EFAMA welcomes the final report by ESMA to the European Commission on technical advice on possible implementing measures of the AIFMD.

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1 EFAMA COMMENTS TO ESMA s FINAL REPORT TECHNICAL ADVICE TO THE EUROPEAN COMMISSION ON POSSIBLE IMPLEMENTING MEASURES OF THE ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE EFAMA welcomes the final report by ESMA to the European Commission on technical advice on possible implementing measures of the AIFMD. EFAMA wishes to congratulate ESMA on the quality of the advice on implementing measures issued for such a broad universe of AIF and AIFM under very tight time constraints. EFAMA particularly appreciates that throughout its advice, ESMA sought consistency with the existing UCITS and MiFID framework while ensuring that rules are appropriate and proportionate for the specific circumstances of the AIFM and the AIF as well as their investors. Most of the concerns EFAMA voiced regarding the draft technical advice by ESMA have been taken into account in this final report. However, some of ESMA s recommendations for possible implementing measures in the final report still raise significant concerns with the industry which EFAMA outlines herebelow. As a general comment, EFAMA would like to voice regret over the very short consultation periods throughout the entire process which has led to this final advice and will lead to the implementing measures. A number of EFAMA Members would have preferred additional consultations by the Commission on the implementing measures and in general longer consultation periods. 1. Transparency EFAMA remains highly concerned about the reporting obligations proposed by ESMA in its final advice. EFAMA understands that the reporting obligations in the AIFMD shall permit the monitoring of systemic risks and foster investor protection. EFAMA has serious doubts that the transparency requirements proposed in ESMA s final advice will be beneficial to achieve either of these goals. As currently proposed, these reporting obligations will prompt too detailed and too frequent reporting which neither the authorities nor investors will be able to analyze in any meaningful way. ESMA has proposed proportionality in the reporting frequency to competent authorities based on assets under management of an AIFM. EFAMA doubts that this is appropriate or sufficient. Basing the differentiation merely on assets under management is too simplistic. Such differentiation does Address: rue Montoyer 47, B 1000 Bruxelles Fax e mail : info@efama.org

2 2 not sufficiently take into account any factors which have an impact on systemic risk or pose threat to investor protection. EFAMA therefore advocates once again that the transparency requirements should be drafted in application of the proportionality principle as intended in the AIFMD and should be differentiated based on criteria which permit to ensure proper consideration of systemic risk or any threats to the interests to investors. In this regard, some EFAMA Members provided suggestions for reporting requirements: Some EFAMA Members proposed a differentiation based on types of funds managed by an AIFM or based on strategies. For example preparing quarterly reporting for UCITS like AIF will only pose an administrative burden on the AIFM and the authorities with little benefit. Funds with more conservative strategies, such as long only passively managed funds which are not employing substantial leverage, will pose less systemic risk and should therefore be subject to less frequent reporting requirements. Similarly, for funds invested on a very long term in few assets, such as real estate funds, annual reporting should be sufficient. As an alternative, one EFAMA Member proposed a differentiation not based on assets under management of an AIFM but rather of an AIF. This would mean that a large number of smaller AIF would not be subject to quarterly reporting but rather semi annual reporting. This approach would allow the authorities to focus on the more meaningful information for the purpose of detecting systemic risks. Last, a large number of EFAMA members mentioned that the thresholds currently proposed by ESMA are too low. Nearly all AIFM will be subject to quarterly reporting which will not permit any meaningful analysis of the data. Should the Commission decide to retain the differentiation merely based on assets under management, the threshold should be raised to avoid that the competent authorities receive too much reporting which they will not be able to analyze in a meaningful way. Some EFAMA Members also raised concerns about the fact that so far no standard technical reporting standards have been agreed between European regulators. It would be beneficial to the success of the regulatory transparency requirements if the reporting process is made as automated as possible. Given the extremely tight deadlines for providing data to regulatory authorities manual data entry solutions into spreadsheets or manual forms should be avoided at all cost. These will cause serious issues in particular given the volume of funds caught by the legislation. They also give rise to serious scope for reporting errors. EFAMA Members are also concerned by the freedom given to national regulators to require additional reporting and different time lines. By comparison Form PF in the US allows for longer reporting deadlines and specifically addresses the issue of data entry using XML standards. Given that Article 24 requires an avoidance of excessive administrative burden on competent authorities it is essential to ensure that data provided is in a format which can be easily searched and analyzed by competent authorities rather than in a static manual format. Several EFAMA Members also mentioned the differences between the reporting requirements in Europe and outside of Europe. These differences will make aggregation or comparison of such data by authorities on an international basis very difficult and might lead to misleading interpretations if

