Sufficiency of funding

9. The funding of financial supervision in the Netherlands is governed by a dedicated law. The Financial Supervision (Funding) Act (Wet bekostiging financieel toezicht, Wbft) contains a detailed process to be followed in setting a regulatory budget. An Advisory Panel, consisting of representatives of supervised entities, is consulted but has no formal decision-making powers. The proposed budgets of the AFM and the DNB are discussed with their respective Supervisory Boards and then sent to the Minister of Finance and the Minister of Social Affairs and Employment for approval. The ministers may withhold approval if the budget is “contrary to the law or public interest,” after prior consultation with the authorities. There is no black-line law or jurisprudence on what constitutes “contrary to the public interest.” In practice, there is a dialogue with the Ministers on the size of the supervisors’ budgets. After approval, each budget is published in the Government Gazette. In the course of the year, if there are substantial differences between the actual outcome and the budget, the Ministers are to be notified. Once approved, the supervisors may reallocate resources to deal with changing demands. The Ministers must approve any budget overruns. This is done at the time the approval is given for the annual financial statements. If there are unforeseen events that have a substantial impact on the funds needed to fulfill required tasks, the authorities may request additional funds from the MoF. An agreement on the overall framework for funding the two supervisors for the next four years was recently reached with the government. The new framework expressly includes a flexible component that grows over the term of the framework.

10. The supervisors are fully funded by the industry. The AFM and the DNB are funded by the sectors that they supervise through annual contributions (levies), fees for registrations and permits (the tariffs are set by the MoF), and fines.⁸ The AFM and the DNB allocate costs to various industry segments. The allocation paid by each industry segment is based on the characteristics of the supervisory duties for each segment, taking into account the perceived risks of the supervised firms.

11. The budgets are viewed by the supervisors as being sufficient to meet their current risk-based priorities, but will be challenged both by increasing regulatory demands and pressure for reduced costs. The AFM and the DNB apply a risk-basis to their activities; priorities are based on regularly updated risk analyses of the conditions in financial markets and at individual supervised entities. In the authorities’ view, the available budget enables the AFM and the DNB to address the most important risks and to fulfill their roles effectively. In fact, both supervisors noted that they routinely have had money left over at the end of each budget period. However, the expectations for and demands on financial supervisors continue to grow, and both supervisors face challenges to supervise effectively and efficiently with the given resources. Further, in July 2016, when delivering the cost frameworks of the two supervisors to Parliament, the MoF indicated that the supervisors were expected to reduce their supervision costs over the next four years. The reduction in 2017 is expected to be 1.75 percent, while in 2020 the target is 7 percent. This will put additional pressure on the ability of the supervisors to carry out the full scope of their duties in the appropriate depth.

12. The AFM is exploring the possibilities of using data more intensively in its supervision activities (data-driven supervision). The new Asset Management division is taking part in one of the first pilots to explore how various data available on CIS can be used for supervision (discussed in detail below) The AFM’s ambition to become a more data-driven supervisor will require additional investments in technology and skills, putting additional pressures on its supervisory budget.

13. Present compensation levels are sufficient to attract and retain the necessary expert staff, but this may be more difficult in the immediate future. According to IOSCO, a key aspect of being an independent regulator is having the resources and ability to obtain and keep staff with the requisite expertise.⁹ The staff compensation levels at the supervisors have been benchmarked to industry and governmental salaries. For most staff positions, overall compensation is sufficient to attract and keep staff with the necessary skills and experience. However, other positions require more specialized skills and experience, and it is becoming more difficult to find the right staff. The attractiveness of the terms of employment is becoming more of a concern.

14. New salary rules are likely to exacerbate the staffing challenges. The members of the governing boards of AFM and the DNB are now subject to the Act on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector (Wet normering topinkomens, WNT). This Remuneration Act caps these persons’ compensation at a maximum of 100 percent of a government minister’s salary and the cap is effective for current board members as of January 1, 2017. Salaries above this limit are to be rolled back. The MoF may give exceptions on a case-by-case basis but has ruled out granting blanket exemptions. Two current AFM Board members and all members of the DNB Board have exemptions, and thus will be able to keep their current remuneration during their terms of appointment. A proposal to extend the WNT cap to all staff (WNT-3) is currently out for consultation, and it is expected that this will affect the salaries of current staff at the supervisors. WNT-3 is likely to have an adverse effect on AFM’s and the DNB’s ability to attract and retain staff, especially at the middle- and higher-management levels, and staff with very specialized expertise. The MoF is of the opinion that the draft amendment offers enough flexibility to the supervisors because the maximum remuneration is sufficient and exemptions are available on a case-by-case basis. The salary cap and necessity for individual approval from the MoF for hiring decisions will both make finding the right people for key tasks more difficult and raise independence issues. To address these concerns, the two supervisors should be granted a high level of autonomy for deciding on exceptions to the WNT.

Accountability

15. AFM and the DNB are accountable for their supervisory activities. The budget identifies the objectives of financial supervision for the upcoming year, based on the government-wide framework of outcome-oriented budgeting. At the end of the budget year, the AFM and the DNB each have to draw up an accounting report relating to the duties assigned under the Wbft. The accounting reports are accompanied by a statement of an auditor, regarding fair presentation, and a report on whether the collection and deployment of resources are in accordance with the Wbft. To avoid conflict of interest issues, the AFM is subject to review by a registered auditor of the Audit Department (Auditdienst Rijk, ADR) within the MoF. A public audit firm audits the DNB. Approval of the accounting reports is given by the MoF and the Ministry of Social Affairs and Employment and may only be withheld if the report is contrary to law or public interest. Each supervisor publishes its budget and annual report on its website.

16. The DNB is subject to additional oversight of its activities by government bodies. Its supervision of pension providers may be reviewed by the Inspection Service for Work and Income on behalf of the Minister of Social Affairs and Employment. This supervision involves regular spot checks and the exchange of information. Also, the Netherlands Court of Audit is entitled to conduct performance audits of the DNB with respect to “national tasks” performed by the DNB. The Court of Audit has legal authority to demand confidential information obtained by the DNB in the execution of its supervisory tasks, if such information is necessary for the execution of the public tasks of the Court of Audit.

Transparency

17. The AFM and the DNB aim to be as transparent as possible within the statutory framework. The supervisors are subject to a general duty that requires maintaining the confidentiality of data and information they obtain in the performance of their duties. The supervisors also have a wide variety of transparency obligations. As an essential part of their supervisory strategies, supervisors publish their plans, activities and the effects of their activities. Both supervisors publish results of thematic inspections, but without identifying individual firms. The AFM has wider power to publish its principal findings and conclusions from its inspections at audit firms and may identify the firms, provided no identifying information regarding the audit clients or third parties appears. Where fines and other significant penalties have been imposed as a result of enforcement actions, these matters are published after five working days. If preliminary relief is sought, publication of the decision is delayed pending the hearing judge rendering judgment. All rules and regulations have to be made public. This includes amendments (and the reasons underlying the amendments) to rules and regulations.

18. Extensive due-process requirements apply to all administrative tasks carried out by both supervisors. The AFM and the DNB, as administrative authorities, have to comply with the provisions of the General Administrative Law Act (Algemene wet bestuursrecht, Awb). These provisions require due process be followed in the exercise of all administrative functions. For example, if the AFM proposes to deny a license or impose a fine, every party negatively affected by that decision is entitled to a hearing prior to the AFM taking the proposed action. Every administrative decision must be based on sound reasons, giving weight to the principles of subsidiarity and proportionality. The reasons for the decision must be delivered to the party concerned before the decision becomes effective. The reasons usually are delivered within one week after the decision is made. The effected person may file a notice of objection. The Executive Board of the AFM will then reconsider the original decision. Its decision on the notice of objection may subsequently be appealed in administrative court. Objections to non-administrative decisions or other conduct of the authority can be brought before the District Court.

