On 17 December 2021 the European Securities and Markets Authority (“ESMA”) published updated version of both its Q&A Application of the UCITS Directive (the “UCITS Q&A”) and its Q&A Application of the AIFMD (the “AIFMD Q&A”). The UCITS Q&A was also amended in November 2021. The updates cover a variety of topics, such as issuer concentration, share-class marketing notification, rebates for UCITS and the scope of application of the AIFMD for managers of crypto-assets undertakings.
Two new questions have been added under Question 5 “Issuer Concentration”.
The first new question regards the possibility provided under article 54 of the UCITS Directive for UCITS to invest up to 100% of their assets in different transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third country, or a public international body to which one or more Member States belong (the “Entities”). ESMA clarified that within the framework of such investment all transferable securities and or money market instruments must be guaranteed by an Entity and that each issue (at least six) shall not account for more than 30% of the total assets under management of the UCITS/sub-fund.
The second new question under Question 5 relates to the calculation of the counterparty risk limit in the context of currency hedging. ESMA clarified that unrealized forward exchange (FX) profits and losses shall be included in the net asset value of the relevant hedged share-class and thus taken into consideration when calculating the 10%/5% counterparty risk.
Share-class marketing notification
A new question Question 8 “Advance notice for the marketing of new share classes of UCITS notified for cross-border marketing” has been created.
ESMA clarified that the intention to market a new share-class in a Member State where a UCITS is already authorised for distribution on a cross-border basis, shall be given at least one month before the marketing of the new share-class starts. This clarification follows the recent implementation of the Directive 2019/1160 with regard to cross-border distribution of collective investment undertakings.
Rebates and other arrangements
Finally, in November 2021 ESMA also clarified that (i) rebates to a third party, such as an individual investor, paid out of the management company’s own resources and (ii) payment of fees from the management company’s own resources to separate investors, (eg by the conclusion of side letterswith institutional investors) where management companies prevent undue costs being charged to the UCITS and its share-holders, fall under the scope of the restrictions on payment of rebates and other arrangements as laid down in article 29 of the UCITS Level 2 Directive 2010/43/EU (the “UCITS Level 2 Directive”) and that those payments shall comply with the conditions set out in such article to be acceptable. In particular those arrangements should be:
- Transparent and meet the conditions laid down in article 29 (1) (b) of the UCITS Level 2 Directive, and
- The management company should be able to demonstrate that:
- they enhance the quality of the relevant service provided to the UCITS; and
- they will not impair compliance with the management company’s duty to act in the best interest of the UCITS.
The management companies should be able to provide accurate and documented justifications that the above conditions are met if and when requested by their national competent authority.
A new question 2 has been added under Section XI: “Scope” of the AIFMD Q&A.
The question relates to the qualification of undertakings investing in crypto-assets and whether their managers would be subject to the AIFMD. ESMA clarified that whether an undertaking investing in crypto-assets qualifies as an alternative investment fund (“AIF”) shall be assessed on a case-by-case basis and as per the definition provided in the AIFMD of an AIF.
As a reminder an undertaking will qualify as an AIF, and thus its manager will be subject to the AIFMD, if:
- It raises capital from a number of investors (in the case of a crypto undertaking to invest in crypto-assets) ;
- It invests the capital raised from its investors according to an investment policy; and
- It invests for the benefit of its investors.
ESMA also stressed that there is no restriction on the assets in which an AIF can invest, and an AIF can in principle invest in crypto-assets provided that their AIFM can ensure compliance with the AIFMD. It was also noted that additional restrictions on this type of investment can exist at national level.