Following on from the publication of its final advice on implementing measures under the Alternative Investment Fund Managers Directive (the “AIFMD”) (see our earlier update), on 23 February 2012 the European Securities and Markets Authority (“ESMA”) issued a discussion paper on key concepts of the AIFMD and types of AIFM (the “Discussion Paper”). The Discussion Paper addresses key issues relating to the definition of the alternative investment fund manager (“AIFM”), the definition of an alternative investment fund (“AIF”) and the interaction of the AIFMD with the UCITS Directive and MiFID.
The Discussion Paper is the first stage in the consultation process and will be followed by a further consultation paper in Q2 2012. The papers will ultimately form the basis of draft regulatory technical standards to be submitted to the European Commission by the end of this year.
A summary of the issues raised in the Discussion Paper is set out below.
Definition of AIFM
The Discussion Paper seeks to clarify when an entity must apply for authorisation as an AIFM. ‘AIFM’ is defined in the AIFMD as any legal person whose regular business is managing one or more AIF. The activity of “managing AIFs” is defined as performing at least portfolio management functions or risk management functions in respect of an AIF.
However, the AIFMD also states that AIFMs shall not be authorised to provide portfolio management services without also providing risk management services and vice versa, which suggests that an entity must be capable of performing both functions to be authorised as AIFM.
The Discussion Paper seeks to clarify that where an entity carries out either portfolio management or risk management, it must seek authorisation under the AIFMD. The AIFMD should be interpreted as requiring an AIFM to be an entity capable of providing, and taking responsibility for, both portfolio management and risk management functions in order to obtain an AIFM authorisation.
Authorisation under the AIFMD will not be required where an entity is carrying out the risk management function or portfolio management function under a delegation arrangement.
ESMA considers that an AIFM may delegate the two functions either in whole or in part, although an AIFM may not delegate both functions in whole at the same time (ie to the extent that it becomes a “letter-box” entity). It is hoped that the consultation paper and the draft regulatory standards which are to follow on from the Discussion Paper provide more detail on this point as, for example, it is standard in the UCITS context to delegate both functions at the same time, although arguably the functions are not delegated “in whole” as the UCITS’ management company or board of directors retains responsibility for elements of those functions. The provisions relating to delegation and the concept of a letter-box entity should not be more restrictive than those currently applying to UCITS.
Definition of AIF
The Discussion Paper sets out proposed criteria to qualify as an AIF, in accordance with the definition of AIF in the AIFMD. AIFs are defined as collective investment undertakings, including investment compartments thereof, which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors.
ESMA provides clarification on the various elements of this definition, including the raising of capital, collective investment, and defined investment policy.
Appointment of AIFM
ESMA acknowledges that a self-managed AIF may take the form of a corporate AIF or possibly a limited partnership.
Treatment of UCITS management companies
The Discussion Paper sets out ESMA's interpretation on the interaction between the AIFMD and UCITS Directive. After the entry into force of the AIFMD, a UCITS management company which manages AIFs and which is designated as the AIFM for the purposes of the AIFMD will not be subject to the UCITS Directive in respect of that activity and will instead be required to obtain an additional authorisation under the AIFMD.
A UCITS management company may also provide services, including investment services, to AIFs but not be appointed AIFM. In that case, the UCITS management company's activities will continue to be covered by its authorisation under the UCITS Directive and it will not need to seek authorisation under the AIFMD.
Treatment of MiFID firms and credit institutions
ESMA clarifies that MiFID firms and credit institutions may not be authorised as AIFMs, but may provide investment services such as individual portfolio management in respect of AIFs without falling within the scope of the AIFMD.
Comments are requested by 23 March 2012. On the basis of the feedback received, ESMA will develop a consultation paper to be published in Q2 2012 setting out formal proposals for draft regulatory technical standards on types of AIFM.
The Discussion Paper contains welcome clarification on the interaction between the AIFMD, the UCITS Directive and MiFID, but a number of issues, including the types AIFM bound by the AIFMD, require further consideration. The consultation paper to be issued later this year may provide clearer guidance as to the ultimate content of the regulatory technical standards.
The Discussion Paper can be accessed at this link: ESMA Discussion Paper.