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  1. 1. 22 August 2008 Mr. Carlo Comporti Secretary General The Committee of European Securities Regulators 11-13 Avenue de Friedland 75008 Paris France Dear Carlo CALL FOR EVIDENCE ON THE MANAGEMENT COMPANY PASSPORT Please find attached the Investment Management Association’s (IMA) 1 response to the call for evidence. We are very pleased that CESR has offered the industry the opportunity to contribute at an early stage of this important exercise. In IMA’s view management company passport is one of the measures needed to enhance the efficiency of the UCITS framework. We therefore very much support CESR’s work to advise the Commission, which will enable including management company passport during the current legislature to the so-called UCITS IV package proposed by the Commission in last July. The IMA calls on CESR to provide the Commission with pragmatic solutions on how the supervisory issues raised by some regulators especially regarding contractual type of UCITS can be solved. We believe that the management company passport should cover all kinds of UCITS funds, even though the detailed solutions can slightly differ between the different legal structures in which UCITS can operate. We believe that CESR needs to analyse what should be the division of duties between the management company supervisor and the fund supervisor, and what will be the real and sensible needs of information for these two regulators to be able to properly conduct their respective duties. 1 The IMA represents the asset management industry operating in the UK. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of £3.4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members represent 99% of funds under management in UK-authorised investment funds (i.e. unit trusts and open-ended investment companies). 65 Kingsway London WC2B 6TD Tel:+44(0)20 7831 0898 Fax:+44(0)20 7831 9975 Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number 4343737. Registered office as above.
  2. 2. The IMA wants to stress that by no means can the solution be a double-authorisation or control of the management company’s systems and operations by the management company supervisor and the fund supervisor. This would be too burdensome a solution which would do away any cost efficiencies aimed at with the passport. Given the vast number of UCITS funds and management companies already in operation, structured to apply their respective legislative and regulatory regimes, CESR’s deliberations should also aim to change only what is really necessary in the current UCITS framework. We understand that a further detailed harmonisation of aspects of the UCITS activity might help some regulators to accept the management company passport more easily. Such a radical step would, however, generate significant work for all firms and regulators concerned and the costs of this would in the end be paid by the investors. It will therefore be important that the scale and costs of such further harmonisation measures are fully taken into consideration before CESR proposes any further detailed harmonisation. The starting point of CESR’s work prior to aiming for further harmonisation of the technical details should be rather to ensure that the necessary investor protection outcomes to the end investor will be achieved also in cross- border fund management. As has been shown during the 20 years of the UCITS Directive in operation, high level of investor protection can be achieved in different regulatory ways regarding many of the details of the activity. Accepting this fact requires of course trust between the national regulators but without it a real and efficient Single Market cannot be achieved. We also note that the Commission has asked CESR to advise them on the required Level 1 provisions “while indicating the fields that could be addressed through Level 2 implementing legislation”. So not all the details need to be solved by the deadline of 1 November 2008, which the Commission has given to CESR’s advice. We have seen the draft response of the European Fund and Asset Management Association (EFAMA) of which we are members and we support their position. Please find below IMA’s detailed responses to the questions raised in the mandate. 1 Definition of the domicile The IMA believes that the domicile of both the fund and the management company would logically be defined on the basis of where they are respectively authorised. This is already reflected regarding the fund in Art. 2(1)(e) of the proposed Directive, according to which “UCITS home Member State means the Member State in which the UCITS is authorised pursuant to Art. 5.” The same principle could be applied to management companies. We believe that the existence of the fund and its depositary in the same Member State is a crucial element making the management company passport possible. We accept that the depositary should be regulated in the same Member State as the UCITS which it oversees because the depositary, in some sense, ‘stands in’ for the regulator of the UCITS. In many countries the depositary can be compared to a gatekeeper, i.e. a “first line of defence for the investor”. We therefore believe that 2
  3. 3. whilst a UCITS and its depositary should be subject to unitary regulation, this is not true of the management company. Therefore, under the operation of the management company passport, a fund’s depositary would remain physically located in the Member State where the fund is authorised (i.e. remote to the management company). Depositaries have varying responsibilities in different Member States, but CESR could examine the degree to which depositaries can provide fund compliance oversight and assist the regulators. 