The winds of change are blowing through the alternative investment fund industry and fund managers will need to reorganise their business if they are to survive in this new environment.
The Alternative Investment Fund Managers Directive was adopted by the European Parliament on 11 November 2010. The directive is expected to come in to force this March, with a deadline for implementation by Member States expected to be March 2013. It will impose widespread changes on alternative investment fund managers based within the EU, non-EU managers who manage EU funds or non-EU managers who market any Funds to investors within the EU.
By 2013, EU based managers that manage EU or non-EU funds will need to become authorised in accordance with the directive, regardless of whether or not they market their products within the EU. By 2015, this requirement will be extended to non-EU managers that manage EU funds, regardless of whether they market their products in the EU, and non-EU based managers that market non-EU funds in the EU.
There is a risk that non-EU managers wishing to market their funds within the EU may face a period of only partial access to EU investors as a result of the delay in the implementation of the passport regime for non-EU managers combined with the possible lack of private placement regimes within the EU. The two year period between 2013 and 2015 for non-EU managers represents a distinct advantage to EU managers as increased regulation may bring with it increased investor confidence and in turn increased investment. The potential increased investment will be supplemented by the EU passport making it easier to sell their products cross-border.
A fund manager will be considered to fall within the remit of the directive if they are managing an alternative investment fund that:
- is not a fund regulated under the UCITS Directive;
- raises capital from a number of investors;
- invests in accordance with a defined investment policy for the benefit of those investors;
and the manager is providing the following services:
- portfolio management; and
- risk management.
Notably, the directive will apply to all managers established within the EU, regardless of:
- the legal form of the fund;
- the legal structure of the manager;
- whether or not the fund is listed on a regulated market;
- whether the funds that it manages are established inside or outside the EU, or
- whether shares/units on the fund can be redeemed by the investors.
There are a number of full and partial exemptions to the directive, although a certain level of authorisation, registration and minimum conditions will still apply to these exemptions. The directive also provides for a voluntary opt-in procedure for managers who fall below the de minimis thresholds, which will result in managers being bound by all of the provisions of the directive and benefiting from the passport regime under the directive.
Authorisation under the directive
For EU based managers the national regulator of the Member State in which the manager is established will be the competent authority responsible for authorising the manager. For non-EU managers, they must seek authorisation with their Member State of reference i.e. the Member State which the manager or the fund has the closest links to. Similar to the current MiFID and UCITS authorisation procedures, an applicant manager will be required to undergo a rigorous application procedure with the competent authority.
Essentially, a manager will be required to provide information on two fronts: first, in relation to the business of the manager itself and second in relation to the funds it intends to manage. Information relating to the manager includes compliance procedures, delegation arrangements, remuneration policies, valuation functions, depositary functions and liquidity risk management. The information required relating to the fund includes fund rules or instruments of incorporation, the use of leverage, risk profiles, characteristics of the fund and information on the depositary.
Importantly, the national regulator granting the authorisation may restrict its scope, particularly relating to the investment strategies of the fund which the manager may employ. It must also be satisfied that the manager has sufficient initial capital and own funds, the manager's shareholders are suitable persons, the management and senior staff are sufficiently experienced and are of sufficiently good repute, and that the manager is in a position to comply with the regulations of the directive. The national regulator may also withdraw authorisation where it feels this is warranted.
Although the deadline for the transposition of the directive is not until 2013 (there may also be an additional transitional period of 12 months imposed by Member States until 2014), managers must now begin to prepare their organisations for the directive and all the changes it brings with it. They may have to implement material operational changes, review all contractual arrangements with third parties, appoint an independent custodian to act on their behalf, together with any other regulatory and administrative requirements to accommodate the directive.
The tides are turning quickly in the investment fund industry and managers must prepare for the effects of this directive and also consider the effect that legislation such as the UCITS IV Directive and MiFID II will have on their business. Preparation for these changes is key. Charles Darwin once said: It is not the strongest of species that survive, nor the most intelligent, but the one most responsive to change.