ESMA Level 2 consultation on the AIFM Directive 3rd Country provisions


The following is a brief summary of ESMA’s proposals. Industry participants are invited to provide ESMA with their comments on these by 23 September 2011.


ESMA’s proposed Level 2 provisions in the area of delegation relate to the conditions under which AIFM may delegate (or under which the delegate may sub-delegate) portfolio management or risk management activities to third-country undertakings. The cooperation between the competent authorities of the home Member State of the AIFM and the regulator in the third country where the delegate (or sub-delegate) is located is to take the form of a written arrangement and need not necessarily be bilateral, but may be negotiated centrally by ESMA on behalf of several or all Member States.

The consultation paper recommends the use of certain IOSCO Memoranda of Understanding (“MOUs”) as templates for the cooperation agreements, and also sets out content requirements for these agreements. The agreements should, among other things, allow regulators in Member States to obtain relevant supervisory information and documents from the third country, request on-site inspections of the delegate or sub-delegate, and procure the enforcement of applicable regulatory rules where these are breached by the delegate or sub-delegate.


ESMA proposes that, where a third-country depositary is to be appointed, the entity in question should be authorised and supervised by an independent regulator and subject to sufficiently dissuasive sanctions where it breaches relevant regulatory rules. It must be possible for the entity’s liability towards investors of the AIF to be invoked through the AIFM. As concerns the rules governing the third-country entity’s eligibility to act as depositary, its capital requirements and its operating conditions, these must be equivalent to those which apply to credit institutions or investment firms in the EU.

Private placement and passporting

ESMA’s paper sets out certain content requirements for the international cooperation arrangements that will need to be in place between Member States and relevant third countries where:

(1) an EU AIFM wishes to manage a non-EU AIF that will not be marketed in the EU;

(2) an EU AIFM wishes to market a non-EU AIF in a Member State on a private-placement basis;

(3) a non-EU AIFM wishes to market an EU or non-EU AIF in a Member State on a private placement basis;

(4) an EU AIFM wishes to market a non-EU AIF in a Member State on a passporting basis;

(5) a non-EU AIFM wishes to market and/or manage an EU or non-EU AIF in a Member State on a passporting basis.

In each of these cases, it is proposed that the cooperation arrangement should be in writing, provide for an exchange of information for supervisory and enforcement purposes, allow Member State regulators to obtain all information required for fulfilling their duties under the AIFMD, enable Member State regulators to request on-site inspections of the non-EU AIFM and/or AIF, and provide for cooperation in enforcement matters. It is important to note that the third-country passport (allowing the management and/or marketing activities set out in (4) and (5) above) is only likely to become available as of 2015. ESMA acknowledges this in its consultation paper, noting that additional requirements in relation to the passporting provisions may be introduced closer to that date.

As in the area of delegation, the consultation paper recommends the use of IOSCO MOUs as templates for the cooperation agreements, and suggests that these could be negotiated centrally by ESMA.

Exchange of information

The consultation paper also responds to the Commission’s request for advice on the type of information to be exchanged between regulators in Member States for the purposes of identifying potential systemic risks. For this purpose, ESMA refers to the list of information contained in the reporting template included in its separate Level 2 consultation published on 13 July, and announces it is developing a system for the secure exchange of information between regulators that will also comply with the requirements of other EU legislative frameworks.

Member State of reference

The measures proposed in the paper include provisions on identifying the “Member State of reference” of a non-EU AIFM (i.e. the Member State where the non-EU AIFM will be authorised) in cases where several Member States potentially qualify for this role. Potential authorities of reference contacted by a non-EU AIFM are to contact each other and ESMA, and ESMA is to contact other potentially qualifying authorities. All authorities involved are to exchange their views within a week of making contact and aim to

reach an agreement on the appropriate Member State of reference with ESMA’s facilitation.


ESMA’s consultation paper on Level 2 measures relating to third-country provisions in the AIFMD is more remarkable for its brevity than for the proposals it contains, which do not add much by way of detail to the Level 1 framework (in stark contrast with the detailed proposals contained in ESMA’s principal, 438-page consultation on Level 2 measures). ESMA may be conscious that the third-country provisions in the Level 1 directive are, in and of themselves, quite detailed and extensive, and that they should not

therefore be elaborated significantly at Level 2. Added to that, ESMA is clearly taking a “wait and see” approach to its Level 2 measures relating to the third-country passport, some of which may be adopted closer to 2015, when the passport is proposed to take effect.

Although the Level 2 measures cannot repeal the draconian third-country provisions contained in the Level 1 framework, the impact of these provisions may be somewhat mitigated by the proposal that multilateral arrangements be negotiated centrally by ESMA. To the extent implemented, this approach would avoid the inconvenience of each Member State needing to negotiate a cooperation arrangement with a relevant third country on an individual basis and would help create a level playing field throughout the EU in relation to delegation to third-country undertakings and access to EU markets for non-EU managers and funds.

If you would like to discuss any points arising from the ESMA consultation, please do get in touch with one of us or with your usual CMS contact.