A&L Goodbody

The Front Page
March 2013


In the news this month:

On the Domestic Front, we look at upcoming deadlines, ONR, F&P, EMIR reporting and a speech by Gareth Murphy, Central Bank Director of Markets Supervision.

On the International Front, we consider AIFMD, ESMA Q&A on its Guidelines on ETFs and other UCITS issues, UCITS V, liquidity risk management, shadow banking, benchmarks, MiFID II, European Venture Capital Funds and European Social Entrepreneurship Funds as well as AML developments.

Irish Practice Developments


Some Approaching Q1/ Q2 Deadlines
• 31 March: This is the first anniversary of the submission to the Central Bank of Ireland (Central Bank) of confirmations by regulated financial service providers (RFSPs) of compliance with the Fitness and Probity Standards. For this reason many RFSPs will choose this date to update their Fitness and Probity documentation. Documentation should be updated at least once in every calendar year.

• 31 March: Submission date for tranche 2 of UCITS IV compliant business plans for UCITS SMICs.

• 1 March: Extension to the use of the Central Bank online regulatory reporting system (ONR) to capture filings of financial statements with a reporting period ending 31 December 2012 onwards (and interim financial statements with reporting period ending 28 February 2013 onwards).


30 April: Filing deadline of annual financial statements for year ending 31 December 2012 which include the first statement of compliance with the Corporate Governance Code for Collective Investment Schemes and Management Companies.

31 May: Final submission date for UCITS IV compliant business plans for UCITS SMICs although Central Bank has indicated that it will accept submissions after this date.

Ongoing - compliance with ESMA guidelines on ETFs and other UCITS issues (see below).


Online Central Bank Reporting 
The Irish Funds Industry Association (IFIA) Technical Committee has issued some practical guidelines for Fund Administrators with regard to the Central Bank's ONR which is being rolled out over the coming months. Fund system administrators who intend to delegate part of the reporting should complete this delegation as soon as possible, so that delegates can ensure sufficient resources, etc are available. In particular the guidance highlights that regulatory reporting is ultimately the responsibility of the CIS board or management company and that permissions of delegates should be obtained before any reporting is delegated to them.

Address by Director of Markets Supervision Gareth Murphy to AIMA
On 20 March 2013, Central Bank Director of Markets Supervision, Gareth Murphy,
addressed the Alternative Investment Management Association (AIMA) in Guildhall in London.

Mr Murphy identified the issues of run-risk leading to credit interruptions and lack of incentive alignment leading to poor loan origination as key concerns for financial authorities. Of particular interest was the analysis of the task of delivering effective regulatory intervention as comprising of a spectrum of ever more intrusive activity which:

  1. starts with monitoring (through data collection),
  2. then analysis (of the data and the business models),
  3. then policy formation (which draws in political and social considerations),
  4. then regulation (which involves writing a rule book),
  5. then supervision (which involves monitoring compliance with the rules),
  6. then enforcement (which punishes rule breaches); and
  7. finally resolution (to mitigate the real economy effects of failure).
Each of these seven steps is progressively more intrusive - in this sense it is a spectrum of regulatory intervention which becomes progressively more intense as each step is taken. But each step is a distinct step which need only be taken if it survives a cost-benefit analysis.


Fitness and Probity
The Central Bank published (5 March 2013) an updated
Frequently Asked Questions (FAQ) document in relation to the Fitness and Probity Regime with the addition of Questions 3.17 (dealing with the requirement that individuals who were in-situ at the time of the introduction of the regime must go through the pre-approval process and submit an IQ when they are subject to re-election/reappointment provisions as the re-election/re-appointment of an individual constitutes a ‘break in service’) and 3.18 (dealing with the fact that this also applies to in-situ PCFs who are subject to employment contract renewals).

The Central Bank also issued its fifth issue of the IQ Bulletin which highlights:

The European Commission Delegated Regulations (EU) No 148/2013 of 19 December 2012 supplementing the European Market Infrastructure Regulation (EMIR) were published in the Official Journal of the European Union (OJ) on 23 February 2013 and entered into force on 15 March 2013. The implementing technical standards were published in the OJ dated 21 December 2012.