Rule-making authority

26. The financial supervisors do not have broad authority to make legally binding instruments (rule-making authority). The supervisors have the authority to issue measures such as supporting guidelines and interpretations of rules, but only have authority to make legally binding instruments where a specific statute explicitly has granted them that power. Where the power exists, it usually addresses very technical aspects of regulation. All other rule-making authority belongs to the legislature or the MoF. Where the AFM and the DNB have such authority, they are required to consult an eligible representative delegation from the institutions under their supervision. Further, regulatory powers can only be vested in the DNB when it concerns organizational or technical matters. Only in special circumstances are the supervisors more generally authorized to impose binding regulations without the need for a specific delegating provision, and these must be of temporary effect. The AFM may do so in order to improve the orderly and transparent financial market processes. The DNB is vested with the power to act in the interest of financial stability, such as when large and uncontrolled market movements occur that result in severe unrest in the financial sector.

27. IOSCO does not expressly say that securities regulators have to have rule-making authority; however, they must be able to act promptly when needed to address developing issues. Securities markets are changing at an ever-increasing rate and sometimes in unexpected ways. In order to be able to act promptly and appropriately in response to developments, the AFM and the DNB need the right tools. These tools include the ability to act flexibly, quickly and in a way that is legally enforceable. In particular, the supervisors should be able to fill in gaps in technical areas where there are no relevant EU regulations or national requirements. Legal reform should be pursued to expand the rule-making authority of the AFM and the DNB.

28. While the MoF does not have to be consulted before legally binding instruments are made, the MoF has discretionary power to revoke them. Where either authority has issued legally binding regulations, there is no obligation to consult the MoF. However, the supervisor must notify the MoF without delay. The Minister may revoke the regulation if, in the Minister’s opinion, it contravenes a law, treaty or binding decision of an international organization, or if it imposes an unreasonable burden on financial markets. The supervisor must be consulted first and be given an opportunity to amend the regulation to eliminate the problem. The Minister has never used these powers of revocation. In particular, there is no binding guidance that governs what criteria are to be applied in reaching a decision that something “imposes an unreasonable burden on financial markets” and the resulting ability of the Minister to exercise his discretion may raise questions about the independence of the supervisors and thus ties into the discussion above. IOSCO generally would require that the circumstances in which such an action is permitted should be clear and the process sufficiently transparent or subject to review to safeguard its integrity.¹¹ The MoF should consider further clarifying the conditions under which the powers to set aside rules of the supervisors would be exercised and those circumstances should be transparent to the public.

Other gaps

29. There is an annual process to identify and inform the legislature of necessary and/or desirable new legislation to improve the ability of the supervisors to carry out their responsibilities. Each supervisor prepares an annual Legislation Letter that identifies desirable reforms, and the MoF forwards these to the House of Representatives. The 2016 AFM Legislation Letter contains, among other issues, a request to extend the powers of the AFM to (i) obtain records kept by providers of telecommunication and data exchange; and (ii) freeze securities/bank accounts. At the moment, only the public prosecutor has these powers. IOSCO recently announced an Enhanced Multilateral Memorandum of Understanding (Enhanced MMoU) on Cooperation and the Exchange of Information. The Enhanced MMoU would require the securities regulator to be able to obtain and share telephone and internet service provider records and to advise on freezing of assets or freeze assets on behalf of another regulator. Both of these powers can be key tools in pursuing enforcement actions and protecting investors’ assets from leaving the jurisdiction improperly. It is recommended that the AFM’s authority to obtain information and freeze assets be expanded as the AFM has requested and that the authorities make the necessary changes to the relevant legislation.

30. The ability of the supervisors to carry out their tasks effectively would be enhanced if they were given authority to use outside experts to conduct inspections/investigations on the supervisors’ behalf. With the complexity of the marketplace increasing, the need for supervisors to have access to extensive, specialized expertise is increasing in tandem. It is neither feasible, nor necessary to have all expertise in-house, if the supervisor has the authority to engage the appropriate external experts as required to act on the supervisor’s behalf. It may also add value, in some circumstances, to engage independent parties to conduct examinations so as to foster public confidence in both the process and conclusions. In recent legislative letters, both supervisors have asked the MoF in for this authority to be added to their regulatory toolkit. Many supervisors have such legal authority and often may require the supervised firm pay the cost of the expert’s examination. It is recommended that this authority be given to the supervisors and that the authorities make the necessary statutory changes. Note that the supervisors should have the ability to make use of outside experts for supervisory activities in all sectors, not just securities.

Summary

31. The supervisors have operational independence, sufficient powers and are suitably accountable for their tasks on a day-to-day basis, but some concerns exist. The line between independence and accountability is difficult to draw. While supervisors may operate independently on a day-to-day basis and the accountability mechanisms are extensive, some aspects of the system may raise concerns depending on how they are used in practice. Such features include: the ministerial control over the budget; the authority of the MoF to set aside rules enacted by the supervisors; and the cap proposed to apply to staff salaries which may limit the supervisors’ ability to hire and retain staff with specialized expertise. Even if these features do not directly affect the supervisors’ independence in practice, they may create a perception of a lack of independence that may be damaging to the public confidence in the system. The risks of impairment of independence could be reduced by the implementation of the recommendations as above, such as greater autonomy over the budget, and the addition of some clear and objective criteria for the exercise of the power to dismiss members of the governing boards or overrule a supervisory regulation. The supervisors’ ability to fully and effectively supervise the markets and take action where problems are identified would be improved by some expansion of their authority.

Independence

50. There are extensive and comprehensive auditor independence requirements in place. In the Netherlands, independence requirements for audit firms and auditors can be found in EU Regulation 537/2014,²⁸ the Wta, the Bta, as well as further Regulations issued by the NBA. The two relevant Regulations are the Audit Firms Regulation (Verordening accountantsorganisaties (VAO)) and the Independence Regulation (Verordening inzake onafhankelijkheid (ViO)).

51. The Dutch system, like many jurisdictions, uses the threats and safeguards system for addressing potential independence issues. Both audit firms and auditors are obliged to assess and document their independence. If a situation exists that may cast doubt on or threaten the auditors’ independence, additional safeguards must be implemented. If sufficient safeguards cannot be put in place to offset the threats, the auditor and/or the audit firm must withdraw from the engagement. The audit firm and auditor must document these actions. More detailed requirements, including an obligation for annual confirmation by all auditors that they comply with the relevant independence rules and report any perceived threats, also apply.

52. The extensive statutory provisions are supplemented by detailed standards issued by the NBA. The VAO of the NBA includes additional obligations in relation to the audit firm’s independence. It, inter alia, obliges audit firms to appoint an officer to supervise compliance with the independence requirements. The NBA ViO also includes a number of independence obligations for all professional accountants involved in assurance engagements. As assurance engagements are broader than statutory audits, this expands the application of independence requirements.

53. The Dutch rules impose stricter auditor rotation requirements than the EU regulation. Under Dutch law, the responsible auditor may only perform the statutory audit of a PIE for a maximum of five consecutive years. The equivalent period under EU Regulation 537/2014 is seven years. The Netherlands has made use of the member state option to impose the shorter period. A cooling-off period of three years then applies before the auditor may again be responsible for the statutory audit for that PIE.

54. There are extensive rules that seek to ensure strict separation of audit and non-audit services in the Netherlands. There are legislative provisions that limit other relationships between the audit firm and audit clients or between the auditors and the audit clients. These include limitations or prohibitions on providing non-audit services and taking employment as a director or senior officer with the audit client. The EU regulation contains a list of non-audit services that cannot be provided by the PIE-audit firm. The Dutch have used their member state option and implemented additional requirements that result in a strict separation of the providers of audit and non-audit services in the jurisdiction.

