Luxembourg, 29 March 2018 Response to the KPMG survey for the European Commission on the Alternative Investment Fund Managers Directive Introduction The Association of the Luxembourg Fund Industry (ALFI) is the representative body of the Luxembourg investment fund community. Created in 1988, the Association today represents over 1,400 Luxembourg domiciled investment funds, asset management companies and a wide range of service providers such as depositary banks, fund administrators, transfer agents, distributors, legal firms, consultants, tax experts, auditors and accountants, specialist IT providers and communication companies. The Luxembourg Fund Industry is the largest fund domicile in Europe and a worldwide leader in cross-border distribution of funds. Luxembourg-domiciled investment structures are distributed in more than 70 countries around the world. We thank the European Commission and KPMG for the opportunity to participate in this survey on the AIFMD. We support the submission of the European Fund and Asset Management Association (EFAMA). Response to the consultation Institutions/Stakeholder related questions Q 3) Please specify what type of stakeholder you are: (Multiple Choice) a. Alternative Investment Fund Manager (AIFM) b. Public authority c. Institutional investor or eligible counterparty investing in AIFs for own account d. Representative body of investors and/or retail consumers e. Entity marketing, selling or selecting AIFs to or for investors f. Non-listed company or enterprise receiving investment from AIFs g. AIF depositary h. AIF sub-custodian i. Investment manager/adviser to AIFs j. Prime Broker k. Broker in underlying AIF assets l. Fund administrator m. Fund accountant n. External valuer o. Other type of entity with activities relating to the operation of AIFs p. Industry body, representing any parties in the operation of AIFs. q. Other, including AIF directors and partners (please specify: )
Q 6) Was your institution active in or involved with the AIF market prior to AIFMD coming into force? a. Yes b. No Q 33) Please specify what type of stakeholders you represent or are your members (please indicate all that apply): Alternative Investment Fund Manager (AIFMs) Institutional investors or eligible counterparties investing in AIFs for own account Representative bodies of investors and/or retail consumers Entities marketing, selling or selecting AIFs to or for retail investors Non-listed companies or enterprises receiving investment from AIFs AIF depositaries or (sub)custodian Investment managers/advisers to AIFs Another type of entity enabling AIFs to operate (e.g. prime brokers, brokers in underlying AIF assets, fund administrators, external valuers) Other industry bodies, representing any parties in the operation of AIFs. Other (please specify: ) ALFI also represents legal firms, consultants, tax experts, auditors and accountants, specialist IT providers and communication companies The objectives of AIFMD Appropriate authorisation and registration requirements Competent Authorities (Chapter IX) Q 45) Please indicate to what extent you agree that AIFMD is applied consistently and without significant variation by all NCAs - fully agree - somewhat agree - neutral - somewhat disagree - fully disagree - no opinion [Display only if answer = somewhat or fully disagree] Please briefly explain the main areas where AIFMD is not applied consistently by all NCAs: To be added at the end in the section last comments: Ad question 45: We are of the view that, overall, there are no major discrepancies in the application of the AIFMD by NCAs, which is due to the high level of detail in the legislation. A consistent application of rules is crucial for a pan-european regime like the AIFMD. In order to ensure a level playing field among AIFMs, NCAs should not apply stricter interpretations at national level, e.g. in terms of substance or provision of services to entities other than AIFs. However, it is crucial that ESMA does not deviate from the level 1 and level 2 texts. Since the application of the AIFMD, ESMA has introduced new interpretations via its Q&A document on the AIFMD that were not expected by the fund industry when reading the AIFMD and its implementing regulation: Fund Managers Directive Page 2
