As of today, 22 July 2013, the regime of the Alternative Investment Fund Managers Directive ("AIFMD") applies in the Netherlands. The AIFMD introduces harmonized requirements for managers of a wide variety of investment institutions that do not constitute undertakings for collective investment in transferrable securities ("UCITS"), and which are marketed to professional investors in the EU. These include private equity funds, hedge funds and real estate funds. Dutch national law provides for additional rules on marketing to retail investors. The AIFMD not only regulates the marketing but also the management of AIFs.
The new regime impacts managers of numerous types of funds. Amongst them are many managers that previously operated under an exception or exemption. The AIFMD thus introduces a license requirement for managers which were previously not subject to supervision. The AIFMD further introduces additional ongoing regulatory requirements for managers already subject to supervision.
This newsletter sets out five important topics in the following categories (i) the AIFMD in general, (ii) Dutch managers and (iii) non-Duch managers.
'Alternative' investment funds
The AIFMD applies to managers of Alternative Investment Funds ("AIFs"). Somewhat deceivingly "alternative" refers to all investment institutions other than UCITS. The AIFMD thus covers a wide variety of types of investment institutions. UCITS were already subject to harmonized EU requirements, which are currently expected to be revised in 2015 as a consequence of the UCITS V Directive.
EU and national legislation
As set out in our newsletter of 13 December 2010, the AIFMD was adopted by the European Parliament following extensive discussions. The AIFMD entered into force on 22 July 2011 and needed to be implemented in the legislation of EU member states by today, 22 July 2013.
As set out in our newsletter of 9 May 2012, on 19 April 2012 the Ministry of Finance submitted a bill to the lower house of the Dutch parliament providing for the implementation of the AIFMD in Dutch law. The bill was adopted by the Upper House of the Dutch parliament on 11 June 2013. On 18 July 2012, the Dutch Decree was published which includes inter alia a further elaboration of the Dutch retail regime.
The AIFMD ("level 1" in terms of the EU legislative procedure) empowers the European Commission to adopt delegated acts containing more specific rules ("level 2") on various subjects covered in the Directive. On 19 December 2012, the level 2 Delegated Regulation was published by the European Commission. This Regulation covers various topics, such as calculation of leverage, delegation and transparency requirements. On 16 May 2013 two Implementing Regulations establishing rules on determining the member state of reference for a non-EU manager and on opting-in for managers that could use the de minimis exemption were published.
For a more elaborate overview of AIFMD topics we refer to our previous newsletters referred to above. Below we will highlight several important topics in three categories.
Five AIFMD topics - general
- Dutch license requirement, exemptions and exceptions regime
The rules that existed under Dutch national law relating to license requirements for managers of investment institutions and available exemptions and exceptions have been extensively overhauled as a result of the implementation of the AIFMD. Where fund managers that solely offer participation rights to qualified investors were excepted from the license obligation until 22 July 2013, these managers will now have to obtain a license and will become subject to ongoing regulatory supervision by the Dutch Authority for the Financial Markets ("AFM") and the Dutch Central Bank ("DNB"). The new regime - other than the pre-AIFMD regime - also specifically regulates the management of AIFs (the old regime focussed on offering participation rights in AIFs). Another important change is that holders of a qualifying interest in a manager are subject to an integrity screening, to be performed by the AFM.
Following this implementation, only a few types of entities are excluded from the AIFMD rules, which means that such entities are not subject to the license requirement:
- pension funds;
- special purpose vehicles used for securitisation purposes only;
- family offices; and
- managers of AIFs in which only group companies invest (provided that none of those group companies themselves are AIFs).
In addition, the AIFMD provides for a de minimis exemption for AIF managers that directly or indirectly manage AIFs whose assets under management do not exceed, in total, a threshold of:
- EUR 100 million; or
- in the case of AIFs that are not leveraged and have no redemption rights exercisable during a period of five years from the date of initial investment in the relevant AIF, EUR 500 million.
The Netherlands has opted to provide that managers which fall under one of these two de minimis thresholds and which offer participations exclusively (a) to professional investors, (b) to fewer than 150 persons or (c) in denominations of at least EUR 100,000 are not required to obtain a license. These managers are only subject to certain registration obligations, also referred to as the 'registration regime'. These managers must also include a selling restriction in a prescribed form in all advertisements and documents announcing the offer of participations.
AIF managers falling under a de minimis exemption may choose to opt for a license voluntarily. In that event, all of the rules based on the AIFMD will become applicable. An AIFMD license can be desirable, for example, to attract investors who for tax reasons or due to statutory investment restrictions will only participate in investment institutions whose manager is licensed. Another reason to opt-in, can be that an AIFMD license enables the manager to make use of the European passport (see below).
- Tasks and responsibilities for AIFMD-depositaries
An AIF manager must appoint a depositary for each AIF under its management. Prior to implementation of the AIFMD under Dutch national law a depositary was mainly charged with the safekeeping of the investment institution's assets. The AIFMD has fundamentally changed the nature of a depositary's activities. The AIFMD depositary's duties now include ensuring that the investment policy is properly implemented, that cash flows are properly monitored and that the investment institution's assets are correctly administered. The traditional Dutch depositary can in principle be maintained. To avoid confusion between these two types of depositaries, the entity that merely holds legal title to the fund's assets is often referred to as 'custodian'.