55. Audit firms carrying out statutory audits of PIEs are obliged to publish a transparency report. Among other disclosures, the report must include a statement concerning their independence practices and confirm that an internal review of independence compliance has been conducted.

56. The Dutch Civil Code regulates who appoints the auditor. The General Meeting of members or shareholders has the power to appoint the auditor. When it does not give such assignment, the Supervisory Board, or where a Supervisory Board is absent or fails to comply with this duty, the management board is empowered to do so. The ability of the management board to appoint the auditor and/or audit firm will likely be removed with the implementation of new legislation in 2017. With the entry into force of EU Regulation 537/2014, the selection procedure for auditors and audit firms by PIEs has become the responsibility of the audit committee. It must make a recommendation for the appointment of a statutory auditor of the PIE.

57. Material changes regarding auditors must be notified to the AFM, but no prompt public disclosure is mandated. If the audit client withdraws the audit assignment, or the auditor and audit firm ends the assignment before the statutory audit has been completed, both the audit firm and the audit client are required to give prompt written notice to the AFM and provide an adequate statement of reasons for the action.²⁹ As a change of auditor is often a red flag indicating significant problems at a public company, IOSCO’s expectations³⁰ are that these events (where they involve a public company) should be disclosed promptly both to the regulator and to the public. Companies with securities listed on regulated markets are obliged to make prompt public announcements of any price sensitive information. Unexpected auditor resignations or changes might well be viewed as price sensitive information and thus subject to the prompt disclosure requirement. However, the Netherlands regime does not include any general obligation on unlisted public issuers or on auditors to make prompt public disclosure of such events, and the AFM does not publish the notices it receives. The relevant legislation should be amended to require immediate public disclosure of a change of auditor and the reasons therefore. This should apply (at least) to all public issuers and consideration should be given to extending the obligation to all PIEs and their auditors. As for the general material change reporting required under the Transparency Directive, the reporting obligation can be drafted to build in the ability to file the notices on a confidential basis in appropriate circumstances.

Valuation of assets

103. IOSCO expects that there be a proper and disclosed basis for asset valuation and for determining the price of units of a CIS.⁵³ There should be specific requirements to govern the regular valuation of CIS assets. These should apply high quality accepted accounting standards used on a consistent basis to produce fair and reliable valuations. The supervisors should periodically evaluate whether the CIS operators have systems and controls in place to ensure the valuations are fair and the calculation of NAVs are correct. The NAV of the CIS’s securities should be published regularly. Pricing errors should be governed by enforceable requirements.

AIFs

108. The valuation requirements for AIFs are based on the AIFMD. AIF assets must be valued and the NAV per unit calculated at least once a year. For open-ended AIFs, the frequency has to be appropriate to the assets held by the AIF and its issuance and redemption frequency. The valuation of financial instruments must take place every time the NAV per unit is calculated, and other assets must be valued at least once a year and every time there is evidence that the last determined value is no longer fair or proper. For closed-ended AIFs, such valuations and calculations also must be carried out in case of an increase or decrease of the AIF’s capital. AIFMD implementing measures include detailed requirements on the content, consistency of application and periodic review of the valuation policies and procedures, use of models to value assets, and review of individual asset values. These requirements do not specify the valuation methods that must be used; they simply require that the valuations follow the rules laid down in the law of the country where the AIF is established and/or in the fund’s rules.⁵⁶ Dutch AIFs would be subject to the same rules as for UCITS funds—as in, valuation at market value as far as possible—but funds established elsewhere would not necessarily be subject to the same requirement.

109. Fund managers are responsible for the proper valuation of AIF assets, the calculation of the NAV and the publication of that NAV. The fund manager’s liability to the AIF and its investors is not affected by the appointment of an external assessor. The external assessor is liable to the fund manager for any losses suffered as a result of the external assessor’s negligence or intentional failure to perform its tasks and cannot contract out of this responsibility. This liability regime is part of Dutch civil law. The AIFs’ depositories and auditors have similar verification obligations as apply to UCITS (see paragraph 103).

110. The AIFMD also includes requirements to support independence of the valuation function. If the AIFM performs the valuation, those responsible for valuation must be functionally independent from the portfolio management function and the remuneration policy, and other measures must ensure conflicts of interest are mitigated. Any external valuer must be independent from the AIF, the AIFM, and any other person with close links to the AIF or AIFM. The AIF’s depositary cannot be appointed as an external valuer of the AIF, unless it has functionally and hierarchically separated the performance of its depositary functions from its valuation tasks and potential conflicts of interest are properly identified, managed, monitored, and disclosed to the investors. The external valuer is prohibited from delegating the valuation function. The AIFM must notify the competent authority of the appointment of the external valuer. If the valuation function is not performed by an independent external valuer, the AIFM’s competent authority may require the manager to have its valuation procedures and/or valuations verified by an external valuer or auditor. The AFM has not yet ordered such a verification.

111. The Dutch CIS regulatory framework requires the use of forward pricing for all types of funds. All AIFs and UCITS funds must be priced using forward pricing, which is consistent with Principle 9 of the IOSCO principles for the Valuation of Collective Investment Schemes. Further, there is a trading system in place in the Netherlands to facilitate purchase and redemption of open-ended CIS funds and Euronext Amsterdam developed a specific service (Euronext Fund Service) to facilitate this trading system. The trading system and associated system for attribution of costs applies to all open end CIS listed at Euronext Amsterdam and all non-listed open-end CIS offering participations in the Netherlands. The price of the executed orders consists of the NAV plus or minus a (limited) spread. This spread may only cover the costs the CIS needs to make in order to facilitate participants entering or exiting the CIS, such as transaction costs of underlying assets and costs as a result of ‘market impact’ in the case illiquid assets need to be bought or sold. The spread is charged as a percentage of the NAV and needs to be published in the prospectus. The difference between the real costs and the calculated spread are settled within the CIS. CIS managers are expected to periodically assess if the size of the spread is adequate, since it is not supposed to be a source of return, nor a structural loss. Historical pricing is not permitted.

112. MMFs pose no present risk in the Netherlands. The EU has been discussing, but has not yet finalized, a MMF Regulation that may permit constant NAV MMFs subject to certain safeguards.⁵⁷ Recommendation 10 of IOSCO Policy Recommendations for MMFs⁵⁸ strongly recommends against allowing constant NAV funds on the basis that the risks of “breaking the buck” and resulting runs are too high. Given that the aggregate AUM of Dutch MMFs is small, and the fact that most are variable NAV funds, the risks of runs are small. However, the AUM at MMFs are growing fast, so the supervisors should keep a close watch on the funds. Further, pending the finalization of the rules at the EU level, the supervisors should endeavor to be sure any new funds with constant NAVs comply with the safeguards of the IOSCO Policy Recommendations for MMFs.

Managing the redemption risk

Use of leverage

125. The EU regulatory requirements on the use of leverage in UCITS funds and AIFs differ materially. A UCITS fund’s global exposure has to be calculated using either the commitment approach or the Value-at-Risk (VaR) method. Borrowing is not taken into account when determining the leverage of a UCITS fund, but UCITS funds are permitted to borrow only up to 10 percent of their NAV. The UCITS Directive limits a UCITS fund’s global exposure from derivative instruments to 100 percent of the total net value of the UCITS portfolio. The AIFMD defines leverage as any method by which the AIFM increases the exposure of an AIF, whether through borrowing of cash or securities, leverage embedded in derivative positions or by any other means. The AIFMD does not set maximum leverage limits; it requires AIFMs to set leverage limits in respect of each AIF they manage and disclose these to investors. The Dutch supervisors do not impose any specific leverage limits on AIFs. Leverage must be calculated using two methods: the gross method and the commitment method. The overall leverage of an AIF is expressed as a ratio of the AIF exposure to its NAV. The four leverage calculation methods are described in more detail in ^{Box 1}.