European Commission Delegated Regulation No 149/2013, Article 12.4 provides that “financial counterparties shall have the necessary procedure to report on a monthly basis to the competent authority designated in accordance with Article 48 of Directive 2004/39/EC (MiFID), the number of unconfirmed OTC derivative transactions referred to in paragraphs 1 and 2 that have been outstanding for more than five business days.”

The Central Bank confirmed (22 March 2013) that "At this point financial counterparties do not need to submit such a report unless specifically requested to by the Central Bank of Ireland. However it is expected that all impacted financial counterparties will, from 15 March 2013, have the necessary procedures in place to report to the Central Bank when requested to do so.”

ESMA published (20 March, 2013) a Q&A on the implementation of EMIR.

Disclosure of interests in other entities - IFRS 12
The IFIA Technical Committee issued a paper to assist in the preparation of financial statements and particularly the disclosure of interests in other entities as required by IFRS.


EU & International Developments


The European Commission issued (26 March 2013)
Q&As on the Alternative Investment Managers Directive (2011/61/EU) (AIFMD) in respect of questions it has received on the AIFMD.

The answers relate to issues including:

In general the Q&As are not very illuminating with many issues being referred back to general principles with the possibility that ESMA may "fuel convergence between Member States' positions on issues" or dependent on  Member States provisions. You will have received our front Page newsalert on transitional provisions which issued yesterday. A few interesting Q&A are set out below:

Question 1177 concerns marketing to retail investors and asks what measures are expected to be taken by the AIFM to avoid marketing its AIFs to non-professionals and whether it is possible for example to have a web page that is not password protected but clearly states that this offering is for professional investors only. The answer is that a simple warning on a webpage is not sufficient; more efforts are needed to ensure that the AIF is offered only to professional investors.


Question 1142 concerns MiFID firms and MiFID activities and asks whether credit institutions and MiFID firms can apply for authorisation as an AIFMD? The answer is that AIFMD does not allow AIFMs to engage in banking or MiFID activities except for the ones listed in Article 6(4). Hence, an AIFM authorisation would be incompatible with an authorisation for a credit institution or for the MIFID firm.

Question 1149 concerns own funds and gives insight into the treatment of internally managed AIFs and external AIFMs. The answer points out that the definition of an AIFM includes both internally managed AIFs and external AIFMs. Whenever the AIFMD uses the term AIFM without making any differentiation between the two categories, it comprises both categories. When it intends to only cover one category, the AIFMD is explicit in mentioning the target category only. In consequence, the neutral term 'AIFM' in Article 9(3) comprises both categories.

Question 1187 concerns passport issues and asks what should happen if a competent authority does not decide on an application for approval of marketing within 20 working days, as required by Article 31. The answer is that the AIFMD does not foresee the consequences of a failure by a competent authority to approve an application for marketing within 20 working days. According to Article 31 the AIFM may start marketing in case of a positive decision. This implies that an AIFM is not allowed to market without the competent authorities having taken a positive decision. However, it depends on the national law how an AIFM could proceed against the competent authority that failed to issue a decision (e.g. administrative or judicial proceedings for failure to act).

Question 1176 concerns reporting requirements and asks when existing AIFMs will be expected to commence reporting? The answer is that

The frequency of reporting is harmonised, whereas the starting date might be different. The Commission again encourages ESMA to issue guidance concerning the alignment of the dates of delivery of information if deemed necessary.

Question 1165 concerns scope and exemptions and asks whether sub-threshold AIFMs can retain an existing MiFID authorisation and whether it is possible for a MiFID firm to manage portfolios of AIFs whose AUM in total do not exceed the thresholds. The answer is that sub-threshold AIFMs may retain an existing MiFID authorisation according to the AIFMD provisions. National law applies in the main to such sub-threshold AIFMs.


On 22 March 2013, the EU Commission's Delegated Regulation (Regulation 231/2013) (AIFMD Regulation) supplementing the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision was published in the OJ. The AIFMD Regulation will apply from 22 July 2013.

