The Alternative Investment Fund Managers Directive (the "AIFMD" or the "Directive") was finally approved by the European Commission and the European Parliament on 11 November. Member states are to bring it into force within two years after its publication in the Official Journal, so it is likely to come into force in the early part of 2013.
This note gives a broad summary of the main provisions of the Directive which we think will be of interest to our clients. It is not intended to be a detailed description of every provision of the Directive.
The Directive has proved one of the most political, and controversial, directives of recent times. It was proposed in haste in the wake of the credit crunch. No consultations were held before the first draft was published, and initial reactions from officials were that no changes would be accepted to the draft, because ministers had already agreed that it was imperative that the Directive be enacted immediately.
It soon became clear, however, that the initial draft of the Directive was badly flawed. The drafting was unclear, and there were serious concerns that the proposals would badly damage the position of the European Union as against the rest of the world. These fears have not been allayed by the final draft.
The impetus behind the Directive was to prevent hedge funds posing a risk to the stability of the EU's financial systems. One notable feature of the Directive is that it applies to fund managers who could not conceivably pose any risk. Another notable feature is the amount of information that needs to be supplied to regulators by fund managers. This, at least, is likely to result in the creation of many jobs - in filing all this information.
Authorisations: To operate in the EU, fund managers need to be authorised by a member state. Once authorised, a fund manager may market funds to professional investors in any member state. Risk Management and Prudential Oversight: Fund managers will need to satisfy their supervising authority of the robustness of their risk management arrangements, and will need to disclose information on a regular basis to the supervising authority. Treatment of Investors: Fund managers must provide clear descriptions of their investment policy, including descriptions of the types of assets and the use of leverage, to potential investors. Leveraged Funds: Supervising authorities have power to set limits to leverage in order to ensure the stability of the financial system. Fund managers using more than a certain amount of leverage will need to report to the authorities on a regular basis. Controlling Stakes in Companies: Fund managers whose funds hold controlling stakes in companies will need to report certain information to other shareholders and their regulator. Marketing: A passport allowing authorised fund managers (whether based in or outside the EU) to market funds to professional investors in the EU will come in to force at a future date, likely to be in 2015. Existing national private placement rules in relation to non-EU AIF can continue until at least 2018 but will be subject to additional conditions. Depositaries: Every fund must have a depositary. Depositaries will have strict liability where they delegate their functions, subject to certain exceptions. ESMA: The new European Securities and Markets Authority ("ESMA"), the successor to the Committee of European Securities Regulators ("CESR") will have increasing control over the policies and decisions of local regulators. A chart showing the application of the Directive to EU and non-EU fund mangers is set out in Annex 2.
This note summarises the main provisions of the Directive under the following headings:
Application and Scope - Who will it affect? Authorisation Conduct of Business Marketing Disclosure to Investors Reporting Obligations to Regulators Controlling Stakes in Companies Leverage Capital Requirements Valuer Considerations for the Future ANNEX 1 - General Principles ANNEX 2 - Application of AIFMD - Roadmap APPLICATION AND SCOPE - WHO WILL IT AFFECT?
The Directive regulates fund managers rather than the funds themselves. The definitions of fund manager (which we refer to as AIFM) and funds (which we call AIF) are crucial to understanding the scope of the Directive.
"AIF" is a broad definition and all funds, except open-ended funds authorised under the UCITS Directive, are categorised as AIFs under the Directive. In this context, a fund is an entity that raises capital from a number of investors and then invests that capital for the benefit of the investors in accordance with a defined investment policy. Hedge funds, private equity funds, investment trusts and all other types of non-UCITS funds are caught by this definition.
"AIFM" covers any person whose regular business is managing one or more AIFs. In order to be considered to be "managing" an AIF, an AIFM should at least be providing investment management services to the AIF: these can either be portfolio management services or risk management services. If neither of these services is provided, a person will not be an AIFM.
The Directive applies to all AIFMs which are established within the EU, regardless of:
whether the AIFs that they manage are established inside or outside the EU; whether shares/units in the AIF can be redeemed by the AIF; whether or not the AIF is listed; the legal form of the AIF; the legal structure of the AIFM. In addition, the Directive applies to all AIFMs established outside the EU, if they manage AIFs established inside the EU. Furthermore, the Directive applies marketing restrictions to AIFMs established outside the EU, which market in the EU AIFs also established outside the EU.
There are a number of exemptions, some of which are optional (at the discretion of the member state in which the relevant AIFM is established), to the scope of the Directive including:
where AIFMs manage AIFs whose only investors are the AIFM itself and group companies of the AIFM, provided that none of the investors are AIFs themselves; and AIFMs who only manage small AIFs, i.e. those whose assets under management do not exceed EUR 100 million (if the AIF uses leverage) or EUR 500 million (if the AIF does use leverage and there are no redemption rights exercisable during a period of 5 years from the date of initial investment in the AIF). Such AIFM must register but will be exempt from most of the Directive's requirements. AUTHORISATION
An AIF must have a single AIFM, which must be authorised.
The AIFM can be either an external manager appointed by the AIF or, if the legal form of the AIF allows it to be managed internally, the AIF itself. In such a case the same entity is both AIF and AIFM.
Someone authorised as an AIFM is not allowed to do anything except manage one or more AIF, except that it may also manage funds authorised under the UCITS directive and may in addition carry out certain administrative and marketing functions in relation to the AIF.
As an exception to this restriction on activity, individual member states may allow an externally appointed AIFM to provide certain other services, such as management of segregated investment portfolios and investment advice.
Authorisation is granted by the competent authority of the AIFM's home member state.
In order to qualify for authorisation, the AIFM must have sufficient initial capital (see Capital requirements below). Otherwise, the conditions to obtaining authorisation are very much what one would expect.
An authorised AIFM established in the EU may manage AIFs established in the EU, both in its home state and in other member states. In addition, it may manage an AIF established outside the EU as long as it is not marketed in the EU. If it is to be marketed in the EU, then separate provisions apply (see Marketing below).
An AIFM established outside the EU must be authorised by its "member state of reference" before:
managing an AIF established in the EU; or marketing in the EU an AIF managed by it. CONDUCT OF BUSINESS
The Directive deals with a number of aspects of running the business of an AIFM.
First, there are some general principles with which an AIFM must comply. The Directive's general principles are set out in Annex 1 to this paper.
One principle is worthy of detailed note. The Directive states that no investor may obtain a preferential treatment, unless this is disclosed in the AIF rules or instrument of incorporation. This is clearly aimed at the practice of side letters being issued. It is not clear whether it would be enough for the instrument of incorporation simply to state that side letters may be issued, or whether it will be necessary to go into greater detail about the circumstances. This is a point that may become clear only when the implementing measures are published.
It is also noteworthy that if an AIFM is authorised to carry out discretionary portfolio management, it may not, as part of that management, make any investments in the shares of the AIF it manages, unless it receives prior general approval from the client.
AIFM must ensure that their remuneration policies do not encourage risk taking which is inconsistent with the risk profiles of the AIF it manages. The Directive sets out a number of principles to be...