFID II and the new regime for portfolio management companies: new update 

The Autorité des Marchés Financiers (the AMF, the French financial markets authority) updated its doctrine in order to take into account the impact of the legislative and regulatory provisions resulting from the entry into force of MiFID II, which, among other things, resulted in the split of the legal regimes of portfolio management companies and investment firms. To that effect, the AMF updated its Instructions n° 2008-04 and n° 2013-07 and its Position-Recommandation n° 2006-23. Beyond this formal update, the Position-Recommandation n° 2006-23 and the Instruction n° 2013-07 have been subject to some substantial modifications, especially with respect to the regime of the Conseillers en Investissements Financiers (French investment advisors, a French national regime). Furthermore, the AMF created a new Instruction n° 2018-11 on the content of management mandates concluded with non-professional clients. 

Read: The announcement 

AMF issues Q&A regarding the prohibition to advertise investment services relating to certain financial contracts 

Article L. 533-127 of the French Monetary and Financial Code (Code monétaire et financier) prohibits investment services providers from advertising by electronic means, directly or indirectly, to clients who may not be professionals (including potential clients) investment services relating to financial contracts which are not admitted to trading on a regulated market or a multilateral trading facility, falling within one of the categories of contracts defined in Article 314-7 of the Autorité des Marchés Financiers (the AMF, the French financial markets authority) General Regulations and having one of the characteristics referred to in that Article of the French Monetary and Financial Code (i.e., mainly certain financial derivatives and binary options). 

Within this framework, the AMF issued a Q&A to clarify the scope of this prohibition. 

Read: The Q&A (French) 

AMF launches consultation on the modification of the 600 € criterion when changing the categorization of a client 

Following the update on May 25, 2018 of the ESMA Q&A on MiFID II and MiFIR investor protection and intermediaries topics, the Autorité des Marchés Financiers (the AMF, the French financial markets authority) has launched a consultation on the modification of the 600 € criterion employed where a non-professional client requests to be treated as a professional client by an investment service provider.



German Federal Ministry of Justice and Consumer Protection published draft bill implementing the Directive (EU) 2017/828 as regards the encouragement of long-term shareholder engagement (“ARUG II”) 

The Directive (EU) 2017/828 of May 17, 2017 aims to further enhance shareholder participation in listed companies and to facilitate cross-border information and exercise of shareholder rights. For this purpose, the directive contains a set of rules on shareholder participation rights, e.g. with regard to the compensation of the Supervisory Board/Management Board ("say-on-pay") and transactions with company related parties ("related-party-transactions") as well as for the better identification and information of shareholders ("know-your-shareholder") and for the improvement of transparency among institutional investors, asset managers and proxy advisors. 

The draft bill of the German Federal Ministry of Justice and Consumer Protection published on October 11, 2018 aims to implement the Directive (EU) 2017/828 into the German law. According to section 134b of the German Draft of the Stock Corporation Act (Aktiengesetz, “AktG”) institutional investors and asset management companies would need to publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so. The policy on shareholder engagement should, among others, describe how institutional investors and asset managers integrate shareholder engagement in their investment strategy and how conflicts of interests are managed. The engagement policy should be publicly available for at least three years on the website of the institutional investors and the asset manager and at least annually updated. 

Pursuant to section 134c of the AktG-draft, asset management companies should also give, inter alia, information to the institutional investor or on their website how they act in the best middle- to long-term interests of the investor, about the major medium to long-term risks and the composition of the portfolio, the portfolio turnover and portfolio turnover costs. 

The transposition deadline for the Directive (EU) 2017/828 into German law is June 10, 2019. 

BaFin provides clarification for outsourcing outside the EU 

BaFin has stated that ESMA's New Questions and Answers (Q & A) on the restrictive interpretation of passive marketing under MiFID II and MiFIR (see sections 13.1 to 13.3 therein) do not refer to the outsourcing of portfolio management by investment management companies in the meaning of the German Capital Investment Code (“KAGB”) and the advisory services requested. 

