AIFMD and Cayman funds Focus on major impacts for a US based manager

Transcription

1 AIFMD and Cayman funds Focus on major impacts for a US based manager March 2013

2 Our discussion today 1 Provide an overview of the AIFM Directive Benjamin Collette Partner EMEA AIFMD Leader 2 3 Discuss case studies applicable to your clients and focus on non-eu managers, private placement and European passport provisions Walkthrough limited (private placement) and full AIFMD compliance requirements 2 AIFMD and US Managers 2013 Deloitte Tax & Consulting

3 The European Union AIFMD ( Alternative Investment Fund Manager Directive ) has an implicit extra-territorial component. You will be impacted if you: Have alternative Investment Management Activities within the European Union, or Have Alternative Investment Funds domiciled in the European Union (regardless of the location of your investment management activities), or Market one of your Alternative Investment Fund to European Investors (regardless of the domicile of your fund or location of your investment management activities). The scope is wide, the impacts are significant you should know what your situation is! 3 AIFMD and US Managers 2013 Deloitte Tax & Consulting

4 Why the AIFMD? 1 Regulate Regulate an industry that operated under a very light regulatory framework up to now to bring closer to UCITS framework 2 Harmonize Achieve a single EU market and common rules (authorization/supervision) for AIF s and AIFM s 3 Protect Investors Increase transparency towards and protection of investors and stakeholders 4 Increase Responsibility Ensure regulators have proper tools and means to control the systemic risks and increase the responsibility and accountability of AIFM holding or controlling stakes in companies (e.g. Private Equity) Source : AIFMD; Deloitte Analysis 4 AIFMD and US Managers 2013 Deloitte Tax & Consulting

5 AIFMD brings the alternative asset classes under a new regulatory framework Objectives of the Directive Scope of AIFMD 1 Regulate 2 Harmonize Regulate an industry that operated under a very light regulatory framework up to now to bring closer to UCITS framework Achieve a single EU market and common rules (authorization/supervision) for AIF s and AIFM s Almost everyone is impacted All the Managers of : Private equity funds Hedge funds Real estate funds Retail non-ucits funds Non-EU funds managed or marketed in the EU Potential exclusions 3 Protect Investors Increase transparency towards and protection of investors and stakeholders 4 Increase Ensure regulators have proper Responsibility tools and means to control the systemic risks and increase the responsibility and accountability of AIFM holding or controlling stakes in companies (e.g. Private Equity) Thresholds: Asset managed by the AIFM is not exceeding 100 million (or 500 million if unleveraged and 5 year lock-up period) Sub-threshold AIFMs are still subject to registration and regulatory reporting under AIFMD Vehicle types: Holding companies Securitisation SPVs Pension funds Employee savings scheme 5 AIFMD and US Managers 2013 Deloitte Tax & Consulting

6 AIFMD where do we stand? Today July 2011 July 2012 December 2012 July 2013 July AIFM Directive enacted Commission issued Level 2 Regulation Deadline for national implementation - Applications start for New AIFM/activities AIFM performing activities before July 2013 must submit application for authorization Extension of passport to non-eu AIFM/Non-EU AIF (if positive opinion of ESMA) Ending of NPPR* (max. timeframe) t 6 AIFMD and US Managers 2013 Deloitte Tax & Consulting

7 The AIFMD is organised around 6 pillars NOT EXHAUSTIVE FOCUS ON US MANAGER Pillars of AIFMD Main topics to be covered Key impacts for US AIFM 1 Marketing US AIFM will have the possibility to market the AIF it manages (US or non-us) throughout EU countries by the means of private placement and/or EU passport under some conditions EU Marketing through Private Placement regime (allowed until 2018) Conditions Compliant with transparency and PE rules cooperation arrangements for systemic risks oversight between the European Member State (MS) where the AIF is marketed and the US MS may impose stricter rules EU Marketing through Passport (from 2015 on) Conditions Applicable to US AIFM managing: EU AIF, or Non-EU AIF AIFMD compliant Prior authorization of AIFM by its reference MS Legal representative of AIFM in the reference MS being the point of contact for investors, authorities and to perform the compliance function cooperation arrangements between AIF 3rd country, the US and AIFM reference MS of the AIFM to ensure information exchange 7 AIFMD and US Managers 2013 Deloitte Tax & Consulting

