AIFMD: What it is and what to do.
AIFMD: What it is and what to do. 1 What is the AIFMD? The AIFMD is an EU directive aimed at introducing a harmonised regulatory framework across the EU for EU-established managers (AIFMs) of alternative investment funds (AIFs). 2 What is an AIFM? An AIFM is an entity which provides, at a minimum, portfolio management and risk management services to one or more AIFs as its regular business, irrespective of where the AIFs are located or what legal form the AIFM takes. 3 What is an AIF? Any collective investment undertaking, including investment compartments thereof, which 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 and which does not require authorisation pursuant to the UCITS Directive. This wide definition covers many types of fund (regardless of structure), including hedge funds, property funds, joint ventures, family office vehicles, closed-ended funds and unregulated collective investment schemes generally. However, a de minimus rule will apply to smaller funds and managed accounts are not covered by the Directive (assuming that they are not structured as collective investment schemes ). 4 What main issues will the AIFMD cover? The main issues will include: Authorisation - AIFMs will be required to be authorised and subject to supervision by the regulator in their home member state; Capital Requirements - capital requirements will be imposed of at least EUR125,000 on AIFMs; Additional requirements to cover professional negligence risks will also be put in place; COBS etc - all AIFMs will be subject to appropriate governance and conduct of business standards and will be required to have robust systems in place to manage risks, liquidity and conflicts of interest; Remuneration - AIFMs must have remuneration policies and practices in place; Valuation - procedures for independent valuation of AIF assets must be put in place; Delegation - restrictions will be put in place on the delegation of AIFM functions; Key service providers - key service providers, including depositaries, must be subject to robust regulatory standards; Enhanced transparency - the supervisors, investors and other key stakeholders of AIFMs and the funds they manage must receive enhanced transparency. The requirements will apply to disclosure to investors prior to investment, reporting obligations to competent regulatory authorities, detailed disclosures in AIF annual reports and AIFM disclosures about investment in investee companies; Passports - a European passport will be introduced under which AIFMs will be able to manage and market EU AIFs to professional investors throughout the EU, subject to compliance with regulatory standards (which may, from 2015, be extended to non-eu AIFs subject to numerous conditions); The third country issue - conditions will be imposed on the management and marketing of non-eu AIFs by non-eu AIFMs; and Supervision - competent authorities (i.e. regulators) will be afforded wide powers of inspection and intervention.
5 What needs to be done by when? At the end of this paper is a timeline. To summarise the issue of applications to the FSA and its successor authority, the FCA, firms which are already authorised and managing or marketing AIFS before 22 July 2013 will have one year in which to become AIFMD compliant and submit an application for authorisation as an AIF manager (the FSA proposes a new regulated activity of managing an AIF, plus another new regulated activity of managing a UCITS). However, a firm which proposes to begin managing an AIF for the first time after 22 July 2013 will not benefit from the transitional period so will have to be fully compliant with the Directive before it begins to manage an AIF (or indeed market any AIF within the EU). Thus, a firm can be operational before 22 July 2014, provided it is either: (i) fully compliant from day one (if not authorised with the right permissions under the law prior to 22 July 2013); or (ii) if authorised and with the right permissions prior to that date, a firm becomes fully compliant and submits an application for authorisation as an AIF manager (in effect, an application to vary its permission (VoP) to include the new regulated activity of AIF management) by 22 July 2014. 6 What will the relevant controlled functions be and how will the FSA handbook reflect the changes? The FSA, and its successor authority the FCA, will create new controlled functions of AIF manager, AIF depositary, UCITS manager and UCITS depositary. Those managers wishing to become AIFs will need to apply to vary their permissions accordingly and new firms will need to make a new application. No forms are as yet available. It is important to remember that the scopes of MiFID and AIFMD do not tally and that the scope of MiFID services that AIFMs can undertake, by virtue of their authorisation as AIFMs, is narrower. Transposition of the final rules implementing the AIFMD is intended to be located primarily in a new sourcebook, FUND, which will replace COLL and will have a wider scope to reflect the range of fund managers, depositaries and other firms affected by the AIFMD. 