IOSCO consults on ETFs regulation
Exchange-traded products (ETPs) include a wide variety of different investment products, including exchange traded funds (ETFs) that are organised collective investment schemes, exchange traded commodities, exchange traded notes, exchange traded instruments and exchange traded vehicles.
There is increasing interest in ETFs worldwide with significant funds being invested in these types of products. However, the growth of ETFs has also drawn the attention of regulators who are concerned about the potential impact of ETFs on investors and the market place.
On 14 March 2012, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a Consultation Report, Principles for the Regulation of Exchange Traded Funds.
The Consultation Report examined key regulatory issues regarding ETFs and touched on certain market structure and financial stability issues. It also contained 15 principles against which both the industry and regulators can assess the quality of regulation and industry practices relating to ETFs regarding investor protection, sound functioning of markets and financial stability. Fourteen of the proposed principles are categorised under the following three headings:
- Principles related to ETF classification and disclosure.
- Principles related to marketing and sale of ETF shares.
- Principles related to the structuring of ETFs.
However, the proposed principles should not be taken to mean that a one-size-fits-all approach is being advocated. The principles have been designed to be of such a nature that they are adaptable to different regulatory frameworks. They should, for example, be relevant regardless of the predominant distribution model. In addition, some of the principles may be better suited to industry best practice as opposed to regulatory requirements.
The deadline for comments on the Consultation Report is 27 June 2012.
View IOSCO consults on exchange traded funds regulation, 14 March 2012
View Principles for the Regulation of Exchange Traded Funds - Consultation Report, 14 March 2012
Policy options for implementing the AIFMD
On 14 March 2012, HM Treasury published an informal Discussion Paper highlighting and inviting initial views on a number of the high level policy decisions that will need to be taken as part of the transposition of the Alternative Investment Fund Managers Directive (AIFMD) in the UK.
The transposition issues covered in the Discussion Paper were:
- Requirements for sub-threshold alternative investment fund managers (AIFMs). The AIFMD requires AIFMs to be authorised but permits Member States to establish a de minimis registration regime for AIFMs managing alternative investment funds (AIFs) with assets under management below certain thresholds. Member States have the option, however, of imposing additional requirements. In the Discussion Paper the Government discusses two possible options: (1) full application of AIFMD requirements to all smaller AIFMs; or (2) apply a lighter regime selectively, differentiating between AIFMs.
- Proposed Regulations on Venture Capital Funds and European Social Entrepreneurship Funds. The Government invites comments on the extent to which venture capital funds and social investment funds are likely to benefit from the Commission’s proposed Regulations on European Venture Capital Funds and European Social Entrepreneurship Funds.
- Approved persons regime. The approved persons regime is a UK concept under the Financial Services and Markets Act 2000 (FSMA) and is not required under the AIFMD. The UK is permitted but not compelled, to apply the regime. The Government has to decide whether or not to apply the regime to individuals within AIFMs newly subject to regulation. These include, for example, internally managed listed investment funds. The FSA has indicated that if the regime is applied, it would exercise its powers in a proportionate manner.
- Marketing to retail investors. The AIFMD prohibits the marketing of AIFs to retail investors but gives Member States the discretion to permit marketing selectively and impose greater restrictions than those for marketing to professional investors. Under the current UK regime, there are two types of UK fund within the scope of the AIFMD that may be marketed to retail investors: (1) collective investment schemes (CIS) that are authorised by the FSA as non-UCITS retail schemes (NURS); and (2) companies that are exempted from the CIS regime but are subject to the general rules of company law (in practice this includes investment companies). CIS that are “recognised schemes” under sections 270 and 272 FSMA, namely schemes from outside the UK which have been recognised as providing comparable protection to NURS, may also be marketed to retail investors in the UK. The transposition of the AIFMD provides an opportunity for the Government to extend or restrict the range of schemes that are permitted to be marketed to retail investors in the UK.
- Private placement regime. The AIFMD permits Member States to continue national private placement for at least the first five years of the application of the Directive. It requires that non-EU managers of non-EU AIFs that wish to market their funds in a Member State must comply with the AIFMD’s provisions on transparency and (if applicable) the rules on private equity. The Government may opt to apply additional requirements for national private placement in the UK. However, at present the Government is minded not to impose additional requirements for non-EU managers of non-EU funds above the Directive minimum.
The deadline for comments on the Discussion Paper is 4 May 2012.
View Policy options for implementing the Alternative Investment Fund Managers Directive, 14 March 2012
Implementation of the AIFMD: The definition of collective investment scheme
On 11 April 2011, the Financial Markets Law Committee (FMLC) published a letter that it sent to the Investment Funds Team at the FSA, regarding the implementation of the Alternative Investment Fund Managers Directive (AIFMD). The letter related specifically to the regulation of collective investment schemes (CIS) and the FMLC will provide the FSA with a broader paper on the implementation of the AIFMD in due course.
In the letter, the FMLC acknowledged that the AIFMD will regulate CIS operators and that implementation of the AIFMD is likely to result in amendments to the Financial Services and Markets Act 2000 (FSMA). Therefore, the FMLC states that this presents an opportunity to clarify the definition of CIS under section 235 of FSMA.
View Implementation of the AIFMD: The definition of collective investment scheme, 11 April 2012