On July 1, 2011, the European Union Directive on Alternative Investment Fund Managers (the “Directive”) was published in the Official Journal of the European Union after several months of delay. While the Directive was released in final form on May 13, 2011 and approved by the European Union Council on May 27, 2011, publication in the Official Journal makes the Directive official and triggers Member States’ two year period with which to comply. The Directive took effect 20 days after publication and each Member State has until July 22, 2013 to pass the Directive into national law.

In addition, on July 13, the European Securities and Markets Authority (“ESMA”) responded to a request from the European Commission to provide to it advice on implementing the Directive (the “Draft Advice”). ESMA has requested response to its consultation paper by September 13, 2011, and it intends to finalize its advice to the Commission by November 16, 2011. Additionally, ESMA will hold an opening hearing on its Draft Advice on September 2, 2011 in Paris.

ESMA’s consultation paper covers three areas:

  • General provisions, authorization, and operating conditions – issues including which managers fall under the Directive and how assets under management are calculated for these purposes, initial capital and seed money, conflicts of interest, risk management, investment in securitization positions, valuation, delegation of manager functions and organizational requirements
  • Depositaries – governance of depositaries to alternative investment funds, appointment of the depositary, duties of a depositary, depositary liability
  • Transparency requirements and leverage – including the definition of leverage and methods of calculation, the content and format of the annual report to be prepared by the manager, disclosure to investors, the use of information by competent authorities, and limits on leverage

The Draft Advice tries to align the requirements with respect to general operation conditions with existing provisions in previous directives which cover retail funds.

The rules governing depositaries have been the subject of much political scrutiny, and the Directive delegates authority to the European Commission to issue more detailed rules on the subject. ESMA is consulting on whether custodians should be liable for the actions of their sub-custodians, and on the role of the custodian in overseeing its sub-custodians, including prime brokers when they are holding collateral.

ESMA’s paper also highlights the Directive’s goal of increasing transparency of managers to both regulators and investors. One part of this section that may be contentious is the disclosure of fees in the annual report. Significantly, ESMA has proposed that all managers be required to make quarterly reports to the authorities.

The fourth area that ESMA will address in the future is supervision. However, these measures are less urgent because they relate to the introduction of a passport for third country entities, which will not be operational until at least July 2015. Thus, this advice will come in a separate consultation letter to be published for comment later this summer.