In this issue we consider ESMA’s final guidance on performance fees in UCITS and retail AIFs, the recently enacted Shareholders’ Rights Regulations and the Central Bank’s extension of certain filing deadlines for funds and fund management companies. Also included are updates on AML, sustainable finance, the Central Bank’s expectations on cybersecurity, as well as some consultations of interest including the UK Treasury’s on a post-Brexit regime for overseas retail funds.

If you would like to discuss any of the topics covered, please feel free to contact a member of our team.

Performance Fees: ESMA Publishes its Final Guidelines

ESMA has published its final guidance (“Guidelines”) on performance fees in UCITS and certain open-ended retail AIFs. The Guidelines will apply to fund managers (including self-managed investment companies) and national regulators and provide for common criteria to promote supervisory convergence in the following five areas:

  1. Performance Fee Calculation Method;
  2. Consistency between the performance fee model and the fund’s investment objectives, strategy and policy;
  3. Frequency of performance fee crystallisation and payment;
  4. The circumstances in which a performance fee should be payable; and
  5. Disclosure of the performance fee model.

ESMA consulted on the proposals in July 2019 and the final Guidelines contain additional guidance and clarifications, including:

  • that there should be consistency between the performance fee model and the fund’s investment objectives, strategy and policy;
  • that the fund manager must be able to demonstrate how the performance fee model provides a reasonable incentive for the manager and is aligned with investors’ interests;
  • that the performance fee calculation should be verifiable and not open to the possibility of manipulation;
  • certain minimum elements that should be included in the performance fee calculation model, and which must also be disclosed in the prospectus. These include the reference indicator used to measure the relative performance of the fund, the crystallisation period and date, the performance reference period, the performance fee rate, the performance methodology and the computation frequency;
  • that performance fees may be calculated on a single investor basis;
  • that the fund manager establish and maintain a process to demonstrate and periodically review that the performance fee model is consistent with the fund’s investment objectives, strategy and policy;
  • specific requirements when a fund is managed in reference to a benchmark around:
    • consistency with the fund’s investment objectives, strategy and policy;

    • negative performance recovery; and

    • disclosures.

  • confirmation of an annual crystallisation frequency;
  • the exclusion of certain performance fee models, including the fulcrum fee model from the annual crystallisation frequency requirement; and
  • that a performance fee may be payable where a fund outperforms a benchmark, but has had a negative overall performance. This guideline (Guideline 4) also provides for the setting of a performance reference period equal to at least five years on a rolling basis where the High Water-mark model is used, and at least five years where a benchmark model is used, where, in both cases, the performance reference period is shorter than the whole life of the fund.

Disclosure requirements

The Guidelines include the following disclosure requirements:

  • the main elements of the performance fee calculation method (as set out in Guideline 1) should be indicated in the prospectus;
  • an explanation as to the choice of benchmark should be included in the prospectus where the fund is managed in reference to a benchmark and calculates its performance fee based on a different but consistent benchmark. Consistency indicators are included in the Guidelines and include:
    • expected return;
    • investment universe;
    • geographical exposure;
    • sector exposure;
    • liquidity measures; and
    • duration;
  • the inclusion of a prominent warning in the KIID if a fund allows for a performance fee to be paid in times of negative performance;
  • the periodic reports of the UCITS and any other ex-post information (such as marketing materials) should indicate, for each relevant share class, the impact of the fees over the crystallisation period, by clearly displaying:
    • the actual amount of performance fees charged; and
    • the performance fees expressed as a percentage of the share class NAV.

The Guidelines will apply two months following the date of their publication on ESMA’s website in all EU official languages. The requirements will apply immediately to any new funds established from this date. Fund managers already operating performance fees at that date will have to comply with the Guidelines by the beginning of the financial year following six months from the application date.

Many of ESMA’s requirements are provided for to some extent in the Central Bank UCITS Regulations 2019 (the “Regulations”), which codified the Central Bank’s former guidance on performance fees and introduced a minimum annual crystallisation frequency. However, as the Guidelines are more prescriptive in certain respects, such as calculation methodologies and disclosure requirements, than the Regulations, it remains to be seen whether the Central Bank will amend the Regulations to include additional requirements on foot of the ESMA guidance.

