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EFAMA’s Views on the European Commission’s legislative proposal for a Directive amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and

Directive 2013/34/EU as regards certain elements of the corporate governance statement – ‘Revision Shareholders’ Rights Directive’

Introduction:

EFAMA1 welcomes the European Commission’s (‘Commission’) revision of the Shareholders’

Rights Directive (SRD II), published on 9 April 2014. Fostering good corporate governance of

listed companies and encouraging shareholder engagement is an essential part of the

European economy’s long-term financing. EFAMA agrees with the Commission that alignment

of interests between asset managers, investors and companies is crucial in securing long-term

strategies, which in turn will encourage long-term financing and growth in the EU.

EFAMA, as the representative body of the asset management industry in Europe, would like to

underline the fiduciary role of asset managers’ vis-à-vis their clients. They act as fiduciaries to

achieve the best long-term economic interests of their institutional and retail clients. As agents

for their clients, asset managers are bound by a mandate, where they act on behalf of their

clients and upon clients’ instructions. Investment strategies, both long-term and short-term,

are taken by the client – represented as the ‘institutional investor’ in the proposal – who will

then instruct the asset manager. While we support the policy objectives of the Commission’s

proposal, we disagree with the Commission’s assertion that asset managers are inherently

short-termist.

Asset managers take their shareholders’ role seriously and many actively engage with the

companies in which they are invested. An illustration of this commitment is the EFAMA Code

for External Governance2, which sets out a framework of high‐level principles and best practice

recommendations for engagement between Investment Management Companies and the

companies in which they invest. The engagement of one or more shareholder can affect

changes in the companies’ governance which are to the benefit of the other shareholders. As

1 EFAMA is the representative association for the European investment management industry. EFAMA represents

through its 27 member associations and 63 corporate members almost EUR 17 trillion in assets under

management of which EUR 10.6 trillion managed by 55,000 investment funds at end June 2014. Just under 36,000

of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds. For more

information about EFAMA, please visit www.efama.org

2 http://www.efama.org/Publications/Public/Corporate_Governance/11-4035%20EFAMA%20ECG_final_6%20April%202011%20v2.pdf

p. 2 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

a result of this multiplier effect, which has a leveraging impact ultimately beneficial to the

industry as a whole, best practices such as EFAMA’s Code for External Governance, have

enabled better engagement between asset managers and the companies they invest in, and

we welcome SRD II as a further step in this direction.

Executive Summary:

1. EFAMA fully supports transparency, as long as it is proportionate and meaningful, as it

encourages asset managers and institutional investors to fulfill their fiduciary duties. For

such transparency to be truly effective and beneficial, we stress the need for a balance

between disclosure requirements, with proprietary information and data privacy

protection.

2. EFAMA welcomes the Commission’s proposal to enhance shareholder rights with the

introduction in Article 9c of the right to vote on related party transactions, which is one of

the few instances in the legislation where the rights of shareholders have been extended.

We are also encouraged by the ‘say on pay’ measures in Article 9a to ensure remuneration

of directors is in line with the business strategy and long-term interest of the company.

3. However, EFAMA is concerned that some of the provisions in this proposal overlap with

requirements asset managers are already subject to in AIFMD, UCITS Directive and MIFID.

We believe this will lead to incoherence of legislation and unnecessary duplication of

duties for asset managers. In this respect, our concerns centre particularly on Article 3f

(engagement policy), Article 3g (investment strategy of institutional investors and

arrangements with asset managers), and Article 3h (transparency of asset managers).

Specific comments:

1. Article 3f – Engagement Policy

EFAMA agrees that transparency of asset managers’ engagement policy with investee

companies is crucial in achieving high corporate governance standards. A transparent

engagement policy, which is clear and coherent, incentivises asset managers to

provide information on their corporate governance approach and engagement

activities and to inform their clients of how their money is invested in companies.

EFAMA has three comments to make on this section:

(i) It is important to avoid overly prescriptive language as engagement strategies

should be allowed to vary in order to meet different objectives and strategies

and to have effective dialogues with corporations outside the EU.

(ii) The engagement policy for asset managers as laid out in Article 3f, particularly

in relation to the exercise of voting rights and the management of conflicts of

interest, partly duplicate existing duties of asset managers under AIFMD and

UCITS Directive. This is widely illustrated in the comparison table in the annex.

p. 3 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

We strongly believe that such duplication would lead to incoherence of

legislation and would only frustrate the process of effective shareholder

engagement. Duplication should be avoided.

For example:

- Article 3f(1)(d) on the exercise of voting rights already exists in AIFM

Regulation 231/2013, Article 37 “An AIFM shall develop adequate and

effective strategies for determining when and how any voting rights held

in the AIF portfolios are to be exercised”, as well as in UCITS Implementing

Directive 2009/65/EC, Article 21 “ensuring that the exercise of voting

rights is in accordance with the investment objectives and policy of the

relevant UCITS”.

- The management of actual and potential conflicts of interests with regard

to shareholder engagement in Article 3f(2) duplicates AIFM Implementing

Regulation 231/2013 Articles 30 to 36 and UCITS Implementing Directive

2009/65/EC, Articles 17 to 20.

