AMF and ESMA Updates - May 2022

AMF: Consultation on the Integration of ESG Requirements into the AMF General Regulation

May 04, 2022

The AMF launched a public consultation on the inclusion of ESG requirements in its General Regulation. The consultation follows the European Commission’s adoption of four delegated acts in August 2021, which require ISPs and asset management companies to take sustainability criteria into account in their procedures and in the investment advice they provide to clients. The delegated acts adopted by the European Commission will enter into force on a staggered timetable, starting from August 1, 2022.

In its response to the consultation, the AFG stated on June 3, 2022 that it had no comments since the changes proposed by the AMF are consistent with the delegated acts. The AFG reminded that asset management companies must incorporate ESG risks and factors for investment fund management and discretionary management from August 1, 2022. The integration of ESG factors in product governance will be mandatory from November 22, 2022.

AFG: Response to ESMA’s Consultation on Guidelines on Certain Aspects of the MiFID II ESG Requirements

May 05, 2022

In its response to ESMA’s consultation on guidelines on certain aspects of sustainability requirements in suitability testing, the AFG presents a concrete approach to meeting the obligations imposed by the regulation. In particular, it proposes to improve the questions relating to the existence of client sustainability preferences, as well as a matrix on the client’s sustainability preferences with regard to the products offered.

Read the full article here.

Digital Finance: Provisional Agreement Reached on the Digital Operational Resilience Act (DORA)

May 11, 2022

The Presidency of the Council of Europe and the European Parliament reached a provisional agreement on DORA. It aims at securing the networks and information systems of European financial sector companies and organizations, as well as critical third-party information and communication technologies (ICT) service providers, to maintain resilient operations in the event of a serious operational disruption, and ultimately to prevent and mitigate cyber threats.

DORA will therefore require all firms from the financial sector (excluding auditors) and their ICT providers to ensure that they have the capacity to withstand and remediate all types of ICT-related disruptions and threats.

This provisional agreement needs to be approved by the Council and the European Parliament. Once approved, DORA will be formally adopted and passed into law by each EU member state.

Read the full article here.

ESMA: Final Report Regarding the Review of the MiFID II Framework on Best Execution Reports by Investment Firms

May 16, 2022

ESMA published its final report concerning its review of certain aspects of MiFID II that relate to reporting requirements on the quality of execution of transactions (Regulatory Technical Standard [RTS] 28) by entities subject to it.

Section 2 of the report sets out proposals for improving RTS 28 execution quality reporting, such as:

• The obligation for investment firms to report periodically on best execution should be maintained.
• The applicability of these obligations to firms that provide RTO services and to management companies that transmit decisions to deal to other firms for execution
• The obligation to report quantitative information in CVS format
• The publication of these reports on the website for a period of at least two years or, in the absence of a website, an obligation to inform clients about the provision of RTS reports, on request and free of charge

This report is to be sent to the European Commission for review; it will contribute to the Commission’s work on a proposal to amend MiFID II and MiFIR.

Read the full article here.

ESMA and AMF: Focus on the Impact of the Ukrainian Conflict Ahead of the 2022 Half-Yearly Closing

May 16, 2022

ESMA published a statement on the publication of half-yearly financial reports, for which there are some points of vigilance to be taken into account given the impacts of the Ukrainian crisis. The regulators encourage management bodies, audit committees and statutory auditors to contribute to the preparation of these reports. Furthermore, the main risks to which issuers are directly or indirectly exposed must be identified and detailed in the financial statements and the management report. In particular, listed companies should inform the market of the trends of the situation as well as direct and indirect impacts of the situation on financial performance in a clear and transparent manner. They should also ensure that the information provided in financial statements and management reports (or any other financial communication) is consistent.

The press release also sets out that certain topics require specific information and analysis (e.g., depreciation tests, estimates and assumptions, credit risks, liquidity and currency risks, etc.)

Read the full article here.

ESMA: Statement Regarding Actions to Manage the Impacts of the Russian-Ukrainian Crisis on Investment Fund Portfolios

May 16, 2022

ESMA’s public statement aims to bring convergence to the measures taken by asset management companies in managing the impact of the Russian-Ukrainian crisis on portfolios exposed to Russian, Belarusian and/or Ukrainian assets. The report outlines general principles, such as the implementation of appropriate valuation and accounting measures and the use of liquidity management tools.

In the event of liquidity risks, asset management companies must assess whether the NAV and valuation can be determined and verify that subscribing or redeeming securities at market price is in the interest of investors. Otherwise, managers should put in place measures to mitigate the risks and temporarily suspend subscriptions and redemptions. An alternative would be to use side pockets to segregate illiquid assets. However, ESMA points out the risks associated with their use.

Read the full article here.

U.S. Subsidiary of German Insurer Fined by U.S. Authorities to Pay USD 6 Billion for Hedge Fund Fraud

May 17, 2022

The U.S. asset management subsidiary of a German insurer pleaded guilty and agreed to pay a total of USD 6 bn, which includes the payment of fines to the U.S. authorities and restitution to victims, to settle litigation related to the collapse of funds sold by the subsidiary. The subsidiary also lost the right to practice in the United States.

