The European Commission has today published the long-awaited implementing measures under the Alternative Investment Fund Managers Directive (the “AIFMD”). The Commission had originally intended to publish the implementing measures earlier this year, but publication was delayed due to discussions concerning a number of key provisions, including those relating to delegation and the depositary regime.
The implementing measures take the form of a regulation (the “Regulation”), which, subject to a three month scrutiny period by the European Parliament and Council, is due to will apply in all EU member states from July 2013 without the need for transposing legislation. The Regulation elaborates on the provisions contained in the AIFMD, and provides further detail on the requirements regarding the conditions and procedure for the determination and authorisation of alternative investment fund managers (“AIFMs”), including the capital requirements applicable to AIFMs; operating conditions for AIFMs; conditions for delegation; rules on depositaries; reporting requirements and leverage calculation; and rules for cooperation arrangements.
The publication of the Commission’s Regulation confirms the necessary detail on a number of issues which will assist asset managers in structuring their business operations to comply with the AIFMD. The Central Bank of Ireland has already consulted with industry on implementation of the AIFMD, and has published a draft AIF Handbook. Following the feedback received from its consultation, the Central Bank will now proceed to issue a revised version of the AIF Handbook in January 2013.
Level 2 Conditions for Delegation
The conditions for delegation under the AIFMD had been the subject of much of the discussion which preceded the publication of the Regulation, and a focal point for industry. The AIFMD contains detailed provisions in relation to the delegation of functions by the AIFM and provides that an AIFM cannot delegate its functions to the extent that it becomes a letter-box entity. The Regulation prescribes the criteria for determining whether an AIFM ought to be deemed a letter-box entity, to the effect that the AIFM will be deemed a letter-box entity in any of the following circumstances:
- the AIFM no longer retains the necessary expertise and resources to supervise the delegated tasks effectively and manage the risks associated with the delegation; or
- the AIFM no longer has the power to take decisions in key areas which fall under the responsibility of the senior management or no longer has the power to perform senior management functions.
These conditions were contained in the European Securities and Markets Authority’s (“ESMA”) final advice to the Commission on implementing measures, published in November 2011.
However, the Regulation goes further and provides that an AIFM will also be deemed a letter-box entity in circumstances including:
- where the AIFM loses its contractual rights to inquire, inspect, have access or give instructions to its delegates; or
- where the AIFM delegates the performance of investment management functions to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself.
In relation to (d), the Regulation provides that when assessing the extent of delegation, competent authorities shall consider the entire delegation structure taking into account not only the assets managed under delegation, but also a number of qualitative criteria. These include the types of assets invested in, and the importance of the assets under delegation for the risk and return profile and achievement of the investment goals of the fund; the geographical and sectoral spread of the fund’s investments; the risk profile of the fund and the types of investment strategies pursued; the types of task delegated in relation to those retained; and the configuration of the delegates and sub-delegates, their geographical sphere of operation and corporate structure.
The final wording of the delegation provisions within the Regulation represents the compromise reached following detailed discussions. The initial draft of the Regulation focussed on quantitative criteria and would have meant many EU-based funds and managers would have had to significantly restructure their operations. It had been anticipated that the final Regulation would adopt qualitative criteria following on from the negotiations, and this is a positive outcome. The delegation model currently in place within the Irish regulatory framework for UCITS will operate effectively under the AIFMD regime, and Ireland is well positioned to ensure the smooth implementation of the AIFMD.
This note focuses primarily on the delegation provisions contained in the Regulation. Should you require further information or legal advice in relation to any of the elements of the Regulation such as the depositary provisions, operating conditions for AIFMs or leverage calculation, please do not hesitate to contact your usual Asset Management and Investment Funds Group contact or any of the contacts listed on this publication.
The Regulation can be accessed through the following link: Delegated Regulation on AIFMD.
The Commission’s adoption of the Regulation coincides with the publication of two consultation papers today by ESMA titled “Guidelines and key concepts of the AIFMD” and “Draft regulatory technical standards on types of AIFMs”. The consultations both close on 1 February 2013 and ESMA intends that the guidelines and technical standards will be finalised in the first half of 2013. The consultation papers may be accessed at the following links: Key concepts of the AIFMD and Draft regulatory technical standards on types of AIFMs.