On 30 April 2009 the European Commission (the "Commission") published a proposal for a directive on alternative investment fund managers (the "Draft Directive"). The Draft Directive is one of a number of measures that the Commission wishes to implement in response to the credit crisis.
Although particularly aimed at regulating hedge funds and private equity funds, the Draft Directive has a much broader scope, providing for far-reaching changes in the supervision of investment funds that do not constitute undertakings for collective investment in transferable securities (UCITS). Such funds include not only hedge funds and private equity funds, but also real estate funds, equity funds, funds of funds and other non-UCITS funds. The Draft Directive refers to all these types of funds – somewhat confusingly, given their large range – as 'alternative investment funds' ("AIFs").
At present, there are harmonised rules at EU level in place for UCITS. Other types of investment institutions are, in most cases, regulated solely at national level. This situation will change as a result of the Draft Directive, which sets out extensive harmonised EU-level rules for managers of AIFs, focusing mainly on AIFs that are marketed to professional investors (as defined in MiFID). The proposed measures include:
- the obligation for managers of AIFs to obtain a licence;
- a 'European passport' system;
- extensive conduct of business rules and prudential rules;
- pecific obligations for managers of leveraged AIFs; and
- specific obligations for managers of AIFs with a 'controlling influence' in one or more companies.
In this newsletter we will discuss the most important provisions of the Draft Directive and their potential impact in the Netherlands. It is expected that the Draft Directive – if adopted in its present form – will bring about major changes in the Dutch supervisory regime for AIFs and their managers. In light of the criticism it has received, however, it is questionable whether the Draft Directive will be adopted unchanged.
Current supervisory regime in the Netherlands
In the Netherlands it is currently prohibited to offer units in an investment institution unless the manager of the institution has obtained a licence from the Authority for the Financial Markets (Autoriteit Financiële Markten, the "AFM"). If an investment institution does not have a separate manager, the obligation to obtain a licence applies to the institution itself.
Exceptions / exemptions
There are several exceptions and exemptions from the above licence requirement. A licence need not be obtained in any of the following situations (among others):
- the units are offered only to qualified investors;
- the units are offered to fewer than 100 individuals or legal entities (other than qualified investors);
- the units offered each have a denomination of at least EUR 50,000;
- the units offered may only be acquired for a consideration of at least EUR 50,000 per investor.
An exception also applies for investment institutions that are domiciled and subject to supervision in a 'designated state', provided that a number of conditions have been met. At present the following jurisdictions constitute designated states: France, Guernsey, Ireland, Jersey, Luxembourg, Malta, the United Kingdom and the United States (if the investment institution is registered with the SEC).
As a result of the broad scope of the exemptions and exceptions, there are currently many investment institutions in the Netherlands that are not required to have a licence.
In this connection it is interesting to note that on 3 April 2009 the Ministry of Finance published a consultation document making it possible for managers of investment institutions which offer units solely to qualified investors to subject themselves voluntarily to supervision.
An investment institution manager that has obtained a licence in the Netherlands is subsequently required to comply on an ongoing basis with certain conduct of business and prudential rules. A manager that is entitled to an exception or exemption from the licence requirement is, as a general rule, also excepted or exempt from the ongoing obligations. Investment institutions that rely on the designated state exception are subject to limited ongoing supervision in the Netherlands.
Most of the rules regarding UCITS are harmonised at European level. A UCITS is an investment institution with the following specific features:
- it has an open-ended character, which means that it repurchases or redeems the units at the request of a participant; and
- it operates on the principle of risk-spreading and is subject to a variety of restrictions on its investment policies.
The manager of a UCITS, like that of an ordinary investment institution, must obtain a licence before being allowed to offer units in the UCITS. Once it has such a licence, the manager can benefit from a 'European passport', under which it can offer its services throughout the EU.
Draft Directive -- authorisation and marketing
Although the Draft Directive is particularly aimed at regulating hedge funds and private equity funds, it has a much broader scope. The Draft Directive covers alternative investment funds, i.e. all investment funds that do not constitute UCITS. In view of the broad definition of AIFs, the proposed rules will apply to a large variety of different investment funds, such as:
- hedge funds;
- private equity funds;
- real estate funds;
- equity funds;
- funds of funds;
- commodity funds; and
- infrastructure funds.