According to section 13.2 of the current ESMA’s Q & A the exception for passive marketing of investment services from third countries under MiFID II and MiFIR does not apply to the sale of "new categories of investment products". ESMA has therefore prepared a non-exhaustive list of investment products that they believe are not in the same category. For example, shares in UCITS and shares in AIFs are just as little in the same category as shares in AIFs with different investment strategies within the meaning of AIFMD reporting. ESMA also sees differences in principle between complex and non-complex financial instruments, between shares traded in different stock exchange segments and between financial instruments with underlying assets from different asset classes. ESMA believes that this granular approach should also be taken into account in ongoing investment advice by a third-party provider. 

Investment statistics as of September 18, 2018 

The German Investment Fund Association BVI has issued its updated funds raised report as of September 18, 2018. According to the BVI statistics, balanced funds topped the sales chart again in July. 

Investment funds raised EUR 56.3 billion net from the beginning of January to the end of July 2018. Of this volume, open-ended special funds accounted for EUR 43.8 billion, open-ended retail funds accounted for EUR 12.2 billion and closed-ended funds accounted for EUR 0.3 billion. In July alone, funds saw inflows to the tune of approximately EUR 6 billion. Investors withdrew EUR 11.4 billion from discretionary mandates since the beginning of the year. The fund industry manages assets totalling EUR 3.1 trillion. 

Almost 10% of retail fund assets, i.e. EUR 98 billion, are contributed by initiators that are neither part of the relevant fund company's corporate group nor originate from any of the large insurance companies or credit institutions. 77% of the assets of these white label funds are attributable to German asset managers, who are generally also involved in the investment decision-making process, either in the capacity of advisers or external portfolio managers. 



Central Bank publishes the fifth edition of its investment firms Q&A 

The Central Bank of Ireland published the fifth edition of its Investment Firms Questions and Answers (the “Q&A”) on October 8, 2018, containing an additional question ID 1039 which relates to the scope of the term “transferable securities” and addresses circumstances where securities have restricted transferability, for example, loan notes and shares in private companies. 

The response to question ID 1039 reiterates the understanding of the term “transferable securities” set out in the European Commission’s Q&A on the Markets in Financial Instruments Directive. The response also indicates that investment firms should consider whether securities with restricted transferability are “transferable securities” for the purposes of the definition of investment instruments in Section 2 of the Investment Intermediaries Act 1995. 

Read: The Q&A 

CBI publishes revised guidance on the use of financial indices by UCITS 

The Central Bank of Ireland (the “Central Bank”) published updated guidance on the use of financial indices by UCITS on October 8, 2018. It clarifies Central Bank requirements and introduces a certification process regarding the use of financial indices by UCITS I. 

Read: The updated guidance 

Exchange Traded Funds: Central Bank of Ireland feedback statement 

The Central Bank of Ireland (the “Central Bank”) published their ETF Feedback Statement on September 14, 2018, on the back of Discussion Paper 6, May 2017 (“Feedback Statement”). 

In relation to exchange traded share classes of mutual funds, the Central Bank has confirmed they will allow listed and unlisted share classes within an investment fund and they will produce guidance on the appropriate disclosure requirements to apply to both share classes in order to avoid investor confusion. 

With regard to dealing cut-off times for hedged and unhedged share classes, the Central Bank will extend the current approach with respect to cash / in-kind share classes to include unhedged and hedge share classes within an ETF. 

The Central Bank will continue to consider portfolio transparency and will engage on this topic at European and international regulatory forums. 

Read: The feedback statement 

Central Bank Introduces Changes to Review Process Conducted in the Context of UCITS Authorisations, Approvals and Post-Authorisation 

The Central Bank of Ireland (the “Central Bank”) published a letter outlining changes introduced, with immediate effect, to the review process conducted in the context of UCITS authorisations, approvals and post-authorisation amendments on October 9, 2018. 

Subject to receipt of the relevant Central Bank application form and written confirmations, the Central Bank will no longer carry out a prior review of the following: 

  1. The establishment of new Share Classes 
  2. Depositary Agreements 
  3. Trust Deeds, Deeds of Constitution 
  4. Investment Limited Partnership Agreements
  5.  UCITS Financial Indices 

The Central Bank will continue to carry out quality assurance checks, selected on a random basis, in relation to the above documentation following authorisation of a UCITS or Retail AIF. 

