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.
SUMMARY
- 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?
Definitions
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.
Scope
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.
Exemptions
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 taken into account when establishing a remuneration policy. For example, where remuneration is performance related, the total amount of remuneration should be based on a combination of the assessment of the performance of the individual and of the business unit or AIF concerned and of the overall results of the AIFM. When assessing individual performance, financial as well as non-financial criteria should be taken into account. It is also stated that guaranteed variable remuneration is exceptional, and should occur only in the context of hiring new staff and be limited to the first year. It is also stated that payments related to the early termination of a contract should reflect performance achieved over time, and be designed in a way that does not reward a failure. The full set of principles is set out in annex II to the Directive.
Conflicts of Interest
AIFM must take all reasonable steps both to identify conflicts of interest and then to prevent conflicts of interests from adversely affecting the interests of the AIF and its investors. Where arrangements put in place to manage conflicts of interests are not sufficient to ensure that the risk of damage to investors' interests will be prevented, the AIFM must disclose the general nature of sources of conflicts of interest to the investors before undertaking business on their behalf.
Risk Management
It will be remembered that an AIFM will fall within the scope of the Directive if it carries out either risk management or portfolio management. If it does both these functions, then it is required to separate them "functionally" and "hierarchically". Presumably this means that they must be carried out by separate divisions or groups of employees. Individual member states may dis-apply this requirement to separate the functions, in cases where it would be disproportionate. In such a case the risk management process must nevertheless be effective.
An AIFM is required to have adequate risk management systems in place to measure and monitor all the risks associated with each investment strategy. These systems must be reviewed at least once a year.
As part of the risk management process, an AIFM must have a written due diligence process for making investments. The risks associated with each investment position of the AIF must be identified, measured and monitored on an ongoing basis. The AIF's risk profile must correspond to the strategy and objective of the AIF as set out in its prospectus.
Investment in Securitisations
The Directive states that AIF may invest in securitisations only where the originator retains a net economic interest of less than 5%. The EU Commission is directed to lay down "qualitative requirements" that must be met by AIFM which invest in these securities on behalf of one or more AIF.
Depositary
Each AIF must have a single depositary, appointed in writing.
The depositary must generally be a credit institution or firm authorised under MiFID, in either case with its registered office in the EU, or some other institution eligible to be the depositary of a UCITS fund.
If the AIF is registered outside the EU the depositary may, alternatively, be an equivalent institution outside the EU as long as it is subject to equivalent prudential regulation.
The AIFM may not act as depositary. Neither may a prime broker to the AIF, unless the depositary functions are properly separated from those of the prime broker and potential conflicts of interest are properly investigated and monitored.
If the AIF is established in the EU, the depositary must be in the same member state as the AIF.
The depositary has a duty to monitor cash flows. The AIF's cash may be kept in an account in the depositary's name (in which case none of the depositary's own money may be paid into the account) but, slightly surprisingly, accounts may also be kept in the name of the AIF or the AIFM.
In the case of other assets, financial instruments must - though the wording is not entirely clear - be registered in the name of the depositary. For other assets which are not financial instruments, such as land, the assets may be registered in the name of the AIF or the AIFM - again, a slightly surprising result that would seem to weaken the protection to investors.
The depositary may delegate its custody functions to third parties, but none of its other functions, which may be broadly described as a general duty of oversight. Even if it does delegate custody, however, the depositary generally remains liable for any loss, unless it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary. Some last-minute horse-trading, however, has provided for other exoneration so long as certain conditions are fulfilled. In particular, the delegation has to be by a written contract under which the delegate accepts liability and the AIF is able to go against the delegate directly.
There are also additional exemptions possible where the local law requires financial instruments to be held by a local custodian.
MARKETING
AIFM Established in the EU
Once the Directive comes into force in 2013 an AIFM authorised in the EU may market an AIF which is also established in the EU and which it manages, to professionals both in its home member state and in other member states. In either case, notification must be given in a prescribed form to the competent authorities of its home member state before the marketing begins. If marketing is to be in member states other than the home state, then the competent authority of the home state notifies the competent authorities in the other state where marketing is to take place.
