UK: The Draft Alternative Investment Fund Managers Directive: Where Are We Now, And How Will Fund Marketing Be Affected?

Last Updated: 13 June 2010
Article by John Langan


In March 2009, the European Commission ('Commission') proposed an "ambitious reform programme" for the European financial system. In this context, on 30 April 2009 it published the text of a proposed Alternative Investment Fund Managers Directive ('Draft Directive') which aims to introduce a harmonised regulatory framework across the European Union ('EU') for managers of alternative investment funds. The Draft Directive's history so far has been somewhat controversial, and there remain areas of significant difficulty and contention.

Following the EU's usual legislative process, the Draft Directive must be adopted by both the European Parliament ('Parliament') and by Member State governments in the Council of the European Union ('Council'). The Commission's original proposal is therefore debated, amended and voted on, in parallel, by the Council and the Parliament.

After a meeting on 18 May 2010, the Council's Economic and Financial Affairs Council ('ECOFIN') announced that it had discussed and agreed on its approach to the Draft Directive.

On the same day, the Parliament also announced that, after a meeting of its Economic and Monetary Affairs Committee ('ECON') on 17 May 2010, it too had agreed on its approach to the Draft Directive. There are, therefore, at present two versions of the Draft Directive, with significant differences.

All three organs of the EU legislature (the Council, the Parliament and the Commission) will now negotiate a common position on the final text of the Draft Directive, so that it may be adopted by the Parliament in plenary session in July 2010.

The story does not, of course, end there, as the directive as finally adopted will need to be implemented by legislation in each EU Member State: there will, no doubt, be ample scope for variations, at least within the parameters allowed by the directive.

This article discusses the scope of the Draft Directive, and in particular its provisions relating to fund marketing, and summarises the key differences between the Parliament and Council drafts.


The Presidency of the European Union rotates on a 6 monthly basis. The Swedish government held the Presidency from July 2009 through December 2009, and in January 2010 the mantle was assumed by the Spanish. The Belgian government takes over in July 2010. One of the responsibilities of the Presidency is to push draft legislation through the various organs of the legislature. On 10 March 2010, the Spanish Presidency published the latest compromise text of the Draft Directive. There was considerable controversy in the alternative fund world on its publication, as the Spaniards re-introduced the problematical provisions on fund marketing which had previously been toned down by the Swedish (Article 35), and introduced new wording in the Recital and at Articles 34a and 34aa, also dealing with fund marketing.

Scope of the Draft Directive - to which funds does the Draft Directive apply?

The scope of the Draft Directive is extensive. It defines an alternative investment fund ('AIF') as 'any collective investment undertaking, including investment compartments thereof, which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors'. It therefore extends, subject to certain exclusions, to funds which may be open or closed-ended; listed or unlisted; and in whatever legal form constituted, whether as a trust, limited partnership, company or contractual common fund. As the term 'collective investment undertaking' has not been defined or limited, the concept may now include structures not previously considered as 'collective investment schemes' within the UK legislation, as well as (potentially) structures which would not necessarily be thought of as 'alternative funds': for instance, carried interest vehicles, investment trusts and venture capital trusts.

An 'AIFM' is defined as 'any legal person whose regular business is managing one or more AIF'. 'Managing an AIF' means the provision of 'investment management services' to one or more AIF. The AIFM may perform certain other functions listed in the Draft Directive, including marketing and administrative functions.

Exemptions from the scope of the Draft Directive are provided for AIFM whose only investors are the AIFM or related companies, UCITS fund managers and institutions such as national central banks and employee participation schemes (a UCITS fund is one set up under the UCITS Directive, as amended, which largely covers long-only retail mutual funds, though also now extends to certain funds - 'UCITS III Funds' - which have wider discretion to invest in derivatives). Member States may apply optional exemptions for AIFM whose assets under management AUM are under EUR100 million, or EUR500million where the underlying AUM are not leveraged and no redemptions are possible within 5 years (this latter exemption being aimed chiefly at private equity funds).

On the other hand, the Parliament claims to propose a system which applies different levels of regulation according to the types of fund, rather than the 'one-size-fits-all' approach taken by the Council. The Member State authorities will establish who qualifies for lighter treatment on the basis of the rules of the Draft Directive. Private equity funds and non-systemically important AIFMs will be able to avoid full implementation of the Draft Directive. Here again, as with many aspects of implementation, the devil will be in the detail.

Third country provisions and the marketing of funds

This is one of the most controversial areas, and successive drafts have drawn accusations of both protectionism and impracticality.

According to the Council's proposed text, an authorised AIFM may manage an AIF, which is neither established nor marketed in the EU, if there are appropriate cooperation arrangements, in line with international standards, between the home Member State of the AIFM and the supervisory authority of the third country where the AIF is established, in order to ensure an efficient exchange of information to allow the home authorities of the AIFM to carry out their duties according to the Draft Directive.