The Council of the EU published a statement (dated 26 February 2013) made by Ireland and 11 other EU member states, including UK, Germany, Sweden and the Netherlands, criticising the AIFMD Regulation and its legislative progress. The statement

Q&A on ESMA guidelines on ETFs and other UCITS issues
The transitional provisions for the European Securities and Markets Authority (ESMA) Guidelines on ETFs and other UCITS issues were set out in the February Front Page. Following this, ESMA published its
Questions and Answers (Q&A) on those guidelines.


The Q&A cover

The Q&A contains some useful clarifications which include

The EU Parliament Committee on Economic and Monetary Affairs (ECON) considered a
draft report on UCITS V (which deals with depositary functions, remuneration policies and sanctions) on 21 March 2013 and issued a press release which stated that investment fund managers' bonuses must be capped (so that the variable component of a fund manager's total salary should not exceed the fixed component salary) and 50% of the variable remuneration should be paid in the units of the UCITS concerned. Moreover, depositaries must not trade in UCITS assets on their own account and will be liable to UCITS for any loss of their assets, even if these assets were held in custody by a third party. The European Parliament plenary will vote in April on whether to give a mandate for three-party negotiations with EU member states and the European Commission.


Other than these new proposals of ECON in relation to bonus caps, the remuneration provisions in the last draft UCITS V generally replicated the provisions of AIFMD. In the AIFMD and the draft UCITS V, ESMA is requested to issue guidelines on remuneration policies. In its guidelines under AIFMD, ESMA extended the provisions to "identified staff" of delegates carrying out investment management or risk management. If these new proposals in relation to bonus caps are agreed with the Commission and included in the final UCITS V, (and unless an amendment is made to extend the provisions to delegates in the directive), we may have to wait to see if ESMA issues similar guidelines for UCITS to those issued under AIFMD to see if the bonus cap provisions are extended to delegates. In any event, we can expect a lot of lobbying before the final UCITS V directive is published.

Liquidity Risk Management
The International Organization of Securities Commissions (IOSCO) published (4 March 2013) the final report on
Principles of Liquidity Risk Management for Collective Investment Schemes which contains a set of principles against which both the industry and regulators can assess the quality of regulation and industry practices concerning liquidity risk management for collective investment schemes (CIS).

The report sets out principles against which both the industry and regulators can assess the quality of regulation and industry practices relating to liquidity risk management for CIS. Liquidity risk management aims to ensure that a CIS can meet redemption obligations and other liabilities, as required. The principles are structured to reflect the time frame of a CIS's life and cover principles that should be considered in the design (pre-launch) phase of a CIS and principles that should form part of the day-to-day liquidity risk management process. The principles are not jurisdiction specific and do not provide directly applicable standards for firms managing CIS. The principles must be implemented within the context of the specific legal structures in place in each jurisdiction and so implementation of the principles may vary from jurisdiction to jurisdiction, depending on local conditions and circumstances.

Shadow Banking (including Money Market Funds and ETFs)
Steven Maijoor, Chair of ESMA,
spoke on shadow banking at the 5th CDU/CSU Congress in Berlin on 11 March 2013. He identified its risks as complexity and opacity, the inter-linkages with the financial system and the size of the shadow banking system. He then identified the EU direct regulatory action as AIFMD, UCITS regulation and ESMA guidelines (for Money Market Funds and Exchange Traded Funds) and market surveillance, as well as the regulation of credit rating agencies. He also looked to UCITS VI and the planned legal framework for Money Market Funds. He sees a limited potential for a positive role for shadow banking and emphasised a strong commitment to containing the risks of shadow banking.


Coherence of financial services legislation
On 15 March 2013, ECON published
a questionnaire for public consultation on ways to further enhance the coherence of EU financial services legislation which aims to ensure that EU legislation fits together seamlessly. Responses are invited by 14 June 2013. The consultation comprises 10 questions which explore legislative overlaps and coherence. It will assist in determining future priorities for the present EU Parliament, and the incoming Parliament in 2014.

EU law: only electronic publication of Official Journal will have legal effect
The Council of the European Union adopted
Council Regulation 216/2013/EU on the electronic publication of the OJ (7 March 2013) which provides that in future only the electronic edition of the OJ will be authentic and legally binding. The Regulation will come into force on 1 July 2013.

