EN




EN        EN
COMMISSION OF THE EUROPEAN COMMUNITIES




                                          Brussels,
                           ...
EXPLANATORY MEMORANDUM

     1.       CONTEXT OF THE PROPOSAL
     1.1.     Context, grounds for, and objectives of the pr...
Source of Risk

      Macro-prudential               • Direct exposure of systemically important banks (as the providers o...
obtain leverage has significantly reduced buy-out activity. A number of PE portfolio
       companies that have been subje...
establishing regulatory and supervisory standards for hedge funds, private equity and other
     systemically important ma...
constrain investment policies without delivering clear regulatory benefit) and be infeasible
     (since they could not co...
The proposed Directive recognises the possibility for AIFM to manage AIF domiciled in third
     countries, subject to the...
and two workshops in January and February 2008. These provided valuable input for an
     impact assessment on private pla...
than or additional to those laid down in the proposal. While providing rights for marketing to
     professional investors...
and supervisory regime for all AIFM managing AIF in the European Union. The regime will
     apply irrespective of the leg...
These general requirements are supplemented by specific provisions applying to AIFM
     implementing particular investmen...
procedure, under which relevant information is provided to the host Member State and
     transmitted to the host.
     Th...
Proposal for a

           DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

                              on Alter...
(4)    The scope of this Directive is confined to the management of collective investment
            vehicles which are a...
(11)   The Directive establishes common requirements for the authorisation and ongoing
            supervision of the AIFM...
(16)   Reliable and objective asset valuation is critical for the protection of investor interests.
            Different ...
Title I: General provisions
                                                 Article 1

                                  ...
(j)     'AIF host Member State' means the Member State, other than the country
                     where the AIF is estab...
Title II: Operating conditions for AIFM
                            SECTION 1: CAPITAL REQUIREMENTS

                     ...
Article 7

                                             Valuation
     1.   All assets of the AIF must be valued at least ...
(a)   the depositary is subject to prudential regulation and on-going supervision
                considered by the compet...
(c)   the AIFM must demonstrate that the third party is qualified and capable of
                   undertaking the functi...
These measures, designed to amend non-essential elements of this Directive by
          supplementing it, shall be adopted...
(b)   ensure that the risks associated to each investment position of the AIF and its
                  overall effect on ...
Title III: Transparency requirements
                                 SECTION   1: ANNUAL REPORT

                        ...
–    a description of the AIF's valuation procedure and, where applicable, of the
               pricing models for valuin...
–    the main categories of assets in which the AIF invested;
          –    and, where relevant, the use of short selling...
Title IV: Obligations regarding AIFM managing specific
                                 types of AIF
                  SEC...
securities for each of the AIF managed by the AIFM, and on the amounts of leverage
             received from each of thes...
This Article shall not apply when the non-listed company employs fewer than 250
                persons, has an annual tur...
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
Draft directive on alternative funds word.doc
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Draft directive on alternative funds word.doc

  1. 1. EN EN EN
  2. 2. COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, COM(2009)XXX final Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Alternative Investment Fund Managers (Text with EEA relevance) [SEC(2009) xxx] [SEC(2009) xxx] EN EN
  3. 3. EXPLANATORY MEMORANDUM 1. CONTEXT OF THE PROPOSAL 1.1. Context, grounds for, and objectives of the proposal The financial crisis has exposed a series of vulnerabilities in the global financial system. It has highlighted the powerful interdependencies that exist between financial market actors and has demonstrated how risks crystallising in one sector can be transmitted rapidly around the financial system, with serious repercussions for all financial market participants and for the stability of the underlying markets. In this context, serious questions have been raised about the adequacy of the regulatory and supervisory framework for all financial market actors in the European Union. The European Commission has responded to these concerns with an ambitious programme of regulatory reform, designed to ensure that financial markets are secure and reliable and that all participants in these markets operate responsibly.1 In full accordance with the conclusions of the G-20 summit in November 2008, these reforms will ensure that all relevant actors and all types of financial instrument are subject to appropriate regulation and oversight. This will entail filling gaps in areas where European or national regulation is currently insufficient or incomplete. One such gap relates to the oversight and supervision of the activities of the managers of alternative investment funds (AIFM). The need for closer regulatory engagement with this sector has been highlighted by the European Parliament - notably through the legislative recommendations contained in own-initiative reports on hedge funds and private equity and the transparency of institutional investors2 - and by the High-Level Group on Financial Supervision chaired by Jacques De Larosière, which recommended to 'extend appropriate regulation, in a proportionate manner, to all firms or entities conducting financial activities of a potentially systemic nature'.3 It is also the subject of ongoing discussion at international level, for example through the work of IOSCO and the Financial Stability Forum. Alternative investment funds (AIF) are defined here as all funds that are not regulated under the UCITS Directive.4 Collectively, funds managed by AIFM constitute a very large and heterogeneous sector. Around €2 trillion in assets are currently managed by AIFM employing a variety of investment techniques, investing in different asset markets and catering to different investor populations. The sector includes hedge funds and private equity, as well as real estate funds, commodity funds, infrastructure funds and other types of institutional fund (such as special funds or qualified investor funds). The financial crisis has underlined the extent to which AIFM are vulnerable to a wide range of risks. These risks are of direct concern to the investors in those funds, but also present a threat to creditors, trading counterparties and to the stability and integrity of European financial markets. These risks take a variety of forms: 1 Commission communication on financial market reform published on 4 March 2009. See http://europa.eu/rapid/pressReleasesAction.do? reference=IP/09/351&format=HTML&aged=0&language=EN&guiLanguage=en 2 of the European Parliament with recommendations to the Commission on hedge funds and private equity (A6-0338/2008) ['Rasmussen' report] and European Parliament report with recommendations to the Commission on transparency of institutional investors (A6-0296-2008) ['Lehne'report]. 3 Report of the High-Level Group on Financial Supervision in the EU, 25 February 2009, p. 25. See http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf 4 Council Directive 85/611/EEC as amended. A recast (so-called UCITS IV) has been adopted by the Europian Parliament in January 2009 and is expected to be adopted by the Council end of April/beginning of May 2009. EN 3 EN
  4. 4. Source of Risk Macro-prudential • Direct exposure of systemically important banks (as the providers of (systemic) risks, relating leverage) to the AIFM sector (the 'credit channel'); and in particular to the use of leverage • Pro-cyclical impact of herding behaviour, risk concentrations in particular market segments and ('forced') deleveraging on the liquidity and stability of financial markets (the 'market channel') Micro-prudential risks • Weakness in internal risk management systems with respect to market risk, counterparty risks, funding liquidity risks (asset-liability liquidity mismatch) and operational risks. Investor protection • Inadequate investor disclosures on investment policy, risk management, internal processes etc as a barrier to effective due diligence by investors. • Conflicts of interest and failures in fund governance, in particular with respect to remuneration, valuation and administration. Market efficiency and • Impact of dynamic trading and short selling techniques on market integrity functioning (both positive and negative impacts) • Potential for market abuse in connection with certain techniques, for example short-selling. Impact on market for • Lack of transparency when building stakes in listed companies (e.g. corporate control through use of stock borrowing, contracts for difference), or concerted action in 'activist' strategies Impact on social • Potential for misalignment of incentives in management of portfolio economy companies, in particular in relation to the use of debt financing. Some of these risks are most closely associated with specific AIFM business models, such as those of hedge funds and private equity. The activities and techniques that form the core of many AIFM investment strategies are widely available, and the associated risks have manifested themselves throughout the AIFM industry over recent months. For example: • Hedge funds have come to play a significant role in financial markets and may have contributed to asset price inflation and to the rapid growth of structured credit markets. The subsequent rapid unwinding of leveraged positions appears to have contributed to market volatility. The use of short-selling strategies has also proved controversial during the financial crisis, provoking curbs on this practice in many jurisdictions. • Funds of hedge funds have faced a serious mismatch between liquidity and redemption intervals: while many apply relatively short redemption periods, their investments in hedge funds could not be liquidated as quickly due to the much longer redemption periods and some hedge fund closures. This led some funds of hedge funds to suspend or otherwise limit redemptions. The sector has also suffered from high-profile failures in due diligence, for example in relation to the Madoff scheme in the US. • Private equity funds have experienced a different set of challenges, relating to the availability of credit and the financial health of their portfolio companies. The inability to EN 4 EN