To take advantage of this simple procedure, if the fund that is being marketed is a feeder fund, then the underlying master fund must also be an AIF established in the EU and managed by an AIFM established in the EU.
From a future date, likely to be in 2015, there will be a passport under which an AIFM established in the EU and which is complying with the AIFMD may also market to professionals in the EU an AIF established outside the EU which it manages, once the AIFM's home state regulator has confirmed that the requirements of the AIFMD are complied with. This passport will require:
- co-operation arrangements to be in place between the competent authorities of the AIFM's home state and the supervisory authorities of the country where the AIF is established;
- the country where the AIF is established is not to be on the Financial Action Task Force ("FATF")'s money laundering blacklist; and
- an agreement for exchange of information on tax matters between the two sets of authorities.
Individual countries may allow an authorised AIFM established in the EU to market to professionals, in that country only, non-EU AIF they manage and feeder funds which do not fall within the second paragraph of this section (i.e. either because the underlying master fund is established outside the EU or because it is not managed by someone in the EU), subject to co-operation agreements being in place and to the country where the fund is established not being on the FATF blacklist as described above.
AIFM Established Outside the EU
From a future date, likely to be in 2015, there will also be a passport under which an AIFM which is established outside the EU, but which has been authorised to manage an AIF established in the EU, may market that AIF to professionals in the EU.
From a future date, likely to be in 2015, there will also be a passport under which an AIFM established outside the EU, but which has been authorised in the EU, may also market AIF established outside the EU and which it manages, to professionals in the EU once its "member state of reference" has confirmed that the requirements of the AIFMD are complied with. Similar conditions apply as those for EU AIFM marketing non-EU AIFs but other member states will be entitled to complain to ESMA if they disagree with the decision by the member state of reference.
Individual countries may allow AIFM established outside the EU, but which are not authorised in the EU, to market AIF to professionals in that country only. There is no passport for such funds.
Retail Investors
The paragraphs set out above describe the position so far as marketing to professional investors is concerned. There is no passport for marketing to retail investors. Instead, individual countries may make their own rules on this topic, which may apply to any type of AIF.
DISCLOSURE TO INVESTORS
The Directive sets out transparency requirements which apply to AIFM. These cover the publication of an annual report for AIF which they manage or market and disclosure obligations to investors.
Annual Report
An AIFM is obliged to make available an annual report for each AIF which it manages. This must be provided to investors on request and must also be made available to the competent authorities of the home member states of the AIF and AIFM.
More limited information is required where the AIF is required to make public an annual report under the Transparency Directive. This information can be included as part of the general annual report or made available separately.
The annual report must contain at least the following information:
- balance sheet or statement of assets and liabilities
- income and expenditure report
- report on activities
- total amount of remuneration, split into fixed and variable remuneration paid by AIFM, and number of beneficiaries and, where relevant, carried interests paid by the AIF
- aggregate amount of remuneration broken down by senior management and members of staff whose action have a material impact on AIF's risk profile
Accounting information in the annual report must be audited and the auditor's report must be reproduced in full in the annual report.
AIFM must include in the annual reports of AIF (other than AIF which are not marketed in the EU) the following information of the relevant non-listed company where the AIFM reaches a position to exercise control:
- the operational and financial developments in respect of the non-listed company (and, in particular, a presentation of revenue and earnings, capital structure and a description of, and key factors relating to, the nature of the company's operations and its principal activities, stating the main categories of products sold and/or services performed, and an indication of any significant new products and/or services that have been introduced and, where the development of new products and/or services has been publicly disclosed, the status of development)
- the number of employees at the end of the period covered by the report (and changes in these numbers if they are material)
- a statement on significant divestment of assets
The EU Commission has power to specify the contents of annual reports, adapted to the type of AIF to which they apply.