126. The leverage discussions and calculations are complicated by a lack of an agreed definition of what constitutes leverage in funds. There is also a mismatch between the definitions set out in the directives (including how NAV is calculated) and how leverage is used and managed in practice. There does not appear to be any consensus between supervisors in different jurisdictions or among the industry participants. The DNB has two projects (thematic investigations) ongoing related to leverage: (a) to improve the data quality of the leverage information; and (b) to develop a conceptual framework to apply to these issues, which will allow it to assess the need for further measures. The latter is being done in cooperation with the ECB. The results are expected at the end of 2016. Several international groups, including IOSCO, are also working on the issues. The AFM contributes internationally to this issue, for instance, via IOSCO Committee on Investment Management that operates in close cooperation with the Financial Stability Board.

127. While the AIFMD requires AIFs’ leverage to be reported to the competent authorities on a regular basis, the reporting requirements on UCITS funds’ leverage are much more limited. UCITS fund managers must only report annually on the types of derivative instruments used for each managed UCITS, the underlying risks, the quantitative limits, and the methods which are chosen to estimate the risks associated with the derivative transactions. UCITS fund managers are currently required to notify the details of their derivative risk management process annually to the supervisors.

128. The absence of an internationally agreed standard for determining an investment fund’s leverage is a major regulatory gap. Market participants are concerned about the potentially misleading leverage information that the current calculation methods may produce. Further, the lack of an agreed definition makes compliance in a regional marketplace very difficult. Also, in order to allow authorities to have a clearer overview of the use of leverage by investment funds, a common method for the calculation of investment fund leverage would be useful.⁶³ The DNB projects in this area are excellent initiatives and it is hoped that these will lead to the development of a practical and common approach to measuring investment fund leverage. The supervisors are also encouraged to contribute to international work to harmonize the leverage calculation method.

Depositaries and safekeeping of client assets

129. IOSCO principles⁶⁴ require adequate segregation of an investment fund’s assets from the assets of the fund manager, custodian and other custody clients. The safekeeping of fund assets is best entrusted to a completely independent depositary. If the use of an independent depositary is not possible, special legal or regulatory safeguards should be applied to ensure the protection of client assets. Client assets should be identified to the depositary and to any sub-custodian it uses. Investment fund assets should be segregated from: (i) the assets of the fund manager and its related entities; (ii) the assets of the custodian/sub-custodian throughout the custody chain; and (iii) the assets of other investment funds and other clients of the custodian throughout the custody chain (unless investment fund assets are held in a permissible omnibus account). With regards to the independence of the depositary/custodian, IOSCO standards highlight some safeguards that may be used to enhance the independence of a related-party custodian, such as additional disclosure or audit requirements.⁶⁵

130. The UCITS Directive and AIFMD require the appointment of a depositary for each UCITS fund and AIF. As a general rule, a depositary must have its registered office or a branch in the same country where the fund is domiciled. However, a non-EEA AIF’s depositary may be established in the AIFM’s home state. The competent authority of the UCITS home state must approve the depositary to act as a depositary for a fund domiciled in that EEA state. There is no such requirement in the AIFMD; however, the Dutch supervisors have to approve all depositaries used by the Netherlands domiciled funds. The AIFMD and UCITS V Directive require a detailed written contract between the fund manager and depositary that includes provisions that regulate the flow of information necessary for each party to perform their roles. The Netherlands regime imposes the same authorization requirements on depositaries for UCITS funds and AIFs. A depositary must be suitable, which includes an assessment of its executives’ fitness and propriety and the depositary’s capacity to carry out its duties for the type of assets to be held and transactions to be undertaken by the fund.

Managers and depositaries

140. The AFM puts significant effort into the authorization process in order to reduce the risk of insufficient governance. As noted, UCITS fund managers must be authorized and AIFMs must be either authorized or registered. In its licensing and other processes relating to these managers, the AFM emphasizes governance matters. These include requirements such as functional and hierarchical separation of portfolio and risk management functions, checks and balances within managers, reporting lines of directors and high-ranking officers (such as the heads of risk, control, audit, legal, and compliance functions), and relationships with third parties (such as depositaries and custodians). Conflicts of interest are another focus.

141. The authorization and ongoing supervision process for AIFMs has been challenging. Eighty seven domestic fund managers that were licensed before July 22, 2013 automatically had their licenses converted to AIFM licenses on the implementation of the AIFMD. Most of these were domestic fund managers that managed funds only sold in the Netherlands. While they were subject to a detailed authorization process when they were originally licensed to sell domestic funds and were required to take all necessary measures to comply with the new AIFMD regime, they were not subject to any special review prior to the conversion of their licenses. Many of these managers were unprepared for the requirements under the AIFMD and the enhanced level of supervision they would face. To address the potential gaps between the old domestic rules and the new AIFMD requirements, special risk-based attention has been given to AIFMs with converted licenses to ensure they fulfill the required obligations, with particular attention being paid to the depositary arrangements and the segregation of client assets. For example, an enhanced compliance review is done when one of these managers applies to manage a new fund or gives notice of a material change, such as a change in management, an acquisition or change in depositary. Approximately 50 percent of these converted managers have been subject to such an enhanced review. The AFM is intending to review the remaining managers⁷¹ in 2017 via thematic and risk-based reviews.

142. There is a comprehensive review process carried out by a dedicated AIFM team when assessing an application for a license or seeking to register a new fund. Any applicant for authorization as an AIF manager that applied after July 22, 2013 has been subject to a comprehensive review process covering all aspects of the requirements. A substantial number of new applications have been refused or withdrawn. The AFM has received a total of 24 depository notifications since 2015 to the end of July 2016. Two hundred ninety three AIFs were registered since 2014.

Table 11.

Netherlands: AIFMD: Number of New Licenses and Registrations

Source: AFM.

^1/Does not include the managers (and their AIFs) that were “pre-AIFMD” domestically licensed and whose licenses were automatically converted into AIFM licenses on July 22, 2014.

^2/The numbers for 2016 reflect only the first half of the year.

Table 11.

Netherlands: AIFMD: Number of New Licenses and Registrations

Year	AIFM Licenses Granted	Registrations of “Light Managers”	AIF Registrations
2014	13 1/	108	150*
2015	12	82	100
2016 2/	4	39	43

Source: AFM.

^1/Does not include the managers (and their AIFs) that were “pre-AIFMD” domestically licensed and whose licenses were automatically converted into AIFM licenses on July 22, 2014.

^2/The numbers for 2016 reflect only the first half of the year.

View Table

Table 11.

Netherlands: AIFMD: Number of New Licenses and Registrations

Year	AIFM Licenses Granted	Registrations of “Light Managers”	AIF Registrations
2014	13 1/	108	150*
2015	12	82	100
2016 2/	4	39	43

Source: AFM.

^1/Does not include the managers (and their AIFs) that were “pre-AIFMD” domestically licensed and whose licenses were automatically converted into AIFM licenses on July 22, 2014.

^2/The numbers for 2016 reflect only the first half of the year.

143. The pool of fund managers in the jurisdiction is small. As of June 1, 2016, 16 fund managers are authorized to manage and offer units in a UCITS fund in the Netherlands. Of the 944 UCITS funds established in the Netherlands, 42 are managed by Dutch fund managers and 902 by non-Dutch fund managers. During the last 3 years the AFM has granted 6 UCITS fund manager licenses and 17 requests for registration of UCITS funds.