Further, those funds that were operating a performance fee model prior to the date the Regulations took effect (27 May 2019) should note that the grandfathering period within which to comply with the Central Bank’s performance fee requirements will end on 27 November 2020. Therefore, funds in scope and their management companies should review their performance fee arrangements to ensure compliance with both the Central Bank’s and ESMA’s requirements.

Periodic Filings: Central Bank Announces Flexibility Measures

In light of the challenges that the current COVID-19 restrictions may pose for investment funds and fund management companies in preparing and submitting their periodic reports within the prescribed regulatory timeframes, ESMA requested that national regulators exercise regulatory forbearance, where possible, regarding these deadlines. The Central Bank subsequently confirmed that it would be allowing investment funds and fund service providers some flexibility around the filing of their periodic reports and other scheduled regulatory returns. For more information, please see our more detailed briefing.

Revised Shareholders’ Rights Directive Transposed

The European Union (Shareholders’ Rights) Regulations 2020 (“Regulations”), which transpose the Revised Shareholder Rights Directive (“SRD II”) into Irish law were published on 20 March 2020 and apply from 30 March 2020. The transposition deadline was 10 June 2019 and so the enactment of the Regulations was significantly delayed.

The Regulations apply to asset managers, which includes AIFMs, UCITS management companies and UCITS self-managed funds, that invest in shares traded on an EU regulated market on behalf of investors, but only in respect of certain disclosure and transparency requirements. Investment funds were exempted from the requirements of the Shareholders Rights Directive (“SRD I”) and this exemption from the broader provisions of SRD I (as amended by SRD II) has been retained.

In summary, the Regulations require asset managers to:

  • adopt on a “comply or explain” basis, an engagement policy describing how the asset manager integrates shareholder engagement into its investment strategy when it or its funds under management are shareholders in EU investee companies. If an asset manager has decided not to adopt an engagement policy it must publish an explanation on its website as to why the decision not to have such a policy is appropriate;
  • disclose on an annual basis:
    • how the policy has been implemented; and
    • how it has cast votes in the general meetings of EU investee companies.
  • Where an asset manager does not, in a given year, publicly disclose how its engagement policy has been implemented it must publicly disclose a clear and reasoned explanation for its failure to do so; and
  • where an asset manager invests on behalf of institutional investors (which include EU life assurance companies and pension funds), the institutional investor must disclose certain details of its arrangements with the relevant asset manager.

Additionally, under SRD II Member States were given discretion to include provisions requiring asset managers to:

  • include the information that must be disclosed to an institutional investor in the asset manager’s periodic reports; and
  • provide the information an asset manager must disclose to an institutional investor to other investors in the fund, at least upon request.

These provisions have not been included in the Regulations.

Cybersecurity Management: Central Bank Outlines its Expectations for Firms

The Central Bank issued an industry letter following its thematic inspection of asset management firms, which included investment firms and fund service providers, to determine the adequacy of cybersecurity risk management, controls and practices. The letter details the Central Bank’s findings and expectations and all firms should review these findings and, where necessary, take steps to remediate any identified issues or weaknesses in their cybersecurity risk management practices. The industry letter must be brought to the attention of boards and senior management before 30 April 2020.

The Central Bank’s thematic inspection covered: cybersecurity risk governance; cybersecurity risk management frameworks; and certain technical controls for mitigating cybersecurity risk. The Central Bank notes that while some good progress has been made in certain areas, many of the weaknesses highlighted in the Central Bank’s 2016 Cross Industry Guidance on IT and cybersecurity risks still prevail. The Central Bank has concerns about whether the arrangements that are in place in firms to oversee all cybersecurity risks are adequate. In our more detailed briefing we consider the issues identified and the Central Bank’s expectations for effective cybersecurity risk management and what this means for fund management companies.

Beneficial Ownership: Central Bank to Maintain Central Register of ICAVs and Unit Trust Funds

On 6 March 2020, the Central Bank confirmed to Irish Funds (the industry body for the Irish funds sector) that it will maintain the central public register of beneficial ownership of ICAVs and funds established as unit trusts. It is expected that the legislation assigning responsibility to the Central Bank to maintain this central register will be introduced during Q2 2020. The Central Bank is finalising its arrangements to implement this register, which includes setting up a dedicated area on the Central Bank website containing:

  • general information on the register;
  • FAQs in relation to the register and how entities can submit the required information; and
  • secure return upload facility for entities to submit their information.

