28 Dec 2012 ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (“AIFM Directive”)
The AIFM Directive – Directive 2011 / 61 / EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (“AIFMs”) – lays down the requirements that both EU AIFMs and non-EU domiciled AIFMs are required to comply with as from the year 2013. It essentially contains new rules on the marketing of alternative investment funds (“AIFs”) in the EU and has important implications for all types of AIFMs.
The directive was adopted mid-2011 and all member states (the “Member States”) are given a two-year in order to transpose it into their national legislation.
The R-CISA adapts Swiss legislation to EU standards with respect to the (i) management,
(ii) custody and (iii) distribution of collective investment schemes. It also reinforces investors‟ protection and contemplates the enhancement of the competitiveness of the Swiss fund market. Below you will find a summary of the most significant amendments on the matter.
I – SCOPE OF THE AIFMD DIRECTIVE
The AIFM Directive applies to all EU AIFMs which manage one (1) or more AIFs irrespective of where the AIFs are domiciled.
The AIFM Directive also applies to all non-EU domiciled AIFMs, which manage one (1) or more AIFs domiciled in the EU or market one
(1) or more AIFs in the EU.
The AIFM Directive has different effects depending on whether the AIFs or the entity that is the AIFM is established within or outside the EU.
II – DEFINITION OF AN AIFM AND OF AN AIF
According to the AIFM Directive, an AIFM includes any legal or natural person whose regular business is to manage one (1) or more
AIFs, such as hedge funds and private equity
On the other hand, an AIF is defined as a collective investment undertaking (other than a UCITS fund) that raises capital from a number of investors and invests in accordance with a defined investment policy, for the benefit of those investors.
III. – EXEMPTIONS
The AIFM Directive provides for a lighter regime for AIFMs where the cumulative AIFs under management fall below a threshold of one hundred million euros (EUR 100,000,000). If the AIF is not leveraged and has a lock-in period of five (5) years or more, this threshold is raised to five hundred million euros (EUR 500,000,000). Consequently, those AIFMs will not be subject to full authorisation but to a registration in their home Member State. Such smaller AIFMs will, however, be permitted to „opt in‟ to the provisions of the AIFM Directive if they wish to do so.
The AIFM Directive also expressly exempts segregated managed accounts, funds managed by public sector entities supporting social security or pension systems, such as certain sovereign wealth funds, or family office vehicles taht invest without raising external capital.
IV – IMPLICATIONS FOR NON-EU DOMICILED AIFMS MANAGING EU AIFS
After the adoption and coming into effect of the AIFM Directive, non-EU domiciled AIFMs or third country AIFMs that manage EU AIFs essentially have two (2) main options.
Non-EU domiciled AIFMs managing EU AIFs will not be given the opportunity to take advantage of an EU marketing passport until 2015 at the earliest. Prior to that date and until at least the year 2018, such non-EU domiciled AIFMs will nonetheless be able to continue to market their AIFs (whether they are EU or non-EU AIFs) in EU
Member States pursuant to national private placement rules.
The above is possible provided that the individual Member States where the EU AIFs are licensed do not decide to require non-EU domiciled AIFMs to fully comply with the AIFM Directive before the year 2018 and provided also that they will not impose tighter regimes than those stipulated in the above-mentioned directive.
This possibility is also only available to such non- EU domiciled AIFMs provided that they satisfy the following three (3) conditions listed below:
· Cooperation Agreements
A supervisory cooperation agreement will need to be in place between the regulator of the EU Member State in which the EU AIF is to be marketed and the third country regulator of the non-EU domiciled AIFM. Moreover, if the non-EU domiciled AIFM is seeking to market an EU AIF, there must be a similar agreement between the competent authorities of those jurisdictions.
Further guidance from the European Securities and Markets Authority (the “ESMA”) is awaited as to the form of cooperation agreement that the AIFM Directive requires. However, it is believed that this should not provide significant difficulty for non-EU domiciled AIFMs since bilateral regulatory agreements have already been established between non-EU G20 countries and many EU Member State regulators.
· Financial Action Task Force Compliance
The third country where the non-EU domiciled AIFM is established must not be on the Financial Action Task Force (“FATF”) blacklist for the purposes of money laundering and terrorist financing.
It is not envisaged that this will be a burdensome requirement for most non-EU domiciled AIFMs to satisfy in relation to themselves.
· Transparency and Reporting
The non-EU domiciled AIFM will need to comply with certain transparency and reporting requirements in the AIFM Directive. In a nutshell, these include disclosures in relation to each AIF marketed by the non-EU domiciled AIFM which will need to be made to the regulators of the EU
Member States in which that AIF has been marketed and has accepted investors.
In relation to the above-mentioned disclosure obligations, it is pertinent to distinguish between “marketing” and “post-marketing” obligations.