3 3 certain data is then possibly even counted double or not properly taken into account. EFAMA therefore considers that the Commission should seek stronger international harmonization than reflected in the current ESMA proposals. Several EFAMA Members have in this context mentioned in particular the work being conducted by the US regulatory authorities on Form PF which is the new required reporting standard under the Dodd Frank financial reform legislation. Form PF covers similar ground to much of the ESMA Annex however there is a lack of consistency in terms of the actual contents of data fields and key definitions. Some EFAMA Members offered to run a workshop for ESMA and/or the EU Commission in January 2012 on the technical issues faced by AIFM in meeting the proposed reporting standards and how these could be improved without compromising the overall aims of regulatory reporting. In relation to the content of the reporting requirements, some EFAMA Members again voiced concern regarding reporting of leverage calculated based on the gross method. These EFAMA Members are strongly opposed to the use of the gross method of calculating the leverage. They insist that it would be misleading if disclosed to investors. At worst, the disclosure of the gross leverage should be limited to regulators only, in the context of monitoring systemic risk, in order not to mislead investors. 2. Inducements According to ESMA s proposals, Box 18 of its final advice should apply to all activities of collective portfolio management (including marketing, as specified in para. 30 of the explanatory text). EFAMA agrees that these rules should apply to direct marketing by the AIFM but strongly disagrees that they should apply to indirect marketing. From a legal point of view, EFAMA does not believe that distribution via intermediaries constitutes part of the fund management services as specified in Annex I to the AIFMD. External intermediaries who are not tied agents act in their own capacity and under their own responsibility. Their relationship to the AIFM is based upon distribution agreements which set out the duties and obligations of each party and ensure compliance with their respective legal requirements. Thirdparty distribution cannot be deemed part of the collective portfolio management activities and the term marketing in para. 2 (b) of Annex I can only refer to direct distribution by the AIFM, by its tied agents, and possibly to marketing on behalf of the AIFM by a placing agent for a closed end investment company IPO. Furthermore, the payment of distribution fees to remunerate the service of investment advice or distribution activities in general is not by nature designed to enhance the quality of the collective portfolio management (para. 1 (b) (ii)). Such payments are mostly extraneous to collective portfolio management. From the AIFM s perspective, they should be rather considered as a necessary cost ( proper fees which enable or are necessary for the provision of the relevant service according to para. 1 (c)), as without that payment, no service would be rendered.

4 4 Most importantly, however, it is not necessary to consider third party distribution payments as inducements in the sense of para. 1 (b) in order to ensure investor protection. Fees and commissions received by intermediaries as remuneration for the distribution service are already regulated, subject to the conditions of Art. 26 (1) (b) of the MiFID Level 2 Directive and to disclosure to investors at the point of sale. There is no need to require the justification of the same payments in relation to collective portfolio management. The AIFM does, however, retain responsibility for managing conflicts of interest related to third party distribution (covered under Section IV.III). In addition, disclosure of inducements in relation to third party distribution should in any case not be necessary in the AIF annual report, as it is already the duty of distributors under MiFID to provide final investors with details of inducements they have received. For the reasons outlined above, EFAMA urges the Commission not to reflect the interpretation provided by ESMA in para. 32 of the explanatory text in the final implementing measures to the AIFMD. 3. Additional own funds and professional indemnity insurance EFAMA would appreciate a clarification from the Commission that the additional own funds or the coverage of the professional indemnity insurance shall be calculated based on assets under management of AIF managed by the AIFM in accordance with Article 9 para. 3 of the AIFMD. For AIFM which are also UCITS management companies or MiFID firms, this basis of calculation permits to avoid the counting of UCITS assets or individual portfolios under management for which the capital requirements are already determined by the UCITS and MiFID Directives. From a level playing field perspective, it would also not be understandable why some individual portfolios or UCITS would be covered by additional own funds / professional indemnity insurance only because the relevant MiFID firm or UCITS Management Company also has an AIFM license, while others would not receive the same treatment because their manager has no AIFM license. EFAMA regrets that ESMA s final advice does not provide for a cap on the additional own funds. EFAMA Members urge the Commission to include a cap for additional own funds into the requirements reflecting the cap of Euro 10 Million already provided for in the directive regarding own funds. This would be in line with the intention of the Level 1 text not to pose an undue infinite burden on AIFM. Further, EFAMA considers that the Commission should significantly lower the quantitative requirements for the additional own funds as outlined in the ESMA final advice. Some EFAMA Members have calculated simulations of additional own funds and the additional funds required in accordance with these simulations seemed very high compared to historical loss data.

5 5 4. Types of AIF Throughout the Consultation, ESMA draws distinctions and suggests differentiations based on types of AIF. EFAMA understands that ESMA is currently preparing proposals for definitions of types of AIF. These definitions will have far reaching consequences because they will determine the applicability of certain provisions to an AIF and/or AIFM. EFAMA gladly remains at ESMA s and the Commission s disposal and offers its expertise to help in the elaboration of such definitions. In particular, EFAMA has been working for many years on the development of the European Fund Classification, which is gathering momentum as the classification standard for cross border funds in Europe. EFAMA would appreciate discussing this project with ESMA and the Commission. In order to make full use of the industry expertise, EFAMA urges ESMA to organize open hearings, workshops and a consultation on any draft proposals of definitions of types of AIF. * * * December