(iii) Finally, regarding the public disclosure of the engagement policy in Article 3f

(3), whilst we do not object to public disclosure per se, we would issue a

warning regarding the required level of detail as put forward in the

Commission’s text. EFAMA considers that publication of voting policies is

already customary and very useful. However, the public disclosure of voting

records should be left to the discretion of each institutional investor and asset

manager, as in some circumstances, this may jeopardise ongoing engagement,

which is confidential in nature. In addition, for institutional investors who

invest individually, public disclosure of ongoing engagement should be left to

the discretion of the institutional investor itself and asset manager and not be

imposed on the asset management company.

2. Article 3g – Investment Strategy

EFAMA agrees with the Commission that the relationship and mandate between

institutional investors and asset managers is key to securing long-term economic

interests and investment strategies. Transparency regarding the investment strategy

of institutional investors and the arrangements they have with asset managers further

reinforces their fiduciary duties towards the client’s long-term economic interests.

However, while we support the proposal’s objective in this article, we believe the

means by which it is introduced is inadequate and disproportionate.

It must be highlighted that too onerous requirements on the disclosure by institutional

investors of their arrangements with the asset managers will put the latter at a crucial

business disadvantage, whereby an asset manager’s main service to a client – the

investment strategy – is disclosed to the public, but also to competitors. This in turn

calls into question the competitiveness of the industry, particularly vis-à-vis third

country actors such as US asset managers.

p. 4 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

In addition to the proportionality problems, such rules should be incorporated into

existing legislation to avoid incoherence and duplication. Disclosure requirements for

institutional investors should be regulated under the Life Assurance Directive and

IORP, not by SRD II. In terms of the legislator’s objective of encouraging institutional

investors and asset managers to act in the long-term interest of their end clients,

EFAMA believes that the effects of AIFMD, the reviewed UCITS Directive and MIFID –

which already provide for more detailed reporting requirements - need to be

accounted for before additional duties are set out in a new layer of legislation.

EFAMA respectfully believes that some parts of Article 3(g) reflect a misunderstanding

of the relationship between institutional investors and asset managers. In addition, we

consider that collective investment undertakings should not be included because, due

to the plurality of investors, the provisions of this Article 3g would be unworkable.

- Article 3g, para 2(a) – Alignment of investment strategy and decisions with the

profile and duration of its liabilities: An asset manager has to act in accordance

with the mandate the client, the institutional investor, has given and adopts

varying strategies to meet specific mandates. In that respect, it ought to be

clarified that it is not the role of an asset manager to manage its clients’ liabilities.

Managing liabilities only plays a role in pension funds with defined benefit

contracts, but even then this is usually a task of the pension fund’s board and not

of its asset manager.

- Article 3g, para 2(b) – The asset managers’ incentives to make investment

decisions based on medium to long-term company performance and

engagement with companies: EFAMA welcomes this provision, which is in line

with our standards on responsible investment. The global move towards using ESG

factors in investment management is also seen by asset managers as an

opportunity to actually increase clients’ assets. We see this article as encouraging

the institutional investor to consider the type of company being invested in.

- Article 3g, para 2(c) – Method and time horizon of the asset manager’s

performance and how this evaluation takes long-term absolute performance

into account: EFAMA has serious reservations against the institutional investor

disclosing this information. Institutional investors monitor asset managers

performance regularly – typically quarterly – but it is rare for a mandate to be

terminated on the basis of short-term underperformance. Mandates are generally

awarded by clients who look at performance over a longer term. We consider that

this paragraph should be deleted.

- Article 3g, para 2(d) – How the structure of the consideration for the asset

management services contributes to the alignment of the investment decisions

of the asset manager with the profile and duration of the liabilities of the

institutional investor: We do not understand why the Commission should wish to

know how the structure of the asset management fee aligns itself with its

investment decisions. In reality, asset managers in both the retail and institutional

markets are generally remunerated on the basis of an ad valorem fee,

p. 5 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

representing a fixed percentage of assets managed. The manager’s fee increases

if the client gives him more money to manage and if the value of the portfolio

increases; the manager’s interest and duty is to manage and invest the money in

the best interest of the client. We consider that this paragraph should be deleted.

- Article 3g, para 2(e) – The targeted portfolio turnover or turnover range: There

is no incentive for the asset manager to turn the portfolio. In fact, doing so is

detrimental to both the asset manager and its clients as it increases transactions

costs and it may reduce investment performance; thereby directly reducing the

manager’s fee. The request for publication of a portfolio turnover rate seems to

be driven by the concern that asset managers are guided by short-termist

considerations. As already stated in our introduction, we believe this is a

simplification of the nature of the asset management business. Asset managers

provide their clients with an investment service and adopt varying strategies,

which have to be adjusted to market conditions, to meet specific mandates. While

long-term holdings will tend to form a core part of portfolios, holding periods of

individual stocks and securities will inevitably vary due to reasons of risk

management and other objectives of clients. We therefore suggest the removal of

this paragraph. In essence the portfolio turnover is influenced by many factors

which are not under the fund manager’s direct control and is therefore difficult to

predict3. In circumstances where the institutional investor invests in a pooled

fund, it is important to ensure that the effects of redemptions and subscriptions

are excluded from the method used for calculating turnovers for the very reason

that they do not reflect portfolio managers’ decision.

