The law implementing the AIFM Directive (the Directive)1 into Belgian law has been adopted by the Belgian parliament and ratified by the King on 19 April 2014 (the AIFM Law). It will be published in the Belgian State Gazette shortly.
While the main purpose of the AIFM Law is to implement the Directive into Belgian law, the Belgian legislator has also taken this opportunity to remodel its current product law. The law implementing the AIFM Directive into Belgian law has been adopted by the Belgian parliament and is expected to enter into force shortly. The scope of application of the law of 3 August 2012 relating to certain forms of collective management has been reviewed and limited to UCITS and collective investment undertakings investing in receivables and all the provisions of the law of 3 August 2012 applying to funds qualifying as alternative investment funds under the Directive (AIFs) and to their managers (AIFMs), have been moved to the AIFM Law.
The AIFM Law has a broad scope of application. It applies to all Belgian funds which qualify as AIFs, such as real estate closed-ended investment funds (sicafis/vastgoedbevaks), Pricafs/Privaks2 and open-ended collective investment companies with variable capital (Sicavs/Bevaks) investing in financial instruments and in cash, as well as to other Belgian funds that are currently unregulated. All the managers of these funds will be subject to the provisions of the AIFM Law. The existing Belgian regulated funds and their managers will remain subject to the provisions currently in force to the extent not covered by the AIFM Law.
It is important to note that a new law on regulated real estate companies has been approved by the Belgian parliament (the RE Law), and will be published in the Belgian State Gazette shortly. The RE Law allows real estate closed-ended investment funds (sicafis/vastgoedbevaks) to convert into a regulated real estate company to avoid the application of the AIFM Law within four months of its entry into force. Real estate closed-ended investment funds which will not convert into a regulated real estate company will fall under the scope of the AIFM Law.
The requirements imposed by the Directive/AIFM Law are numerous. They relate to internal governance, transparency, disclosure and reporting obligations, asset-stripping restrictions, capital, and depositary requirements. The Directive further introduces a marketing and
a management passport mechanism.
What is the AIFM Directive?
The AIFM Directive is a regulatory response to the financial crisis and calls for more supervision and regulation of AIFs and their managers. It aims to introduce a harmonised regulatory framework across Europe for AIFMs and to have all firms falling within the scope of the Directive being authorised and regulated by an EU regulator.
The transitional period for AIFMs performing activities under the Directive will
end on 22 July 2014.
The Directive came into force on 21 July 2011 and each EU member state was required to transpose it into national law by 22 July 2013. The Directive has now been implemented into the majority of the member states but still needs to be implemented into Belgian law. The AIFM Law has been approved by the Belgian parliament and is expected to enter into force shortly.
In order to ensure the smooth implementation of the Directive into the various domestic laws, the Directive provides for a one-year transitional period for AIFMs performing activities under the Directive. These managers will have until 22 July 2014 to be authorised as AIFMs and to comply with the Directive.
Since the Directive has still not been fully implemented in Belgium, all Belgian AIFMs – whether existing before 22 July 2013, or having started their activities after that date – are still not subject to the Directive’s requirements and do not benefit from the AIFMD passport.
The FSMA adopted a Q&A on 2 July 2013 providing guidance on the legal and regulatory framework to which AIFMs will be subject until 22 July 2014 in Belgium. By this circular, the FSMA also invites Belgian AIFMs to submit a dossier to request their authorisation
as AIFMs prior to the implementation of the Directive into Belgian law, to allow the FSMA to examine their file and to have it approved as soon as possible once the AIFM Law has entered into force.
Scope of application
What is an ‘AIFM’ and what is an ‘AIF’?
An AIFM is any person whose regular business is to manage one or more AIFs. Managing includes the provision of investment management services (whether portfolio or risk management). AIFMs may also perform the administration, marketing and other activities related to the assets of the AIF.
An AIF is defined as a ‘collective investment undertaking’ which raises capital from a number of investors with a view to investing it for the benefit of those investors, according to a defined investment policy and which is not covered by the UCITS Directive.3 It broadly captures all funds which are not covered by the UCITS Directive and which do not benefit from the exceptions and exemptions provided for by the Directive.