8 AIFMD Scope and Compliance Areas (2/2) National Discretion but mandatory for EU passport Not required for private placement but mandatory for EU Passport Applicable NOT EXHAUSTIVE FOCUS ON US MANAGER Pillars of AIFMD Main topics to be covered Key impacts for US AIFM EU AIF Non-EU AIF Authorization New roles or service providers Conduct of business Every AIFM will have to seek authorization from its regulatory authority. It will have to upgrade its current structure, provide substance and meet capital requirements Non-EU AIFM will need to appoint a local representative Each AIF will have to appoint a depositary bank The AIFM will be able to delegate some functions to the extent it does not become a letter box entity (i.e. lack of operational substance) Valuation will have to be independent being performed internally or delegated Functional and hierarchical separation of the risk management and valuation functions Permanent compliance and internal audit functions 5 Transparency Reporting to authorities includes market traded, investment strategies, exposure and risk profile. Enhanced disclosure to investors and potential investors such as description of delegated functions, valuation procedures, all fees, liquidity risk management, gates, side pockets or similar arrangements 8 6 Specific provisions AIFMD and US Managers Remuneration guidelines will apply Leverage computation and limits PE house will have to disclose major holdings and control Asset stripping restrictions over a period of 2 years 2013 Deloitte Tax & Consulting

9 US Private Equity managers will be impacted by AIFMD NOT EXHAUSTIVE FOCUS ON US MANAGER Areas impacted by AIFMD Legal Representative ) EU Marketing within EU and AIFMD Compliance PE House (General Partners) ) Remuneration Executives / Managers ) You will be affected by AIFMD if you Mmgt. Fees / Carried interest Manage an EU-domiciled fund, or Non-EU Fund (Limited Partnership) EU Fund (Limited Partnership) Market your EU or non- EU fund to EU-based investors Contribute loan or cash Repayment & agreed return ) Non-EU ) EU Non-EU investors (Limited Partners) EU investors (Limited Partners) Non-EU investors (Limited Partners) EU investors (Limited Partners) ) Non-EU ) EU ) Non-EU ) EU 9 AIFMD and US Managers 2013 Deloitte Tax & Consulting

10 and impacts will extend beyond the current parties involved Seggregated Risk Management Investment Management Legal Representative in an EU Member State of reference AIFM License PE House (General Partners) ) US NOT EXHAUSTIVE FOCUS ON US MANAGER Executives / Managers ) New actors / Functions Prime Broker Custodian Bank AIF Non-EU Fund (Limited Partnership) AIF EU Fund (Limited Partnership) Prime Broker Custodian Bank Safekeeping Ownership verification ) Non-EU ) EU Safekeeping Ownership verification Administrator Administrator Valuation, Reporting & Accounting Valuation, Reporting & Accounting Non-EU investors (Limited Partners) EU investors (Limited Partners) Non-EU investors (Limited Partners) EU investors (Limited Partners) 10 AIFMD and US Managers ) Non-EU ) EU ) Non-EU ) EU 2013 Deloitte Tax & Consulting

11 Impacts of AIFMD on U.S Managers AIFMD Impacts H M L High Low Manager Client License and approval Substance and capital requirements Delegation and operating model impacts Investment and risk management Reporting to authorities Independent valuation Remunerations rules H M L Reporting to investors Private Placement and/or EU passport Legal representative Management compliance Marketing compliance H M L If you market your fund to EU Investor you will automatically fall under the AIFMD provisions Fund Appointment of a depositary Leverage limitations Risks limits Major holdings and controls Liquidity Management H M L 11 AIFMD and US Managers 2013 Deloitte Tax & Consulting

12 Introduction to AIFMD The new regime Deloitte Investment 2013 Management Deloitte & Touche 12 12

13 AIFMD key compliance areas Authorisation as AIFM Delegation Depositary and prime broker arrangements Capital and professional indemnity Change management Cost minimisation Business strategy Distribution AIFM Organisational rules Regulatory Tax Reporting and disclosures Risk, liquidity, valuation Remuneration Conduct of business rules Organisational Operational People Processes 13

14 Case studies Deloitte Investment 2013 Management Deloitte & Touche 14 14

15 AIFMD overview of case studies US AIFM / Cayman AIF (no EU marketing) No direct impact No direct impact No direct impact No direct impact No direct impact No direct impact No direct impact 2 US AIFM / Cayman AIF (EU marketing) PP PP PP / EU passport PP / EU passport PP / EU passport PP / EU passport EU passport 3 US AIFM / EU AIF (no EU marketing) MS discretion MS discretio n MS discretion / full compliance Full complianc e Full complianc e Full complianc e Full complian ce 4 US AIFM / EU AIF (EU marketing) PP PP PP / EU passport PP / EU passport PP / EU passport PP / EU passport EU passport 5 EU AIFM / EU AIF (US manager uses an EU ManCo or SMIC and acts as a portfolio delegate) EU Passport EU Passpo rt EU Passport EU Passport EU Passport EU Passport EU Passport PP = private placement requirements apply. Access to EU markets under private placement is permitted but may be restricted by individual member states EU passport = requires full compliance with AIFMD but permits access to all EU markets once authorised in one EU member state MS discretion = individual member state has the discretion to permit management only subject to local requirements EU ManCo = management company established in the EU to manage UCITS or non-ucits funds SMIC = self managed investment company in which the governing body of the fund opts to be the manager, i.e. AIFM 15

