1 European Securities Markets Authority 103 Rue de Grenelle PARIS FRANCE Federation of the Dutch Pension Funds Prinses Margrietplantsoen BR The Hague PO Box AD The Hague The Netherlands T +31 (0) KvK Haaglanden Rabobank REFERENCE: B/12/5972/SR DATE: March 23, 2012 SUBJECT: Response to ESMA Discussion Paper Key concepts of the Alternative Regulation Investment Fund Managers Directive and types of AIFM Dear Sir/Madam, 1. Introduction On behalf of approximately 350 pension funds, the Federation of the Dutch Pension Funds promotes the pension interests of 5.6 million participants, 2.7 million pensioners and 8.3 million early leavers. About 85% of the total number of Dutch employees is participant of a pension fund which is associated with the Federation of the Dutch Pension Funds. The Federation of the Dutch Pension Funds is a cooperation between the umbrella organizations for industry-wide (VB), occupational (UvB) and company (OPF) pension funds. The present response to the discussion paper Key concepts of the Alternative Investment Fund Managers Directive and types of AIFM issued by the European Securities and Markets Authority (ESMA) on 23 February 2012, has been prepared by a joint working group of the Federation of the Dutch Pension Funds together with APG, MN, PGGM and Shell Asset Management Company B.V.. These are service providers of pension funds. APG Algemene Pensioen Groep N.V (APG) is a Netherlands based asset manager for Dutch pension funds with assets under management of approximately 285 billion as at 31 December APG is itself an indirect subsidiary of Stichting Pensioenfonds ABP, the Dutch pension fund for the government and education sector and the second largest pension fund globally. APG works for more than 20,000 employers and provides for the income of more than 4.5 million Dutch citizens managing over 30% of all collective pensions in The Netherlands.
2 B/12/5972/SR, page 2 of 11 MN is a Netherlands based asset manager for a broad variety of pension funds in The Netherlands and the United Kingdom. With assets under management of approximately 70 billion as per 31 December 2011, MN is one of the largest pension administrators and asset managers in The Netherlands. PGGM Vermogensbeheer B.V. (PGGM) is an asset manager for Dutch pension funds in the care and welfare services based in The Netherlands, with assets under management of approximately 114 billion as at 31 December PGGM is a wholly-owned subsidiary of PGGM N.V., which is 100% owned by PGGM Coöperatie U.A., a co-operative with more than half a million members. PGGM manages the pension assets of about 2.5 million Dutch citizens. Shell Asset Management Company B.V. (SAMCo) is an asset and fund management company that provides investment advice and asset management services to pension funds associated with Royal Dutch Shell worldwide. SAMCo has approximately 40 billion assets under management. 2. General remark We welcome the opportunity to respond to ESMA s discussion paper dated 23 February 2012 on -in short- certain aspects of the scope of the AIFMD. Please note that we have responded to the discussion paper primarily from an end users perspective and that our remarks stem from the fact that Dutch pension funds are very large institutional investors, acting in the interest of pensioners. 3. Key remarks Please note that in The Netherlands, the largest part of the pension funds assets is managed through investment vehicles in which multiple pension funds but only pension funds - invest. With the ongoing consolidation in the Dutch pension industry (currently numbering approximately 400 pension funds as opposed to 800 pension funds in 2009) many Dutch pension funds have, for the purposes of professional management and improved risk management, and also to benefit from economies of scale, outsourced the day-to-day management of their assets to an individual or joint service administration company (uitvoeringsorganisatie). These service administration companies are separate organizational entities, although often owned/controlled by the pension funds and/or are dedicated to operating solely for the benefit of the pension funds.
