On October 4, 2018, the European Securities and Markets Authority (ESMA) refreshed its questions and answers document (Q&A – ESMA34-32-352) on the application of Directive 2011/61/EU on alternative investment fund managers (AIFMD). The new update provides guidance on the cross-border management of alternative investment funds (AIFs) having an umbrella structure with multiple compartments, or sub-funds, via the EU passport.

According to ESMA, alternative investment fund managers (AIFM) that intend to carry out the above management have to notify their national competent authority (NCA) about the identity of their general umbrella fund as well as the names and the investment strategies of its sub-funds. The AIFM also needs to inform the NCA if any change occurs in the composition of the umbrella AIF.

An umbrella fund represents an attractive structuring option to fund sponsors since it allows the creation of separate sub-funds under the roof of a single legal entity. Each sub-fund can be molded to the needs of particular investors - e.g. through a different investment policy or reference currency - without having to set up a completely new fund. This, in combination with the ring-fencing or legal separation of assets and liabilities on the level of each sub-fund, enhances investor protection.

Back in 2014 and 2015, ESMA clarified that an AIFM has to launch an extra notification procedure with its NCA in respect of each sub-fund it wishes to market in another member state under articles 31, 32, 35, 40 of the AIFMD (current Q&A 2 under section II – Notifications of AIFs) and that each sub-fund has to be treated separately for the purpose of the reporting obligations, including for the reporting frequency (current Q&A 62 under section III - Reporting to national competent authorities under Articles 3, 24 and 42).

The most recent Q&A deals with the notification procedure under article 33 of the AIFMD governing cross-border management (as opposed to marketing) of umbrella AIFs. The overarching principle that can be discerned from the three sets of Q&As is that despite the relative simplicity of the implementation and operation of an umbrella structure, sub-funds may in some cases require additional regulatory requirements to be fulfilled. 

However, ESMA's new answer has also, perhaps inadvertently, generated a supplementary question with regard to the notification of an NCA of "any change in the composition of an umbrella AIF". In particular, it is unclear what "composition" refers to. 

For example, in Q&A 6 under section II – Notifications of AIFs, ESMA did not consider it necessary to notify an NCA regarding the creation of a share class, which is to be marketed cross-border within an already notified (sub-)fund, but it is not clear whether the same principle can be applied by analogy to transnational umbrella fund management

It is worth noting that ESMA's Q&A guidance is in theory non-binding in nature, although NCAs rarely divert from it. This is particularly true for ESMA's guidelines, accompanied by a comply-or-explain mechanism, which effectively dissuades NCAs from being the "black sheep". Nevertheless, it appears that at least the term "composition" calls for further interpretation and it will be interesting to see how the NCAs will approach the issue.

The Luxembourg financial supervisory authority (CSSF), has already provided its own guidance on specific aspects of sub-funds (see the CSSFs Q&As concerning the Luxembourg Law of 12 July 2013 on alternative investment fund managers, in particular Q&As 8.d, 23.b and 23.o).  In the alternative investment universe, Luxembourg offers the possibility to establish sub-funds in both regulated vehicles - namely the specialized investment fund (SIF) and the investment company in risk capital (SICAR) - as well as in the semi-regulated reserved alternative investment fund (RAIF). As regulated vehicles (SIFs and SICARs) are under the supervision of the CSSF, each sub-fund and its relevant AIFM are automatically known to the CSSF. The ESMA Q&A now clarifies the situation for RAIFs, which are not under the supervision of the CSSF.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.