16 AIFMD case studies Case 1: US AIFM / Cayman AIF (no EU marketing) US AIFM Cayman AIF No EU marketing Not in scope Key considerations US manager needs to ensure its activities do not meet the definition of marketing. Units of the Cayman AIF must not be offered directly or indirectly to EU based investors The US manager may rely on reverse solicitation from EU-based investors who request to subscribe into the non-eu AIF The strict depositary liability for assets held throughout the sub-custody network (see slides 42 and 43) could potentially impact the investment process for EU fund of fund investors, whose depositary may require a higher level of due diligence and/or a depositary to be appointed to the Cayman AIF 16

17 AIFMD case studies Case 2: US AIFM / Cayman AIF (EU marketing) Private placement (allowed until 2018) US AIFM Cayman AIF EU marketing Comply with reporting/disclosure and private equity rules EU cooperation arrangements with US/Cayman Islands US/Cayman not blacklisted by FATF EU passport (from 2015) Key considerations Cooperation arrangements necessary for private placement have not yet been signed with Cayman or the US, which creates distribution uncertainty Under private placement individual member states reserve the right to impose stricter requirements or refuse access altogether Some member states will not permit private placement into their markets The EU passport for non-eu managers will only be available from 2015 and will require the US based AIFM to fully comply with AIFMD, including the remuneration provisions Full compliance with AIFMD Authoristion by a member state of reference Legal representative in the reference MS as contact for investors, authorities and performs the compliance function EU cooperation arrangements with the US, Cayman Islands US/Cayman not blacklisted by FATF US/Cayman compliance with OECD Model Tax Convention 17

18 AIFMD case studies Case 3: US AIFM / EU AIF (no EU marketing) US AIFM EU AIF Member state requirements (until 2015) Management only may be permitted by the AIF member state subject to its local requirements Key considerations No EU marketing From July 2013 individual member states may impose differing requirements on non-eu AIFMs who manage (but do not market) AIFs on their territory. This may include full compliance with AIFMD From 2015, authorisation and full compliance would be required. The US AIFM will need to consider the costs versus benefits of a full AIFMD authorisation if it does not wish to market in the EU at this point Full compliance (from 2015) Full compliance with AIFMD Authorisation by a member state of reference Legal representative in the reference MS as contact for investors, authorities and performs the compliance function EU cooperation arrangements with the US US not blacklisted by FATF US compliance with OECD Model Tax Convention 18

19 AIFMD case studies Case 4: US AIFM / EU AIF (EU marketing) Private placement (allowed until 2018) US AIFM EU AIF Comply with reporting/disclosure and private equity rules EU cooperation arrangements with US/Cayman Islands US/Cayman not blacklisted by FATF EU marketing EU passport (from 2015) Key considerations Cooperation arrangements necessary for private placement have not yet been signed with Cayman or the US, which creates distribution uncertainty Under private placement individual member states reserve the right to impose stricter requirements or refuse access altogether AIF member state regulator has discretion to impose further requirements on an AIF it authorises, e.g. appointment of a depositary Some member states will not permit private placement into their markets The EU passport for non-eu managers will only be available from 2015 and will require the US based AIFM to fully comply with AIFMD, including the remuneration provisions Full compliance with AIFMD Authoristion by a member state of reference Legal representative in the reference MS as contact for investors, authorities and performs the compliance function EU cooperation arrangements with the US, Cayman Islands US/Cayman not blacklisted by FATF US/Cayman compliance with OECD Model Tax Convention 19

20 AIFMD case studies Case 5: EU AIFM / EU AIF (EU marketing) US delegate Or US delegate EU ManCo EU SMIC US manager sets up an EU AIFM (structured as a ManCo or SMIC) Management companies and self managed investment companies (SMICs) are frequently used by US managers acting as portfolio management delegates AIFMD permits management companies and internally managed investment companies to be the AIFM The EU ManCo / AF is authorised as the AIFM and can access EU markets through the EU passport The EU AIFM ensures full compliance with AIFMD and delegates portfolio / risk management to the US manager EU cooperation arrangements must be in place with the US The US delegate must be authorised and supervised in the US The US delegate will be subject to due diligence by the EU AIFM EU AIF(s) Key considerations AIFMD imposes new requirements in relation to the delegation of investment management functions by an AIFM EU marketing EU marketing In order not to be deemed a letter-box entity the EU management company or SMIC acting as AIFM will need to perform qualitative investment management functions and maintain appropriate control and oversight This may involve strengthening the functions currently performed by a ManCo/SMIC and its board if that entity is to fulfil the role of an AIFM ESMA s guidelines on remuneration also apply to portfolio and risk management delegates 20

21 Non-EU rules Deloitte Investment 2013 Management Deloitte & Touche 21 21

22 AIFMD non-eu rules AIFMD covers a wide range of compliance areas The so called third country provisions govern the treatment of non-eu AIFs and AIFMs in scope These rules determine the extent to which non-eu AIFMs and AIFs must comply with other aspects and by when Depositary regime Reporting, disclosures, PE rules Risk, liquidity, valuation Authorisation as AIFM Remuneration AIFM Delegation Conduct of business rules Capital and professional indemnity Distribution and Non-EU Organisational rules 22

