Introduction

The Alternative Investment Fund Managers Directive (Directive) came into force on 21 July 2011. It requires each country in the European Economic Area (EEA) to:

  • Make rules (Rules) that will implement the Directive in its jurisdiction; and
  • Require alternative investment fund managers (Managers) to comply with the Rules from 22 July 2013; July 2014; mid-2015 or 2018. The date on which a particular Manager will have to comply with a particular Rule will depend on the Manager's status on 22 July 2013, and the particular Rule. Some of these dates are also subject to change.

When the Rules are made and fully implemented they will apply to:

  • EEA Managers who manage alternative investment funds (Funds), wherever those Funds are;
  • Non-EEA Managers who manage EEA Funds; and
  • Non-EEA Managers who market Funds in the EEA, wherever those Funds are.

For these purposes:

  • A'Manager' is "a legal person whose regular business is managing one or more Funds";
  • 'Managing' means performing portfolio management or risk management for a Fund;
  • 'Fund' means a "collective investment undertaking" which (i) "Raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of the investors"; and (ii) does not require authorisation under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (2009/65).

It doesn't matter whether the Fund is open or closed-ended; what its structure is; how it's constituted or what the underlying assets are. Private equity funds will usually therefore be caught.

  • 'Marketing' means "a direct or indirect offering or placement at the initiative of the [Manager] or on behalf of the [Manager] of units or shares of [a Fund] it manages to or with investors domiciled or with a registered office in the [EEA]".

The 5 basic rules:

  1. Each Fund must have a single authorised Manager which is responsible for ensuring compliance with the Rules.

The Manager may be:

  • An external manager appointed by or on behalf of the Fund. An external Manager is permitted to administer and Market the Fund, and manage a UCITS fund, but must not engage in other activities; or
  • (If the Fund's governing body chooses not to appoint an external manager, and the Fund's constitution permits it) the Fund itself. An internal Manager may administer and Market the Fund, but must not engage in other activities.
  1. Each Manager must have a 'total remuneration' policy.

The policy must:

  • Cover the total remuneration of the Manager's senior managers and risk takers;
  • Be consistent with, and promote, sound and effective risk management;
  • Not encourage risk taking that's inconsistent with the risk profiles, rules or instruments of incorporation of the Fund(s) it manages.
  1. Each Manager must:
  • Identify, prevent, manage and monitor conflicts of interest, to prevent them from adversely affecting the Fund and its investors;
  • Have an independent risk function, which takes a proportionate approach to the identification, measurement, management and monitoring of all relevant risks;
  • Monitor the liquidity of each Fund, ensuring that the liquidity profile of the Fund's investments comply with its underlying obligations;
  • Ensure that a single depositary is appointed for each Fund it manages;
  • (For each EEA Fund it Manages, and each Fund it Markets in the EEA):
    • Prepare an annual financial report for submission to the Manager's regulator;
    • Make certain information available to actual and potential investors;
  1. A Manager may only delegate a function to a third-party if it gives its regulator prior notice and certain tests have been met. In particular, a Manager cannot delegate so much that it becomes a mere 'letter-box entity'; it cannot delegate or outsource its regulatory or other responsibilities; and some functions can only be outsourced if the regulator gives its prior approval.   
  1. If a Fund acquires control of a listed or unlisted company the Manager must not, within 2 years' of acquisition, facilitate, support or instruct, any distribution, capital reduction, share redemption or acquisition of own shares by the company.

Managing the Fund

Before an EEA Manager can Manage a Fund that is:

  • Inside the EEA, but outside the Manager's home EEA country, it must tell its regulator which country the Fund is in, whether it will manage the Fund directly or via a branch, and what services it will perform. Within a month (for direct management) or two (for management via a branch), the regulator must (i) tell the regulators in the host country, and the Manager, that management may begin; or (ii) tell the Manager that it has declined to do this because the Manager or Fund do not comply with the Rules;
  • Outside the EEA there must be a co-operation agreement in place between the Manager's regulator and the regulator in the country where the Fund is situated. The Manager and Fund must also comply with all but a small number of the Rules.

Marketing the Fund

Before an EEA Manager can Market:

  • An EEA Fund to professional investors in the EEA, it must give its regulator notice of its proposals, together with information about the Fund it is proposing to market, and the countries it is proposing to Market those Funds into. Within 20 days of receipt, the regulator must tell (i) the Manager, and the regulators in the relevant EEA countries, that marketing can begin; or (ii) the Manager that Marketing cannot begin because the Manager or Fund do not comply with the Rules.
  • A non-EEA Fund to professional investors in the EEA, there must be (i) a co-operation agreement between the Manager's regulator and the regulator for the country where the Fund is based; and (ii) an agreement between the country where the Fund is based, the country where the Manager is based, and each country into which the Fund will be Marketed, which complies with the OECD Model Tax Convention on Income and Capital. In addition, the country where the Fund is established must not be listed as Non-Cooperative by the Financial Action Task Force (FATF).

