European Union: AIFMD Update – Impact On Fund Managers Outside The EU

Last Updated: 20 February 2013
Article by Angela Hayes, Tim Nosworthy and Mark Compton

Keywords: AIFMD, fund managers, European Union, AIFMU, alternative investment funds


In July 2013 the hotly debated EU Alternative Investment Fund Managers Directive (AIFMD) will finally be implemented across Member States in the EU. It represents a significant change in EU regulation of "alternative investment funds" (AIFs, which include private equity funds, hedge funds and real estate funds), their managers (AIFMs) and other service providers. Broadly, from July 2013, management and marketing of AIFs in the EU must comply with the new requirements of the AIFMD. Critically, the AIFMD will directly impact the way in which non-EU AIFMs are permitted to market AIFs into the EU.

In this update, we discuss how the UK is implementing the AIFMD regime for non-EU (sometimes referred to as "third country") AIFMs wishing to market AIFs into the UK during the first phase of the AIFMD, from July 2013 until (according to current thinking) July 2015.1

Which entity will be designated as the AIFM?

The AIFMD recognises a single manager, the AIFM, for each AIF. The AIFM is the lead manager that has principal investment discretion conferred by the AIF or overall responsibility for risk management, provided that it is not a "letterbox entity".2 AIFMs must become authorised under the AIFMD in order to operate in the EU. However, in the first phase of AIFMD implementation, non-EU AIFMs cannot become authorised under the AIFMD. Further, EU based advisers and sub-managers to non-EU AIFMs cannot opt to become authorised as AIFMs under the AIFMD; they would only be able to do so if responsibilities were restructured to give the EU based entity the lead manager role. Non-EU AIFs cannot be marketed under the AIFMD in the first phase, so such a restructuring is unlikely to have value unless the launch of new EU based AIFs is contemplated.

Additional legislation will be needed to enable non-EU AIFs and AIFMs to operate under the AIFMD and this is not expected before July 2015 at the earliest.

How a non-EU AIFM can market AIFs after July 2013

The AIFMD gives EU Member States discretion to allow non-EU AIFMs to continue to market AIFs to professional investors using national private placement regimes, provided certain minimum requirements are satisfied.

These are:

  • the non-EU AIFM must comply with certain of the Directive's requirements relating to transparency and reporting in respect of each AIF marketed (which include requirements specific to private equity funds);
  • there must be appropriate cooperation arrangements in place between: (a) the regulator in the EU Member State into which marketing takes place; and (b) the supervisory authorities/regulators of the countries in which the AIFs and non-EU AIFM are established; and
  • the country of establishment of the non-EU AIFM (and, if applicable, non-EU AIF) must not be listed as a Non-Cooperative Country and Territory by the Financial Action Task Force (FATF).

Member States are entitled to impose more onerous requirements.

If it is intended to introduce new EU investors into non- EU AIFs after July 2013 or to increase subscription levels, it will be necessary to understand the detailed requirements for marketing in each target jurisdiction under local private placement regimes insofar as these are available.

UK domestic implementation of the AIFMD

Changes are required to both the UK regulator's rule book and the domestic legislation. Both the UK Financial Services Authority (FSA) and HM Treasury (HMT) have published consultation papers on how the AIFMD will be implemented. A further set of consultation papers is expected in due course.

The UK has confirmed that it intends to continue to allow non-EU AIFMs to market AIFs into the UK, in accordance with the UK's existing private placement regime, subject to satisfying the applicable requirements set out in the AIFMD (see above) and subject to prior approval by the Financial Conduct Authority (FCA, the successor to the FSA), following which the AIF will appear on an FCA register.

Registers of AIFs approved for marketing under the UK's private placement regime

According to the proposals set out in HMT's consultation paper, the FCA will maintain two registers of AIFs managed by non-EU AIFMs, which will be approved for marketing under the UK's private placement regime as follows:

(a) AIFs managed by "small" third country AIFMs; and

(b) AIFs managed by third country AIFMs which are not "small".

This distinction is required because "small" AIFMs will not, even after July 2015, be caught by the full scope of the Directive, unless such AIFMs choose to opt in.

What is a small AIFM?

The quantum of assets under management will determine this. A small fund manager is one which either directly or indirectly, through a company with which it is linked by common management or control, or by a substantive direct or indirect holding, manages AIFs whose assets under management do not exceed:

(a) 500 million euros in total in cases where the funds are unleveraged and there are no redemption rights exercisable during a period of 5 years following the date of initial investment in each fund; or

(b) 100 million euros in total in other cases, including any assets acquired through the use of leverage.

What must third country AIFMs which are not small do? In order to be able to market AIFs into the UK, the third country AIFM must apply to the FCA for approval. As a pre-requisite to being accepted on the FCA's register, the FCA must determine whether the requirements under the AIFMD (set out above) have been satisfied (i.e. the various transparency and reporting requirements, cooperation arrangements and FATF requirement).

What must small third country AIFMs do? The AIFMD requirements set out above will not apply. However, such managers will still need to register with the FCA and the FCA may specify certain types of information that the AIFM is required to provide in order for the FCA to monitor systemic risk effectively.

How long will it take the FCA to process applications for marketing registration? An application for approval for entry on either of the two registers must be determined by the FCA within 20 working days of receipt of a completed application. If an incomplete application is submitted, the FCA will have up to 2 months to determine it.

Further details on the registration process are expected in the FSA's next consultation paper, which is due out later this month.


1 Following this date, it may be possible for a non-EU AIFM to become authorised under the AIFMD, which will enable it to take advantage of an EU marketing "passport". At an even later stage, it is anticipated that private placement regimes will be phased out.

2 If the investment management functions delegated by a manager exceed by a substantial margin the functions it performs itself, then the manager will be viewed as a "letterbox entity". This issue may mean that the entity designated as manager under fund documentation is not regarded as the AIFM for purposes of the AIFMD but instead a sub-manager would be the AIFM.

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