The European Securities and Markets Authority (ESMA) issued a long-awaited opinion (Opinion) on July 20, 2017, affecting the custody, brokerage and trading structure of Europe-based investment funds. The Opinion could affect European funds managed by U.S. advisers as well as the brokerage firms that service these entities and advisers. It is an important step toward facilitating the market activities of European investment funds, including Undertakings for Collective Investment in Transferable Securities (UCITS) vehicles, Alternative Investment Funds (AIFs) and their respective managers, and seeks to better harmonize the European depositary regime with market infrastructure and the laws of various countries engaged in the European investment funds market. In a guest article, Sadis & Goldberg counsel Richard Shamos and partner Dan Viola, review how the European asset segregation model, generally applicable to UCITS funds and AIFs, conflicts with market-wide practice by prime and clearing brokers of using omnibus accounts – particularly the “legally segregated, operationally commingled” framework adopted under the Dodd-Frank Act – and analyze the guidance by ESMA that would resolve this conflict, thereby facilitating market activities and cross-border transactions by UCITS funds and AIFs. For additional insights from Viola, see “How Investment Managers Can Advertise Sub-Adviser Performance Without Violating SEC Rules
” (Dec. 1, 2016); and “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination
” (Jan. 28, 2016). For related discussions of U.S. and European asset segregation models for derivatives, see “EMIR Offers Three Models of Asset Segregation to Fund Managers That Trade OTC Derivatives
” (Apr. 16, 2015); “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers
” (Jul. 25, 2013); and “Don Muller and Joshua Satten of Northern Trust Hedge Fund Services Discuss the Impact of OTC Derivatives Reforms on Hedge Fund Managers
” (Feb. 7, 2013).