On 11 November 2010, the European Parliament – after extensive discussions – adopted the directive on managers of alternative investment funds. Although particularly aimed at regulating hedge funds and private equity funds, the directive has a much broader scope, providing for far-reaching changes in the supervision of all investment institutions other than UCITS. Such institutions include not only hedge funds and private equity funds, but also real estate funds, equity funds and funds of funds, among others.
The directive, which is expected to come into force early next year, will bring about major changes in the supervisory regime for investment institutions in the Netherlands. It must be implemented in the Netherlands by the beginning of 2013.
On 30 April 2009 the European Commission published a proposal for a directive on managers of alternative investment funds (the "AIFMD"). The AIFMD was adopted by the European Parliament on 11 November 2010 after extensive discussions.
Although particularly aimed at regulating managers of hedge funds and private equity funds, the AIFMD has a much broader scope, providing for far-reaching changes in the supervision of managers of all investment institutions other than undertakings for collective investment in transferable securities (UCITS). Such institutions 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 AIFMD refers to all these types of investment institutions – 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 AIFMD, which sets out extensive harmonised EU-level rules for managers of AIFs. 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;
- specific obligations for managers of leveraged AIFs; and
- specific obligations for managers of AIFs that acquire control over one or more companies.
In this newsletter we will discuss the most important provisions of the AIFMD and their anticipated impact in the Netherlands. The AIFMD, which is expected to come into force early next year, will bring about major changes in the Dutch supervisory regime for investment institutions and their managers. It must be implemented in the Netherlands by the beginning of 2013.
Current supervisory regime in the Netherlands
In the Netherlands it is currently prohibited to offer participations 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 by investment institutions or their managers in any of the following situations (among others):
the participations are offered only to 'qualified investors';
- the participations are offered to fewer than 100 individuals or legal entities (other than qualified investors);
- the participations offered each have a denomination of at least EUR 50,000;
- the participations offered may only be acquired for a consideration of at least EUR 50,000 per investor.
On 30 November 2010 a bill was submitted to the Dutch parliament that will increase the abovementioned EUR 50,000 thresholds to EUR 100,000, in line with the recent amendments to the EU Prospectus Directive. The bill is expected to come into force no later than 1 January 2012.
An exception also applies for investment institutions that are established and subject to full 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 26 August 2009 a bill was submitted that will enable managers of investment institutions which offer participations solely to 'qualified investors' to apply for supervision under a voluntary regime. The new rules are expected to take effect in the beginning of 2011.
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 participations 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 participations 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. On 7 December 2009, a new, recast UCITS directive came into force – UCITS IV. UCITS IV and its implementing measures must be implemented in national law before 1 July 2011. The changes introduced by UCITS IV include:
- rules making possible cross-border mergers between UCITS;
- rules for master-feeder structures;
- an obligation to include key investor information in a Key Investor Information document, replacing the simplified prospectus; and
- simplification of the notification procedure for marketing UCITS in other EU member states.
AIFMD – authorisation and marketing
Although the AIFMD is particularly aimed at regulating managers of hedge funds and private equity funds, it has a much broader scope. The AIFMD covers managers of alternative investment funds, i.e. all investment institutions other than UCITS. In view of the broad definition of AIFs, the proposed rules will apply to managers of a large variety of types of 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 AIFMD focuses mainly on the managers of AIFs. It requires EU member states to ensure that a manager is prohibited from managing an AIF unless it has first obtained a licence. It is irrelevant what legal form the manager or the AIF possesses and whether the AIF is open-ended or closed-ended. Additional rules apply if the AIF and/or the manager is established outside the EU (see below).
Every AIF must have a manager. The AIFMD makes a distinction between internally managed and externally managed AIFs. If the AIF's legal form permits internal management and its governing body so elects, the AIF may act as its own manager and is characterised as an internally appointed manager. Depending on whether the AIF is internally managed or externally managed, the AIFMD contains restrictions on the activities that a manager may perform.
Exceptions / exemptions from licence requirement
The AIFMD excludes a few types of entities from its scope of application, which means that such entities are not subject to the above-mentioned licence requirement. The excluded entities include:
- pension funds; and
- managers of AIFs in which only group companies invest (provided that none of those group companies is itself an AIF).
In addition, the AIFMD provides 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.
AIF managers qualifying under a de minimis exemption in principle fall outside the scope of the AIFMD. They must, however, register in their home member state and provide certain information. In addition, the AIFMD allows member states to impose additional requirements. AIF managers qualifying under a de minimis exemption may also elect to be covered by the AIFMD's licence regime on a voluntary basis, entitling them to take advantage of the European passport (see below).