Regulation of benchmarks
The European Supervisory Authorities (ESAs) (which comprise, EBA, EIOPA and ESMA) have outlined a
suggested framework for the regulation of the production and use of indices serving as benchmarks in financial and other contracts.

The ESAs have already provided a package of initiatives relating to benchmarking and the benchmark-setting process. The letter sets out the wider work the ESAs believe is necessary to regulate how indices and benchmarks are compiled, produced and used. It sets out a number of key features the ESAs believe a future regulatory framework for benchmarks should be based on, which include:

According to the letter the EBA and ESMA are in the process of finalising the Principles for Benchmark Setting Processes in the EU which they consulted on in February 2013.

On 3 March 2013, the Presidency of the Council of the EU published:

European Venture Capital Funds and European Social Entrepreneurship Funds
The European Commission published a press release welcoming the adoption by the European Parliament (12 March) of the proposed Regulations on European Venture Capital Funds (EuVECAs) and European Social Entrepreneurship Funds (EuSEFs). This states that the Council was expected to adopt the Regulations on 21 March 2013 and that the Regulations will enter into force 20 days after publication in the OJ, which the Commission expects to be "before the summer".

European Commission speech on anti-money laundering
On 15 March 2013, Cecilia Malmström, EU Commissioner for Home Affairs, gave a 
speech setting out a number of anti-money laundering initiatives for the coming year. It appears that the final decision has yet to be made on whether to propose a directive to ensure that deterrent sanctions apply when money laundering occurs (separate from the proposed Fourth Money Laundering Directive (MLD4)). Such a directive would lay down minimum rules for all member states concerning what types of acts should be considered criminal money laundering and what level of criminal sanctions should apply so as to facilitate co-operation between police and prosecutors across borders and to avoid exploitation of differences by criminals.


The Financial Action Task Force (FATF) held a plenary meeting in Paris, 20 to 22 February 2013 where it agreed:

FATF is considering whether to expand its membership to ensure that it has an "optimal membership" in the fight against money laundering and terrorist financing.

The revised guidance on AML and CTF measures and financial inclusion focuses in particular on the reinforcement of the risk-based approach (RBA) as a general and underlying principle of all AML and CTF systems (countries and firms are expected to understand, identify and assess their risks, take appropriate actions to mitigate them and allocate the resources efficiently by focusing on higher risk areas).

The updated list of jurisdictions with strategic AML and CTF deficiencies issued with the ongoing progress document which provides an update on FATF's work. This identifies jurisdictions that have strategic AML or CTF deficiencies for which they have developed an action plan with FATF to address the identified deficiencies. For example, FATF notes that Cuba, Bolivia, Sri Lanka, and Thailand, which were included in the October 2012 version of the statement on deficiencies, have now taken sufficient steps to be transferred to the list of jurisdictions set out in the ongoing progress document. FATF explains it has not yet reviewed a large number of jurisdictions. It will continue to identify additional jurisdictions, on an on-going basis, that pose a risk to the international financial system.

A key objective of money laundering is identified as hiding the real ownership of the illegal assets. Most major criminal cases - whether money laundering, corruption or serious tax crime, involve misuse of companies, trusts or other corporate vehicles. The new Recommendation 24 adds a number of new requirements to increase transparency. In particular it lays out certain mandatory basic requirements for corporate registries. This is complemented by Art 29/30 of AML4 which requires companies and trusts to keep adequate, accurate and current information on their beneficial owners to ensure this information can be accessed in a timely way by both competent authorities and obliged entities.

Tax crimes (both direct and indirect taxes) are now recognised as predicate offences for money laundering. There is a need for the tax and AML authorities to work together more closely to exchange information and take action (including internationally) to prevent serious tax crime and associated money laundering.


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Disclaimer: The contents of this Newsletter are necessarily expressed in broad terms and limited to general information rather than detailed analyses or legal advice. Specialist professional advice should always be obtained to address legal and other issues arising in specific contexts. Copyright A&L Goodbody 2013.