7 Can firms become AIFMs or will a new entity need to be appointed to this role? Either can be done and the choice will depend on specific circumstances. Firms will need to take legal and regulatory advice on whether to apply to be an AIFM or whether to set up a new entity to undertake this role and delegate down certain functions to a MiFID investment manager. However, there is a limit on what can be delegated as the AIFM is expected to retain some functions, at the very least being that of risk manager. It is hoped that the Level 2 requirements will bring greater clarity on this point. 8 Will compliance documentation, including ICAAP, need to be amended? Where a firm applies to become an AIFM, it will need to update all compliance and financial documentation, including its ICAAP, compliance manual and monitoring programme. 9 What will the new regulatory capital requirements be? The FSA has proposed three new prudential categories to describe the capital requirements applicable to AIFMs, as follows: collective portfolio management firm (no MiFID services) (CPMs) internally managed AIF collective portfolio management investment firm (provides MiFID services) (CPMIs)
CPMs will have to meet an initial capital requirement of 125,000 and then maintain own funds on an ongoing basis of at least the higher of: 125,000 plus 0.02% of the portfolios of UCITS and AIFs under management over 250 million; and one quarter of the firm s relevant fixed expenditure. Internally managed AIFs will need to meet initial capital requirements of at least 300,000 out of their own funds on an ongoing basis. CPMIs will need to hold the higher of AIFMD s own funds requirements and the capital requirements currently set out for MiFID firms. 10 How will the appointment of an AIFM be documented? The AIFM will need to be appointed under an agreement with the fund whose assets it manages. Where an investment management agreement is already in place it will need to be amended and where a new structure is to be used, new documents will need to be put in place. If there is to be an AIFM who delegates to a MiFID investment manager, both documents need to be prepared carefully to ensure the AIFMD s delegation rules are met and that the AIFM retains sufficient activities. All parties will also need to consider who should be able to enforce which contracts and where liability lies for their respective acts or omissions. 11 Will the offering memorandum need to be amended? Each offering memorandum of an AIF will need to be updated to describe and disclose fully the new arrangements. These will include not just who will manage the AIF, but how brokerage, custody and depositary functions will be exercised. The updated offering memorandum will need to be fully scrutinised and approved by the AIF s directors and filed with the relevant authority. Where the AIF is listed, the listing particulars will need to be updated in accordance with the relevant listing regime and correct announcements made. 12 Will there be any impact on prime brokerage appointments? Prime brokers must be situated in the EEA and will need to negotiate with depositaries on the control of the AIF s assets. More detail will come when the Level 2 rules are published, but the agreement of prime brokers and depositaries on the control of assets will be complex and costly. All AIFs will be required to appoint a depositary. The duties of a depositary are greater than those of a custodian or an administrator and extend to what may be interpreted as a strict liability toward the AIF s assets. Inevitably the new arrangements will lead to greater costs being imposed on AIFs. Again, the Level 2 rules will provide greater clarity, but the impact of the AIFMD on the holding and control of assets is arguably its area of greatest impact while the details are still unclear. 13 Will there be any impact on administrator appointments? The assets of an AIF must be independently valued. This goes further than merely calculating the NAV. It is likely that the AIFMD will lead to administrators having to provide more valueadded services, such as valuation and risk monitoring. 14 What is the definition of marketing? This is the direct or indirect offering or placement, at the initiative of the AIFM or on behalf of the AIFM, of units or shares in an AIF it manages to or with investors domiciled or with a registered office in the EU. This means that AIFMD will not apply to: (i) marketing outside the EU (although an EU-based manager will need to be authorised to manage the AIF, even if the AIF is not marketed in the EU);