  5. 5. obtain leverage has significantly reduced buy-out activity. A number of PE portfolio companies that have been subject to leveraged buy-outs are reported to be faced with difficulties in finding new loans to finance their activities.. This credit rationing could result in bankruptcies. • Commodity funds were implicated in the commodity price bubbles that developed in late 2007. To date, there has been no direct regulation of AIFM activity in Community law. The activities of AIFM are regulated by a combination of national financial and company law regulations and general provisions of Community law. They are supplemented in some areas by industry-developed standards. It has become apparent that nationally fragmented approaches do not constitute a robust and comprehensive response to risks in this sector. Some of the risks associated with AIFM have been underestimated and are not sufficiently addressed by current rules. Where the risks are addressed by national regulation, the perspective is purely national. Experience has shown that this regulatory structure does not adequately reflect that many of the risks are inherently cross-border in nature, due to the interconnectedness of financial markets and the international character of AIFM counterparties and investors. This is particularly striking in relation to the effective oversight and control of macro- prudential risks. The individual and collective activities of large AIFM, particularly those employing high levels of leverage, amplify market movements and have contributed to the ongoing instability of financial markets across the European Union. Macro-prudential oversight of AIFM has been largely indirect in nature, through the regulation of the providers of credit to the sector, the prime brokers, which are subject to Community banking law. The crisis has demonstrated clearly that while this indirect model of supervision is, and will remain, a vital component of the regulatory framework, it does not provide national authorities with a sufficiently comprehensive overview of the potential systemic impact of the AIFM sector. Nor does it provide for effective oversight of the systems, controls and techniques employed by AIFM. It is also the case at the micro-prudential level: the quality and transparency of internal governance arrangements and risk management systems also have important cross-border implications when investors, creditors and trading counterparties are domiciled in other Member States. Effective management of the cross-border dimension of these risks therefore demands a common understanding of the obligations of AIFM; a coordinated approach to the oversight of risk management processes, internal governance and transparency; and clear arrangements to support supervisors in managing these risks, both at domestic level and through effective supervisory cooperation and information sharing at European level. In addition to vulnerabilities in relation to the risks posed by AIFM, the current fragmentation of the regulatory environment also results in legal and regulatory obstacles to the efficient cross-border marketing of AIF. Provided that AIFM operate in accordance with strict common requirements, there is no obvious justification for restricting an AIFM domiciled in one Member State from marketing AIF to professional investors in another Member State market. It is in recognition of these weaknesses and inefficiencies in the existing regulatory framework that the European Commission committed in the Communication on Driving European Recovery to bringing forward a proposal for a comprehensive legislative instrument EN 5 EN
  6. 6. establishing regulatory and supervisory standards for hedge funds, private equity and other systemically important market players. Specifically, the proposed Directive will: • provide for a secure, harmonised and all-encompassing EU framework for monitoring and supervising the risks that the activities of AIFM pose to their investors, counterparties, other financial market participants and to financial stability; and • contribute to the removal of barriers to the efficient operation of the AIFM market by allowing AIFM to market funds that they manage subject to compliance with a high, common level of regulatory safeguards. While the enhancement of the regulatory and supervisory environment for AIFM at European level represents an important and necessary step, the process of placing global financial markets on a more secure footing will require complementary action at international level. The European Commission hopes that the principles embodied in this proposal will make an important contribution to the debate on the reinforcement of the architecture for global financial supervision, in the context of the G-20 discussions and elsewhere. 1.2. General approach The following section sets out the key principles underpinning the provisions of the proposed Directive. Specific provisions are described in greater detail in Section 2.5. The managers of all non-UCITS funds will require authorisation in accordance with the proposed Directive in order to manage and market AIF in the European Union While the principal political focus is currently on hedge funds and private equity, the European Commission believes that it would be ineffective and short-sighted to limit any legislative initiative to these two categories of AIFM: ineffective because any arbitrary definition of these funds might not adequately capture all the relevant actors and could be easily circumvented; and short-sighted because, as described above, many of the underlying risks are also present in other types of AIFM activity. The regulatory solution which is likely to prove the most enduring and productive is therefore to capture all AIFM whose activities give rise to those risks, albeit to a greater or lesser extent. These risks stem primarily from the conduct and organisation of the fund manager. Few material risks arise at the level of the AIF, which is typically merely a [shell] structure through which assets are gathered and held. The most effective way to tackle the risks is therefore to focus on the activities of the AIFM. Accordingly, in order to manage AIF in the European Union, all AIFM must be authorised and supervised in accordance with the requirements of the Directive. This broad coverage does not imply a 'one size fits all' approach A common set of basic provisions will govern the conditions for the initial authorisation and organisation of all AIFM. In addition to these common provisions, the proposal foresees a number of specific, tailored provisions which will only apply to AIFM that employ certain techniques or strategies when managing their AIF (for instance, systematic use of a high degree of leverage, short selling, acquisition of minority or majority stakes in companies) and will ensure an appropriate degree of transparency with respect to these techniques. The proposal does not impose restrictions on AIF investment policies The proposed Directive does not contain detailed rules relating to the organisation or structure of the AIF portfolio. This would be disproportionate (given that the marketing of AIF is to be restricted to professional investors), counter-productive (as such rules could excessively EN 6 EN
  7. 7. constrain investment policies without delivering clear regulatory benefit) and be infeasible (since they could not cover the large range of investment strategies available). Nevertheless, in the interests of transparency, the proposal envisages that the AIFM shall notify its competent authority of all AIF that it manages, and will be required to manage those AIF in accordance with the requirements of the Directive. De minimis exemption for managers of small asset portfolios AIFM managing AIF portfolios with total assets of less than XXX will be exempt from the provisions of the proposed Directive. The management of these funds is unlikely to pose significant risks to financial stability and market efficiency and hence the authorisation and reporting requirements would be disproportionate. These AIFM would have no rights under the Directive.5 The result of this exemption is that supervisory attention will be focused on the areas where risks are concentrated. A threshold of 250mio€ implies that roughly 15% of hedge fund managers, managing 76% of assets of EU domiciled hedge funds, would be covered by the Directive. It would capture 36% of managers of other non-UCITS (such as open-ended Dutch funds, open-ended real estate funds, institutional funds) and 96% of the assets invested in these funds. A 250mio€ threshold also ensures that most managers in niche businesses (such as start-up and venture capital) for whom the new requirements could be overly burdensome would not be caught by the Directive. AIFM will be entitled to market AIF to professional investors only Authorisation as an AIFM will entitle the manager to manage, administer and market the AIF to professional investors only, as defined by MiFID.6 Many AIF entail a relatively high level of risk (of loss of much or all of the capital invested) and/or have other features which render them unsuitable for retail investors. In particular, they may lock investors in to their investment for longer than is acceptable for retail funds. Investment strategies are typically complex and often involve investment in illiquid and harder-to-value investments. The marketing of these AIF will therefore be limited to those investors that are equipped to understand and to bear the risks associated with this type of investment. The limitation to professional investors is consistent with the current situation in many Member States. However, some of the categories of AIF covered by the proposed Directive are accessible to retail investors in some Member States, subject to strict regulatory controls. For instance, open-ended real estate funds are available to retail investors in 12 Member States; and funds of hedge funds in several Member States. The level of harmonisation achieved by the proposed Directive is not, however, sufficient to create the conditions for the pan-European distribution of these funds to retail investors. In order to recognise the existence of different approaches to the retail marketing of some AIFM managed funds, and in keeping with the principle of subsidiarity, each Member State will remain free to determine whether funds managed by some or all AIFM can be distributed to retail investors in their Member State and to impose any additional requirements to this end that they see fit. AIFM will be permitted to manage AIF domiciled in third countries 5 An AIFM could be permitted to 'opt-in' to the provisions of the Directive were it to see benefit in operating under this regime. 6 This definition is not ideal for private equity investors: the regular transaction test excludes many sophisticated but irregular private investors: conversely the definition includes many SMEs. EN 7 EN
