The European Commission has published on its website answers to questions it has received on the interpretation of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (AIFMD). The Q&A document can be found at: http://ec.europa.eu/yqol/index.cfm?fuseaction=legislation. show&lexId=9

The questions concern:

  • transitional provisions;
  • scope and exemptions;
  • the definition of an alternative investment fund (AIF); and
  • MiFID firms and MiFID activities.

We set out below answers given by the Commission on some of the more urgent issues.

Transitional provisions applicable to existing AIFMs

Article 61(1) of AIFMD provides that alternative investment fund managers (AIFMs) performing activities before 22 July 2013 "shall take all necessary measures to comply with national law stemming from this Directive and shall submit an application for authorization within 1 year of that date". The question is whether this means that existing AIFMs have one year to comply in full with national law and to submit an application for authorisation? This is a key issue for existing AIFMs. In an Irish context, AIFMs include both the managers of AIFs but also qualifying investor funds structured as "internally-managed AIFs".

The Commission's response is that during the one year transitional period, AIFMs are expected to comply on a "best efforts basis" with the requirements of national law transposing AIFMD. The AIFM's obligation to seek an authorisation is legally binding, but only needs to be complied with within a year of the entry into force of the Directive. In respect of other requirements contained in AIFMD (such as the general principles, operating conditions, organisational requirements, conflicts of interests, remuneration, risk management, liquidity management rules, securitisation rules, valuation, delegation, depositary rules and reporting requirements), an AIFM that exists at the date of entry into force of AIFMD (22 July 2013), shall -during the 1-year transitional period to 22 July 2014 take all necessary measures (i.e., "expend its best efforts") to comply with AIFMD in respect of all relevant activities undertaken subsequent to 22 July 2013. After the transitional period, all of the obligations arising under AIFMD are legally binding.

The Commission notes that, according to Article 5, paragraph 1 of AIFMD, Member States shall ensure that each AIF has a single AIFM which shall be responsible for ensuring compliance with AIFMD and that this Article 5 applies as of 22 July 2013. The Commission expects that transposition of this provision into national law should enable Member States to monitor compliance of the not-yet authorized AIFMs. Member States may choose the means of how to achieve the above mentioned goal.

There are a few points to note from the Commission's answer:-

  • existing AIFMs must comply from 22 July 2013 on a "best efforts" basis with the requirements of national law transposing AIFMD. The Commission does not elaborate on what best efforts compliance means. This language suggests that existing AIFMs will need to take steps to achieve at least a certain level of compliance with AIFMD by 22 July 2013.
  • the Commission refers to compliance with the "national law" transposing AIFMD. Therefore, the level of compliance required will be dictated by the detail of the relevant national law. In an Irish context, this will be comprised of primary and secondary legislation, as well as regulatory conditions contained in the Central Bank of Ireland's AIF Handbook.
  • the latest draft of the AIF Handbook was silent on transitional provisions pending guidance from either the European Securities and Markets Authority (ESMA) or the European Commission. Now that the Commission has published this Q&A document, it is expected that the Central Bank will address timing. Public statements by the Central Bank have indicated some sympathy for the practical challenges involved in achieving compliance over such a short time frame - see http://www.centralbank.ie/press-area/speeches/pages/ addressbymartinmoloneytothe4thaifmdirectiveconference. Aspxfor the text of a speech given by the Central Bank's Head of Markets Policy, Martin Moloney, to the 4th AIFM Directive Conference. Therefore, it is hoped that a pragmatic approach will be adopted in this regard.
  • the Commission acknowledges that the relevant obligations under AIFMD become "legally binding" when the 1-year transitional period expires on 22 July 2014. This appears to mean that the relevant compliance obligations under the EU Directive itself are not legally binding for 1 year. Therefore, it seems that national law will determine the extent, if any, to which the obligations are legally binding during that transitional period.

In a separate question, the Commission was asked to consider the difficulties involved in implementing the reporting requirements and depositary arrangements in the transitional period prior to the authorisation of an AIFM. The Commission's response was that compliance with AIFMD has to be ensured on a best efforts basis as of the date of transposition into national law. In general, existing AIFMs will be expected to start reporting as of the date of the application of the AIFMD in accordance with the reporting frequencies foreseen in AIFMD and the Level 2 rules. Also, compliance with reporting obligations "or other obligations" (presumably this includes the depositary obligations) does not depend on the AIFM having obtained an authorisation. This ignores the very significant practical difficulties in discharging the reporting obligations and having in place AIFMD-compliant depositary arrangements by 22 July 2013. Again, it is hoped that a sensible approach to these matters will be taken by the Central Bank.

Scope

REITS

The Commission was asked to consider whether the definition of "alternative investment fund" (AIF) in Article 4(1)(a) includes REITs or real estate companies. The Commission's response is that the determination of whether or not a REIT or real estate company is excluded from the scope of the AIFMD depends on whether or not it falls within the definition of an AIF in Article 4(1)(a). Each structure should be considered on its own merits based on substance, not on form.

Article 4(1)(a) defines AIFs as "collective investment undertakings, including investment compartments thereof, which: (i) 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; and (ii) do not require authorisation pursuant to [the UCITS Directive]".

Further guidance on this topic is included in ESMA draft Guidelines on key concepts of the AIFMD at http://www. esma.europa.eu/system/files/2012-845.pdf .

Special purpose vehicles/entities

The Commission was advised that that guidance was need on Article 2(3)(g) of Directive 2011/61/EU which provides that AIFMD shall not apply to "securitisation special purpose entities" (SPEs). The question noted that AIFMD defines SPEs as entities whose sole purpose is the carry on a securitisation or securitisations within the meaning of Regulation (EC) No 24/2009 of the European Central Bank and other activities which are appropriate to accomplish that purpose. The question notes that in another context AIFMD defines "investment in securitisation positions" with a cross-reference to the Directive 2006/48/EC (CRD). The question refers to this inconsistency in definitions and says that it offers opportunities for managers willing to circumvent AIFMD and deciding to manage a hedge fund through a SPE issuing shares whose performance could be 100% correlated to the hedge fund's performance itself.

The Commission's response is that the definition of SPE in AIFMD is clear and cannot be interpreted as referring to the CRD. However, the Commission emphasises that the reference to a securitisation SPE should be interpreted narrowly and should not be used in order to circumvent the application of AIFMD. The Commission supports the idea of the development of guidelines by ESMA against circumvention of the AIFMD.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.