Asset Management And Investment Funds Legal And Regulatory Update November 2020 – Finance and Banking

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In this issue we consider a number of recent Central Bank
updates including its confirmation of a fast-track process for
prospectus updates required under the Sustainable Finance
Disclosures Regulation, the findings from its CP86 review, and its
revised statement regarding certain COVID-19 flexibility measures.
We also look at ESMA’s recent report to the ESRB on fund
liquidity, the application of ESMA’s performance fee guidelines
and the announcement of a common supervisory action on investment
fund costs and fees, as well as some open consultations of

If you would like to discuss any of the topics covered, please
feel free to contact a member of our team.

Central Bank Confirms Fast-track Process for Prospectus Updates
under SFDR

On 30 October 2020, the European Commission
(“Commission“) wrote to the European
Supervisory Authorities (EBA, EIOPA and ESMA)
(“ESAs“) confirming a delay to the
implementation of the level 2 measures
(“RTS“) under the Sustainable Finance
Disclosures Regulation (“SFDR“). In its

, the Commission explains that the application of the
SFDR is not conditional on the formal adoption and entry into force
or application of the RTS. Therefore, financial market participants
and financial advisers subject to the SFDR will still need to
comply with its high level and principle-based requirements from 10
March 2021. In order to provide financial market participants and
financial advisers adequate time for implementation, the RTS will
become applicable at a later stage.

Following the Commission’s clarification, the Central Bank
has confirmed that it will allow a fast track process for the
amendments to prospectus documents that relate only to changes
being made to ensure compliance with SFDR. The Central Bank has
also confirmed that it does not intend to provide further guidance
at this time as that will come, in time, from the Commission. In
the meantime, however, the Central Bank, will not be reviewing the
categorisation of products or the approach to compliance with other
elements of SFDR and will rely on the self-certification from the
fund management company until such time as the RTS are final and
effective. However, the Central Bank has emphasised that the
fast-track regime should not be seen as providing scope for a
lesser quality of disclosure than would otherwise be produced. The
Central Bank is expected to issue more detailed information
regarding the fast track process will in due course.

For more information on the requirements under SFDR, please see
our more detailed briefing

Central Bank Publishes CP86 Review Findings

On 20 October 2020, the Central Bank published the much
anticipated findings of the review of its Fund Management Company
Guidance (“CP86“). The Central Bank
communicated its findings (“Findings“)
in an industry letter that all fund management companies (including
self-managed investment funds) (“FMCs“)
should use to “critically assess” their operating models
and resourcing and governance arrangements. The Central Bank
expects all FMCs to review the issues identified in the Findings
and to develop and progress individual action plans to address
these issues and meet the Central Bank’s expectations. These
action plans must be approved by the board of directors of the FMC
by the end of Q1 2021. The most significant findings relate to
substance and governance. The Central Bank has stated that all FMCs
should have a minimum of 3 FTEs (full-time employee or equivalent
to full time employee) and should appoint locally based Designated
Persons (“DPs“) and other staff who have
sufficient time to dedicate to their roles and responsibilities,
including delegate oversight. FMCs will have to carefully consider
their resourcing requirements and decisions and ensure that they
conduct appropriate due diligence on delegates and PCF-holders.

In its
, the Central Bank noted that some FMCs had
demonstrated that they were broadly compliant with the CP86
framework. These FMCs have resourcing and operational structures in
place that support a considered and well-planned approach to
implementation of the CP86 framework. Many of these FMCs were
authorised following the introduction of the CP86 rules in 2017.
The Central Bank found that, in its view, many FMCs authorised
prior to the introduction of CP86 failed to fully implement CP86
and could only evidence the introduction of very limited changes as
a result of CP86.

The key issues identified by the Central Bank related to:

  • resourcing;

  • designated persons;

  • delegate oversight;

  • risk management frameworks;

  • board approval of new funds;

  • the organisational effectiveness
    director; and

  • governance and culture.

All FMCs must carefully review the Findings and critically
assess their day to day operational, resourcing and governance
arrangements to make necessary changes to ensure the full and
effective embedding of all aspects of CP86. FMCs must immediately
develop appropriate action plans to meet the Central Bank’s
expectations. These action plans must be approved by the FMC board
by the end of Q1 2021.

