European Regulatory Update – September 2021
Latest Developments at European Level
1. Cross-Border Distribution Directive and Regulation (CBDF)
Remember That The New Pre-Marketing Regime Now Applies.
As explained in our Regulatory Newsletter dated June 2021, the Directive (EU) 2019/1160 (the “Cross-Border Directive”) and Regulation (EU) 2019/1156 (the “Cross-Border Regulation”) on facilitating cross-border distribution of collective European funds entered into force on 1 August 2019 and the EU Member States were required to implement the rules into national law by 2 August 2021.
2. SFDR (Sustainable Finance Discloser Regulation) – Level 2
Application Date of Regulatory Technical Standards (RTS) Postponed
In our June 2021 Regulatory Newsletter, we noted that the Level 2 of the Regulation (EU) 2019/2088 (SFDR), i.e. the RTS on SFDR were supposed to enter into force on 1 January 2022.
The European Commission’s Director-General for Financial Stability decided and announced in a letter dated 8 July 2021 to, however, postpone the application of the RTS to 1 July 2022, noting that the draft RTS under Articles 2a(3), 4(6) and (7), 8(3), 9(5), 10(2) and 11(4) of the SFDR could not be adopted by the Commission within the three-month period, given their length and technical detail.
Their decision was also motivated by the fact that the European Insurance and Occupational Pensions Authority (EIOPA), European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) (together the “ESAs”) are currently preparing an additional six draft RTS based on Articles 8(4), 9(6) and 11(5) of the SFDR following the public consultation [1] conducted by ESAs from 15 March 2021 to 12 May 2021. The aim is to further amend the first draft RTS dated 4 February 2021 in order to integrate Taxonomy-related information. The document is still under review by ESAs, and the deadline for submission (1 June 2021) has already passed.
In his letter, the Director-General recognises the need for the European Commission to take steps to facilitate the smooth implementation of the RTS. Therefore, the European Commission plans to bundle all 13 of the RTS into a single delegated act which they intend to release by the end of 2021 deferring the application dates by six months to 1 July 2022.
ESA’s Q&A on SFDR
On 26th July 2021, the ESAs published a Q&A consolidating the European Commission’s answers to questions related to the interpretation of the SFDR.
Clarification On the AIFMs in Scope
The Q&A clarifies the scope of SFDR, which applies to AIFMs (Alternative Investment Fund Managers) including those having their registered office in a Member State (EU AIFMs) and those having their registered office in a third country (non-EU AIFMs) , as well as to registered (sub-threshold) AIFMs referred to in Article 3(2) AIFMD. More specifically, an AIFM from a third country which may carry out its activities within the European Union.
Given the absence of the activation of the AIFM third country passport under AIFMD, access to end investors in individual EU Member States may be done on the basis of national laws set out in National Private Placement Regimes. Where an AIFM from a third country enters the market of a given Member State by means of a National Private Placement Regime, that AIFM must ensure compliance with SFDR, including the financial product related provisions.
The 500-Employee Criterion of the PAI
The 500-employee criterion related to the “principal adverse impact” (“PAI”) disclosure, as laid down in Article 4(3) of Regulation 2019/2088, should relate, according to the Q&A to the large group in its entirety. Therefore the calculation of the headcount should also take into account the number of employees during the financial year (i) of a parent undertaking and (ii) of subsidiary undertakings, regardless if they are established inside or outside the EU.
For larger group entities, we therefore recommend that a further assessment is carried out if the 500-employee criterion still applies in light of the Q&A.
Additional Guidance
Finally the ESAs clarify the differences between Article 8 and 9 SFDR products as well as the fact that dedicated investment vehicles also fall into the scope of SFDR, meaning their offering documents should include the relevant SFDR disclosures.
3. Performance fees
ESMA Updates Q&A on Performance Fee
On 16 July 2021 ESMA updated its Q&As on both the AIFMD and the UCITS Directive with two additional questions regarding performance fees (the “Guidelines”) which should be considered as of the date of their publication.
Application of the Guidelines to European funds with multiple portfolio managers
The first new Q&A looks at the situation where:
- The manager delegates the portfolio management function to different delegated portfolio managers
- Overall, the fund underperforms during the relevant reference period
- Some of the delegated portfolio managers overperform.