Unlike the rules currently applicable in the Netherlands, the AIFMD does not contain an exception or exemption for, e.g., the offering of participations to 'qualified' investors or the offering of participations with a denomination of, or for a consideration per investor amounting to, at least EUR 50,000. Consequently, the AIFMD 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 information on, among other things, the following subjects:
- the persons that will actually carry out the management;
- 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;
- the remuneration policy;
- arrangements (if any) made for the delegation or sub-delegation of management activities to third parties;
- the AIFs that will be managed, including information about their investment strategies;
- the appointment of the depositary for the AIFs that will be managed; and
- the information which the manager is required to provide to potential investors (see below).
Marketing to professional investors
The AIFMD 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 participations to professional investors. The relevant rules are described below.
Home member state
Under the AIFMD, possession by the manager of a licence does not mean that the relevant AIFs may be marketed. For each AIF, the manager must submit an extensive notification to the supervisory authority of the AIF's home member state. The latter must inform the manager, within twenty 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 AIFMD will be permitted – following completion of a notification procedure – to:
- offer participations to professional investors in another member state; and/or
- to conduct the management of AIFs established in another member state
without a licence from that other member state being required.
Managers / AIFs from non-EU countries
If an AIF manager or an AIF is established outside the EU, additional requirements for management and marketing apply. For this purpose, distinctions are made between:
- AIF managers established within the EU that manage or market AIFs established outside the EU;
- AIF managers established outside the EU that manage AIFs established within the EU; and
- AIF managers established outside the EU that market AIFs (EU or non-EU) within the EU;
The additional requirements differ for each situation. For example, for the marketing within the EU of AIFs established outside the EU by a manager established within the EU (with a European passport), the additional requirements include the following:
- a cooperation agreement must be in place between the supervisory authority of the manager's home member state and the supervisory authority of the country in which the AIF is established;
- 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
- there must be an agreement on the exchange of information in tax matters between the country in which the AIF is established, the home member state of the AIF manager and each member state in which the AIF will be marketed.
A transitional period of at least two years after the implementation deadline (i.e. until the beginning of 2013) will apply to both AIF managers established outside the EU and AIFs established outside the EU before they can use the European passport. During that period, the national regimes for investment institutions will continue to apply. Once the European Commission has taken a decision to that effect, it will be possible (until 2018) to opt either for the national regime or for the European passport. After that period, and again following a decision of the European Commission to that effect, the first option (application of the national regime) will no longer be available, and the European passport regime will become the sole and mandatory regime applicable in all member states.
Marketing to non-professional investors
The AIFMD does not aim to harmonise the rules on the marketing of AIFs to non-professional investors. A licence issued pursuant to the AIFMD 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, a member state may impose stricter requirements on the manager and/or the AIF than those imposed by the AIFMD on the marketing of AIFs to professional investors.
In addition to requiring that AIF managers be licensed and that an approval be obtained prior to marketing an AIF, the AIFMD imposes various ongoing obligations. A few of the most important of these are summarised below. The AIFMD also provides that the European Commission and the European Securities and Markets Authority (ESMA) will draw up further rules specifying many of the ongoing obligations.
Appointment of depositary
The AIFMD requires the manager to ensure that a depositary is appointed for each AIF that it manages. The depositary 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 another category of institution that is subject to prudential regulation and ongoing supervision. For (i) AIFs established outside the EU and for (ii) AIFs that (a) have no redemption rights which are exercisable during a period of five years from the date of initial investment in the relevant AIF and (b) follow a particular investment policy (such as real estate funds and private equity funds), different rules may apply.
In addition, the AIFMD contains far-reaching provisions on the delegation of duties by depositaries and on their liability.
Prudential supervision / organisational requirements
The AIFMD imposes a large number of ongoing prudential and organisational requirements on AIF managers, such as requirements with regard to:
- risk management;
- investment in securitisation positions: the European Commission plans to draw up additional rules regarding the holding of securitisation positions by AIFs;
- organisational requirements;
- liquidity management; and
- capital requirements.
In addition, the AIFMD requires AIF managers to have remuneration policies and practices that promote sound and effective risk management. The AIFMD contains detailed rules on the substance of these policies and practices, such as regarding guaranteed bonuses and the obligation to pay out a substantial portion of any variable remuneration in participations or shares, or equivalent interests, in the relevant AIF. The AIFMD also contains rules on the delegation of duties by the manager. A manager that intends to delegate must notify the competent authorities of its home member state and meet a number of other conditions.
Other rules worthy of mention are those pertaining to valuation. The manager of one or more AIFs must ensure that an independent valuation of the AIF's asset is conducted on a regular basis and in accordance with the provisions of the AIFMD.
Conduct of business supervision
Under the AIFMD, 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 AIFMD 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, types of investments, techniques, maximum leverage and risks);
- the identity of the AIF's manager and depositary as well as other parties involved in the AIF;
- any management and depositary functions that have been delegated;
- the valuation procedure and pricing methodology for valuing the AIF's assets;
- all fees, charges and expenses, and the maximum amounts thereof, which are borne by the investors; and
- the AIF's liquidity risk management.
