Welcome to the Funds-Axis Regulatory Round Up!
The past month brought several important regulatory developments, particularly on regulatory supervisory feedback, with the FCA unimpressed with UK AFMs governance and operations processes, Belgium’s FSMA expecting vast improvements to PRIIPs KIDs and New Zealand’s FMA less than impressed with MIS Managers liquidity risk management.
This month also saw developments concerning:
- Money Market Funds
- Schedule 13D
- Short Selling; and
Continue reading below to find out more about these and many other recent regulatory developments.
The Financial Conduct Authority (FCA) has published finding of the multi firm review into the activities of host Authorised Fund Manager firms.
The FCA visited a sample of host AFMs between Q4 2019 and Q4 2020. During the review the FCA examined:
- How well host AFMs understand their responsibilities for the funds they operate
- Whether these firms had adequate governance, controls and resources to carry out their role
- How effectively the host AFM firms considered their regulatory responsibilities, primarily under the Collective Investment Scheme Sourcebook (COLL)
- How their oversight of delegated third-party investment managers considered the interests of fund investors
- Whether they had appropriate resources for the nature and scale of the business they carried out
Following the review, the FCA has called for ‘host’ Authorised Fund Managers (AFMs) to improve their standards. During the review, the FCA found that, while some firms were operating well, others did not meet FCA standards. The FCA found weaknesses in governance structures, conflicts of interest management and operational controls.
The FCA also found some firms referring to funds as if they were solely operated by delegate third-party investment managers or fund sponsors rather than themselves, and a lack of focus on controlling the risk of harm from investors exposed to inappropriate or poor value products.
ESMA has published updated Guidelines on stress test scenarios under the MMF Regulation. The guidelines apply to competent authorities, money market funds and managers of money market funds as defined in the MMF Regulation.
The MMF Regulations establish common reference parameters of the stress test scenarios to be included in the stress tests taking into account the following factors specified in Article 28(1) of the MMF Regulation:
- Hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF;
- Hypothetical changes in the level of credit risk of the assets held in the portfolio of the MMF, including credit events and rating events;
- Hypothetical movements of the interest rates and exchange rates;
- Hypothetical levels of redemption;
- Hypothetical widening or narrowing of spreads among indexes to which interest rates of portfolio securities are tied;
- Hypothetical macro systemic shocks affecting the economy as a whole.
The Central Bank of Ireland (CBI) has published a feedback statement following the consultation on competent authority discretions in the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR) (CP135) which signals the Central Bank’s proposed approach to provisions in the IFD/IFR where the Central Bank can or must exercise it discretion.
This statement also confirms the Central Bank’s intention to revise the reporting requirements for investment firms set out in Section 8 of S.I. No. 604 of 2017 Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2017.
The statement also confirms that Alternative Investment Fund Managers and UCITS Management Companies with MiFID top-up permissions should continue to comply with the current prudential regime specified in their condition of authorisation.
The CBI has issued the 31st Edition of the Central Bank UCITS Q&A document, which includes a new Q&A, ID 1099.
The new Q&A, ID 1099, confirms the Central Bank’s position in relation to a UCITS having a share class that makes distributions to charity. The Q&A also confirms that this is permissible, subject to a number of requirements being met by the UCITS.
The Central Bank of Ireland has issued the 39th edition of the Central Bank AIFMD Q&A, which updates QAs ID 1021 and ID 1136 and includes two new Q&As, ID1143 and ID1144.
QA ID 1021 has been updated to clarify the extent to which an Irish entity can perform duties for non-EU AIFs pursuant to Article 36(1)(a) of the AIFMD.
QA ID 1136 updates the types of AIF for which a Depositary of Assets other than Financial Instruments (DAoFI) can act.
New QA, ID 1143, outlines the circumstances in which a DAoFI can accept an appointment from a non-EU AIFs pursuant to Article 36(1)(a) of the AIFMD to perform the duties set out in Article 21(7)-(9) of the AIFMD.
QA ID 1144 confirms the Central Bank’s position in relation to AIFs having a share class that makes distributions to charity.
The Asset Management Association Switzerland has updated a number of guidelines as part of an ongoing effort to finalize the implementation of the FinSA and FinIA.
The following guidelines have been revised:
- Code of Conduct
- Guidelines for real estate funds
- Technical guidelines (Guidelines for money market funds, Guidelines on the valuation of assets and the handling of valuation errors, Guidelines on the calculation and publication of performance data, Guidelines on the calculation and disclosure of the TER)
The provisions of the old Transparency Guidelines were also revised and integrated into the revised Code of Conduct. The Distribution Guidelines of 22 May 2014 and the KIID Guidelines of 20 January 2012 will cease to apply as of 31 December 2021.
The CSSF have published a document regarding return files, respective error codes and error messages for AIFM reporting.
The document describes the controls that the CSSF applies to the AIFMD reporting files that AIFMs are required to submit to the CSSF upon the basis of articles 3 (3)(d), 24 (1), (2) and (4) of the AIFMD Regulation 231/2013. Guidance on different aspects can be found in the ESMA guidelines and in the CSSF FAQ. Technical details and naming conventions are described in the CSSF circular 14/581.