3 B/12/5972/SR, page 3 of 11 Many of said service administration companies facilitate pooling structures for pension funds in order to efficiently maximize returns from a purely operational and administrative perspective against the lowest possible costs for (ultimately) the pension beneficiaries. These asset pooling structures are not available other than within the scope of overarching individual management mandates given by the pension funds to the service administration companies and are by no means marketed to nor available for parties other than pension funds.. To avoid legal uncertainty and in order to mitigate the risk that different jurisdictions will apply different implementation measures in this respect, we would strongly support ESMA clarifying that pooling vehicles through which only pension funds assets are being managed, fall outside the scope of the AIFMD. The AIFMD does not apply to the management of pension funds and the entities responsible for such management 1. Although we trust it to speak for itself that pension funds pooling vehicles and their managers do not fall within the scope of the AIFMD, due to the fact that this is just another form of the already exempted management of pension funds assets, the wording of the AIFMD appears to be somewhat confusing in this respect. In particular, the fact that article 2(3)(b) of the AIFMD states that the AIFMD does not apply to authorised entities responsible for the management of pension funds assets insofar as they do not manage AIFs has raised a number of questions. We trust said addition to be made only for the purpose of stressing that in case managers of such pension funds pooling vehicles would also pool and manage assets of investors other than pension funds, they would nonetheless fall within the scope of the AIFMD (which we support). Moreover, article 2(3)(e) of the AIFMD intends to generally exempt the managers of such pension funds pooling or alike structures, being bodies or other institutions which manage funds supporting social security and pension systems. This can also been demonstrated by the fact that in the course of the AIFMD legislative process the word public has been deleted in this respect (compare, for instance, the Council texts dated 12 November, 2009 and 1 February, 2010). 1 Recital 8, article 2(3)(b) and article 2(3)(e) of the AIFMD.
4 B/12/5972/SR, page 4 of 11 The rationale for exclusion of pension funds under the AIFMD would call for an exemption of more modern and flexible situation such as pension pooling structures as well. If these structures would be captured by the AIFMD, the Dutch pension funds industry will be unevenly affected compared to the situation in many other EU Member States. Without an appropriate exemption for these organizations and the pooling structures, the AIFMD will lead to increased costs for the Dutch pension funds, which will ultimately be borne by the current and future pensioners. We note that we have recently seen a trend of investments, amongst which those being made by Dutch pension funds pooling vehicles, being structured by means of a joint venture. In short, this means that the pension funds pooling vehicle would partner up with one or several other market parties (typically with other institutional investors) in order to jointly create a joint venture vehicle with the sole purpose of holding one or several assets/investments. We strongly support substantiating the notion of joint ventures to the effect that (also) these types of joint venture vehicles fall outside the scope of the AIFMD. In case of such joint ventures, which may have at least certain features of an AIF, no external capital will be raised. This simply is a way of structuring the holding of a certain investment, upon the partners reaching a bilateral business agreement to that effect. This investment level should not be confused with the level of the actual AIF itself. In general, we note that the notion of raising capital should refer to raising external capital or rather to direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM. Kindly note that especially concerning the question whether or not pension funds pooling vehicles are outside the scope of the AIFMD, we consider the proposed timeframe, i.e. submission of ESMA s draft regulatory technical standards to the European Commission by the end of 2012, to be very tight. In case the managers of such Dutch pension funds pooling vehicles would, nonetheless and unexpected, be required to procure that their operations as well as those of the AIFs under their management will be AIFMD compliant they will need a significant amount of time, especially considering the scale of their operations (hundreds of billions of euros under management).
5 B/12/5972/SR, page 5 of 11 Please find below as an Annex to this letter our specific and more technical comments on certain elements of the discussion paper. We hope that our response is of assistance. Should you have any (remaining) questions or would like additional clarification, please do not hesitate to contact us. Yours sincerely, Gerard Riemen General Director
6 B/12/5972/SR, page 6 of 11 ANNEX: Specific remarks IV. Definition of AIF Q1. Do you see merit in clarifying further the notion of family office vehicles? If yes, please clarify what you believe the notion of investing the private wealth of investors without raising external capital should cover. We have no remarks in relation to the definition of family office vehicles. Q2. Do you see merit in clarifying the terms insurance contracts and joint ventures? If yes, please provide suggestions. We have no remarks in relation to the definition of insurance contracts. We strongly support clarifying the term joint ventures as to our view features of certain types of typical joint venture structures may coincide with those of an AIF (as defined in the AIFMD and further clarified in the discussion paper). An investment 2 joint venture vehicle may also have multiple stakeholders, hold assets with a view to generate returns and have an investment policy. We note that we see a trend in certain asset classes towards the holding of investments in the form of joint ventures. A very substantial part of the investments currently held by Dutch pension funds investment vehicles take such form. Typically, one of the pension funds investment vehicles in such case partners up with one or several other market parties in order to jointly establish a joint venture vehicle, with the sole purpose of (directly or indirectly) holding one or several assets/investments. The investors in the investment vehicle-partner, being the relevant Dutch pension funds, thus indirectly invest in the joint venture vehicle(s) so incorporated or established and the assets held by it/them. Let alone whether or not the investment vehicle itself, being one of the joint venture partners, qualifies as an AIF (please see our remarks in that respect above and under Q4 below), such holding joint venture vehicles should in our view most definitely not. The cooperation between the partners, including the establishment of the joint venture vehicle, qualifies as a bilateral business agreement. 2 We trust the joint venture exemption as incorporated in recital 8 to refer to investment types of joint ventures, as undertakings will by nature not fall within the scope of the AIFMD, as in that scenario no (collective) investment activities are at all performed.