· Marketing Obligations
In terms of marketing, the non-EU domiciled AIFM will need to ensure that certain disclosures are made to prospective EU-based investors in relation to the AIF. The AIFM Directive contains a list of requirements that must be found in the relevant disclosures to investors which are consistent with the current content of typical private placements but with an additional level of investor protection.
Notable inclusions are as follows:
- A description of the investment strategy and objectives of the AIF;
- A description of the procedures by which the AIF may change its investment strategy;
- A description of the main legal oblgiations of the contractual relationship entered into for the purposes of the investment;
- Descriptions of valuation and pricing methodologies;
- A description of all fees and expenses to be borne by investors; and
- The manner in which the AIFM ensures fair treatment of investors (including a description of what types of investors might receive preferential )
· Post-Marketing Obligations
Once investors are admitted to an AIF, the disclosures essentially relate to the delivery of annual financial reporting (to both investors and the regulators of the EU Member States in which it has investors) and certain other reporting requirements.
The annual report must, at minimum, contain are the following:
- A balance-sheet or statement of assets and liabilities;
- An income and expensiture account for the financial year;
- A report on the activities of the financial year;
- Any material deviation from the initial disclosures to
In terms of other reporting requirements stipulated by the AIFM Directive, the AIFM will need to report to the competent authority of the EU Member States from which it has admitted investors on a regular basis on the following:
- The main instruments on which it is trading;
- The markets of which it is a member or on which it actively trades; and
- The principal exposures and most important concentrations of each AIF it
Such an AIFM will also necessarily need to make available certain information regarding the overall level of leverage where leverage is employed on a “substantial basis”.
Despite the fact that non-EU domiciled AIFMs can continue to market their AIFs in accordance with national placement regimes until the year 2018, it is highly probable that the Commission will decide to abolish such regimes during this year and effectively oblige such AIFMs to comply with the provisions of the AIFM Directive as from the year 2018.
The non-EU domiciled AIFM that manages an EU AIFM also has the possibility of choosing to continue to market such EU AIFs in accordance with national placement regimes until the year 2015 and then, provided that the Commission approves and puts such an option into effect, to opt in to the AIFM Directive in that year.
This would essentially imply that from the year 2015 non-EU domiciled AIFMs will be entitled to apply for a “European Passport.” By granting such AIFMs such a possibility, the Commission will be introducing a “dual system” that will operate for three (3) years, to the effect that from the year 2015 till the year 2018, as opposed to continuing to market their AIFMs under the existing national private placement rules, such non-EU domiciled AIFMs can take advantage of the EU passporting regime. The obvious intent is that these private placement rules will be phased out and replaced with a European Passport for non-EU domiciled AIFMs in the future.
The non-EU domiciled AIFM that wishes to opt in to the AIFM Directive as from the year 2015 will, naturally, be subject to the provisions contained in AIFM Directive, including the requirement to obtain authorisation in a Member State and will also need to comply with the AIFM Directive in full (please refer to section 0 of this memoranda for more details). In particular, the non-EU domiciled AIFM will need to, amongst other matters, seek authorisation of a “legal representative” of the AIFM in an “EU Member State of reference.” The Directive provides for a series of tests to determine the EU Member State of reference with which the non-EU domiciled AIFM will have most connection with a variety of factors taken into account including the location of the EU AIF, the EU Member State where the largest amount of assets are managed or the EU Member State that will be subject to the most marketing.
After the expiration of the three-year period mentioned above, the Commission can decide to terminate the national private placement option which would mean that non-EU domiciled AIFMs will be obliged to continue to fully comply with the AIFM Directive in the year 2018.
It should be kept in mind that the compliance obligations for firms authorised under the AIFM Directive are onerous and non-EU domiciled AIFMs will need to balance the compliance costs arising out of authorisation against the benefits of being able to raise funds with an EU passport.
Non-EU domiciled AIFMs will also need to take account the fact that some EU Member States are expected to tighten their private placement rules which may mean that authorisation is more favourable for non-EU domiciled AIFMs that raise the majority of their capital from these jurisdictions.
IV – OBLIGATIONS FOR NON-EU DOMICILED AIFMS THAT CHOOSE TO OPT IN TO THE AIFM DIRECTIVE (IN THE YEAR 2015)
The AIFM Directive lays down rules for the authorisation, ongoing operation and transparency of EU AIFMs and non-EU domiciled AIFMs that choose to be regulated by the AIFM Directive from the year 2015 (should the Commission approve this possibility).
Once the directive has been transposed into national law, all the above-mentioned AIFMs will be subject to detailed authorisation requirements pursuant to which they will need to seek authorisation in order to manage an EU domiciled AIF or a non-EU AIF.
