Asset Management Intelligence - February 2015 - AIFMD — Looking Back, but Moving Forward
On November 11, 2010, following the event in which the Economic and Financial Affairs Council reached consensus in respect of the Alternative Investment Fund Managers Directive (“AIFMD” or the “Directive”), the European parliament voted in favor of adapting this new legislation.
The Directive aims to regulate the management and marketing of collective investment undertakings that are not subject to the UCITS regime. The legislation was drafted following the Madoff case with the goal of preventing such fraud and protecting investors from investing into a fund which has no title to the assets it claims, or uses the funds collected from investors for different purposes than communicated.
AIFMD applies to all Alternative Investment Funds (“AIFs”) which are not in scope of the UCITS regime with very little exemptions. In general, unleveraged funds with 500 million EUR in AUM or leveraged funds with 100 million EUR in AUM are obligated to comply. This includes all alternative investment funds regardless of whether a hedge fund, private equity fund, real estate fund, or fund of hedge fund. Given the extremely broad scope and far-stretching consequences of failure to comply, the Directive has managed to keep the European regulators, fund managers, banks, lawyers, and nearly all active members in the financial services industry occupied for the past few years leading up to its recent implementation.
Last year on July 22, the legislation finally came into full effect throughout the European Union upon the elapse of the one-year grace period.
The Directive also affects managers and funds outside of Europe when:
- A fund outside of Europe is managed by a European fund manager
- A manager outside of Europe is managing a European fund
- A manager outside of Europe is managing a non- European fund that markets to European investors.
Simply said, fund managers either fall under the full or partial scope of the legislation depending on the local laws of the European member state involved.
For those who are unfamiliar with the regulation, a manager who is under full scope of AIFMD qualifies as an Alternative Investment Fund Manager (“AIFM”) and is obligated to uphold the following rules, which are imposed by the Directive:
- Apply for authorization from the regulator of the country in which the AIFM is based.
- Comply with the minimum capital requirements.
- Comply with conduct of business rules (such as managing conflicts of interests and fair treatment of investors) and implementation of risk and liquidity management measures.
- Comply with specific remuneration practices
(including requirements for deferred payment of variable remuneration and for share or unit based payments).
- Segregate internal risk functions and portfolio management.
- Appoint external depositories to safeguard fund assets
and monitor cash flows (and requirements regarding depositories’ liabilities for safeguarding such assets).
- Delegate the AIFM’s functions according to strict rules.
- Submit to limits on and disclosure of the use of leverage.
- Disclose information to the regulator and to investors.
Whilst European AIFMs, their advisors, service providers, and bankers have been fully occupied ensuring that all AIFMs met the extensive list of requirements, non-European managers have been on the sidelines, struggling to understand what their obligations were per country.
Each non-European manager who intends to market to investors of any European member state is obligated to comply with the National Private Placement Regime (“NPPR”) of that member state. In a situation where, for example, a U.S. manager with a non-European fund is marketing to European-based investors in the United Kingdom, Luxembourg, France and the Netherlands, the manager will need to follow the NPPR of all four European countries.
Thus, despite AIFMD being a European regulation, it has been implemented into the local laws of each member state, leaving non-European managers forced to comply with different local regimes varying from full exemptions in certain countries, to light regimes imposed on them in others, to very strict rules in some countries such as Germany.
Although the regulation is still perceived as challenging, nearly half a year later, the regulators have provided much more clarity and there are now certain jurisdictions with the European Union that have strongly positioned themselves as “AIFMD-friendly.”
With the progression of time, we continue to see attention shifting to different facets of the Directive. From becoming AIFMD compliant and obtaining a license, to finding a depository and complying with many other aspects which have swiftly become business as usual, the focus has shifted to complying with the stringent data-reporting obligations known as the AIFMD Annex IV transparency reporting. The latter has also stirred up all parties outside Europe who need to register and submit their first local reporting.
There are two Annex IV reports:
- The AIFM report provides details of the manager and a consolidated view of the assets managed.
- The AIF report must be completed for each fund and contain details of the assets held by the fund, the risks to which it is exposed, the types of investor holding shares or interests in the fund, and much more.
The exact filing dates are different within in each member state. Adding further complexity, the frequency of the Annex IV reporting is based upon the AUM, resulting in a variance of reporting dates for managers – quarterly, bi-annually or simply annually (for those who are lucky).
Producing an Annex IV report requires more than merely gathering data. Aggregating information from several sources and managing different types of data — varying from static data, accounting data and risk measurements—are involved, creating a substantial amount of work and tremendous time demands on a manager. The report has some similarities to Form PF, which is a reporting due to the Securities and Exchange Commission in the U.S.
With the elapse of each new AIFMD phase comes a new challenge: 2015 brings the EU Passport and resolution on whether this will become available for non-European managers.
For those who are not familiar with the EU passport regime under AIFMD — this will in fact allow AIFMs to market their AIFs to professional investors across Europe and to manage an AIF that is domiciled in another member state. The regime will become effective in the course of 2015.
On November 7, 2014, the European Securities and Markets Authority (“ESMA”) published a call for evidence on the EU passport under the AIFMD and third country AIFMs; the deadline for responses to the call for evidence was January 8, 2015. ESMA will consider the feedback it received in the first quarter of 2015 and is required to deliver the opinion and the advice to the Commission by July 22, 2015.
This means that it is possible that non-EU AIFMs may be able to apply for authorization to market AIFs under the passport system, depending on the outcome of ESMA and its advice to the Commission.
Although the regulation has caused necessary concerns amongst those who need to comply with it, I believe that it all stands or falls with guidance; having the right local support to rely upon makes a difference. As challenging as the regulation might seem, AIFMD is here to stay.
Asset Management Intelligence - February 2015