  8. 8. The proposed Directive recognises the possibility for AIFM to manage AIF domiciled in third countries, subject to the following conditions: • that the valuation be conducted by an EU domiciled valuator; • that the safekeeping of assets by depositaries domiciled in a third country is only permitted for offshore AIF subject to particular attention by the home authority of the AIFM. The AIFM home authority should only authorise the AIFM once it has satisfied itself that the custody arrangements provide adequate assurances as to the security of the AIF' assets and that the depositary is subject to prudential regulation, ongoing supervision and anti-money laundering rules equivalent to EU law. • that the third country domicile be a signatory to necessary information-sharing agreements with competent authorities in the European Union to ensure efficient supervision. Authorised AIFM will be permitted to market AIF throughout the EU Subject to authorisation in accordance with the Directive, the AIFM would enjoy certain rights within the European Union, notably: • The right to market AIF to professional investors on markets in other Member States on the basis of an authorisation obtained from the competent authorities of the home Member State. Cross-border marketing would be subject only to the filing of appropriate information with the host competent authority. • The right to manage AIF in other Member States – analogous to the management company passport in UCITS. This right explicitly recognises the well-established business model in some Member States whereby AIFM manage funds located in third countries. 1.3. Preparation of the proposal: consultation and impact assessment The European Commission has consulted extensively on the adequacy of regulatory arrangements for non-UCITS fund managers and for the marketing of non-UCITS fund products in the European Union. Drawing on the reports of two industry expert groups on hedge funds and private equity respectively and the subsequent public consultation, the White Paper on Asset Management in November 2006 committed to a review of the need to develop single market solutions for non-harmonised investment funds.7 Subsequent work in the area of retail-oriented funds has included study of the investment strategies, techniques and features of harmonised funds and retail-oriented non-harmonised funds; and on the marketing of non-harmonised funds to retail investors.8,9 An Expert Group was established on open ended real estate funds in June 2007; the Group published a report in March 2008 which was then put out for public consultation and was discussed at an Open Hearing on retail-oriented non-harmonised funds in April 2008.10,11 In relation to funds targeted at institutional investors, the need for and design of a 'private placement' regime at European level was explored through a call for evidence in spring 2007 7 For details on the expert groups, their reports, a summary of the feedback in the public consultation as well as the individual contributions can be found on the Commission website: http://ec.europa.eu/internal_market/investment/ alternative_investments_en.htm#alternative. 8 "Study on "investment funds in the European Union: comparative analysis of use of investment powers, investment outcomes and related risk features in both UCITS and non-harmonised markets", http://ec.europa.eu/internal_market/investment/other_docs/index_en.htm#studies 9 http://ec.europa.eu/internal_market/investment/studies_en.htm 10 http://ec.europa.eu/internal_market/investment/real_estate_funds_en.htm 11 http://ec.europa.eu/internal_market/investment/consultations/index_en.htm#hearing0804 EN 8 EN
  9. 9. and two workshops in January and February 2008. These provided valuable input for an impact assessment on private placement, published in July 2008.12 A public consultation on the adequacy of existing regulatory and supervisory arrangements for hedge funds was held between December 2008 and January 2009.13 Over 100 responses were received from hedge funds, industry associations, prime brokers, investor associations, trade unions, public authorities at national and European level and individuals. These contributions, together with a summary of the responses, are available on the European Commission website.14 This consultation was followed by a high-level conference on hedge funds and private equity, held in Brussels on 26-27 February 2009. The conference brought together representatives of the hedge fund and private equity industries, investors, members of the regulatory community and other experts to discuss emerging policy issues in these sectors. The conference focused in particular on financial stability, transparency and investor protection. A summary record of this event and the presentations delivered are available on the European Commission website.15 Drawing on the input from this consultation and in accordance with the principles of Better Regulation, the European Commission has conducted a [proportionate] assessment of the impact of alternative approaches to achieving the stated policy objectives. X options were considered: • […] It was concluded that legislative action at the European level offered the most effective and coherent response to the identified risks. 2. LEGAL ELEMENTS OF THE PROPOSAL 2.1. Legal basis The proposal is based on Articles 47(2) and 95 of the EC Treaty 2.2. Subsidiarity and proportionality The Commission proposal for a Directive on AIFM is in line with the principle of subsidiarity as laid down in Article 5(2) of the EC Treaty, which requires the Community to act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community. The activities of AIFM affect investors, counterparties and financial markets located in other Member States and hence the risks associated with the activities of AIFM are inherently cross-border in nature. The effective monitoring of macro-prudential risks and oversight of AIFM activity thus requires a common level of transparency and regulatory safeguards across the EU. The Directive also provides a harmonised framework for the safe and efficient cross- border marketing of AIF, which could not be established as effectively through the uncoordinated action of Member States. The principle of subsidiarity has also been taken into account when granting Member States the right to apply to AIFM domiciled within their territory requirements which are stricter 12 The executive summary of this impact assessment is attached as annex XXX. 13 http://ec.europa.eu/internal_market/consultations/2008/hedge_funds_en.htm 14 [To be added] 15 [To be added] EN 9 EN
  10. 10. than or additional to those laid down in the proposal. While providing rights for marketing to professional investors only, the Directive also recognises the right of Member States to establish or maintain regulatory regimes to make AIF available to retail investors within their jurisdiction. The proposed Directive is also proportionate, as required by Article 5(3) of the EC Treaty. Many of the provisions of the Directive relate to particular activities; if an AIFM does not engage in these activities, the provisions shall not apply. Moreover, the Directive is to incorporate a de minimis exemption: authorisation requirements are to be waived for AIFM managing AIF below a threshold of 250mio€, since these are unlikely to give rise to important systemic risks or to be a threat to orderly markets. 2.3. Choice of instrument The choice of a Directive as the legal instrument represents a sensible trade-off between harmonisation and flexibility. The proposed Directive provides a sufficient degree of harmonisation to provide a consistent and secure pan-European framework for the authorisation of AIFM and their ongoing supervision. The choice of a Directive allows Member States a degree of flexibility in deciding how to adapt their national legal orders to the new framework. This is consistent with the principle of subsidiarity. 2.4. Comitology The proposal is based on the Lamfalussy process for regulating financial services. The body of the proposed Directive contains the principles necessary to ensure that AIFM are subject to consistently high standards of transparency and regulatory oversight in the European Union. 2.5. Content of the proposal The proposed Directive is organised according to the following structure: General provisions, scope, definitions and exemptions Articles 1 – 3 Operating conditions for AIFM Articles 5 – 13 Transparency requirements Articles 14 – 16 Obligations for AIFM managing specific types of AIF Articles 17 – 24 Conditions and procedures for authorisation of AIFM Articles 25 – 29 Rights to provide AIF management services in the AIFM home Articles 30 – 31 Member State Rights to provide AIF management services in an AIFM host Member Articles 32 – 33 State Competent authorities Articles 34 – 41 Final provisions Articles 42 – 46 The principal elements of the proposed Directive are now described. 2.5.1. Scope and definitions (Articles 1 and 2) In order to ensure that all AIFM operating in the European Union are subject to effective supervision and oversight, the proposed Directive introduces a legally binding authorisation EN 10 EN