In this case, ESMA’s view is that it would not be acceptable to pay the overperforming portfolio managers a performance fee, since the Guidelines state that:
- performance fees should be paid only where positive performance has been accrued during the performance reference period; and
- performance fees could however be paid in case the fund had a negative performance if the fund has overperformed the reference benchmark.
This applies equally where there has been delegation to different portfolio managers.
As a result, where there has been global underperformance of the fund, overperforming delegated portfolio managers will not be entitled to receive performance fees.
Crystallisation of performance fees
Where a new fund (AIF or UCITS), compartment or share class has been created in the course of the financial year, ESMA confirms that performance fees cannot crystallise after less than 12 months from the date of creation.
ESMA reminds that the Guidelines foresee the crystallisation date being the same for all share classes of a fund that levies a performance fee.
4. AML/CFT
New EU Commission Legislative Package
On 20 July 2021, the European Commission introduced a package of legislative proposals (the “Legislative Package”) which implements the commitments of its action plan adopted on 7 May 2020 for a comprehensive EU policy on preventing money laundering and terrorism financing.
The objective of this new Legislative Package is to strengthen the EU’s anti-money laundering and countering the financing of terrorism (AML/CFT) rules, triggering substantial amendments to the current AML/CFT framework, if adopted as such.
The Legislative Package includes:
- Proposal for a Regulation establishing a new EU AML/CFT authority: the European Authority for Anti-Money Laundering and Countering the Financing of Terrorism (“AMLA”), which will become the hub of an integrated AML/CFT supervisory system, consisting of the AMLA itself and the national authorities having an AML/CFT supervisory mandate.
- Establishment of an EU single rulebook on AML/CFT, which includes:
- Proposal for a Regulation on AML/CFT:This proposal contains directly applicable rules (i) transferring provisions from the existing Directive (EU) 2015/849 (“AMLD 4”) as amended by Directive (EU) 2018/843 (“AMLD 5”) to the Regulation, but also (ii) containing significant changes in the areas of customer due diligence and beneficial ownership made to reach a greater level of harmonisation and convergence in the application of AML/CFT rules across the EU.
- Proposal for a Sixth Directive on AML/CFT:This Directive shall replace AMLD 5. The proposal contains provisions such as rules to achieve a greater level of convergence in the practices on national supervisors and financial intelligence units in EU Member States and in relation to cooperation among competent authorities.
- Recast of the 2015 Regulation on transfers of funds:This proposal aims to amend the Regulation (EU) 2015/847 of 20 May 2015 on information accompanying transfers of European funds to extend the information requirements currently applying to wire transfers and crypto assets, with the necessary adjustments needed due to their different features.
5. LIBOR
Joint Public Statement on The Forthcoming Cessation of All LIBOR Settings
The European Commission, ESMA, the ECB Banking Supervision[2] and EBA published a joint public statement on the forthcoming cessation of all LIBOR settings as continuing to rely on the LIBOR settings may have an impact on the functioning of the European financial system.
Market participants are therefore strongly encouraged to use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposure to these interest rates, by (i) stopping using the 35 LIBOR settings (including USD LIBOR) as a reference rate in new contracts as soon as practicable and in any event by 31 December 2021, except for contracts that are particularly difficult to amend ahead of LIBOR’s cessation (commonly referred to as “tough legacy”) and (ii) including robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.
The UK Financial Conduct Authority (FCA) announced on 5 March 2021 that all 35 LIBOR benchmarks settings will cease to be provided by any administrator or will no longer be representative, as follows:
- Immediately after 31 December 2021, in the case of all GBP, EUR, CHF and JPY settings, and the 1-week and 2-month USD settings; and
- Immediately after 30 June 2023, in the case of the remaining USD settings.
In case you are impacted, we recommend that you contact your legal advisor to take the appropriate steps to anticipate the cessation of the LIBOR settings.
6. France
New Quarterly Reporting to the AMF
New AMF Reporting Requirements were published on 23 June 2021 by the French authority, which announced new quarterly reporting obligations relating to (i) indemnification payments to unitholders and (ii) breaches of investment ratios by UCITS managers and AIFMs.
The new policy on reporting obligations follows the Order of 29 March 2021 approving the update of the AMF General Regulation which entered into force on 1 July 2021. The first report is expected to be filed by the UCITS managers and AIFMs in scope no later than 31 October 2021, for the quarter starting 1 July to 30 September.
