UK: AIFMD - What Do You Need To Know, And How Can We Help?

Last Updated: 22 June 2011
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Background and introduction

The Alternative Investment Fund Managers Directive ("AIFMD" or "the Directive") was approved by the European Parliament on 11 November 2010. Deloitte has been active in its assembly of a dedicated group of specialists to assist our clients to understand and address the impact that the Directive will have on their business.

The Directive will impact:

  • how Alternative Investment Fund Managers ("AIFM's") distribute their funds, cross border or otherwise;
  • how they remunerate their people;
  • how they operate their business; and
  • the support requiried to maximise their potential.

In December 2010 the European Commission issued a request for guidance to the newly formed European Securities and Markets Authority ("ESMA") in relation to the many subordinate measures found within the Directive. The final guidance is expected in November 2011 with draft guidelines to be released mid-2011. While there is still some uncertainty about what the Directive's level 2 measures will bring, this document should be an aid to simplify the key provisions to date and assist AIFM's to become AIFMD 'ready'.

We encourage you to contact one of our specialists listed on the final page, as we would be delighted to have a discussion with you about the Directive and its impact on your business.

Key requirements of the Directive

1. Registration, Authorisation and Marketing

What are the key provisions?

1.1. Authorisation must be obtained, subject to certain limits. Exemption is available for AIFM's with aggregate funds under management less than €100m (€500m for unleveraged funds with restricted redemption rights for at least 5 years). However, AIFM's may choose to "opt in", to benefit from the marketing passport (Refer to Marketing Section below). Those AIFM's who do not opt in may face a reduced investor base compared to those who do.

1.2. Capital adequacy requirements will have to be satisfied prior to authorisation for AIFM's. Such capital requirements are:

  • €300,000 for an internally managed Alternative Investment Fund ("AIF").
  • €125,000 for an AIFM not integrated with an AIF.
  • Further capital required where funds under management are in excess of €250m, on a sliding scale.

1.3. Non-EU AIFM's will have to be authorised by the regulator in their member state of reference (i.e. where their European operations are effectively based) and must appoint a local representative, who will act as a direct point of contact for regulators and investors based in the EU.

1.4. "Passporting" allows an EU AIFM to market an AIF to professional investors in another EEA jurisdiction, once the AIFM has been authorised under the Directive and its home state regulator has given approval. This mechanism will be introduced for EU AIFM's in early 2013, when all those in the scope of the Directive must be authorised and fully compliant. Where EU AIFM's market non-EU AIF's, the AIF must not be in a non-cooperative jurisdiction as defined by the Financial Action Task Force ("FATF"), and the non-EU jurisdiction must comply with the Directive's rules on cooperation agreements and tax information sharing.

1.5. For Non-EU AIFM's, the Directive continues to allow the marketing of AIF's to professional investors via the Private Placement regime but also introduces a passporting system. The passport system for non-EU AIFM's will come into effect from 2015. From 2015 onwards, a non-EU AIFM will have to register with a Member State of Reference. The non-EU AIFM will have to comply with the Directive and depending on whether the AIF is EU or non-EU, the respective jurisdictions involved will have to adhere to the Directive's rules on cooperation agreements, tax information sharing and restrictions on AIF's in non-cooperative jurisdictions.

What should AIFM's be doing now?

  • Each AIFM should be assessing whether they fall within the scope of the Directive now so that they can plan accordingly.
  • For those AIFM's that currently fall below the exemption threshold, a review should be conducted to assess:
    • whether it is likely that this will change in the near to medium term and what the implications would be; and
    • whether it will be of benefit to the AIFM to choose to opt in to the Directive.
  • Each AIFM should assess whether they are likely to be in compliance with the capital adequacy rules of the Directive. (Note: Most AIFM's will already be subject to local capital adequacy requirements. However, these are likely to increase for certain AIFMs).
  • Each AIFM should review their existing business model in light of the requirements of the Directive and consider the existing domicile and structure of the products they manage.
  • AIFM's should consider the adequacy of their compliance function and its readiness for the requirements set down by the Directive.

2. Remuneration

What are the key provisions?

2.1. The remuneration section of the Directive is intended to ensure that the AIFM has sound policies that promote effective risk management. The main themes in the Directive's provisions are geared toward striking a balance between fixed and variable pay, ensuring that variable pay in the form of bonuses is deferred or paid in shares, subject to claw-back and does not reward failure. The AIFM's annual report will be required to have the policies included therein and should disclose the total remuneration paid by the AIFM and the AIF. The provisions in the AIFM are broadly consistent with those in the FSA's Remuneration Code.

What should AIFM's be doing now?

  • Each AIFM should be reviewing remuneration policies for compliance with the Directive's provisions to assess if current policy reflects best practice and meets the criteria and requirements of the Directive. UK Managers should already be compliant with the Remuneration Code, and if not should take immediate steps to do so.

3. Other ongoing requirements

What are the key provisions?

3.1. A single depository must be appointed for each AIF that an AIFM manages. The depository should generally be in the same jurisdiction as the AIF. There are more relaxed rules in relation to Private Equity AIF's where the home state may allow a lawyer or a registrar to act as a depository.

3.2. The Directive increases the level of care required in performing due diligence (both initial and ongoing) on 3rd parties to which essential functions are delegated (e.g. administrator, sub-manager, etc). Only if the correct level of care has been exercised, will the AIFM be considered to have effectively delegated the responsibility. Merely obtaining SAS 70 reports will not be robust enough for the purposes of the Directive.

3.3. The Directive imposes provisions on the valuation of an AIF's investments. Valuations should be conducted either by an external valuer or by the AIFM itself (provided that the valuation performed is independent of the operations of the AIF i.e. not performed by the portfolio management function and remuneration for those staff performing the valuation is not linked to portfolio performance). Where the valuation is performed by the AIFM and not an independent valuer the home stage regulator is permitted to conduct a review of the AIFM's valuation techniques and policies. The AIFM is ultimately responsible for the valuation function, whether delegated or not.

What should AIFM's be doing now?

  • AIFM's should be reviewing their due diligence policies and procedures (in particular those relating to on-going due diligence), to ascertain whether they can demonstrate effective delegation of responsibility of essential functions of management of the AIF's it manages, and consulting with 3rd party service providers to assess their readiness for AIFMD.
  • AIFM's should be reviewing their in-house valuation policies and procedures and the independence of the function from other parts of the business to ensure that valuation teams can produce valuations without undue pressure or conflicts, or consider the possibility of outsourcing of the function, while stilll retaining ownership thereof.

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.

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