  11. 11. and supervisory regime for all AIFM managing AIF in the European Union. The regime will apply irrespective of the legal domicile of the AIF managed. For reasons of proportionality, the Directive will not apply to AIFM managing portfolios of AIF with less than 250 million€ of assets. A manager authorised in accordance with the UCITS Directive requires an additional authorisation to operate under the AIFM regime. 2.5.2. Operating conditions and initial authorisation (Articles 5-29) To operate in the European Union, all AIFM will be required to obtain authorisation from the competent authority of their home Member State. All AIFM operating on European soil will be required to demonstrate that they are suitably qualified to provide AIF management services and will be required to provide detailed information on the planned activity of the AIFM, the identity and characteristics of the AIF managed, the governance of the AIFM (including arrangements for the delegation of management services), arrangements for the valuation and safe-keeping of assets, audit arrangements, and the systems of regulatory reporting, where required. The AIFM will also be required to hold and retain a minimum level of capital. To ensure that the risks associated with AIFM activity are effectively managed on an ongoing basis, the AIFM will be required to satisfy the competent authority of the robustness of internal arrangements with respect to risk management, in particular liquidity risks and additional operational and counterparty risks associated with short selling; the management and disclosure of conflicts of interest; the fair valuation of assets; and the security of depository/custodial arrangements. When managed AIF are domiciled in a third country and the assets of those AIF are also deposited in a third country, competent authorities will be required to pay particular attention to the robustness of these depository arrangements. Given the diversity of AIFM investment strategies, the proposed Directive foresees that the precise requirements, in particular with regard to disclosure requirements, will be tailored to the particular investment strategy employed. 2.5.3. Treatment of investors (Article 10, 11, 14 and 15) While the marketing of AIF will be limited to professional investors, the proposed Directive provides for a minimum level of service and information provision to such investors, on an initial and ongoing basis, to facilitate their due diligence and ensure a minimum level of investor protection. The proposed Directive requires AIFM to provide to their investors a clear description of the investment policy, including descriptions of the type of assets and the use of leverage; redemption policy in normal and exceptional circumstances; valuation, custody, administration and risk management procedures; and fees, charges and expenses associated with the investment. AIFM will be required to treat their investors fairly and, if investors are not treated equally, to disclose any such preferential treatment clearly to all investors. 2.5.4. Disclosure to regulators (Article 16) To support the effective macro-prudential oversight of AIFM activities, AIFM will also be required to report to the competent authority on a regular basis on the principal markets and instruments in which it trades, its principal exposures, performance data and concentrations of risk. The AIFM will also be required to notify the competent authorities of the home Member State of the identity of the AIF managed, the markets and assets in which the AIF will invest and the organisational and risk management arrangements established in relation to that AIF. EN 11 EN
  12. 12. These general requirements are supplemented by specific provisions applying to AIFM implementing particular investment strategies or trading techniques. 2.5.4.1. Specific requirements for AIFM managing leveraged AIF (Articles17- 20) The use of a systematically high level of leverage implies that the impact of that activity on the financial system is likely to be amplified. An AIFM employing leverage on a systematic basis above a defined threshold will be required to disclose aggregate leverage, the form of leverage (cash borrowing, securities borrowing, leverage embedded in derivatives), and the main sources of leverage (lending institutions such as prime brokers, banks etc) to the home authority of the AIFM. The draft proposal does not impose obligations upon competent authorities as regards the use of this information. It however recognises emergency powers for authorities to restrict the use of leverage in respect of individual managers and funds, if the stability and integrity of financial markets so requires. It requires competent authorities for such leveraged funds to aggregate and share, with other competent authorities, information that is relevant for monitoring and responding to the potential consequences of AIFM activity for systemically relevant financial institutions across the EU and/or for the orderly functioning of the markets on which IAFM are active. The proposed Directive requires that this information be transmitted on quarterly basis to the Economic and Financial Committee (or to the yet to be created European Systemic Risk Council) and without delay in the event of threat of imminent instability or counterparty failure. 2.5.4.2. Specific requirements for AIFM acquiring controlling stakes in companies (Articles 21 – 24) The proposal provides for disclosures of information to other shareholders and interested parties at the time that the AIFM acquires a controlling interest. It also foresees provision whereby the AIFM issues annual disclosure on the investment strategy and objectives of its fund when acquiring control of companies, and some general disclosures about the performance of the portfolio company following acquisition of control. These reporting obligations are introduced in view of the need for private equity and buy-out funds to account publicly for the manner in which they manage companies of wider public interest, control of which they have acquired. The information requirements address the perceived deficit of strategic information about how private equity managers intend to, or have managed portfolio companies which they own. Demands for this type of disclosure are made in respect of larger buy-out investments and public to private transactions – to inform interested constituencies about the strategy in accordance with which the company will be run and (ex post) information on performance. For reasons of proportionality the draft proposal does not extend these requirements to acquisitions of control in SMEs – and thereby seeks to avoid imposing these obligations on start-up or venture capital providers (to the extent that they are not already exempted from the scope of the entire Directive). In reaction to concerns raised with regard to the delisting of public companies owned by private equity funds and the subsequent reduction of transparency the draft proposal requires that such delisted companies temporarily continue to be subject to reporting obligations for listed companies. 2.5.5. Rights of AIFM under the Directive (Articles 29 - 33) In order to facilitate the development of the single market, an AIFM authorised in its home Member State will be entitled to market its funds to professional investors on the territory of any Member State. As a corollary of the high common regulatory standard achieved by the proposed Directive, Member States will not be permitted to impose additional requirements on AIFM domiciled in another Member State insofar as marketing to professional investors is concerned. The cross-border marketing of AIF shall be subject only to a notification EN 12 EN
  13. 13. procedure, under which relevant information is provided to the host Member State and transmitted to the host. The proposed Directive does not provide rights in relation to marketing AIF to retail investors. Member States may allow for marketing to retail investors within their territory and may apply additional regulatory safeguards for this purpose. Such requirements shall not discriminate according to the domicile of the AIFM. AIFM shall also be entitled to freely provide management services in Member States other than their Member State of domicile, subject to a notification procedure. 2.5.6. Supervisory cooperation and information sharing (Articles 39 - 41) In order to ensure the secure functioning of the AIFM sector, competent authorities of the Member States will be required to cooperate whenever necessary so as to achieve the aims of the Directive. Given the cross-border nature of risks arising in the AIFM sector, a prerequisite for effective macro-prudential oversight will be the timely sharing of relevant macro-prudential data at the European, or even global, level. The competent authorities of the home Member State will thus be required to transmit relevant macro-prudential data, in a suitably aggregated format, to public authorities in other Member States. 2.6. Budgetary Implications The proposal has no implications for the Community budget. EN 13 EN
  14. 14. Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Alternative Investment Fund Managers THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty establishing the European Community, and in particular Articles 47(2) and 95 […] thereof, Having regard to the proposal from the Commission16, Having regard to the opinion of the European Economic and Social Committee17, Having regard to the opinion of the Committee of the Regions18, Acting in accordance with the procedure laid down in Article 251 of the Treaty19, Whereas: (1) Managers of alternative investment funds (AIFM) are responsible for management of a significant amount of invested assets in Europe, account for significant amounts of trading in markets for financial instruments, and can exercise an important influence on markets and companies in which they invest; (2) The impact of AIFM on the markets in which they operate is largely beneficial, and AIFM represent an important and welcome source of investment capital, the activities of AIFM may also give rise to risks for their investors, and to financial stability, market efficiency and integrity. Recent financial difficulties have underlined how activities of AIFM may also serve to spread or amplify risks through the financial system in unexpected ways. Some of these risks may be cross-border or systemic in nature, uncoordinated national interventions to these risks have not created a framework which is conducive to the efficient management of or response to these risks. This Directive establishes common requirements governing the authorisation and supervision of AIFM in order to provide a coherent approach to supervising the related risks and their impact on European investors and markets. (3) AIFM implement a diverse range of investment strategies and techniques, resulting in different forms and intensities of risk for investors, other market participants and markets. Recent difficulties in financial markets have underlined that many AIFM strategies are vulnerable to some or several important risks. In order to provide comprehensive arrangements for supervising these risks, it is necessary to establish a framework capable of addressing these risks in whatever AIFM strategy they materialise. Consequently, this Directive encompasses managers of all funds which are not covered by Directive 85/611/EEC. AIFM cannot manage UCITS funds on the basis of authorisation under this Directive. 16 OJ C […], […], p. […]. 17 OJ C […], […], p. […]. 18 OJ C […], […], p. […]. 19 OJ C […], […], p. […]. EN 14 EN
