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AQMetrics Regulatory Round-up: March-April 2020


Welcome to AQMetrics regulatory round-up, a monthly initiative that keeps readers abreast of all the latest regulatory news and events.


Following a busy start to the year, regulators are being forced to grapple with the COVID-19 crisis, with many investment managers impacted by the unprecedented lockdown.Initially, at least, regulators were quick to say that they expect regulated firms to meet all existing regulations. Yet in recent weeks regulators have provided some targeted relief measures, with ESMA, SEC, FCA, CSSF and CFTC relaxing a selection of reporting deadlines.Regulators are aware that the confinement measures taken by Member States to prevent COVID-19 contagion present significant difficulties and operational challenges, therefore a risk-based approach has beenrecommended, with national competent authorities advised not to prioritise supervisory actions against these market participants affected.Although COVID-19 continues to dominate headlines,regulators are also proceeding with previously signposted changes.ESMA is considering leverage limits for AIFs, the FCA is set to roll out its Gabriel reporting replacement, and the CBI warned asset managers to continue to make cyber security a top priority.


COVID-19 responses

Early March, Regulators target operational resilience

  • As much of the world went into lockdown,financial regulatorswere quick to reiterate that they expect firms’ to have risk management procedures and contingency plans in place and that they also expect firms to take all reasonable steps to meet their regulatory requirements.
  • All major regulators’ came out with statements, and most have set up hubs on their website dealing with the fallout from COVID-19. And while some relief measures have been announced, these measures are temporary in nature, and the vast majority of financial regulations still apply.


11 March, ESMA releases COVID-19 recommendations

  • The European Securities and Markets Authority (ESMA) also provided a number ofrecommendationsfor market participants, including measures around business continuity, market disclosure, financial reporting and fund management.
  • ‘All financial market participants, including infrastructures should be ready to apply their contingency plans, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations,’ they said. ‘Asset managers should continue to apply the requirements on risk management, and react accordingly.’


20 March, CFTC provides reporting relief

  • The US commodity futures trading commission (CFTC)unveileda number of no-action measures aimed at providing temporary relief for commodity pool operators (CPOs).
  • The measures, which include extending filing deadlines for CPOs facing compliance challenges, are part of nearly a dozen actions the CFTC has rolled out in response to the COVID-19 crisis.


23 March, SEC offers funding relief to mutual funds facing redemptions

  • In anextraordinary move, the Securities and Exchange Commission (SEC) allowed mutual funds facing market stress to tap their parent asset management companies and other affiliates for funding. The move will provide flexibility for firms until at least 30 June, and should give the nearly $20 trillion mutual fund industry a vital tool to deal with large redemptive shocks.
  • That closely mirrors 2008 SEC relief measures that allowed asset managers to inject money into money market mutual funds, as a bank run looked imminent during the credit crunch. Mutual funds suffered some of their heaviest ever outflows in mid-March, with corporate bonds particularly hard, but have since recovered as the Federal Reserve has rolled out more than half a dozen different facilities aimed at stabilising markets.
  • You can read AQMetrics latest whitepaper on fund liquidity risks, and the regulatory response.


23 March, CSSF offers reporting relief

  • As the COVID-19 fallout continued, the Commission de Surveillance du Secteur Financier (CSSF) and SEC followed in the footsteps of the CFTC in offering reporting relief measures.
  • On 23 March, Luxembourg’sfinancial regulatorsaid it expects firms to uphold their reporting and regulatory requirements during the COVID-19 crisis, but those whose operations have been majorly affected may be offered some leeway if reporting delays are duly justified.
  • But it added that firms’ experiencing major difficulties in reporting, because of staff working remotely without full access to the system, for example, should contact the CSSF immediately through their usual channels and ahead of reporting deadlines.


25 March, SEC extends reporting relief

  • N-CEN or N-PORT forms under the Investment Company Act may now be filed on 30 June, theSEC saidon 25 March.
  • Annual and semi-annual reports are also due on 30 June, while close-ended investment companies have until 15 August to file their Form N-23C-2.


4 April, FCA clarifies senior manager expectations

  • The FCAoutlinedits expectations of senior managers during the COVID-19 crisis. According to the regulator, senior managers performing required functions such as compliance oversight should only be furloughed as a last resort. Where there is a temporary replacement, however, firms can use the 12-week rule.


