After one and a half year of negotiations between the European Parliament, the European Committee and the European member states, the European Parliament has adopted in November 2010 a new European directive for alternative investment fund managers. Through this new directive, managers of alternative investment funds (such as hedge funds and private equity funds) will become subject to supervision in order to ensure proper information to investors and protect the financial markets in Europe. The new directive shall be implemented in the rules of the European member states in 2013 (2 years after the new directive will enter into force).
An alternative investment fund is defined in the new directive as any collective investment undertaking 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. Collective investment undertakings that qualify as undertakings for collective investment in transferable securities (UCITS) do not fall under the definition of alternative investment fund considering that UCITS are already regulated by a separate European directive (2009/65/EC).
Although the primary aim of the new directive was to apply supervision to managers of hedge funds and private equity funds, the broad scope of the definition of alternative investment fund ensures that managers of all investment funds (including real estate funds and equity and debt funds) will become subject to the new directive.
Exceptions and exemptions
The new directive shall not apply to certain holding companies, pension funds and employee participation schemes. In addition, an important exemption has been made for (i) managers of investment funds whose assets under management, including any assets acquired through use of leverage, in total do not exceed a threshold of EUR 100 million, or (ii) managers of certain closed-end investment funds (investment funds that have no redemption rights exercisable during a period of 5 years following the date of initial investment) that are not leveraged and whose assets under management in total do not exceed a threshold of EUR 500 million.
Basic principle under the new directive is the granting of authorisation to the manager for the managing of investment funds in the European member state of the manager (the so-called home member state). Subsequently, an authorised manager can obtain authorisation for (i) the managing of investment funds in other European member states and (ii) the marketing of investment funds to professional investors (in the European member state of the manager and in other European member states through a so-called European passport).
Considering that the new directive applies to the marketing of investment funds to professional investors (professional clients for the purpose of the MiFID such as institutional investors and certain large undertakings) European member states may impose additional (stricter) requirements when marketing investment funds to retail investors on their territory. Therefore, the above mentioned European passport will not apply when marketing investment funds to retail investors.
Application for authorisation
Pursuant to the new directive the manager of one or more alternative investment funds will have to apply for authorisation at the supervisory authorities of the European member state of the manager (the so-called competent authorities). In order to obtain authorisation, the manager shall provide information relating to the manager and on the investment funds it intends manage. The information relating to the manager includes information on the persons effectively conducting the business of the manager, information on the identities of the shareholders of the manager, a programme of activity, information on the remuneration policies and information on delegation of functions to third parties. The information on the investment funds it intends to manage includes information about the investment strategies, the policy as regards the use of leverage, and the risk profiles and other characteristics of the funds.
The operating conditions of the manager include a sound remuneration policy, measures to identify conflicts of interest and implementing an adequate risk management system and an appropriate liquidity management system. In addition, certain organisational requirements (so that a proper and independent valuation of the assets of the funds can be performed) and conditions applicable for delegation of functions to third parties, will apply.
As part of the operating conditions, the manager shall ensure that a single depositary is appointed in writing. In principle, only a credit institution, an investment firm or any other institution that is subject to prudential supervision can be appointed as depositary. Certain closed-end private equity, venture capital or real estate funds (which have no redemption rights exercisable during the period of five years) may appoint certain other entities, such as a lawyer or a notary, as depositary.
The manager shall, for each of the EU investment fund it manages and for each investment fund it markets in the European Union, make available an annual report for each financial year. In addition, the manager shall disclose certain information to investors and shall regularly report to the competent authorities of its home member state.
Managers and investment funds from outside the European Union
Additional conditions (such as a cooperation between the competent authorities and the supervisory authorities of the third country where the investment fund is established) shall apply for managers which manage and/or market investment funds from outside the Europe Union. Also managers from outside the European Union intending to manage and/or market investment funds within the European Union shall be subject to additional conditions such as (i) a legal representative in the European member state designated by the new directive (member state of reference) and (ii) an appropriate cooperation between the competent authorities of the member state of reference and the supervisory authorities of the third country where the manager is established. A European passport will only be available for managers and investment funds from outside the European Union in 2015 (2 years after implementation of the new directive in 2013). This European passport will only be available after compliance with additional conditions (such as the existence of a tax treaty).
Conditions when managing specific types of investment funds
Specific rules in the new directive apply to investment funds employing leverage. In this respect managers shall disclose to investors the total amount of leverage employed by each investment fund. Also managers shall report to the competent authorities the overall level of leverage employed by each investment fund it manages, and the sources of such leverage. In addition, the manager must demonstrate that the leverage limits for each investment fund it manages are reasonable and that it complies at all times with the leverage limits set by it.
Managers shall notify the competent authorities of the proportion of voting rights of a non-listed company held by the investment fund it manages any time when that proportion reaches, exceeds or falls below the thresholds of 10%, 20%, 30%, 50% and 75%. This will not apply to the voting rights of small and medium enterprises (within the meaning of directive 2003/361/EC) and of special purpose vehicles (with the purpose of purchasing, holding or administrating real estate).
In addition, the manager shall notify the non-listed company, the shareholders of the non-listed company and the competent authorities when an investment fund, individually or jointly, it manages, acquires control of a non-listed company. Control shall mean more than 50% of the voting rights (direct or indirect) of the company.
When a (private equity) fund acquires control of a non-listed company, the manager managing such fund shall before the end of the period expiring 24 months following the acquisition of control of the company by the fund not be allowed to facilitate, support or instruct any distribution, capital reduction, share redemption and/or acquisition of own shares by the company.
Impact of the new directive in The Netherlands
Once the new rules on alternative investment fund managers have been implemented in the Dutch rules, the current exception for the offering of units in an investment fund to qualified investors in the Dutch Financial Supervision Act (FSA), and the current exemption to the offering prohibition insofar as units in an investment fund may only be acquired for a consideration of at least EUR 50,000 per participant or insofar as those rights have a nominal value for each right of EUR 50,000, in the Exemption Regulation FSA, will be revoked.
Managers of investment funds who profit from the current exception or exemption in the Netherlands should apply for authorisation in accordance with the rules in the new directive and become subject to supervision and transparency (unless the assets under management, including any assets acquired through use of leverage, in total do not exceed a threshold of EUR 100 million, or the assets under management, in total do not exceed a threshold of EUR 500 million in case the managed closed-end investment funds are not leveraged). This will mean that also the rules on leverage and control will apply.
On the other hand, under the rules in the new directive the authorised manager can also obtain authorisation for the managing and marketing of investment funds in other European member states (through a European passport). A European passport will, subject to additional conditions, only be available for managers and investment funds from outside the European Union in 2015 (2 years after implementation of the new directive in 2013).