UK: The Alternative Investment Fund Managers Directive Changing the Fund Management Horizon

Last Updated: 29 November 2010
Article by Eve Ellis

Introduction

On 11 November 2010, the European Parliament adopted the text of the Alternative Investment Fund Managers Directive (the "Directive"), which will significantly change the legal framework in which fund managers operate and how investment funds are marketed in Europe. The controversial Directive has been in the making for over a year and a half and has faced intense lobbying from the fund industry.

Scope

The Directive will regulate investment fund managers which are not authorised under the UCITS Directive as follows:

  • alternative investment fund managers ("AIFMs") in the EU managing alternative investment funds ("AIFs") whether or not the AIF is based in the EU and irrespective of whether the AIF is marketed in the EU or not;
  • non-EU AIFMs managing EU AIFs irrespective of whether the AIF is marketed in the EU or not;
  • non-EU AIFMs marketing EU or non-EU AIFs within the EU.

The scope of the Directive is broad and it will catch a wide range of AIFMs, including those which manage private equity, hedge, real estate, infrastructure, venture capital and listed funds. Neither the form of the AIF nor whether it is open or closed ended will have a bearing on whether the Directive applies. This "one size fits all" approach to the regulation of AIFMs has been one of the key criticisms of the Directive and whilst the approved text makes some distinctions between certain types of funds, this is still an overriding issue.

The Directive requires an AIF to have a single manager. Accordingly, in a structure where there are multiple managers, it will be necessary to assess which manager will be the AIFM in the context of the Directive and how this impacts on the rest of the structure.

There is some good news for small managers, who, provided they meet certain threshold conditions, will benefit from a limited scope. The limited scope regime applies if an AIFM manages portfolios of AIFs whose assets under management in total do not exceed €100 million (with the use of leverage) or €500 million (without the use of leverage and where there are no redemption rights exercisable during a 5 year period from the date of initial investment in each AIF). Interests held by common management vehicles will be considered when assessing these threshold limits. Limited scope AIFMs will still need to register with the regulator in the relevant Member State and will need to provide details (both on registration and on an on going basis) about it and the AIFs it manages, including details on investment strategies and investments made. A limited scope AIFM can elect to opt in to the wider scope of the Directive, which will allow it to benefit from the rights under the Directive such as the passport regime (see below). However, if it does opt in, the entire Directive will apply.

Key provisions of the Directive

The Directive is detailed and a large proportion will be supplemented and hopefully clarified by implementing legislation. However, in very broad terms, the key provisions are:

Marketing passport – An authorised EU AIFM can market EU AIFs that it manages to professional investors in the EU by way of a marketing passport. The approval of the regulator in the Home State must be obtained before marketing commences and material changes to the documents submitted must be provided to, and in certain circumstances approved by, the regulator. Whilst this will be an improvement from the current system, where fund managers must comply with local private placement regimes which differ from Member State to Member State, the need to seek prior approval will impact on the fundraising timetable.

Third country provisions – These provisions have probably been the most heavily negotiated of the Directive and have received significant press coverage. Consequently, these provisions are complex and the application of the Directive differs depending on the location of the AIFM and the AIF. For example, the possible permeations may include an EU AIFM managing a non-EU AIF but not marketing it in the EU, an EU AIFM managing and marketing a non-EU AIF, a non-EU AIFM managing an EU AIF and a non-EU AIFM marketing a non-EU AIF in Europe. The rules also differ depending on whether marketing is undertaken under a passport or using the private placement regimes (see below).

In broad terms, non-EU AIFMs managing EU AIFs or marketing EU or non-EU AIFs in Europe will need to comply with the Directive (although certain provisions will not apply in some circumstances). For non-EU AIFMs marketing or managing AIFs, there is a derogation from this where local law makes compliance with the Directive incompatible. However, in these circumstances local law needs to be equivalent, which may make compliance an issue for non-EU AIFMs. Further, cooperation agreements relating to information sharing are required between third countries and the Home State (or Member State of Reference for a non-EU AIFM) and, in certain circumstances, agreements between third countries regarding compliance with the OECD Model Tax Convention are also required with each Member State an AIF is marketed in.

Non-EU AIFMs and EU AIFMs marketing non-EU AIFs in Europe can benefit from the passporting rights available to EU AIFMs marketing EU AIFs provided certain conditions are satisfied. However, this right will not be available until two years after the implementation of the Directive into national law. Until then, the current private placement regimes will remain in place and the two regimes will continue to apply in parallel for a further three years (currently expected to end in 2018).

Capital – The Directive imposes capital requirements on AIFMs. An internally managed AIF must have initial capital of at least €300,000. An external AIFM must have initial capital of at least €125,000. In addition, where the value of the portfolios of AIFs managed by the AIFM exceed €250 million, the AIFM shall provide an additional amount of own funds equal to 0.02% of the amount by which the value of the portfolios exceed €250 million (subject to a cap of €10 million). Notwithstanding this, the amount of own funds can never be less than ¼ of the preceding year's fixed overheads. For a number of UK fund managers this will be a substantial increase from their current regulatory capital requirement.

Depositories – This is another area which met with significant resistance during the negotiation process as a number of fund managers, in particular private equity managers, considered this an unnecessary expense. The Directive requires that a single depositary is appointed for each AIF. The depositary must either be an EU credit institution or EU investment firm subject to certain capital requirements. There are specific rules in relaiton to depositaries for non-EU AIFs and relaxed rules, in effect for private equity managers (the depositary may be an entity which carries out depositary functions as part of its professional or business activities).

Remuneration rules – The remuneration rules, which were not included in the first draft of the Directive, require AIFMs to have remuneration policies and practices in place. These include performance elements of remuneration being assessed over a multi year time frame, limitations on guaranteed variable remuneration, adjustments to remuneration to take account of current and future risk and variable remuneration to comprise of at least 50% interests in the AIF.

Specific rules in relation to private equity funds – Specific rules in relation to private equity funds which acquire control of portfolio companies (either individually or jointly) apply, including disclosures to the local regulator, the portfolio company and its employees. These rules do not apply to portfolio companies which are SMEs or special purpose vehicles with the purpose of purchasing real estate. In addition, rules relating to the prevention of asset stripping by AIFs acquiring control, either individually or jointly, of unlisted companies have been introduced. Broadly, the AIFM must not, for a period of 24 months following acquisition, facilitate or instruct any distribution, capital reduction, share redemption and/or acquisition of own shares by the portfolio company.

Reporting and disclosure requirements – The Directive introduces increased disclosure requirements, both to the local regulator and also to investors, including the provision of an annual report (which must include details about remuneration and carried interest paid).

Valuations – Independent valuations of the assets of an AIF must be carried out. Whilst the AIFM can undertake the valuation itself, the valuation task must be functionally independent form the portfolio management and the remuneration policies of the AIFM and measures must be implemented to mitigate against conflicts of interest.

Other provisions – Other provisions included in the Directive relate to delegation of responsibilities and certain conduct of business provisions (such as not giving another investor preferential treatment without disclosing details in the AIFs' constitutional documents (which may impact on the use of side letters), risk management, liquidity management, conflicts of interest and leverage).

Next steps

The current timetable is for the Directive to come into force in January 2011. Member States will have two years following this to transpose the Directive into national law. During this period, Level 2 implementing legislation will be published by the Commission, which will hopefully provide clarity to certain aspects of the Directive. This process will need to be monitored as until these measures are introduced the full impact of the Directive cannot be assessed

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 Mondaq.com.

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

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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