23 AIFMD the new distribution landscape Overview of different marketing regimes and requirements Marketing Routes Private placement EU passport (EU) EU passport (Non-EU) Jul Marketing routes EU passport EU AIFM / non-eu AIF EU AIFM / EU AIF Non-EU AIFM / Non-EU AIF Non-EU AIFM / EU AIF Private placement n/a Required compliance Capital Depositary Operational Transparency EU passport may be available from 2015 Not required for private placement but mandatory for EU passport Depositary functions but no strict liability (depositary lite) National private placement may be turned off from 2018 National discretion but mandatory for access to EU passport 23

24 AIFMD non-eu rules EU AIFMs with EU AIFs must comply fully with AIFMD and will be able to avail of an EU passport to market freely to professional investors across EU Member States (similar to the current UCITS passport ) In all other cases, AIFMs marketing in Europe will need to rely on private placement,or the EU passport from 2015, subject to the conditions and requirements outlined below Private Placement (from 22 July 2013 until at least 2018) Minimum requirements: 1. Co-operation arrangements must be in place between relevant EU authorities and the jurisdiction of the non-eu AIFM and AIF 2. The non-eu jurisdictions must not be listed as non-cooperative by FATF 3. Detailed EU regulatory reporting and investor disclosures 4. Compliance with private equity rules on control disclosures and asset stripping Note: Member states reserve the right to impose stricter requirements or refuse access under private placement. EU Passport (from 2015) 1. Co-operation arrangements must be in place between relevant EU authorities and the jurisdiction of the non-eu AIFM and AIF 2. The non-eu jurisdictions must not be listed as non-cooperative by FATF 3. The non-eu jurisdictions must comply with standards under the OECD Model Tax Convention 4. Full AIFMD compliance required with authorisation and legal representative appointed in member state of reference Note: Member states cannot impose further restrictions or refuse access under the EU passport. 24

25 AIFMD marketing and managing Marketing Marketing means 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. Non-EU fund managers may accept reverse solicitation (investor requests to subscribe) without coming within scope of AIFMD The concept of marketing may be further defined and managers seeking to rely on reverse solicitation will need to ensure that they remain outside the definition of marketing in each member state Non-EU fund managers who are managing an EU AIF but not marketing this fund in Europe are still impacted by AIFMD Managing but not marketing funds in the EU Up to 2015 From 2015 Management of an EU AIF by a non-eu AIFM (with no distribution into the EU) Management only permitted if AIF member state allows, subject to local regulatory requirements Some member states may permit existing arrangements to continue while others may require full AIFMD compliance Full AIFMD compliance required with authorisation and legal representative appointed in member state of reference Cooperation arrangements with non-eu jurisdiction, FATF cooperation and OECD Model Tax Convention compliance required as for EU passport 25

26 AIFMD cooperation arrangements Cooperation arrangements with non-eu jurisdictions are necessary in all cases for marketing and/or managing AIFs when either the AIFM or the AIF is non-eu based Cooperation arrangements are also necessary for the delegation of portfolio management by an EU AIFM to a non-eu AIFM Cooperation arrangements must be in place with each EU member state where the AIF is marketed (under private placement) and with the member state of reference (state of authorisation /management activity and/or state where most marketing takes place) under the third country EU passport ESMA is centrally negotiating the cooperation arrangements on behalf of the EU 27, with each member state signing a common memorandum of understanding (MoU) If multiple non-eu jurisdictions are involved (e.g. US manager and Cayman fund), each non-eu jurisdiction must have signed its own cooperation arrangements with EU authorities Cooperation arrangements cover: Exchange of information for supervisory and enforcement purposes Access to information Ability to carry out on-site inspections Enforcement assistance Exchange of information for systemic risk oversight purposes Co-operation arrangements agreed (as of March 2013): Switzerland Brazil 26

27 Private placement requirements Deloitte Investment 2013 Management Deloitte & Touche 27 27

28 AIFMD private placement compliance US-based managers will be able to avail of private placement until at least 2018, unless the target EU member state has closed the private placement route AIFMs availing of private placement will need to meet the transparency (reporting and disclosure)requirements of AIFMD and also the requirements in relation to private equity control and disclosures, if applicable These are the minimum requirements and individual member states reserve the right to impose further requirements in cases were AIFS are privately placed 28