Below Is a Summary on What The AMF is Changing And What This Means For In-Scope Entities
Previously French-regulated asset managers were already required to inform the AMF, without delay, of incidents that were likely to result in a loss or gain – for example, indemnification payments to unitholders, a payment of costs relating to civil or criminal liability, an administrative sanction or an incident resulting in reputational damage – that represented more than 5% (gross) of their regulatory own funds.
Under the new Policy, both French and foreign UCITS managers and AIFMs will be subject to new reporting obligations, with the intention to strengthen the AMF’s risk-based supervisory approach and enable it to improve data collection.
In cases where the UCITS or the AIF has not complied with legal, regulatory or contractual requirements relating to investment rules and asset composition, the requirements will only apply in respect of “active” breaches (i.e. there is no obligation to report where the non-compliance is as a result of something that is beyond the control of the UCITS manager/AIFM and is not as a result of the financial instrument maturing).
This reporting requirement applies to:
(i) French UCITS managers and AIFMs in relation to both French and foreign collective investment schemes (CIS) that they manage – including by delegation – and
(ii) foreign UCITS managers and AIFMs with respect to the French funds they manage.
The report shall contain the amount of compensation paid by French UCITS managers and AIFMs to (i) the shareholders or unitholders in respect of both French and foreign CIS that they manage, including by delegation, and (ii) the clients to whom they provide investment or related services, as well as foreign UCITS managers and AIFMs with respect to French CIS they manage, including by delegation.
Even if there are no indemnification payments or breaches of investment ratios in the reporting period, a report confirming the same must be submitted to the AMF.
Timeline:
Asset managers will be required to report this new information no later than 31 October 2021 for the reporting period 1 July 2021 – 30 September 2021.
Foreign UCITS managers and AIFMs are to submit the reports through a dedicated email address.
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Luxembourg regulatory developments
1. Use of Securities Financing Transactions
Reminder on The New CSSF FAQ
As we mentioned in our June 2021 Regulatory Newsletter and in a recent client communication, the CSSF published an FAQ on 18 December 2020 (FAQ) on the use of the following securities financing transactions (SFTs) by UCITS (i.e. securities lending transactions, reverse repurchase agreement transactions, repurchase agreement transactions, buy/sell-back and sell/buy-back transactions), aiming to bring further clarification concerning the use by UCITS of these SFTs, taking into consideration the applicable regulatory framework as well as the supervisory experienced gained by the CSSF over the last years.
The CSSF expects the disclosure clarifications provided in the FAQ to be reflected in the prospectuses of UCITS and in the disclosures to investors of AIFs, Part II UCIs and SIFs by 30 September 2021.
In the case where a UCITS does not intend to use a given SFT/SFTs (respectively a UCITS that did not use this SFT in the past and does not intend to use it in the near future such instrument(s)), the prospectus should be updated and clearly state this fact.
Please contact your legal advisor if your investment vehicle falls into the scope of SFTR or if the respective prospectus/offering document are allowing the use of SFTs/TRS to ensure the compliance of these documents with the FAQ.
2. CRD V
Implementation into Luxembourg Law
The Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (CRD V) has been implemented into Luxembourg law by the act of 20 May 2021.
The law requires that Luxembourg-based credit institutions, investment firms[3] and (mixed) financial holding companies adapt and, among others, review a series of internal policies, procedures and arrangements, such as:
- Internal control arrangements;
- Remuneration policy and related internal arrangements;
- Own funds policy, liquidity strategy policy, risk management policy, policy on cooperation with the supervisory authority and related internal arrangements.
3. MiFID II
CSSF FAQ
On 10 June 2021, the CSSF published an FAQ on the application of MiFID II to Luxembourg management companies (Section 10) and alternative investment fund managers (Section 26) to clarify under what circumstances and to what extent MiFID applies to UCITS managers and AIFMs, their third-party delegates and their investment advisers.
From a practical perspective, the organisation model should be analysed to assess:
- The need for an authorisation to provide services under (i) Article 101(3) of the UCITS Law or (ii) under Article 5(4) of the AIFM Law, i.e. discretionary portfolio management and non-core services (including investment advice); and
- Appropriate compliance by any third country entity acting as their delegate or undertaking services on their behalf with the third country regime as foreseen under CSSF Circular 19/716 on the provision in Luxembourg of investment services or performance of investment activities and ancillary services in accordance with Article 32-1 of the Law of 5 April 1993 on the financial sector, as amended.
