United States: Update On The Alternative Investment Fund Managers Directive

Last Updated: February 26 2013
Article by Jerry Walter and David W. Selden

The Alternative Investment Fund Managers Directive (the "Directive") is due, this July, to be transposed into national law in each of the European Union member states. This briefing provides an update on recent developments in the implementation process.

Overview of the Directive

Although the Directive was published by the EU in July 2011 and "entered into force" on 21 July 2011, EU member states have until 22 July 2013 in which to "transpose" the Directive into their national laws. This is the key date for the commencement of the new regime.

The regulatory framework

The Directive establishes a framework for regulating the managers of Alternative Investment Funds ("AIFs"). Essentially, these funds consist of those collective investment funds which are not EU-regulated "UCITS" funds. Therefore, private equity funds, hedge funds and real estate funds are all types of AIF.

The main aim of the Directive is to regulate EU-established managers of AIFs. However, the Directive will also affect managers established outside the EU. First, under the current timetable, from 2015, non-EU managers of EU-established AIFs will need to be authorised under the Directive. Secondly, and perhaps most controversially, the Directive contains provisions which will apply to non-EU managers who market their AIFs into the EU. These will apply even if the funds are not EU funds, and even if the funds are marketed in reliance on, and in compliance with, the national private placement regimes applicable in the countries into which the funds are marketed. As a result, the Directive will, for example, affect US managers who market their funds to European investors.

The Identity of the AIFM

Under the Directive, each AIF has a manager (the "Alternative Investment Fund Manager" ("AIFM")). If the fund's legal form permits internal management, and if the fund's governing body has decided not to appoint an external manager, the fund itself will be the AIFM under the Directive. This is in contrast with externally managed funds, where the AIFM is the entity responsible for "managing" the fund. In this context, "managing" means providing at least portfolio management or risk management services to the fund (where risk management involves managing risks relevant to the fund's investment strategy).

Authorisation Requirements

The Directive applies in different ways according to whether the AIFM and the AIF are established in the EU. From July 2013, if the AIFM is established in the EU, it must, unless an exemption applies, be authorised by the relevant national regulator (subject to EU AIFMs operating before that date being given a further year in which to apply for authorisation).

In the case of a non-EU AIFM of an EU AIF, authorisation will not be required until 2015 (under the current timetable). A non-EU AIFM of a non-EU AIF does not require authorisation (however, as discussed below, it is intended that it will be permitted to apply for authorisation from 2015 so as to obtain the "passport", and it will be subject to some of the provisions of the Directive from July 2013 if it markets its AIFs in the EU).

There is a significantly lighter regulatory regime applying to AIFMs managing small funds (i.e., those AIFMs managing AIFs with assets under management, which, in total across all such AIFs, do not exceed Euro 100 million, or do not exceed Euro 500 million where the funds are not leveraged and investors have no redemption rights for the first five years).

Brief summary of the obligations on AIFMs regulated under the Directive

Authorised AIFMs are to be subject to minimum capital requirements and to a number of organisational requirements covering matters such as delegation, conflicts of interest, risk management, liquidity and the valuation of fund assets. Such AIFMs must have remuneration policies in place for certain senior staff which promote sound and effective risk management, including restrictions on the amount of variable remuneration that can be paid without deferral.

The Directive contains requirements for each AIF to have a depositary. Managers must set a maximum level of leverage which they may employ on behalf of each fund. The Directive includes a number of disclosure and reporting obligations on managers in respect of their funds, including a requirement for an annual report, disclosures to investors and reporting to regulators. There are disclosure and "asset stripping" provisions (designed to restrict the level of distributions for two years following the acquisition of control by the AIF) directed at managers of private equity funds with substantial stakes in EU companies.

Marketing of funds

The Directive also includes provisions on the marketing of funds within the EU. These make the Directive important to all managers, both within and outside the EU, who wish to market their funds to investors in the EU.

The passport

From July 2013, EU AIFMs will be obliged to use the "passport" if they wish to market EU AIFs to "professional investors" in other EU countries (the passport is due to be available to EU AIFMs in respect of their non-EU AIFs from 2015). The passport will permit an AIFM authorised in one EU member state to market its AIFs to professional investors in other EU member states without the need for separate authorisation in those states. It is hoped that the AIFMD passport will make it easier to market AIFs across Europe, since it will avoid the necessity of complying with the differing private placement regimes across the EU.