For more information, please see our detailed briefing

PCF 39 ‘In Situ Returns’ Due by 27 November 2020

last month, the Central Bank published the Central
Bank Reform Act 2010 (Sections 20 and 22) (Amendment) Regulations
2020 designating the new PCF-39A-F roles, each aligned to the
specific managerial functions set out in the Central Bank’s
Fund Management Company Guidance (commonly referred to as
CP86“). Designated persons
(“DPs“) in situ on 5 October 2020 (the
effective date of the Amending Regulations) are not required to
seek the approval of the Central Bank to continue to perform one of
the new PCF roles. However, funds/fund management companies must
submit a list of the individuals performing each of the newly
designated PCF 39 A-F roles via an “In Situ return” to
the Central Bank by 27 November 2020. If the
individual preforming the role changes after the new DP roles have
been introduced, (i.e. after 5 October 2020), he/she will be
required to seek the Central Bank’s prior approval in writing
to that appointment by means of a new Individual Questionnaire.

The Central Bank has published the submission template and
associated guidance on its website

Fund Liquidity: ESMA Issues its Report to the ESRB

On 14 May, ESMA published a
statement of support
for an ESRB recommendation that it
coordinate a focused supervisory engagement amongst EU regulators
with investment funds that have significant exposures to corporate
debt and real estate. The recommendation was part of a set of
actions to address the COVID-19 emergency from a macro-prudential

requested ESMA to coordinate with the national
regulators to undertake a focused piece of supervisory exercise
with investment funds that have significant exposures to corporate
debt and real estate assets to assess the preparedness of these two
segments of the investment funds sector to potential future adverse
shocks, including any potential resumption of significant
redemptions and/or an increase in valuation uncertainty.

On 13 November 2020, ESMA published its
on the preparedness of these funds to deal with
potential future adverse liquidity and valuation shocks. The
findings indicate that the funds exposed to corporate debt and real
estate funds that were under review overall managed to adequately
maintain their activities when facing redemption pressures and/or
episodes of valuation uncertainty. The analysis of their behaviour
during the market stress linked to the COVID-19 pandemic revealed
that only a limited number of the analysed funds suspended
subscriptions and redemptions while the vast majority was able to
meet redemptions requests and maintain their portfolio

However, ESMA has advised that these results should be
interpreted with caution since the redemption shock linked to the
COVID-19 pandemic was concentrated over a short period of time,
amid significant government and central bank interventions which
provided support to the markets in which these funds invest. The
findings also demonstrated some areas with weaknesses which need
addressing including:

  • some funds presented potential
    liquidity mismatches due to their liquidity set up (e.g. a
    combination of high redemption frequency, no/short notice periods
    and no liquidity management tools
    (“LMTs“) in the case of funds investing
    in asset classes either illiquid by nature or whose liquidity may
    recede during a period of market stress); and

  • only a few funds have adjusted their
    liquidity set-up according to the pursued investment strategy and
    in light of the liquidity issues encountered (e.g., introduction of
    LMTs, adaptation of the redemption frequency and notice

ESMA also identified the following five priority areas that
would enhance the preparedness of the relevant investment funds for
potential future adverse liquidity and valuation shocks:

  1. ongoing supervision of the alignment
    of the fund’s investment strategy, liquidity profile and
    redemption policy;

  2. ongoing supervision of liquidity risk

  3. fund liquidity profile

  4. increase of the availability and use
    of LMTs; and

  5. supervision of valuation processes in
    the context of valuation uncertainty.

In its report, ESMA notes that it will follow up with national
regulators on the first, second and fifth of these policy areas to
foster supervisory convergence in how national regulators supervise
firms’ compliance with their obligations in this area. However,
ESMA states that it considers that the increase of the availability
of LMTs in EU member states and further convergence in the
establishment of liquidity profiles under AIFMD should be taken
forward in the context of the Commission’s review of the AIFMD.
More generally, ESMA supports further initiatives to develop a
macro-prudential toolkit for investment funds that could be
developed by the ESRB in conjunction with ESMA and NCAs.

Fund Fees to Remain a Key Supervisory Priority in 2021

On 13 November 2020, ESMA
its supervisory priorities for national regulators.
In 2021, coordinated by ESMA, national regulators will be
undertaking supervisory action on:

  1. costs and fees charged by fund
    managers; and

  2. improving the quality of transparency
    data reported under MiFIR.