3. Article 3h – Transparency of asset managers

EFAMA fully supports transparency of asset managers, as long as it is meaningful. Asset

managers have a genuine interest in collaborating with their clients and providing any

information requested. However, asset managers are already required by law under

AIFMD, UCITS Directive and MIFID to report to their clients, as illustrated in the table

in the annex. EFAMA believes that the inclusion of this article is incoherent and only

duplicates existing reporting requirements, which are only slightly different.

In terms of compliance of investment strategy and its implementation (Article 3h(1)),

asset managers are already required under AIFMD, UCITS Directive and MIFID to

report on the investment activities, the AIFs’ or UCITS’ portfolio, as well as a statement

of how the investment meets the clients’ preferences and objectives.

Similarly, portfolio turnover costs (Article 3h(2)(d)) are duly covered by AIFMD and

UCITS Directive, which already require a disclosure of transaction costs in the yearly

2 A study by Eumedion ‘The Duration and Turnover of Dutch Equity Ownership - A Case Study of Dutch Institutional Investors’ shows that taking portfolio turnover to show that a fund is a ‘short term investor’ is misleading, because there will be ‘strategic’ holdings which a fund will hold on to for many years, and ‘tactical’ holdings which may be bought and sold many times over the space of a year.

p. 6 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

or half yearly report. MiFID asks that the appropriate information to be provided to

clients with regard to the investment firm, including the information about all costs

and charges.

Finally, in relation to potential conflicts of interest in connection with engagement

activities (Article 3h(2)(f)), AIFMD, UCITS Directive and MiFID already provide for

extensive requirements regarding conflicts of interest, including a requirement to

establish, implement and apply a conflict of interest policy, as well as manage, monitor

and disclose conflicts of interest.

In so far as these proposals differ from provisions in AIFMD, UCITS Directive, MiFID

and IORP, EFAMA has the following comments:

Article 3h(1) assumes that an asset manager’s investment strategy is always

the same for each mandate and for each collective investment scheme. This is

typically not the case and the provision needs to reflect this. If it does not, the

level of abstraction of an asset manager’s investment strategy would be too

high to be useful.

Article 3h(1) can be practically applied to each individual discretionary

mandate with an institutional investor. However, it cannot be applied to

collective investment schemes. Collective investment schemes such as a UCITS

and an AIF typically have a prospectus requirement (UCITS Directive) or an

information requirement (AIFMD) which legally requires them to detail their

investment strategy. It is the client/participant who has to decide whether this

is compatible with his/her needs and wishes.

We do not believe there is a good reason to stipulate that this transparency

should be given to the institutional investor every 6 months. We believe it

should be up to the institutional investor to determine whether this

information is required more frequently than annually. Of course, when

important changes occur, the asset manager has to inform his clients. This is

part of MiFID (duty of care) and usually stipulated in individual portfolio

management contracts.

Article 3h(3) provides that this information has to be provided free of charge,

and “in case the asset manager does not manage the assets on a discretionary

client-by-client basis”, i.e. in case of collective investment schemes, it has to

be provided to others on request. This provision is not necessary as all UCITS

and AIFs have to have websites. It would be much more effective and efficient

to provide for disclosure by offering or making available this information on

the funds’ or fund managers’ website.

p. 7 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

4. Article 3a-d – Identification of shareholders, transmission of information and

facilitation of exercise of shareholder rights

EFAMA welcomes this new chapter in SRD II. We are encouraged by the Commission’s

attempt to clarify the rather complex voting chain and to address the barriers to cross-

border voting. In turn, this will facilitate equality of treatment between all types of

shareholders, the exercise of voting rights and transparency of voting across the EU.

We would like to make the following suggestions:

(i) Where possible, we would suggest that the identification of

shareholders should be made on the basis of the Legal Entity Identifier

which allows for clear and unique identification.

(ii) Generally speaking, we would also welcome a clarification that the

shareholder within the meaning of this Directive is to be understood

only as the entity effectively deciding how the shares are voted.

(iii) We do not understand the distinction between legal and natural

persons in relation to rectifying any incomplete or erasing inaccurate

data (Article 3(a)(3)).

(iv) Collective investment schemes which are traded on a trading venue

should be exempt from the shareholder identification rules of Article

3a. Shareholders in such a fund are also the clients of an investment

firm (a bank or portfolio manager). From the bank or broker’s point of

view, it would be highly undesirable if it were possible for the fund

manager to have easy access to the identities of shareholders,

especially since many fund managers are also competitors of banks

and portfolio managers, or are portfolio managers themselves. It

would enable fund managers to get into contact directly with the

clients of banks and portfolio managers, thus bypassing banks and

portfolio managers. At the same time, it would also be undesirable if

these schemes were to withdraw from trading on these trading

venues as they would lose the liquidity they want to provide to their

customers.

(v) We suggest taking out any reference to costs at this point of the

process (Article 3(d)).