The document also gives an overview of the different feedback files that the CSSF generates upon receipt of the AIFMD reporting files.
Following the Common Supervisory Action on UCITS liquidity risk management conducted by ESMA and all 30 EU/EEA NCAs, the CSSF have published the CSSF Feedback Report – ESMA Common Supervisory Action on UCITS Liquidity Risk Management.
The Feedback Report presents the main observations made by the CSSF in the context of the CSA, together with the related recommendations for improvements in view of the applicable regulatory requirements.
The CSSF is currently engaging on a bilateral basis with IFM in relation to the observations made in the context of the CSA exercise, thereby asking these IFM to implement the necessary corrective measures for the shortcomings observed.
The New Zealand Financial Market Authority (FMA) has published a report on liquidity risk management of Managed Investment Schemes (MIS).
The report contains recommendations on liquidity risk management frameworks (with a focus on stress testing), processes, and procedures. The report follows the liquidity risk management good practice guide the FMA published last year, and also the survey the FMA issued last August asking Managed Investment Scheme managers (MIS managers) to self-assess their liquidity risk management capabilities.
The SEC have published Form N-CEN XML Technical Specification (Version 2.7). The document describes the valid structure and content of the Form N-CEN Electronic Data Gathering, Analysis, and Retrieval (EDGAR) Extensible Markup Language (XML) submission types. This specification provides a basis for creating Form N-CEN submissions.
The Financial Services and Markets Authority (FSMA) has examined the key information documents made available to Belgian retail clients who buy insurance-based investment products or structured products. The aim was to determine whether these documents are of sufficiently high quality to enable clients to understand clearly the features of these products.
As a result of its observations, the FSMA expects the sector to improve in particular the clarity and readability of the information that these documents must provide.
The CSSF has published guidelines on the UCITS risk reporting. The document gives further guidance on the UCITS risk reporting and contains definitions, explanations and examples for the items as referred to in the Excel reporting file.
The European Commission has adopted a Delegated Regulation amending Delegated Regulation 2018/990 with regard to requirements for assets received by money market funds as part of reverse repurchase agreements.
ESMA has published the compliance table of competent authorities that comply or intend to comply with ESMA’s Guidelines on performance fees in UCITS and certain types of AIFs (ESMA34-39-992).
All EU and EEA States currently comply or intent to comply apart from Sweden.
Sweden has stated that Finansinspektionen does not comply and does not intend to comply with the guideline in respect of open-ended AIFs which are allowed to be marketed to retail investors on the basis of the funds being admitted to trading on a regulated market. AIFs admitted to trading on a regulated market are, after authorisation by Finansinspektionen, allowed to be marketed to retail investors. The Swedish regulation does not provide specific rules on the fee structure of such funds. Finansinspektionen is therefore unable to comply with the guideline in respect of these funds.
The CSSF has announced that it will implement a recurrent data collection exercise focusing on the financing of the commercial real estate (CRE) sector by investment funds. This data collection will take place on a bi-annual basis. For the purpose of this first iteration, answers are expected by 30 September on the basis of CRE stock data ending on 31 December 2020 and of CRE investment data over the second half of 2020.
As of 2022, the data collection will be due twice a year, on 31 March and 30 September of each calendar year.
IOSCO has requested feedback on proposed recommendations about sustainability-related regulatory and supervisory expectations in asset management. The recommendations cover five areas:
- sset manager practices, policies, procedures and disclosure
- Product disclosure
- Supervision and enforcement
- Financial and investor education
The recommendations aim to address various challenges, such as existing gaps in skills and expertise and the risk of fragmentation caused by divergent regulatory approaches.
Finansinspektionen (FI) has updated the short selling FAQs. The questions and answers include information on:
- Calculations of net short positions
- Issued Share Capital
- Competent Authority
The Takeover Panel has published the thirteenth edition of the Takeover Code.
The following sections have been updated:
- Practice Statement No 5 – Rule 13.5(a) – Invocation of Conditions
- Practice Statement No 11 – Working Capital Requirements in Cash and Securities Exchange Offers
- Practice Statement No 22 – Irrevocable Commitments, Concert Parties and Related Matters
- Practice Statement No 24 – Appropriate Offers and Proposals Under Rule 15
- Practice Statement No 26 – Shareholder Activism
- Practice Statement No 29 – RULE 21.2 – Offer-Related Arrangements
- Practice Statement No 30 – RULE 21.3 – Information Required for The Purpose of Obtaining Regulatory Consents
- Practice Statement No 31 – Strategic Reviews, Formal Sale Processes and Other Circumstances in Which a Company is Seeking Potential Offerors
Gary Gensler, Chairman of the Securities and Exchange Commission (SEC) recently gave a speech at London City Week. During the speech, he stated that he believes the current 10 day reporting deadline for 13D is now outdated. He has therefore request staff at the SEC to review how the rule may be updated to possibly shorten the reporting deadline.
The Financial Stability Board (FSB) has published policy proposals to enhance money market funds resilience.
The policy options in the report aim to address these vulnerabilities and are intended to inform jurisdiction-specific reforms and any necessary adjustments to the policy recommendations for MMFs issued by the International Organization of Securities Commissions (IOSCO).
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.