AIFMD:What it is andwhat to do.www.cummingslaw.com
www.cummingslaw.com1 What is the AIFMD?The AIFMD is an EU directive aimed atintroducing a harmonised regulatory frameworkacross the EU for EU-established managers(AIFMs) of alternative investment funds (AIFs).2 What is an AIFM?An AIFM is an entity which provides, at aminimum, portfolio management and riskmanagement services to one or more AIFs as itsregular business, irrespective of where the AIFsare located or what legal form the AIFM takes.3 What is an AIF?Any collective investment undertaking, includinginvestment compartments thereof, whichraises capital from a number of investors witha view to investing it in accordance with adefined investment policy for the benefit ofthose investors and which does not requireauthorisation pursuant to the UCITS Directive.This wide definition covers many types of fund(regardless of structure), including hedge funds,property funds, joint ventures, family officevehicles, closed-ended funds and unregulatedcollective investment schemes generally.However, a de minimus rule will apply to smallerfunds and managed accounts are not coveredby the Directive (assuming that they are notstructured as “collective investment schemes”).4 What main issues will the AIFMDcover?The main issues will include:Authorisation - AIFMs will be required to beauthorised and subject to supervision by theregulator in their home member state;Capital Requirements - capital requirements willbe imposed of at least EUR125,000 on AIFMs;Additional requirements to cover professionalnegligence risks will also be put in place;COBS etc - all AIFMs will be subject to appropriategovernance and conduct of business standards andwill be required to have robust systems in place tomanage risks, liquidity and conflicts of interest;Remuneration - AIFMs must have remunerationpolicies and practices in place;Valuation - procedures for independent valuationof AIF assets must be put in place;Delegation - restrictions will be put in place onthe delegation of AIFM functions;Key service providers - key service providers,including depositaries, must be subject to robustregulatory standards;Enhanced transparency - the supervisors,investors and other key stakeholders of AIFMsand the funds they manage must receiveenhanced transparency. The requirementswill apply to disclosure to investors prior toinvestment, reporting obligations to competentregulatory authorities, detailed disclosures inAIF annual reports and AIFM disclosures aboutinvestment in investee companies;Passports - a European passport will beintroduced under which AIFMs will be able tomanage and market EU AIFs to professionalinvestors throughout the EU, subject tocompliance with regulatory standards (whichmay, from 2015, be extended to non-EU AIFssubject to numerous conditions);The third country issue - conditions will beimposed on the management and marketing ofnon-EU AIFs by non-EU AIFMs; andSupervision - competent authorities (i.e.regulators) will be afforded wide powers ofinspection and intervention.AIFMD: What it is andwhat to do.www.cummingslaw.com
www.cummingslaw.com5 What needs to be done by when?At the end of this paper is a timeline.To summarise the issue of applications to theFSA and its successor authority, the FCA, firmswhich are already authorised and managing ormarketing AIFS before 22 July 2013 will have oneyear in which to become AIFMD compliant andsubmit an application for authorisation as anAIF manager (the FSA proposes a new regulatedactivity of managing an AIF, plus another newregulated activity of managing a UCITS).However, a firm which proposes to beginmanaging an AIF for the first time after 22 July2013 will not benefit from the transitionalperiod so will have to be fully compliant with theDirective before it begins to manage an AIF (orindeed market any AIF within the EU).Thus, a firm can be operational before 22 July2014, provided it is either:(i) fully compliant from day one (if notauthorised with the right permissions underthe law prior to 22 July 2013); or(ii) if authorised and with the right permissionsprior to that date, a firm becomes fullycompliant and submits an application forauthorisation as an AIF manager (in effect,an application to vary its permission (VoP)to include the new regulated activity of AIFmanagement) by 22 July 2014.6 What will the relevant controlledfunctions be and how will the FSAhandbook reflect the changes?The FSA, and its successor authority the FCA, willcreate new controlled functions of AIF manager,AIF depositary, UCITS manager and UCITSdepositary. Those managers wishing to becomeAIFs will need to apply to vary their permissionsaccordingly and new firms will need to make anew application. No forms are as yet available.It is important to remember that the scopes ofMiFID and AIFMD do not tally and that the scopeof MiFID services that AIFMs can undertake,by virtue of their authorisation as AIFMs, isnarrower.Transposition of the final rules