Disclosure to Investors Before Investing
AIFM must make certain information available to investors before they invest in the AIF. This applies whether the AIFM manages the AIF or simply markets it in the EU. The information is, broadly, as follows:
- description of investment strategy and objectives; types of asset the AIF may invest in and techniques it may employ and associated risks; investment restrictions; circumstances in which AIF can use leverage; types and sources of leverage permitted and associated risks and restrictions on use of leverage;
- details of how AIF can change its investment strategy / investment policy;
- description of main legal implications of contractual relationship entered into, including information on jurisdiction, applicable law and on existence (or nonexistence) of legal instruments providing for the recognition and enforcement of judgments in the territory where the AIF is established;
- identity of the AIFM, the AIF's depositary, auditor and other service provided, and a description of their duties and investors' rights;
- description of any delegated management or depositary function, including identity of delegatee and any conflicts of interest which may arise from these delegations;
- description of the AIF's valuation procedure and the pricing methodology for valuing assets (including the methods used in valuing hard-to-value assets);
- description of the AIF's liquidity risk management, including redemption rights in normal and exceptional circumstances, existing redemption arrangements with investors and how the AIFM ensures the fair treatment of investors;
- description of all fees, charges and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors;
- how the AIFM ensures fair treatment of investors and, whenever an investor obtains a preferential treatment or the right to obtain preferential treatment, a description of that preferential treatment;
- the latest annual report;
- procedure and conditions of issue and sale of units or shares;
- the latest net asset value of the AIF or the latest market price of the unit or share of the AIF;
- information about the AIFM's arrangements, such as insurance, to cover its liability for negligence.
Investors must be told when there is any change to this information.
The AIFM must also inform investors, before they invest in the AIF, of any arrangements made by the depositary to contractually discharge itself of liability. The AIFM must also inform investors of any changes in relation to depositary liability without delay.
Where the AIF is required to publish a prospectus under the Prospectus Directive, only the information which is in addition to that contained in the prospectus needs to be disclosed. This can be done either separately, or as additional information in the prospectus.
For each AIF which an AIFM manages, it must also periodically disclose to investors:
- the percentage of the AIF's assets which are subject to special arrangements arising from their illiquid nature;
- any new arrangements for managing the liquidity of the AIF;
- the current risk profile of the AIF and the risk management systems employed by the AIFM to manage these risks.
AIFM managing or marketing one or more AIF employing leverage must, for each such AIF:
- disclose the maximum level of leverage and any changes to this level which the AIFM may use on behalf of the AIF as well as any right of the re-use of collateral or any guarantee granted under the leveraging arrangement;
- periodically disclose the total amount of leverage employed by that AIF.
The EU Commission has power to specify disclosure obligations of AIFM in relation to liquidity and leverage, adapted to the type of AIF to which they apply.
REPORTING OBLIGATIONS TO REGULATORS
AIFM are required to report regularly to their home regulator on the principal markets and instruments in which they trade on behalf of AIF which they manage. They must provide aggregated information on the main instruments in which they are trading, markets of which they are a member or where they actively trade, and on the principal exposures and most important concentrations of each AIF which they manage.
For each AIF established in the EU which it manages, an AIFM must provide its home regulator with the following information:
- the percentage of the AIF's assets which are subject to special arrangements arising from their illiquid nature;
- any new arrangements for managing the liquidity of the AIF;
- the risk profile of the AIF and the risk management tools used by the AIFM to manage market risk, liquidity risk, counterparty risk and other risks including operational risk;
- the main categories of assets in which the AIF is invested;
- the results of stress tests.
On request from its regulator, an AIFM must also provide its home regulator with a copy of the annual report for each AIF which it manages for each financial year and a detailed list of all AIF which it manages as at the end of each quarter.
An AIFM which manages AIF which employ leverage on a substantial basis must also make available to its home regulator information about the overall level of leverage employed by each AIF which it manages, including a break-down between leverage arising from borrowing cash or securities and leverage embedded in financial derivatives and the extent to which their assets have been re-used under leveraging arrangements. Information provided to an AIFM's home regulator about the level of leverage used by AIF which it manages must include the identity of the five largest sources of borrowed cash or securities for each AIF and the amount of leverage received from each of those entities for each AIF.