  15. 15. (4) The scope of this Directive is confined to the management of collective investment vehicles which are asset pooling vehicles created with the sole purpose of raising capital from a number of investors with a view to investing the proceeds in accordance with a defined investment policy. This Directive does not extend to persons managing or administering non-pooled investment vehicles such as endowments or sovereign wealth funds (or to actively managed investments in the form of securities – certificates, managed futures, index-linked bonds)). It shall include managers of all such collective investment vehicles which are not authorised as UCITS funds – irrespective of the legal or contractual manner in which the manager is entrusted with responsibility. (5) This harmonisation shall establish high requirements for AIFM, it does not prevent Member States from adopting additional requirements in respect of AIFM established on their territory. Any additional requirements on locally domiciled AIFM cannot be invoked to prevent the exercise of rights conferred by this Directive on AIFM authorised in another Member State in accordance with this Directive. (6) It is desirable to avoid imposing excessive or disproportionate requirements through this Directive and preventing small fund managers from entering the market. To this end, the Directive provides for an exemption for managers where the cumulative funds under management fall below a certain threshold and the activities of the AIFM concerned are unlikely to have significant consequences for financial stability or market efficiency. (7) Authorisation in accordance with this Directive covers the services of management and administration of alternative investment funds. The AIFM may delegate responsibility for functions in accordance with the relevant provisions of the Directive. The AIFM shall remain responsible for the proper performance of its function and compliance with the rules set out in this Directive – except where the Directive expressly provides that certain functions or processes shall be undertaken by an independent entity. (8) Many AIFM currently manage funds which are domiciled in third countries. It is considered appropriate to permit AIFM authorised under this Directive to continue to manage funds in third countries, subject to appropriate arrangements needed to ensure the sound administration of those funds and the effective safe-keeping of assets invested by EU investors. This Directive introduces provisions which clarify the conditions that competent authorities should impose before authorising an AIFM to place those funds on its home market or that of any other Member State. (9) The level of harmonisation and standards of supervision imposed by this Directive are sufficiently high to permit the cross-border provision of services by AIFM and the cross-border marketing of funds managed by AIFM, subject to some conditions inherent to the investment strategies proposed by AIFM. (10) Authorisation under this Directive also covers the right for the AIFM to market its funds to or place its funds with professional investors throughout the single market. In order to permit effective supervisory cooperation and permit host authorities to verify respect for distribution and marketing arrangements as well as enforce other public order considerations, the marketing of funds managed by an AIFM in other Member States shall be the object of a communication from the competent authority of the AIFM to the authorities where the funds will be distributed. EN 15 EN
  16. 16. (11) The Directive establishes common requirements for the authorisation and ongoing supervision of the AIFM, and lays down requirements regarding the way in which it shall manage funds under its responsibility. The Directive imposes particular requirements on AIFM employing certain techniques giving rise to particular risks. It would be disproportionate and counterproductive to regulate the structure or composition of the portfolios of the funds managed by AIFM and such prescriptive harmonisation could not be undertaken for the very diverse range of fund-types managed by AIFM. (12) AIFM employing high levels of leverage in their investment strategies are, under certain conditions, considered as capable of contributing to the build up of systemic risk or disorderly markets. The information needed to detect, monitor and respond to such developments has not been collected in a consistent way throughout Europe, and not shared across Member States so as to identify potential sources of risk to the stability of European financial markets. To this end, the Directive lays down particular requirements for AIFM, above a certain size, which consistently use high levels of leverage in their investment strategies to disclose information regarding their use and sources of leverage. The Directive, moreover, foresees that this information shall be aggregated and shared with other EU authorities so as to facilitate a collective analysis of and response to the impact of AIFM leverage and trading on the European financial system. (13) Funds managed by AIFM encompass a wide range of investment strategies and techniques giving rise to different risk profiles, from the investor perspective these funds are often illiquid and subject to higher risk of substantial capital loss. This Directive stipulates that these investment strategies are not adapted to the investment profile or needs of retail investors and are more suitable for professional investors, and investors having a sufficiently large investment portfolio so as to be able to absorb the higher risks of loss associated with these investments. Member States retain the right under this Directive to authorise the marketing of AIF managed by AIFM to retail investors in their own Member State, subject to any additional safeguards that the Member State considers necessary to protect its retail investors. Where a Member State allows the marketing of AIFM managed funds to its retail investors, the same possibilities are also open to AIFM in other Member States subject to the same, non- discriminatory requirements. (14) It is necessary to provide for the application of minimum capital requirements to ensure the continuity and the regularity of the management services by the AIFM. These requirements are similar to those applicable to the collective portfolio investment managers authorised under Directive n° 85-611. However, on going capital requirements have been amended to cover the potential exposure of AIFM to professional liability in respect of all its activities – including management services provided under delegation or on the basis of a mandate. (15) It is necessary to ensure that AIFM operate subject to robust governance controls and that the AIFM is organised to ensure that it is soundly managed and organised so as to minimise conflicts of interest. Recent developments, underline the crucial need to separate asset safe-keeping and management functions, and segregate investor assets from those of the manager. To this end, this Directive establishes requirements governing the custody of investor subscriptions, cash and financial instruments and the safe-keeping of other non-financial assets by the AIFM. These arrangements will be adapted taking account of the nature of the assets acquired by AIFM on behalf of the AIF. EN 16 EN
  17. 17. (16) Reliable and objective asset valuation is critical for the protection of investor interests. Different AIFM, depending on the assets and markets in which they predominantly invest, employ different methodologies and systems for valuing assets. It is necessary to recognise these differences but to, nevertheless, require the valuation of assets be undertaken (under the responsibility of) by an entity which is (functionally/legally) independent of the AIFM. (17) It is necessary to ensure that AIFM provides all companies over which it can exercise a controlling or dominant influence, with the information necessary for the company to assess how this event in the short to medium term impacts the company's economic and social situation. It is also necessary to enhance the understanding and available information about the progress of the controlled companies. To this end, the Directive foresees particular requirements for AIFM managing AIF which are in a position to exercise controlling or dominant influence over a listed or non-listed company, to notify the existence of this position and to disclose information to the company and all its other shareholders about the AIFM intentions with regard to the future business development and other planned changes of the controlled entity. In order to ensure transparency over the progress of the controlled entity, the Directive provides for enhanced reporting requirements for AIFM to supplement annual reports of theirs AIF with information that is specific to the type of investment and the controlled entity. (18) It is necessary to clarify the powers and duties of competent authorities responsible for implementing this Directive, and to strengthen the mechanisms needed to ensure the necessary level of cross-border supervisory cooperation. (19) Member States should lay down rules on sanctions applicable to infringements of the provisions of this Regulation and ensure that they are implemented. The sanctions should be effective, proportionate and dissuasive. (20) Any exchange or transmission of information between competent authorities, other authorities, bodies or persons should be in accordance with the rules on transfer of personal data as laid down in Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data. (21) The measures necessary for the implementation of this Regulation should be adopted in accordance with Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission. (22) Since the objectives of the action to be taken, namely to ensure a high level of consumer and investor protection by laying down a common framework for the authorisation and supervision of AIFM cannot be sufficiently achieved by the Member States, as evidenced by the deficiencies of existing nationally based regulation and oversight of these actors, and can therefore, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives. HAVE ADOPTED THIS DIRECTIVE: EN 17 EN