(vi) Intermediaries will demand fees for this service of passing on

information identifying shareholders. These costs should be managed

in the interest of both companies and shareholders, because costs

may induce shareholders to refrain from exercising their voting rights.

Provisions should be included to avoid excessive or disproportionate

pricing by intermediaries, as can be found in European Directives on

p. 8 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

networks for telecommunication, railways and energy, where service

providers and client also depend on an infrastructure provider.

(vii) Finally, we would recommend including a proportionality principle in

this Article. Identification of shareholders at all costs could discourage

many corporates from getting listed, given the costs incurred.

5. Article 3i – Transparency of proxy advisors

We agree with the Commission that greater transparency of the methodologies and

policies used by proxy advisors is needed to ensure both the reliability of their services

and a stable market for all industry participants. However, we question how this

provision would work with ESMA’s advice from February 2013, which states that

binding measures in relation to proxy advisors “would not be justified”4. We believe

that transparency of proxy advisors should be driven by the markets and investors’ /

clients’ requirements, rather than by binding legislation.

We suggest that SRD II should have a provision stating that proxy advisors should

always act in the interest of their clients – similar to MiFID-firms. In addition, like

intermediaries (see Article 3(c)(2) sentence 2), proxy advisors casting votes should

have to transmit a voting confirmation to the shareholder.

6. Articles 9a and b – Remuneration

EFAMA welcomes the ‘say-on-pay’ measures requiring companies to set out a

maximum level of pay in a remuneration policy document, which would then be

subject to a binding shareholder vote. We believe this will enhance the accountability

of board members and might lead to less complex remuneration structures, more

aligned to shareholders’ interest.

However, we are concerned that the level of detail set out in Articles 9a and 9b might

overshadow the overall objective of governing remuneration. In practice,

remuneration already monopolises the dialogue between shareholders and

companies over other themes such as business strategy, succession planning or

related party transactions. While we fully support the inclusion of these remuneration

measures in the Revision, we would advocate for a simplification of the requirements

as set out in Articles 9a and b to ensure that companies and shareholders are not

caught in a mono-dimensional, remuneration-only engagement.

4 http://www.esma.europa.eu/news/ESMA-recommends-EU-Code-Conduct-proxy-advisor-industry

p. 9 EFAMA position paper on Shareholders’ Rights Directive (SHRD II)

7. Article 9c – Right to vote on related party transactions

The right to approve material transactions, including related-party transactions, is a

fundamental right of shareholders, and is all the more important in closely-held or

controlled companies. EFAMA is very supportive of the extension of shareholders

rights with Article 9c on related party transactions. In the event that a company loses

its best assets when a related party transaction takes place, implementing safeguards

to ensure that the transaction is fair and reasonable is instrumental in ensuring the

protection of shareholders’ property. We see this article as key in protecting

shareholders from potential abuse and conflicts of interest between companies and

management, directors and their controlling shareholders. It will ultimately protect

the exercise of their fundamental ownership right related to their investment. EFAMA

is, however, of the opinion that there should be exemptions which allow management

to abstain from a shareholder vote. Such exemptions could include intra-group

transactions as these are part of the normal course of business.

***

October 2014

[14-4068]

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ANNEX – OVERLAP

SRD II AIFM UCITS OTHER Article 3f – Engagement Policy 1- Development of an engagement policy

SRD II – Article 3f, para1 Member States shall ensure that institutional investors and asset managers develop a policy on shareholder engagement (“engagement policy”) This engagement policy shall determine how institutional investors and asset managers conduct all of the following actions:

AIFM Regulation 231/2013 - Article 37 Strategies for the exercise of voting rights An AIFM shall develop adequate and effective strategies for determining when and how any voting rights held in the AIF portfolios it manages are to be exercised, to the exclusive benefit of the AIF concerned and its investors. (…) A summary description of the strategies and details of the actions taken on the basis of those strategies shall be made available to the investors on their request.

UCITS Implementing Directive 2009/65/EC – Article 21 Member States shall require management companies to develop adequate and effective strategies for determining when and how voting rights attached to instruments held in the managed portfolios are to be exercised, to the exclusive benefit of the UCITS concerned. (…) A summary description of the strategies referred to in paragraph 1 shall be made available to investors. Details of the actions taken on the basis of those strategies shall be made available to the unit-holders free of charge and on their request.

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2- Integration of shareholder engagement in the investment strategy SRD II – Article 3f para 1, 2(a) (a) to integrate shareholder engagement in their investment strategy; 3- Monitoring of investee companies including their non-financial performance SRD II – Article 3f para 1, 2(b) (b) to monitor investee companies, including on their non-financial performance; 4- Conduct dialogue with investee companies SRD II – Article 3f para 1, 2(c) (c) to conduct dialogues with investee companies;

AIFM Regulation 231/2013 - Article 37, para 2(b) (b) ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant AIF; AIFM Regulation 231/2013 - Article 37, para 2(a) (a) monitoring relevant corporate actions; General conflicts of interest requirements apply. This includes requirement not to favour interest of one investor over other investors in another AIF AIFM Regulation 231/2013 - Article 30(c) (…) a relevant person or a person directly or indirectly linked by way of control to the AIFM:

