The text of the AIFM Directive (the "AIFMD" or the "Directive") adopted by the European Parliament on 11 November 2010 after 18 months of intensive discussions, sets down a new piece of regulation applicable to managers of alternative investment funds (AIFMs) and indirectly to alternative investment funds (AIFs).
Although the text of the Directive itself is very detailed, it provides that, in relation to a significant number of issues, the European Commission ("EC") and the European Securities and Markets Authority ("ESMA"), which replaced CESR with effect from 1 January 2011, must implement measures in the form of delegated acts, regulatory technical standards, implementing technical standards and other guidelines of a specific or general nature. Many of the items will have to be published by December 2011 and it is only those detailed provisions which will allow clarification of a number of aspects which currently remain uncertain.
The Directive was published on 1 July 2011 in the Official Journal of the European Union and entered into force on 21 July 2011. It provides that Member States must implement the Directive into national law by 22 July 2013.
Existing AIFM performing activities before 22 July 2013 benefit from a grandfathering period of one year and have to submit an application for authorisation by 22 July 2014 at the latest.
For Luxembourg, as one of the world's leading financial centres for investment funds, the implementation of the Directive will have a significant impact.
The text of the Directive provides for essential amendments to the current AIFM business models. However, many of the new requirements are familiar to professionals of the Luxembourg fund industry for being already part of their administrative, auditing, banking or counselling activities dedicated to a large extent to UCITS but also to Luxembourg regulated non-UCITS.
The discussions below aim at highlighting how some of the key requirements of the Directive can be addressed from a Luxembourg perspective.
1. The Directive has a truly all-encompassing scope (outside of that covered by the UCITS Directive). It is applicable to all EU managers who manage EU and non- EU funds. It also applies to all non-EU managers who manage EU funds and who market EU funds or non-EU funds in the European Union. This entails that the only situation which is out of scope is where there is no relationship with the EU such as the situation where a US manager manages a Cayman fund and distributes the fund in Japan.
The Directive is also all encompassing in terms of asset classes in which funds invest. In that respect, it covers hedge funds, fund of hedge funds, private equity funds, real estate funds, commodity funds, but also funds investing in traditional assets such as shares, bonds and money market instruments (if they are not UCITS).
A lighter registration regime is offered to small managers with assets under management of less than €100m or less than €500m in relation to non-leveraged funds where investors have no redemption right for a period of 5 years.
Certain grandfathering provisions also apply to existing funds which do not accept any further subscriptions.
Some types of vehicles are out of scope as they are not considered as investment funds, such as holding companies, pension funds and saving schemes and securitisation vehicles.
The Directive defines the AIF as a "collective investment undertaking which raises capital from a number of investors". This implies that funds with only one or a very limited number of investors would not be covered by the Directive. For illustration purposes the introducing provisions of the Directive mention as an example "family office vehicles which invest the private wealth of investors without raising external capital".
All in all and subject to the above, for Luxembourg this means that all investment funds that are not UCITS and their managers are in principle covered by the Directive, namely Luxembourg Undertakings for Collective Investment (UCIs) governed by Part II of the Law of 17 December 2010, Specialised Investment Funds (SIFs) governed by the amended Law of 13 February 2007 and Investment Companies in Risk Capital (SICARs) governed by the amended Law of 15 June 2004. Some other Luxembourg investment vehicles, that are presently non-regulated, may also be covered by the Directive.
2. The Directive aims at regulating investment managers, the AIFM and, indirectly, the funds they manage (the AIF). However, the Directive also comprises a number of requirements which will apply at the level of the AIF, such as the requirements for a depositary, a valuation agent, the publication of an annual report, the provision of information to investors by means of an offering memorandum or otherwise and to report to regulators.
Most of these requirements will not imply significant changes for Luxembourg UCIs, SIFs and SICARs because they are already subject to similar requirements under their current regulated status.
3. Although the initial objective of the G20 and the EU Commission was principally to regulate the alternative investment industry in order to control and avoid systemic risk, the Directive now also entails a European passport for AIFM in that they can, once they are authorised in a EU Member country, market the AIF they manage to professional investors in all other EU Member countries.
