The Alternative Investment Fund Managers Directive – ESMA's draft technical advice to the European Commission – Speech by Sheila Nicoll, Director of Conduct Policy at the Financial Services Authority, 21 July 2011 The Alternative Investment Fund Managers Directive1 (AIFM Directive) came into force on 21 July. The Financial Services Authority (FSA), its successor organisations, and HM Treasury, must transpose the Directive's provisions into national law by 22 July 2013.2 Last year, the European Commission issued a request for advice to the Committee of European Securities Regulators (CESR, now the European Securities and Markets Authority (ESMA)), on the content of the detailed rules that will sit under the Directive.3 On 13 July, ESMA published its policy proposals for public consultation, specifically on authorisation and operating conditions, depositaries, and leverage and transparency.4 In a recent speech before the PwC Global Alternative Investments Seminar, Sheila Nicoll, Director of Conduct Policy at the FSA, outlines the regulator's views on the development of the AIFM Directive, in view of ESMA's latest offerings. ESMA, remarks Nicoll, has been charged with no easy task. Working to a tight timetable, it must submit its final advice to the Commission by 16 November. After six months' intensive consultation with industry, ESMA's draft advice, which presently covers only three-quarters of the Commission's request, stretches to some 438 pages. Its length is in part attributable to the complexity and political sensitivity surrounding some of the issues discussed. In so far as it was possible, ESMA, for the sake of cross-sectoral consistency, has aligned its proposed advice to existing requirements set out in the UCITS Directive5 or MiFID6). Nicoll notes, though, that in some circumstances ESMA has had to tailor existing rules to the specificities of the alternative investment sector. Depositaries One of the most controversial, sensitive and therefore scrutinised aspects of the Directive concerns the role of the depositary.7 In Nicoll's view, while ESMA's draft advice on depositaries "joins up many of the dots which had been left unconnected by the Original Directive," it nonetheless "raises as many questions as it answers." Perhaps the most contentious and sensitive aspects of the draft advice, Nicoll explains, relates to depositary liability. As a starting point, ESMA asks whether the depositary should be liable for the actions of its sub-custodians as if it had performed those actions itself. Nicoll notes with interest that ESMA's draft advice prescribes detailed due diligence provisions to be followed when delegating custodial duties and comprehensive monitoring rules to be adhered to thereafter. With these in mind, she finds it counterintuitive that such robust requirements will not change the extent to which a depositary is liable for its sub-custodian's actions. Depositaries may, she fear, end up being held responsible for events outside their reasonable control. While ESMA provides that depositaries, in some cases, must take "appropriate actions," Nicoll seems somewhat disappointed that it fails to clarify what such actions should be. In her view, "practitioners would find it incredibly useful if ESMA explains what these additional actions look like and when they must be taken." Leverage One of the most technical parts of ESMA's advice concerns leverage and the degree to which this should be restricted.8 For Nicoll, ESMA's focus needs to be on two particular phases:
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