In order to function as AIFMD depositary an entity must satisfy numerous conditions, the most notable of which is that, in principle, it must be a credit institution or investment firm established in the EU or an institution that meets the requirements for acting as a depositary in relation to UCITS assets. In respect of certain types of assets, an alternative depositary is allowed, which must nevertheless be subject to a certain supervision.
Managers should take into account that if they appoint a depositary which is not a credit institution or an investment firm, but another institution that is allowed to act as depositary for a UCITS, this depositary may in a few years' time no longer be able to act as depositary. Based on the current stance of affairs the new UCITS V regime will only recognize credit institutions and investment firms as depositary. Managers appointing other UCITS depositaries may thus have to seek new depositaries following the introduction of UCITS V.
The new regime also includes requirements and restrictions regarding the organisation and performance of the business of the depositary, for example regarding delegation and the liability of the depositary.
- Leverage ratios and additional rules on use of leverage
Managers of AIFs that use leverage on a substantial basis (more than three times net asset value) are subject to newly introduced disclosure requirements, pertaining to amongst others: the overall level of leverage, a break-down of the types of leverage used (cash borrowing, securities, derivatives). A manager needs to set a leverage limit for each AIF under its management, be able to demonstrate that such limits are reasonable and are that such limits at all times complied with.
When necessary to ensure the stability and integrity of the financial system, DNB may impose limits on the level of leverage used by a manager or impose other restrictions, for the purpose of limiting systemic risk or market disorder caused by leverage.
- Rules on major holdings, control and asset stripping
Following implementation of the AIFMD rules regarding the disclosure of major holdings in certain non-listed companies (i.e. those which employ at least 250 persons and which have an annual turnover of more than EUR 50 million, and/or an annual balance sheet total of more than EUR 43 million) will be introduced. For holdings in these non-listed companies notification to the AFM is required if voting rights held in the non-listed company reach, exceed or fall below thresholds of 10%, 20%, 30%, 50% or 75%. The disclosure requirements are similar to those already applicable in respect of holdings in listed companies. In addition, the manager must inform the shareholders of non-listed companies on certain topics.
Rules on control
Specific rules apply in relation to the acquisition of control in a listed or unlisted company of a certain size. These rules apply:
- in relation to non-listed companies: when more than 50% of the voting rights is acquired directly or indirectly by the AIF;
- in relation to Dutch listed companies: when 30% or more of the voting rights is acquired.
If control over a non-listed company is acquired by an AIF upon entry into force of the AIFMD, transparency requirements apply, amongst others about the acquisition of control and about the AIFs intentions with the company and the expected effects thereof for the employees.
Asset stripping following control
Two years following the acquisition of control over a company, it is prohibited to facilitate, support or instruct certain distributions of profit, any capital reduction and/or any acquisition of own shares by the controlled company to the extent that certain financial thresholds are met.
- Other ongoing requirements
The AIFMD has brought about various other ongoing requirements, such as:
- Rules relating to sound and prudent business operations: These include rules relating to the conduct of an effective conflict-of-interests policy, an appraisal duty when selecting counterparties, risk management, liquidity management, valuation and organisational requirements. In establishing these rules specific attention has been given to the various risks associated with investments in securitisation positions; and
- Rules on remuneration: the AIFMD has brought about various new rules on remuneration. For example, a substantial portion of any variable remuneration paid to the fund's employees must consist of shares or units of the fund itself. In addition, parts of the variable remuneration payment must in principle be deferred.
- Market conduct rules: these include the obligation for the manager to make a prospectus available to potential investors in the AIF. If an AIF is offered to retail investors, the key investor information must be published in a predescribed format.
Five things to know for Dutch managers
- Transitional period for managers active prior to 22 July 2013
Dutch managers that were not active prior to 22 July 2013, will need a license and will have to comply with the AIFMD regime as of the date it starts its AIFMD activities in the Netherlands.
Dutch managers that were active in the Netherlands prior to 22 July 2013, either on the basis of a license pursuant to the Dutch national regime or on the basis of an exemption or exception, may benefit from a transitional period of one year. These managers may continue to operate on the basis of the same conditions that applied prior to 22 July 2013. Such manager may also launch new AIFs of a similar nature of those managed by it prior to 22 July 2013 in the Netherlands. During this one year transitional period, the manager will have a best efforts obligation to ensure it will meet the AIFMD requirements ultimo as of 22 July 2014.
- Retail regime
As set out above, the AIFMD provides for rules in relation to the offering and managing of AIFs that are marketed to professional investors. Member states are allowed to impose stricter requirements in respect of the marketing to retail investors. The Netherlands has elected to do so.
If an AIF manager wishes to offer participation rights in the Netherlands to retail investors, it will become subject to the Dutch 'top-up' regime. The 'top-up' regime is inspired by the rules that apply to marketing of UCITS to retail investors in the Netherlands. The intention is to create a level playing field between AIFs and UCITS when targeting retail investors.
