Following our article in our newsletter of November 2010, we resume the subject of the Directive on alternative investment funds managers and give a more detailed overview on the rules which came into force in the meantime.
In answer to the financial crisis the European Commission (the "Commission") had been looking for measures to submit certain actors and activities connected with the financial markets and subject to considerable risks to a common and binding regulation. The draft of a directive on alternative investment funds managers ("AIFM"), established by the Commission in 2009, which was, after tedious discussions and various amendments, finally adopted on 11 November 2010 as the Alternative Investment Fund Managers Directive 2011/61/EU (the "Directive"), came into effect on the 20th day of its publication in the official journal on 1 July 2011. Upon its implementation by the EU member states within two years following that date, it will provide for a first EU-wide regulation for fund managers of alternative investment vehicles.
The innovation will be a "passport" for the mentioned fund managers of EU funds – and also for non-EU fund managers and non-EU funds managed by EU-fund managers in future –, which will enable them, once the passport is obtained in one of the EU member states, to market Alternative Investment Funds ("AIF") in all member states.
The provisions of the Directive currently apply to AIFM being either located within the EU or being located outside of the EU but managing EU funds or marketing funds onto the EU market (EU fund managers). In the years following the end of the implementation deadline however, from 2013 until 2018 approximately, regulatory provisions shall be developed step by step with regard to non-EU fund managers and non-EU funds (see further below). With regard to the AIF, the Directive applies to open-ended funds as well as to closed-ended funds, regulated or not regulated, which do not fall under the UCITS directive, and does neither differentiate between legal forms the funds may take or different kinds of alternative assets the funds may deal with. The Directive specifies however that it does not apply to holding companies or to such fund managers which exclusively manage funds whose investors are the manager itself or either its parent or subsidiary, as long as neither of these is an AIF.
The rules on AIFM, and indirectly also on AIF, as established by
the Directive are outlined in the following and summarised with
regard to the most important aspects of the Directive.
Authorisation procedure and "passporting"
The Directive provides that a fund may only have one AIFM, which will need to be authorised by the competent regulation authority ("regulator") in the member state where it has its registered office, upon application by the AIFM. The regulator will have to decide on such applications in due time as prescribed by the Directive (within a period of three months, which is extendable to six months if the regulator in its discretion so decides). An unauthorised AIFM will not be allowed to manage an AIF.
As part of the application procedure, the AIFM will need to provide the national regulator with information on its own structure, organisation, personnel and remuneration policy as well as on the AIFM shareholders or members, as the case may be, and generally all information on how the AIFM intends to comply with its various obligations under the Directive. Furthermore, the AIFM will be required to provide information on the AIF to be managed by it under the new regime, which shall include the "instruments of incorporation" depending on the legal form of the AIF, on investment strategies to be followed by the AIF, on risk profiles and the intended use of leverage, on intended appointments with depositaries and, finally, all information that also needs to be disclosed to investors.
"When granting an authorisation, the regulator may limit its scope, for example with regard to certain investment strategies, if it is not convinced that the AIFM or, more specifically, its personnel, has sufficient experience to execute all intended strategies."
If the authorisation is granted, the new passport system will allow for the AIFM to market all kinds of EU AIF to professional investors as defined by the MiFID directive, after notification to the national regulator and confirmation by such regulator within a period of 20 days, in the member state of its registered office or domicile. For marketing a national EU AIF in another member state than that of its registered office or domicile, the national regulator needs to be notified of the respective fund(s) upon which it will pass the information, again within a period of 20 days, on to the competent regulator of the other member state. Furthermore, the AIFM may manage any EU AIF established in any other member state, upon notification of the regulator of that member state. The AIFM may also, upon notification of its national regulator and further information on the fund and intended strategy, establish a branch in another member state to market an EU AIF established in that member state.
