RESPONSE TO ESMA CONSULTATION (ESMA/2011/270, DATED 23 AUGUST

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1 Submission from the Emerging Markets Private Equity Association th Street NW Suite 100 Washington, DC T F September 23, 2011 RESPONSE TO ESMA CONSULTATION (ESMA/2011/270, DATED 23 AUGUST 2011) Consultation on ESMA's draft technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive in relation to supervision and third countries On behalf of the 290 member firms of the Emerging Markets Private Equity Association (EMPEA), we appreciate the opportunity to submit comments on the ESMA Consultation Paper on possible implementing measures of the Alternative Investment Fund Managers Directive (AIFMD) in relation to supervision and third countries. EMPEA is an independent, global membership association established in 2004 to catalyze private equity and venture capital investment in emerging markets. EMPEA member firms include leading global institutional investors, and private equity and venture capital fund managers across more than 50 developing and developed markets across Africa, the Middle East, Asia, India, South America, North America and Europe. Our members share the belief that private equity and venture capital is a critical source of financing, valuable knowhow and business expertise for companies in developing economies that simultaneously provides investors with the opportunity to achieve superior financial returns. Many of those investors and managers interests will be significantly affected by the AIFMD. In support of its mission, EMPEA provides statistical research and analysis on the development of private equity and venture capital in emerging economies and tracks the impact of investments on companies and communities. EMPEA also supports legal and regulatory frameworks that encourage the long-term growth of this critical source of economic development capital, including efforts to enhance transparency and accountability of fund managers while providing appropriate protection of investors in funds. EMPEA works to ensure that regulatory efforts do not unintentionally yield a framework that could restrict the availability of private equity and venture capital and simultaneously limit the ability of EU investors to participate in some of the most attractive private equity and venture capital markets at this time. It is with this in mind that we have considered the provisions in the AIFMD governing the marketing of AIFs to EU investors. Non-EU jurisdictions which are the home jurisdiction of managers who would wish to market AIFs to EU investors may have a significant amount of legislative reform to effect in order to meet the equivalence tests in AIFMD. Our concern is that delays in that process and in EU assessment of equivalence means that the inter-authority arrangements required by the AIFMD are not in place in respect of all relevant jurisdictions by July If such a delay occurs, active marketing of AIFs by non-eu managers will be restricted, thereby reducing (i) the access of EU investors to these investment opportunities and manager expertise; and (ii) the access of non-eu managers to EU capital for investment in emerging economies thereby negatively (continued) Emerging Markets Private Equity Association th Street NW, Suite 100 Washington, DC USA T F W empea.net E empea@empea.net

2 (Continued) impacting the flow of development capital into those economies. Further, in establishing the inter-authority arrangements, we favour the ESMA-led measures proposed in the Consultation Paper. Expecting a large number of bi-lateral arrangements to be put in place by July 2013, and to be done so in uniform manner, is, in our view, unrealistic. Our responses to your questions are set out in the annex to this letter. Thank you for your consideration of our views. We are available to respond to any questions that ESMA may have concerning this letter. Sincerely, Sarah E. Alexander President and CEO Emerging Markets Private Equity Association (EMPEA) Emerging Markets Private Equity Association th Street NW, Suite 100 Washington, DC USA T F W empea.net E empea@empea.net

3 ANNEX EMPEA Response to ESMA Consultation Question 1 Article 20.1(c) permits delegation to a third country firm which is not authorised in the third country, with the prior approval of the home state regulator. Article 20.1(d) requires there to be co-operation between the competent authority and the supervisory authority of the third country firm. It would be helpful for the ESMA guidance to confirm that the co-operation requirement in Article 20.1(d) does not apply in circumstances (permitted by Article 20.1(c)) in which the third country firm is not authorised in the third country (noting that the AIFM would have needed to obtain prior approval from the competent authority prior to delegation). This comment relates to Box 1, paragraph 4(e). This advice should be clarified so that it refers solely to financial services laws and regulation in the third country and that the enforcement in question is that which may be effected by the supervisory authority in that third country. This comment relates to Box 1, paragraph 5. First, an AIFM which proposes to effect a delegation needs to know in advance of effecting the delegation whether the delegate meets the equivalence test. There needs to be an efficient method by which an AIFM can determine equivalence, such as a publicly available list of what in respect of non-eu jurisdictions constitutes equivalent regulatory status. For example, the list should state that in jurisdiction A, a local entity will satisfy the equivalence requirement if it holds licences of the following types: X, Y or Z. The AIFM could then check the licensed status and support its position by means of obtaining contractual representations from the third country manager. If the equivalence test is to be applied by the competent authority, there is a risk that the test is applied differently by competent authorities in other Member States. A central list of equivalent status per non-eu jurisdiction would avoid the scope for inconsistency between competent authorities. Further, in respect of the legislative criteria specified in Box 67 of ESMA/2011/209, the essence of the equivalence test when applied to non-eu managers should be to look at the substance of the standards required before the licensed status referred to in Box 67 can be obtained. There should not be an automatic, unqualified application to non-eu managers of the typologies specified in Box 67, because the third country licensing framework may use different classifications. Question 2 This comment relates to paragraph 8 of the explanatory text. There are clear benefits to having a centrally negotiated MMoU. While individually negotiated bilateral arrangements allow for more flexibility, the key goal is to ensure that the necessary arrangements are in fact in place. Our view is that this is more likely to be achieved by a MMoU. We support the proposal to use the IOSCO precedents as the basis for the MMoU.

