Implementation of AIFMD in the Netherlands June 2013 This newsletter contains an update on the implementation status and current developments concerning the Alternative Investment Fund Management Directive ( AIFMD ) in the Netherlands. Contents 01 Q&As of the EC and the AFM 02 ESMA regulatory technical standards 03 ESMA guidelines on key concepts of the AIFMD 04 Practical implications of reporting under AIFMD 05 Reward 06 Valuations 07 Our observations in the market 08 Trends in Dutch local regulations Contacts The legislative proposals to implement the AIFMD in the Netherlands are currently still under consideration of the Dutch Parliament. In advance of the AIFMD implementation preparations are made to address the more practical implications. Both the Dutch Authority for the Financial Markets ( AFM ) and the European Commission ( EC ) published Q&As on the AIFMD on their website. In April 2013 the European Securities and Markets Authority ( ESMA ) published its final report on draft regulatory technical standards ( RTS ) on types of AIFMs. The RTS contain a proposed definition of open-ended and closed-ended funds. In May 2013 ESMA also published a final report with guidelines on key concepts of the AIFMD and a consultation paper with guidelines on reporting obligations. By means of this newsletter we also inform you of the new regulations to prohibit commissions for investment firms in the Netherlands which are expected to enter into force in 2014. www.pwc.nl
01 Q&As of the EC and the AFM In March 2013 the EC published a series of questions and answers on the application of the AIFMD. Separately, the AFM published frequently asked questions on its website. The Q&A section provides responses to technical questions raised in relation to AIFMD. Open for business As of 22 May 2013 it will be possible to file an application for an AIFM license with the AFM. The AIFM license will however not be granted before 22 July 2013. Fund managers that fall under the so-called light regime (i.e. they remain under the De Minimis threshold of the AIFMD and satisfy Dutch local private placement criteria) are not subject to the license requirement under AIFMD, but instead must comply with specific notification and reporting requirements. These requirements include notification of the value of the assets under management and the investment strategies of the AIFs under management, as well as reporting on the financial instruments which are traded and risk positions and concentrations of the AIFs under management. Fund managers which are subject to the light regime will not have an AIFM license and will therefore not be able to make use of the passporting facility under AIFMD. They have the possibility, however, to voluntarily opt-in for a full AIFM license and also benefit from the passport facility. Aside from the light regime, fund managers which are exempt from the AIFMD cannot voluntarily opt-in for an AIFM license. Application of De Minimis criteria Fund managers are responsible for implementing policies and procedures to monitor the assets under management. In its Q&A the AFM clarifies the value of which assets should be excluded from the calculation of the total assets under management: Assets of UCITS Assets of AIFs for which management activities are performed under delegation arrangements on behalf of another party which is the AIFM Assets managed under discretionary portfolio management The value of (cross) investments between AIFs and sub-funds under management, in case this would lead to double counting of assets Assets of grandfathered AIFs, i.e. those closed-end AIFs managed already before 22 July 2013 and that do not make additional investments after 22 July 2013, or closed-end AIFs of which the subscription period for investors has ended before 22 July 2011 and in case the expiration date is 22 July 2016 at the latest. In case the light manager identifies a breach of the applicable De Minimis threshold (i.e. EUR 100 million or 500 million), then it should notify the AFM. The manager should assess whether it expects the breach to be temporarily (i.e. breach will not last longer than 3 months) or not and notify the AFM accordingly. Grandfathering The EC states that additional investments in the context of article 61(3) of the AIFMD should be interpreted widely. This generally implies a new contract, involving investment of capital for