The Directive also provides that, where necessary for the effective monitoring of systemic risk, an AIFM's home regulator may also require additional information on a periodic or ad hoc basis.
The Commission has power to specify obligations to report and provide information. The Directive specifically provides that these measures shall take into account the need to avoid excessive administrative burdens for regulators.
CONTROLLING STAKES IN COMPANIES
The Directive sets out obligations for AIFM managing AIF which acquire control of non-listed companies and issuers. These will principally affect private equity funds. The Directive recognises the need to maintain a level playing field between EU AIF and non-EU AIF when acquiring control of companies in the EU and the danger of putting EU AIFM at a disadvantage vis-ā-vis other possible competitors including sovereign wealth funds but the reality is that the provisions will be more onerous for EU AIFM and AIF. The provisions including obligations in relation to:
- notification of the acquisition of control of non-listed companies;
- disclosure in the case of an acquisition of control of a non-listed company;
- disclosure of leverage in the case of an acquisition of control of non-listed companies;
- specific provisions regarding the annual report of AIF which exercise control of non-listed companies.
In terms of scope, the obligations apply to:
- AIFM which manage one or more AIF which, either individually or collectively, acquire control of a non-listed company; and
- AIFM which have reached an agreement with one or more other AIFM which would allow AIF managed by these AIFM to acquire control of a non-listed company.
For the purposes of the Directive, "control" is the acquisition of 50% or more of the voting rights of a non-listed company.
There are exemptions which mean that the requirements of this section of the Directive do not apply where the non-listed company concerned is:
- a small or medium enterprise; or
- a special purpose vehicle which purchases, holds or administers real estate
The provisions in the Directive in relation to control of non-listed companies and issuers do not affect any rules adopted by individual member states in respect of the acquisition of holdings in issuers and non-listed companies in their jurisdiction.
Notification to Competent Authority
The Directive sets out certain shareholding thresholds, ranging from 10% to 75%, and each time an AIF acquires or disposes of shares which takes it above or below a threshold, the AIFM must notify the competent authority of its home state.
Notification of Acquisition of Control of Non-Listed Companies
The Directive requires that when an AIFM reaches a position to exercise control of a nonlisted company, the AIFM must notify the company and shareholders of the following information:
- the resulting situation in terms of voting rights;
- the conditions under which control has been reached, including information about the identity of the different shareholders involved, any person entitled to exercise voting rights on their behalf and, if applicable, the chain of undertakings through which voting rights are effectively held;
- the date on which control was acquired.
The Directive also imposes an obligation that when an AIFM reaches a position to exercise control of a non-listed company, the AIFM makes the following information available to the company, its shareholders and the AIFM's home state regulator:
- the identity of the AIFM which, either individually or in agreement with other AIFM, have reached control;
- the policy for managing conflicts of interests, particularly between the AIFM and the non-listed company;
- the policy for external and internal communication of the non-listed company, particularly in relation to employees.
Annual Report
Where an AIF acquires control of a non-listed company the AIFM must try to persuade the board of the company to include information about the company's likely future development in its annual report and must also include information about each controlled company in the AIF's own annual report.
Disclosure of Leverage
Where an AIFM reaches a position to exercise control of a non-listed company or an issuer, the AIFM must notify its home regulator and the investors in the AIF itself with information about the debt supported directly or indirectly by the non-listed company or issuer, both directly before and immediately after the control has been reached. This information must also be updated without delay whenever material changes occur. This is in addition to the information that must be disclosed about the use of leverage by the AIFM itself.
Asset Stripping
When an AIF has acquired control of an unlisted company it may not, for the next two years, support any share buy-back or distribution which would have the effect of paying out more than accumulated net profits, or reduce the company's net assets below that of the subscribed share capital and undistributable reserves. However reprehensible such action may be, it is hard to see how it would have a detrimental effect on the EU's financial system, and this requirement is a good indication of the political nature of the Directive.
LEVERAGE
The provisions on leverage in the Directive are primarily designed to reduce the build up of systemic risk and disorderly markets.
