Welcome to the Funds-Axis Regulatory Round Up!
In this month’s round-up, of particular interest, nearly two years after the implementation of the Assessment of Value requirements, the FCA have finally provided feedback following a review of 18 firms conducted between July 2020 and May 2021.
Elsewhere, liquidity continues to remain in the headlines, the FCA has ditched performance scenarios in the PRIIPs KIDs and the European Commission is considering adjusting the short selling reporting thresholds once again.
This and much more is contained in the July edition of the regulatory round up:
The Financial Stability Board (FSB) has published a consultation on policy proposals to enhance money market fund resilience.
The policy options are grouped according to the main mechanism through which they aim to enhance MMF resilience – namely, to:
- impose on redeeming investors the cost of their redemptions;
- absorb losses;
- reduce threshold effects; and
- reduce liquidity transformation.
The report assesses the likely effects of each option on the behaviour of MMF investors, fund managers and sponsors, as well as their implications for the underlying markets.
The consultation report also sets out considerations on how different policy options could be selected and combined to address all the vulnerabilities arising from different types of MMFs.
The AMF has published an impact analysis on the liquidity of French equity options following the introduction of a speed bump on the Eurex trading venue.
The study analyses changes in the liquidity of French equity options following the implementation of a speed bump on Eurex, the German derivatives market, in June 2019. Based on transaction data between January and December 2019, the AMF has noted the beneficial effects of such a mechanism, with improved spreads and increased depth at the best limit.
The AMF has published its proposals as part of the European Commission’s consultation on supervisory convergence. The aim of the proposals is to provide ESMA with a greater role in order to achieve harmonised, unified supervision, ensuring a level playing field while minimising the possibility of regulatory arbitrage.
The Bank of England (BoE) and Financial Conduct Authority (FCA) have published a joint review on open-ended investment funds and the risks posed by their liquidity mismatch.
In the report on Assessing the resilience of market-based finance, the BoE and FCA have put forward a suggested possible framework for how a liquidity classification framework for funds could be designed, as well as considerations around the calculation and use of swing pricing.
More on the joint review here:
Earlier in the month the FCA published the results of their review on ‘host’ Authorised Fund Management firms’ which concluded with the FCA wanting to see “significant improvements” with many currently failing to meet the FCA standards.
Between July 2020 and May 2021, the FCA visited 18 firms to review their AoV processes. During the review, they interviewed staff and directors to understand their processes, the inputs they used and their governance structures.
Overall, the FCA found that:
- Most AFMs reviewed had not implemented AoV arrangements sufficient to comply with the rules
- AFMs often made assumptions that they could not justify
- Many firms did not properly apply some of the minimum considerations
- Some firms assessed value only at a fund level rather than by unit class
- When considering a fund’s performance, many firms did not consider what the fund should deliver given its investment policy, investment strategy and fees
- Independent directors on AFM Boards did not provide the robust challenge expected
More on the joint review here:
The FCA has set out proposals to change disclosure documents provided to retail investors under the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation.
In the consultation, the FCA has set out its proposals in order to address some of the most serious concerns over PRIIPs. The FCA consultation proposes to amend the PRIIPs Regulatory Technical Standards to:
- require written explanation on performance in the KID;
- combat the potential for PRIIPs being assigned an inappropriately low summary risk indicator in the KID and;
- address concerns over applications of the slippage methodology when calculating transaction costs.
Additionally, the consultation proposes to clarify the scope of the PRIIPs regulation making it clearer that certain common features of these instruments do not make them into PRIIPS.
The FCA plans to amend the PRIIPs RTS by the end of 2021.
More on the consultation here:
ESMA has submitted to the European Parliament, the Council and the European Commission its first report on national rules governing the marketing of investment funds under the Regulation on cross-border distribution of funds.
In the report, ESMA provides an overview of the marketing requirements across Member States, and analyses the effects of national laws, regulations and administrative provisions governing the marketing of investment funds.
Key findings include:
- National laws, regulations and administrative provisions governing marketing requirements are usually based on the transposition of the AIFMD and the UCITS Directive, although NCAs’ responses showed that some additional national requirements may be applicable.
- Only a very limited number of NCAs carry out ex-ante or ex-post verification or marketing communications.
- It is expected that greater harmonisation of the marketing requirements will be achieved after the transposition of the Directive on cross-border distribution of collective investment undertakings by 2 August 2021.
The CSSF have published circular CSSF 21/777. The circular implements the ESMA guidelines on outsourcing to cloud service providers. In turn, it amends the scope of Circular CSSF 17/654 on IT outsourcing relying on a cloud computing infrastructure in order to include all the entities covered by the Cloud Guidelines.
The circular entered into force on 31st July 2021.
On 8 July 2021, several trade bodies circulated a copy of the Commission’s letter of 8 July 2021, sent to the Chair of the European Parliament’s ECON Committee and the president of the Council of the EU’s Ecofin Council.
In the letter, the European Commission informed the European Council that the implementation of level 2 of the Sustainable Financial Disclosure Regulation (SFDR), known as the Regulatory Technical Standards (RTS), will be delayed by six months from 1 January 2022 until 1 July 2022.