In the context of UCITS, Luxembourg has taken advantage of the opportunities given by the passport regime and has on that basis become the leading jurisdiction in the world for retail cross-border distribution. Luxembourg intends to build on this positive experience and offer the possibility for both AIFM and AIF to use Luxembourg as their hub for marketing AIFs to professional investors in the EU and, potentially, as is currently the case for UCITS, beyond the EU.
4. A significant subject for discussion during the drafting process of the Directive was the treatment of third countries, i.e. investment managers and investment funds established in non-EU Member countries. The compromise solution that could be reached provides for complex delayed transposition rules applicable to AIFM and AIF situated in non-EU Member countries:
- During an initial two-year period (from July 2013 until July 2015), only EU-based AIFM and the EU AIFs they manage have to comply with all the terms of the Directive and, as a result, benefit from the European passport for marketing to professional investors in Europe.
- During this two-year period, non-EU managers cannot take advantage of the passport but may, subject to, inter alia, certain reporting and transparency requirements, continue the marketing of the funds they manage on a private placement basis, in accordance with private placement rules, as may be applicable in each EU Member country.
- After this two-year period, non-EU managers can also benefit from the EU passport if they meet the requirements of the Directive and thereby become AIFM under the Directive. Alternatively, they can continue to market on the basis of the local private placement regimes until 2018, at which time the EU Commission eventually aims at abolishing local private placement rules.
For Luxembourg AIFs with EU-based AIFMs, this means that they will have the benefit of the European passport for marketing to professional investors from July 2013.
For Luxembourg AIFs with non-EU based AIFMs (US, Switzerland, etc.), this means that they will be able to continue to market in the EU on the basis of the local private placement rules (as is currently the case) subject to complying with some requirements of the Directive. If the private placement rules appear to be too restrictive, a restructuring can be considered by interposing between the Luxembourg AIF and the non-EU AIFM a Luxembourg AIFM (such as an AIFMD compliant Luxembourg management company) (see also 6. below). The Luxembourg AIF would thus be managed by a Luxembourg AIFM which would delegate investment management functions to the non-EU AIFM (assuming the latter is authorised and regulated in its home jurisdiction as discussed in 5. below). On this basis the AIF will have the benefit of the passport from July 2013.
5. The initial draft of the Directive prepared by the Commission considered the possibility for the AIFM to delegate investment management functions to a submanager but required that the sub-manager itself be authorised as an AIFM. This requirement is no longer included in the final Directive. Investment and risk management functions can be delegated to third parties provided the latter are authorised for providing investment management services and are subject to supervision. For investment managers established in non-EU Member countries there must, in addition, be cooperation between the supervisory authority of the AIFM and the supervisory authority in the country in which the investment manager is based.
This will thus enable Luxembourg AIFM (including UCITS management companies authorised to that effect (see 6. below), to delegate investment management to investment managers who do not qualify as AIFM, including investment managers established in non-EU Member countries.
It is to be noted that the conditions for delegation to investment managers established in non-EU Member countries will be further clarified in the implementing measures referred to under 7. below.
6. UCITS management companies can, if they meet all of the requirements of the AIFM Directive, be authorised also to act as AIFMs. This will thus enable the same management company to manage both UCITS and AIF.
This creates an opportunity for Luxembourg where numerous UCITS management companies have been set up since the implementation of UCITS III in 2002. Some investment management groups have set up their own UCITS management companies in Luxembourg but specialised service providers have also set up UCITS management companies to provide third party management company services to UCITS set up in Luxembourg by asset management groups who have no physical presence in Luxembourg. Going forward, these management companies have the possibility to extend the authorisation also to manage AIFs.
7. As stated above, a huge number of implementing measures will need to be prepared by ESMA and adopted by the EU Commission.
The preparation of these implementing measures was accompanied by a consultation process in relation to which the Luxembourg investment fund industry has been actively participating.
Luxembourg has become a leading financial centre in the world. It has a sophisticated legal and regulatory environment to accommodate the needs of the investment management industry and there is no doubt that the appropriate adaptations will be made to implement and reflect the provisions of the AIFMD. It also has the most valuable experience in servicing investment funds, their promoters and managers. The professionalism of the Luxembourg service providers and the pragmatic approach of its authorities are additional key elements which will assist the Luxembourg financial sector to develop a robust business model for AIFM and the AIF they manage not only in an EU context but on a worldwide basis.
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.