International arbitration report
In this issue, we cover a broad spectrum of ‘hot button issues’ for boards and companies operating internationally.
|Cross border distribution of investment funds – legislation published in the OJ||July 12, 2019||
There was published in the Official Journal of the EU (OJ) the following legislative acts:
The Directive and Regulation entered into force on August 1, 2019. The Regulation will apply from August 1, 2019, with the exception of Articles 4(1) to (5), Articles 5(1) and (2), Article 15 and Article 16, which will apply from August 2, 2021. Member States are required to apply measures implementing the Directive from August 2, 2021.
ESMA consults on draft guidelines on performance fees in UCITS
|ESMA consults on draft guidelines on performance fees in UCITS||July 16, 2019||
The European Securities and Markets Authority (ESMA) issued a public consultation on draft guidelines on performance fees under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.
ESMA’s draft guidelines propose common criteria to promote supervisory convergence in the following areas:
The deadline for responding to the consultation was October 31, 2019.
|IOSCO statement on liquidity risk management recommendations||July 18, 2019||
The International Organization of Securities Commissions (IOSCO) published a statement explaining why its 2018 Liquidity Risk Management Recommendations (LRM) provide a comprehensive framework for regulators to deal with liquidity risks in investment funds.
The statement followed media coverage of liquidity problems that affected some investment funds and the comments made by the UK Financial Policy Committee (FPC) in the Bank of England’s Financial Stability Report which discussed potential mismatches between the liquidity of fund assets and redemption terms offered by funds to their investors. In particular the FPC stated that: “This is a global issue. For that reason, the FPC supported the Financial Stability Board’s 2017 recommendation that funds’ assets and investment strategies should be consistent with their redemption terms. However, subsequent work by IOSCO did not prescribe how this should be achieved.”
IOSCO concluded its statement by commenting that the 2018 LRM Recommendations are directed at preventing liquidity and redemption mismatches from arising in the first place, rather than just mitigating problems as they crystallize. It also adds that they deal with attendant benefits and risks when open-ended investment funds may exceptionally look to use other liquidity management tools in the face of untoward redemption pressures, including the need to treat investors fairly and to consider any broader market implications. They also allow domestic regulators to apply the recommendations in a prescriptive manner to manage specific or idiosyncratic liquidity risks.
|FCA final guidance on cryptoassets regulation||
July 31, 2019
The FCA published Policy Statement 19/22: Guidance on cryptoassets – feedback and final guidance to CP19/3 (PS19/22). In PS19/22 the FCA responded to the feedback it received to Consultation Paper 19/3: Guidance on cryptoassets (CP19/3) and set out final guidance.
In PS19/22 the FCA reported that the majority of respondents to CP19/3 were receptive to its proposals. The FCA therefore decided to proceed on the basis on which it consulted. The final guidance remains largely the same as the version consulted on. However, the FCA made amendments in a few areas, for example it amended the wording in the guidance to provide further clarity on tokens commonly referred to as ‘stablecoins’. The FCA also made minor drafting changes throughout the guidance, particularly to provide more clarity where tokens might be e-money.
The FCA expects market participants to take the final guidance into consideration and will use it as a basis on which the regulator can proactively engage with any cryptoassets firms to check whether they are carrying on regulated activities.
|FCA letter on UK-specific UCITS liquidity standards||August 7, 2019||
The FCA published a letter (dated August 6, 2019) from Andrew Bailey, FCA Chief Executive, in response to Lord Myners’ written question asking if the Government has ever formally reviewed the case for the UK establishing its own requirements for liquidity standards for UCITS at higher levels than specified in EU Directives or whether the UK is bound by EU rules and cannot introduce higher standards.
Mr Bailey explained that the UCITS Directive is generally minimum harmonizing and therefore it would be possible to tighten the liquidity standards for UCITS schemes established in the UK. However, Mr Bailey also pointed out two significant drawbacks to this course of action:
Mr Bailey stated that in his view there was merit in considering the new SEC approach in the US which creates a purposive test of liquid status and supports this with requirements around governance, systems and controls, etc. The purposive test requires fund managers to allocate assets to liquidity buckets based on the estimated time it would take to sell the asset.
|ESMA final guidance on liquidity stress test guidance for investment funds||September 2, 2019||
ESMA published its final guidance regarding liquidity stress testing of investment funds – applicable to AIFs and UCITS. The report follows an earlier consultation in February 2019 on draft guidelines and contains an overview of the feedback received and explains how ESMA took this into account.
The guidelines will be translated into the official EU languages, the publication of which will trigger a two-month period where Member State competent authorities must notify ESMA whether they comply or intend to comply with the guidelines. The guidelines apply from September 30, 2020.
|ESMA publishes stress simulation framework for investment funds||September 2, 2019||
ESMA has developed a framework to be used for stress simulations for the investment fund sector. ESMA encourages national authorities to use the method as described in the accompanying report. The report contains a case study where the method has been applied to 6,000 UCITS bond funds.