7 B/12/5972/SR, page 7 of 11 No capital is being raised within the meaning of AIFMD. Please see also our remarks under Q7 below in relation to the notion of raising capital. Depositing the required funds (only) occurs if and when the joint venture partners reach an agreement to that effect. We note that, if and when the pension funds investment vehicles would qualify as AIFs, which we trust not to be the case, joint venture vehicles as outlined above would qualify as master-aifs. Under certain circumstances, the pension funds investment vehicles on the one hand and the joint venture vehicles on the other, might even qualify as master-aif/feeder-aif structures. We trust all of these consequences not to be envisaged for simple holding structures, which are based on bilateral business agreements. For this reason we suggest introducing a definition joint venture as follows: an entity that has been incorporated or established by and upon reaching a mutual business agreement to that effect between two or several joint venture partners, that themselves capitalize such entity without raising any external capital. Q3. Do you see merit in elaborating further on the characteristics of holding companies, based on the definition provided by Article 4(1)(o) of the AIFMD? If yes, please provide suggestions. We have no remarks in this respect. Q4. Do you see merit in clarifying further the notion of any of the other exclusions and exemptions mentioned above in this section? If yes, please explain which other exclusions and exemptions should be further clarified and provide suggestions. As indicated in our cover note, it is vital to the Dutch pension fund industry to clarify that any type of investment vehicle through which the assets of pension funds are managed (and invested) do not fall within the scope of the AIFMD. Although we trust this to be intended considering the wording of recital 8 and articles 2(3)(b) and (e) of the AIFMD, this should be made more explicit to avoid confusion on the financial markets as well as amongst jurisdictions / supervisory authorities.
8 B/12/5972/SR, page 8 of 11 Q5. Do you agree with the orientations set out above on the content of the criteria extracted from the definition of AIF? Taking into account our below remarks, we agree to the orientations set out as such. Q6. Do you have any alternative/additional suggestions on the content of these criteria? Please see our remarks below. Q7. Do you agree with the details provided above on the notion of raising capital? If not, please provide explanations and an alternative solution. We believe the notion of raising capital to be somewhat confusing since from a legal point of view capital will always be raised one way or the other to procure that the required funds (or assets, as the case may be) are deposited into the relevant vehicle. We think that ESMA is right in stating that in order to qualify as an AIF capital will have to be raised externally. We trust it to be important to establish what will be deemed to qualify as external capital. To our view, it should be clear that in case 1) parties agree to deposit funds or assets by means of a mutual business agreement and 2) such without inviting a larger group of (potential) participants to that effect without knowing upfront who will in the end participate, such should not be deemed to be capital that has been externally raised. For example, joint venture type of structures (please see our remarks in respect of joint venture structures above) should not qualify as AIFs for the same reasons and should thus fall outside the scope of the AIFMD. The explanation as presented under (26) of the discussion paper, to us seems to apply to any type of structure, since there will always be some form of communication between shareholders / participants and the relevant vehicle in order to procure that it becomes capitalized. It should be considered to amend this notion so as to apply to the raising of external capital only (defining such term as outlined above). Alternatively, it could be considered to further substantiate the notion of raising capital by linking this to marketing activities, as have already been identified and defined in the AIFMD, i.e. to direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM. Such marketing activities would then not only be relevant in the view of the licensing requirement, but could then also serve as one of the criteria to establish whether or not an entity qualifies as an AIF.