Licence requirement for managers of AIFs
The Draft Directive focuses mainly on the managers of AIFs. In this regard, it provides that EU member states must ensure that a manager is prohibited from carrying out the following activities unless it has first obtained a licence:
- the management of an AIF; and/or
- the marketing of units in an AIF.
A licence can be issued for the management of either all or specific types of AIFs. In this regard, it is irrelevant what legal form the manager or the AIF possesses and whether the AIF is open-ended or closed-ended. Additional rules will apply if the AIF and/or the manager is established outside the EU (see below).
Exceptions to licence requirement
The Draft Directive sets out a limited number of exceptions to the requirement to obtain a licence. The excepted categories include the following: • banks;
- pension funds;
- insurers and reinsurers;
- UCITS and managers of UCITS; and
- managers that only manage AIFs which are domiciled outside the EU and whose units are not offered within the EU.
In addition, the Draft Directive contains a de minimis exception. Under this exception, an AIF manager will not be subject to the relevant rules if it directly or indirectly manages AIFs the value of whose assets under management do not exceed:
- EUR 100 million; or
- in the case of AIFs that are not leveraged and in respect of which no redemption rights are exercisable within the first five years following the setting up of the relevant fund, EUR 500 million.
Unlike the rules currently applicable in the Netherlands, the Draft Directive does not set out exceptions for, e.g., marketing to qualified investors or the offering of units with a denomination of, or for a consideration per investor amounting to, at least EUR 50,000. Consequently, the Draft Directive has a very broad scope of application.
Procedure for granting licence
In order to obtain the requisite licence, the prospective manager will be required to provide the relevant supervisory authority with the following information:
- the identities of the direct or indirect shareholders of the manager that hold at least 10% of the shares or voting rights in its capital, or that are otherwise in a position to exercise significant influence over its management;
- a programme of activity;
- detailed information about the AIFs that are to be managed;
- the fund rules or articles of association of the above AIFs;
- information about the arrangements made for the delegation to third parties of management activities;
- information about the arrangements made for the custody of the AIFs' assets; and
- the information that the manager is required to provide to potential investors (see below).
Marketing to professional investors
The Draft Directive sets out harmonised rules on the marketing of AIFs to professional investors (as defined in MiFID) and creates a European passport system for AIF managers that offer units to professional investors. The relevant rules will be described below.
Home member state
Under the Draft Directive, possession by the manager of a licence does not mean that the relevant AIFs can be marketed. In order to market AIFs to professional investors in the home member state, it will be necessary to first obtain a separate approval for each AIF from the supervisory authority in that state. To this end and for each AIF, the manager must submit an extensive notification to the supervisory authority. The latter must inform the manager, within ten days of the submission of the notification, whether or not the marketing of the relevant AIF may be commenced.
Other member states (European passport)
Under the European passport system, a manager holding a licence issued pursuant to the Draft Directive will be permitted – following completion of a notification procedure – to:
- offer units to professional investors in another member state; and/or
- to conduct the management of AIFs domiciled in another member state;
without a licence from that other member state being required.
AIFs from non-EU countries
An additional requirement will apply for the marketing to professional investors of an AIF having its domicile in a non-EU country: there must be an agreement on the exchange of information in tax matters between that country and the member state in which the AIF will be marketed. With regard to the timeframe for determining whether such an AIF can be marketed within its territory, a member state may provide for a period longer than the abovementioned ten days. These new rules regarding AIFs from non-EU countries will only enter into effect three years after the entry into force of the Draft Directive. Until that time, a member state can allow units in non-EU AIFs to be marketed in its territory under the applicable existing rules.
Marketing to non-professional investors
The Draft Directive does not aim to harmonise the rules on the marketing of AIFs to non-professional investors. A licence issued pursuant to the Draft Directive will not entitle the relevant manager to market AIFs to such investors. However, member states may permit AIFs to be marketed to non-professional investors within their territory. In this regard and unlike when AIFs are marketed to professional investors, a member state may impose additional requirements on the manager and/or the AIF over and above those laid down in the Draft Directive.