the purpose of obtaining a gain. The EC clarifies that the management of the portfolio falling under the provision in article 61(3) for the sole purpose of maintaining the value of the portfolio should be possible. This implies that limited amounts of financial injection should be possible provided they are arising out of existing commitments, they represent a negligible percentage of the AIF s portfolio and they aim only to maintain the value of the portfolio. The interpretation of additional investments ultimately has to take place in the context of the specific investment strategy and in the context of the legal provisions which aim to exempt AIFMs that manage end-of-life AIFs from the application of provisions of the AIFMD. Transitional arrangements Fund managers can benefit from a transition period between 22 July 2013 and 22 July 2014 during which they can continue their business on the basis of their current authorization or exemption / exception pursuant to the Continue reading on the next page
01 Q&As of the EC and the AFM Dutch Act on Financial Supervision as applicable on 21 July 2013. An AIFMD license is immediately required, however, in case the AIFM launches new activities already during the transition period. The AFM clarifies that one such new activity includes the situation where a fund manager which makes use of an exemption under the AFS starts managing AIFs which are open to retail investors after July 2013. The EC Q&As state that AIFMs are expected to comply with the requirements on a best efforts basis during the one year transitional period between 22 July 2013 and 22 July 2014. This includes compliance with the reporting requirements from 22 July 2013. Best efforts is a term used by the EC, whereas the AIFMD itself requires AIFMs to take all necessary measures to comply. The AFM Q&As clarify that AIFMs must make best efforts such that they comply with the AIFMD requirements when the transition period ends. This implies that fund managers in the Netherlands may make full use of the 12-month transitional period with full compliance required by 21 July 2014. During the transition period fund managers must be able to demonstrate to the AFM upon request how timely compliance is ensured. This implies the possibility to demonstrate a clear approach and time path for becoming fully compliant with the AIFMD provisions. MiFID-related activities The possibility for an AIFM to have separate licenses for AIFMD and for MiFID is excluded under the AIFMD. Member States may however authorize AIFMs to perform a limited number of MiFID-related activities under Article 6(4) of the AIFMD. The EC states that this possibility has to be interpreted narrowly. Furthermore, the EC and the AFM clarify that the EU passport facility does not apply to these MiFID-activities and that an AIFM may only provide these services to clients in its home country. Thus, an AIFM is not able to freely provide these (MiFID) services across the EU under its AIFM license. Providing these (MiFID) services across the EU requires the establishment of a separate entity licensed as investment firm. The EC Q&As can be found on: http://ec.europa.eu/yqol/index.cfm?fuseaction=legislation.show&lexid=9&maxrows=* The AFM Q&As can be found on: http://www.afm.nl/nl/professionals/diensten/veelgestelde-vragen/aifmd/reikwijdte.aspx
02 ESMA regulatory technical standards On 2 April 2013 ESMA published its final report on the draft regulatory technical standards ( RTS ) on types of AIFMs, as required by Article 4(4) of the AIFMD. The RTS contain a proposed definition of open-ended and closed-ended funds. ESMA confirms its approach of taking the AIF s redemption policy as the key element for distinguishing between AIFMs of open-ended AIFs and AIFMs of closed-ended AIFs. ESMA considers that it is desirable to determine an appropriate threshold for the frequency of redemption opportunities offered to AIF investors given the particular relevance thereof to the rules on liquidity management and valuation procedures. Taking into account current market practice, ESMA states that it is appropriate to consider as open-ended those AIFs which offer redemption frequencies at least yearly. The draft RTS are submitted to the EC for endorsement and forwarded to the European Parliament and the Council. Within 3 months of receipt of the draft RTS, the EC shall decide whether to endorse it.