Read: Dechert OnPoint 

Central Bank of Ireland speeches – Brexit, CP86 and substance 

Recent speeches from Martina Kelly, Gerry Cross and Michael Hodson of the Central Bank of Ireland provide the key insights from the regulator in areas such as CP86 and substance requirements for fund management companies in Ireland and Brexit. 

Martina Kelly’s speech points towards existing entities requiring equal substance to new entities; Gerry Cross’ speech focused on inter alia the continuing growth of the fund industry in Ireland, Brexit, the need for new alliances for Ireland post Brexit, the need for supervisory consistency across the EU and the importance of the capital markets union; and Michael Hodson spoke about a number of topics such as Brexit, culture and Fund Management Company Effectiveness, otherwise known as CP86. 

Read: The full speeches Martina Kelly, Gerry Cross, Michael Hodson



Luxembourg and Australia enter agreement on Fintech and Regtech

The CSSF published a press release noting that it and the Australian Securities & Investments Commission (“ASIC”) signed a Cooperation Agreement which provides a framework for cooperation to understand financial innovation in each jurisdiction on October 4, 2018. 

Read: The press release

CSSF Releases its Newsletter for October 2018

The CSSF published its newsletter for October 2018 on October 22, 2018.

Read: The newsletter



FCA Consults on Rules for Post-Brexit Temporary Permissions Regime for Incoming EEA Firms and Funds 

The UK government is proposing to implement a “temporary permissions regime” to cover “inbound” European Economic Area (EEA) firms and funds in the event of a “no deal” Brexit. The regime is proposed to cover both firms and funds authorised in an EEA country and providing investment services or marketing funds to UK customers under EU passporting arrangements prior to the date of the UK’s exit from the EU. The stated intention is to allow such inbound firms and funds to continue operating in the UK within the scope of their current passports for up to three years after a “no deal” Brexit while they apply for full (permanent) UK authorisation or recognition. Participation in the regimes is to be by notification to the FCA. 

The FCA expects the notification window to begin in early January 2019 and to end prior to the exit day. The FCA has consulted on changes to its handbook necessary to implement the temporary permissions regime. 

Read: The consultation paper 

FCA Consults on Brexit Rule Changes and Binding Technical Standards 

The FCA has published its first consultation paper on proposed changes to the FCA Handbook and to binding technical standards (BTS) resulting from Brexit. This paper sets out the FCA’s approach to reviewing the Handbook and BTS to ensure an operational regulatory framework after Brexit. Responses are due by December 7, 2018 and the FCA will provide feedback early next year and publish final versions of the materials on or before March 29, 2019. 

The FCA is due to publish a second consultation covering amendments to BTS and parts of the Handbook affected by Brexit statutory instruments that are due to be published, how the European Union (Withdrawal) Act 2018 affects the FCA’s ability to exercise its existing waiver and modification powers in relation to rules that transpose EU directive requirements, and implications for the Handbook relating to the E-Commerce Directive, etc. 

Read: The consultation paper 

FCA Consults on New Rules for Non-UCITS Retail Schemes (NURS) 

Investing in Inherently Illiquid Assets The FCA has issued a consultation paper on proposed new rules in its Collective Investment Schemes Sourcebook (COLL) for FCA authorised Non-UCITS Retail Schemes (NURS) investing in inherently illiquid assets. The consultation follows an FCA Discussion Paper on this topic in 2017 (DP 17/1). 

The proposed new rules would define inherently illiquid assets to include investment in immovables, such as real property, infrastructure investments, non-readily realisable securities and certain funds investing in such assets. 

Through the proposed rule changes, the FCA seeks to: 

  • reduce the risk of incorrect pricing by requiring NURSs holding immovables to suspend trading when the Standing Independent Valuer (SIV) expresses “material uncertainty” about the value of immovables that account for a significant part of the scheme property; 
  • improve liquidity management in NURSs investing mainly in illiquid assets by requiring managers to produce contingency plans for liquidity crisis events and enhancing depositaries’ oversight of the liquidity management process; and
  • improve disclosure for NURSs investing mainly in illiquid assets, by requiring more information to be disclosed about the liquidity risks, the liquidity management tools available to the fund manager, the circumstances in which they may be used and what impact they may have on investors. 

The consultation closes on January 31, 2019 and the regulator will then publish a policy statement with final rules and guidance. Changes are not expected to come into force until 2020. 