Earlier this year, ESMA issued a supervisory briefing
(“Briefing“) to support national
regulators in their assessments of “undue costs” and
supervising the obligation to prevent such undue costs being
charged to investors. Although the Briefing is non-binding, ESMA
has stated that it will closely cooperate with national regulators
to promote its application and will review the level of convergence
reached across the EU in 2021. In its Work Programme for 2021, ESMA
had already flagged that a Common Supervisory Action
(“CSA“) on costs and fees was planned
for 2021, noting that this CSA is expected to “represent a
major area of focus to increase convergence in the supervision of
costs in UCITS and AIFs, including securities lending fees and

For more information on the Briefing and ESMA’s
expectations, please see our more detailed briefing

Central Bank Updates its COVID-19 Regulatory Flexibility

previously reported
, in light of the effect of the COVID-19
pandemic, in April 2020 the Central Bank introduced certain
regulatory flexibility measures for regulated firms, including
funds and fund service providers, in certain specified areas. These
included flexibility around the filing of periodic reports and
other scheduled regulatory returns and the conducting of on-site
due diligence visits. The Central Bank also clarified its
expectations regarding the implementation of risk mitigation
programmes and its requirements for additional information requests
to assess the effects of COVID-19 on the financial sector.

On 5 November 2020, the Central Bank published a
revised statement
of its expectations. The Central Bank has
decided that certain previously communicated measures which have
since expired on their terms, will not be extended. However,
certain flexibility measures afforded to investment funds and fund
service providers are retained. These relate to investment
funds’ annual and semi-annual financial statement filings and
on-site due diligence visits.

In addition, having postponed any updates to its regulatory
policy framework in respect of investment firms, funds and fund
management companies at the outset of the pandemic, the Central
Bank has advised that these publications and updates generally have
now resumed. In particular, the Central Bank expects to publish its
feedback statement to its consultation on the treatment, correction
and redress of errors in investment funds (“
“) by Q1 2021.

ESMA’s Performance Fee Guidelines to Apply from January

On 5 November 2020, ESMA published the

official translations
of its guidelines on performance fees in
UCITS and certain types of AIFs
(“Guidelines“), thereby triggering the
two month notice period within which national regulators should
notify EMSA whether they comply or intend to comply with the

The publication of the official translations also clarifies the
application date of the Guidelines. The Guidelines state that

  • apply from two months after the date
    of publication of the guidelines on ESMA’s website in all EU
    official languages (5 January 2021).
    Managers of any new funds created after the date
    of application of the Guidelines with a performance fee, or any
    funds existing before the date of application that introduce a
    performance fee for the first time after that date, should comply
    with the Guidelines immediately in respect of those funds.

  • managers of funds with a performance
    fee existing before the date of application of these guidelines
    should apply the Guidelines in respect of those funds by the
    beginning of the financial year following 6 months from the
    application date of the Guidelines (by the beginning of the
    financial year post 5 July 2021).

The grandfathering period under Central Bank UCITS Regulations
2019 for funds with existing performance fees to comply with the
Central Bank’s requirements in respect of performance fees ends
on 27 November 2020. There is some divergence between the ESMA
Guidelines and the Central Bank requirements and the Central Bank
is expected to communicate with industry soon in this regard.

For more information on the Guidelines, please see our previous

Central Bank: The Impact of COVID-19 on the Funds Industry

On 25 September 2020, the Central Bank held an invitation only
event to discuss the impact of COVID-19 on the funds industry. The
purpose of the event was to gain insights from key firms and
representative bodies on their experiences, lessons learned, and
vulnerabilities identified from the COVID-19 crisis. The event also
served as an opportunity for the Central Bank to provide its views
on the crisis and to set out some key supervisory and policy
priorities for the funds sector.

The event was comprised of three sessions:

Session 1: Macro-prudential Perspective on
COVID-19 and the Funds Sector

Session 2: Reflections from Supervisory
Engagements During COVID Market Events

Session 3: Potential Future Policy

In the opening remarks to the event, Derville Rowland, Director
General, Financial Conduct acknowledged that the funds sector had
broadly demonstrated sufficient operational resilience throughout
the pandemic, but that certain vulnerabilities had been highlighted
and needed to be examined. She noted that further work is required
to demonstrate that the funds sector is effectively managing the
risks to which it is exposed, particularly in relation to leverage,
liquidity and valuation uncertainty.

For a summary of some of the Central Bank’s key points and
observations from this event, please see our detailed briefing

AIFMD Review: European Commission Issues Consultation

On 21 October 2020, the European Commission
(“Commission“) published a public
on the operation of the Alternative Investment
Fund Managers Directive (“AIFMD“). The
consultation takes the form of an online questionnaire and
comprises 102 questions across 6 main sections as follows:

  1. Functioning of the AIFMD
    regulatory framework, scope and authorisation
    : the Commission is seeking views from
    stakeholders on the scope of the AIFM licence, its potential
    extension to smaller AIFMs and level playing field concerns in
    relation to the regulation of other financial intermediaries, like
    MiFID firms, credit institutions or UCITS managers that provide
    similar services.

