On December 19, 2012, the European Commission published the AIFMD Delegated Regulations (the “Level 2 Regulations”), which supplement the Directive on Alternative Investment Fund Managers (the “Directive”). See the December 17, 2010 Investment Management Regulatory Update for a detailed discussion on the Directive. In short, the Directive established a new regulatory framework for the authorization and supervision of alternative investment fund managers (“AIF Managers”) that conduct business in the European Union (the “EU”). The Directive allows AIF Managers to manage alternative investment funds (“AIFs”),2 including private equity funds and hedge funds, in the EU and market AIFs in the EU to “professional investors,” subject to compliance with the conditions set forth in the Directive.

The Level 2 Regulations are an extensive set of implementing measures that provide details on the framework established by the Directive. As with the Directive, the Level 2 Regulations may apply to EU AIF Managers and non-EU AIF Managers that manage or market one or more AIFs in the EU. The Level 2 Regulations are subject to a three-month scrutiny period by the European Parliament and Council and, absent any objections from these two bodies, will take effect on July 22, 2013. As of the effective date of the Level 2 Regulations, a non-EU AIF Manager cannot market AIFs in the EU unless a cooperation agreement is in place between the regulatory authorities of the relevant EU member state and the regulatory authority of a non-EU AIF Manager’s home country.

The Level 2 Regulations address, among other things, delegation, the calculation of assets under management, leverage, reporting and disclosure obligations, conflicts of interest, risk and liquidity management, the safeguarding of assets by depositaries and cooperation agreements. Additional details regarding three key aspects of the Level 2 Regulations follow—delegation, calculation of assets under management and leverage.


Under the Directive, an AIF may have only one AIF Manager. An AIF Manager may, in turn, delegate certain of its functions to a third party with the requisite resources and expertise, provided that the AIF Manager complies with a number of conditions (including that it notifies the relevant regulatory authorities and provides objective reasons for the delegation structure). The Directive also provides that an AIF Manager will no longer be considered the manager of an AIF if it becomes a “letter-box entity” as a result of excessive delegation of its management functions, in which case the delegate may instead be treated as the AIF Manager for purposes of the Directive. The Level 2 Regulations sets forth four examples in which an AIF Manager will be considered a letter-box entity:

  • the AIF Manager no longer retains the necessary expertise and resources to supervise the delegated tasks effectively and manage the risks associated with the delegation;
  • the AIF Manager no longer has the power to carry out certain senior management functions;
  • the AIF Manager loses (or cannot exercise) its contractual rights to inquire, inspect, have access to or instruct its delegates; or
  • the AIF Manager delegates the performance of investment management functions to an extent that exceeds by a “substantial margin” the investment management functions performed by the AIF Manager itself. Investment management functions includes both portfolio management and risk management.

In assessing the extent of delegation, the Level 2 Regulations direct the relevant regulators to assess the entire delegation structure, taking into account the assets managed under delegation as well as certain specified qualitative criteria such as the importance of the assets managed under delegation for the risk and return profile of the AIF, the geographical and sector spread of the AIF’s investments, the AIF’s investment strategies, the AIF’s risk profile, the types of tasks delegated in relation to those retained and whether the delegate is an affiliate of the delegating AIF Manager.

The European Commission must review the application of the delegation provisions established under the Level 2 Regulations after two years and, if necessary, provide further clarity on the conditions under which an AIF Manager would be deemed a letter-box entity.

Calculation of Assets Under Management

The Directive includes a partial exemption for AIF Managers that directly or indirectly manage portfolios of AIFs with assets under management (“AUM”) of (i) EUR 100 million or less (including any assets acquired through the use of leverage) or (ii) EUR 500 million or less when the portfolios of the AIFs consist of other AIFs that are not leveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF. These AIF Managers are only required to register with regulators rather than comply with the full set of rules under the Directive.

The Level 2 Regulations provide guidance on how to calculate AUM for purposes of this exemption. They clarify, among other things, that AUM should be calculated by aggregating the value of all assets of the AIFs managed by the AIF Manager, including the assets of AIFs where the AIF Manager has delegated management functions to another manager but excluding assets where the AIF Manager is managing under delegation. The Level 2 Regulations do not require assets to be “double-counted” in a “masterfeeder” structure, and they also exclude from the AUM calculation the assets of UCITS managed by an AIF Manager. In addition, the Level 2 Regulations explain that the value of derivative positions should be calculated by reference to the underlying assets.

Under the Level 2 Regulations, AIF Managers seeking exemption from authorization must monitor AUM on an ongoing basis and calculate AUM at least annually. If an AIF Manager exceeds the applicable exemption threshold and determines that this is not a temporary situation (i.e., the AUM is likely to remain above the applicable threshold for more than three months), then the AIF Manager must seek authorization under the Directive within 30 days.


The Directive requires that an AIF Manager set a maximum level of leverage that it can employ on behalf of each AIF it manages and periodically make disclosures about its use of leverage to investors and the relevant regulatory authorities. In addition, the Directive authorizes the relevant regulatory authorities to impose limits on the level of leverage that an AIF Manager may employ. The Level 2 Regulations confirm, among other things, that an AIF’s exposure to leverage must be calculated in accordance with two methods: (i) the gross method, which is intended to capture an AIF’s overall exposure to leverage and (ii) the commitment method, which is intended to account for an AIF Manager’s hedging and netting techniques. The Level 2 Regulations also confirm that AIF Managers that employ leverage on a substantial basis, which is defined as three times the net asset value of an AIF based on the commitment method, will be subject to additional reporting obligations to regulators.