Once the legislation in introduced, entities will have five months within which to submit the relevant information to the Central Bank. The information will then be publicly available in the central register after this lead-in period.

Sustainable Finance: European Council Adopts Taxonomy Regulation

On 15 April, the European Council adopted at first reading (and by written procedure) a regulation setting out an EU-wide classification system, or “taxonomy”, which will provide businesses and investors with a common language to identify those economic activities that are considered environmentally sustainable.

The framework will be based on six EU environmental objectives:

  • climate change mitigation;
  • climate change adaptation;
  • sustainable use and protection of water and marine resources;
  • transition to a circular economy;
  • pollution prevention and control; and
  • protection and restauration of biodiversity and ecosystems.

The taxonomy for climate change mitigation and climate change adaptation should be established by the end of 2020 in order to ensure its full application by end of 2021. For the four other objectives, the taxonomy should be established by the end of 2021 for application by the end of 2022.

Once the regulation is adopted by the European Parliament, it will be published in the Official Journal and enter into force.

The taxonomy should prove very helpful for investment funds wishing to develop sustainable products or pursue ESG-related strategies.


Open consultations of interest include:

UK Treasury Consults on a post-Brexit “Overseas Funds Regime”

The UK Treasury is consulting on a proposal for a more streamlined regime for overseas funds, including EU UCITS and money market funds (“MMFs”), to be known as the overseas funds regime (“OFR”).

The proposed OFR will introduce two new regimes based on the principle of equivalence: one for retail investment funds and the other for MMFs. It will enable the UK Treasury to grant equivalence to a country or territory and to allow streamlined access to marketing in the UK. The regime for retail funds will include the possibility to apply additional requirements to funds from equivalent countries.

Section 272 of Financial Services and Markets Act 2000 will not be repealed but will continue to be available for individual funds that are not eligible to be recognised through the OFR because they are not covered by an equivalence determination for retail investment funds. It is proposed to make some minor amendments to section 272 to make it more efficient for both industry and the FCA.

The consultation will close on 11 May 2020.

ESMA Consults on Guidance to Address Leverage Risk in the AIF Sector

ESMA has published a consultation (27 March) on its draft guidance to address leverage risks in the AIF sector. The consultation is part of the ESMA response to the recommendations of the European Systemic Risk Board in April 2018 to address liquidity and leverage risk in investment funds.

The draft guidelines are issued under Article 25 of AIFMD and aim to promote supervisory convergence in the way National Competent Authorities (NCAs) assess how the use of leverage within the AIF sector contributes to the build-up of systemic risk in the financial system, as well as how they design, calibrate and implement leverage limits.

The guidelines will apply to NCAs and focus on:

  • how the leverage-related systemic risk assessment should be conducted; and
  • when leverage limits might be imposed.

The consultation will close on 1 September 2020.

Cross-border distribution: ESMA Consultation on Regulators’ Standardised Information Requirements

ESMA has issued a consultation (31 March) on the standard forms, templates, and procedures that national regulators should use to publish information on their websites to facilitate cross-border distribution of funds.

In particular, the standard information should cover:

  • national laws, regulations and administrative provisions governing marketing requirements for AIFs and UCITS and the summaries thereof; and
  • any regulatory fees and charges they levy for carrying out their duties in relation to the cross-border activities of fund managers.

The consultation will close on 30 June 2020 with a view to finalising the implementing technical standards for submission to the European Commission by 2 February 2021.

For more information on the forthcoming changes to the cross-border distribution regime under AIFMD and the UCITS Directive, please see our previous briefing.

ESMA Extends Money Market Funds Reporting Deadline

On 31 March, ESMA announced that it would be extending the deadline for submission of the first reports due by Money Market Funds (MMF) managers under the MMF Regulation to September 2020. These reports were originally due in April. This change in timeline is due to required enhancements to the reporting templates and MMF managers will need additional time to comply with the reporting obligation.

As previously reported, the Central Bank had already announced a deferral of its April deadline to July 2020 and in light of ESMA’s announcement may extend this deadline further.