29 AIFMD regulatory reporting Information required Frequency thresholds Report by AIFM level AIF level Substantially leveraged Principal markets traded comprising top 5 most important markets / instruments traded and AuM data Breakdown of investment strategies by predetermined category Principal exposures and most important concentrations - main instruments traded, geographical focus, most important portfolio concentrations and principal markets, investor concentrations Instruments traded and individual exposures comprising the main categories of assets traded, long and short value exposures, typical deal/position size dominant influence Risk Profile of the AIF comprising data on market risk, counterparty risk, liquidity risk, borrowing risk, exposure risk, Liquidity risk profile, including percentage of assets subject to special arrangements and any new arrangement for managing the AIF s liquidity The results of periodic stress tests under normal and exceptional circumstances Borrowing and exposure risk including report of leverage figures Break-down between leverage from cash/securities and embedded in derivatives and the extent to which these assets have been reused The identity of the five largest sources and the amount received < 100 Mn (annually) 100 Mn to 1.5 Bn (half-yearly) > 1.5 Bn (quarterly) Any AIF > 500 Mn (quarterly) Report to each target MS regulator under PP or MS of reference under third country passport End Oct 2013 (if reporting quarterly) End Jan 2013 (if reporting annually) End Jul 2013 (if reporting halfyearly) Note: National regulatory authorities will provide detail on timeframes and mechanisms for reporting Significant volumes of data reporting similar to Form PF in the USA 29

30 AIFMD disclosure to investors Key areas of disclosure Disclosure to investors The procedure for changing the AIF s investment strategy The main legal implications for investors owing to the jurisdiction of the AIF. How professional indemnity risks are covered Description of delegated functions Valuation procedures All fees (direct and indirect) and maximum values thereof How a fair treatment of investors is ensured Gates and side pockets Risk management activities A description of any preferential treatment, the type of investors who obtain such preferential treatment as well as, where relevant, their legal or economic links with the AIF or AIFM Description of the AIF s liquidity risk management, including the redemption rights both in normal and exceptional circumstances, existing redemption arrangements with investors The percentage of the AIF s assets which are subject to special arrangements arising from their illiquid nature Risk profile and risk management systems employed by the AIFM Rights of re-use of collateral Notify investors immediately where gates, side pockets or similar arrangements are activated Disclose material changes in line with accounting standards and rules adopted by the AIF Leverage Liquidity management 30

31 AIFMD annual report Key areas of disclosure Annual report of the AIF Material changes to the information provided to investors Minimal changes to the IFRS/US GAAP/UK GAAP accounting formats Remuneration: the split between variable and fixed remuneration and, on an aggregated basis, amounts broken down by senior management and members of staff of the AIFM whose actions have a material impact on the risk profile of the AIF Remuneration: choice as to format of disclosure but must disclose fixed and variable proportions Full remuneration for all staff of the AIFM Full remuneration for AIFM staff that are involved in the activities of the AIF IFRS Pro-rata allocation of remuneration AIFMD Overview of investment activities during the year or period, and an overview of the AIF s portfolio at year-end or period end Overview of AIF performance over the year or period Local rules 31

32 AIFMD private equity rules Disclosures Not applicable to SMEs or Real Estate SPVs Notification thresholds to regulator of 10%, 20%, 30%, 50% and 50%, the AIFM shall notify the nonlisted company, its shareholders and its home Member AIFM shall also ensure that the board of the acquired company informs its 50%, AIFM must make available its intentions regarding the future of the nonlisted company and the likely repercussions on employment, including any material change in the conditions of employment Private Equity Asset Striping Restrictions Upon obtaining control over a non-listed company, for a period of 2 years the AIFM must: Not vote in favour, facilitate, support or instruct any distribution, capital reduction, share redemption and/or acquisition of own shares by the company which: 1. would reduce the net assets lower than the amount of subscribed capital plus reserves which may not be distributed under local law 2. would exceed the amount of accumulated profit in reserves 32

33 What does full compliance look like? Deloitte Investment 2013 Management Deloitte & Touche 33 33

34 AIFMD full compliance While US AIFMs will be able to avail of the transitional private placement regime until at least 2018, it is envisaged that full compliance and authorisation will be required from 2019 For distribution access, US AIFMs may seek authorisation earlier under the EU passport for third countries, which is due to become available in 2015 Also with a view to capital raising in the EU, US managers may wish to establish an EU AIFM at the commencement of the regime to ensure continued EU market access Full compliance entails a wide range of areas 34

35 AIFMD appointment and authorisation of an AIFM Different entities could be appointed as the AIFM Management company Investment manager The fund in the case of a self-managed structure A number of factors will need to be considered in determining which type of AIFM is most suitable and there may be non one size fits all Letter-box criteria Business model / objectives Transitional arrangements Investor expectations Marketing strategy Entity consolidation Tax implications MiFID restrictions Cost 35

36 Delegation letter-box entity criteria Portfolio Mgmt. AIFM Core Functions Risk Mgmt. AIFM has to perform functions relating to either PM or RM and must be closely involved in the decision making of its delegates Delegation of the core and other investment management (IM) functions is possible But an AIFM may not delegate IM functions to the extent that it becomes a letter-box entity IM functions cannot be delegated to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself Key factors to determine if AIFM is a letter-box entity Does not have the necessary resources and expertise to supervise delegates Loss of contractual rights over delegates Cannot mitigate risks of delegation Balance of investment management (portfolio management & risk management) functions delegated compared to those performed by the AIFM? 36