(ii) reverse solicitation, though this may be hard to prove; or (iii) funds marketed on the basis of a current Prospectus Directive prospectus as of 22 July 2013. 15 How do different combinations of EU and non-eu AIFs and AIFMs comply with the marketing rules? An EU AIFM marketing an EU AIF will need to take the following steps: notify competent authorities in own state; notify any other states in which intends to market (local competent authorities then notifies other member state authorities); comply in full with the Directive and with other member states marketing laws; and make use of passporting rights, where applicable, as of 22 July 2013. An EU AIFM marketing a non-eu AIF without a passport will need to comply with the following (and please note that the private placement routes permitting such marketing under individual member states laws may be switched off from 2018 if the passport is switched on for non-eu AIFs in 2015): be AIFMD compliant; the AIF must originate from a country which has a cooperation agreement in place with the AIF s supervisory authorities; the AIF must originate from a country which is not non-cooperative for FATF purposes; and the AIF must originate from a country which has an OECD model tax information exchange agreement in place with the AIF home country and each member state where the AIF is to be marketed. A non-eu AIFM marketing EU AIF with a passport will need to comply with the following, with effect from 2015 (subject to ESMA advice): will need to have prior authorisation by an EU regulator of reference and be compliant with the AIFMD; will need legal representative in the member state of reference; will need to comply with the EU supervisory authorities; must originate from a country which is not non-cooperative for FATF purposes; must originate from a country which has a tax information exchange agreement with the member state of reference; and must originate from a country which will not impede the supervision of the AIFM. A non-eu AIFM marketing non-eu AIF without a passport will need to comply with the following: may make use of the private placement rules which apply (but which may be revoked come 2018, subject to ESMA advice) in individual member states; comply with annual reporting, disclosure and reporting requirements and also requirements re acquiring control over unlisted companies, asset-stripping etc. (where relevant); cooperation agreements must be in place between competent authorities of member states where the AIF is marketed and the supervisory authorities of the AIFM and of the non-eu AIFs; and both the AIFM and the AIF(s) must originate from a country which must not be noncooperative for FATF purposes.
A non-eu AIFM marketing an EU AIF with a passport will need to comply with the following, with effect from 2015 (subject to ESMA advice): agree a regulator of reference in the EU; originate from a country which has a cooperation agreement between the member state of reference and the AIFM s supervisory authorities; originate from a country which is not noncooperative for FATF purposes; and originate from a country with an OECD model tax information exchange agreement in place with the member state of reference and with each member state where the AIF is to be marketed. An EU AIFM marketing a non-eu AIF with a passport will need to comply with the following, with effect from 2015 (subject to the passport for non-eu AIFs being switched on ): be AIFMD compliant; cooperation agreement must be in place between AIFM s member state and AIF s supervisory authorities; the AIF must originate from a country which is not non-cooperative for FATF purposes; and the AIF must originate from a country with an OECD model tax information exchange agreement in place with the member state of reference and with each member state where the AIF is to be marketed.
DATE ORGANISATION ACTION Late 2012 EU Level 2 rules to be published (much delayed) 1 February 2013 FSA Closing date for CP1 (CP12/32). February 2013 FSA Second consultation paper (CP2) on the UK s implementation of AIFMD expected By end of March 2013 HM Treasury Consultation on draft AIFMD Regulations 2013 due June 2013 FCA Policy statement on the UK s implementation of AIFMD (covering CP1 and CP2) due 22 July 2013 All member states AIFMD needs to be transposed into national law and implemented by member states 23 July 2013 FCA Date from which the FCA expects to be in a position to receive applications for authorisation or a VoP from prospective AIFMs 22 July 2014 FCA Date by which firms already managing or marketing AIFs before 22 July 2013 will be expected to apply for authorisation or a VoP 22 July 2015 ESMA Opinion issued on whether to allow the EU passport for third country AIFMs and AIFs 22 October 2015 ESMA EU passport for third country AIFMs and AIFs comes into force, if so recommended by ESMA 22 July 2017 EC Review of AIFMD begins. Suggests AIFMD II 22 October 2018 ESMA Issue statement on whether to allow private placement regime to continue 22 January 2019 EC Decision on whether to allow private placement regime to continue
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