Summary and implications
We have all been poised for months. It has been a year and a half since the first draft of the Alternative Investment Fund Managers Directive (the AIFM Directive) was put on the table by the European Commission. Europe has now reached agreement. The upshot is a messy compromise over the marketing of “third country funds”, a crackdown on pay and a heavy compliance burden for fund managers.
Some key headline points are:
- Scope: There is an exemption for EU listed holding companies and REITS. Unlisted property companies may also benefit. There is also an exemption for joint ventures.
- Marketing: Third country funds will continue to be marketed in accordance with national placement regimes until at least 2018 and the third countries in which they are based must meet various EU regulatory tests;
- Pay: 40 per cent of performance-related pay (60 per cent for top earners) is to be deferred for at least three years. Cash bonuses are capped at 30 per cent (20 per cent for top earners); and
- Depositaries: Both EU and non-EU managers must ensure that funds which they manage appoint a depositary.
Headline issues for fund managers
The definition of an alternative investment fund (AIF) is very broad and captures closed-ended, open-ended and listed funds and other vehicles, including trusts, limited partnerships and LLPs. There is an exemption for certain holding companies, including EU listed holding companies and REITS. There is an exemption for “joint ventures”, although there is no detail about the exemption and lobbying will need to continue as the AIFM Directive enters “Level 2”, in which national regulators sit down with the European Commission to formulate more detailed rules.
There is a partial exemption for “non systemically relevant” alternative investment fund managers (AIFMs) which (a) manage total gross assets of less than €100m, or (b) manage unleveraged AIFs which have no redemption rights for five years, and manage total gross assets which do not exceed €250m.
As expected, EU AIFMs which manage EU AIFs will have a passport to market EU AIFs throughout the EU to professional investors.
So-called “third country funds” (EU AIFM managed by non-EU AIFMs and non-EU AIFMs managed by non-EU AIFMs) may continue to be marketed in accordance with national placement regimes until at least 2018. The third countries in which these funds are based must meet various EU regulatory tests. The Commission may introduce a passport for third country funds from 2015. It is possible that third country funds may never benefit from the passport, which would chime with the preference of France and Germany to continue the use of private placement regimes. Some countries may tighten their regimes.
Please click here to view the table of marketing rules.
c) Timetable (which may change)
Please click here to view the timetable.
New regulations, formulated with bankers’ bonuses in mind, will apply to the pay and bonuses (including carried interest) paid by an AIFM or an AIF to its senior managers and all other staff who have a material impact on its risk profile. The FSA can exercise some discretion in implementation but needs to take into account the following:
- At least 40 per cent of bonuses must be deferred for at least three to five years (60 per cent for “particularly high” remuneration), and can potentially be recovered if relevant investments perform poorly;
- At least 50 per cent of bonuses to be paid in the form of “contingent capital” (funds to be called upon first in difficult times) and shares (or equivalent ownership interests);
- Bonuses to be balanced appropriately with salary; and
- Cash bonuses are capped at 30 per cent (or 20 per cent for “particularly large” bonuses). The AIFM Directive may give rise to changes to the FSA Remuneration Code, with which most UK fund managers will have to comply from 1 January 2011.
ESMA: Europe’s new super-regulator
The European Securities and Markets Authority (ESMA), based in Paris, will come into existence on 1 January 2011. One of ESMA’s first tasks will be to deal with the AIFM Directive, including to assist in calibrating its transparency and reporting requirements. Industry commentators are concerned that the Lisbon Treaty gives ESMA wide powers.
All EU AIFMs and non-EU AIFMs must ensure that AIFs which they manage appoint a depository. The depositary of a non-EU AIF must be in the country in which the non-EU AIF is established and that country must meet certain EU regulatory tests.
AIFMs will be subject to reporting obligations to regulatory authorities, for example on leverage and remuneration. AIFMs will also be subject to enhanced reporting obligations to investors, including about arrangements with depositaries and sub-custodians.
Set out over the page is an example of a common real estate fund structure. We have highlighted the impact the AIFM Directive will have on certain areas (assuming no exemption or exclusion can be used).
Please click here to see the diagram of JUT and UK LP.
The JUT and the UK LP are both AIFs. The managing trustee of the JUT (the Managing Trustee) is a non-EU AIFM and the UK manager of the UK LP is an EU AIFM. The Directive will not apply to the Managing Trustee in full because the Channel Islands does not form part of the EU. The Managing Trustee will be subject to certain transparency and reporting obligations in relation to the JUT, and to a restricted marketing regime.
- The UK LP and the UK manager must defer for a least three to five years at least 40–60 per cent of any bonuses and carried interest payments of high earning staff. There will need to be clawback arrangements in place for these.
- Any cash bonuses must be capped at 30 per cent (20 per cent for “large” bonuses).
Marketing and Managing
- The UK manager may need to vary its FSA permissions to comply with the Directive.
- The UK manager can market the UKLP to professional investors in the UK and other EU member states using the passport.
- The Managing Trustee can only market in the EU in accordance with national placement regimes until 2018 if Jersey meets various regulatory tests.
- The Managing Trustee will need to be authorised in a member state to take advantage of the passport after 2018.
Comment from Jersey on 11 November 2010
Jersey has confirmed that it will meet the agreed criteria for ongoing market access into Europe.
Jersey is also confident that it will be among the first jurisdictions to obtain a passport for non-EU alternative investment funds and managers, when it is introduced in 2015.
Both the Managing Trustee and the UK manager must ensure that the JUT and the UKLP appoint separate depositaries.
- The UK manager must maintain a minimum level of own funds (capped at €10m) of €125,000 plus 0.02 per cent of the amount by which the total value of its gross assets under management (being all funds managed by the UK manager other than funds which it manages as a sub-manager) exceeds €250m.
- The Directive will not impose any capital requirements on the Managing Trustee.
- The UK manager can delegate investment and risk management decisions to any person which is authorised by a regulator.
- The UK manager can delegate certain administrative functions to appropriate persons (whom the Directive will not require to be authorised).
- The UK manager remains strictly liable for all acts of its delegates.
- The depositaries of the JUT and the UKLP will have to take care if they delegate responsibilities to sub-custodians.