144. The authorization process is largely based on reviewing documents that are submitted on line and/or on paper. Additional contacts with the applicant are initiated as needed. The application process for new AIF or UCITS manager licenses requires submission of extensive information on matters including fitness and propriety of the policy makers; policies and procedures for the sound conduct of business; control structure; conflict of interest policies and disclosure; depositary and safekeeping of assets; capital adequacy and solvency. The application package is filed with the AFM and automatically provided to the DNB. The AFM is lead supervisor on the licensing process and licenses are granted when all requirements are fulfilled and any additional questions are answered satisfactorily. The DNB carries out its prudential assessments of the managers and depositaries independently (but with full communication with the AFM on issues) and provides the AFM with its “prudential advice” on whether the applicant meets the prudential requirements once that process is completed.

145. The review of an application at the AFM is risk-based. When reviewing a license application or a new fund registration, all materials are reviewed but areas seen to give rise to significant risks are given particular attention, such as:

• The soundness of matches between the types of invested assets (liquidity profiles and complexity of assets), redemption frequencies, available restrictions managers can impose on redemption rights, and the type of investor that is targeted and their investment horizon;

• The policies that may have a direct or indirect impact on risk profiles and risk-taking behavior, e.g., remuneration, conduct of business, risk management, and conflicts of interest policies. For example, when liquidity management policies are reviewed, the ability of the fund to restrict redemptions in appropriate circumstances is considered;

• The governance, such as a functionally independent risk function and fit and proper day-to-day management; and

• The role of the depositary.

146. For depositaries, the AFM focuses on the content of the depositary agreement between the fund manager and the depositary. Every time a fund manager applies for the registration of a depositary, the depositary agreement will be fully reviewed to ensure it complies with the rules as laid down in the directives and implementing regulations. The AFM also reviews the operating memoranda, service or operating level agreements and all other documents that are provided to the AFM and checks if these comply with the law. Further, the persons who effectively conduct the business of the depositary must be of sufficiently good repute and sufficiently experienced (i.e., fit-and-proper testing of their day-to-day management). If new instruments are to be held by the depositary, its capacities are reassessed to ensure it can handle the new demands.

147. The DNB has a comprehensive application review process that seeks to ensure both that initial capital is met and that the firm will be operated in a sound and prudent fashion. The DNB does its due diligence on the whole package of information and its assessments go beyond looking at whether the initial capital requirements are met. The reviewers also assess, for example, the reasonableness of the business plans and forecasts, and what would happen to the capital of the firm if the forecasts were not met. The initial capital presented is expected to be sufficient to cover the minimum required plus the expected losses in the initial years of operation. The DNB also assesses risk management, liquidity management and leverage management as applicable. The DNB follows up with the applicant for further information, as needed, and when gaps are identified. As noted earlier, the DNB also reviews the fitness and financial soundness of anyone who holds or proposes to hold more than 10 percent of the equity of an investment firm or the manager of a UCITS fund. It has no equivalent authority to review qualified holdings of AIFMs. This authority belongs to the AFM (see also the discussion in paragraph 99).

148. Under the UCITS Directive, member states have the discretion to determine whether, and subject to which conditions, delegation of investment management is permitted. The fund manager may delegate one or more of the functions it has to perform as a fund manager in compliance with the requirements set out in the UCITS Directive. However, outsourcing of the investment policy is not permitted. The UCITS Directive prevents delegating investment management to the depositary or to any other person with potential conflicts of interest and requires the delegate to be authorized for asset management, prudentially supervised and, in the case of a non-EEA person, there must be cooperation arrangements in place between the relevant authorities. Delegation must not prevent effective supervision or the fund manager from giving further instructions to the delegate or from withdrawing the mandate.

149. AIFMD includes similar, but not identical, delegation requirements. An AIFM must provide a detailed description of its entire delegation structure to its competent authority. Subject to the approval of the competent authority of its home state, an AIFM can delegate portfolio management or risk management. Several conditions must be met, such as the AIFM must be able to provide objective reasons to justify its entire delegation structure; the delegate must have sufficient resources to perform such task; for portfolio and risk management the delegate must authorized and subject to supervision; and the delegation must not prevent effective supervision. Delegation to such persons is not permitted under the UCITS Directive. Sub-delegation requires the consent of the fund manager and notification to the competent authority. The AIFMD specifically prohibits delegation and sub-delegation of portfolio management or risk management to a delegate of the depositary that is not functionally and hierarchically separated. The AFM does not apply any requirements in addition to those set out in the AIFMD.

150. Common requirements apply under both Directives regarding notice of delegation, liability and limits to delegation that are consistent with IOSCO expectations. A fund manager is also obliged to inform the AFM of its intention to delegate any function and the disclosure document (prospectus) for the fund must contain information about the delegates. The liability of the fund manager is not affected by the delegation, and it remains responsible for the proper operation of the fund. Finally, a fund manager must not delegate its functions to the extent that it becomes an empty shell (or “letter box entity”).

151. AIFMD includes additional requirements on delegation to non-EEA persons. A written agreement must exist between the relevant competent authorities covering at least access to information and documents, the ability to carry out on-site inspections and enforcement cooperation. The non-EEA country also must not be on the Financial Action Task Force’s (FATF) list of noncooperative countries. As of September 2015, the AFM had entered into the AIFMD Memorandum of Understanding (MoU) with 44 foreign regulators.⁷²

Funds

152. The AFM follows the same overall process for the registration of new UCITS funds and when notified of new AIFs. All UCITS funds and AIFs sold by authorized AIFMDs are subject to prospectus requirements, although the requirements are less extensive for AIFs offered to professional investors. As described above for asset-backed securities, all prospectuses are reviewed, but more attention is focused on specific information elements within the disclosure documents, and less effort is applied to less critical elements. The AFM uses a structured approach, using both internal and external sources of information, to perform a risk assessment of the transaction and identify the KPRs. These KPRs can be general, issuer or transaction specific, and steer the review. For example, for AIFs the information on the depositary and on the manager is a particular focus. The purpose of the review is to verify compliance with the relevant regulatory requirements. When the AFM is not satisfied with the information provided or the disclosures made, it challenges the proposal or aspects of it. This usually results in amendments to the fund documentation or withdrawal of the application. Where the AFM receives notification of a new AIF from an AIFM that was automatically licensed when the AIFMD was implemented, the AFM reviews the application particularly carefully and the prospectus is assessed in detail. This has led to the rejection of several applications because the prospectus did not comply with the law. The AFM also uses the review of the prospectus as an opportunity to ensure the AIFM complies more widely with the relevant AIFMD requirements.

Foreign funds and managers

153. The requirements set out in the UCITS and AIFM Directives on cross-border offering or management of funds applies with few, if any, additional requirements imposed by the Netherlands authorities. A description of the rules that apply to cross-border offering and management of funds is set out in Appendix II. These largely track the requirements in the directives without any additional requirements imposed at the national level. The one material exception is for licensed fund managers established in a member state other than the Netherlands who wish to offer their EU AIFs to Dutch retail investors. The fund manager will have to meet the specific requirements applicable in the Netherlands for offering units to nonprofessional investors (the “top-up retail regime”) which necessitates more extensive disclosure to bring the AIF prospectus into alignment with the information provided in a UCITS prospectus. To use this regime, European fund managers need to complete the passport procedure, send a retail distribution notice form to the AFM, and provide a signed declaration wherein the fund manager explicitly states that it will meet the top up requirements in the Netherlands when it offers units in an AIF to nonprofessional investors.

Organization and resources

154. IOSCO principles require the regulator to apply proper supervision throughout the life of a particular CIS and CIS operator that promotes high standards of competence, integrity and investor protection.⁷³ The regulator should have clear responsibilities and powers with respect to inspections, investigations and authority to take remedial action in the event of breach or default. The ongoing review should involve both off-site monitoring, such as review of regulatory reports and appropriate performance of on-site inspections of entities involved in operating CIS (CIS operators, custodians, etc.).

