www.cummingslaw.comA IntroductionImplementation of the Alternative InvestmentFund Managers Directive (AIFMD) is due to comeinto force on 22 July 2013, with the result that allalternative investment fund managers (AIFMs)must be appropriately authorised to managealternative investment funds (AIFs) which areestablished or marketed in the EU.An AIFM is anyone who, at a minimum, eitherperforms portfolio management services orrisk management services for an AIF and an AIFmeans virtually any fund, regardless of structure,jurisdiction or investment strategy, other than aUCITS fund.The AIFMD introduces a new European passportsystem for the marketing of AIFs throughoutthe EU to professional investors, which willautomatically be available to EU authorisedAIFMs managing EU AIFs on transposition ofthe AIFMD. However, an equivalent passport for non-EUAIFMs will not be available until 2015 at theearliest, which means that non-EU AIFMs willneed to consider how they can continue tomarket in the EU after 22 July 2013.The following summary sets out those issueswhich need to be considered by a non-EU AIFMmarketing and/or managing funds in the EU andthe effect of the implementation of the AIFMDon the non-EU AIFM’s operations andmarketing activities.B Who will be affected?The AIFMD will apply to a non-EU AIFMmarketing and/or managing funds in the EU,whether the fund is based either in the EU (an“EU fund”) or outside the EU (a “non-EU fund”).However, it distinguishes between:(i) non-EU AIFMs who manage EU funds, or whointend to market funds (whether EU funds ornon-EU funds) which are managed by themin the EU; and(ii) non-EU AIFMs who manage non-EU fundsoutside of the EU.It should be noted that managers who manageleveraged assets of below €100m (a small hedgefund) and those who manage unleveraged assetsof below €500m where there are no redemptionrights within five years of initial investment in theAIFs (for instance, a typical private equity fund)are exempt from the requirements of the AIFMDfor these purposes. They are however subjectto certain of the provisions of the AIFMD andcannot benefit from its passporting rights.Non-EU AIFMs falling within (i) will have tobecome authorised as AIFMs by the regulatorin the appropriate “Member State of reference”and will be subject to virtually full compliancewith the AIFMD, while those falling within (ii) willonly have to comply with certain of the AIFMD’sprovisions and can be marketed under thecurrent “private placement” requirements.C How will non-EU AIFMs continuemarketing after 22 July 2013?As mentioned above, the passport regime willnot come into effect for non-EU AIFMs until 2015and this is subject to the European Securities andMarkets Authority (ESMA) recommending thatthe passport is made available to non-EU AIFMs.If the passport regime is activated, all non-EUAIFMs managing or marketing AIFs in the EU willneed to apply for authorisation and comply fullywith the AIFMD.Until the passport regime comes into effect, ifand when it does, non-EU AIFMs will only be ableto market in the EU under the existing privateplacement regimes of Member States. It shouldbe noted that the private placements regimes ofeach country vary.AIFMD: Non-EU Managers.
www.cummingslaw.comD How does the private placementregime work?The private placement regime is subject to anumber of conditions under the AIFMD, whichmust be met for a non-EU AIFM to be ableto market its AIFs in the EU, in particular thefollowing minimum conditions:(i) the relevant EU Member State must havea private placement regime which permitsnon-EU AIFMs to market AIFs in thatMember State;(ii) co-operation agreements must be in placebetween the regulator of the relevant EUMember State and the regulator of thecountry of domicile of the non-EU AIFM and,if the AIF is a non-EU AIF, the regulator of theAIF’s country of domicile also for the purposeof systemic risk oversight;(iii) the country of domicile of the non-EU AIFMand, if the AIF is a non-EU AIF, the AIF’scountry of domicile must not be listed asnon-cooperative for FATF purposes; and(iv) the non-EU AIFM must comply with certainrequirements of the AIFMD, namelythe disclosure obligations (to investors),transparency requirements (to regulators)and the annual reporting obligations ofthe AIF, as well as any additional localrequirements of the relevant EU MemberState (please see below for more detailedinformation on each of these requirements).The non-EU AIFM will not be able to market,or continue to market, in the EU after 22July 2013 if any of these conditions are notsatisfied. Furthermore, it is important to note(as mentioned above) that private placementregimes vary and Member States have the abilityto impose stricter conditions on their privateplacement regimes or to ban private placementsaltogether at any time.The private placement regime is expected toremain in place until at least 2018, at whichtime ESMA is expected to report on whetherthis regime should stay or be abolished. If it isabolished, the only marketing route availablewould then be the passport system, subject toESMA’s recommendation as stated above. Ifthat is the case, all non-EU AIFMs who wish tocontinue marketing their AIFs in the EU will needto apply for authorisation and comply fully withthe AIFMD.Disclosures