The European Union's Alternative Investment Fund Managers Directive (AIFMD) provides for comprehensive changes in the regulatory framework applicable to alternative investment fund managers (AIFMs) that manage or market funds within the European Union.
The deadline for transposing the AIFMD into national law by EU member states was 22 July 2013. However, because of the transitional periods offered by many EU member states, the relevant watershed moment for most is more like 22 July 2014. It's a fast approaching deadline, and to the extent AIFMs are not already doing so, AIFMD contingency plans need to be put in place.
We have compiled a table setting out the implementation status for key European jurisdictions. We also set out our top six matters PE houses should be considering in the context of the AIFMD at this stage.
1. Does the AIFMD apply?
In a nutshell, the AIFMD applies to:
all EU AIFMs managing or marketing an AIF; and
all non-EU AIFMs who are either managing and marketing an EU AIF, or marketing a non-EU AIF to EU investors.
An AIFM is any legal person whose regular business is to manage one or more AIFs. An AIF, in turn, is any collective investment undertaking other than UCITS which raises capital from a number of investors with a view to investing for the benefit of those investors in accordance with a defined investment policy.
Partial exemptions exist for AIFMs managing AIFs with assets under management below specified monetary thresholds, and the AIFMD also specifically excludes a number of entities from being AIFs.
2. Getting authorized or registered
Unless it can make use of one of the exemptions, an AIFM to which the AIFMD applies must obtain authorization from its home regulator. AIFMs which qualify for an exemption will not be required to be authorized, but will be required to at least register with their home regulator.
As part of the authorization process, the home regulator will require specific information about the AIFM, including, for example, identity and details of holdings of "Qualifying Shareholders", details of the organizational structure of the AIFM, information on the AIFM's remuneration policies and practices and details of delegation arrangements.
2 Are you AIFMD ready? July 2014
Further, the home regulator will require information about each AIF the AIFM
intends to manage, including, for example, details of the AIFs investment
strategies, the AIFMs policy regarding the use of leverage, risk profiles as well
as the fund rules or instruments of incorporation of the AIF.
3. Appoint a depositary
Under the AIFMD regulations, each AIFM must appoint a "depositary" to
receive and safeguard the investors funds and financial instruments held by
the AIF. The depositary is responsible for monitoring the assets of the fund,
reconciling daily cash movements and providing independent verification that
the fund is being run properly. Information on the arrangements made for the
appointment of the depositary for the AIF must be provided to the home
regulator as part of the authorisation process.
4. Delegation and due diligence
There are new rules for when an AIFM delegates some of its duties to a third
party service provider. The AIFM is directly responsible for the oversight of
such third parties and is required to undertake substantial initial and on-going
due diligence to satisfy the AIFMD requirements.
5. Review remuneration policies
There are new rules around variable remuneration awards for performance
periods commencing after the AIFM is authorized. AIFMs must introduce
prudent remuneration policies and organizational structures to avoid conflicts
of interest or which may encourage excessive risk-taking. There are specific
requirements in relation to the formulation of these policies, which are also
subject to the remuneration disclosure rules. The AIFMs remuneration policy
must be reviewed annually, and in some instances, a remuneration committee
will need to be established.
6. Calculate and review leverage limits
AIFMs must set leverage limits for each AIF they manage, taking into account
the AIFs investment strategy. The leverage limits must be reasonable and the
AIFM must be able to demonstrate that the AIF complies with the limits at all
times. AIFMD introduces two methods to calculate leverage (the "gross" and
"commitment" methods), and the AIFs overall leverage must be expressed as
a ratio between the exposure of the AIF and its net asset value.
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