Non-EEA Managers Managing or Marketing EEA and non-EEA Funds in or into the EEA

Before a non-EEA Manager can Manage or Market an EEA or non-EEA Fund in or into the EEA:

  • The Manager must be authorised by the EEA "Member State of Reference" (as to which, see below);
  • The Manager must comply with the Rules in full;
  • There must be a supervisory co-operation agreement in place between the regulator in the Member State of Reference and the regulator in the Manager's home country;
  • The country where the Manager and Fund are established must not be listed as Non-Cooperative by the FATF; and
  • An appropriate taxation agreement must exist between the Member State of Reference, and the countries where the Manager and Fund are established.

The Manager's Member State of Reference will vary, depending on where its Funds are based, and whether and where it wants to Market them. For example, if a non-EEA Manager intends to:

  • Manage one or more EEA Funds, but not Market them in the EEA, the Member State of Reference will be the country where the Funds are based (if they're all in the same country) or where most of the Funds or most of the Funds' assets are based (if not);
  • Market one EEA Fund in one EEA member country, the Member State of Reference will be the EEA country where the Manager intends to Market the Fund or, if the Fund is authorised or registered, the EEA country where the Fund is authorised or registered;
  • Market a non-EEA Fund in one or more EEA countries, the Member State of Reference will be the EEA country where the Fund will be Marketed (if it will only be Marketed in one country) or one of the EEA countries in which it will be Marketed (if it will be Marketed in more than one); and
  • Market several EEA and non-EEA Funds, or several non-EEA Funds, in the EEA, the Member State of Reference will be the EEA country where it intends to develop effective Marketing for most of those Funds.

Other issues

  1. There are exceptions to some of the Rules, and exemptions and transitional provisions are available for some Managers and Funds. For example:
    1. A Manager with total assets under management that do not exceed €500 million may be exempt from the obligation to comply with the Rules; and
    2. Whilst an EEA Manager established on or after 22 July 2013 would commit an offence if it started to Manage a Fund without first obtaining an appropriate regulatory permission to do so, and would be required to comply with the Rules immediately, a Manager that begins to Manage a Fund before 22 July 2013 may not need to be authorised or to comply with the Rules until July 2014;
  2. Some EEA countries will retain their financial promotion rules. If a Fund is Marketed into one of these countries, the Marketing will have to comply with the relevant financial promotion rules and the Rules;
  3. Although the Directive has been published and is in its final form, many of the Rules are only available in draft (if they are available at all). For example, and at least from a UK perspective:
    1. The following consultation papers have been published, but the final version of the Rules are not yet available and may be different
      1. FSA Consultation Paper CP 12/32***: Implementation of the Alternative Investment Fund Managers Directive (Part 1) (November 2013);
      2. FSA Consultation Paper CP 13/9***: Implementation of the Alternative Investment Fund Managers Directive (Part 2) (March 2013);
      3. Consultation on the Transpositiopn of the Alternative Investment Fund Managers Directive (published by HM Treasury on 10 January 2013);
      4. Transposition of the Alternative Investment Fund Managers Directive: further consultation (published by HM Treasury on 13 March 2013);
      5. European Securities and Markets Authority Condultation on Guidelines on Key Concepts of the Alternative Investment Fund Managers Directive (published 19 December 2012); and 
      6. European Securities and Markets Authority Consultation on draft Regulatory Technical Standards on the Alternative Investment Fund Managers Directive (published 19 December 2012).
    2. The following are not yet available:
      1. European Securities and Markets Authority's Advice on the Functioning of the pan-European Passport for Alternative Investment Fund Managers (publication expected mid-2015).

Action points

Managers should consider how best to establish whether they will be the Manager for each of the Funds they currently manage, or help to manage.

Having done so, Managers should consider carrying out:

  1. A detailed Rule analysis to determine which Rules will apply to them, to their Funds and to their Marketing activities, and from when;
  2. A "gap analysis" to work out what (if anything) they need to do to comply with the Rules in the right way and on time (whenever that might be);
  3. A detailed review of their existing delegation, outsourcing and depositary arrangements, in case (for example) the pricing structure and desirability of those arrangements will change when the Rules begin to apply and/or some activities would be better brought back "in house";
  4. A detailed review of its acquisition strategy and asset mix, in case (for example) it will no longer be lawful, appropriate or desirable to acquire control of public or private limited companies before engaging in share redemption, acquisition of own share or other activities; and
  5. A detailed review of its pricing strategy and business models against the risk that the Rules will materially alter the legality and economics of its existing strategy and activities.