Council of the EU adopts position on EU MISP package

 To bring EU group companies outside of the scope of the UCITS/AIFMD delegation rules

Under the existing frameworks, any intra-group allocation of functions to other EU entities within a group is subject to the same stringent delegation rules as those applicable to third parties (such as due diligence, monitoring and resource assessments).

The European Commission has proposed that such delegation rules should not be applied where reliance is placed on other EU authorised management companies, EU authorised investment firms or EU authorised credit institutions within the same group. The management company would however remain fully responsible for the functions carried out by entities within the EU group and must ensure that such reliance does not reduce them to mere “letter box” entities.

This calibration of the delegation regime is intended to facilitate the sharing of group-wide resources and to avoid unnecessary duplication of resources across different EU entities within the EU group.

The Council has retained the concept of the “EU group”.

However, it has proposed that only those delegation rules relating to due diligence, monitoring, justification of delegation and requirement to have the power to withdraw the mandate immediately should be disapplied for delegations within an EU group.[2]

It also clarifies that any sub-delegation to a non-group entity within the EU remains subject to the full suite of delegation rules.

ESMA to conduct an annual review of large EU groups of management companies and AIFMs

The European Commission has not proposed that ESMA become the direct supervisor of either management companies or EU domiciled funds. Instead, it has proposed that ESMA should be required to carry out an annual review of the supervision of “large EU groups of management companies and AIFMs” (Large Groups) by each of the relevant national competent authorities (NCAs)[3].

This annual review must focus on the way in which the group is supervised by the various NCAs, including the supervisory approaches regarding each group’s organisational structure, governance arrangements and resources amongst others.

If ESMA identifies any corrective action to be taken by one or more NCAs to remove diverging or deficient supervisory approaches, the relevant NCA has a maximum of one year to implement such corrective action. If the NCA fails to take such corrective action, ESMA has a range of powers available to it including organising collaboration platforms, arranging binding mediation between two NCAs or, as a measure of last resort, requiring that the NCA will be obliged to obtain its opinion before the NCA grants approval to financial products, services, activities or entities.

The Commission’s proposals have been removed.

The Council has instead proposed that a co-ordination college be established for each Large Group which will comprise of ESMA and relevant NCAs.

That college will not have any supervisory or decision-making powers but will identify material divergences, gold plating, regulatory gaps, duplications and inconsistencies in supervisory approaches. 

ESMA should, where appropriate, then address any identified issues through its supervisory-convergence tools.

Harmonised authorisation process for management companies and UCITS funds across the EU

Under the Proposal, delegated acts will dictate the information that must be submitted to the relevant NCA in seeking authorisation of (i) a UCITS fund or (ii) a management company as well as the procedures and timelines to be followed by NCAs. This is intended to streamline the UCITS and management company approval processes across all Member States.

This provision has been retained in the Council Position which has extended it to apply to the authorisation of AIFMs.

Automatic passporting framework for UCITS funds

Complex rules relating to marketing notifications and diverging national practices by individual NCAs has hindered the development of a “true single market” for UCITS and management companies. The existing patchwork framework and fragmented local rules have caused higher compliance costs, delays market access and limited funds’ capacity to scale and effectively market cross-border.

Under the Proposal, as part of the authorisation application, UCITS will elect the host Member States in which they wish to market, and the home NCA will immediately notify the host NCAs on authorisation with marketing permissions applying immediately from date of authorisation of the UCITS.

The home NCA of the UCITS will share all relevant documentation and information with host Member States via an interactive ESMA data platform to be developed by ESMA.

Host NCAs are prohibited from requiring additional documentation or imposing any additional requirements including a local presence, meaning that the likes of country supplements etc will no longer be required

Additional registration notifications can be added by notification to the home NCA which will be transmitted to the relevant host NCAs via the ESMA data platform with marketing permission having immediate effect. This overhauls the current procedure under which separate notification packages must be prepared for each host Member State after authorisation.

This provision has been retained in the Council Position but has been moved from the amending directive to the amending regulation so that the provisions would be directly effective.

Importantly, the Council also removes the existing challenging one-month notification requirement for new UCITS share classes.

Under the Council Position, ESMA will charge UCITS a fee for using the passporting and de-notification procedures, with the amount to be set by delegated act. This will be in addition to any fees imposed by the relevant NCAs.

