How will the implementation of the European Union's AIFMD impact on Ireland's investment funds industry, ask Adam Donoghue and Ann-Marie Teehan.
The global financial crisis of 2008, most notably the Lehman and Madoff affairs, highlighted certain gaps in the regulatory framework of the alternative investment fund industry and led to many questions regarding the due care and diligence that fund managers were exercising on behalf of their investors. Thus, work began on both sides of the Atlantic on putting a comprehensive and harmonised regulatory structure in place. In the EU the result is AIFMD (Alternative Investment Fund Managers Directive), which was due to be implemented across all member states by last July, but which in many cases allowed a 12-month 'grandfathering' period and is only now clearly coming into focus.
The Directive is designed to regulate the actions of alternative investment fund managers (AIFMs) that manage alternative investment funds (AIFs) within the EU, and/or market AIFs to EU investors, while at the same time creating an internal European market for AIFMs to carry on their business. The Directive is supplemented by secondary regulations, which provide more granular detail and guidance on many of the requirements.
The scope of the Directive is very broad in terms of the definition of an AIF, catching all collective investment schemes that are not Undertakings for Collective Investment in Transferable Securities (UCITS) and allowing only a limited number of exemptions. While the Directive focuses on the activities of the AIFM and purports not to regulate AIFs directly, it does have a huge impact on fund products in terms of structural requirements and reporting obligations.
What are the key requirements?
The Directive has introduced extensive changes aimed at establishing a coherent approach to risk and its impact on investors and markets in the EU. While this article cannot comprehensively discuss what is the most significant regulatory restructure in the history of the alternative asset management industry, the main provisions can be summarised under the following headings.
AIFMs that have never previously been subject to any regulatory oversight in terms of remuneration now find themselves faced with onerous rules designed to promote sound and effective risk management and discourage excessive risk-taking, for example requirements to defer a portion of any bonuses and to pay at least half of bonuses...