03 ESMA guidelines on key concepts of the AIFMD On 24 May, 2013, ESMA published its final guidelines on key concepts of AIFMD ( ESMA Guidelines ). The purpose of the ESMA Guidelines is to ensure common, uniform and consistent application of the concepts that compromise the definition of AIF across the EU. Under the AIFMD, an AIF is defined as: (i) a collective investment undertaking; (ii) which raises capital from a number of investors; (iii) and invests that capital in accordance with a defined investment policy; (iv) for the benefit of those investors; (v) and which is not a UCIT. The ESMA Guidelines provide guidance on these concepts of an AIF and the exemptions in the AIFMD, but leave room for interpretation by national regulators to identify vehicles that fall in scope of the AIFMD. Consequently, the ESMA Guidelines do not provide a prescriptive overview of which vehicles are AIFs. As such the ESMA Guidelines do not alter the provisions of the AIFMD but rather illustrate and explain the characteristics likely to lead to a vehicle being considered as an AIF. This implies for instance that a case-by-case assessment of joint ventures should be required to assess the applicability of the AIFMD requirements. Pursuant to the ESMA Guidelines a fund that is not prevented by national law, its rules or instruments of incorporation, or any other binding agreement from raising capital from a number of investors could qualify as an AIF even if the fund in fact has only a single investor. ESMA also clarifies that if a fund is prevented from raising capital from more than one investors it could still be regarded as raising capital from a number of investors, in case the sole investor: invests capital which it has raised from more than one legal or natural person with the view to investing it for the benefit of these persons; and consists of an arrangement or structure with a number of persons. Examples include master-feeder structures, fund-of-fund structures and arrangements where the sole investor is nominee acting as agent for more than one investor. The ESMA Guidelines do not have direct effect in EU Member States; they will be translated and published on the ESMA website. National regulators must confirm their compliance or intention to comply to ESMA within two months of the guidelines being published on ESMA s website. The guidelines can be found here: http://www.esma.europa.eu/system/files/2013-600_final_ report_on_guidelines_on_key_concepts_of_the_aifmd_0.pdf Final report Guidelines on key concepts of the AIFMD 24 May 2013 ESMA/2013/600
04 Practical implications of reporting under AIFMD The AIFMD lays down a number of transparency and reporting requirements for both AIFM and each of the AIFs they manage and market in the European Union. These requirements cover the information disclosure to prospective investors in the prospectus or information memorandum, the annual report as well as periodic reporting to investors and finally the reporting obligations to authorities. It is evident from the implementation guidance that AIFs will need to disclose information that they were previously not required to provide. Examples are disclosure requirements in relation to remuneration and leverage, but also other requirements depending on the accounting standards the AIFs adopt. These are some examples from the AIFMD and implementation guidance where the reporting requirements are rather explicit. AIFMs should also consider some of the more implicit reporting requirements. For example, it is likely that implementation of the AIFMD requires changes to policies which requires new management information to be readily available in order to comply with the AIFMD. In any case, reporting requirements, both explicit and implicit, (may) require changes to current information systems and processes to be able to generate the required information and safeguard the integrity of the data used. AIFMs should timely consider the impact of both explicit and implicit transparency and reporting requirements to address the impact on the information systems and processes concurrently and holistically. With regards to reporting obligations under the AIFMD, ESMA has issued a consultation paper on guidelines on AIFMD reporting obligations with the aim to provide clarification on what AIFMs should report, the timing of such reporting together with the procedures to be followed when AIFMs move from one reporting obligation to another. The consultation paper can be found on: http://www.esma.europa.eu/content/consultationpaper-esma%e2%80%99s-guidelines-aifmd-reportingobligations-under-articles-3-and-24-aif
05 Reward Although no further clarification has been provided on the remuneration regulations under AIFMD yet, the Dutch translation of the CRD IV Directive has been published in April 2013. This is relevant for financial institutions that are both in scope of CRD IV and AIFMD, as the CRD IV text provides some clarity on what the regulator sees as a solution in case of overlap., In our view, the solution that is being proposed in the CRD IV text is, however, rather unpractical. Existing issues remain unsolved, e.g. (i) how to apply the rules on external individuals who could be considered identified staff, but are not employed by the AIFM, (ii) what specific responsibility would the AIFM have regarding remuneration in case of delegation, (iii) how to set up a governing body that would meet the criteria as laid down in the remuneration regulations, but would also fit into the current AIFM governance structure, and (iv) how to practically deal with the remuneration requirements around instruments.i.e. the requirement that part of the variable remuneration is paid in non-cash. We, therefore, recommend financial institutions choose a practical approach for now and implement solutions further once more clarity is provided.