A Member State may allow an authorised AIFM to market a non-EU AIF to professional investors on its territory if: (a) the AIFM complies with all the requirements of the Draft Directive (other than, broadly speaking, those relating to Depositaries); and (b) appropriate cooperation arrangements in line with international standards are in place between the competent authorities of the home Member State of the AIFM and the supervisory authority in the AIF's home country, to ensure an efficient exchange of information allowing the competent authorities of the AIFM to carry out their duties according to the Draft Directive.

The Council's Draft further provides that a Member State may allow an AIFM established in a 'third country' (ie outside the EU) to market its AIF to professional investors in that Member State if the AIF:

  • complies with substantial requirements regarding disclosure to investors, reporting to authorities, annual reports, leverage, and disclosure and notification re acquisition of control of non-listed companies; and
  • appropriate cooperation arrangements for the purpose of systemic risk oversight and in line with international standards are in place between the competent authorities of the Member State where the AIF is marketed and the competent authorities of the AIFM, to ensure an efficient exchange of information to allow the competent authorities to carry out their duties according to the Draft Directive.

The Parliament's text goes significantly further. A non-EU AIFM seeking access to the EU markets would be required to voluntarily comply with the Draft Directive, and its financial supervisor to act as agent to the European Securities and Markets Authority (ESMA) (which is intended to be in operation next year) in the supervision of that manager and (effectively) in enforcement of EU regulation. A non-EU AIF would be allowed to be marketed in the EU if the country where it is located has high enough standards to combat money laundering and terrorist financing, grants reciprocal access to marketing of EU funds on its territory, and has agreements in place with each Member State where marketing is intended on exchange of information related to taxation and monitoring matters. In addition, the country concerned must recognise and enforce judgments given in the EU.

It is hard to see any non-EU financial supervisor agreeing to act as agent for ESMA, and equally difficult to see how EU law and regulatory decisions could be enforced outside the EU (absent a treaty for the mutual reorganization thereof in any given jurisdiction). This would require (say) the Securities and Exchange Commission ('SEC') of the US to enforce EU law against a SEC-registered investment advisor, as agent for ESMA: a prospect less in the realms of practicality than of speculative fiction.

Although the Council's draft text is more reasonable on this aspect, it nevertheless still requires arrangements to be set up between different EU and non-EU states which would likely be difficult to achieve, in many cases. For example, where a non-EU AIFM wants to access more than one EU market, separate co-operation agreements would need to be in place between the AIFM's financial supervisor and each relevant Member State. This is bound to be easier to achieve for some non-EU states than for others, and indeed with some Member States than with others. The existing position, whereby a fund manager or promoter seeking to access the EU markets for alternative funds must rely on a variety of different local private placement exemptions (a complex situation, but generally manageable), would therefore cease. Non-EU promoters or managers face instead the prospect of dealing with one or other of the two regimes set out in the Draft Directives, each of which is fraught with difficulties and one - Parliament's draft - evidently unrealistic.

As regards EU AIFMs marketing funds in the EU which are established outside the EU, Parliament's draft allows this only where the non-EU jurisdiction has "high enough standards" on money-laundering, grants reciprocal access to EU funds and has an agreement with the relevant EU state on taxation and monitoring matters. Again the Council's draft is slightly more flexible, permitting marketing of such funds if the relevant country complies with certain (but not all) provisions of the Draft Directive and the relevant EU state allows it, but still is likely to present issues in terms of how this will work in practice.

Other areas of contention

Both Draft Directives contain provisions which, subject to narrow carve-outs, would subject custodians to (in effect) strict liability for their sub-custodians. This is bound to be a particular concern for custodians and prime brokers of funds with significant exposure to emerging markets, where custody and settlement procedures, and the law and regulatory practice around them, are relatively undeveloped and subject to significant local risk. In addition, the Parliament's draft, in dealing with the role of the 'valuator', refers to an AIFM remaining liable for valuations of assets carried out by a 'valuator', which seems inconsistent with the way most funds are structured (particularly corporate funds, where valuation is ultimately a Board responsibility, which is delegated to the administrator). Further areas of contention include remuneration (where the Draft Directive seeks to apply the banking directive provisions) and the ban on naked short-selling in the Parliament draft.


There has been substantial debate and concern expressed about the Draft Directive, both within and outside the European Union and by commentators (and organisations) of considerable substance and influence. Most commentators accept, however, that the directive is likely to become a reality in the relatively near term, and the hope is that a compromise will be reached which, while in all likelihood imperfect, will be liveable with. A likely long-term result of the directive's implementation, as far as one can predict at this stage, may be to bifurcate the market for 'alternative funds' (or at least those of a significant size) and their managers between those aimed, to a material degree, at EU-based investors and those with little or no EU-based investment.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.