NETHERLANDS: AFM Views on the Review of the Alternative Investment Fund Directive

Friday June 19 2020

The AFM has published a paper highlighting some areas which it considers to be relevant for the public consultation and for the AIFMD review. The AFM is generally satisfied with the AIFMD and the way it works out in practice. However, in their assessment whether the objectives of the AIFMD are fully achieved, they still see room for improvements in a number of areas. These include

• the co-existence of the Third Country passport and National Private Placement Regimes (NPPRs);
• the improvement of data quality;
• the option to include potential new macro prudential instruments in light of the current discussions on the need for such tools;
• improvements regarding the EU management and marketing passport;
• equal interpretations of AIFMD definitions and provisions; and
• amendments to the rules on private equity transparency notifications and asset stripping.

Recommendations

Third Country passport and National Private Placement Regimes (NPPRs)

It is key that the European capital markets remain open and attractive for foreign investment. The interaction between European capital markets and the global capital markets becomes increasingly relevant now that the UK has left the EU. EU capital markets should remain accessible for third country asset managers (without compromising the integrity of the single market).

In the AFMs view, the most appropriate way to arrange for this is by re-starting the work on the Third Country passport (as foreseen in the AIFMD) which enables Third Country managers to freely circulate their funds throughout the EU on a cross border basis. Currently – in the absence of the Third Country passport – Third Country managers have or may have market access on a country-per-country basis through the National Private Placement Regimes (NPPRs). NPPRs currently prove to be a crucial tool to arrange for effective access to national markets. This is particularly relevant for the Dutch pension sector which is serviced by many Third Country managers. In the AIFMD it is envisaged that the NPPRs are ultimately replaced (and faded out) when the Third Country passport shall have been established and operational for a period of three years (article 68). In contrast to what is currently foreseen in the AIFMD, the AFM would recommend that NPPRs remain longer in place and co-exist alongside the Third Country passport until the passport has proven to work sufficiently adequate in practice.

One single data point for AIFMD data and improving data quality

To enhance effective and efficient supervision by the NCAs, including the AFM, it is essential that the article 24 AIFMD data is readily accessible (no time lags) and of good quality. The AFM believes this can best be accomplished if ESMA or a third party service provider is the single recipient of the AIFMD data and that each NCA (and ESMA) is able to access this database in respect of its ‘own national population’. Experiences could be drawn from other pieces of EU legislation. In this way, updates or improvements on the reporting templates (e.g. limiting or removing open text boxes and removing any duplications in the reporting templates) can be carried out centrally and this would increase data quality and would prevent data arbitrage. Additionally, if reports are centrally collected, this would circumvent delays in the exports of data from market participants to NCAs and from NCAs to ESMA (and the review processes of this data).

Macro prudential instruments

The current legislative framework contains three instruments in the fund sector which can be activated to prevent risks to the financial system. On the basis of the AIFMD, NCAs have the possibility to impose leverage limits or other restrictions to limit the use of leverage (article 25). The AIFMD also offers NCAs the possibility to suspend redemptions in both the interest of unit- holders and the public (article 46), although the AFM miss a framework in level 1 for information exchange between NCAs and/or the possibility to inform ESMA of the intended action to suspend.

In the AFMs view, this is important for the prevention of potential spill-over effects to other Member States. Finally, MiFIR enables ESMA and NCAs to temporarily restrict or prohibit the marketing, distribution or sale of financial products if there is a threat to the stability of the whole or part of the financial system (articles 40, 42). The AFM very much appreciates these intervening powers as a tool to prevent financial stability risks. Yet, in light of current discussions (at the ESRB, FSB and IOSCO) on the need for new macro prudential instruments, the AFM would like to ask the Commission to take into account during the AIFMD-review the option to include potential new instruments that specifically address liquidity risks more directly.

Improvements EU management and marketing passport

One of the objectives of the AIFMD is achieving an internal market within the Union for EU AIFMs. To reach a fully internal market for EU AIFMs, it is necessary to ensure a level playing field and to remove restrictions to the free movement of financial services in the Union. The new rules on the cross border distribution of funds (as set out in the Cross Border Fund Distribution Directive and Regulation) which are part of the Capital Markets Union package are a crucial step forward. The AFM believe it is a very good development that market participants are well-informed on the specific rules for market access in the relevant marketing jurisdictions, on the information to be produced by them and the relevant fees and charges levied by competent authorities for supervision of crossborder activities and that this information is available on the website of ESMA. In this way, the ESMA website is a central point for information for market parties.

Furthermore, the AFM believe that the interactive tool enabling indicative calculations of those fees and charges levied by national competent authorities is a good development to increase the transparency of the fees charged. However, they would welcome further harmonization efforts in this area in the future (both in terms of documentation to be produced and fees and charges levied) so as to procure that AIFMD services can be offered more seamlessly on a cross border basis. This would contribute to the level playing field within the Union and the further development of the Capital Markets Union.

Equal interpretations of AIFMD definitions and provisions

The AFM see that NCAs and Member States interpret and apply definitions of the AIFMD differently. This may result in a tendency of market parties towards those Member States that make use of broad interpretations (regulatory arbitrage). For instance, there are differences in the interpretations of the activities of the depository and the delegation rules. The AFM consider it undesirable that there are large variations in supervisory practices due to these different interpretations. This undermines the objective of establishing equal authorisation and supervision of AIFMs in order to provide a coherent approach within the Union. In order to mitigate the differences between NCAs and to ensure a level playing field within the Union, the AFM have proposed more clarification on level 1, and where this is more suitable, more harmonization through level 2 legislation or level 3 guidance.

Private equity transparency notifications and asset stripping

The AIFMD includes certain transparency requirements for private equity managers vis-à-vis NCAs. The AFM questions the relevance of receiving such transparency notifications. Articles 26-30 AIFMD contain the obligation of private equity managers that acquire a major holding or control in a non-listed portfolio company to inform the portfolio company and its shareholders of the percentage of the manager’s holding. Where private equity managers acquire control over a non-listed company, the private equity manager must in addition fulfil certain disclosure requirements vis-à-vis the portfolio company and its stakeholders, including the relevant trade union or individual employees. The private equity managers must at the same time also inform its relevant NCA of these transparency notifications. The AFM questions the relevance of receiving these notifications. The mandate of the AFM is confined to protecting investors and the integrity of the financial markets. The AFM is therefore a recipient of information which does not seem useful for its supervisory work. Accordingly, the AFM would rather not receive these type of notifications, or would at least prefer that the transparency requirements would be confined to the acquisition of control (and not to the acquisition of a major holding). In addition, the AFM also believes that in case the aim of these notifications is to detect the occurrence of asset stripping, more specific reports tailored for that purpose could be designed.

Asset stripping refers to the practice of selling off the assets of a portfolio company in order to improve returns for equity investors. The rules on asset stripping (article 30) apply once an alternative investment fund, either individually or jointly, has acquired control of a portfolio company. The basic restriction is that in the 24 months after the fund has acquired control, the AIFM must use its best efforts to prevent the ‘controlled’ company effecting distributions, capital reductions, share redemptions and/or the acquisition of own shares. The AFM notes there are a number of unclarified questions on the concept of asset stripping. For instance, which law applies to determine whether or not the asset stripping rules are breached (the law applicable to the manager or the law applicable to the portfolio company). The AFM believes that the asset stripping rules could best be addressed in corporate law regulations so as to achieve a level playing field amongst private equity investors and other investors. If this is not feasible, further guidance on the application of the asset stripping rules would be most welcome.

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