UCITS Implementing Directive 2009/65/EC – Article 21, para 2(b) (b) ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant UCITS; UCITS Implementing Directive 2009/65/EC – Article 21, para 2(a) (a) monitoring relevant corporate events; General conflicts of interest requirements apply. This includes dealing with situations where interests of the UCITS differ from those of another client Article 17(1) Member States shall ensure that, for the purposes of identifying the types of conflict of interest that arise in the course of providing services and activities and

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5- Exercise of voting rights SRD II – Article 3f para 1, 2(d) (d) to exercise voting rights; 6- Use of proxy advisor services SRD II – Article 3f para 1, 2 (e) (e) to use services provided by proxy advisors;

(c) has a financial or other incentive to favour: — the interest of a UCITS, a client or group of clients or another AIF over the interest of the AIF, — the interest of one investor over the interest of another investor or group of investors in the same AIF; AIFM Regulation 231/2013 – Article 37 An AIFM shall develop adequate and effective strategies for determining when and how any voting rights held in the AIF portfolios it manages are to be exercised, to the exclusive benefit of the AIF concerned and its investors. General conflicts of interest apply AIFM Regulation 231/2013 – Article 37 (2)(c) preventing or managing any conflicts of interest arising from the exercise of voting rights.

whose existence may damage the interests of a UCITS, management companies take into account, by way of minimum criteria, the question of whether the management company or a relevant person, or a person directly or indirectly linked by way of control to the management company, is in any of the following situations, whether as a result of providing collective portfolio management activities or otherwise: UCITS Implementing Directive 2009/65/EC – Article 21 (b) ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant UCITS; General conflicts of interest apply UCITS Implementing Directive 2009/65/EC Article 21(2)(c) preventing or managing any conflicts of interest arising from the exercise of voting rights.

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7- Cooperation with other shareholders (f) to cooperate with other shareholders 9 - Management of conflicts of interest SRD II – Article 3f para 2 2. Member States shall ensure that the engagement policy includes policies to manage actual or potential conflicts of interests with regard to shareholder engagement. Such policies shall in particular be developed for all of the following situations: (a) the institutional investor or the asset manager, or other companies affiliated to them, offer financial products to or have other commercial relationships with the investee company; (b) a director of the institutional investor or the asset manager is also a director of the investee company;

No specific requirement for cooperation so far AIFM Regulation 231/2013 Articles 30-36. Extract: Types of conflicts of interest For the purpose of identifying the types of conflicts of interest that arise in the course of managing an AIF, AIFMs shall take into account, in particular, whether the AIFM, a relevant person or a person directly or indirectly linked by way of control to the AIFM: (a) is likely to make a financial gain, or avoid a financial loss, at the expense of the AIF or its investors; (b) has an interest in the outcome of a service or an activity provided to the AIF or its investors or to a client or of a transaction carried out on behalf of the AIF or a client, which is distinct from the AIF’s interest in that outcome;

No specific requirement for cooperation so far UCITS Implementing Directive 2009/65/EC - Articles 17-20. Extract: Criteria for the identification of conflicts of interest. Member States shall ensure that, for the purposes of identifying the types of conflict of interest that arise in the course of providing services and activities and whose existence may damage the interests of a UCITS, management companies take into account, by way of minimum criteria, the question of whether the management company or a relevant person, or a person directly or indirectly linked by way of control to the management company, is in any of the following situations, whether as a result of providing collective

AIFMD 2011/61/EU - Article 14 Conflicts of interest 1. Member States shall require AIFMs to take all reasonable steps to identify conflicts of interest that arise in the course of managing AIFs between: (a) the AIFM, including its managers, employees or any person directly or indirectly linked to the AIFM by control, and the AIF managed by the AIFM or the investors in that AIF; (b) the AIF or the investors in that AIF, and another AIF or the investors in that AIF; (c) the AIF or the investors in that AIF, and another client of the AIFM; (d) the AIF or the investors in that AIF, and a UCITS managed by the AIFM or the investors in that UCITS; or

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(c) an asset manager managing the assets of an institution for occupational retirement provision invests in a company that contributes to that institution; (d) the institutional investor or asset manager is affiliated with a company for whose shares a takeover bid has been launched.

(c) has a financial or other incentive to favour: — the interest of a UCITS, a client or group of clients or another AIF over the interest of the AIF, — the interest of one investor over the interest of another investor or group of investors in the same AIF; (d) carries out the same activities for the AIF and for another AIF, a UCITS or client; or (e) receives or will receive from a person other than the AIF or its investors an inducement in relation to collective portfolio management activities provided to the AIF, in the form of monies, goods or services other than the standard commission or fee for that service.

portfolio management activities or otherwise: (a) the management company or that person is likely to make a financial gain, or avoid a financial loss, at the expense of the UCITS; (b) the management company or that person has an interest in the outcome of a service or an activity provided to the UCITS or another client or of a transaction carried out on behalf of the UCITS or another client, which is distinct from the UCITS interest in that outcome; (c) the management company or that person has a financial or other incentive to favour the interest of another client or group of clients over the interests of the UCITS; (d) the management company or that person carries on the same activities for the UCITS and for another client or clients which are not UCITS; (e) the management company or that person receives or will receive from a person other than the UCITS an inducement in relation to collective portfolio management activities provided to the UCITS, in the form of monies, goods or services, other than the standard commission or fee for that service.