37 Delegation letter-box entity criteria The Commission s final Letter-box entity criteria have moved away from a solely quantitative approach to a more nuanced qualitative approach National regulators are charged with making an assessment of the delegation structure based on qualitative criteria such as: the types of assets the AIF or the AIFM the importance of the assets under delegation for the achievement of investment goals the geographical and sectoral spread of the AIF's investments the risk profile of the AIF the type of investment strategies pursued the types of tasks delegated in relation to those retained Whether the delegates are within the same corporate group National interpretations?! The Commission is to review the application of the rules after 2 year and may specify further measures. ESMA may issue delegation guidelines. 37

38 AIFMD capital requirements Initial Capital + Additional funds (if AuM exceeds 250 million) + Professional negligence External AIFM: 125, 000 Internal AIFM: 300,000 Additional amount is 0.02% of the amount by which the AUM exceeds 250m Additional own funds must not be less than ¼ of fixed overheads To cover potential professional liability risks AIFMs must have either Additional own funds cover of 0.01% of AuM (A Member State has discretion to reduce to 0.008% of AuM for an AIFM based on historical assessment) Hold professional indemnity insurance (PII) equal to at least 0.7% of AuM and at least 0.9% of AuM for aggregate claims per year. 38

39 AIFMD organisational and conduct of business rules Functions Functional and hierarchical separation of the risk management and valuation functions Permanent compliance and internal audit functions Operational impact of delegation and letter-box rules MiFID v AIFMD restrictions Operating conditions Acting in the best interests of the AIF/investors Due diligence Selection and appointment of counterparties and prime brokers Acting honestly, fairly and with due skills Sufficient resources Fair treatment of investors Inducements Placing/handling orders Best execution Conflicts of interest policy Organisational rules Decision-making procedures Electronic data processing Accounting procedures Control by governing body Permanent compliance function Permanent internal audit function Personal transactions Recording of portfolio transactions Recording of subscription and redemption orders Recordkeeping requirements 39

40 AIFMD remuneration Overview Applicable to AIFMs with specific requirements in relation to identified staff - exec. and nonexec. members of the governing body, senior management, control functions, various departmental heads, other risk takers Implement a detailed remuneration policy and governance structure which adheres to AIFMD s remuneration principles and ESMA s guidelines aimed at avoiding conflicts of interest and excessive risk taking Key rules Appropriate balance between fixed and variable remuneration (variable remuneration should decrease as a result of negative performance) At least 50% of variable remuneration should consist of units or shares of the AIF or equivalent At least 40% to 60% of variable remuneration should be deferred over a minimum period of 3 to 5 years, and vest no faster than on a pro-rata basis. Variable remuneration should be subject to overall financial performance and downward adjustment by way of malus (pre-vesting) or clawback (post-vesting) adjustments Payment on termination of employment should reflect performance and not reward failure Framework AIFM s supervisory function is responsible for approving an maintaining the remuneration policy Certain rules may not apply under proportionality Larger AIFMs will need to set up a Remuneration Committee to support operation of the policy Document a remuneration policy to promote sound and effective risk management Review the remuneration policy at least annually External and internal remuneration disclosures Portfolio and risk management delegates must be subject to requirements that are equally as effective or put in place contractual arrangements with the delegate to ensure compliance 40

41 AIFMD remuneration Remuneration Committee Non exhaustive list of factors in determining if a RemCo should be set up AIFMs managing not more 1.25 billion with no more than 50 employees may not need a RemCo AIFMs that are part of a wider group may rely on the group s RemCo RemCo composition should include non-executive members and an independent chair Proportionality Criteria: size, internal organisation and nature, scope, complexity of activities Requirements that may be disapplied: variable remuneration in instalments, retention, deferral and malus/clawback AIFMs need to perform an assessment in relation to every single requirement they intend to disapply and need to be able to justify this decision Disclosure Annual report The total amount of remuneration for the financial year paid by the AIFM to its staff, split into fixed and variable remuneration. The total amount of remuneration broken down by senior management and members of staff of the AIFM whose actions have a material impact on the risk profile of the AIF. Commission Recommendation: Disclose at least annually detailed information regarding remuneration policies and procedures which must not necessarily be made public (proportionality applies) 41

