Frequently asked questions on Alternative Investment Fund Managers' Directive ("AIFMD")

Answers based on the text adopted by the European Parliament on November 11th, 2010.

 

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1. Where do we stand with the AIFMD?
Since end of September, there were several compromise texts published by the Belgian Presidency of the Council of the European Union reflecting strong negotiations on several key provisions of the AIFMD.

On the 27 October 2010, the last version submitted by the Belgian Presidency of the Council of the European Union has been agreed by the ECOFIN and adopted on the 11 November 2010, on plenary session by the European Parliament.

The AIFMD is expected to enter into force in 2011 (expected end of second quarter).

The deadline for transposition of the AIFMD into national laws is expected to be in 2013.
2. Who is subject to the AIFMD?
All alternative investment funds manager (“AIFM”) established in the European Union (“E.U.”), whether they manage E.U. or non-E.U. AIF, are subject to the AIFMD as well as non-E.U. AIFM managing E.U. AIF. The AIFMD also governs the marketing in the E.U. of AIF managed by an AIFM established outside the E.U.

Alternative Investment Funds (“AIF”) under AIFMD are defined as any collective investment undertaking other than UCITS.

In Luxembourg, are therefore concerned: Specialized Investment Funds (“SIF”) governed by the Luxembourg law of 13 February 2007, Investments Funds as defined by the Part II of the Luxembourg law of 20 December 2002 (“Part II funds”) and Investment Companies in Risk Capital (“SICAR”) governed by the law of 15 June 2004, unless they have less than 3 investors which are neither AIF or UCITS themselves. These types of vehicles may also benefit from exemption based on the size of their assets they managed. Indeed, an AIFM managing AIF portfolios with less than EUR 100 million of assets under management (“AuM”) or managing AIF portfolios of less than EUR 500 million of AuM with a lock-up period of five years will only have to comply with light provisions (registrations and systemic risk monitoring).
3. May a "Soparfi" be subject to the AIFMD?
The scope of the AIFMD includes any investment undertakings which raise capital from a number of investors with a view to invest it in accordance with a defined or discretionary investment policy for the benefit of those investors. The rationale of a Soparfi is the holding of participations and not the generation of returns for the investors, hence we assume that the Soparfi is not within the scope of application of the AIFMD.
4. Are the managers of non-E.U. AIF, whose units / shares are held by European investors but no longer marketed in the E.U., obliged to abide by the AIFMD?
According to the adopted text, any AIFM managing closed-end AIF in which no additional investment are made after the final transposition date of the AIFMD (expected to be in 2013) may continue managing such AIF without asking for an authorization.

Besides, if such AIF has its subscription period closed before the entry into force of this Directive (expected to be in 2011) and is constituted for a period of time expiring at the latest three years after the final transposition date of the AIFMD (expected to be in 2013), AIFM may continue to manage such AIF without complying with the AIFMD except to provisions related to annual report, disclosure for non-listed companies acquisition and asset stripping.
5. Does a Management Company authorized under the UCITS Directive have to apply for AIFM authorization?
According to the Directive voted, an authorized AIFM can manage funds under the UCITS Directive. However, authorizations to be entitled to manage UCITS or to be an authorized AIFM are two separate processes and shall be perform independently.

Nevertheless, competent authorities should not require the Management Company to provide information or documents already provided at the time of the authorization under UCITS Directive unless they are no longer up-to-date.
6. May an AIF be distributed to E.U. retail investors?
E.U. Members States may allow AIFM to market to retail investors on their territory, irrespective of whether AIF are E.U. or non-E.U. ones.

E.U. Members States may impose stricter requirements on AIFM or AIF that those applicable to professional investors but they should be the same for AIF marketed domestically or on a cross-border basis.
7. May an E.U. feeder AIF with a non E.U. master AIF benefit from the European passport under the AIFMD?
The AIFMD states that, in order for an E.U. AIFM to benefit from the passport, the E.U. feeder AIF it manages must be invested in an E.U. master AIF managed by an authorized E.U. AIFM.

In case the master AIF is not an E.U. one, the following conditions must be fulfilled (in addition to full compliance to the AIFMD):
  • Appropriate cooperation agreements between E.U. AIFM home country and third country of the master AIF
  • Master AIF third country shall not be listed as a Non-Cooperative Country and Territory by the FATF
  • OECD tax information exchange standards

Notwithstanding the above, the adopted directive defined a feeder AIF as an AIF investing (or having an exposure of) at least 85% of its assets into one or several another AIF (master AIF) having identical investment strategies.
8. Does an E.U. AIFM managing E.U. AIFs but not marketing them to E.U. investors need to comply with the directive?
The AIFMD applies to all E.U. AIFM irrespective whether AIF they managed are E.U. or non-E.U. ones and whether they are marketed to E.U. investors. Therefore, an E.U. AIFM managing E.U. AIFs without marketing them to E.U. investors has to comply with all requirements of the directive.

In the case the AIFM is a non-E.U. AIFM, manager has to seek for authorization from its home Member State of reference and thus, has to comply with the AIFMD as well.
9. What are the minimum capital requirements for an AIFM? And for a self-managed AIF?
A self-managed AIF, i.e. authorized as an AIFM, shall have an initial capital of at least € 300,000.-. Otherwise, an AIFM appointed as external manager of an AIF shall have an initial capital of at least € 125,000.-.

Furthermore, AIFM shall be required to hold own funds equivalent at least to one quarter of their preceding year's fixed overheads.