2 Applicable law and allocation of supervisory responsibilities • Double-control is not the solution The cornerstone of a well-functioning management company passport will be a clear division of duties between the two supervisors concerned, and mutual trust between them. A supervisor needs to be able to trust the supervisory work conducted by the other supervisor across the border. By no means can the solution be a double-authorisation or control of the management company’s systems and operations by the management company supervisor and the fund supervisor. This would be too burdensome a solution which would do away any cost efficiencies aimed at with the passport. As a result, a management company should for example not be obliged to report the same information to both the management company supervisor and the fund supervisor, but only to one of them. The supervisors can then exchange information based on their actual supervisory needs. As the supervisors have not harmonised reporting requirements, reporting by applying two different sets of rules would be burdensome and costly. Likewise it must be clear that the management company supervisor sets out the requirements for risk management for the management company. Member States’ implementation of the Directive’s requirements differs in the detail, which would make it very costly if not impossible to apply requirements of both domiciles at the same time. Enabling a fund manager with operations in many domiciles to have a centralised risk management, a centre for excellence for this, has been one of the key aims of the passport. A centralised risk management by a passporting management company provides much stronger management of risk than small local operations in each of the domiciles to nominally apply with the requirement to have the operation based in the fund domicile. One of our members, an internationally active bank, put it to us like this: “Who would you rather have overseeing the risk management processes of a UCITS – a locally resident director, or a global, specialised risk management team back in head office?” The result of CESR’s work should therefore not be a split risk management function. • Flow of information between the supervisors is a key issue In our view, CESR needs to start by analysing what is the division of duties between the management company supervisor and the fund supervisor, and what are the real 3
  4. 4. and sensible needs for information for them to conduct their respective duties. It has to be stressed that these duties will be fulfilled in a modern financial services environment based on extensive use of IT systems. Physical presence has in many ways lost its meaning or at least needs to be redefined, as data is saved in servers and can be transmitted cross borders without limits or delay. In practice nowadays many parts of the value chain in fund management are conducted cross-border, and management companies are yet able to fulfil their responsibilities. The two supervisors involved in a remote management scenario need to be prepared to exchange information between them speedily and efficiently. Here the Directive should set the main requirements for a basis for the exchange of information, as it already largely will do after the proposed amendments to Chapter XII. The exchange of information could be further facilitated by MOUs between the relevant supervisors, if necessary also using the college of supervisors structure which is currently being discussed for banking and insurance sectors. • Division of competences The starting point at Level 1 of the Directive should be that the management company supervisor authorises the management company and is responsible for ongoing supervision of the requirements regarding the management company including conditions for authorisation, capital requirements, rules of conduct etc. The fund supervisor will be responsible for authorising the fund and ongoing supervision of compliance with rules relating to the fund, especially eligible assets and investment limits. Further specification of duties could be done at Level 2. 3 Authorisation procedure for UCITS funds whose management company is established in another Member State When a foreign management company requests a fund supervisor to authorise a new fund, the fund supervisor has some justified needs for information regarding the management company, including: - The authorisation of the management company in its home Member State - The risk management system of the management company - Contact details of the management company The list of the information a foreign management company needs to submit to the fund supervisor with the application to approve fund rules should be maximum harmonised at Level 1. Further details on the content of the documents to be provided should be developed on Level 2. Maximum harmonisation of the documents needed would make the fund authorisation process easier and quicker and would prevent from any discrimination against foreign management companies. If in some exceptional circumstances the fund supervisor does not want to proceed with authorising the fund despite the management company having submitted all the necessary documentation with its application, the fund supervisor should raise the issue for mediation at CESR. 4
  5. 5. 4 On-going supervision of the management of the fund We refer to our response under item 2 and believe that the proposed Art. 93 already provides a good basis for the fund supervisor to be able to conduct its supervisory duties. According to Art. 93 “Competent authorities shall be given all supervisory and investigatory powers that are necessary for the exercise of their functions. Such powers shall be exercised in any of the following ways…b) in collaboration with other authorities.” Proposed Art. 100 provides for a basis for adoption of implementing measures in this regard. We believe that CESR should analyse whether these provisions are not already adequate as Level 1 provisions. 5 Dealing with breaches of rules governing the management of the fund In IMA’s view CESR should look carefully at the proposed measures at Chapter XII. These proposals extend significantly the duties and possibilities of national regulators to cooperate. CESR should indicate what requirements, if anything, would be needed in addition for a well-functioning remote fund management. In case of any breaches of rules either regarding the fund rules or the rules impacting the management company, the two supervisors need to be able to keep each other informed so that proper supervisory action can be taken without delay. In case the breach of rules is with the remote management company, the management company supervisor must take appropriate supervisory measures when reported breaches by the fund supervisor. The supervisory measures will be the same as applied by the management company supervisor to management companies operating only domestic fund ranges, up to withdrawing the authorisation of the management company if the breaches are of that severe nature. Please do not hesitate to contact us with any queries you may have on our submission or points you would like to follow up. Yours sincerely Jarkko Syyrilä Director, International Relations 5