implementing theAIFMD is intended to be located primarily in anew sourcebook, FUND, which will replace COLLand will have a wider scope to reflect the rangeof fund managers, depositaries and other firmsaffected by the AIFMD.7 Can firms become AIFMs or willa new entity need to be appointed tothis role?Either can be done and the choice will depend onspecific circumstances.Firms will need to take legal and regulatoryadvice on whether to apply to be an AIFM orwhether to set up a new entity to undertake thisrole and delegate down certain functions to aMiFID investment manager. However, there isa limit on what can be delegated as the AIFM isexpected to retain some functions, at the veryleast being that of risk manager. It is hoped thatthe Level 2 requirements will bring greater clarityon this point.8 Will compliance documentation,including ICAAP, need to beamended?Where a firm applies to become an AIFM, itwill need to update all compliance and financialdocumentation, including its ICAAP, compliancemanual and monitoring programme.9 What will the new regulatorycapital requirements be?The FSA has proposed three new prudentialcategories to describe the capital requirementsapplicable to AIFMs, as follows:• collective portfolio management firm (noMiFID services) (CPMs)• internally managed AIF• collective portfolio management investmentfirm (provides MiFID services) (CPMIs)
www.cummingslaw.comCPMs will have to meet an initial capitalrequirement of €125,000 and then maintainown funds on an ongoing basis of at least thehigher of:• €125,000 plus 0.02% of the portfolios ofUCITS and AIFs under management over€250 million; and• one quarter of the firm’s relevant fixedexpenditure.Internally managed AIFs will need to meet initialcapital requirements of at least €300,000 out oftheir own funds on an ongoing basis.CPMIs will need to hold the higher of AIFMD’sown funds requirements and the capitalrequirements currently set out for MiFID firms.10 How will the appointment of anAIFM be documented?The AIFM will need to be appointed underan agreement with the fund whose assets itmanages. Where an investment managementagreement is already in place it will need to beamended and where a new structure is to be used,new documents will need to be put in place.If there is to be an AIFM who delegates to aMiFID investment manager, both documentsneed to be prepared carefully to ensure theAIFMD’s delegation rules are met and that theAIFM retains sufficient activities. All parties willalso need to consider who should be able toenforce which contracts and where liability liesfor their respective acts or omissions.11 Will the offering memorandumneed to be amended?Each offering memorandum of an AIF will need tobe updated to describe and disclose fully the newarrangements. These will include not just whowill manage the AIF, but how brokerage, custodyand depositary functions will be exercised.The updated offering memorandum will needto be fully scrutinised and approved by the AIF’sdirectors and filed with the relevant authority.Where the AIF is listed, the listing particularswill need to be updated in accordancewith the relevant listing regime and correctannouncements made.12 Will there be any impact onprime brokerage appointments?Prime brokers must be situated in the EEA andwill need to negotiate with depositaries on thecontrol of the AIF’s assets. More detail will comewhen the Level 2 rules are published, but theagreement of prime brokers and depositaries onthe control of assets will be complex and costly.All AIFs will be required to appoint a depositary.The duties of a depositary are greater than thoseof a custodian or an administrator and extendto what may be interpreted as a strict liabilitytoward the AIF’s assets. Inevitably the newarrangements will lead to greater costs beingimposed on AIFs.Again, the Level 2 rules will provide greaterclarity, but the impact of the AIFMD on theholding and control of assets is arguably its areaof greatest impact while the details are stillunclear.13 Will there be any impact onadministrator appointments?The assets of an AIF must be independentlyvalued. This goes further than merely calculatingthe NAV. It is likely that the AIFMD will lead toadministrators having to provide more “value-added” services, such as valuation and riskmonitoring.14 What is the definition of“marketing”?This is the direct or indirect offering orplacement, at the initiative of the AIFM or onbehalf of the AIFM, of units or shares in an AIF itmanages to or with investors domiciled or with aregistered office in the EU.This means that AIFMD will not apply to: (i)marketing outside the EU (although an EU-basedmanager will need to be authorised to managethe AIF, even if the AIF is not marketed in the EU);
