European Union: Getting Ready For The Alternative Investment Fund Managers Directive

The countdown for the implementation of the EU Alternative Investment Fund Managers Directive (the Directive) has now begun and Member States are required to implement the Directive into national law by 22 July 2013.

The Directive requires most EU investment fund managers (and depositaries of such funds) to be authorised before they can start managing and marketing their funds within the EU, and contains rules governing how they structure and organise their business and services.

It will be implemented jointly by the Financial Services Authority (FSA) and HM Treasury. Late last year the FSA published the first part of its consultation paper¹ on the implementation of the Directive, and HM Treasury followed earlier this year with the first part of its consultation. The second parts of these consultation papers are expected to be issued shortly. In December 2012 the European Commission published the long awaited draft level 2 regulations which implement the Directive and contain much of the detail crucial for managers of alternative investment funds who are subject to the Directive. Once in force, the level 2 regulations will be directly applicable in national law.

Who will have to comply with the Directive?

The Directive applies to managers of alternative investment funds (AIFM), i.e., legal persons whose regular business is managing one or more alternative investment fund (AIF).

An AIF is defined as a collective investment undertaking (other than a fund requiring authorisation under the Undertakings for Collective Investments for Transferrable Securities (UCITS) Directive) that 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.

The Directive applies to:-

• EU-based fund managers; and
• non EU-based fund managers who manage EU funds or market fund interests to EU investors.

A fund manager falling within the scope of the Directive may not manage and/or market AIFs within the EU unless authorised to do so under the Directive.

Although primarily aimed at managers of funds that only have professional investors, the definition of AIFM is broad and includes managers of non-UCITS retail funds and qualified investor schemes. The FSA indicates that it expects the following to fall within the scope of the Directive:

• Managers of most unregulated collective investment schemes (UCIS) such as UK-based unauthorised unit trusts and limited partnerships investing in transferable securities, derivatives, real estate, private companies etc.;
• Managers of investment companies; and
• Managers of offshore investment funds.

Note that managers structured as limited partnerships under the law of England and Wales cannot become AIFMs as they do not have separate legal personality.

The FSA is further giving some guidance as to the factors they will take into account when determining whether certain undertakings constitute AIFs falling within the scope of the Directive. These factors include among others:-

• whether the entity's main business is a commercial activity (likely to fall outside the Directive's scope) or whether the entity merely owns a company whose main business is a commercial activity without the entity participating directly in the commercial activity (likely to be an AIF within the scope of the Directive); and
• whether the entity employs a substantial number of employees carrying on commercial activities (likely to fall outside the Directive's scope) or whether the entity employs relatively few people to manage its assets (likely to be an AIF within the scope of the Directive).

Depending on the specific circumstances and features of the relevant undertaking, property investment firms such as real estate investment trusts (REITs), joint ventures, family office vehicles and private wealth undertakings may all constitute AIFs falling within the scope of the Directive.

When do fund managers have to comply with the Directive?

Fund managers that, prior to 22 July 2013, are already managing or marketing AIFs may continue carrying on their management activities subject to the relevant FSA rules applying immediately before that date without needing an AIFM authorisation. They will have until 22 July 2014 to fully comply with the requirements of the Directive and apply for an AIFM authorisation (or a variation of their existing permission).

UK fund managing firms intending to begin managing an AIF for the first time after 22 July 2013 will, however, first have to apply to the FSA (then Financial Conduct Authority) for an AIFM authorisation and fully comply with the requirements of the Directive before beginning to manage an AIF.

Footnote

1. The FSA's consultation paper "Implementation of the Alternative Investment Fund Managers Directive – Part 1" (CP12/32) is available at http://www.fsa.gov.uk/static/pubs/cp/cp12-32.pdf. HM Treasury's consultation on "Transposition of the Alternative Investment Fund Managers Directive" is available at http://www.hm-treasury.gov.uk/d/consult_transposition_of_the_alternative_investment_fund_managers_directive_110113.pdf.

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