  18. 18. Title I: General provisions Article 1 General provisions and scope 1. This Directive shall apply to all managers of alternative investment funds (AIFM) which are providing management services to one or more alternative investment funds (AIF), provided that the AIFM is established in a Member State. It shall apply irrespective of: – whether the AIF is established or domiciled inside or outside of the European Union; – whether the AIF belongs to the open-ended or closed-ended type; and – the legal structure of the AIF and of the AIFM. 2. For the purpose of this Directive, an AIFM is deemed to be established in the Member State where it has its registered office. The AIFM must have its head office in the same Member State as its registered office. Article 2 Definitions For the purpose of this Directive, the following definitions shall apply: (a) 'Alternative investment fund' (AIF) means any collective investment undertaking of whatever legal form which is not authorised pursuant to Article 5 of Directive 2009/XX/EC [the UCITS Directive]. AIF shall include investment compartments thereof. (b) 'Alternative investment fund manager' means any legal/natural person or company, whose regular business is to manage one or several AIF; (c) 'Valuator' means any legal/natural person or company valuing the assets and establishing the value of the shares or units of an AIF; (d) 'AIF management services' means the activities of managing, administering and marketing one or more AIF on behalf of one or more investors; (e) 'Professional investor' means any investor meeting the criteria foreseen in the Annex; (f) 'Retail investor' means any investor who is not a professional investor; (g) 'AIFM home Member State' means the Member State in which the manager has been authorised to manage an AIF; (h) 'AIFM host Member State means the Member State, other than the home Member State, within the territory of which a manager provides AIF management services; (i) 'AIF home Member State' means the Member State in which the AIF is established, provided that the AIF is not established in a third country; EN 18 EN
  19. 19. (j) 'AIF host Member State' means the Member State, other than the country where the AIF is established, in which the units or shares of the AIF are marketed; (k) 'Competent authorities' mean the authorities which each Member State designates under paragraph 1 of Article 34; (l) 'Financial instruments' means an instrument as specified in Annex I Section C of Directive 2004/39/EC; (m) 'Market operator' means a person or persons who manage(s) and/or operate(s) the business of a regulated market, as defined in Article 4(1)(13) of Directive 2004/39/EC as amended by …; (n) 'Leverage' means any method by which the AIFM increases the exposure of an AIF it manages to a particular investment whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means; and (o) 'Marketing' means any general offering or placement of units or shares in an AIF to or with investors domiciled or established anywhere in the European Union, regardless of at whose initiative the offer or placement takes place. Article 3 Exemptions 1. This Directive shall not apply to AIFM managing – portfolios of AIF whose assets under management (including any assets acquired through use of leverage) in total do not exceed a threshold of 250 million Euro; and; – to UCITS or their management or investment companies authorised in accordance with Directive 2009/XX/EC [the UCITS Directive]. An AIFM may hold an authorisation pursuant to this directive and be authorised as a management or investment company pursuant to the UCITS Directive. 2. The Commission may adopt implementing measures with a view to modifying the threshold referred to in the first paragraph, and to defining the conditions and procedures under which AIFM managing portfolios of AIF whose assets under management do not exceed this threshold may opt to be covered by this Directive. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). Article 4 Member States shall ensure that AIFM may provide their AIF management services within the Community only if they comply with the provisions of this Directive on an ongoing basis. Entities which are not authorised in accordance with the provisions of this Directive shall not be allowed to provide AIF management services in respect of AIF within the European Union. EN 19 EN
  20. 20. Title II: Operating conditions for AIFM SECTION 1: CAPITAL REQUIREMENTS Article 5 Initial and ongoing capital 1. AIFM shall have an initial and ongoing capital of at least EUR125 000, taking into account the following : (i) when the value of the portfolios of AIF managed by the AIFM exceeds EUR 250 000 000, the AIFM shall be required to provide an additional amount of own funds; this additional amount of own funds shall be equal to 0,02 % of the amount by which the value of the portfolios of the manager exceeds EUR 250 000 000; (ii) for the purpose of this paragraph the following portfolios shall be deemed to be the portfolios of the AIFM: – any AIF portfolios managed by the AIFM, including AIF for which the AIFM delegated one or more functions to another entity in accordance with Article 22; – anyAIF portfolios that the AIFM is managing under delegation; (iii) irrespective of the amount of these requirements, the own funds of the AIFM shall never be less than the amount prescribed in Article 21 of Directive 2006/49/EC as amended by …; 2. Member States may authorise AIFM not to provide up to 50 % of the additional amount of own funds referred to in point (i) if they benefit from a guarantee of the same amount given by a credit institution or an insurance undertaking; the credit institution or insurance undertaking shall have its registered office in a Member State, or in a third country provided that it is subject to ongoing supervision considered by the competent authorities as equivalent to those laid down in Community law. SECTION 2: ORGANISATIONAL REQUIREMENTS Article 6 General principles AIFM must use adequate and appropriate resources at all times, including material, financial, technical and human resources, that are necessary for the proper performance of their management activities. They must be organised and have updated systems, documented internal procedures and regular internal controls of their conduct of business, in order to mitigate and manage the risks associated with their activity. EN 20 EN
  21. 21. Article 7 Valuation 1. All assets of the AIF must be valued at least once a year, and each time shares or units of the AIF are issued or redeemed if this is more frequent. The rules for the valuation of assets and the rules for calculating the net asset value per unit or share of the AIF must be laid down in the law the of country where it is established or domiciled in the AIF rules or instruments of incorporation. 2. AIFM shall ensure that the assets of the AIF are valued by a valuator which is legally or functionally independent of the AIFM. 3. The valuator appointed to value the assets of the AIF shall have its registered office in a Member State. AIFM shall ensure that the valuator has appropriate, updated, and consistent procedures to value the assets of the AIF in accordance with existing applicable accounting standards and rules, in order to reflect the true and fair value of the shares or units of the AIF. 4. The Commission may adopt implementing measures further specifying the requirements for valuing the assets of AIF under the management of the AIFM and the requirements regarding the independence of the valuation process. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). Article 8 Depositary 1. Member States shall ensure that a depositary is appointed to: (a) safeguard all subscriptions made by investors of the AIF in a segregated account in the event that the AIFM receives money from investors; (b) to safe-keep any financial instruments which belong to the AIF; and (c) to secure the ownership of all other assets the AIF invests in. 2. No single company shall act both as AIFM and depositary. The depositary must act independently and solely in the interest of AIF investors. 3. The depositary shall be subject to prudential regulation and on-going supervision. It shall furnish sufficient financial and professional guarantees as are needed to be able effectively to pursue its business and meet the commitments inherent to that function. 4. If the AIF is domiciled in a Member State, the depositary must be a credit institution having its registered office in a Member State and be authorised in accordance with Directive 2000/12/EC, as amended by ... If the AIF is domiciled outside the European Union, the depositary can either be a credit institution complying with the conditions laid down in the first subparagraph or a credit institution having its registered office in a third country provided that: EN 21 EN
