ESMA Issues Warning on Sharing Investment Recommendations on Social Media

The European Securities & Markets Authority (ESMA) issued a cautionary statement on 6 February 2024 regarding the posting of investment recommendations on social media platforms. It highlighted the requirements set out by the Market Abuse Regulation (MAR) which aims to improve investor protection and market integrity, emphasising how failure to comply with the requirements can result in administrative and criminal sanctions.

Investment Recommendation

An investment recommendation is defined quite extensively by the MAR framework, though it can be summarised as the use of any form of public communication such as social media to:

• Provide direct or indirect advice regarding the purchase or sale of a financial instrument, or how to compose a portfolio of financial instruments.

• Express an opinion on the future price of a share or any other financial instrument.

General MAR Requirements

Individuals must ensure their investment recommendation:

• Specifies the identities of the investment producers:

  • Names, job titles of all individuals involved, and the date and time of the recommendation.

• Guarantees an unbiased presentation of investment advice:

  • Distinguishing facts from interpretations, estimates, and opinions. Verifies the reliability of all information sources and clearly indicates any uncertainties.

• Transparently discloses any conflicts of interest for investor awareness.

Risks

Sharing investment recommendations on social media platforms poses risks associated to market abuse such as:

• Unlawful disclosure of confidential information.

• Insider dealing arising when an individual utilises confidential information to buy or sell financial instruments related to that information.

• Market manipulation due to provision of inaccurate or deceptive information about the value, demand, and supply of a financial instrument.

Press Release: https://www.esma.europa.eu/press-news/esma-news/requirements-when-posting-investments-recommendations-social-media

ESMA Monitoring of EU AIFs Increases

On 30 January 2024 the European Securities & Markets Authority (ESMA) published their findings regarding the risks that leveraged Alternative Investment Funds (AIFs) pose within the EU. In particular, the findings highlighted the risks of real estate funds in jurisdictions where circumstances of declining prices and volume of transactions are prominent. Such revelations have led ESMA to notably increase their monitoring of these AIFS with the aim of better managing these risks.

Real Estate Funds: Key Finding

The assessment revealed that due to the large share of open-ended real estate funds which offer daily or recurrent redemptions to investors, existing liquidity mismatches are often amplified. Hence jurisdictions where this type of real estate funds hold the greatest proportion of the market are considerably more vulnerable to such risks, one example being Austria which was found to have an average liquidity mismatch of 82% of NAV within one week, which was correlated to the fact that most Austrian real estate funds are open ended.

Overall Sector Findings:

• Decline in value of alternatives sector mainly caused by valuation losses experienced during unpropitious market developments in 2022, in particular for funds exposed to equities and bonds.

• Various risks faced by real estate funds associated with market footprint, leverage, valuation discrepancies and liquidity mismatches.

• Potential risk of market impact due to high leverage of hedge funds.

• Liability Driven Investment (LDI) funds which acquire leveraged exposures to the UK government bond market have demonstrated consistent heightened levels of risk, as reported by national competent authorities.

Press Release: https://www.esma.europa.eu/press-news/esma-news/esma-steps-its-monitoring-eu-alternative-investment-funds-and-sees-potential

SEC Modernises Beneficial Ownership Reporting Rules

On 10 October 2023, revisions to Schedule 13D and 13G were adopted by the Securities and Exchange Commission. These are filing sections of the Exchange Act applicable to investors who hold over five percent beneficial ownership of covered class equity securities. The modifications are centred around the aim of keeping up with modern fast-paced markets, by lowering information irregularities and allowing investors to receive information in a timely manner. The amendments will come into effect on 5 February 2024. They include:

Both Schedule 13D & 13G Filers:

• Filing time deadline extended from 5:30 pm to 10:00 pm (Eastern time).

• Filings must use a machine-readable and structured data language.

Schedule 13D Filers:

• Initial filing deadline reduced from 10 days to 5 business days.

• Item 6 of Schedule 13D disclosure requirements revised, to clarify that a person utilising the issuer’s equity security as a reference security, is now required to disclose interests in all derivative securities.

Schedule 13G Filers:

• Passive Investors:  initial filing deadline reduced from 10 days to 5 business days.

• Qualified Institutional Investors & Exempt Investors: initial filing deadline reduced from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter.

• Material changes required to be filed 45 days after the calendar quarter in which it occurred, rather than 45 days after the calendar year end.

• Qualified Institutional Investors & Passive Investors:  if their beneficial ownership surpasses 10 percent or changes by 5 percent (increase or decrease), reporting obligations are increased.  