155. The AFM devotes significant resources to the supervision of funds and fund managers. Responsibility for supervision of funds and managers is divided between two divisions: Asset Management and Retail Investors. The various activities the AFM performs regarding the authorization of applications as well as the ongoing supervision of the different type of CIS, their fund managers, depositaries and the investment companies (licensed under MiFID), are now brought together in a newly formed Asset Management Division. This division also is responsible for supervising the distribution of funds to institutional investors. The division has 26 FTEs (including support staff) with 12 FTEs dedicated to licensing and 9 to supervision and enforcement in 2016. The ongoing supervision of distribution and investment services to retail investors is carried out in a separate Retail Investor Division, which also focuses on suitability risks and is responsible for the monitoring and enforcement of transparency requirements with respect to offerings to these investors. Both divisions work closely together in order to optimize results.

156. The department at the DNB primarily responsible for supervision of fund managers is the Supervision Investment Firms and CIS. The department consists of 12 staff: 9 supervisors and 3 analysts. Its activities are supported by various other departments within the DNB such as Supervision Policy, Statistics, Intervention, Financial Stability, and On-Site Supervision, whose expertise can be called upon when needed.

Powers

157. The supervisors have extensive powers for the performance of examinations and investigations at the fund manager, CIS and the depositary. As discussed under the Auditor section, Dutch administrative law does not formally distinguish between inspections and investigations. The same legal basis for carrying out inspections and investigations applies and the supervisors have the same broad supervisory powers for each activity.

Supervisory approach

158. The AFM’s supervision is risk-oriented. The risk analysis is based on signals from consumers, investors and other stakeholders, the insights the AFM acquires during interviews and investigations, and information collected from regular and ad hoc reports. Output from the risk analysis influences the prioritization of both thematic inspections as well as both inspections or investigations of individual companies, depending on the type of risk (e.g., is it an issue at the individual fund or manager level or market wide?) or the nature of the signal.

159. Fund managers with a large potential impact (because of their size or role) on the market are under more intensive supervision by the AFM. In addition to supervisory activities performed by the Asset Management Division, a dedicated account management team within the AFM monitors the conduct of these significant entities and may design and execute specific supervisory strategies if deemed necessary. To fulfill this task they may request additional reports such as compliance and audit reports or send questionnaires on specific topics. Large UCITS fund managers⁷⁴ and other fund managers under increased supervision are visited at least once a year by the supervision teams of the AFM. On-Site examinations are not full-scope but focus on specific areas such as the outsourcing policies, risk management and separation of functions, investment policy and liquidity, and NAV calculations. Smaller fund managers are supervised by another supervision team. For these fund managers, risk indicators are used, such as: general signals, Total Expense Ratio, Portfolio Turnover Rate, other signals of “churning,” and auditors’ reports.

160. The AFM monitors the activities of the UCITS fund managers and the depositaries on an ongoing basis. The AFM conducts “nursery visits” within a year after granting the license. On these visits the AFM assesses the operation of the administrative organization and internal controls (Operational and Control Procedures and Processes) in practice. The ongoing supervision is performed using the overall risk-based model. The supervision program emphasizes compliance with the duty of care.

161. The day-to-day supervision of AIFMs by the AFM has been focused on ensuring that all fund managers comply with the requirements of the AIFMD. As previously described, ensuring all AIFMs meet the AIFMD requirements has required a great deal of effort by the AFM. As this process is very resource intensive, regular on-site inspections and thematic inspections under the AIFMD regime have not yet taken place but are planned to start in the near future.⁷⁵

162. The AFM also engages in thematic reviews in areas indicated by the risk analysis process. The AFM’s risk analysis and prioritization processes lead to the formation of themes. Within these themes, project teams may look into different risks. The thematic investigations⁷⁶ the AFM has performed during the last three years are:

• Risks of securities lending across the majority of the UCITS fund managers;

• “Index-huggers.” In 2015, the AFM performed an investigation into UCITS funds that qualify as index-huggers, or closet index tracking funds. Closet indexing or index-hugging refers to the practice of fund managers claiming to manage portfolios actively (and charging higher fees) when in reality the fund stays close to a benchmark (which should be less expensive). The findings were published in 2016;

• Low volatility products. In May 2015, the AFM published a study on low volatility funds. In the report, the AFM makes clear that there are major differences in how volatility is measured, and how effectively the funds are able to reduce the volatility of the fund prices;

• Sustainable investing (both AIFs and UCITS funds) In response to the growing interest in environmental, social and corporate governance (sustainable) investments, the AFM has conducted interviews with a number of fund managers and assessed their investment policies and processes to get an idea of how they apply sustainable investment criteria in their funds. The AFM has found that there are many differences between fund houses in the way they interpret the criteria. The AFM follows the developments in the market with interest; and

• Real estate funds. In 2013, the AFM investigated to what extent fund managers of real estate funds have financially controlled and sound business operations. The investigation focused on potential financial risks,⁷⁷ contamination risks⁷⁸ and security risks. The AFM investigated to what extent fund managers were able to adjust the cost level in order to cope with decreasing income from management fees; what actions the fund manager took to secure financing for the funds; the level of information (correct, transparent and fair presentation) to the fund participants; and to what extent there is active rental management by the administrator.

163. The DNB’s supervision activities are also risk-based. The supervisor has categorized the fund managers (both AIF and UCITS) according to their T-score (in line with the DNB’s general FOCUS! methodology that categorizes all institutions under the DNB supervision according to their risk-profile). The fund managers are placed in category T1, T2 or T3 (with T5 being the highest risk category). The initial categorization is determined by the size of AUM, the type of client and the reputation of the firm.

• For the different T-categories a supervisory plan is set and updated on a yearly basis. The smaller and less risky institutions (T1 and T2) are subject to the regular prudential off-site monitoring. If events occur, appropriate action is taken on a case-by-case basis including on-site examinations and formal measures. The action plans are designed by the supervisors in cooperation with the DNB’s intervention and enforcement department. When formal measures are taken the intervention and enforcement department determines what is appropriate.

• In addition to the above mentioned activities, the T3 institutions are subject to account supervision, which includes off-site prudential monitoring, regular institution visits, and interviews conducted with the board, risk, compliance and other relevant parties to ensure that the DNB has sufficient information on the risks, mitigating policies and daily functioning of the different institutions.

• As for T4 and T5 firms, all three T categories of firms are expected to prepare a yearly Internal Capital Adequacy Assessment Program (ICAAP) assessment. All T3 institutions must file this yearly and one or two T1 and T2 institutions are selected to file on an ad hoc basis. The ICAAPs prepared by the institutions are reviewed by the DNB supervisors, benchmarked against each other and discussed/challenged by panels (composed of the DNB management, supervisors of other sectors (banks, insurance and pension funds) and the AFM). The outcome of this assessment is discussed with the boards of the institutions. Unlike for banks, the DNB does not have the authority under the CRR to impose additional capital requirements based on the outcomes of this process. However, informal means are used to encourage increased capital levels. For 2017 onsite visits will also take the form of onsite investigations, both regarding institution-specific issues and more sector wide concerns (IT, outsourcing).

• Every six months, the T3 institutions are scored by the supervisors on a number of selected risks according to the FOCUS! methodology in an automated system called Riskwise. T2 and T1 institutions are scored in groups according to their specifications. These scores are challenged by a panel (panel members include representatives from other departments and management) and approved by management.