- ESMA introduced in 2016 new Q&As on delegation (questions 2 and 3 of section VIII) that go beyond the provisions included in the AIFMD; - In 2017, ESMA required AIFMs to disclose information on remuneration of their delegates in the annual report (question 6 of section I). These new interpretations were published without consultation of the industry, without transition periods and only years after the transposition of the AIFMD into national law. Scope, exemptions, definitions (Art. 2-4) Q 52) Are you aware of differences in interpretation of the definition of an AIF or in the formation of investment vehicles that might adversely impact competitiveness within the industry or investor protection? Yes No Don t know [Display only if answer = yes] Please provide a brief explanation: There may be differences in the interpretation of the definition of an AIF or in the formation of investment vehicles, but not all those differences adversely impact the competitiveness within the industry or investor protection. Our members informed us of the following examples: - Regarding what constitutes a number of investors in accordance with article 4 para. 1a AIFMD (and ESMA s guidelines on key concepts of the AIFMD), a Dutch court (Rechtbank Rotterdam, decision of 27 April 2017, case n ROT 16/6878 and ROT 16/7425) recently interpreted the AIF test as follows: the fact that the undertakings in question each (i) had only one investor, (ii) had never offered units to additional investors and (iii) had taken management decisions not to admit additional investors was sufficient to fail the AIF test and hence fall outside the AIFMD; - The Swedish regulator (Finansinspektionen) charges its regulatory fees for an Article 36 AIFMD (EU AIFM marketing non-eu AIF) and Article 42 AIFMD notification per AIF which is taken to mean sub-fund level rather than AIF/vehicle level. Q 53) Are you aware of any market practices that enable AIFM-like firms not to be classified as AIFMs and therefore to be outside the AIFMD requirements for AIFMs? Yes No Don t know [Display only if answer = yes] Please provide a brief explanation: Q 54) Please indicate to what extent you agree with the following statements about AIFMs that are, or that choose to be, subject to the full AIFMD requirements. AIFMs provide a high standard in AIF management that is comparable to or better than standards in other jurisdictions around the globe Fund Managers Directive Page 3
AIFMs provide a high level of investor protection AIFMs provide a high level of transparency with regard to their services AIFMs provide a high level of transparency with regard to the AIFs they manage Q 55) Please indicate to what extent you agree with the following statements about sub-threshold AIFMs? In practice there is no significant difference in the professional standards of subthreshold and full-scope AIFMs To be added at the end in the section last comments: Ad question 55, first bullet point: Depending on the comparison and in line with the rules of the AIFMD, there can be significant differences in the professional standards of sub-threshold and full-scope AIFMs. But this does not mean that lighter professional standards are by default inappropriate, or in other words, the sub-threshold AIFM can still be properly organised. Sub-threshold AIFMs provide similar disclosures to full-scope AIFMs Sub-threshold AIFMs follow similar risk management standards to full-scope AIFMs Fund Managers Directive Page 4
Sub-threshold AIFMs manage conflicts of interest to the same standards as full-scope AIFMs Enhanced transparency of macro-prudential risks Leverage (Art. 25) Q 63) Since AIFMD implementation, have you observed any changes in: The level of leverage in EU/EEA AIFs? o strongly increased o somewhat increased o somewhat decreased o strongly decreased The sources of leverage in EU/EEA AIFs? o strongly increased o somewhat increased o somewhat decreased o strongly decreased The level of leverage in non-eu/eea AIFs? o strongly increased o somewhat increased o somewhat decreased o strongly decreased The sources of leverage in non-eu/eea AIFs? o strongly increased o somewhat increased o somewhat decreased o strongly decreased Limitation of micro-prudential risk and investor protection Conflict of interests (Art. 14) Q 67) Please indicate to what extent you agree with the statement that AIFMs are required to have appropriate conflicts of interest management Fund Managers Directive Page 5
[Display only if answer = somewhat or fully disagree] Please briefly explain the main reason(s) for your answer: Risk Management (Art. 15) Q 69) Please indicate to what extent you agree with the statement that AIFMs are required to have appropriate risk management processes [Display only if answer = somewhat or fully disagree] Please briefly explain the main reason(s) for your answer: To be added at the end in the section last comments: Ad question 69: Depending on the structure (for smaller private equity or real estate structures), there is a risk that the AIFMD requires too much / is too burdensome in terms of risk management. The separation between risk management and portfolio management is in these cases sometimes considered as artificial. Guidance on how this should be implemented would be helpful for practitioners. It is crucial to strike an appropriate balance. Liquidity Management (Art. 16) Q 71) Please indicate to what extent you agree with the statement that AIFMs are required to have appropriate liquidity management processes [Display only if answer = somewhat or fully disagree] Please briefly explain the main reason(s) for your answer: Valuation (Art. 19) Q 72) Please indicate to what extent you agree with the following statements relating to valuation. Net Asset Values of AIFs are calculated more frequently than before AIF assets are valued more frequently than before Fund Managers Directive Page 6