42 AIFMD risk management Risk Management Function Permanent, independent Functionally and hierarchically separated from other business units Identify, measure, manage and monitor all revenant risks Disclose to investors Monitor compliance Provide regular updates to the governing body and senior management Risk Management Policy Documented procedures, tools and techniques to manage risk Describe independence safeguards Allocation of responsibilities Risk limits and justification Frequency of reporting Take into account nature, scale and complexity Risk Limits Set quantitative and qualitative risk for each AIF Align limits with risk profile of AIF Market risks Credit risks Liquidity risks Counterparty risks Operational risks Risk Monitoring and Review Duty to be proactive and foresee breaches Senior management of the AIFM should be responsible for and actively involved in RM control Adequacy and effectiveness Level of compliance with RM policy Review measures to address deficiencies Risk Reporting Comprehensive and regular risk reporting to management Risk information disclosure to investors Risk figures and stress tests Failures in various processes, e.g. investment/divestment, valuations Failures in infrastructure, e.g. IT Risks specific to specific investments, e.g. fraud, lease negotiation, property rights, tax Risk Testing Periodic back-testing of risk measurement arrangements Testing of model-based forecasts Periodic stress tests and scenario analysis Corrective actions to be taken in case of particular vulnerability 42

43 AIFMD liquidity management Alignment of investment strategy, liquidity profile and redemption policy Ensure investors can redeem: In a manner consistent with the fair treatment of all investors In accordance with AIF redemption policy and obligations Prior disclosure of Special Arrangements Gates, side pockets etc. Liquidity management policies and procedures Liquidity monitoring Marginal contribution of individual assets which may have a material impact on liquidity Profile of the investor base Relative size of investments and redemption terms Liquidity stress testing Simulate shortage of liquidity Cover market risks and account valuation sensitivities under stressed conditions Conduct at a frequency appropriate to the nature of the AIF 43

44 AIFMD Valuation Who can perform the valuation? Valuation independence whether external or internal AIFM retains responsibility for proper valuation and the calculation of the NAV. The AIFM s liability is not affected by the appointment of an external valuer. Internal valuation An AIFM can perform the valuation task if functionally separated from the portfolio management and the remuneration policy and other conflicts of interests are managed internally If performed in-house, a Member State can ask for AIFM valuation procedure reviews either by an external valuer or auditor. External valuer Subject to mandatory professional registration, rules on professional conduct. Must have professional indemnity insurance for any losses suffered by the AIFM, AIF or AIF investors. Third party fund administrator calculating NAV only may not be the external valuer Key valuation controls Independent valuation model validation Valuation methodologies should be applied consistently across AIF Policies and procedures Additional controls around complex and illiquid asset valuation Frequency of valuation For open-ended AIFs: on a frequency appropriate for assets and fund issuance/redemption For closed-ended AIFs: align with AIF capital increase/decrease NAV per share must be calculated at least once per year 44

45 AIFMD Leverage Use of leverage: AIFM sets a maximum level of leverage for each AIF taking into account various factors, such as the type of AIF and the investment strategy AIFMs must also set the extent of the right to reuse collateral or guarantee that could be granted under a leveraging agreement Regulators will receive new reporting on leverage and will have the power to impose leverage limits on AIFMs if they deem this necessary for the avoidance of systemic risk Additional regulatory reporting for substantially leveraged funds Calculation of leverage: Gross Commitment The sum of the absolute value of all the positions No netting or hedging arrangements taken into account Takes into account some netting and hedging arrangements subject to criteria E.g. the netting arrangements should relate to the same asset class The Commission provides for only the Gross and Commitment methods which may result in the disclosure of higher leverage figures. Substantially leveraged funds are defined as 3xNAV under the commitment approach. Advanced The Commission will consider allowing a more flexible advanced approach in

46 AIFMD depositary regime Applicable for EU-AIFs managed by an EU AIFM Depositary functions must be carried out by one or more entities for a non-eu AIF with EU AIFM To access the EU passport in 2015, non-eu AIFs will need a depositary Oversight and safekeeping duties are now more prescriptive with increased liability reversal of burden of proof New cash flow monitoring duty to which the Commission Regulation has added a daily reconciliation requirement which will involve duplicating the administrator s reconciliations Depositary regime key features Custody Oversight Cash Monitoring Key new duty Compliance Monitoring Valuation Delegation New level of strict liability with onerous requirements Liability Contracts Asset Verification 46

47 AIFMD depositary regime Safekeeping Requirements: Certain financial instruments held in custody will be subject to a form of strict liability and must be returned by the depositary without undue delay in the event of loss The strict liability apples liability throughout the sub-custody network, e.g. liability for the loss of a financial instrument due to fraud at an unaffiliated sub-custodian Ability to discharge liability severely restricted Negligence test for other assets, which are subject to ownership verification and record-keeping Financial instruments in custody Transferable securities Embedded derivatives Money market instruments Units of CIS (if registered in the name of the depositary) Financial instruments registered or held in an account directly or indirectly in the name of the depositary Collateral. Any custody assets provided or received as collateral Other assets OTC derivatives Cash deposits Private equity shares Shares in SPVs All securities registered directly with the issuer/registrar/ta Risk factors will increase price Frontier and emerging markets Non-affiliated sub-custodians and prime brokers Depositary risk assessment of sub-custodian/pb Range of prime broker activities Number of counterparties 47