The EC had the following reasons for the delay:
- the length and technical detail of the RTS;
- the late submissions to the EC following consultation on the RTS;
- amendments which the EC is currently envisaging making to the RTS; and
- to facilitate the smooth implementation of the RTS by product manufacturers, financial advisers and supervisors.
The European Commission launched a Consultation on 15 July 2021 proposing the extension of the exemption period for the UCITS KIID from the PRIIPs regulation until 30 June 2022, instead of 31 December 2021.
The new timeline proposed by the Commission aims to give the industry more time to be ready for the transition from UCITS KIID to PRIIPs KID.
The consultation is open until 9th September 2021.
According to Art. 144 para. 3 CISO, fund management companies, SICAVs, and limited partnerships for collective investment must submit revised fund contracts, investment regulations, and partnership agreements to FINMA within two years of the FinSA and FinIA entering into force.
This would make the deadline 31 December 2021.
On 12th July 2021, FINMA extended the deadline under Art. 144 para. 3 CISO until 30 June 2022. The revised fund documents must now be submitted to FINMA by 30 June 2022 at the latest.
The Cyprus Securities and Exchange Commission (CySEC) has published Circular C459. The Circular aims to draw the attention of AIFMs with regard to the requirements for them to regularly review their policies and procedures in order to ensure compliance, at all times, with their reporting obligations under the AIFM Law and the Regulation. More specifically, the obligation on AIFMs to ensure the following:
- Timely submission of valid AIFMD reports
- Accuracy of information provided
- Consistency of information reported within the AIFMD reports and/or between the AIFMD reports submitted by an AIFM
- Completeness of information
- Non duplication of reporting
The Central Bank of Ireland (CBI) has issued a publication of national provisions governing marketing requirements for UCITS. In application of Article 1 of the Commission Implementing Regulation (EU) 2021/955, the publication contains the information on the national laws, regulations and administrative provisions governing marketing requirements referred to in Article 5(1) of Regulation (EU) 2019/1156 of the European Parliament and of the Council of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings.
Summary of Marketing Requirements for UCITS
Notification and prior approval of marketing communications
Without prejudice to Article 93 of the UCITS Directive, the Central Bank does not require notification or prior approval of marketing communications for UCITS.
Any other requirements for the marketing of UCITS that the competent authority considers appropriate
UCITS must ensure compliance with Regulation 116 of the UCITS Regulations, Regulation 54 and 97 of the Central Bank UCITS Regulations and the advertising standards set out in Schedule 6 of the Central Bank UCITS Regulations.
When a UCITS ceases to market to investors in the State, it must comply with Regulation 97 of the Central Bank UCITS Regulations.
The UCITS, in marketing its units in Ireland to investors, shall comply with the Consumer Protection Code of the Central Bank.
The UK Takeover Panel has published the results of a consultation on disclosures of takeover approaches. The consultation comes in light of concerns raised with the Panel about the timing of the disclosure of takeovers – a number of recent situations, in which takeover approaches were kept confidential for a long period of time without any announcement being made. As a result, the Code Committee reviewed the current rules and consulted with a range of external parties on whether the requirements of the Takeover Code in this area should be expanded.
The Code Committee has concluded that it should not make any changes to the existing regime under Rule 2 regarding the disclosure of takeover approaches.
On 1 January 2021, major reforms to Australia’s foreign investment review framework came into effect to address these risks and improve the overall operation of the framework.
The reforms updated the framework in three broad ways:
- they addressed national security risks;
- strengthened the existing system, including in relation to compliance; and
- streamlined investment in non-sensitive businesses.
The reforms also set up a framework to establish a register of foreign ownership of Australian assets.
Following the implementation of the new rules, the Australian Treasury is conducting an evaluation of the new foreign investment reforms with stakeholder invited to provide submissions on the operation and performance of the reforms.
The Treasury has also updated the Guidance Notes available on the FIRB website. The updates aims to provide greater clarity to investors about their obligations under the foreign investment framework, including by addressing a number of issues identified since major reforms to the framework commenced on 1 January 2021.
The European Commission (EC) has published a consultation on adjusting the threshold for notifications of net short positions.
The EC agrees with ESMA’s opinion that the lower notification threshold would significantly improve transparency and monitoring of significant net short positions in shares at individual, sectorial and market-wide level, resulting in an increase in regulatory efficiency.
The EC believes that that it is appropriate to amend the current relevant notification threshold and set it permanently at 0.1%. In turn, it has put forward the following amendments to Regulation (EU) No 236/2012:
In Article 5 of Regulation (EU) No 236/2012, paragraph 2 is replaced by the following:
‘2. A relevant notification threshold is a percentage that equals 0,1 % of the issued share capital of the company concerned and each 0,1 % above that.’
The Securities Exchange Commission (SEC) have published an official List of updated Section 13F Securities for Qtr II, 2021.
This list is current as of June 15, 2021, and may be relied on by institutional investment managers filing Form 13F reports for the calendar quarter ending June 30, 2021.