The principal requirements that the above- mentioned AIFMs will be subject to are the following:
- Rules regarding the AIFM‟s own capital requirements;
- Rules regarding the remuneration of principals of the AIFM;
- Obligations on the use of independent depositaries (with less onerous provisions applying to private equity and private equity real estate AIFs);
- Valuation and reporting requirements (to investors and regulators);
- Required investor disclosures;
- Disclosure obligations in relation to leveraged funds (and possible stipulations as to the limits on any leverage incurred by AIFs managed by the EU AIFM); and
- For the purposes of private equity AIFMs (excluding private equity real estate AIFMs), specific disclosure obligations in relation to the acquisition and disposal of substantial stakes in EU-based non-listed companies and limitations in relation to certain corporate transactions of such companies within two (2) years of the acquisition of control (so-called “asset- stripping provisions”).
The central feature that the AIFM Directive introduces is that of an EU marketing passport pursuant to which an EU AIFM that is authorised in one (1) EU Member State will be able to market EU AIFs to all professional investors (the “Professional Investors”) in other Member States following a process of pre-filing and clearance by their own regulators without any additional or registration requirements.
This naturally has the added benefit of enabling EU AIFMs to market their AIFs to investors across the EU without first having to seek permission from each Member State and comply with different national laws.
In order for AIFMs to be entitled to an EU marketing passport by the AIFM Directive, such AIFMs must be authorised under the AIFM Directive by the competent regulatory authority of their home Member State.
The conditions that the AIFMs have to fulfil mainly include the following:
- Initial capital requirements: An AIFM managing one (1) or more AIFs must have at least one hundred and twenty-five thousand euros (EUR 125,000);
- Own funds: Where the value of the portfolios of the AIFs managed by the AIFM exceeds two hundred and fifty million euros (EUR 250,000,000), additional own funds are required;
- Personnel: The persons conducting the business of the AIFM must be of sufficiently good repute and sufficiently experienced in relation to the investment strategies pursued by the· Operating ConditionsThe AIFM is required to fulfil the following conditions on an ongoing basis in order to be able to benefit from the EU passporting regime:
- Employ effectively the resources and procedures that are necessary for the proper performance of its business activities;
- Take all reasonable steps to avoid conflicts of interests and to identify and manage any conflicts of interest to prevent them from adversely affecting the interests of the AIF and its investors;
- Comply with all applicable regulatory requirements so as to promote the best interests of the AIF, its investors and the integrity of the market;
- Have sound remuneration policies and practices in place that are consistent with and promote sound and effective risk management;
- Implement adequate systems to identify, measure, manage and monitor all risks relevant to each AIF investment strategy;
- Employ an appropriate liquidity management system for each AIF it
· Organisational Requirements
Each AIFM has the duty of ensuring that for each AIF that it manages, appropriate and consistent procedures are established in order for a proper and independent valuation of the assets of the AIF can be performed in accordance with the AIFM Directive and the applicable national and AIF rules.
The AIFM Directive also imposes conditions on the delegation of AIFM functions to third parties.
All AIFMs authorised in accordance with the AIFM Directive will be required to ensure that the AIFs that they manage appoint an independent and qualified depositary, which will be responsible for overseeing the AIF‟s activities and ensuring that the AIF‟s cash and assets are appropriately protected.
The depositary must be situated in the following respective locations:
- For EU AIFs, the depositary must be established in the home Member State of the AIF;
- For non-EU AIFs, the depositary must be established in the third country or non-EU Member State where the AIF is established, or in the home Member State of the AIFM managing the AIF, or, as the case may be, in the Member State of reference of the AIFM managing the
Depositaries will be subject to a high standard of liability in the event of a loss of assets. Furthermore, in such a scenario the burden of proof will reside with the depositary.
The AIFM Directive requires that if a depositary legally delegates its tasks to others, it must provide a contract which allows the AIF or AIFM to claim damages against the entity to which the tasks are delegated. This is intended to ensure that at no point in the chain will liability be irretrievably lost.
The European Parliament has also secured the requirement that investors of the AIF in question must be informed about the potential delegation of liability of the depositary, if any, and must also be informed about the reasons for such delegation.
These new rules are likely to create additional operational and compliance burdens for depositaries.
Level 2 measures are expected to further elaborate and detail depositaries‟ duties.
In view of the fact that one (1) of the aims of the AIFM Directive is to enhance the transparency of AIFMs and the AIFs that they manage, such a directive introduces new transparency requirements that cover disclosure to investors prior to investment, reporting obligations to the relevant competent authorities and detailed disclosures in AIF annual reports.
IV – TWO-YEAR TIME LAG
Although the AIFM Directive will probably grant the possibility to non-EU domiciled AIFMs managing AIFs (established both inside and outside the EU) of being entitled to be given an EU Passport which will allow them to freely market their AIFs around the Member States, there will be at least a two- year time lag before such a passport is readily available for such AIFMs.
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