6 April, FCA offers temporary reporting relief

  • The FCA has also offered sometemporary relief to affected firms, including a two month reprieve for annual reports of authorised fundmanagers (AFMs) of UK UCITS schemes and non-UCITS retail schemes (NURS). Half yearly reports were given a one month reprieve.
  • The FCA added that: ‘We expect firms to contact us, when appropriate, to communicate issues of material concern under Principle 11. AFMs are expected to work closely with their depositaries and ensure that decisions are made in line with good standards of governance.’


9 April, ESMA also offers temporary reporting relief

  • ESMA became one of the final regulators offeringtemporaryregulatory relief. The relief covers UCITS management companies and authorised AIFMs that may be affected by the ongoing COVID-19 crisis.
  • Funds with a December year-end will have an extra two months to publish annual reports, with an extra month for half-yearly updates. Affected firms are expected to inform their National Conduct Authorities, as well as informing investors about the delay, the reason for the delay, and the new estimated publication date.


Non-COVID-19 Regulatory Communications

10 March, CBI warns asset managers on cyber security

  • The Central Bank of Ireland (CBI) warned in anindustry letterthat asset managers must bolster their cybersecurity systems, with many making little progress in recent years. After a series of on-site visits, the regular said senior management must now make cybersecurity a top priority.
  • ‘While the Inspection identified that some firms have made good progress in strengthening their resilience to a cyber-attack in certain areas, we are of the view that cybersecurity is a practice that remains underdeveloped in the asset management industry,’ remarked Michael Hodson, Director of Asset Management and Investment Banking Supervision, in the letter.


26 March, FCA readies Gabriel replacement

  • The Financial Conduct Authority (FCA) said that it is pushing ahead with itsplans to replace Gabriel, the FCA’s main regulatory data collection system, which facilitates the collection of some 500,000 submissions across 52,000 firms annually.
  • The watchdog revealed in an email that: ‘From 2 April we will be asking firms to register for our new data collection platform the next time they log into Gabriel. The new platform will require the same login details that firms use for Connect.’
  • The new system has yet to be rolled out just yet, although the FCA added that ‘we will notify firms in good time in advance of their moving date.’


27 March, ESMA considers leverage in alternative funds

  • ESMAannouncedthat it was consulting on whether to introduce leverage limits for Alternative Investment Fund (AIF) managers, such as hedge funds and private equity.
  • As it stands, AIFs can employ financial and derivatives leverage, but synthetic derivatives are not recorded on the balance sheet – making it difficult for regulators and national competent authorities (NCAs) to assess company and systematic risks.
  • Regulators have thus far stopped short of imposing limits since AIFMD was introduced in 2014. That could be about to change, though, with the consultation suggesting regulators could impose leverage limits on funds or groups that pose a risk to financial stability. Under the proposals, AIFs with over €500m regulatory AUM employing leverage of any kind will also be identified by NCAs, and could also find themselves facing tougher scrutiny or leverage limits.


31 March, FCA publishes Dear CEO Letter on retail investors

  • The FCA published aDear CEO letterdiscussing their updates to firms providing services to retail investors. The letter deals with its ongoing regulatory approach, including acting on firm or trade association requests, as well as best execution and financial resilience.
  • The FCA also provided a helpful policy workstream for the future, including implementation deadlines for a number of initiatives.


3 April, ESMA publishes final guidance on performances fees

  • ESMApublished itsfinal guidanceon performance fees of UCITS and open-ended AIFs in a bid to ensure a ‘level playing field and a consistent level of protection to retail investors,’ the European regulator said.
  • According to ESMA, the new guidelines will harmonise the way fund managers charge performance fees as well as the circumstances in which they can be applied, as regulators continue to heavily scrutinise the fees managers are charging retail investors.
  • Before the latest guidelines, for instance, an ESMA survey showed that there was no consistency when it came to selecting a benchmark or index across 14 jurisdictions, which can lead to inconsistencies, easier out-performance, and regulatory arbitrage by investment firms.


7 April, FCA sets out priorities for 2020

  • The FCA set out itsbusiness prioritiesfor the year ahead – with specific focus on the challenges presented by the COVID-19 pandemic.
  • Of particular note is the fact that the FCA has delayed many planned activities where they judge that it is not urgent and may distract firms from their immediate priorities.While it’s unclear which non-essential items will get delayed, the regulator said that it was reviewing its work plans and will ‘delay activity which is not critical to protecting consumers and market integrity in the short-term, allowing firms to focus on supporting their customers during this time‘
  • The FCA also outlined five key priorities for the next 1-3 years. These include:
  1. Transforming how they work and regulate
  2. Enabling effective consumer investment decisions
  3. Ensuring credit markets work well
  4. Making payments safe and accessible
  5. Delivering fair value in a digital age.