An AIFM may either be an external manager, ie a legal person appointed by the AIF and which is responsible for managing the AIF or an internal manager, ie the AIF itself to the extent the legal form of the AIF allows internal management. These two structures are already known in the Belgian legislative framework, with external managers being referred to as ‘management companies’ and internally managed funds being referred to as ‘self- managed funds’.
Impact on the funds industry
Subject to certain exceptions and exemptions, the Directive will affect managers of hedge funds, private equity funds, commodity funds, venture capital funds, real estate funds and investment trusts but only if the relevant manager: (i) has its registered office in the EU; (ii) manages any AIF which is ‘authorised or registered’ in the EU; or (iii) markets an AIF in the EU.
As a result, if a Belgian fund raises capital from more than one investor, does not benefit from the exemptions referred to in the Directive/AIFM Law and does not qualify as a UCIT, it will be considered as an AIF irrespective of whether it takes the form of a regulated fund (such as a pricaf/privak or a sicav/bevak investing in financial instruments or cash) or an unregulated fund.
The Directive/AIFM Law only applies
to managers of AIFs. This, however, does not mean that AIFs will not be impacted by the Directive/AIFM Law.
The Directive/AIFM Law only applies to managers of AIFs. This, however, does not mean that AIFs will not be impacted by the Directive/AIFM Law. For instance, if the AIF is internally managed, the AIF itself will need to be authorised as a manager and comply with the requirements of the Directive/AIFM Law. In addition, all AIFs (whether internally or externally managed) will be required to comply with the transparency requirements contained in the Directive/AIFM Law. Finally, member states are free to regulate the activities of AIFs at a national level, to the extent this limit the passporting mechanism introduces by the Directive.
The Belgian legislative framework
The existing law of 3 August 2012 regulates the managers of certain types of funds falling within the scope of the Directive. Pursuant to this law, AIFs making a public offer in Belgium (Public AIFs) may only be managed by authorised managers. The regulated funds falling within this category and within the scope of the AIFM Law are sicavs/bevaks investing in financial instruments and in cash, sicafis/vastgoebevaks and public pricafs/privaks.
The AIFM Law also applies to AIFMs that do not make any public offer in Belgium
(Non-public AIFs). No mandatory regulation currently applies to these funds. They, however, may voluntarily decide to opt for a legal form such as an open-ended institutional collective investment fund (OPC institutionnel à nombre variable de parts/institutionele instelling voor collective belegging), institutional sicafi/vastgoedbevaks and private pricafs/pricafs.
Upon the entry into force of the AIFM Law, the law of 3 August 2012 will be amended to reduce its scope to UCITS as well as to undertakings for collective investment investing in receivables. All provisions of the law of 3 August 2012 which fall outside its revised scope and which are not already addressed by the Directive are inserted in the AIFM Law.
The Belgian regulated funds and their managers will thus become subject to two layers of regulation: the provisions of the Directive as transposed, as well as the existing provisions of the law of 3 August which are not addressed by the Directive.4
Exclusions and exemptions
The AIFM Law excludes certain types of funds from its scope and provides for certain exemptions which may be helpful for managers of smaller or of certain specific funds.
As such, holding companies, institutions for occupational retirement provisions, employee participation schemes/employee saving schemes, securitisation SPVs, family office vehicles, joint ventures, supranational institutions, national central banks and governments are excluded from its scope of application.
In addition to these exclusions, the following AIFMs will benefit from a lighter regime:
- AIFMs managing AIFs with total assets under their management of a value of less than
- AIFMs managing AIFs with total assets under their management of a value of less than
€500m (if the AIFs portfolios are unlevered and no redemption rights exist during a period of five years following the date of initial investment in each AIF).
The Belgian legislator has decided not to make use of the possibility to impose stricter rules on these sub-threshold AIFs except if these are publicly marketed.
Non-public AIFs will only be subject to the notification and information requirements contained in the AIFM Law. They will be allowed to start their activities in Belgium after having filed a notification with the FSMA of their identity, the funds they manage and information on their investment strategy. They will be registered on a list held by the FSMA and be subject to continuing information requirements to the FSMA. These funds will not benefit from the marketing passport, unless they have decided to opt in for the full authorisation regime of the AIFM Law.