The authorisation of the AIFM as explained above will however not be required for AIFM that do not reach a certain threshold: AIFM that manage or intend to manage AIF(s) with assets with a value of less than 100 million euros, or with assets with a value of less than 500 million euros in case that the AIF(s) is (are) unleveraged and investments are not redeemable for a period of 5 years, do not need to be authorised under the Directive, but they will, on the other hand, not benefit from the passporting system as long as they do not opt in" by application for an authorisation.
Required capital and own funds
As regards the capital requirements, the Directive makes a difference between AIF that are self-managed and other AIFM. Self-managed AIF are required to have an initial capital of 300.000 euros, other AIFM are required to have an initial capital of 125.000 euros plus 0.02 % of the amount by which the value of the assets it manages exceeds the amount of 250 million euros. Member states may, however, allow for AIFM meeting only part of the initial capital requirements – not less than 50 % of the required capital though – if a bank or insurance guarantee is provided for the remaining part.
Rules of conduct
An AIFM will need to comply with principles of conduct with
regard to the managing and marketing of AIF. The Directive requires
the AIFM explicitly to act in the best interest of the AIF or its
investors and the integrity of the market, to act honestly, fair,
carefully and diligent and to do its best to avoid conflicts of
interest. The Directive does not, however, specify any criteria
which will allow for determining whether an AIFM meets those
requirements or not; it will be left to the Commission to establish
such criteria in the coming years.
Furthermore, the AIFM will need to establish a risk management system which shall enable the AIFM to assess risks within its investment strategy. The risk management system will have to be managed separately from the portfolio management system and to be checked and, if necessary, adapted once a year. Finally, a liquidity management system will also need to be established by which the liquidity of the AIF shall be assured, which will include regular stress tests and reporting to the national regulator.
Another aspect of managing risks is the establishing of
remuneration policies for the personnel of AIFM, as also required
by the Directive. Such remuneration policies shall obviate undue
risk taking by personnel concerned with investment decisions or
whose activities in the AIFM have a "material impact" on
the risk profile of the AIFs managed. Further to the remuneration
as such, bonuses will need to be deferred over a certain period of
time – to be specified by the member states, the
Directive proposes a period of at least three to five years
–, which shall be appropriate to the general remuneration
policy with regard to the AIF in question as well as its duration.
Guaranteed bonuses shall be an exception and only be allotted to
newly hired personnel. Those remuneration policies must also be
The assets managed by the AIFM need to be valued regularly and deposited at a single depositary.
The AIFM may value the assets itself – in this case it must take care that the valuation takes place separately to the portfolio management – or by an external body, of which the AIFM must be convinced that it will be able to perform its duties and obligations. The valuation must be lead through at least annually.
The depositary appointed to hold the AIF's assets must be domiciled in the same member state as the AIFM and may be an EU credit institution or other regulated EU entity authorised to provide custodial services, provided certain capital requirements are met, as well as entities allowed to act as depositaries under the UCITS directive.
The external valuation is not the only activity which may be delegated to third parties, but any delegation requires due diligence by the AIFM with regard to resources, personnel experience etc. of any delegatee. In case of a delegation of management activities however, the delegatee must either be authorised as an asset manager itself (or registered, as the case may be) or be approved by the national regulator before the delegation occurs. Any delegation needs to be notified to the regulator.
The AIFM – and, indirectly, the AIF – need
to comply with certain transparency requirements under the
Directive towards their regulators and their investors.
Regulators must be provided with the annual report for each AIF managed containing (at least) the financial statements, a description of its activities, an update regarding any changes of information previously disclosed and information on remuneration paid to its personnel. Furthermore, AIFM must report to their national regulators in which markets and instruments they currently trade, and render information on the performance of each AIF as to its risk profile and actions taken for managing those risks, the results of stress tests taken and the main categories of assets the AIF invests in.