Non-EU managers will only be able to apply for the passport to market their AIFs from 2015 (under current plans). To qualify for the passport, they will need to become authorised under the Directive (there will also need to be cooperation arrangements in place between the relevant non-EU and EU regulators).

Private placement regimes

Accordingly, from July 2013 until the availability of the passport in 2015, non-EU managers will need to rely on and comply with the relevant national private placement regimes in order to market their funds to professional investors in the EU. Even then, they will be subject to certain aspects of the Directive (those concerning annual reports, disclosure to investors, regular reporting to regulators, requirements on managers of funds that acquire substantial stakes in EU companies and anti-asset stripping provisions). There will also need to be cooperation arrangements in place between the relevant non-EU and EU regulators.

The current intention is to phase out the private placement regimes in 2018, and so this marketing option for non-EU managers is only expected to be available from 2013 to 2018. Even during this period, there will be a wide variation in the extent to which the private placement route can be used in each EU country; member states are not obliged to maintain private placement regimes. For example, although the UK has indicated that it will retain its current fairly liberal private placement regime during this five year transitional period (subject to a new approval and registration requirement), Germany has proposed that its existing private placement regime will be replaced this July.

Reverse solicitation

The Directive does not restrict professional investors in the EU who wish to invest in funds on their own initiative (so-called "reverse solicitation"). National regulators may, however, police the use of reverse solicitation more closely than they have in the past.

Which route should non-EU managers use to market their funds in the EU?

This will depend on the extent of the marketing intended to be conducted in each EU member state. If there is only to be limited marketing and if the potential investors are mainly to be sought in countries such as the UK which have fairly liberal private placement regimes, then it may be possible to rely on the private placement route for a few more years. However, if a non-EU manager wishes to market its funds in many countries across the EU, it may wish to consider establishing an affiliate entity in an EU jurisdiction to become an AIFM under the Directive.

As noted above, the availability of the passport is due to be extended to non-EU managers from 2015, but until it is so extended, the AIFM will need to be based within the EU to be eligible for the passport.

The relative merits of relying on private placement, in comparison with becoming an AIFM authorised under the Directive, and so eligible for the passport, but subject to all the requirements of the Directive, will be easier to assess once the new regime is operational later this year and once the principal EU countries clarify the extent to which their private placement regimes will continue over the next few years.

Recent developments in the development of the new regime

The Directive empowers the European Commission (the executive body of the EU) to adopt a number of delegated acts, known as â€~Level 2 Measures', in which much of the detail of the new regime is to be found. On 19 December 2012, the Commission published its long anticipated Level 2 Regulation. On the same day, the European Securities and Markets Authority ("ESMA") published two consultation papers regarding the nature of the managers and funds falling within the ambit of the Directive. Responses to ESMA's two consultations were published in early February 2013.

The Commission's Level 2 Regulation

The Commission's Level 2 Measures (which, as noted below, will apply from 22 July 2013) had originally been expected in the summer of 2012, but were delayed whilst controversial areas such as depositary liability were considered further. The Commission's Regulation contains detailed provisions on the delegation of the AIFM's functions, risk and liquidity management, depositary liability, transparency requirements, third country provisions, the calculation of assets under management, valuation methods and the maximum leverage to be employed by AIFs.

The Commission chose to employ the legal form of a regulation for these Level 2 Measures, since an EU regulation, unlike a directive, has direct effect in EU member states (and so does not need to be implemented by member states). The use of a regulation, rather than a directive, ensures greater uniformity in the standards to be adopted across the EU and gives the Commission a greater degree of control over those standards.

The Regulation's restrictions on delegation arrangements are designed to ensure that the AIFM retains overall responsibility for decision making and is not a mere "letter-box entity". The Regulation provides that if the AIFM delegates the performance of investment management functions to an extent that exceeds by "a substantial margin" the investment management functions performed by the AIFM itself, then it shall no longer be considered to be managing an AIF. To the extent that delegation is allowed, portfolio management can only be delegated to a suitably regulated entity. Although the Regulation is meant to apply in a uniform manner across the EU, it may be that different national regulators will adopt different interpretations as to the practical consequences of these delegation provisions on current fund structures.

