The European Securities Markets Authority ("ESMA") has published a discussion paper on certain key concepts of the Alternative Investment Fund Managers Directive ("AIFMD") and the types of alternative investment fund manager ("AIFM") and alternative investment funds ("AIF") which will fall under its scope.
The discussion paper covers the following matters:
Definition of AIFM
ESMA is required under the AIFMD to determine the type of AIFMs falling within its scope with the aim of ensuring uniform conditions for the application of the Directive. As a result, ESMA has set out its views on the range of functions that an entity must be capable of performing in order for it to be eligible for authorisation as an AIFM, as well as the extent to which such functions may be delegated to third parties and the liability applicable to such delegation. The key focus here for managers and their advisors is the substance of any entity seeking to delegate functions and a restatement of the principle that delegation cannot be made to the extent that the AIFM becomes a "letter-box entity" (this term was considered in the previous Level 2 advice). ESMA has interpreted Article 6(5)(d) as requiring an entity to be capable of providing, and taking reponsibility for, both portfolio management and risk management in order to fulfil the AIFM function.
Definition of AIF
The broad scope of the definition of AIF and the limited number of exemptions has caused issues since the Level 1 text was finally settled. ESMA has conducted a mapping exercise of current AIFs within the EU and using this data will concentrate on the key elements of the definition under Article 4(1)(a) to classify what constitutes an AIF. The elements identified are: raising capital, collective investment, number of investors, defined investment policies, ownership and control of underlying assets. ESMA's interpretation of each of these key elements is fleshed out in the discussion paper and the analysis will be of particular importance to managers as they add further colour to some Level 1 exemptions (e.g. single investor structures). Other exemptions for family offices, insurance contracts and joint ventures are also proposed as areas for clarification and ESMA has also noted that the use of other exempt categories (i.e holding companies) will not be permitted to circumvent the provisions of the Directive. Finally, ESMA is proposing a definition of "open-ended" AIFs and a series of clarifications be made to determine the full or partial application of AIFMD to AIFs based on a proportionality and key features test.
Appointment of AIFM
ESMA has stressed the importance of identifying and clarifying the "single" AIFM responsible for complying with the Directive and hence in the relevant arrangement with an AIF whether that entity is being appointed (i) as the AIFM or (ii) as a delegate of the AIFM. The discussion paper covers both the internally managed AIF and externally appointed AIFM options.
Treatment of UCITS management Companies
ESMA has provided its interpretation on the interplay between the AIFMD and the UCITS Directive, specifically regarding the services that entities authorised under either Directive may and may not provide. In summary, ESMA covers the possibility of dual authorisation under UCITS and AIFMD; whether UCITS managers obtain separate authorisation under AIFMD where they act as the AIFM and where they do not but instead seek to provide "other services"; and the option for UCITS managers to carry out additional services under an AIFMD authorisation which they cannot currently provide (receipt and transmission of orders).
Treatment of MiFID firms and credit Institutions
ESMA has clarified that firms authorised under MiFID and credit institutions may continue to provide investment services such as individual portfolio management to AIFs without coming within the scope of AIFMD.
Next steps
ESMA has invited responses on the discussion paper by 23 March 2012. According to ESMA, the responses received will influence its development of a formal consultation paper for technical standards on the AIFMD, which it intends to publish in the second quarter of this year. In turn, the results of that public consultation will be used by ESMA to finalise the draft regulatory technical standards which it will submit to the European Commission for endorsement by the end of this year. The Level 1 Directive is due to be implemented into national law in all EU member states on or before 22 July 2013.
The discussion paper can be found at: http://www.esma.europa.eu/consultation/Keyconcepts-Alternative-Investment-Fund-Managers-Directive-nd-types-AIFM
Originally published March 2012
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