164. The DNB regularly carries out thematic investigations called Risk Identification Projects (RIPs) and Risk Mitigation Projects (RMPs). The selection of RIPs and RMPs is also done bi-annually after the risk scoring and is based upon perceived risks, persistent gaps and signals from third parties. These RIPs/RMPs are conducted on an individual level or more sector-wide. The thematic investigations conducted on fund managers have included:

• Investigation regarding the operational risks for a selected population of fund managers;

• The impact of FINTECH on fund management business models;

• Compliance with international best practices pertaining to remuneration policies for fund managers; and

• Assessment of the adequacy of the professional indemnity insurance held by fund managers.

165. Additional thematic investigations are planned. They include on-site inspections regarding the modeling used for the ICAAP; and fund managers exit plans in case of a wind-down scenario.

166. The resources devoted to on-site supervision of CIS and their managers should be increased, particularly routine on-site inspections. Effective supervision requires a combination of both on-site and off-site supervision. Risk-based supervision is an accepted supervision technique, but it may miss developments that are not yet part of the risk analysis process. Business practices may slip at supervised entities if they do not have a reasonable expectation of seeing a regulator on-site. It is also extremely difficult to do effective supervision of business conduct without doing on-site examinations. Finally, IOSCO generally expects on-site supervision to be part of the supervision of CIS. Both supervisors have on-site supervision programs, but the resources devoted to CIS are not extensive, nor are the inspections frequent. The supervisors should be conducting more examinations of firms and consider conducting some comprehensive examinations to get a fuller view of the managers’ actual practices.

167. All fund managers are subject to regular off-site prudential monitoring. Twice a year the DNB receives statements on the prudential position of fund managers. The statements have been designed by the DNB based on the financial reporting (FINREP) and common reporting framework (COREP)⁷⁹ for investment firms. There is an automated process in place that monitors whether the prudential position of the fund manager is in line with its prudential requirements. Every report is subject to a consistency/plausibility check on items that can significantly impact the prudential position of the investment fund, for example the calculation of the fixed overhead and the appropriate use and reporting of a professional indemnity insurance.

Reporting

168. The supervisors have extensive powers to obtain information on a regular or ad hoc basis. As noted above, the AFM and the DNB have extensive statutory powers to request any information from any person that is reasonably necessary for the due fulfillment of their responsibilities and exercise of their powers. The AFM and the DNB may request fund managers to supply them with additional information regarding themselves, the (type of) AIFs or UCITS funds, depositaries and any other relevant entities. If an event has occurred that seriously affects or may seriously affect the financial position of a financial undertaking such as an AIF manager or a UCITS management company, the DNB has the authority to prescribe that one or more statements (e-line reports) must be submitted with a higher frequency or within a shorter period than would normally be required. Neither supervisor has the power to require more frequent reporting on a routine basis, such as to require all funds of a certain type to file quarterly, rather than annually.

169. Both supervisors receive routine and ad hoc reports from fund managers and funds. Each AIFM licensed by the AFM must provide the AFM with annual financial and management statements for the manager and each AIF it offers in the Netherlands and each EEA fund it manages within six months of the year-end of the fund. Additional disclosure requirements apply to funds offered to retail investors. The manager must also file interim reports within nine weeks of the end of the first six months of the fund’s fiscal year. These statements must be published on the manager’s website. UCITS funds and managers are obliged to file annual financial statements with the AFM and the DNB within four months of the funds’ year-end and interim (semi-annual) statements on the same timing as for AIFs. The fund manager is obliged to file prudential statements (as described above in paragraph 164) with the DNB annually or semi-annually, depending on the nature of the manager’s business and license, not later than the last working day of the month following the reporting period. A Dutch AIFM also has to file the information specified in the AIFMD on the AIFs it manages regarding risk-management, use of leverage and results of stress testing. Equivalent information from UCITS managers on stress testing or risk management is not required to be filed routinely, but can be requested on a case-by-case basis.

170. In addition, as required under the AIFMD, the DNB receives regular reports on the AIFs under management by Dutch fund managers. These reports are designed by ESMA and the frequency of reporting depends on the size and risk of the funds, with the largest funds or those using leverage reporting quarterly. Under the twin peaks structure, these reports are sent to the DNB. The DNB and the AFM are currently developing the infrastructure to provide the data to the AFM so that it can be forwarded to ESMA as required. At the same time, ESMA is developing the systems necessary to receive and aggregate the information from each member country and analyze it from a regional perspective. The reports include the information required by the AIFMD on main instruments held, principal exposures and most important concentrations of the AIFs. In its analysis of the information, the DNB focuses on leverage within individual funds. However, the reporting template is complicated, not particularly well understood by the managers, and lacks user-friendly guidance on how to complete it, which reduces the accuracy of the reporting and the usefulness of the aggregate information generated. The definitions used in the template are also subject to varying interpretations. As a result, the DNB has two projects (thematic investigations) ongoing related to leverage: (a) to improve the data quality of the leverage information; and (b) to develop a framework to assess the leverage in AIFs. The latter is being done in cooperation with the ECB. The results are expected at the end of 2016.

171. Information about cross-border fund transactions that do not involve a Dutch fund manager or the Netherlands domiciled fund is not easily available to supervisors. Information is collected at the national level and is to be forwarded to ESMA. Particular information necessary for domestic supervision purposes may be requested from other countries’ competent authorities on an ad hoc basis, but there is no simple way to access that information routinely. While the AIFMD transparency reporting ostensibly applies to non-EEA managers and funds, the DNB published a notice that non-EU managers were not required to file the reports for 2015.

172. Effective supervision of CIS, their managers and related stability matters requires good data, and getting better data will require efforts on several fronts. To improve the consistency of AIFMD reporting and, thus, the quality of the information produced, the supervisors should:

• Work with ESMA and their fellow supervisors on improving the reporting template and related guidance, particularly with respect to clarification of the definitions of the terms used; and

• Continue to work with the industry, through workshops and additional “how to” guidance, to enhance the industry’s understanding of the requirements.

173. Incomplete data will hamper proper analyses of risk. The supervisors should ensure, as far as possible, that data from all managers and funds that are sold in the EEA (whether managed within the EU or from outside) are captured in the information where relevant for systemic risk monitoring. The authorities should also ensure that the full ESMA database (when operational) is available to supervisors so that they can obtain complete relevant information for national supervision activities.

Dutch authorities should also ensure active cooperation takes place with the home country authorities of the non-Dutch managers of Dutch domiciled funds, as the bulk of Dutch UCITS funds are managed from outside the country (see paragraph 91). Finally, to be useful for prudential supervision, the prudential statements from managers need to be timely enough to give early warning of changes of concern.⁸⁰ The authorities should consider whether prudential reporting by fund managers should be more frequent than semi-annual as large changes can happen in six months. Quarterly reporting, as required for investment firms, may be preferable.

Use of supervisory and enforcement tools

174. The supervisors have a wide range of formal enforcement measures at their disposal. They can, for example,

• Appoint a conservator;

• Give an instruction, such as to suspend the redemption of units;

• Impose an administrative fine;

• Impose an order for interim penalty payments; and

• Withdraw the license.

175. The supervisors also have the power to bar an executive director, a policy maker or a person in charge of the day-to-day policy, if such a person no longer complies with the rules regarding suitability. Further, the DNB may give a direction to a manager obliging it to adopt a certain course of conduct on specific points. A direction may be issued if either institution fails to comply with the provisions of the law or the DNB identifies signs of a development that may endanger the entity’s own funds, solvency or liquidity.

176. The supervisors have published a joint enforcement policy that sets out the relevant circumstances in deciding whether a violation has taken place and whether to proceed with enforcement. The policy describes how they supervise compliance with financial laws and regulations, the principles on which their enforcement policy is based, the factors involved in applying available enforcement tools and their accountability. The policy mentions a number of practical factors which affect their decision on whether to impose enforcement measures against a violator, including voluntary disclosure of the violation to the supervisor; the violator’s initiative to terminate the violation; its attitude towards the supervisor (cooperative or not); adequate follow-up to measures suggested by the supervisor; and management involvement with the violation.