  2. Investor Protection:
    this section raises questions on investor access
    that take into account the differences between retail and
    professional investors and whether there a need to structure an AIF
    under the EU law that could be marketed to retail investors with a
    passport. The adequacy of disclosure requirements are also covered
    including the specific requirements that could be added, changed or
    removed from the current rulebook. Other questions address the
    alleged ambiguities in the depositary regime and the lack of the
    depositary passport. Stakeholders are also invited to comment on
    potential improvements to the AIFMD rules on valuation.

  3. International
    : the Commission is seeking
    views on how best to achieve the equitable treatment of non-EU AIFs
    and securing a wider choice of AIFs for investors while at the same
    time ensuring that EU AIFMs are not exposed to unfair competition
    or otherwise disadvantaged.

  4. Financial Stability:
    this section seeks stakeholder views on how to ensure that national
    regulators and AIFMs have the tools necessary to effectively
    mitigate and deal with systemic risks. Specific input is sought
    regarding improvements to the supervisory reporting template
    provided in the AIFM Regulation with a particular focus on the
    increased activities of AIFs in the credit market.

  5. Investing in Private
    : feedback is being sought on the effectiveness
    of the current rules and their potential enhancement.

  6. Sustainability/ESG:
    this section seeks input on how the alternative investment sector
    can participate effectively in the areas of responsible investing
    and the preservation of the planet.

There are also questions in respect of UCITS
including whether there should be a single licence for AIF and
UCITS managers, harmonised metrics for leverage calculation and
reporting on the use of liquidity management tools.

The consultation closes on 29 January 2021 and
is the next step in the Commission’s review of AIFMD. The
Commission is also mandated to propose legislative amendments to
AIFMD on foot of its review and in this context, ESMA has written
to the Commission with a number of recommended changes to both the
AIFMD and UCITS frameworks. Please see our more detailed briefings
for more information on the AIFMD review and ESMA’s
legislative proposals.


Recent consultations of interest include:

ESMA: Funds’ Marketing

On 9 November 2020, ESMA issued a
on guidelines on marketing communications under
the Regulation on facilitating cross-border distribution of
collective investment undertakings.

The purpose of the draft guidelines is to specify the
requirements for marketing communications sent to investors in
order to promote UCITS and AIFs, including EuSEFs (European social
entrepreneurship funds), EuVECAs (European venture capital funds)
and ELTIFs (European long-term investment funds). These
requirements are that the material shall:

  • be identifiable as marketing

  • describe the risks and rewards of
    purchasing units or shares of an AIF or units of a UCITS in an
    equally prominent manner; and

  • contain information which is fair,
    clear and not misleading.

Draft guidelines are therefore provided on:

  1. the identification of marketing
    communications as such;

  2. the description of risks and rewards
    in an equally prominent manner; and

  3. the fair, clear and not misleading
    character of marketing communications, which includes guidance on:

    1. the suitability of the marketing
      communication to potential/target investors;

    2. consistency with other documents, in
      particular the prospectus, KIID, the constitutive documents of the
      fund, the periodic reports and information disclosed on the
      websites of UCITS management companies, AIFMs, EuVECA managers and
      EuSEF managers under the Sustainable Finance Disclosures

    3. the description of the features of
      the investment;

    4. information on costs;

    5. Information on past performance and
      expected future performance; and

    6. Information on sustainability-related

The consultation closes on 8 February 2021 and
ESMA intends to issue the final guidelines by 2 August

ELTIFs: On 19 October 2020, the
European Commission (“Commission“)
launched a consultation relating to its review of the ELTIF

The Commission is seeking feedback on issues including:

  • scope of the ELTIF authorisation and

  • investment universe, eligible assets
    and qualifying portfolio undertakings;

  • borrowing of cash and leverage;

  • rules on portfolio composition and

The consultation closes on 19 January 2021.

Separately, ESMA has established its public
of ELTIFs, as it is required to do under the ELTIF

Sustainable Corporate Governance: On
26 October 2020, the European Commission launched a
consultation on sustainable corporate governance
Sustainability in corporate governance encompasses encouraging
businesses to consider environmental (including climate,
biodiversity), social, human and economic impact in their business
decisions, and to focus on long-term sustainable value creation
rather than short-term financial value. The consultation seeks to

  • the views of stakeholders on the need
    and objectives for EU intervention as well as different policy

  • data that can be used to better
    assess the costs and benefits of different policy options; and

  • additional knowledge about certain
    specific issues, in particular as regards national frameworks,
    enforcement mechanisms and current jurisprudence.

The consultation closes on 8 February 2021.

Originally Published by Arthur Cox, November 2020

This article contains a general summary of developments and
is not a complete or definitive statement of the law. Specific
legal advice should be obtained where appropriate.

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