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The Alternative Investment Fund Managers Directive – Overview
The Alternative Investment Fund Managers Directive (“AIFMD”) came into force in 2011 and was required to be transposed into national law by EU member countries by 2013. It creates a harmonised and stringent regulatory and supervisory framework in the EU for Alternative Investment Fund Managers, and has far-reaching consequences for a number of participants in the financial services industry.
The AIFMD is currently under review by the European Commission, in consultation with the European Securities and Markets Authority (“ESMA”).
The AIFMD was introduced in response to the global financial crisis of 2008, and sought to implement a framework capable of addressing a range of investor risks. The full text of the AIFMD can be accessed at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32011L0061&from=EN, and should be read in conjunction with the various regulations and guidance issued by ESMA.
The AIFMD has already been transposed into UK law, primarily through the Alternative Investment Fund Managers Regulations 2013 and by means of various changes and supplements to the FCA rules.
Those affected by the AIFMD include:
- Alternative Investment Funds (“AIFs”)
- Alternative Investment Fund Managers (“AIFMs”)
- Brokers and placement agents
It should be noted that the AIFMD can impact on the activities of AIFMs located outside the EU.
Funds falling within the definition of an AIF
Broadly speaking, a collective investment undertaking (other than a UCITS) 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,
will be treated as an AIF.
If an AIF appoints an external manager to provide portfolio management and risk management services, that external manager will generally be the AIFM. Where both of those services are managed internally within the AIF, the AIF will generally be the AIFM. Complications arise where one of those services is outsourced and another managed internally.
An EU AIFM must be authorised in the EU member state in which that AIFM has its registered office (regardless of the location of its AIF, and regardless of whether marketing is directed at investors in the EU).
A non-EU AIFM that manages an EU AIF will need to comply with any applicable national authorisation regime (but see below, “Scope to amend authorisation and passporting regimes”).
The following AIFMs are not subject to full authorisation but are subject to registration:
- an AIFM that has assets under management (“AUM”), including assets acquired through use of leverage, in respect of the AIFs it manages of €100m or less; or
- an AIFM that has AUM in respect of the AIFs it manages of €500m or less, so long as the AIFM only manages unleveraged AIFs that do not offer investors any redemption rights in the first five years.
These AIFMs can decide to opt in to full authorisation in order to take full advantage of the rights granted under the AIFMD. An AIFM that does not make such an election cannot benefit from the passporting and other rights under the AIFMD.
Marketing of AIFs – passporting regime and NPPR
Marketing is defined by the AIFMD as “a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union”.
In summary, the current position (but see below, “Scope to amend authorisation and passporting regimes”) is as follows:
- Fully authorised EU AIFMs must market EU AIFs in the EU under the passporting regime;
- Fully authorised EU AIFMs must market non-EU AIFs in the EU under the NPPR of the EU member country in which such marketing is undertaken; and
- Registered EU AIFMs, and non-EU AIFMs, must market both EU AIFs and non-EU AIFs in the EU under the NPPR of the EU member country in which such marketing is undertaken.
The NPPRs vary from member country to member country, and are in some cases onerous.
Non-EU AIFMs marketing AIFs in the EU under the NPPR are subject to certain transparency, disclosure and reporting requirements under the AIFMD (both to investors and regulators) and any additional requirements of the relevant EU member country.
AIFMs may not market non-EU AIFs which are established in a country listed as a Non-Cooperative Country and Territory by the Financial Action Task Force on anti-money laundering and terrorist financing, and certain cooperation/information exchange arrangements must be in place. Non-EU AIFMs which are established in a country listed as a Non-Cooperative Country and Territory are subject to a similar restriction.
The AIFMD regulates the marketing of AIFs to professional investors. The definition of “professional investors” for these purposes is narrower than might be expected, and should be reviewed carefully.
The marketing of AIFs to retail investors is not addressed by the AIFMD and is outside the scope of this blog post.
Other consequences of authorisation
An EU AIFM that is subject to full authorisation and which manages an EU AIF is subject to a number of requirements, including the following:
- an obligation to appoint a depositary;
- prudential/capital requirements;
- restrictions on delegation;
- remuneration policies and practices for certain categories of staff;
- internal governance requirements, including a requirement to have robust systems in place in relation to conflicts of interest, fair treatment and risk/liquidity management etc.;
- transparency, reporting and disclosure requirements;
- notification requirements on acquiring substantial stakes in EU companies; and
- requirements for independent valuation of assets.
An EU AIFM managing a non-EU AIF is subject to the same requirements as those applicable to an EU AIFM managing an EU AIF, although an EU AIFM managing an EU AIF is subject to additional requirements in relation to its depositary.
Scope to amend authorisation and passporting regimes
The European Commission has the power to change the AIFMD’s authorisation and passporting regimes to the effect that:
- a non-EU AIFM managing an EU AIF, or wishing to market a non-EU AIF in the EU, will need to be authorised in an EU member “state of reference”;
- a non-EU AIFM that becomes so authorised will be able to market EU AIFs in the EU under the passporting regime; and/or
- an EU AIFM will be able to market non-EU AIFs in the EU under the passporting regime.
ESMA has prepared various opinions in relation to the likely impact of making these changes. The changes would be implemented by bringing into effect Article 35 and Articles 37 to 41 of the AIFMD pursuant to a delegated act. The availability of the NPPR route to non-EU AIFMs managing an EU AIF, or to EU AIFMs marketing non-EU AIFs, will depend on whether Articles 36 and 42 are at that time terminated by a delegated act.
Disclaimer: This article is produced for and on behalf of White & Black Limited, which is a limited liability company registered in England and Wales with registered number 06436665. It is authorised and regulated by the Solicitors Regulation Authority. The contents of this article should be viewed as opinion and general guidance, and should not be treated as legal advice.