The AIFMD valuation requirements provide for an appropriate level of governance, including in relation to potential conflicts of interest The AIFMD requirements have led to an overall improvement in valuation processes To be added at the end in the section last comments: Ad question 72, fourth bullet point: Before the introduction of the AIFMD, fund products were regulated. The AIFMD introduced the concept of manager regulation. Generally, both concepts are equally good, but should not be applied at the same time (i.e. application of either the one or the other concept). Regarding the AIFMD, it would not be good for the fund industry to change the concept of manager regulation. The liability requirement for external valuers has not limited the ability or willingness of such entities to perform this function Q 73) What was/is the leading market practice of valuation for non-listed assets? a. Prior to AIFMD coming into force: Internal valuation by the AIFM Valuation by the investment manager/adviser Valuation by an external valuer Valuation by the depository Other (please specify: market practice of valuation depends on asset classes. For real estate / infrastructure assets professional appraisers with local market expertise apply international valuation standards (e.g. RICS, IVSC, TEGoVA). Private equity / private debt is mainly valued by investment managers / advisors in line with industry valuation standards like IPEV, ILPA. Don t know Fund Managers Directive Page 7
b. Today Internal valuation by the AIFM Valuation by the investment manager/adviser Valuation by an external valuer Valuation by the depository Other (please specify: ) Don t know To be added at the end in the section last comments: Ad question 73 b): The AIFMD provides that the ultimate/legal responsibility lies with the AIFM, but valuation can also be performed by another internal or external valuer. However, for certain asset types (such as real estate), external valuers refrain from assuming the work and, as a result, the ultimate/legal responsibility. Depository (Art. 21) Q 76) Please indicate to what extent you agree with the following statements about AIF depositaries. A depositary is essential for all types of AIFs The types of entities that can be a depositary are appropriate Entities like notaries, lawyers or accountants should in our view not act as depositaries. The value to professional investors of the depositary oversight function outweighs its cost The AIFMD requirements resulted in significant cost impacts for depositaries. We expect that any future changes will be balanced, ensuring that changes are not made where it is clearly evident that the costs will outweigh the benefits/protection. AIF depositaries provide for an appropriate level of protection for professional investors Fund Managers Directive Page 8
The oversight responsibilities for depositaries cover the appropriate activities of the AIFM/AIF The cash monitoring requirements for depositaries are necessary and appropriately detailed The cash monitoring requirements have significantly impacted depositaries. We would not welcome further changes, but only clarifications that these cash monitoring requirements could be covered by the oversight function of the AIFM s activities rather than by re-performing tasks performed by the AIFM or its delegate (the administrator). The delegation requirements are appropriately set and do not unnecessarily constrain non-eu investments by AIFs We are also of the view that the rules on due-diligence and the strict liability regime are quite restrictive, and create challenges in respect of frontier and emerging markets. The asset segregation and omnibus account requirements for sub-custodians provide additional benefits for professional investors that clearly outweigh the additional costs Individually segregated accounts at the level of delegates do not necessarily provide additional insolvency protections for clients, which is one of the main objectives of the asset segregation requirements. We welcome the approach ESMA proposed in its opinion on asset segregation and this opinion must be implemented in such a way that depositaries can use the records of their third party delegates and are not be expected to duplicate records. The requirements for non-custody assets are necessary and appropriate Fund Managers Directive Page 9