Managers managing sub-threshold Public AIFs will be subject to the same requirements as the other AIFMs. They will, however, be exempted from complying with the reporting obligations to the FSMA, the obligations applying to AIFMs managing leveraged AIFs or AIFs which acquire control of non-listed companies and issuers (including the asset-stripping provisions). They will also be required to comply with the Belgian legal requirements applying to Public AIFs and
to the management firms managing Public AIFs. These AIFMs will be allowed to provide investment services under the same conditions as other Belgian AIFMs.
Main requirements imposed by the AIFM Law
No AIFM will be allowed to start its activities without being duly authorised by the FSMA and without complying with the various requirements set out in the AIFM Law.
No AIFM will be allowed to start its activities without being duly authorised by the FSMA and without complying with various requirements.
Governance and operating conditions
AIFMs are subject to general principles such as acting in the best interests of the AIF, the investors and the integrity of the market, acting honestly and with due skill, care and diligence, treating investors fairly and complying with regulatory requirements. AIFMs are further required to manage conflicts of interest and to operate satisfactory risk management and liquidity management systems.
The AIFM Law provides for certain capital requirements which differ depending on whether the AIFM is internally or externally managing the AIF.
An internally-managed AIF will be required to maintain an initial capital of €300,000. If the AIF is externally managed, it will be required to maintain an initial capital of €125,000 and will have to maintain own funds which are equal to 0.02 per cent of the amount by which the total value of assets under management exceeds €250m with a cap of €10m (however, up to 50 per cent of this amount is not required if the AIFM benefits from a guarantee from a bank or an insurer). All AIFMs will also be required to hold either an appropriate professional indemnity insurance or an amount of own funds to cover potential liability for professional negligence.
In addition to this, the AIFM Law provides that the own funds of the manager cannot fall below the thresholds defined by the FSMA’s regulation on own funds of management companies of collective investment undertakings. The above-mentioned capital requirements do not apply to management companies which are also managing UCITS.
The AIFM Law requires AIFMs to put in place remuneration policies and practices for their senior management, risk takers, control functions, and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. The AIFMs must establish remuneration policies and practices which promote sound and effective risk management and which do not encourage risk taking which would be inconsistent with the risk profiles and rules of the relevant AIFs authorised under the AIFM Law.
An AIFM is required to ensure that a single depositary is appointed for each AIF it manages, even where the AIF was established before the Directive entered into force.
The three core functions of the depositary are the safekeeping of the assets of the fund, the day-to-day administration of the assets of the fund; and the control of the funds operation. They are subject to numerous duties and their ability to delegate is restricted by the AIFM Law.
The AIFM Law lists all entities which can act as a depositary. This includes EEA credit institutions, investment firms or institutions eligible to be a UCITS depositary under the UCITS IV Directive.
An optional additional flexibility is provided by the Directive for private equity and real estate funds whose investors have no redemption rights for five years from the date of their original investment. The depositary of such funds may be a lawyer, a notary, a registrar or any other entity meeting the legal requirements if so allowed by the member states.
The AIFM Law leaves this option open and empowers the King to determine the conditions under which a depositary which does not qualify as credit institution or as an investment firm can be appointed as depositary and to set the obligations applying to such depositary, taking into account the requirements imposed by the Directive.5 Since no Royal Decree has been enacted yet, the possibility to appoint such depositaries is currently not available.
Private equity provisions
Transparency and notification requirements
AIFMs managing one or more AIFs that acquire control (ie more than 50 per cent of the voting rights) of non-listed companies will be required to notify the non-listed company, the shareholders of the non-listed company and the relevant competent authority of the acquisition.
In addition to this, if the AIF buys, sells or holds shares in a non-listed company, the AIFM managing such AIF will be required to notify its competent authority of the proportion of voting rights it holds in such entity when it reaches, exceeds or falls below the thresholds of 10 per cent, 20 per cent, 30 per cent, 50 per cent and 75 per cent of the voting rights.