- European passport
The AIFMD introduces a European passport enhancing the possibility to market AIFs on a cross-border basis. A Dutch manager that has obtained an AIFMD-license from the AFM, wishing either to:
- market a Dutch AIF managed by it to professional investors in another member state;
- manage an AIF from another member state;
does not need to obtain a license in such other member state. Instead it may use the license granted to it by the AFM to perform these activities in other EU member states as well, provided certain conditions are met.
- Provision of investment services by AIF managers
The AIFMD creates the possibility for member states to allow a manager to perform other activities in addition to the core activities listed in Annex I to the AIFMD. These core activities are, in short, portfolio management, risk management, administration, marketing and other activities related to the assets of the AIF.
The Netherlands has made use of this possibility. A Dutch manager is allowed, on the basis of its AIFMD license, to perform certain investment services. The manager does not require a separate MiFID license. It is even not allowed for an entity to hold both an AIFMD and a MiFID license at the same time. AIF managers cannot perform investment services in another member state on the basis of a passported AIFMD license.
A manager thatperforms investment services on the basis of its AIFMD license is still required to observe the ongoing regulatory requirements applicable to investment firms.
- No exemption for AIFs offered solely to pension funds
As set out above, the AIFMD regime does not apply to pension funds. The Lower Chamber of the Dutch parliament had asked to include, in addition, an exception for AIFs that solely target Dutch pension funds. This exemption did not make it to the final text of the Dutch implementation bill, because it was determined that such exception would not be in line with the views of the European Commission on the scope of the AIFMD.
Five things to know for non-Dutch managers
The Dutch implementation Act provides for rules that apply to Dutch managers, but also contains rules regarding managers incorporated in another EU member state and managers incorporated outside the EU ("non-EU managers") wishing to pursue business in the Netherlands. The following points of attention relate to these categories of managers.
- EU managers: passporting available and required for activities in the Netherlands
Managers from other EU member states wishing to pursue business in the Netherlands can passport their home-state license to the Netherlands allowing them to:
- market an AIF established under the laws of another member state to professional investors in the Netherlands; and/or
- manage a Dutch AIF.
- Non-EU managers: passporting not available before 22 July 2015
The European passport system is currently unavailable for managers located in third countries.
This may change as of 2015. By 22 July 2015 the European Securities and Markets Authority ("ESMA") will advise on the functioning of the European passport system and national private placement regimes. Following such review ESMA will advise whether the European passport regime should be made available for non-EU managers as well. Following ESMA's advice it is up to the European Commission to decide whether or not the European passport regime will be made available for non-EU managers.
- EU & non-EU managers: one year transitional period for managers already active in the Netherlands
Above we referred to the one year transitional period available for Dutch managers between 22 July 2013 and 22 July 2014. This transitional period also applies to managers from other EU countries and non-EU managers. As also set out above, manager relying on this one year transitional period will have a best efforts obligation to comply with the regime applicable to it as of 22 July 2014.
This one year transitional period may be combined with the transitional regime up to 2018 for non-EU managers as described below.
- Non-EU managers: Dutch private placement regime for qualified investors available until 2018
The Netherlands have elected to apply a national private placement regime to non-EU managers until 2018. During this transitional period, a non-EU manager that offers participations in the Netherlands will not need to obtain a license from the AFM, provided that the following conditions are met:
- the participation rights are solely offered to qualified investors;
- the country in which the AIF is established may not be listed as non-cooperative country and territory by the Financial Action Task Force on anti-money laundering and terrorist financing; and
- the AFM and the supervisory authority of the manager's home state must have concluded a cooperation agreement. On 30 May 2013 ESMA published a list of cooperation agreement with 34 third country regulators approved by it, including the USA, Canada, Switzerland, Hong Kong and Singapore.
Certain transparency requirements will still apply to third country managers operating under the private placement regime:
- the manager must inform DNB on the manner in which it manages the AIFs, the main instruments in which it will be trading, on markets of which it will be a member or where it will actively trade, and on the principal exposures and most important concentrations of each of the AIFs it will manage;
- the manager must make available certain financial information to investors at their request; and
- it must be assessed whether a prospectus must be made available to prospective investors.
A non-EU manager which has been active in the Netherlands prior to 22 July 2013 may, as set out above, during the general one-year transitional period, continue to rely on the conditions applicable to it prior to 22 July 2013. As of 22 July 2014 it will have to comply with the transitional regime for non-EU managers described above.
- Non-EU managers from certain designated states may target professional and retail investors without requiring a license, provided that certain conditions are met
Prior to 22 July 2013, managers from investment institutions incorporated in a state designated by the Dutch Minister of Finance as having an adequate supervisory regime, did not need to obtain a license prior to offering participations in the Netherlands. Certain ongoing Dutch regulatory requirements still apply to these managers. This designated state exemption remains available after 22 July 2013 for managers from Guernsey, Jersey and SEC registered managers from the USA. This exception covers both offerings to professional investors as well as retail investors in the Netherlands.