The Alternative Investment Fund Managers Directive (“AIFMD”), first proposed in early 2009 as part of the EU G20 commitment towards a secure and stable financial system, will soon be fully in force for EU fund managers and for non-EU fund managers marketing their funds into the EU. Any fund which is not regulated under the UCITS Directive is classified as an alternative investment fund (“AIF”) under AIFMD and its fund manager is classified as an alternative investment fund manager (“AIFM”). AIFMD fundamentally changes the rules for marketing anywhere in the EU of non-EU funds and funds with non-EU managers, introducing new transparency and disclosure requirements for these funds as well as new registration and authorisation requirements.
The implementation of AIFMD is subject to a transitional period which finally expires on22 July 2014. EU AIFMs marketing EU AIFs will have access to an EU wide passport to market these AIFs to professional investors. No passport will be available for AIFs managed by non-EU AIFMs or for non-EU AIFs managed by EU AIFMs until at least 2016. From the end of the transitional period, it will be necessary to comply with new national private placement regimes introduced under AIFMD to market such AIFs in the EU, except in cases of genuine reverse solicitation. National private placement regimes under AIFMD are implemented on a country-by-country basis – AIFMD imposes certain minimum requirements but individual EU member states can (and do) impose stricter or additional requirements – see below. To comply with the private placement regime in an EU state it is generally necessary to register the AIF with or obtain marketing authorisation for the AIF from the regulator in that country. In some jurisdictions, for example France and Germany, a lengthy prior approval process, stretching to as much as eight months, will be required to market by way of private placement. The need to go through this process may be commercially unappealing and cause significant interruptions to business.
To assist you in gaining an understanding of the current position throughout Europe, please click here for a summary of the current position on AIFMD passporting and private placement. There are a number of specific points to note:
- The private placement of AIFs will not be possible in some countries, including Croatia, Greece, Latvia and Poland.
- There will be limited private placement regimes in Austria, Denmark, France, Germany and Italy, where strict local requirements will apply.
- In Finland, the local regulator currently requires prior notification from AIFMs that wish to make use of the transitional arrangements under the AIFMD.
- In the Netherlands, AIFMs licensed by the relevant securities regulators in the USA, Jersey or Guernsey (so called “designated states”) may offer AIFs to any investor provided a notification is made to the Dutch regulator. This notification includes some additional documentation and information requirements.
- In the UK, the Financial Conduct Authority (“FCA”) is keen to emphasise that, although UK AIFMs are not required to be authorised by 22 July 2014, they must submit a complete application by that date and, ideally, no later than 22 April 2014. If firms are not fully compliant with all relevant AIFMD requirements by 22 July 2014, they will be at risk of business interruption.
Minimum requirements for national private placement regimes
As noted above, AIFMD imposes minimum requirements for national private placement regimes which must be complied with in all cases. These cover mandatory disclosure to investors (which will require amendments to prospectuses, PPMs and other offering materials and to websites), making audited accounts for the AIF available to investors and regulators as well as making periodic reports to regulators.
The following disclosures, among others, must be made available before an investor invests in a non-EU AIF, as well as any material changes:
- The investment strategy, objectives, restrictions and risks of the AIF;
- The circumstances in which the AIF may employ leverage including the types and sources of leverage permitted and any associated risks;
- A description of how an EU AIFM is complying with the requirements to cover professional liability risks;
- The AIF’s valuation procedure and of the pricing methodology for valuing assets, including the methods used in valuing hard-to-value assets;
- A description of all fees, charges and expenses and the maximum amounts directly or indirectly borne by investors;
- A description of how fair treatment of investors is ensured;
- A description of any preferential treatment and the type of investor who obtains the preferential treatment and any legal or economic link with the AIF;
- A description of any delegated management function;
- A description of any safe-keeping function delegated by the depositary;
- Details of any prime brokerage arrangements;
- Details of any arrangements made by the depositary to contractually discharge itself of liability as permitted by the AIFMD;
- The latest annual report – see below; and
- Where available, the historical performance of the AIF.
Regular reports to Member State regulators
Periodic reports to regulators require information about the main instruments in which the AIF is trading, the markets of which the AIF is a member or where it actively trades, and the diversification of the AIF’s portfolio. Annex IV to the European Commission’s Level 2 Regulation supplementing AIFMD contains a pro forma reporting template which each Member State regulator must base its reporting forms. The Level 2 Regulation sets out the tests for determining whether an AIFM is to report to the regulators on a quarterly, half-yearly or annual basis which depends, in essence, on the amount and/or type of AIF related assets which the AIFM manages. In its Guidelines on the reporting obligations, the European Securities and Markets Authority sets out the procedure for first reports, indicating that AIFMs should start reporting as from the first day of the following quarter after they have information to report until the end of the first reporting period. This means that, for example, an AIFM subject to a half-yearly reporting obligation who had information to report from 15 February, because it started marketing in a particular Member State on that date, would have to report information from 1 April to 30 June. Under the Level 2 Regulation, it would have to file the relevant Member State regulator’s Article 24 reporting form with that regulator as soon as possible after 30 June and no later than 31 July, i.e. one month after the end of the reporting period. Those AIFMs who relied on the transitional period and, therefore, have not so far had to report to regulators on their AIFs will have to start planning to make such reports.
The second of type of report is an audited annual report under Article 22 of the AIFMD and the supplementary provisions of the Level 2 Regulation. An AIFM is required to make this report available for each financial year no later than six months following the end of the financial year save that stock exchange listed AIFs continue to be subject to the Transparency Directive requirement to publish their annual financial reports within four months following the end of the financial year. The AIFM must make available the report to investors on request, to the regulators in the AIFM’s home Member State and, where applicable, the AIF’s home Member State. The annual report is required to contain financial and accounting information, prepared in accordance with the accounting standards in the AIF’s jurisdiction of incorporation, together with the following:
- A report on activities of the most recent financial year;
- Any material changes in information already made available to investors; and
- Disclosures regarding the AIFM, including any carried interest or performance fee/performance allocations and general information governing remuneration polices, and detailed information regarding the AIFM’s remuneration policies and practices for members of staff whose professional activities have a material impact of the risk profile of the AIFs which the AIFM manages or has marketed in the EU. The remuneration disclosure will require disclosure of the total amount of remuneration paid by the AIFM to its staff with this being broken down, in turn, by reference to the individual AIFs.
Although the AIFMD is not entirely clear, a proper reading would indicate that the financial years in respect of which an AIFM would have to make an annual report would be those when the AIFM had managed or marketed AIFs under the AIFMD. If, for example, an AIF has a financial year end of 30 June and an AIFM becomes authorised or obtains the relevant private placement approval on 18 July 2014, then the year-end for the first financial year in which it operated under the AIFMD would be 30 June 2015 and it would have to make the annual report available by 31 December 2015, i.e. six months following the end of the financial year. This is consistent with the approach to reporting to regulators under Article 24 of AIFMD and the FCA’s approach to when the AIFM Remuneration Code takes effect.