Between 2016 and 2020, the U.S. subsidiary lied about the investment strategy of funds marketed to professional and retail clients. Three former employees, including the funds’ investment director and two managers, are under investigation for conspiracy, fraud on securities, investment adviser fraud and obstruction of justice.

Read the full article here.

ESMA: Consultation on Implementing Technical Standards (ITS) Regarding Notifications for Cross-Border Marketing and Management of AIFS and UCITS

May 17, 2022

ESMA published a consultation paper on draft technical standards on the notifications for cross-border marketing and management of AIFs and UCITS. Stakeholders have until September 09, 2022 to send their comments, which will be considered by ESMA with a view to publishing the final report in early 2023.

Technical standards are developed on the information to be published by asset managers to pursue their activities within the EU, either directly or through a subsidiary or branch, as well as on the form and content of the notification letters to be submitted to the competent national authorities, for the marketing and management of UCITS and AIFs within the EU.

Read the full article here.

AMF: 2021 Annual Report and Review of Its Five-Year Strategic Plan #Supervision2022

May 18, 2022

The AMF’s annual report presents the actions taken in 2021 in light of its strategic orientations for 2018–2022. It reminds that the mission of the AMF aims at protecting investors and ensuring the proper functioning of the markets. In 2021, the AMF reported on an active year for initial public offerings, the implementation of European provisions such as SFDR and Taxonomy, actions to encourage the adoption of liquidity management tools by asset managers, and the impacts of the Russian-Ukrainian crisis on the markets.

The AMF sets out the main challenges ahead for financial market supervision and regulation in France and in the EU, such as the digitalization of processing and exchanges with asset management companies and custodians, a better use of data to identify risks, and proper implementation of the new extra-financial requirements. Finally, as regards the digitalization of cross-border marketing of financial products, the AMF expects ESMA to assume greater responsibility and to strengthen the powers of the national supervisory authorities in the countries where the products are marketed.

Read the full article here.

ESMA: Update of Its Q&As on the Application of the UCITS and AIFM Directives Regarding Performance Fees

May 20, 2022

ESMA updated its Q&As on its guidelines relating to the application of the UCITS and AIFM directives. Two main changes concern performance fees:

• Regarding the performance reference period for the benchmark model: ESMA provides clarification on how fund managers should compensate underperformances recorded during the reference period.
• Regarding the performance reference period for the hurdle rate model: ESMA confirms that the five-year performance reference period applies to the hurdle rate model.

AMF: Summary of Its Findings Regarding Costs and Fees of UCITS Marketed to Retail Investors, and Update of Its Policy on Funds with High Fees

May 23, 2022

As part of a supervisory exercise monitored by ESMA, the AMF published a summary of the findings relating to costs and fees in UCITS funds marketed to retail investors. It stems from a series of SPOT inspections and questionnaires sent by the AMF to 49 management companies covering about 2,000 French and foreign investment funds with total of assets of EUR 760 bn.

Based on the practices observed in the sample, the AMF has amended the regulation in force: its doctrine DOC 2007-25 (Q&A on the rules of conduct applicable to ISPs) has been updated and will be applicable as of January 1, 2023. First, turnover fees will be prohibited (except for real estate assets) as of January 1, 2026. Second, for active funds, ISPs providing investment advice must have procedures in place to ensure that management fees are consistent with performance (e.g., how closely they match the performance of their benchmarks). Finally, for passive funds, ISPs must also implement procedures to compare the level of fees of equivalent funds to advise clients on lower-cost equivalent collective investments.

Read the full article here.

ESMA: Report on the Common Supervisory Action (CSA) on Supervision of Fees and Costs in Investment Funds

May 31, 2022

This report follows up on the joint supervisory action launched by ESMA in 2021 with NCAs regarding UCITS-related costs and fees. The report presents the main findings of this study; in particular, small asset management companies should improve their monitoring of fund-related costs and fees, and controls should be carried out on the delegates who determine the level of costs and fees. ESMA also set out that there is a lack of effective policies and procedures, and a lack of clear disclosures in accordance with ESMA’s guidelines. Finally, ESMA reminds that it is important to ensure that investors are adequately compensated in case of undue costs and charges.

ESMA encourages NCAs to sanction investment management companies when they are in significant breach of the regulatory requirements.

Read the full article here.

ESMA: Supervisory Briefing on Sustainability Risks and Disclosures in the Area of Investment Management

May 31, 2022

ESMA published a supervisory briefing to ensure convergence across the EU in the supervision of investment funds by competent authorities with respect to sustainability risks and disclosure by asset management companies. It sets out ESMA’s guidelines on NCA supervision of contractual disclosures: Authorities should check the compliance of pre-contractual information provided to investors with applicable regulations (notably SFDR and Taxonomy), and the consistency of ESG information in marketing and fund documents by considering how sustainability information is presented, the name of the fund, the ESG policy, or the investment strategy of the fund. NCA should also verify the information published on the website, compliance with periodic reporting obligations, and the integration of ESG risks by asset management companies in their risk management and governance processes.

Read the article here.