On 30 April 2009, the Commission made a proposal for a new directive on Alternative Investment Fund Managers ("AIFM"). On 11 November 2010, the European Parliament in consensus with the Council had its first reading of the Commission's proposal. There is political agreement on the final act (the "Directive"). The Directive will affect a significant number of AIFMs that manage and/or market alternative investment funds ("AIFs") within the EU.

Scope of the Directive

The Directive lays down rules for authorization, ongoing operation and transparency of AIFMs which manage and/or market AIFs in the EU. The Directive regulates AIFMs, rather than the AIFs that they manage, as it is the AIFM that is responsible for all key decisions in relation to the AIF management.

Key provisionsfor AIFMs

Authorization:

  • The AIFMs will need to be authorized by the home member state's competent authority (the Danish FSA). The Directive does not impose registration requirements directly on AIFs. Once the authorization has been issued in the home member state it is valid for management of AIFs in all EU member states.

Capital Requirements:

  • If an AIFM only manages its own AIFs, it must have an initial capital of at least EUR300,000.
  • If an AIFM manages third party AIFs, it must have an initial capital of at least EUR125,000.
  • If the AIF(s) managed by the AIFM have over EUR250 million in assets, the AIFM must have additional capital equal to 0.02% of the AIF(s) assets over EUR250 million. However, in no event is the AIFM required to hold initial capital of more than EUR10 million.

Leverage:

  • An AIFM must set a maximum level of leverage which the AIFM may employ on behalf of each AIF. The Danish FSA must assess the risks that the use of leverage by an AIFM with respect to the AIF it manages could entail. EU Member States will have the authority to impose limits/restrictions on the use of leverage.

Facts

What is an AIF?

Mainly, an AIFis defined 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.

Hedge funds, private equity funds, commodity funds, real estate funds and infrastructure funds, among others, fall within this category. Among others, the Directive does not apply to management of pension funds, employee participation or savings schemes. Further, traditional Danish investment funds/associations to retail investors (in Danish: Investeringsforeninger) would often be comprised by the UCITS-directive. However, as more than half of the industry's capital is invested in non-UCITS-products, many Danish investments funds/associations will be comprised by the new Directive.

Main conduct of business requirements:

  • An AIFM must functionally and hierarchically separate the functions of risk management from the operating units, including the portfolio management.
  • No investor may obtain preferential treatment unless such treatment is disclosed in the AIF's documentation.
  • The AIFM must at least once a year have a value ssessment of the AIF(s) it manages made.

Remuneration of AIFM staff:

  • AIFMs must have remuneration policies and practices for some categories of staff that are consistent with and promote effective risk management and do not encourage risk-taking inconsistent with the risk profiles etc. of the AIF.

Depositary:

  • An AIFM must appoint a single depositary, such as an EU regulated bank or an EU securities firm, for each of its AIF. The depositary's main task is to ensure that the AIF's cash flows are properly monitored.

Facts

Lighter regime for "Small fund managers"

"Small fund managers" are exempt from the majority of the Directive's provisions if each manages less than EUR100 million in assets (or EUR500 million in assets, if its AIFs do not use leverage and have at least a 5-year lock-up period). Those AIFMs are not subject to full authorization but to registration in their respective home member states and must provide the relevant authorities with information regarding the main instruments in which they are trading and on the principal exposures and most important concentrations of the AIF(s) they manage. However, such small fund managers may not manage/market AIFs in other EU member states if they choose not to comply with the complete regulation for AIFMs in the Directive.

Delegation of AIFM's responsibilities:

  • An AIFM must notify its regulator (the Danish FSA) prior to delegating any of its responsibilities.

Transparency/disclosures:

  • The audited annual report of each AIF must be made available by the AIFM to investors and the relevant regulatory agencies, including details of remuneration.
  • An AIFM must provide its investors with information about the AIF, including its strategy, which assets it may invest in, its valuation procedures, any descriptions of preferential treatment, the percentage of assets that are illiquid and subject to side pockets, changes in managing liquidity and its risk profile.
  • An AIFM must report certain information to the national regulator (the Danish FSA), including actual risk profiles of the AIF, leverage, categories of assets invested in, share of illiquid assets etc.
  • If an AIF acquires 50 % or more of the voting rights of a private company, the AIFM must provide information of the AIF's holding (a) to the company, (b) to all other shareholders of the company and (c) to the AIFM's home EU member state regulator (the Danish FSA). The AIFM would need to disclose, among other things, the future development of the private company either in the company's annual report or in the AIF's annual report.

Marketing of non-EU AIFs:

  • The Directive implements a dual regime for marketing non-EU AIFs to professional investors in the EU. An AIFM may market its non-EU AIFs either (a) into an EU member state if the EU member state's securities regulator expressly allows it, or (b) into all EU member states under an EU "passport regime" (the details need to be further agreed, including that coorporation agreements must be entered into between the authorities of the AIFM's member state and the authorities of the non-EU AIF country).
  • Non-EU AIFMs may market shares and units in AIF(s) throughout the EU with a passport, subject to the requirements of the Directive.
  • An AIFM's use of a marketing or placement agent to conduct marketing activity in the EU for non-EU AIFs will most likely be considered "marketing" under the Directive, and thus subject to the Directive.

Facts

Which AIFMs are covered?

The Directive regulates (a) EU AIFMs and (b) non-EU AIFMs that either (i) manage an AIFin the EU or (ii) market an AIFto investors in the EU. An AIFM is a legal entity which as a minimum manages an AIF's risk management and investments.

Transposition into Danish law in 2013

The text of the Directive is expected to be published in the Official Journal sometime in the first or second quarter of 2011. The Directive will be effective 20 days after publication and the EU member states will have two years from such date to implement most of the Directive. It is anticipated that the European Securities and Markets Authority will issue guidelines and more detailed regulation to supplement/complement the Directive.

The Directive delegates competence to regulate supervisory authority to the relevant national authorities, and we expect that the Danish FSA will assume a leading role in the implementation of the Directive into Danish domestic law in close cooperation with the Commission and the European Securities and Markets Authority.

Follow the further developments here:

http://ec.europa.eu/prelex/detail_dossier_real.cfm?CL=en&DosId=198243 .

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.