Investors must be provided with extensive information before
investing in the AIF, in particular on the planned investment
strategy and objectives of an AIF, the types of assets to be
invested in by the AIF and risks associated therewith, past
performance of an AIF (if applicable), conditions for changes in
the investment strategy, identity of depositary and any delegatees
or other service providers, valuation and risk management
procedures and on the charges and overall expenses to be borne by
After investing in the AIF, investors must be kept informed on the liquidity of the assets of each AIF, its risk profile and the performance of the risk management system. The Directive does not prescribe the frequency of this ongoing disclosure requirement, but refers to "periodical" information.
There will exist specific obligations for AIFM whose AIF reach a certain level of control of another – listed or unlisted – company, excluding SMEs and real estate SPVs. These obligations consist in additional notification requirements if the AIF acquires or disposes of shares with voting rights exceeding or falling below a threshold of 10%, 20%, 30%, 50% and 75%, and additional disclosure requirements if that AIF acquires more than 50% of the voting rights in an unlisted company or more than 33,33 % in a listed company. In the first case the AIFM will be obliged to notify the acquisition or disposal to the regulator, in the latter case the AIFM will need to disclose to the regulator as well as to the company itself and its members or shareholders, the identity of the AIFM, the mechanisms in place to avoid conflicts of interest and its communications policy with regard to the company and its employees. The AIF must further notify the respective company and its members / shareholders of the acquisition of 50% or more of the voting rights and specify its interests in the company as well as its intentions with regard to the business of the company and resulting impacts for its employees. The annual report of the AIF acquiring 50% or more of the voting rights in a company shall contain a presumption on the company's potential development.
Furthermore, if an AIF gains control over a company (by acquisition of 50% or more of the voting rights), the AIFM will be obliged to do its best to prevent any "asset stripping" of the company, i.e. measures like distributions, capital reductions, share redemptions, buy-backs etc. which might have as a result that the company's net asset value will be reduced below its capital and reserves or that a distribution exceeds the company's actual net profit. To that respect, special care must be taken in case that an AIFM places its own personnel in the company controlled by its AIF, to avoid any conflicts of interest which may arise in this constellation.
Provisions on non-EU AIFM and non-EU AIF
If an EU AIFM wants to market a non-EU AIF, it will have to fully comply with the Directive, not only with regard to itself but also with regard to the AIF (compliance with all aforementioned obligations). Additionally, and before the non-EU AIF may be marketed by the AIFM, "cooperation arrangements" must be established between the regulator of the AIFM's member state and the regulator in the state of the non-EU AIF. It is the Commission's task to set up a common framework to that respect. The passport system, as described above, will not apply to EU AIFM marketing non-EU AIF immediately though, so that national fund regulations and restrictions will continue to be applied for time being. From 2013 to 2015, a "private placement regime" shall allow for non-EU AIFM to offer funds in the EU and for EU-AIFM to offer non-EU funds into the EU, but there will be no common provisions of all member states on the offering as such. Additionally, in 2015 the passport system shall be introduced for non-EU AIFM and non-EU AIF, with a stricter authorisation procedure than that applied to EU managers and funds. From 2018 onwards, it is expected to abandon the private placement regime and to have a fully equivalent passport system which shall, as it is intended at present, be the only way for non-EU managers to market funds within the EU.
The European Securities and Markets Authority ("ESMA") is concerned with the establishment of implementing measures on request of the Commission and is also in charge of advising non-EU countries. Its consultations shall close mid-September and its finalised advice is supposed to be rendered by mid-November, whereupon the Commission will adopt the implementing measures between mid- and late 2012. The Directive provides that EU-AIFM may apply for authorisation under the new regime from 22 July 2013 on, and necessarily must do so by 22 July 2014.
For further details we refer to our article on the ESMA
consultation on AIFM implementing measures.
In 2015 the ESMA is supposed to render a consideration with regard to non-EU AIFM and non-EU AIF, and the passport system will again be reviewed by the Commission in the year 2017.
The Luxembourg legislator has established a draft of a law based on the Directive, modifying its law of 13 February 2007 (Loi du 13 février 2007 relative aux fonds d'investissement spécialisés), which is supposed to be voted on at the end of 2011.
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.