www.cummingslaw.com(ii) “reverse solicitation”, though this may be hardto prove; or (iii) funds marketed on the basis of acurrent Prospectus Directive prospectus as of 22July 2013.15 How do different combinationsof EU and non-EU AIFs and AIFMscomply with the marketing rules?An EU AIFM marketing an EU AIF will need totake the following steps:• notify competent authorities in own state;• notify any other states in which intends tomarket (local competent authorities thennotifies other member state authorities);• comply in full with the Directive and withother member states’ marketing laws; and• make use of passporting rights, whereapplicable, as of 22 July 2013.An EU AIFM marketing a non-EU AIF without a“passport” will need to comply with the following(and please note that the “private placement”routes permitting such marketing underindividual member states’ laws may be ‘switchedoff’ from 2018 if the “passport” is ‘switched on’for non-EU AIFs in 2015):• be AIFMD compliant;• the AIF must originate from a country whichhas a cooperation agreement in place withthe AIF’s supervisory authorities;• the AIF must originate from a country whichis not non-cooperative for FATF purposes;and• the AIF must originate from a country whichhas an OECD model tax information exchangeagreement in place with the AIF homecountry and each member state where theAIF is to be marketed.A non-EU AIFM marketing EU AIF with a“passport” will need to comply with thefollowing, with effect from 2015 (subject to ESMAadvice):• will need to have prior authorisation by anEU “regulator of reference” and be compliantwith the AIFMD;• will need legal representative in the memberstate of reference;• will need to comply with the EU supervisoryauthorities;• must originate from a country which is notnon-cooperative for FATF purposes;• must originate from a country which has atax information exchange agreement withthe member state of reference; and• must originate from a country which will notimpede the supervision of the AIFM.A non-EU AIFM marketing non-EU AIF withouta “passport” will need to comply with thefollowing:• may make use of the private placement ruleswhich apply (but which may be revokedcome 2018, subject to ESMA advice) inindividual member states;• comply with annual reporting, disclosureand reporting requirements and alsorequirements re acquiring control overunlisted companies, asset-stripping etc.(where relevant);• cooperation agreements must be in placebetween competent authorities of memberstates where the AIF is marketed and thesupervisory authorities of the AIFM and ofthe non-EU AIFs; and• both the AIFM and the AIF(s) must originatefrom a country which must not be non-cooperative for FATF purposes.
www.cummingslaw.comA non-EU AIFM marketing an EU AIF witha “passport” will need to comply with thefollowing, with effect from 2015 (subject toESMA advice):• agree a regulator of reference in the EU;• originate from a country which has acooperation agreement between themember state of reference and the AIFM’ssupervisory authorities;• originate from a country which is not non-cooperative for FATF purposes; and• originate from a country with an OECDmodel tax information exchange agreementin place with the member state of referenceand with each member state where the AIF isto be marketed.An EU AIFM marketing a non-EU AIF witha “passport” will need to comply with thefollowing, with effect from 2015 (subject to the“passport” for non-EU AIFs being ‘switched on’):• be AIFMD compliant;• cooperation agreement must be in placebetween AIFM’s member state and AIF’ssupervisory authorities;• the AIF must originate from a country whichis not non-cooperative for FATF purposes;and• the AIF must originate from a country withan OECD model tax information exchangeagreement in place with the member stateof reference and with each member statewhere the AIF is to be marketed.
www.cummingslaw.comDATE ORGANISATION ACTIONLate 2012 EU Level 2 rules to be published (much delayed)1 February 2013 FSA Closing date for CP1 (CP12/32).February 2013 FSA Second consultation paper (CP2) on the UK’simplementation of AIFMD expectedBy end of March 2013 HM Treasury Consultation on draft AIFMD Regulations 2013dueJune 2013 FCA Policy statement on the UK’s implementation ofAIFMD (covering CP1 and CP2) due22 July 2013 All member states AIFMD needs to be transposed into national lawand implemented by member states23 July 2013 FCA Date from which the FCA expects to be in aposition to receive applications for authorisationor a VoP from prospective AIFMs22 July 2014 FCA Date by which firms already managing ormarketing AIFs before 22 July 2013 will beexpected to apply for authorisation or a VoP22 July 2015 ESMA Opinion issued on whether to allow the EUpassport for third country AIFMs and AIFs22 October 2015 ESMA EU passport for third country AIFMs and AIFscomes into force, if so recommended by ESMA22 July 2017 EC Review of AIFMD begins. Suggests AIFMD II22 October 2018 ESMA Issue statement on whether to allow privateplacement regime to continue22 January 2019 EC Decision on whether to allow private placementregime to continue
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