Read: The consultation 

UK-Hong Kong MoU on the Mutual Recognition of Funds – Includes Streamlined Recognition under FSMA s 272 

The FCA and the Hong Kong Securities and Futures Commission (SFC) have entered into a Memorandum of Understanding on Mutual Recognition of Funds (MoU). 

The MoU permits certain UK retail funds (including UCITS) to benefit from a smoother recognition in Hong Kong and certain Hong Kong public funds to be distributed in the UK. 

The process for distributing Hong Kong funds in the UK is notable because it relies on a streamlined “recognition” process under Section 272 of the Financial Services and Markets Act 2000 (FSMA). The FCA has said it aims to process applications within two months. 

Recognition under FSMA s. 272 is similar to the recognition of non-UK UCITS under FSMA s 264 in that both processes permit the recognised funds to be distributed to the public in the UK. Whilst the Section 264 process is only open to UCITS funds, the Section 272 process is potentially open to other non-UK funds subject to requirements comparable to UK retail funds; however, the Section 272 process is generally regarded as overly cumbersome and is currently rarely used. 

After Brexit, public marketing of non-UK UCITS in the UK is likely to require recognition under Section 272 (subject to the proposed temporary permissions regime described above). The streamlined Section 272 process under the UK-Hong Kong MoU might provide an example of the sort of arrangement that could be reached for non-UK UCITS after Brexit. 

Read: The MoU 

Read: The FCA webpage 

FCA consults on Guidance for Firms preparing for the Extended Senior Managers and Certification Regime (SM&CR) 

With the extension of the SM&CR regime to all FSMA authorised firms on December 9, 2019, the FCA is consulting on guidance for FCA solo-regulated firms. The guidance aims to give practical assistance and information to firms preparing Statements of Responsibilities (SoR) and Responsibilities Maps which are required under the regime. 

Comments are requested by December 10, 2018. 

Read: The consultation



AIFMD – updated ESMA Q&A

ESMA published updated Q&As on the application of the AIFMD on October 4. ESMA has added a new Q&A clarifying the application of the AIFMD notification requirements with regard to AIFMs managing umbrella AIFs on a cross-border basis.

Read: The updated Q&As

Read: The associated press release 

MiFID II – updated ESMA Q&A on market structure and transparency topics, investor protection and intermediaries and commodity derivatives

ESMA published updated Q&As on MiFID II on market structure and transparency topics on October 4. The updated Q&As address the following topics:

  • Classification of derivatives on derivatives for transparency purposesDefault liquidity status of bonds (amendment to an existing Q&A)
  • Scope of the pre-trade transparency waiver provided under Article 9(1)(c) of MiFIR
  • Market Making activities and incentives to be provided during stressed market conditions
  • Treatment of bulk quotes for the calculation of the Order to Trade Ratio
  • Scope of Article 17(6) of MiFID II and Chapter IV (Articles 24-27) of Delegated Regulation (EU) 2017/589 (RTS 6)
  • Arranging of transactions that are ultimately formalised on another trading venue
  • Registration of a segment of an MTF as an SME growth market
  • Maker Taker schemes

Read: The updated Q&As here and here

Read: The associated press release 

ESMA published updated Q&As on MiFIR investor protection and intermediaries on October 3. The updated Q&As address: 

  • Best execution – Reporting for firms using a venue’s RFQ system to agree a trade Investment advice on an independent basis – Use of a “look-through” approach.

Read: The updated Q&As

Read: The associated press release 

ESMA published updated Q&As on MiFID II and MiFIR commodity derivatives topics on October 3. The updated Q&As provide clarification on issues related to the MiFID II/MiFIR regime for commodity derivatives, including on position limits, position reporting and ancillary activity.

Read: The updated Q&As

Read: The associated press release 

Other – ESMA’s view on Brexit preparation

ESMA Chair, Steven Maijoor gave a speech on the state of implementation of MiFID II and preparing for Brexit on October 3. The speech highlighted that ESMA’s objective is to have Memoranda of Understanding in place between the FCA and other EU regulators (as required to permit delegated portfolio management under UCITS and AIFMD) “in place sufficiently on time before the end of March 2019.”

Read: The speech


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