The Regulation is now subject to the scrutiny of the European Parliament and the Council of Ministers, each of whom has the right to object to the Regulation. If, as is expected, neither of these bodies objects within the three month scrutiny period, it will apply from 22 July 2013, the implementation date of the Directive.

ESMA's Consultation Paper on "Draft regulatory technical standards on types of AIFMs"

The Directive provided that ESMA was to develop draft "regulatory technical standards" to determine the types of AIFM within the scope of the Directive, and to ensure uniform conditions for the application of the Directive. In the draft regulatory technical standards annexed to this consultation paper, ESMA only addressed the difference between open-ended and closed-ended funds. This distinction is relevant in that it affects the application of certain provisions under the Directive (notably those concerning liquidity management and valuation procedures). In summary, open-ended funds are those where redemption rights may be exercised at least once a year at a price that does not vary significantly from the net asset value per unit. This was therefore a fairly narrowly focused consultation paper, but ESMA noted that it may, where relevant, develop further measures in order to establish additional categories of AIFM.

ESMA's Consultation Paper on "Guidelines on key concepts of the AIFMD"

ESMA's other December consultation paper included its proposals for guidelines to ensure a common, uniform and consistent application of the concepts in the definition of an AIF. The Directive itself defines AIFs as "collective investment undertakings" which "raise 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". The consultation paper attached draft guidelines on the meaning of each of these terms. "Collective investment undertakings" are those undertakings that: (a) are not ordinary companies with general commercial purpose; (b) pool together capital raised from their investors for the purpose of investment with a view to generating a pooled return; and (c) whose unitholders have no day-to-day control over the management of the undertakings' assets. The consultation paper confirms the breadth of the applicability of the Directive.

Future developments

Despite these measures, there are still significant areas of uncertainty as regards the scope of the Directive and its practical effect on investment funds and their managers. Notwithstanding the Commission's aim to create a single European rulebook by the use of a regulation, it is possible that these areas of uncertainty will result in the Directive being implemented in different ways by different EU member states. ESMA will, over time, produce further guidelines on the precise scope and meaning of the Directive, which it is hoped will reduce any such uncertainties and inconsistencies.

Differing attitudes to the Directive across the EU

Some EU member states, notably Luxembourg and Ireland, view the Directive as opening new business opportunities. They hope to emulate their successes in building significant fund industries based on the EU UCITS regime that has existed for a number of years. However, many in the industry, particularly in the UK, are more sceptical about whether there is a genuine need for the proposed level of regulation of AIFMs, and are not convinced that the new regime will result in any great benefit to investors.

UK implementation of the Directive

The precise nature of the regime is likely only to become apparent once the member states and national regulators have finalised the detailed rules and regulations that will implement the Directive (which are required in addition to the Commission's Level 2 Measures). In the UK, it will be implemented by way of new UK legislation and through amendments to the rulebook of the Financial Conduct Authority (which is to be the successor body to the Financial Services Authority).

In November 2012, the FSA published the first of its two planned consultations on the new rules and guidance needed to implement the Directive in the UK. It included the FSA's proposals for a new Investment Funds sourcebook to cover the requirements for AIFs, UCITS and their managers.

Furthermore, in January 2013, the Treasury published its first consultation paper on the proposed changes to the UK legislation required in order to transpose the Directive into UK law, notably by way of the "Alternative Investment Fund Managers Regulations 2013", which will come into force on the Directive's implementation date, 22 July 2013. In addition, the European Commission's Level 2 Regulation, described above, will apply directly in the UK.

Conclusion

Despite the breadth of the Directive and the complexity of its subject matter, there are still significant uncertainties about the precise scope and the practical effects of the new regime. It seems that the full consequences will only be known once the approach of each national regulator towards implementation has become apparent. Nevertheless, what is already clear is that the new regime will increase the compliance burden on EU based fund managers, and that it will affect non-EU managers who wish to market their funds in the EU and the way in which they market those funds in the EU.

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
Related Video
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.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

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.