Weavering judgment_ a warning for NEDs

it is now compulsory for all such funds to use the notional based approach for all derivatives. It is of immediate effect for new funds and has to be  in place – and prospectus amended - by year end for all existing funds.

We are happy to discuss further the implications of that document. feel free to contact us!

AIFMD level 2 on the need to establish proper Risk Management Governance and keeping it up to date

ESMA has released their comments on the AIFMD and we continue to release extracts that we find important and relevant to our area of focus: risk.

as you will see, the AIFMD gives an important place to an independent permanent risk management function, with direct reporting line to the governing/supervisory body of the AIF; the attach documents goes into high level principles on the roles and responsibilities of this function.

Needless to say we would be delighted to assist you in putting in place a suitable organisation!

AIFMD level 2 – extracts on the necessity and importance of a permanent risk mangement function

Objective

The objective of the service is to assist NEDs to obtain the necessary FSA approval for their role, to enable NEDs to fulfil their responsibilities with skill and confidence and to reduce the risk of confrontation with regulators throughout their term of office.

Regulatory challenge

The principal regulatory challenges for a NED are:

• Obtaining FSA approval for the appointment
• Interviews with FSA supervisors during ARROW and other visits to the firm
• Meeting FSA requirements and expectations in the course of their duties

As FSA becomes more intrusive, so it becomes ever more challenging and demanding, especially in relation to the performance of NEDs. The new NED approval interview regime is resulting in one in five potential NEDs not proceeding with the appointment. This high and expensive drop-out rate is one which firms and candidates are increasingly keen to forestall. Sound preparation saves expensive disappointment.

OWL Approach

The OWL approach is in four parts:

• Preparation for approval and ARROW interviews by mock interviews and guidance on areas of due diligence required and expected

• Quarterly briefings on regulatory developments, covering changes in regulatory requirements as well as evolution in regulatory practice

• Half yearly briefings on regulatory obligations for Board members of regulated firms

• On-call advice on regulatory questions of principle and practice

Through this approach, OWL provides NEDs and regulated firms with a combination of regular and on-demand advice and briefings. Focused on FSA and European regulation, a key aim of the service is to assist directors to keep up to date with their ever expanding and constantly changing regulatory obligations and to determine the best means of fulfilling them.

You may well have seen comments recently about the likely impact of the AIFMD on the implementation of the Remuneration Code for asset managers. This is a question that should be getting rather more attention even than it already is, despite the picture being far from clear. The ‘threat’ is that ESMA, in producing guidelines on the application of proportionality for the Code under AIFMD, might consider itself to be obliged to bring back ‘deferral’ and non-cash bonuses for alternative investment fund managers and their delegates, including anyone managing the assets of an AIF (any non-UCITS fund). There has been press comment suggesting that ESMA had somehow published something about this ‘in the small print’. That is not the case.

The grounds for concern are that, whereas when CEBS dealt with CRD3 on this at the end of last year, it was covering a wide spectrum of sectors, including banks, the AIFMD remuneration requirements relate only to fund managers and their delegates. Consequently, with CRD, it was possible to apply the key measures only to the high risk sectors; with AIFMD, there is much less scope for differentiation and consequent selective application of those same key measures, all of which appear in the AIFM Directive itself (i.e. in Level 1).

However, the optimists take the view that ESMA would be unlikely to overturn what was done by CEBS (now EBA) only a few months ago, especially since the directive explicitly requires ESMA to work with EBA on this point. ESMA will recognise the damage that it would do to the new structure of European supervisory authorities if it brought about such an early u-turn. Consistency and acceptability will be high in their priorities.

The reason that the position on this remains unclear is that, while ESMA is working on Level 2 of AIFMD, it will not start on the guidelines. That means that we will not see any pronouncement from them on this until November at the very earliest, and more likely in January next year. However, that does not mean that it is too early to talk to them about it. With the Level 2 Public Hearing coming up on 2^nd September, there should be opportunities to raise the point with them. If you would like to discuss this, give me a call.

Oliver Lodge

020 7389 7028

As those who were present will have heard, at the FSA’s Annual Public Meeting this morning, Margaret Cole showed that she was unable to answer a straight forward question about Suitability. When I asked whether variations in regulatory standards in different countries should be taken into account when making the Suitability judgement, she would only say that FCA expected to be ‘compatible with Europe’ and therefore the issue should not arise. As the FSA has made it quite clear that FCA may well be taking a much more robust approach than other regulators, particularly in relation to Product Intervention, that was a  pretty unhelpful answer. If the FSA wants to shine the spot light on Suitability and to take firms to task for failures, it will need to be clear about what is expected.