to investors under the privateplacement regimeThe AIFMD specifies a number of matters whichshould be disclosed to an EU investor prior to anyinitial investment, but in most cases these usuallyform part of the contents of an AIF’s offeringmemorandum, such as investment strategy,policy and restrictions, details of leverage andre-hypothecation arrangements, valuation, feesand expenses, prime brokerage arrangementsand side letters.With regard to leverage, non-EU AIFMs shouldbe aware that the European Commission hasrecently published the draft level 2 delegatedRegulation (the “Level 2 Measures”) which,amongst other things, provides detail on themethodology for calculating leverage for AIFMDpurposes. In brief, the AIFMD defines leverageas any method by which the AIFM increasesexposure of an AIF it manages, whether throughborrowing or leverage, and in order to ensureuniform compliance when calculating leverage.The Level 2 Measures provide two methods forcalculation:(i) the “gross” method; and(ii) the “commitment” method.Although additional and optional methods maybe adopted on the basis of technical advicedeveloped by ESMA, the gross and commitmentmethods remain obligatory for all AIFMs.Generally, the gross method indicates the overallexposure of the AIF and the commitment methodprovides information on hedging and netting, theintention being to allow regulators and investorsto gain a complete picture of the AIF.
www.cummingslaw.comOther disclosure obligations to investors includenotifying them of any material changes inrelation to the above information and also detailsof any preferential treatment provided to aninvestor or any special arrangements, such asside pockets.Disclosures to regulators under the privateplacement regimeThe AIFMD requires regular reporting by thenon-EU AIFM to the competent authoritiesin each EU Member State where the AIFs aremarketed. The Level 2 Measures set out thereporting template, which must be delivered tothe relevant authorities within one month (with afurther 15 days for funds of funds) after the endof the relevant period, which varies according tothe total assets under management of all AIFsmanaged by the non-EU AIFM. These reportingrequirements include reporting in relation to thepercentage of the AIF’s assets which are subjectto special arrangements arising from their illiquidnature and also reporting in relation to the maincategories of assets in which the AIF invests.For US managers, the reporting requirementsare similar to Form PF, but it will not be possiblemerely to lift all the necessary information fromone report into another, as the valuation andleverage calculations differ under the AIFMD.The calculation of leverage methodology is asdiscussed above. As regards the calculation ofassets, the AIFM has to calculate total AUM bydetermining the value of all assets it manages,without deducting liabilities, and valuing allfinancial derivative instruments at the value of anequivalent position in the underlying assets (soas to reflect the AIF’’s exposure to those assets).This calculation must be made at least annually,using the calculation methodology set out in theLevel 2 Measures, and AIFMs are then requiredto monitor AUM on an on-going basis and actionmust be taken when thresholds laid down in theAIFMD are occasionally breached.Annual reporting disclosures under theprivate placement regimeAn annual report for each AIF marketed to EUinvestors must be made available to investorsby no later than six months following the endof the financial year and the report is requiredto contain, in addition to the balance sheet andprofit and loss, disclosures in relation to theremuneration and management fees paid bythe non-EU AIFM to its staff, including the totalamount of carried interest payments.E What action is needed now?If non-EU AIFMs wish to market, or continue tomarket, their AIFs to EU investors after 22 July2013, then it can be seen from the above thata certain amount of preparation and review isrequired. We would recommend that you readour Checklist for Non-EU Managers, which can befound under ‘Publications’ on our website.To summarise briefly, non-EU AIFMs need toliaise with counsel to:• discuss their specific structures and considerwhat actions need to be taken;• determine which EU Member States area marketing target and review relevantprivate placement regimes, noting stricterrequirements, if any, by a particular MemberState;• consider the benefits of authorisation anduse of the passport system from 2015onwards (subject to ESMA advice) as againstthe private placement regimes;• make a checklist of AIFMD disclosurerequirements and update offeringmemoranda and all marketingdocumentation if required;• prepare for calculation of leverage inaccordance and• review existing reporting systems andprocedures and determine whether theywill need updating for AIFMD purposes.Should you wish to discuss any of the pointsraised in the above or the AIFMD passportingregime in more detail, please contact Claire atClaire.Cummings@cummingslaw.com
42 Brook Street, London W1K 5DB +44 20 7585 1406 | Neuhofstrasse 3d, CH-6340 Baar +41 41 544 5549Regulated by the Solicitors Regulation AuthorityThis document is for general guidance only. It does not constitute adviceFebruary 2013