4 EMPEA Submission to ESMA/2011/270 Page 2 Question 3 This comment relates to Box 2, paragraph 1(a). We do not consider that it is realistic that a competent authority would be prepared to object to the appointment of a third country depositary on the basis that its regulator does not have adequate resources to fulfil its tasks. First, it is unlikely that a competent authority in the EU can make such an assessment. Secondly, even if it does have the data to be able to make such an assessment, it is unlikely to announce that conclusion publicly. We therefore suggest that the words "with adequate resources to fulfil its tasks" be removed from the guidance in Box 2, paragraph 1(a). It is clear from the draft guidance in Box 2 that ESMA has interpreted "which have the same effect" in Article 21(6)(b) as requiring equivalence. While we agree that the third country regulation should be equivalent in its effect on the depositary, it does not need to be equivalent in all other respects. It is likely that the word "equivalent", which features so clearly in other parts of the AIFMD, was deliberately not used in Article This comment relates to Box 2, paragraphs 1(c) and (d). We could not see that it makes sense to apply equivalent capital requirements by reference to the requirements that apply to credit institutions and investment firms. For example, there is no good reason why a third country bank with local capital requirements which are lower than those that would apply to an EU credit institution (but which exceed those that apply to an investment firm) should be excluded by this requirement. Likewise in respect of the operation conditions referred to in paragraph 1(d) of Box 2: the typologies of credit institution and investment firm need to be applied flexibly to take account of third country approaches to the licensing of financial institutions. EMPEA Comment 4 AIFMD Article 21(6) provides that it is "without prejudice to the requirements set out in paragraph 3". It would be useful if the ESMA guidance on Article 21 highlighted this, as it may mean that in some circumstances a third country depositary which meets the requirement in Article 21(3)(c) but which does not meet all parts of Article 21(6). Further, it would be helpful if the identification of those categories of institution referred to in Article 21(3)(c) could be carried out by ESMA. Question 4 We consider that the equivalence criteria are appropriate but so that comparisons do not fail because of a lack of exact equivalence, the local regulatory framework should be "substantially" equivalent.

5 EMPEA Submission to ESMA/2011/270 Page 3 Question 5 This comment relates to Box 3, paragraph 1(d). The right of the competent authority to perform an on-site inspection itself in the jurisdiction of the non-eu AIFM should be qualified by a statement that the competent authority shall in performing such inspection be subject to the same third country legal and regulatory requirements that would apply to the third country competent authority when performing such an inspection. This comment relates to Box 3, paragraph 2. The reference to "EU legislation" is too broad and should be confined to relevant financial services legislation. Also, it is likely that in some non-eu jurisdictions, it will not be possible under local law for EU legislation to be enforced. We support the proposal for a MMoU agreed centrally by ESMA and for the written agreements to be based on an ESMA template, as suggested in paragraph 12 of the explanatory text. Although this approach risks delay due to the complexity of negotiating with all relevant stakeholders, and is likely to be less flexible (for example, when amendment is required), it should be concluded more quickly than a large number of bilateral agreements, and there is also merit in the uniformity of a single form of words, both in the MMoU and the template-based agreements. Question 6 We support the proposal to use the IOSCO precedents. Question 7 We agree with the proposal. Question 8 We agree with the proposal. Question 9 We do not have any such suggestions. Question 10 There is no significant gain to be had by implementing measures on this topic. Question 11 We agreed with the time periods but whether these refer solely to business days should be clarified.