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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.
AIFMD: What it is and
what to do.
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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)
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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 “value-
added” 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);
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(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 non-
cooperative for FATF purposes.
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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 non-
cooperative 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.
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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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