The AIFM Law further includes asset protection measures requiring AIFMs managing AIFs which acquire control of an EU non-listed company or issuer, for a period of 24 months following the acquisition of control, not to facilitate, instruct or vote for and to use its best efforts to prevent asset stripping (ie distributions, capital reductions, share redemptions
or acquisitions of own shares) of the relevant company.
Such restrictions, however, only apply if the contemplated transaction is likely to put the controlled company at risk. In other words, no distribution can be made within the two years following the acquisition of control if as a result of distribution, the net assets as set out in the annual accounts would become lower than the amount of subscribed capital plus undistributable reserves.
AIFMs are allowed to delegate the performance of some of their functions under certain conditions. An AIFM shall, however, not be entitled to delegate its functions if such delegation would prevent the relevant AIFM from acting in the best interest of investors or if such delegation would not allow it to retain responsibility for the delegated functions.
In any event, the AIFM cannot delegate functions if such delegation would render the AIFM a letter-box entity.
In addition to this, the portfolio and risk management functions may not be delegated to certain entities such as the depositary, any non-EU undertaking (unless there is appropriate co-operation between the respective regulatory authorities of the AIFM and its delegate), entities that are not authorised for asset management, entities that would be in a conflict of interest situation with the AIFM or the AIF investors.
In any event, any delegation arrangements must be disclosed to the AIFMs regulator and made available to the AIF investors before they invest in the relevant AIF.
- The Directive provides that such depositary (i) must carry out depositary functions as part of its professional or business activities, (ii) is subject to mandatory professional registration recognised by law or to legal or
regulatory provisions or rules of professional conduct and (iii) must provide sufficient financial and professional guarantees to enable it to perform effectively the relevant depositary functions and meet the commitments inherent in those functions.
The Directive introduces a framework for AIFMs to market AIFs to other
professional investors in the EU under a marketing passport.
The Directive introduces a framework for AIFMs to market AIFs to professional investors in the EU.
An EU AIFM which is authorised in its home member state will be entitled to market the units or the shares in an EU AIF it manages, or to have such units or shares marketed on its behalf, to other professional investors in the EU under this marketing passport.
Passive marketing or reverse solicitation are not covered by the Directive. In other words, an AIFM will be required to comply with the Directive and the passporting requirements if it wishes to market an AIF within the EU but nothing prevents a professional investor from investing on its own initiative in an AIF which is not authorised or passported in the investor’s home country.
As indicated above, the Directive does not apply to the marketing of AIFs to retail investors and allows member states to apply stricter requirements to the marketing of AIFs to retail investors. The AIFM Law makes use of this possibility and continues to apply the provisions currently applying to Public AIFs and to their managers for retail marketing. Public AIFs and their managers will thus be subject to the rules contained in the Directive as far as marketing to professional investors is concerned and to the existing provisions as far as marketing to retail investors are concerned.
The third countries regime
The AIFM Law contains specific provisions in relation to third countries. Non-EU AIFMs managing AIFs and EU AIFMs managing non-EU AIFs will only benefit from the EU passport from 2015 at the earliest under certain additional conditions. This passport will run in parallel with the national private placement regime which will remain available until 2018.
The private placement regime
The AIFM Law allows (i) EU AIFMs managing non-EU AIFs, (ii) non-EU AIFMs managing AIFs to market these AIFs under the existing national private placement regimes if certain conditions are satisfied – namely (i) that a supervisory co-operation agreement is put in place between the regulator of the EU member state and the third country regulator and
(ii) that the third country is not listed on the Financial Action Taskforce (FATF) Blacklist.
In addition, EU AIFMs marketing non-EU AIFs under the private placement rules will be required to be authorised as an AIFM and to comply in full with the Directive.6 Non-EU AIFMs marketing AIFs under the private placement rules will be subject to certain requirements for the AIFs they intend to market (such as publication of an annual report, information obligations towards investors and the FSMA). In addition provisions relating to leveraged AIFs, acquisition of participation in non-listed companies and asset stripping provisions shall apply.
Such AIFMs will be required to notify the FSMA of their intention to market the AIFs in Belgium and will not be allowed to start marketing these funds before being authorised to do so by the FSMA.
The private placement rules will no longer apply after 2018 following a review by FSMA and the EU passport will then apply in full to third countries.