The CSSF FAQ should be complied with as soon as possible and by 31 December 2021 at the latest, considering the best interests of investors.
New CSSF Circular
The CSSF published Circular 21/779 regarding the adoption of ESMA guidelines on certain aspects of MiFID II compliance function requirements (ESMA35-36-1952) notifying ESMA of compliance of the guidelines, which will enter into force two months after their publication in all official languages of the EU.
These guidelines replace the ESMA guidelines on the same topic issued in 2012 and include updates that enhance clarity and foster greater convergence in the implementation, and supervision of the new MiFID II compliance function requirements.
While the objectives of the compliance function as well as the key principles of the regulatory requirements have remained unchanged, the obligations have been further strengthened, broadened and detailed under MiFID II. The guidelines will enhance the value of existing standards by providing additional clarifications on certain specific topics, such as new responsibilities in relation to MiFID II’s product governance requirements, by notably detailing further the reporting obligations of the compliance function.
The guidelines are addressed to investment firms[4] and credit institutions providing investment services and activities, investment firms and credit institutions selling or advising clients in relation to structured deposits, UCITS managers and AIFMs when providing investment services and activities in accordance with the UCITS Directive and the AIFMD.
4. Use of US GAAP by AIFs (including SCSp)
CSSF Updated the FAQ On AIFM Law
On 30 June 2021, the CSSF updated its FAQ on the AIFM Law, more specifically the Section 14, L2 related to the accounting standards which are accepted under article 20(3) of the AIFM Law for preparing accounting information in the annual report of an AIF managed by an authorised AIFM established in Luxembourg. This section had provided that Lux GAAP and IFRS were the sole accounting standards accepted under article 20(3) of the AIFM Law. The CSSF has, however, taken into consideration inter alia the Luxembourg Bill No. 7737, which now explicitly permits AIFs under the form of special limited partnership (SCSp) to use Lux GAAP, IFRS and other accounting standards from certain third countries (such as US GAAP) to draw up the accounting information contained in their annual report.
5. CSSF Authorisation Process
CSSF Requires Additional Documents
The CSSF introduced some changes to the authorisation process of new UCIs/sub-funds to existing structures.
A new questionnaire has been introduced that should be submitted with the application file replacing a series of confirmations currently requested separately. This questionnaire, named “Fund Pre-Inception Readiness Review” intends to provide confirmation by the different stakeholders that all preparatory work and assessments required by regulations have been completed and that the new fund/sub-fund(s) is/are ready to be on-boarded. Also, a new letter confirming compliance of final executed core agreements with applicable legal and regulatory requirements should be submitted together with these agreements.
The new adaptations are applicable from 16 August 2021.
6. CBDF
Circular CSSF 11/509 updated by Circular CSSF 21/778
CSSF Circular 11/509 has been updated by the CSSF Circular 21/778 to include amendments relating to the Law of 21 July 2021 transposing the CBDF Directive, and in particular the process of de-notification of Luxembourg-based UCITS.
The main changes are the new de-notification procedure for UCITS at sub-fund or share class level in addition to the initial and update notifications and consequently the precision that an initial notification should now be sent for each new share class.
CSSF FAQ on Notification Procedures
The CSSF issued an FAQ in relation to the CBDF Regulation which aims at highlighting the changes for notifications to the CSSF as from 2 August 2021.
The FAQ gives guidance on the main changes brought by the CBDF Regulation for notification procedures as well as detailed information for UCITS notifications and/or AIFM notifications on the new information to include in the initial notification letter, on de-notification request, update of notification or pre-marketing notification.
7. Fund Liquidation
CSSF Process Simplification
On 31 August 2021 the CSSF issued a communication in relation to the requirement to submit liquidation period extension requests for regulated funds structures in non-judicial liquidation. The regulator clarified that the previously needed liquidation period extension requests for funds structures in non-judicial liquidation will no longer be required.
From the date of the communication, the CSSF will monitor the status of the liquidation processes via the semi-annual reports on the progress of the liquidation submitted by the liquidator via a specific CSSF form.
Nevertheless, any significant issue shall be reported by the liquidator to the CSSF without any delay and should not wait until issuing the semi-annual report.
Liquidation period extension requests for sub-funds of umbrella funds structures that are on the CSSF’s official list will, however, still be required when the nine-month deadline is reached.