Leverage is widely defined as "any method by which the AIFM increases the exposure of an AIF it manages whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means".
The Directive deals with leverage in two ways, first by enabling the imposition of leverage limits and secondly by prescriptive disclosure requirements both in respect of investors and regulators.
LIMITS
Each competent authority is required to assess the risks that the use of leverage could entail, and where necessary to ensure the stability and integrity of the financial system (after notifying various EU supra-national authorities), to impose leverage limits or other restrictions on the management of the AIF.
The Commission is required to adopt implementing measures setting out principles clarifying the circumstances in which competent authorities must exercise such obligations, taking into account the different investment strategies, market conditions and the possible pro-cyclical effects that might follow.
CAPITAL REQUIREMENTS
The Directive states that minimum capital requirements are necessary to ensure the continuity and the regularity of the management of AIF provided by the AIFM.
An AIFM appointed as external manager must have an initial capital of at least EUR 125 000.
When the value of the portfolios of AIF managed by the AIFM exceeds EUR 250 million, however, the AIFM must be required to provide an additional amount of own funds which is equal to 0.02 % of the amount by which the value of the portfolios of the AIFM exceeds EUR 250 million (but the required total of the initial capital and the additional amount need not, however, exceed EUR 10 million).
In respect of this additional amount, AIF managed by the AIFM, (including AIF for which the AIFM has delegated one or more functions but excluding AIF portfolios that the AIFM is managing under delegation), are deemed to be portfolios of the AIFM.
In any event, the own funds of the AIFM must never be less than the amount required under Article 21 of Directive 2006/49/EC (on the capital adequacy of investment firms and credit institutions).
Member States may reduce the additional amount of own funds referred to in 9.3 above by half if the AIFM benefits from a guarantee of the same amount given by a credit institution or an insurance undertaking which has its registered office in a Member State, or in a third country where it is subject to prudential rules considered by the competent authorities as equivalent to those laid down in Community law.
An AIFM which is an internally-managed AIF must have an initial capital of at least EUR 300 000.
The capital requirements set out in the Directive do not apply to management companies authorised under the UCITS Directive which also manage AIF.
VALUER
The Directive requires each fund manager to appoint a valuer to establish the value for assets acquired by each fund and the value of the shares and units of the fund. Valuations must be done at least once a year, and more frequently if this is appropriate in the case of an open-ended fund.
The valuer has to be either legally or functionally independent of the fund manager. It is clear, therefore, that the fund manager itself can be the valuer, as long as a separate division is involved which is independent from the manager. Appropriate safeguards have to be put in place to prevent conflicts of interest and undue influence.
An external valuer must be properly qualified. The Commission is given authority to lay down which entities are eligible to be appointed under the Directive and other rules relating to valuations. Any valuer must have effective arrangements in place to prevent conflicts of interest from affecting the interests of the investors.
An AIFM has responsibility for the proper valuation of the fund assets, even though the valuation has been delegated to an external valuer. It looks, therefore, as if many fund managers will put arrangements in place to enable them to continue to do the valuations. Indeed, where a fund is invested in listed shares, the expense of an external valuer would not seem to be justified.
CONSIDERATIONS FOR THE FUTURE
Structure Funds as UCITS to Fall Outside of the AIFMD
Many investment strategies using derivatives can be accommodated within the rules applying to UCITS funds. This would not be possible though, for a fund which relies on borrowing to generate investment returns, as UCITS fund may not borrow except in very limited circumstances.
Managed Accounts
The Directive applies to managing funds. It does not apply to the management of a portfolio of assets belonging to one person.
Structured Products
It may be possible to achieve an investment result similar to that of investing in a fund without actually having a fund. For example, instead of a fund investing in shares of the FTSE-100 Index, a swap contract could be taken out by reference to the performance of the index.
Fund Redomiciliation
The ability to market funds domiciled outside the EU will depend on the ability of the country where the fund is based to satisfy the requirements of the AIFMD to enable funds domiciled there to be marketed in the EU. If this proves problematic consideration could be given to redomiciling funds into the EU.