Automatic passporting framework for AIFMs marketing AIFs to professional investors

Similar to the framework proposed to allow for the automatic passporting of UCITS funds from the date of authorisation, an AIFM should, during the authorisation process, inform the home NCA of the EU AIFs that it manages and of the Member States where it intends to market them to professional investors. The relevant AIFs can be marketed in those Member States from the date of authorisation of the AIFM by its home NCA.

Additional registration notifications can be added by notification by the AIFM to its home NCA which will transmit to the relevant host NCAs via the ESMA data platform with marketing permissions having immediate effect.

This provision has been retained in the Council Position but has been moved from the amending directive to the amending regulation so that the provisions would be directly effective.

The ESMA passporting fee will also apply.

Shorter approval process for passporting applications for management companies

Under the Proposal, home Member States must process applications from management companies to passport their services into another Member State within 15 days (reduced from 1 month) if providing such services on a freedom of services basis and within 1 month (reduced from 2 months) of establishing a branch.

This provision has been retained in the Council Position.

 Simplified marketing communication process

Marketing communications must only be filed with the home Member State.

Host Member States are prohibited from requiring changes to the content of the marketing communications or from requiring marketing communications to be reviewed by or filed directly with them.

Marketing communications aimed at retail investors must be submitted to the ESMA data platform before they are first used in a Member State (other than the home Member State).

The Council has also proposed that host NCAs may monitor retail marketing communications used in their territory and, where they have reasonable grounds to suspect non-compliance, direct the AIFM or UCITS to correct them immediately, notifying ESMA and other NCAs within two working days.

 Simplified de-notification process

It is proposed to simplify arrangements for de-notification of UCITS and AIFs for marketing. The de-notification process will involve a notification to the home NCA who will notify host NCAs within 5 days. The electronic publication of de-notification may be in English or a local language.

This proposal has been retained in the Council Position.

 Removal of the black out period for pre-marketing

The Proposal removes the existing 36-month blackout period whereby AIFMs were prohibited from pre-marketing similar investment strategies in a host Member State following de-notification of an AIF.

This provision has been retained in the Council Position.

UCITS Facilities

The Proposal retains the requirement to provide investor facilities (without a local presence) but now proposes that these facilities may be provided either in a local language or in English.

This provision has been retained in the Council Position.

Advance notice of material changes

A UCITS or AIFM shall be required only to notify its home NCA of any proposed material changes to the information or documentation relating to the marketing of the UCITS or AIFs. Such updated information shall be shared to host NCAs through the ESMA data platform.  The notice period for such notification has been reduced from one month to 15 working days.

This has been retained in the Council Position, which proposes reducing the notice period for such notification further to 10 working days.

Pre-marketing

It is proposed that AIFMs will have an automatic right to pre-market throughout the EU. Member States shall be prohibited from imposing any additional requirements on the pre-marketing of AIFs.

This provision has been retained in the Council Position.

Removal of the UCITS KIID provisions from the UCITS Directive

Given that all UCITS made available to EU retail investors must prepare a PRIIPs KID, the European Commission has proposed removing the obligation to prepare a UCITS KIIID.

This means that UCITS funds will no longer be required to provide a UCITS KIID to EU professional investors while EU retail investors will continue to receive a PRIIPs KID.

This provision has been retained in the Council Position.

Adjustment to UCITS investment limits

The European Commission has proposed increasing the current 10% limit on investment in debt securities issued by a single entity to 15% where the UCITS is investing in securitisations issued in accordance with the EU Securitisation Regulation.

This provision has been removed in the Council Position. However, adjustments to this investment restriction will instead be made via the regulation revising the EU Securitisation Regulation.

Introduction of a Depositary Passport

Under the Proposal, UCITS and AIFs will be permitted to appoint a depositary located in another Member State provided that it is authorised as an EU credit institution or an EU investment firm.

The Council has retained the concept of the depositary passport but has provided Member States with the discretion as to whether funds domiciled in their jurisdiction would be able to appoint a depositary authorised in another Member State.

Additional powers granted to ESMA to address cross-border issues

Under the proposed revised framework, ESMA must detect and address supervisory actions hampering the passporting of management services/depositary services or the cross-border distribution of funds within the EU.

Where the relevant NCA fails to take corrective action as instructed by ESMA or takes such action but such issues continue to persist, ESMA has a range of powers including, as a measure of last resort, the power to suspend the right of investment funds, management companies or depositaries to operate on a cross-border basis.

This provision has been retained in the Council Position.