Additional capital is required if the assets under management ("AuM") exceed € 250 million (0.02% above € 250 million) with a € 10 million cap (same as for a management company of a UCITS).

Nonetheless an AIFM has the possibility to benefit from a guarantee from a credit institution/insurance up to 50% of this additional capital.

To be noted: this capital shall be invested in liquid asset or readily convertible in cash in short term.
10. Does an AIF marketed in the E.U. to institutional investors need to be managed by an E.U. AIFM?
An AIF marketed in the E.U. to institutional investors (or to any well-informed investor) needs:
  • Either to be managed by an E.U. AIFM,
  • Or to be managed by a non-E.U. AIFM which has to fulfill the following:
    • The AIF is marketed through private placement regime:
      • Compliance with the AIFMD provisions related to transparency and private equity rules;
      • Appropriate cooperation agreements on systemic risk oversight between E.U. AIF country, E.U. countries where AIF is marketed and non-E.U. AIFM third country;
      • Non-E.U. AIFM third country shall not be listed as a Non-Cooperative Country and Territory by the FATF.
    • The AIF is marketed with a passport:
      • Compliance with the full AIFMD;
      • Appointment of a legal representative established in the Member State of reference and is contact person for the investors, ESMA and the competent authorities;
      • Appropriate cooperation agreements between E.U. AIF country, E.U. country of reference and non-E.U. AIFM third country;
      • Non-E.U. AIFM third country shall not be listed as a Non-Cooperative Country and Territory by the FATF;
      • OECD tax information exchange standards between Non-E.U. AIFM third country and Member State of reference;
      • Non-E.U. AIFM third country’s laws shall not prevent effective exercise of supervision by relevant competent authorities.
11. May a management company of a UCITS also act as AIFM?
Authorised managers of a UCITS should be entitled to be authorised as AIFM and vice versa, subject only to complying with any relevant additional requirements for the new authorisation.
12. Does an E.U. AIFM need to appoint an external valuator?
The AIFM needs to appoint a valuator either legally or functionally independent, hence the valuator does not need to be external to the extent that it can be evidenced that he is functionally independent. However, should no external valuator be appointed, the competent authority of the E.U. Member State may require the AIFM to have its valuation procedures and / or valuations verified by an external auditor or, where appropriate, an auditor.
13. Does an AIF marketed in the E.U. need to appoint a depository in its home country?
For an E.U. AIF:

A depositary of an EU AIF must have registered office in the E.U. Member State of the AIF.

For a non-E.U. AIF:

A depositary of non-E.U. AIF managed by an authorised AIFM must have a registered office in the E.U., unless:
  • The regulator of the AIFM and the third country of domiciliation of the AIF has signed cooperation agreement;
  • The third country of the AIF is subject to an effective prudential regulation and supervision;
  • The depositary is contractually liable to AIFM and investors of the AIF;
  • The third country of the AIF meets FATS standards on money laundering and terrorist financing;
  • The AIFM’s home state has signed an OECD model tax convention agreement with the third country of domiciliation of the AIF;
  • The depositary is a bank or an entity of the same nature as those authorized to act as such in the E.U.
14. May an AIF have several AIFM (e.g. one AIFM in Jersey and one in the UK)?
Each AIF managed within the scope of the AIFMD shall only have one single AIFM, responsible for the compliance with the requirements of the AIFMD.
15. Is there any leverage limitation for the AIF marketed in the EU?
Any AIFM managing one or more AIF using leverage will have to provide to the competent authorities of its home Member State regular information concerning its leverage including set-up limitation in order for the latter to ensure reasonability and compliance of such rules The concerned Member State regulator will have to inform the ESMA about the leverage limits disclosed and the latter may decide to limit the level of leverage used if it considers that the leverage employed by an AIFM may pose a substantial risk to the stability and the integrity of the financial system.
16. May an E.U. AIFM delegate the portfolio management to an asset manager based in a third country?
An E.U. AIFM may only delegate the portfolio management of its AIF to a third country asset manager if the following are satisfied:
  • Asset manager shall be authorized or registered for such purposes and subject to supervision;
  • Cooperation agreements in place between third country and E.U. AIFM home Member State;
  • Delegation shall not prevent the effectiveness of supervision of the AIFM;
  • AIFM must demonstrate that delegate is qualified and capable and that he performs due diligence in the selection of the delegate
17. May the entity appointed as depositary of an AIFM be also in charge of the risk management function?
A depositary of an AIFM shall not be in charge of neither the risk management function nor portfolio management function. This ban also applies to any other undertaking unless such entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from its other potentially conflicting tasks. In addition, the potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF.
18. Are the risk management requirements under AIFMD similar to those for UCITS?
The main provisions governing the risk management under AIFMD are inspired by the risk management regulations governing the UCITS, accordingly we assume that the risk management requirements will be at least similar to the ones for UCITS. However, considering that we are at the draft stage of the AIFMD, there are no enough to answer with certainty to this question but we believe that details will be unveiled at level 2 regulations of this directive.
19. Are the reporting and the disclosure requirements under AIFMD lighter than for UCITS?
The disclosure requirements to the investors and reporting to competent authorities under AIFMD are higher in various respects than for UCITS, mainly justified by the fact that by nature, they invest in a broader range of assets and therefore may carry a greater level of risk to investors and markets. Specific provisions in the AIFMD relate to the disclosure of leverage levels used, main short positions, stakes in non-listed companies, contractual relationships between AIF and depositary, main borrowings sources... We assume that more information will be detailed also at level 2 regulations but we believe reporting and disclosure would be one of the major challenge of the AIFM.