(e) two clients of the AIFM. AIFMs shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their investors. AIFMs shall segregate, within their own operating environment, tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest. AIFMs shall assess whether their operating conditions may involve any other material conflicts of interest and disclose them to the investors of the AIFs. 2. Where organisational arrangements made by the AIFM to identify, prevent, manage and monitor conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to investors’ interests will be prevented, the AIFM shall clearly disclose the general nature or sources of conflicts of interest to the investors before undertaking

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2. Member States shall require management companies, when identifying the types of conflict of interests, to take into account: (a) the interests of the management company, including those deriving from its belonging to a group or from the performance of services and activities, the interests of the clients and the duty of the management company towards the UCITS; (b) the interests of two or more managed UCITS.

business on their behalf, and develop appropriate policies and procedures. 3. Where the AIFM on behalf of an AIF uses the services of a prime broker, the terms shall be set out in a written contract. In particular any possibility of transfer and reuse of AIF assets shall be provided for in that contract and shall comply with the AIF rules or instruments of incorporation. The contract shall provide that the depositary be informed of the contract. AIFMs shall exercise due skill, care and diligence in the selection and appointment of prime brokers with whom a contract is to be concluded. 4. The Commission shall adopt, by means of delegated acts in accordance with Article 56 and subject to the conditions of Articles 57 and 58, measures specifying: (a) the types of conflicts of interest as referred to in paragraph 1; (b) the reasonable steps AIFMs are expected to take in terms of structures

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Article 3h – Transparency of asset managers 1 - Compliance of investment strategy and its implementation with agreement SRD II – Article 3h para 1 1. Member States shall ensure that asset managers disclose on a half-yearly basis to the institutional investor with which they have entered into the arrangement referred to in Article 3g(2) how their investment strategy and implementation thereof complies with that arrangement and how the investment strategy and implementation thereof contributes to medium to long-term performance of the assets of the institutional investor.

AIFM Regulation 231/2013 - Article 105 1. The report on activities of the financial year shall include at least: (a) an overview of investment activities during the year or period, and an overview of the AIF’s portfolio at year-end or period end; (b) an overview of AIF performance over the year or period; (c) material changes as defined below in the information listed in Article 23 of Directive 2011/61/EU not already present in the financial statements. 2. The report shall include a fair and balanced review of the activities and performance of the AIF, containing also a description of the principal risks and investment or economic uncertainties that the AIF might face. 3. To the extent necessary for an understanding of the AIF’s investment activities or its performance, the analysis shall

UCITS Implementing Directive 2009/65/EC - Article 69 3. The annual report shall include a balance-sheet or a statement of assets and liabilities, a detailed income and expenditure account for the financial year, a report on the activities of the financial year and the other information provided for in Schedule B of Annex I as well as any significant information which will enable investors to make an informed judgement on the development of the activities of the UCITS and its results. Annex I Schedule B SCHEDULE B Information to be included in the periodic reports I. Statement of assets and liabilities: transferable securities, — bank balances, — other assets, —

MIFID 2014/65/EU - Article 25 N.B: Also see Article 41 MiFID Implementation Directive 6. The investment firm shall provide the client with adequate reports on the service provided in a durable medium. Those reports shall include periodic communications to clients, taking into account the type and the complexity of financial instruments involved and the nature of the service provided to the client and shall include, where applicable, the costs associated with the transactions and services undertaken on behalf of the client. When providing investment advice, the investment firm shall, before the transaction is made, provide the client with a statement on suitability in a durable medium specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the retail client.

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include both financial and non-financial key performance indicators relevant to that AIF. The information provided in the report shall be consistent with national rules where the AIF is established. 4. The information in the report on the activities of the financial year shall form part of the directors or investment managers report in so far as this is usually presented alongside the financial statements of the AIF.

total assets, — liabilities, — net asset value. II. Number of units in circulation III. Net asset value per unit IV. Portfolio, distinguishing between: (…) V. Statement of the developments concerning the assets of the UCITS during the reference period (…) VI. A comparative table covering the last three financial years and including, for each financial year, at the end of the financial (…) VII. Details, by category of transaction within the meaning of Article 51 carried out by the UCITS during the reference period, of the resulting amount of commitments.

Where the agreement to buy or sell a financial instrument is concluded using a means of distance communication which prevents the prior delivery of the suitability statement, the investment firm may provide the written statement on suitability in a durable medium immediately after the client is bound by any agreement, provided both the following conditions are met: (a) the client has consented to receiving the suitability statement without undue delay after the conclusion of the transaction; and (b) the investment firm has given the client the option of delaying the transaction in order to receive the statement on suitability in advance. Where an investment firm provides portfolio management or has informed the client that it will carry out a periodic assessment of suitability, the periodic report shall contain an updated statement of how the investment meets the client’s preferences, objectives and other characteristics of the retail client.