48 AIFMD depositary regime Discharge of depositary liability only in very limited circumstances, such as the occurrence of an external event No No Liability Yes Yes Step 2: Event beyond reasonable control Step 3: Could the consequences have been avoided with reasonable efforts? Step 1: External Event No Yes Liability No External Events: Acts of State (e.g. nationalisation), war, riots or any other major upheaval Internal Events: Accounting errors, operational failures, fraud and failure to apply the asset segregation requirements properly! Depositary liability for actions of unaffiliated sub custodians Implications for operating in emerging markets and for certain asset classes Additional liability cover will drive costs higher for depositaries and their clients 48

49 AIFMD depositary regime Collateral provided by the AIF in the form of financial instruments held in custody will now fall under the strict depositary liability regime, unless there is title transfer PB in sub-custody relationship with depositary for custody assets PB right of re-use of assets restricted = increase fees? Oversight relationship for other assets, require greater operational integration between the depositary and the prime broke The EU depositary regime will impact on the due diligence EU depositaries will undertake when EU fund of fund investors invest in offshore funds EU depositaries may require that underlying offshore funds in fund of fund investments appoint a depositary Alternative Investment Fund Manager Alternative Investment Fund Depositary Delegation Oversight Sub-custodian Prime Broker Administrator Prime Broker Transfer Agent 49

50 How we can help Deloitte Investment 2013 Management Deloitte & Touche 50 50

51 AIFMD our AIFMD solutions framework 51 Strategic assessment Distribution Reporting Remuneration compliance Compliance management Risk governance Independent valuation advice Operational alignment Audit attest A strategic cost-benefit analysis taking into account your existing business model and objectives, tax and regulatory issues to identify the best compliance approach to AIFMD for your business. Deloitte offers a distribution hub to assist you to benefit from the cross-border distribution passport or understand national private placement regimes. We can assist with local regulatory filing and tax requirements. We can conduct a gap analysis against existing reporting and identify how the reporting can be adapted and enhanced, as well as advice on the areas of the control framework that can be outsourced. We can conduct an impact analysis of the remuneration requirements and identify where proportionality can be applied. We can advice on tax and HR aspects and on the drafting of new policies and procedures. We can perform a detailed gap analysis between the requirements of AIFMD and your current business and operating models to identify the shortcomings of your current framework and define a plan for remedial action. Deloitte provides assistance in the set up and review of an AIFMD compliant risk manager, including the risk framework, leverage calculation and liquidity management as well as providing risk stress testing and back testing. Our solution also covers a review and implementation of new controls, procedures and reporting. Deloitte provides assistance in designing and reviewing valuation models. Our experts can also provide independent valuation services depending on applicable local regulations and requirements. Our solution to the increased reporting requirements consists of conducting a gap analysis based on the requirements compared to existing reporting processes and how these can be adapted and enhanced, as well as advice on the areas of the control framework that can be outsourced. Deloitte s auditors can assess your entity under the ISAE 3402 on the investment management function, the ISAE 3000 on the risk management process and the ISRS 4400 agreed upon procedures on delegated functions.

52 Deloitte contacts Deloitte Investment 2013 Management Deloitte & Touche 52 52

53 Your key Deloitte EMEA and Luxembourg contacts EMEA Leadership Benjamin Collette Partner EMEA AIFMD Leader T: M: E: bcollette@deloitte.lu Vincent Gouverneur Partner EMEA IM Leader T: M: E: vgouverneur@deloitte.lu Cayman Contact Carrie Brown Director Cayman Islands T: E: cbrown@deloitte.com Marc Noirhomme Director PMO, EMEA AIFMD T: M: E: mnoirhomme@deloitte.lu Brian Jackson Partner PMO, EMEA AIFMD T: E: brijackson@deloitte.ie Michael Booth Senior Manager PMO, EMEA AIFMD T: M: E: mbooth@deloitte.co.uk Patrick Rooney Manager PMO, EMEA AIFMD T: E: prooney@deloitte.ie Distribution Private Equity Real Estate Remuneration 53 Lou Kiesch Partner T: M: E: lkiesch@deloitte.lu Flip Gilbert Partner T: M: E: fgilbert@deloitte.lu AIFMD and US Managers Nick Tabone Partner T: M: E: ntabone@deloitte.lu Raymond Krawczykowski Partner T: M: E: rkrawczykowski@deloitte.lu Risk Management & Valuation Xavier Zaegel Partner T: M: E: xzaegel@deloitte.lu Benjamin Lam Partner T: M: E: blam@deloitte.lu David Capocci Partner T: M: E: dcapocci@deloitte.lu Johnny Yip Partner T: M: E: jyiplanyan@deloitte.lu 2013 Deloitte Tax & Consulting

54 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte Cayman Islands is an affiliate of Deloitte Caribbean and Bermuda Limited, a member firm of Deloitte Touche Tohmatsu Limited. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals, all committed to becoming the standard of excellence. This publication contains general information only, and none of the Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network ) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication Deloitte Caribbean and Bermuda Limited and its affiliates 54 AIFMD and US Managers 2013 Deloitte Tax & Consulting