177. The AFM and the DNB also use informal instruments to change noncompliant behavior of the fund manager, depositary or CIS. These instruments include sending a letter requesting a change of behavior or having a constructive conversation on compliance with standards at which the noncompliant behavior and the necessary change are discussed with the company. When a CIS or firm does not put in place the required changes, the AFM and the DNB usually move to use formal measures. Whether the AFM and the DNB choose to start with informal or formal measures depends on the severity of the situation, including the risk for investors, the repercussions for its prudential position and the previous history of the CIS or firm.

178. The AFM has used its enforcement powers in the investment management sector. In 2015, the AFM issued a public warning with respect to two AIFs. That same year, 40 informal enforcement measures were imposed on AIFs. The table below sets out more specific information on the administrative fines, the most serious formal enforcement measure that the AFM imposed, during the period 2014–15.

Table 12.

Netherlands: Formal Enforcement Actions of the AFM in the Period 2014–15

Source: AFM.

Table 12.

Netherlands: Formal Enforcement Actions of the AFM in the Period 2014–15

Year	Administrative Fine	Type of Entity	Violation
2015	€750.000	Asset Manager	Breach of the obligation to organize its operations so as to safeguard controlled and sound business operations.
2014	€100.000	Administrator	Offering rights of participation in a unit trust, not holding the required license.

Source: AFM.

View Table

Table 12.

Netherlands: Formal Enforcement Actions of the AFM in the Period 2014–15

Year	Administrative Fine	Type of Entity	Violation
2015	€750.000	Asset Manager	Breach of the obligation to organize its operations so as to safeguard controlled and sound business operations.
2014	€100.000	Administrator	Offering rights of participation in a unit trust, not holding the required license.

Source: AFM.

179. The DNB uses its enforcement powers in the investment management sector. When institutions fail to meet prudential requirements or the information required to be filed is late or flawed, the DNB takes action in accordance with enforcement policies that have been published on its website. There is a formal process for dealing with a firm that has breached its capital requirements. The process sets out the monetary penalties for the first breach in 25 months and for any subsequent breaches. Less formal processes apply to non-monetary sanctions, such as orders for interim penalty payments. When the DNB is of the view that a firm is unable to comply with the prudential requirements on an ongoing basis, it asks the AFM to revoke the firm’s license. The matter then becomes one for the AFM to hear and decide.

Table 13.

Netherlands: Formal Enforcement Actions of the DNB in the Period 2011–15

Source: DNB.

Table 13.

Netherlands: Formal Enforcement Actions of the DNB in the Period 2011–15

Year	Supervisory measure	Type of Entity	Violation
2016	Order for interim penalty payments	Asset Manager	Failure to comply with the prudential capital requirements.
2014/2015	No measures
2013	Instruction	Fund Manager	Failure to comply with the prudential capital requirements and controlled operations.
2012	Instruction	Fund Manager	Failure to comply with the prudential capital requirements.
2012	Instruction	Fund Manager	Failure to comply with the prudential capital requirements.
2011	Instruction	Investment Company	Failure to comply with the prudential capital requirements and requirements on controlled operations.

Source: DNB.

View Table

Table 13.

Netherlands: Formal Enforcement Actions of the DNB in the Period 2011–15

Year	Supervisory measure	Type of Entity	Violation
2016	Order for interim penalty payments	Asset Manager	Failure to comply with the prudential capital requirements.
2014/2015	No measures
2013	Instruction	Fund Manager	Failure to comply with the prudential capital requirements and controlled operations.
2012	Instruction	Fund Manager	Failure to comply with the prudential capital requirements.
2012	Instruction	Fund Manager	Failure to comply with the prudential capital requirements.
2011	Instruction	Investment Company	Failure to comply with the prudential capital requirements and requirements on controlled operations.

Source: DNB.

FSC

184. The FSC brings together the MoF, DNB and AFM with the objective of identifying risks to financial stability in the Netherlands and making appropriate recommendations. The FSC was formed following a post-crisis parliamentary enquiry. Senior officials of the MoF and the supervisors are committee members and it is chaired by the president of the DNB. The Netherlands Bureau for Economic Policy Analysis attends meetings as an external expert. The Committee meets at least twice a year to discuss developments concerning financial stability of the Dutch financial system, including the way in which warnings and recommendations of the ESRB should be implemented in the Netherlands. While issues relating to shadow banking generally (and asset management issues in particular) have been discussed, the principal focus of this forum has been issues relating to real estate mortgage financing.

185. Both supervisors have established groups to address stability issues. The AFM has created a Financial Stability Forum within the supervisor. The forum is currently chaired by the Head of the Asset Management Division and consists of delegates of various AFM divisions who meet every one to two months to discuss macro trends/developments and potential systemic risks. The scope is AFM-wide and not just focused on asset management issues. A small team for financial stability analysis, consisting of members from various divisions assigned part time, carries out the work agenda. If needed, the team conducts analyses concerning specific stability topics, often in close cooperation with one or more specific divisions. The AFM input on topics to be discussed in the FSC are prepared by members of the financial stability team. The DNB has established the Committee on Financial Stability. It is chaired by the Director of the Financial Stability Division and comprised of senior management members. Among other tasks, it prepares the DNB’s positions for discussions at the FSC.

186. The new Asset Management Division is exploring the possibilities of using more quantitative analysis in both routine supervision and financial stability activities. This work is in its early stages of development. Within the Division a data team, closely cooperating with other internal and external specialists, has been formed to analyze the potential of the data that is generated by the AIFMD reporting requirements. This project has three aspects:

• Improving the quality of the AIFMD data provided by the fund managers by combining this data with other information available from a variety of sources such as markets, the DNB macroeconomic statistics, data generated by other EU directives (such as the EMIR that can be used to monitor the use of derivatives, and from MiFID on transactions), fund documents, such as disclosure documents, self-assessments and regular financial reports, ongoing supervision information and signals, and other national and international data/risk information;

• Assessing the scope and limits of the available data in order to get a better understanding of its potential use for monitoring and mapping of trends and developments and corresponding (potential) systemic risk implications; and

• Exploring whether the data received under the AIFMD (i.e., data about the funds individually, rather than at the fund manager level) provides valuable input for broader conduct of business supervision of fund managers.

187. The first analysis has recently been delivered on the domestic AIF market. The analysis used information from reporting under the AIFMD and other information available to the supervisor, such as prospectus disclosure.

188. The Asset Management Division and its financial stability team collaborate on stability topics related to the asset management sector. For example, in a joint effort, the Asset Management Division and the financial stability team (together with the DNB) are currently investigating whether there are Dutch real estate funds with liquidity mismatches that may give rise to systemic risk. This project is also looking at the extent into which the “high risk” combination exists of open-ended real estate funds (with frequent redemption rights) that invest in illiquid assets⁸² and in which investors are likely to make use of these redemption rights (i.e., retail investors or other open-ended funds). The possibility that this high-risk combination might lead to “fire sales” by the manager/fund in order to meet the redemption demands is also being assessed, along with whether enough preventive and/or reactive liquidity management tools can be used by the manager to prevent that from happening. The existing disclosure provided to investors on these tools is part of the review. The project is identifying which additional liquidity management tools might be needed in the areas where the present liquidity management tools of the manager/fund are insufficient. Simultaneously, an assessment is being made of the sufficiency of the supervisors’ authority to require funds or managers to make use of all available liquidity management tools. It is recommended that the assessment of the supervisors’ powers, with respect to the use of liquidity management tools, be pursued in any event, even if the risks of this particular aspect of the funds industry proves to be not material.