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2- Contribution of investment strategy and implementation with long-term performance of the assets and non-financial performance SRD II – Article 3h para 1 and 2(a) Refer to above for para 1 2. Member States shall ensure that asset managers disclose to the institutional investor on a half-yearly basis all of the following information: (a) whether or not, and if so how, they make investment decisions on the basis of judgements about medium-to long-term performance of the investee company, including non-financial performance; 3 - Portfolio contribution, explanation of significant changes SRD II – Article 3h para 2(b) (b) how the portfolio was composed and provide an explanation of significant changes in the portfolio in the previous period;

AIFM Regulation 231/2013 – Article 105 3. To the extent necessary for an understanding of the AIF’s investment activities or its performance, the analysis shall include both financial and non-financial key performance indicators relevant to that AIF. The information provided in the report shall be consistent with national rules where the AIF is established. Refer to 1) Compliance of investment strategy and its implementation with agreement

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4- Level of portfolio turnover, calculation method, explanation of excess of targeted level SRD II – Article 3h para 2 (c) (c) the level of portfolio turnover, the method used to calculate it and an explanation if the turnover exceeded the targeted level; 5 - Portfolio turnover costs SRD II – Article 3h para 2(d) (d) portfolio turnover costs;

Refer to 1) Compliance of investment strategy and its implementation with agreement. Generally there is no targeted portfolio turnover within the agreement. Turnover of portfolios depend not on any agreement in advance but simply on market conditions. AIFMD 2011/61/EU - Article 22, para 22(d) (d) any material changes in the information listed in Article 23 during the financial year covered by the report; In connection with Article 23 para 1(i)

(i) a description of all fees, charges and expenses

UCITS 2009/65/EC – Annex I, Schedule B Statement of the developments concerning the assets of the UCITS during the reference period including the following: (…) transaction costs, which are costs incurred by a UCITS in connection with transactions on its portfolio.

MIFID2014/65/EU – Article 24, para 4 Also refer to Art 41 MIFID Implementing Directive 4. Appropriate information shall be provided in good time to clients or potential clients with regard to the investment firm and its services, the financial instruments and proposed investment strategies, execution venues and all costs and related

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and of the maximum amounts thereof which are directly or indirectly borne by investors;

Portfolio, distinguishing between: (a) transferable securities admitted to official stock exchange listing; (b) transferable securities dealt in on another regulated market; (c) recently issued transferable securities of the type referred to in Article 50(1)(d); (d) other transferable securities of the type referred to in Article 50(2)(a); and analysed in accordance with the most appropriate criteria in the light of the investment policy of the UCITS (e.g. in accordance with economic, geographical or currency criteria) as a percentage of net assets; for each of the above investments the proportion it represents of the total assets of the UCITS. Statement of changes in the composition of the portfolio during the reference period.

charges. That information shall include the following: (a) when investment advice is provided, the investment firm must, in good time before it provides investment advice, inform the client: (i) whether or not the advice is provided on an independent basis; (ii) whether the advice is based on a broad or on a more restricted analysis of different types of financial instruments and, in particular, whether the range is limited to financial instruments issued or provided by entities having close links with the investment firm or any other legal or economic relationships, such as contractual relationships, so close as to pose a risk of impairing the independent basis of the advice provided; (iii) whether the investment firm will provide the client with a periodic assessment of the suitability of the financial instruments recommended to that client; (b) the information on financial instruments and proposed investment strategies must include appropriate guidance on and warnings of the risks associated with investments in those instruments or in respect of particular investment

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strategies and whether the financial instrument is intended for retail or professional clients, taking account of the identified target market in accordance with paragraph 2; (c) the information on all costs and associated charges must include information relating to both investment and ancillary services, including the cost of advice, where relevant, the cost of the financial instrument recommended or marketed to the client and how the client may pay for it, also encompassing any third-party payments. The information about all costs and charges, including costs and charges in connection with the investment service and the financial instrument, which are not caused by the occurrence of underlying market risk, shall be aggregated to allow the client to understand the overall cost as well as the cumulative effect on return of the investment, and where the client so requests, an itemised breakdown shall be provided. Where applicable, such information shall be provided to the client on a regular basis, at least annually, during the life of the investment.

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6 - Policy on securities lending SRD II – Article 3h (e) their policy on securities lending and the implementation thereof;

ESMA guidelines regarding ETFs and other UCITs issues No 25-35

ESMA guidelines regarding ETFs and other UCITS issues No 25 – 35

Proposal on reporting and transparency of securities financing transactions Article 14 Investment fund's transparency in pre-investment documents 1. The UCITS prospectus referred to in Article 69 of Directive 2009/65/EC, and the disclosure by AIFMs to investors referred to in Article 24 (1) and (3) of Directive 2011/61/EU shall specify the SFT and other financing structures which UCITS management companies or investment companies, and AIFMs respectively, are authorised to use and include a clear statement that these techniques are used. 2. The prospectus and the disclosure to investors referred to in paragraph shall comprise at least the data provided for in Section B of the Annex. 3. The Commission shall be empowered to adopt delegated acts in accordance with