  22. 22. (a) the depositary is subject to prudential regulation and on-going supervision considered by the competent authorities of the AIFM home Member State as equivalent to those laid down in Community law; (b) co-operation between authorities is sufficiently ensured; (c) the standards to prevent money laundering and terrorist financing are considered by the competent authorities of the AIFM home Member State as equivalent to those laid down in Community law; and (d) the competent authorities of the AIFM home Member State consider that the liability of the depositary towards the AIFM and investors as equivalent to those under the law of the AIFM home Member State. 5. The depositary shall be liable to the AIFM and the investors of the AIF for any losses suffered by them as a result of the depositary's unjustifiable failure to perform its obligations or its improper performance of them. Liability to AIF investors may be invoked either directly or indirectly through the AIFM, depending on the legal nature of the relationship between the depositary, the AIFM and the investors. The depositary's liability shall not be affected by the fact that it has entrusted to a third party all or some of the assets in its safe-keeping. 6. The Commission may adopt implementing measures further specifying the tasks and requirements for depositaries, the requirements for delegating depositary functions and the liability of the depositary having regard to the different degrees to which investors are exposed to the risk of loss of assets invested with the AIFM These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). SECTION 3: DELEGATION OF AIFM FUNCTIONS Article 9 Delegation 1. AIFM which intend to delegate to third parties the task of carrying out on their behalf one or more of their functions shall obtain prior authorisation from the competent authorities of the AIFM home Member State for each delegation. The following preconditions have to be complied with: (a) when the delegation concerns the portfolio management or the risk management, the third party must also be authorised as an AIFM under this Directive by the competent authorities of the AIFM's home Member State to manage an AIF of the same type. In all other cases the third party must at least be established in a Member State of the European Union or of the European Economic Area, must be creditworthy and the persons who effectively conduct the business must be of sufficiently good repute and sufficiently experienced; (b) the delegation shall not prevent the effectiveness of supervision of the AIFM, and in particular it must not prevent the AIFM from acting, or the AIF from being managed, in the best interests of its investors; EN 22 EN
  23. 23. (c) the AIFM must demonstrate that the third party is qualified and capable of undertaking the functions in question, that it was selected with due care and that the AIFM is in a position to monitor effectively at any time the delegated activity, to give at any time further instructions to the third party and to withdraw the delegation with immediate effect when this is in the interest of investors; (d) no delegation shall be given to the depositary, the valuator, or to any other undertaking whose interests may conflict with those of the AIF or its investors; (e) the AIFM must review the services provided by each third party on an ongoing basis. 2. In no case shall the AIFM's liability be affected by the fact that the AIFM delegated functions to a third party, nor shall the AIFM delegate its functions to the extent that it becomes a letter box entity. 3. The third party may not sub-delegate any of the functions delegated to it by the AIFM. 4. The Commission may adopt implementing measures further specifying: (a) when the delegation concerns the portfolio management or the risk management, the conditions for determining whether the third party is authorised to manage the same type of AIF; (b) when the delegation does neither concern the portfolio management nor the risk management, the requirements for third parties; (c) the conditions for approving the delegation; and (d) under which conditions the manager would become a letter box entity by way of delegation. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). SECTION 4: CONDUCT OF BUSINESS Article 10 General principles 1. The AIFM shall: (a) act honestly, with due skill, care and diligence and fairly in conducting its activities; (b) act in the best interests of the AIF it manages, the investors of those AIF and the integrity of the market; and (c) ensure that all AIF investors are treated fairly. No investor may obtain a preferential treatment, unless this is disclosed in the AIF rules or instruments of incorporation. 2. The Commission may adopt implementing measures, with a view to ensuring that the AIFM complies with the duties set out in paragraph 1. EN 23 EN
  24. 24. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). Article 11 Conflicts of interest 1. AIFM shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest, as defined in this Article, from adversely affecting the interests of the AIF and its investors. AIFM shall segregate within its own operating environment, tasks and responsibilities which may be regarded as incompatible with each other. AIFM shall assess whether its operating conditions may involve any other material conflicts of interest and disclose them to the AIF investors. 2. Member States shall require AIFM to take all reasonable steps to identify conflicts of interest between the AIFM, including their managers, employees or any person directly or indirectly linked to the AIFM by control, and the investors in AIF managed by the AIFM or between one investor and another that arise in the course of managing one or more AIF. Where organisational arrangements made by the AIFM to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to investors' interests will be prevented, the AIFM shall clearly disclose the general nature and/or sources of conflicts of interest to the investors before undertaking business on their behalf, and develop appropriate policies and procedures. 3. The Commission may adopt implementing measures further specifying how AIFM shall prevent or manage conflicts of interest. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). Article 12 Risk management 1. The AIFM must functionally separate the tasks and responsibilities for risk management and for portfolio management. 2. The AIFM must implement updated risk management systems in order to measure and monitor appropriately all risks associated to each AIF investment strategy and to which each AIF is or can be exposed to. 3. The AIFM shall at least: (a) implement an appropriate due diligence process when investing on behalf of the AIF, according to the investment strategy, the objectives and risk profile of the AIF. Such due diligence process shall be documented and regularly updated; EN 24 EN
  25. 25. (b) ensure that the risks associated to each investment position of the AIF and its overall effect on the AIF's portfolio can be accurately identified, measured and monitored at any time. To that end, AIFM shall implement all appropriate stress testing procedures; and (c) ensure that the risk profile of the AIF shall correspond to the size, portfolio structure and investment strategies and objectives of the AIF as laid down in the AIF rules or instruments of incorporation. 4. In the case of AIFM which engage in short selling when investing on behalf of one or more AIF, Member States shall ensure that the AIFM operates procedures which provide it with access to the securities or other financial instruments at the date when the AIFM committed to deliver them, and that the AIFM implements a risk management procedure which allows the risks associated with the delivery of short sold securities or other financial instruments to be adequately managed. 5. The Commission may adopt implementing measures further specifying: (a) the risk management requirements to be employed by AIFM as a function of the risks which the AIFM incurs on behalf of the AIF that it manages; and (b) arrangements needed to enable AIFM to manage the particular risks associated with short selling transactions, including any relevant restrictions that might be needed to protect the AIF from undue risk exposures. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). Article 13 Liquidity management 1. AIFM shall adopt an appropriate liquidity management framework and procedures to ensure that the liquidity profile of the AIF's investments complies with the AIF's underlying obligations. The AIFM shall regularly conduct stress tests, both under normal and exceptional liquidity conditions and monitor the liquidity risk of the AIF accordingly. 2. AIFM shall ensure that the AIF has an appropriate redemption policy which must be laid down in the AIF rules or instruments of incorporation. 3. The Commission may adopt implementing measures further specifying the liquidity management requirements. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). EN 25 EN
  26. 26. Title III: Transparency requirements SECTION 1: ANNUAL REPORT Article 14 Annual report 1. For each of the AIF it manages an AIFM shall publish an annual report for each financial year. The annual report shall be published no later than four months following the end of the financial year. 2. The annual report shall include a balance-sheet or a statement of assets and liabilities, a detailed income and expenditure account for the financial year, a report on the activities of the financial year as well as any significant information which will enable investors to make an informed judgement on the development of the activities of the AIF and its results. 3. The accounting information given in the annual report shall be audited by one or more persons empowered by law to audit accounts in accordance with Directive 2006/43/EC. The auditor's report, including any qualifications, shall be reproduced in full in the annual report. 4. The Commission may adopt implementing measures further specifying the content and format of the annual report. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). SECTION 2: DISCLOSURE TO INVESTORS Article 15 Disclosure to investors 1. AIFM shall ensure that AIF investors receive the following information before they invest in the AIF and have regular updates thereof: – a description of the investment strategy and objectives of the AIF, all the assets which the AIF can invest in and of the techniques it may employ and of all associated risks, any applicable investment restrictions, the circumstances in which the AIF may use leverage, the types and sources of leverage permitted and the associated risks and of any restrictions to the use of leverage; – a description of the procedures by which the AIF may change its investment strategy and/or investment policy; – the identity of the AIF's depositary, valuator, auditor and any other service providers and a description of their duties and the investors' rights should any failure arise; – a description of any delegated management or depositary function and the identity of the third party to whom the function has been delegated; EN 26 EN