Press Release: https://www.sec.gov/news/press-release/2023-219

SEC Adopts Final Rule for Private Fund Advisers

The Securities & Exchange Commission adopted its final rule on 23 August 2023 regarding revisions to the Investment Advisers Act of 1940 (Advisers Act). The enhanced regulation for private fund advisors aims to increase transparency and competition, thus protecting private fund investors and improving the efficiency of private fund markets. There has also been a key revision in the compliance rule, applicable to all registered advisors, to perform a written annual review regarding their compliance procedures and policies. The main rules for private fund advisors include:

All Private Fund Advisors:

• Restrictions in granting preferential treatment that can have a harmful impact on certain investors (unless disclosures provided or investor permission given).

• Restrictions to engagement in activities that are not within public interest or can harm investors (unless disclosures provided).

Registered Private Fund Advisors:

• A quarterly statement must be provided to private fund investors disclosing information such as performance, fees and the costs to invest in the fund.

• Private funds must undertake an audit for their financial statements.

• In relation to adviser-led secondary transactions, private fund advisors must acquire a valuation/fairness opinion.

 Press Release: https://www.sec.gov/news/press-release/2023-155

EU Reaches Provisional Agreement on New Rules for AIFMD & Framework for UCITS

The Council and European Parliament reached a provisional agreement on 20 July 2023 regarding revisions to rules in the Alternative Investment Fund Managers Directive, the regulatory framework that applies to private equity, hedge, real estate, and private debt funds, as well as amendments to the framework for Undertakings for Collective Investment in Transferable Securities. The agreement is based upon the EU’s aim of facilitating the easy flow of savings and investments across all member states. It awaits formal approval by Parliament and Council before its adoption.

These new provisional requirements will aid European fund managers to work through times of financial turbulence and to better manage risk. For instance, under the agreement, there will be a rise in the obtainability of liquidity management tools, as well as new measures to help detect undue costs. Other key revisions include:

• Disclosure

  • Increased disclosure regarding investments with private funds in non-EU countries, such as the United States and United Kingdom.

• Loans

  • Requirement for new issued loans to be held by the originating company and money must be kept aside to help manage liquidity demands in markets with financial instability.

• Leverage Limits

  • Limits on leverage and debt levels to be set for funds which issue loans.

Press Release:

https://www.consilium.europa.eu/en/press/press-releases/2023/07/20/capital-markets-union-provisional-agreement-reached-on-alternative-investment-fund-managers-directive-and-plain-vanilla-eu-investment-funds/

SEC RELEASES FINAL FORM PF AMENDMENTS

The Securities and Exchange Commission have adopted their Final Rule for enhancements of the Form PF reporting requirement. The new rules confirm much of what the SEC proposed in August 2022, with some important revisions in particular around the content and timing of the event-triggered current reports:

• Large Hedge Fund Advisors will need to submit a Section 5 return within 72 hours of any of these triggering events with respect to their qualifying funds:

  • Extraordinary Investment Losses

  • Significant Margin and Default Events

  • Termination or Material Restriction of Prime Broker Relationship

  • Operational events

  • Events relating to Withdrawal and Redemption Requests

• Private Equity Fund Advisors in scope for Form PF will need to submit Section 6 within 60 days of any fiscal quarter end in which either of their triggering events occur:

  • Adviser-Led Secondary Transactions

  • Removal of General Partner or Election to Terminate the Investment Period or Fund

Full SEC press release and Final Rule are available at https://www.sec.gov/news/press-release/2023-86

ESMA RELEASES NEW Q&As

The full Q&As are available from the ESMA website:

https://www.esma.europa.eu/press-news/esma-news/new-qas-available-5

ESMA CONSULTS ON NOTIFICATIONS FOR CROSS-BORDER MARKETING AND MANAGEMENT OF FUNDS

The full report is available here:

https://www.esma.europa.eu/press-news/esma-news/esma-consults-notifications-cross-border-marketing-and-management-funds

FCA FINALISES THE PRIIPS REGULATIONS

The full article available from the FCA website:

https://www.fca.org.uk/news/news-stories/fca-confirms-priips-regulations

FCA TO DISCUSS THE USE OF 'SIDE POCKETS' FOR RETAIL FUNDS WITH EXPOSURE TO SANCTIONED AND SUSPENDED RUSSIAN ASSETS

The full statement available from the FCA website:

https://www.fca.org.uk/news/statements/fca-consult-use-side-pockets-retail-funds-exposure-sanctioned-and-suspended-russian-assets