Different Solutions for Existing Funds and New Funds?
We wait to see whether there will be any "grandfathering" positions for funds which already exist.
Non-EU Managers Remaining Outside EU
Managers whose fund investors are drawn almost entirely from outside the EU may decide simply not to offer their funds within the EU any more.
ANNEX 1 - GENERAL PRINCIPLES
The AIFM shall:
- act honestly, with due skill, care and diligence and fairly in conducting its activities;
- act in the best interests of the AIF or the investors of the AIF it manages and the integrity of the market;
- have and employ effectively the resources and procedures that are necessary for the proper performance of its business activities;
- take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, to identify, prevent, manage and monitor, and where applicable, disclose, those conflicts of interest in order to prevent them from adversely affecting the interests of the AIF and its investors and to ensure that the AIF it manages are fairly treated;
- comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of the AIF or the investors of the AIF or the investors of the AIF it manages and the integrity of the market;
- treat all AIF investors fairly.
No investor in any AIF may obtain a preferential treatment, unless this is disclosed in the relevant AIF's rules or instrument of incorporation.
Each AIFM the authorisation of which also covers discretionary portfolio management shall:
- not be permitted to invest all or a part of a client's portfolio in units or shares of the AIF it manages, unless it receives prior general approval from the client;
- with regard to certain non-core services, such as investment advice, be subject to investor-compensation schemes.
ANNEX 2 - APPLICATION OF AIFMD - ROADMAP
Key elements on the level of application of AIFMD will be:
- the location of the AIFM
- the location of the AIF
- whether marketing activity is carried out within the EU in respect of the AIF
|
Note |
Scenario |
AIFMD Implications |
|
1 |
EU AIFM managing EU AIF (Articles 31-33) |
|
|
2 |
EU AIFM managing non- EU AIF which are not marketed within the EU (Article 34) |
AIFMD will apply to the AIFM with the exception of Articles 21 and 22 relating to appointment of a custodian and production of an annual report by each AIF. Co-operation arrangements must be in place (between AIFM's home Member State competent authority and supervisory authority in third country where the AIF is domiciled) to ensure efficient exchange of information to enable the AIFM's home Member State competent authority to carry out its duties under the Directive. |
|
3 |
From 2015: EU AIFM marketing non-EU AIF within the EU under a passport (Article 35) |
|
|
4 |
EU AIFM marketing non- EU AIF within the EU without a passport (up to 2018) (Article 36) |
Private placement to professionals may be permitted by Member States provided the minimum conditions in Article 36 are met (but Member States may apply stricter rules):
|
|
5 |
From 2015: Non-EU AIFM managing or marketing EU AIF (Articles 37 and 38) |
|
|
6 |
From 2015: Marketing within the EU under a passport of non- EU AIF managed by non-EU AIFM (Article 39) |
|
|
7 |
Non-EU AIFM marketing non- EU AIF to professional investors within the EU without a passport (up to 2018) (Article 40) |
Private placement to professionals may be permitted by Member States provided the minimum conditions in Article 40 are met (Member States may apply stricter rules):
|
|
8 |
Non-EU AIFM managing non- EU AIF not marketed within the EU |
The AIFMD does not apply |
|
9 |
EU and non-EU AIFM marketing EU or non-EU AIF to retail Investors |
Member States may allow AIFM to market to retail investors in their territory AIF which the AIFM manage in accordance with the Directive |
Disclaimer
This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Eversheds O'Donnell Sweeney for any action taken in reliance on the information contained herein. Any and all information is subject to change. Eversheds O'Donnell Sweeney is not responsible for the contents of any other website or third party material which can be accessed through this website.
Eversheds O'Donnell Sweeney is an Irish partnership and a member firm of the Eversheds International network of firms affiliated with Eversheds International Limited, an English company limited by guarantee. Member firms of Eversheds International are independent firms and members of Eversheds International Limited, but have no authority to obligate or bind Eversheds International Limited or one another vis-à-vis third parties. Neither Eversheds International Limited nor any of its member firms have any liability for each other's acts or omissions.