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7 - Potential conflicts of interest in connection with engagement activities, dealing with conflicts SRD II - Article 3, para 2(f) (f) whether or not, and if so, what actual or potential conflicts of interest have arisen in connection with engagement activities and how the asset manager has dealt with them;

AIFMD 2011/61/EU - Article 14 Also see Art 30-36 AIFM Regulation 213/2013 Conflicts of interest 1. Member States shall require AIFMs to take all reasonable steps to identify conflicts of interest that arise in the course of managing AIFs between: (a) the AIFM, including its managers, employees or any person directly or indirectly linked to the AIFM by control, and the AIF managed by the AIFM or the investors in that AIF;

UCITS 2009/65/EC - Article 17 Criteria for the identification of conflicts of interest. Member States shall ensure that, for the purposes of identifying the types of conflict of interest that arise in the course of providing services and activities and whose existence may damage the interests of a UCITS, management companies take into account, by way of minimum criteria, the question of whether the management company or a relevant person, or a person directly or indirectly linked by way of control to

Article 27 amending Section B of the Annex in order to reflect the evolution of market practices and technological developments. MIFID 2014/65/EU – Article 23 Conflicts of interest 1. Member States shall require investment firms to take all appropriate steps to identify and to prevent or manage conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof, including

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(b) the AIF or the investors in that AIF, and another AIF or the investors in that AIF; (c) the AIF or the investors in that AIF, and another client of the AIFM; (d) the AIF or the investors in that AIF, and a UCITS managed by the AIFM or the investors in that UCITS; or (e) two clients of the AIFM. AIFMs shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their investors.

the management company, is in any of the following situations, whether as a result of providing collective portfolio management activities or otherwise: (a) the management company or that person is likely to make a financial gain, or avoid a financial loss, at the expense of the UCITS; (b) the management company or that person has an interest in the outcome of a service or an activity provided to the UCITS or another client or of a transaction carried out on behalf of the UCITS or another client, which is distinct from the UCITS interest in that outcome; (c) the management company or that person has a financial or other incentive to favour the interest of another client or group of clients over the interests of the UCITS; (d) the management company or that person carries on the same activities for the UCITS and for another client or clients which are not UCITS; (e) the management company or that person receives or will receive from a person other than the UCITS an inducement in relation to collective portfolio management activities provided to the UCITS, in

those caused by the receipt of inducements from third parties or by the investment firm’s own remuneration and other incentive structures. 2. Where organisational or administrative arrangements made by the investment firm in accordance with Article 16(3) to prevent conflicts of interest from adversely affecting the interest of its client are not sufficient to ensure, with reasonable confidence, that risks of damage to client interests will be prevented, the investment firm shall clearly disclose to the client the general nature and/or sources of conflicts of interest and the steps taken to mitigate those risks before undertaking business on its behalf. 3. The disclosure referred to in paragraph 2 shall: (a) be made in a durable medium; and (b) include sufficient detail, taking into account the nature of the client, to enable that client to take an informed decision with respect to the service in the context of which the conflict of interest arises.EN L 173/404 Official Journal of the European Union 12.6.2014

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8 - Use of proxy advisors for purpose of engagement activities SRD II – Article 3h, para2(g) (g) whether or not, and if so how, the asset manager uses proxy advisors for the purpose of their engagement activities.

AIFM Regulation 231/2013 Article 37 Strategies for the exercise of voting rights 1. An AIFM shall develop adequate and effective strategies for determining when and how any

the form of monies, goods or services, other than the standard commission or fee for that service. 2. Member States shall require management companies, when identifying the types of conflict of interests, to take into account: (a) the interests of the management company, including those deriving from its belonging to a group or from the performance of services and activities, the interests of the clients and the duty of the management company towards the UCITS; (b) the interests of two or more managed UCITS. UCITS Implementing Directive 2009/65/EC Article 21 Strategies for the exercise of voting rights. Member States shall require management companies to develop

4. The Commission shall be empowered to adopt delegated acts in accordance with Article 89 to: (a) define the steps that investment firms might reasonably be expected to take to identify, prevent, manage and disclose conflicts of interest when providing various investment and ancillary services and combinations thereof; (b) establish appropriate criteria for determining the types of conflict of interest whose existence may damage the interests of the clients or potential clients of the investment firm.

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voting rights held in the AIF portfolios it manages are to be exercised, to the exclusive benefit of the AIF concerned and its investors. 2. The strategy referred to in paragraph 1 shall determine measures and procedures for: (a) monitoring relevant corporate actions; (b) ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant AIF; (c) preventing or managing any conflicts of interest arising from the exercise of voting rights. 3. A summary description of the strategies and details of the actions taken on the basis of those strategies shall be made available to the investors on their request.

adequate and effective strategies for determining when and how voting rights attached to instruments held in the managed portfolios are to be exercised, to the exclusive benefit of the UCITS concerned. The strategy referred to in paragraph 1 shall determine measures and procedures for: (a) monitoring relevant corporate events; (b) ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant UCITS; (c) preventing or managing any conflicts of interest arising from the exercise of voting rights. 3. A summary description of the strategies referred to in paragraph 1 shall be made available to investors. Details of the actions taken on the basis of those strategies shall be made available to the unit-holders free of charge and on their request.