ESMA intends to use this stress simulation framework to assist in its regular risk monitoring to identify and assess risks that may impact the funds industry.
|FCA announces changes to AIFMs’ submission of notification and material change under NPPR||September 3, 2019||
The FCA updated its webpage on the national private placement regime (NPPR). The FCA reported that on September 9, 2019, it would make changes to the submission of notifications by AIFMs marketing AIFs under Regulations 57, 58, 59 of the Alternative Investment Fund Managers Regulations 2013 (as amended). AIFMs marketing funds under Regulations 58, 59 and, for UK AIFMs only, Regulation 57, will return to submitting notifications via Connect. Full scope EEA AIFMs marketing AIFs under Regulation 57 will be required to submit notifications using new forms.
|FCA findings from unit-linked funds’ governance review||September 24, 2019
The FCA published a webpage setting out its key findings and next steps in relation to its review of firms’ governance practices covering the value provided by unit-linked funds. These funds can be described as funds whose performance determines the benefits due to holders of unit-linked insurance contracts.
The FCA found that insurance firms’ fund governance for unit-linked funds often does not include considerations that it believes are likely to be important in assessing whether unit-linked funds provide good value for their investors.
In terms of next steps, the FCA will assess the findings from its review alongside the continuing work on non-workplace pensions, the governance of unit-linked mirror funds and the effectiveness and scope of independent governance committees. It will then decide whether further remedies are necessary.
|FCA Policy Statement on illiquid assets and open-ended funds||September 30, 2019||
The FCA published Policy Statement 19/24: Illiquid assets and open-ended funds and feedback to Consultation Paper 18/27 (PS19/24).
In October 2018, the FCA consulted on changes intended to reduce the risk of poor outcomes to retail investors in open-ended funds, specifically non-UCITS retail schemes (NURSs), that invest in illiquid assets. In PS19/24, the FCA summarised the feedback it received to the consultation, its response to the feedback and set out its final rules.
The FCA stated that its final rules in PS19/24 reflected that it does not want to prohibit open-ended funds from investing in illiquid or less liquid assets where investors understand and are willing to accept the liquidity risk this can involve.
The FCA reported that following feedback to its consultation it will not proceed with two of its proposals:
In terms of the new rules, these are in summary:
The new rules and guidance will enter into force on September 30, 2020. This will allow firms to use scheduled annual reviews of fund documentation to make the necessary changes.
|IOSCO reports on peer reviews of MMFs and securitization regulation||October 2, 2019||
IOSCO published two update reports on its peer reviews of the regulation of MMFs and of the implementation of incentive alignment recommendations for securitization.
|FCA consults on recovery of costs of supervising cryptoassets firms under AML regulations||October 16, 2019||
The FCA published Consultation Paper 19/29: Recovery of costs of supervising cryptoasset businesses under the anti-money laundering regulations – fees proposals (CP19/29). From January 10, 2020, the FCA will become the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for cryptoassets businesses. In CP19/29 the FCA sets out its proposals for recovering the costs of the new role.
The deadline for comments on the proposed registration fee was November 11, 2019. The deadline for comments on periodic fees based on income is December 10, 2019.
The FCA will consider the responses to the consultation and intends to publish feedback on registration fees in December 2019, and on periodic fees in April 2020.
|Council of EU adopts Disclosure Regulation and Low Carbon Benchmarks Regulation at first reading||October 24, 2019||
The Council of the EU published the texts it adopted at first
The Disclosure Regulation will enter into force on the 20th day following its publication in the OJ of the EU and will apply from 15 months following that date. The Low Carbon Benchmarks Regulation will enter into force on the day after publication in the OJ.
|FCA revised directions extending notification window to enter temporary permissions regime||October 31, 2019||
The FCA published the following revised directions for:
The directions amend the previous versions in the FCA Handbook and extend the notification period for firms wanting to enter the temporary permissions regime to January 30, 2020
|FCA asks Authorized Fund Managers to review their liquidity management arrangements||November 4, 2019||
The FCA published a letter sent by the head of its Asset Management Department, Nick Miller, to the Chairs of AFMs in relation to good practices for effective liquidity management.
Specifically, the letter asked chairs to:
The FCA also asked chairs to carry out their reviews “as soon as practicable” so that they and their fellow AFM board members are confident that their practices are appropriate.
In this issue, we cover a broad spectrum of ‘hot button issues’ for boards and companies operating internationally.
It is impossible to ignore that climate change and sustainability issues are scorching hot topics (pardon the pun).
© Norton Rose Fulbright LLP 2021