The depositary requirements are implemented in a similar way across the EU/EEA The way in which the depositary operates and interfaces with the AIFM/AIF is similar across the EU/EEA Please provide additional brief information on any of these points, if you wish: Disclosure to public and investors (Art. 22, 23) Q 78) Please indicate to what extent you agree with the following statements on the impact of AIFMD on the information provided to investors prior to investment. Content of disclosure has expanded The content of disclosure has indeed expanded to the extent that the key terms of side letters are being disclosed as well. The practice of including in side letters a most favoured clause supports fair treatment of investors. Quality of disclosure has improved The disclosure does not duplicate information provided elsewhere Disclosure is consistent across the EU/EEA Fund Managers Directive Page 10
Please provide brief information on any of these points, if you wish: Q 79) Please indicate to what extent you agree with the following statements on the impact of AIFMD on periodic disclosures to investors. Frequency of reporting has increased Content of reporting has expanded Quality of reporting has improved This reporting does not duplicate information provided in other reports Reporting is consistent across the EU Please provide brief information on any of these points, if you wish: Specific investment types Q 97) To what extent do you believe AIFMD has impacted: investment in private equity or venture capital? o strongly increased o somewhat increased o somewhat decreased o strongly decreased Fund Managers Directive Page 11
o don t know investment in or for the benefit of developing countries? o strongly increased o somewhat increased o somewhat decreased o strongly decreased o don t know investment in real assets? o strongly increased o somewhat increased o somewhat decreased o strongly decreased o don t know [if investment in private equity or venture capital has changed] Please briefly explain why investment in private equity or venture capital has changed. [if investment in or for the benefit of developing countries has changed] Please briefly explain why investment in or for the benefit of developing countries has changed. [if investment in real assets has changed] Please briefly explain why investment in real assets has changed. Market and commercial impacts Q 112) Do you believe that retail investors are impacted by AIFMD? Yes No Q 113) Do you believe that AIFMD has had positive impacts for retail investors, directly or indirectly? Yes No If yes, please briefly explain the main positive impacts. In jurisdictions in which AIFs can be marketed to retail investors, the AIFMD brought further legal clarity and certainty. Q 114) Do you believe that AIFMD has had adverse impacts for retail investors, directly or indirectly? Yes No If yes, please briefly explain the main adverse impacts The AIMFD marketing passport may only be used for marketing to professional investors. Any marketing to retail investors has to be notified and carried out according to national legislation (national private placement regime, if applicable) in the host Member State of the AIF and cannot be carried out by way of the AIF marketing passport. Fund Managers Directive Page 12
Impact of and interplay with other legislation Q 117) Do you believe that other legislation has assisted or hindered achievement of the objectives of AIFMD? National product regulation of AIFs for professional investors only o strongly assisted o somewhat assisted o somewhat hindered o strongly hindered National product regulation for AIFs available to retail investors o strongly assisted o somewhat assisted o somewhat hindered o strongly hindered Other regulatory reporting o strongly assisted o somewhat assisted o somewhat hindered o strongly hindered Tax Legislation o strongly assisted o somewhat assisted o somewhat hindered o strongly hindered National savings policies o strongly assisted o somewhat assisted o somewhat hindered o strongly hindered Other EU legislation or regulation o strongly assisted o somewhat assisted o somewhat hindered o strongly hindered Other national requirements o strongly assisted o somewhat assisted o somewhat hindered Fund Managers Directive Page 13
o strongly hindered [And after each question to which the answer is other than no opinion, add] Please briefly explain why: You can send the survey by clicking Submit survey. Feel free to leave any last comments if you like. There is primarily a need for stability. As a managers Directive, the AIFMD should continue to regulate managers. Any additional layer of regulation at the level of the funds could impair existing flexibility. The AIFMD is not yet recognised as a brand comparable to UCITS. Moreover, it will take ESMA and the European Commission additional time, in particular in a Brexit context, to consider the extension of the AIFMD passport to selected third countries. If the AIFMD standard is still meant to be exported to countries worldwide, it would in our view be detrimental to change the basic principle of manager regulation at this early stage. (further last comments to be added as indicated throughout the document) Fund Managers Directive Page 14