06 Valuations Under the AIFMD, an AIFM must establish and maintain appropriate and consistent procedures concerning the valuation of AIFs. AIFMs are required to perform a valuation of the assets of an AIF at least once a year, depending on the regime under which the assets and AIF classify. The EC notes that it is of crucial importance that assets are valued objectively to protect the interests of the investors. According to the AIFMD fund managers are allowed to perform the valuation themselves as long as the valuation is performed functionally independent from the portfolio management and the remuneration policy and other measures ensure that conflicts of interests are mitigated and that undue influence upon the employees is prevented. In case the AIFM performs the valuations, it is obliged to put procedures and policies in place regarding valuation approaches and methodologies and to test these procedures on a periodic basis with market practice. It should be noted that, if the valuation is not performed by an external party, the AFM may require the AIFM to have its valuation and/or valuation procedures verified by an external valuer or, where appropriate, by an auditor. The AIFM is also allowed to appoint an external party for the valuation. This external party should be independent from the AIFM, registered and sufficiently skilled. An external valuation may increase the objectivity of the valuation and investors may appreciate an external party performing the valuation. http://www.matheson.com/images/uploads/publications/aifmd_factsheet_valuation_web_jan_13.pdf
07 Our observations in the market The pressure begins to increase as the deadline of 22 July is approaching. We are currently seeing a quite some movement in the market, where both the authorities and the fund managers show ample activity. The supervisors are working on interpretation and elaboration of the regulations and definitions. Fund managers have kept themselves busy writing and updating policies and procedures. Also the selection of the depositary is a time consuming activity that is on top of mind of most fund managers. Across all segments there are fund managers who have yet to start any thinking on the matter, while others believe they are nearly done. This appears to be caused partly due to a difference in goal setting (how should we operate post AIFMD implementation?), not only in pre-gap-analysis status. Not all sectors are showing the same level of awareness it seems. In our view, the real estate sector is for example, on average, more focused on the topic than the private equity industry. While we already see more and more activity on the operational side, one of the main challenges still appears to be the identification of the (preferred) AIFM(s). Many fund managers have noted that this question is not so much a legal question, but often a strategic and operational question, where substance considerations play an important role. Timely determination of the preferred strategy concerning the number and location of the AIFMs is key, as a change in structure might have a major impact on the operations.
08 Trends in Dutch local regulations: Ban on commissions for investment firms New regulations to prohibit commissions for investment firms in the Netherlands are expected to enter into force in 2014. These new regulations are part of the draft Amending Decree Financial Markets 2014. To fully ensure that investment firms act in a fair and professional manner in the best interests of their clients, it is deemed necessary to prohibit commissions to and from third parties. In the new envisaged situation the customer pays directly for the provision of services received from an investment firm. Because the investment firm only receives a fee from the customer, there is no risk that the investment firm does not act in the interest of the customer. The ban on commissions applies to investment services including individual portfolio management, investment advice and execution only service (receiving, transmitting or execution of orders concerning financial instruments). The ban concerns all types of inducements (including distribution, returnand referral fees), and applies to investment services provided to retail and professional investors. Introduction of the new rules locally in the Netherlands was deemed necessary as a ban on commissions at European level will most likely not be introduced at short notice. The Dutch Ministry of Finance and the Authority for the Financial Markets had already indicated to be in favour of a complete ban on commissions. The new regulations should be viewed in this context and will replace the current regime for inducements concerning investment services. The new regulations are similar to a ban on commissions which was already introduced in January 2013 for - amongst other - complex products, mortgage loans, life and payment protection insurance products. It is currently expected that the commission ban will enter into force on 1 January 2014. There is a transition period of one year for services provided before that date. The transition period is intended for investment firms to engage with their clients and make preparations for the transition to the new regime (i.e. client positions in commission free products). The transition period is also intended for product providers to make the required steps in the context of this transition.
Contacts If you would like to discuss the implications of the AIFMD for your organisation, please contact: AIFMD leader Wendy Verschoor, 088 792 74 54 wendy.verschoor@nl.pwc.com Tax Martin Vink, 088 792 63 69 martin.vink@nl.pwc.com Reward Janet Visbeen, 088 792 64 29 janet.visbeen@nl.pwc.com Real Estate Bart Kruijssen, 088 792 60 37 bart.kruijssen@nl.pwc.com Consulting Arthur Kilian, 088 792 30 35 arthur.kilian@nl.pwc.com Asset Management Frank van Groenestein, 088 792 40 65 frank.van.groenestein@nl.pwc.com Reporting Daniel van Veen, 088 792 67 41 daniel.van.veen@nl.pwc.com Valuations Wim Holterman, 088 792 63 77 wim.holterman@nl.pwc.com www.pwc.nl Implementation of AIFMD in the Netherlands This content - June is 2013 for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 2013 PricewaterhouseCoopers Belastingadviseurs N.V. (KvK 34180284). All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.