  27. 27. – a description of the AIF's valuation procedure and, where applicable, of the pricing models for valuing assets, including the methods used in valuing hard- to-value assets; – a description of the AIF's liquidity risk management, including the redemption rights both in normal and exceptional circumstances, existing redemption arrangements with investors, gates, side pockets and how the AIFM ensures a fair treatment of investors; – a description of all fees, charges and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors; – whenever an investor obtains a preferential treatment or the right to obtain preferential treatment, the identity of the investor and a description of this preferential treatment; and – the latest annual report. 2. For each AIF an AIFM manages, it shall periodically disclose to investors: – the percentage of the AIF's assets which are hard-to-value, illiquid and assets placed in side pockets; – any new arrangements for managing the liquidity of the AIF; – the current risk profile of the AIF and the risk management systems employed by the AIFM to manage these risks.. 3. The Commission may adopt implementing measures further specifying the disclosure obligations of AIFM and what is to be understood by 'periodically' in paragraph 2. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). SECTION 3: REPORTING TO COMPETENT AUTHORITIES Article 16 Reporting obligations to competent authorities 1. AIFM shall regularly report to the competent authorities of its home Member State on the principal markets and instruments in which it trades on behalf of the AIF it manages. It shall provide aggregated information on the main instruments in which it is trading, markets of which it is a member or where it actively trades, and on the principal exposures and most important concentrations of each of the AIF it manages. 2. For each AIF an AIFM manages, it shall periodically report to the competent authorities of its home Member State: – the percentage of the AIF's assets which are hard-to-value, illiquid and of assets placed in side pockets; – any new arrangements for managing the liquidity of the AIF; – the actual risk profile of the AIF and the risk management tools employed by the AIFM to manage these risks; and EN 27 EN
  28. 28. – the main categories of assets in which the AIF invested; – and, where relevant, the use of short selling during the reporting period. 3. For each of the AIF it manages the AIFM shall submit the following documents to the competent authorities of its home Member State: – an annual report of each AIF managed by the AIFM for each financial year, within four months from the end of the periods to which it relates; and – a detailed list of all AIF which the AIFM manages for the end of each quarter. 4. The Commission may adopt implementing measures further specifying the reporting obligations referred to in paragraphs 1, 2 and 3 and their frequency. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). EN 28 EN
  29. 29. Title IV: Obligations regarding AIFM managing specific types of AIF SECTION 1: OBLIGATIONS FOR AIFM MANAGING LEVERAGED AIF Article 17 Definitions and general principles 1. The provisions of this section shall apply only to AIFM which manage one or more AIF employing high levels of leverage on a systematic basis, provided that the total assets under management, including leverage, of the AIFM of such AIF exceed 500 million€. 2. An AIF employs high levels of leverage on a systematic basis when the combined leverage from all sources exceeds the value of the equity capital of the AIF on two out of the past four quarters. 3. The Commission may adopt implementing measures with a view to modifying the threshold referred to in paragraph 1 or the definition of 'high levels of leverage on a systematic basis' referred to in paragraph 2 and to defining reporting obligations for AIFM whose use of leverage no longer meets the levels foreseen in paragraph 2. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). Article 18 Disclosure to investors AIFM managing one or more AIF employing high levels of leverage on a systematic basis shall for each such AIF: – disclose to investors the maximum level of leverage which will, under normal conditions, be employed by the AIF as well as any right of re-use of collateral or any guarantee granted under the leveraging arrangement; and – regularly disclose to investors the total amount of leverage employed by each AIF in the preceding period. Article 19 Reporting to competent authorities 1. AIFM managing one or more AIF employing high levels of leverage on a systematic basis shall regularly provide, to the competent authorities of its home Member State, information about the overall level of leverage employed by each AIF it manages, and a break-down between leverage arising from borrowing of cash or securities and leverage embedded in financial derivatives. This shall include information on the identity of the five entities which are the principal source of borrowed cash or EN 29 EN
  30. 30. securities for each of the AIF managed by the AIFM, and on the amounts of leverage received from each of these entities for each of the AIF managed by the AIFM. 2. The Commission may adopt implementing measures further specifying the disclosure requirements with regard to leverage and the frequency of regular reporting to competent authorities and of regular disclosure to investors. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2). Article 20 Use of information by competent authorities, supervisory cooperation and emergency powers 1. Member States shall ensure that the competent authorities of the AIFM home Member State use the information to be reported under Article 23 for the purposes of identifying the extent to which the use of leverage contributes to the build-up of systemic risk in the financial system or risks of disorderly markets. 2. AIFM home Member States shall ensure that all information received under Article 23, aggregated in respect of all AIFM that it supervises, are made available to other competent authorities through the procedure set out in Article 40 on supervisory co- operation. It shall, without delay, also provide information through this mechanism, and bilaterally to other Member States directly concerned, if an AIFM under its responsibility could potentially constitute an important source of counterparty risk to a credit institution or other systemically relevant institution in other Member States. 3. If the stability and integrity of financial markets so require, the AIFM home Member State may oblige an AIFM to restrict the level of leverage employed when managing one or more AIF. SECTION 2: OBLIGATIONS FOR AIFM MANAGING AIF WHICH ACQUIRE CONTROLLING INFLUENCE IN COMPANIES Article 21 Notification of the acquisition of controlling influence in non-listed companies 1. Member States shall ensure that when, under the conditions foreseen under paragraph 2, an AIFM is in a position to exercise 30 % or more of the voting rights of a non-listed company, such AIFM notifies the non-listed company and all other share-holders the information provided in paragraph 3. This notification shall be made, as soon as possible, but not later than four trading days the first of which being the day on which the AIFM has reached the position of being able to exercise 30% of the voting rights. 2. This Article shall apply to: – AIFM managing one or more AIF which either individually or in aggregation acquires 30 % or more of the voting rights of the non-listed company; – AIFM having concluded an agreement with one or more other AIFM which would allow the AIF managed by these AIFM to acquire 30 % or more of the non-listed company. EN 30 EN
  31. 31. This Article shall not apply when the non-listed company employs fewer than 250 persons, has an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. 3. The notification required under paragraph 1 shall contain the following information: (a) the resulting situation in terms of voting rights; (b) the conditions under which the 30% threshold has been reached, including information about the identity of the different shareholders involved; (c) the date on which the threshold was reached or exceeded. Article 22 Disclosure in case of acquisition controlling influence in issuers or non-listed companies 1. Without prejudice to Article 21, Member States shall ensure that when an AIFM acquires 30 % or more of the voting rights of an issuer or a non-listed company, such AIFM makes the following information available to the issuer, the non-listed company and their respective shareholders: Regarding issuers, the AIFM shall make available the following: (a) the information provided under Article 6 (3) of Directive 2004/25/EC (b) the policy for preventing and managing conflicts of interests, in particular between the AIFM and the issuer; (c) the policy for external and internal communication of the issuer in particular as regards employees. Regarding non-listed companies, the AIFM shall make available the following information: (a) the identity of the AIFM which either individually or in agreement with other AIFM have reached the 30 % threshold; (b) the development plan for the non-listed company; (c) the policy for preventing and managing conflicts of interests, in particular between the AIFM and the non-listed company; (d) the policy for external and internal communication of the issuer or non-listed company, in particular as regards employees. 2. This Article shall apply to: – both issuers in the meaning of Article 2 (d) of Directive 2004/109/EC and non- listed companies; – AIFM managing one or more AIF which either individually or in aggregation acquires 30 % or more of voting rights of the issuer or the non-listed company; – AIFM having concluded an agreement with one or more other AIFM which would allow the AIF managed by these AIFM to acquire 30 % or more of the voting rights of the issuer or non-listed company. This Article shall not apply when the issuer or the non-listed company employs fewer than 250 persons, has an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. EN 31 EN

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