Special provisions regarding leveraged AIFs
The AIFMD contains specific rules for managers of AIFs that work with leverage. These rules are aimed at but not limited to hedge funds.
A manager must, for each AIF that it manages, set a maximum level of leverage that may be used. The manager must also set a limit on the collateral may be re-used and the guarantees that may be granted under the leveraging arrangement. In this respect, the manager must take into account, among other things, the type of AIF, its strategy and the sources of its leverage. The manager must demonstrate that the leverage limits for each AIF that it manages are reasonable and that it complies with these limits at all times.
When necessary to ensure the stability and integrity of the financial system, the supervisory authority of an AIF manager's home member state may impose limits on the level of leverage that the manager may use or impose other restrictions on its management of AIFs, for the purpose of limiting systemic risk or market disorder caused by leverage.
Specific provisions regarding AIFs that acquire major holdings or control
The AIFMD also contains specific rules for managers of AIFs that acquire major holdings in or control of a company. These rules will mainly affect private equity funds. They do not apply to the acquisition of control of:
- small or medium-sized companies;
- special purpose vehicles whose purpose is to purchase, hold or administer real estate.
Holdings in non-listed companies
If the proportion of voting rights held by an AIF in a non-listed company reaches, exceeds or falls below the threshold of 10%, 20%, 30%, 50% or 75%, the manager must notify the supervisory authority in its home member state of this.
Holdings in listed or non-listed companies
The AIFMD also contains specific rules that apply if control of a listed or unlisted company is acquired. The acquisition of control means (i) for non-listed companies: the direct or indirect acquisition of more than 50% of the voting rights and (ii) for listed companies in the Netherlands: 30% or more of the voting rights (the percentage can be different in other member states). (If a manager acts jointly with other managers on the basis of an agreement aimed at the acquisition of control, the voting rights must be aggregated.) Upon the acquisition of control, far-reaching notification obligations as well as restrictions on the sale of assets (asset stripping) apply.
Pursuant to the notification obligations, and irrespective of whether control is acquired of a listed or non-listed company, the manager(s) of the relevant AIFs must, depending on the obligation in question, provide information to the supervisory authority, the company, the other shareholders and/or the employee representatives about (among other things):
- the identity of the AIF manager(s);
- the policy for preventing and managing conflicts of interest, in particular between the manager, the AIF and the company;
- the policy for external and internal communication relating to the company.
Where control is acquired of a non-listed company, the information must include the AIF's intentions with regard to the company's future business and the likely repercussions on employment, including any material change in the conditions of employment.
The AIFMD also contains restrictions on the sale of assets (asset stripping) that apply if control is acquired of a listed or a non-listed company. In short, the manager of an AIF that has acquired such control may not, for a period of 25 months from the acquisition, facilitate, instruct, support any distribution, capital reduction, share redemption and/or acquisition of own shares by the company or vote in favour of any such act. The AIF is also required to use its best efforts to prevent such acts.
Impact of the AIFMD on the Dutch supervisory regime
The AIFMD 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:
Clcik here to view table
Timeframe and transitional provisions
A draft AIFMD was presented by the European Commission to the European Parliament and the European Council on 30 April 2009. On 11 November 2010, the European Parliament adopted a substantially amended version of that draft. The next step is for the European Council to grant its approval, which is only a formality. The Council's approval is expected shortly and it is generally believed that the AIFMD will come into force in early 2011.
The member states (including the Netherlands) must implement the AIFMD in their national law within two years after its entry into force, i.e. by the beginning of 2013. This applies not only to the AIFMD itself, but also to the implementation measures to be drawn up on the basis of the AIFMD. In anticipation of the approval of the Council, the European Commission has requested ESMA to provide technical advice on a number of topics set out in the directive before 16 September 2011.
AIF managers that are active as such before the implementation deadline must apply for a licence within one year of that deadline (i.e. before the beginning of 2014). Managers of closed-end AIFs that (i) make no additional investments after the implementation deadline (i.e. after the beginning of 2013) or (ii) that will be terminated within three years after the deadline (i.e. before the beginning of 2016) and whose subscription period for new investors closes prior to the entry into force of the AIFMD (i.e. before the beginning of 2011) may continue to manage such AIF without a licence under the AIFMD. They are, however, obligated to make certain information available.
As stated above, a transitional period of at least two years after the implementation deadline (i.e. until the beginning of 2013) will apply to both AIF managers established outside the EU and AIFs established outside the EU before they can use the European passport. During that period, the national regimes for investment institutions will continue to apply. Once the European Commission has taken a decision to that effect, it will be possible (until 2018) to opt either for the national regime or for the European passport. After that period, and again following decision of the European Commission to that effect, the first option (application of the national regime) will no longer be available, and the European passport regime will become the sole and mandatory regime applicable in all member states.