Summary and implications

On 16 November, the European Securities and Markets Authority (ESMA) published its technical advice on implementing the Alternative Investment Fund Managers Directive (AIFMD). Taking into account the “framework” nature of the AIFMD itself, ESMA’s technical advice has been greatly anticipated as it provides further details and clarity relating to a number of areas covered within the AIFMD.

ESMA’s advice has four main areas:

  • General provisions for managers, authorisation and operating conditions;
  • Governance of depositories;
  • Transparency requirements and leverage; and
  • The position relating to third countries.

This briefing summarises a number of the main points that we believe will be of interest to firms.

We intend to produce further briefing notes over the coming weeks to summarise the outstanding issues discussed in ESMA’s technical advice. Our next briefing note will address ESMA’s technical guidance on depositories.


ESMA will continue to produce technical guidance on the correct implementation of the AIFMD into 2012 and the Commission intends to publish draft Level 2 rules by early 2012.

Member States will need to ensure that the AIFMD is fully implemented into national law by 22 July 2013. AIFMs will then have until 23 July 2014 to become authorised.

Scope of the AIFMD

The AIFMD contains a partial exemption which applies to alternative investment fund managers (AIFMs) with assets under management below a certain level. To determine whether an AIFM can fall within this partial exemption, ESMA has recommended that assets under management should be valued at least annually (using the latest asset value calculation) and should follow the methodologies developed by CESR (ESMA’s predecessor) in the guidelines on Risk Management and the Calculation of Global Exposure Risk for UCITS.

In relation to cross-holdings, e.g. where an AIF invests in another AIF and both have the same AIFM, ESMA has confirmed that it will continue with the “look-through” approach upon which it previously consulted. On the basis that there is one set of underlying assets, any cross-holdings can be excluded from the assets under management calculation unless the assets are acquired through the use of leverage or financial derivative instruments.

ESMA was also asked to advise on how to treat AIFMs whose total assets under management fluctuate and may occasionally exceed the relevant threshold during a calendar year. In this respect, ESMA commented that it would not be practical for AIFMs to continually fall in and out of the scope of the AIFMD, but that they should have procedures in place to monitor their total assets under management on a continuous basis. This suggests that AIFMs will, for example, need to monitor subscription levels and the market value of assets on a more regular basis.

On each occasion where the assets under management exceed the relevant threshold, ESMA suggests that the AIFM should be required to notify the regulator “without delay” and state whether or not this is considered to be of a “temporary nature”. This will not result in the AIFM being required to submit an application for authorisation under the AIFMD, but ESMA believes that exceeding the relevant threshold for any period in excess of three months would not be regarded as being of a temporary nature.

ESMA was also asked to advise on the information AIFMs that fall within this partial exemption should provide to the regulator. While most of this information is fairly straightforward, one of the requirements is to provide the regulator with regular reports outlining the main instruments in which they are trading, principal exposures and concentrations. Following the comments ESMA received on its consultation, ESMA has decided that this information can be provided annually, rather than quarterly as was originally suggested.  

When AIFMs that fall within this exemption decide to “opt in” to the AIFMD, ESMA has confirmed that the same procedure will apply as the one followed by AIFMs that do not fall within this exemption.

Additional own funds to cover potential professional liability risks

The AIFMD provides that AIFMs must hold additional own funds or have appropriate professional indemnity insurance relating to “liability risks”. ESMA has provided a non-exhaustive list of the types of risks that would fall within this category, such as losses arising from a negligent failure to meet a professional obligation to specific investors or clients. ESMA has also confirmed that the liability of the AIFM will be limited to the AIFM’s directors, officers, staff or third parties for whom the AIFM has vicariously liability. However, ESMA did not agree with requests to introduce a cap for additional own funds on the basis that this would be advantageous for larger AIFMs.

In relation to the amount of additional own funds to be held, ESMA states that this should be equal to 0.01 per cent of assets under management. However, to incentivise better operational risk, the regulator can reduce this to 0.008 per cent in certain circumstances. Any professional indemnity insurance policy must satisfy certain conditions including having a minimum coverage per claim and for claims in aggregate. ESMA has also confirmed that it is possible for an AIFM to have a combination of own funds and professional indemnity insurance and has outlined a detailed calculation for when firms choose this option.


In relation to delegation, ESMA has suggested that the requirements in the AIFMD should only apply to outsourcing “critical or important” functions, in a similar way to the outsourcing requirements under the Markets in Financial Instruments Directive (MiFID). The general principles that an AIFM should consider when delegating tasks to third parties are also based on the MiFID requirements.

The AIFMD provides that an AIFM must be able to justify its entire delegation structure on “objective reasons”. ESMA has provided further detail in this respect and stated that, in line with the approach in the UCITS Directive, an AIFM “should be able to demonstrate that the delegation is done for the purpose of a more efficient conduct of the AIFM’s management of the AIF”.

In relation to delegation of portfolio management or risk management, ESMA has advised that (other than with the approval of the regulator) this should only be delegated to certain entities (outlined in the table opposite).

In addition, where portfolio management or risk management is delegated (or sub-delegated) to a third country firm there must also be an appropriate co-operation agreement in place. This agreement must be between the home state regulator and the third country regulator (which should be based on existing international standards which could be centrally negotiated by ESMA). The delegation/sub-delegation agreement must also allow the competent authorities certain supervisory powers of the delegate/sub-delegate firm, such as access to documents and on-site inspections (in certain circumstances).

How to demonstrate that delegation is done for more efficient conduct of the AIFM’s management

  • Optimising of business functions and processes
  • Cost savings
  • Expertise of the delegate in administration/specific markets/investments
  • Access of the delegate to global trading capabilities

To whom can the AIFM delegate portfolio management or risk management?

  • Management companies authorised under the UCITS Directive
  • Investment firms authorised under MiFID to perform portfolio management
  • Credit institutions authorised under the Banking Consolidation Directive and having the authorisation to perform portfolio management under MiFID
  • Externally-appointed AIFMs authorised under the AIFMD

Where an AIFM consents to sub-delegation, this should be stated in writing. ESMA has stated that general consent would not be sufficient and the AIFM would need to give its consent to each individual sub-delegation arrangement.

The AIFMD also states that the Commission will outline the circumstances when the AIFM will become a “letter box company” and can no longer be considered to be the manager of the AIF concerned.

When would the AIFM become a “letter box company”?

  • The AIFM no longer retains the necessary expertise and resources to supervise the delegated tasks effectively and manage the risks associated with the delegation (for example, where the AIFM only retains few resources to supervise the delegated tasks in proportion to the extent to which it has delegated tasks and these resources are not sufficient for an effective supervision of the delegated tasks).
  • The AIFM no longer has the power to take decisions in key areas which fall under the responsibility of the senior management or no longer has the power to perform senior management functions, in particular in relation to implementation of the general investment policy and investment strategies.