9 B/12/5972/SR, page 9 of 11 Q8. Do you consider that any co-investment of the manager should be taken into account when determining whether or not an entity raises capital from a number of investors? We strongly feel that any co-investments of managers, including or as well as 1) general partners of limited partnerships and managers of Dutch FGRs (please see our answer to Q9 below for information on Dutch FGRs), insofar as they would not qualify as the relevant fund s AIFM and 2) all of such entities (carried interest) vehicles through which the co-investments are being held, should be excluded from the notion of the number of investors. These parties should not be considered as being market participants, but rather as forming a part of the AIF structure itself and simply as a way of structuring the management arrangements involved. We stress that in case these entities would be counted as investors, many of our much used intermediate investment holding structures would all of a sudden qualify as AIFs, which may very well result in management participations no longer being structured as such. The reason for this is that the entity will then often only have one (remaining) investor and not qualify as an AIF. The side effect hereof will, however, be that there will be less management alignment, which will be detrimental for the ultimate investors. Q9. Do you agree with the analysis on the ownership of the underlying assets in an AIF? Do other ownership structures exist in your jurisdiction? Generally, we agree with the ownership analysis. We note that the underlying assets as referred to in the discussion paper will generally be held through some form of an investment holding structure. Merely for information purposes, we additionally note that the largest part of the Dutch pension funds investment vehicles take the form of a fonds voor gemene rekening (FGR), being a mutual fund comparable to the Luxembourg fonds commun de placement. An FGR does not have legal personality; it is basically a contractual arrangement between the FGR s manager, depositary and any of its investors. The legal ownership of the assets of FGRs are, given the absence of legal personality of the FGR itself, held by a special purpose vehicle that takes the form of a Dutch foundation (stichting). Such foundation is typically called the fund s depositary, which should not be confused with the depositary within the meaning of AIFMD. An FGR also has a manager in place. Q10. Do you agree with the analysis on the absence of any investor discretion or control of the underlying assets in an AIF? If not, please explain why. We have no remarks in this respect.
10 B/12/5972/SR, page 10 of 11 Q11. Do you agree with the proposed definition of open-ended funds in paragraph 41? In particular, do you agree that funds offering the ability to repurchase or redeem their units at less than an annual frequency should be considered as closed-ended? We agree with the concept of a fund with less than annual redemption options qualifying as closed-ended We do stress that it should be added that such (less than annual or otherwise) redemptions occur at the request of the investor. We note that closed-ended AIFs may have very limited (or even non-existent during the fund s term) redemption facilities, while they may facilitate, under certain conditions and always at the manager s sole and full discretion, redemption possibilities upon the manager s initiative/request. Such redemption options may have different causes, which are identified in the terms and conditions and serve the investors interests (for instance in case of dissolved or defaulting participants or in order to facilitate matched redemptions and subsequent issues)... Q12. Do you see merit in clarifying further the other concepts mentioned in paragraph 37 above? If so, please provide suggestions. It would be meaningful to have the term significant in size further substantiated in terms of actual quantitative criteria. In relation to substantial leverage, the concept of proportionality should be duly taken into account. In our view, there should be no disclosure obligations to the supervisory authorities at all, when the degree of leverage employed within an AIF cannot be deemed to contribute to the build-up of systemic risks. Also, it should be made clear that (a) any temporarily / short term borrowings or credit facilities as well as (b) leverage for cash management purposes only, as opposed to for the purpose of leveraging investments, will not prevent a closed-ended AIF to qualify as an unleveraged closed-ended AIF within the meaning of article 16 of the AIFMD. In relation to an AIF being internally or externally managed, kindly take note of the Dutch FGR type of investment vehicles as we have outlined in our answer to Q9 above. We trust such an FGR to qualify as a legal form that does not permit internal management (as referred to in article 5(1)(b) and recital 20 of the AIFMD).
11 B/12/5972/SR, page 11 of 11 We have no remarks in relation to the concept of contracts with a prime broker. VI. Treatment of UCITS management companies Q13. Do you agree with the above analysis? If not, please provide explanations. We agree with the analysis and strongly support an AIFM also being authorised to hold a UCITS license / passport. VII. Treatment of MiFID firms and Credit Institutions Q14. Do you agree with the above analysis? If not, please provide explanations. No, we think that a MiFID firm should also be able to obtain an AIFMD license, particularly taking into account that an AIFM is allowed to provide investment services such as individual portfolio management to AIFs. In addition, we would support clarification of the fact that article 6 (4)(a) of the AIFMD refers to individual management of portfolios of investments (including those of pension funds). We note that such terminology has also been used in article 6(8) of the AIFMD.