Managers from non-EU countries
Under the Draft Directive, AIF managers established outside the EU are in principle prohibited from conducting the management of, and marketing units in, AIFs within the EU. However, a member state may grant a licence to a non-EU manager for this purpose, provided that a number of additional requirements are met, including the following:
- the Commission must have determined that the relevant country's legislation regarding prudential regulation and ongoing supervision is equivalent to the provisions of the Draft Directive and is effectively enforced;
- the Commission must also have determined that the relevant country grants AIF managers from the EU effective market access comparable to that granted by the EU to AIF managers from that country; and
- there must be a cooperation agreement between the supervisory authority of the member state in which the licence is being applied for and the competent supervisory authority of the country in which the AIF manager is established.
Like the rules on AIFs from non-EU countries, these rules will only enter into effect three years after the entry into force of the Draft Directive. Until that time, a member state can allow non-EU managers to market AIF units in its territory under the applicable existing rules.
In addition to requiring that AIF managers be licensed and that an approval be obtained prior to marketing an AIF, the Draft Directive imposes various ongoing obligations. A few of the most important of these are summarised below. The Draft Directive also requires the Commission to draw up further rules specifying many of the ongoing obligations.
Appointment of depositary
The Draft Directive requires the manager to ensure that a depositary is appointed for each AIF that it manages. The depositary must meet numerous demands, the most notable of which is that it be a credit institution having its registered office in the EU.
The Draft Directive imposes a large number of ongoing prudential requirements on the AIF manager, such as requirements with regard to:
- risk management;
- investment in securitisation positions: the Commission plans to draw up additional rules regarding the holding of securitisation positions by AIFs;
- capital requirements;
- liquidity management; and
- the delegation of certain functions to third parties
Conduct of business supervision
Under the Draft Directive, a manager must, on an ongoing basis, comply with certain conduct of business rules. These rules include:
- rules regarding the prevention and management of conflicts of interest; and
- obligations to provide information to clients and the relevant supervisory authorities. For example, under the Draft Directive a manager must ensure that investors receive information on the following subjects before they invest in an AIF:
- the AIF's investment profile (e.g. its strategy, objectives, the type of assets in which it may invest and the techniques it may employ);
- the identity of the AIF's depositary and other parties involved in the AIF;
- the AIF's valuation procedure and pricing models;
- any management and depositary functions that have been delegated;
- all fees, charges and expenses borne by the investors; and
- the AIF's liquidity risk management.
Special provisions regarding leveraged AIFs
The Draft Directive contains specific rules for AIF managers that employ high levels of leverage on a systematic basis. These rules are particularly aimed at hedge funds. Under the Draft Directive, the specific rules will apply if the combined leverage from all sources exceeds the value of the AIF's equity capital in two of the past four quarters. The manager of such an AIF must, among other things, report to the relevant supervisory authorities of its home member state information about the overall level of leverage and the main sources thereof. It must also disclose additional information to investors.
Special provisions with regard to AIFs with a controlling influence in companies
The Draft Directive also imposes specific notification and disclosure obligations on managers with a 'controlling influence' in a listed or unlisted company – i.e. managers that hold 30% or more of the voting rights of the relevant company (or have concluded an agreement pursuant to which such an interest can be acquired). These obligations are particularly aimed at private equity funds. The manager of such an AIF must provide certain information to the company itself and to the company's shareholders and employee representatives. In the case of a controlling interest in a listed company, this includes information about the manager's intentions with regard to the future of the company's business. If the controlling interest is in an unlisted company, a development plan for the relevant company must be made available. According to the Draft Directive, these obligations do not apply with respect to controlling interests in "small and medium enterprises that employ fewer than 250 persons, have an annual turnover not exceeding 50 million euro and/or an annual balance sheet not exceeding 43 million euro".
Impact of the Draft Directive on the Dutch supervisory regime
If adopted in its present form, the Draft Directive will have a major impact on the Dutch rules regarding AIFs and their managers. The following chart sets out a few of the most notable changes.
The Draft Directive was presented by the Commission to the European Parliament and the European Council on 30 April 2009. The contents of the proposal can still be amended during the legislative process. Given the highly controversial nature of the proposed new rules, this process may take a while. Once adopted, the Draft Directive will then have to be implemented in the national law of the member states.
The Commission has expressed the hope that the proposal will be adopted at the end of 2009. If this occurs, the implementation deadline will, according to the Commission, be the end of 2011.
Under the Draft Directive, AIF managers operating in the EU before the implementation deadline must submit an application for a licence within one year after the deadline.