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An introduction for U.S. managers

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  1. 1. AIFMD 101:An Introduction for U.S. ManagersThe new regulatory regime for hedge funds in EuropeJanuary 2013 1
  2. 2. Agenda Overview Regulations European passport Fund structure Timeline 2
  3. 3. OverviewWhat is the AIFMD? 3
  4. 4. What is the AIFMD?• AIFMD stands for Alternative Investment Fund Managers Directive• It is a set of new rules governing investment funds sold to professional investors in the European Union• It was adopted by the European Parliament in July 2011 in reaction to the financial crisis 4
  5. 5. Key Objectives of AIFMD• Better manage systemic risks related to alternative funds• Increase transparency of these funds for regulators and investors• Enhance investor protection 5
  6. 6. Who is Affected by the AIFMD?• AIFMD directly regulates managers of alternative investment funds sold to E.U. investors• AIFMD indirectly regulates the alternative investment funds themselves and service providers to those funds 6
  7. 7. Key Terms AIF Alternative investment fundAIFM Alternative investment fund manager European Securities and Markets Authority,ESMA the E.U. equivalent of the SECMiFID Markets in Financial Instruments Directive Private placement regime, an existing private fund regulatoryPPR regime within a single E.U. member state 7
  8. 8. A Guide to Eurospeak Goals adopted by the European Parliament; Directive member states must then pass “implementing measures” transposing them into national law Rules adopted by the European Parliament that areRegulation imposed directly on member states without the need for implementing measures Solicitation of comments on proposed directives orConsultation measures 8
  9. 9. What is an AIF?All funds managed in the European Union or marketedto E.U. investors EXCEPT: – UCITS funds, i.e. retail mutual funds – Funds with less than €100 million in assets – Funds with less than €500 million in assets that don’t use leverage and require a 5-year lockupAIFs may be marketed only to “professional clients” asdefined in MiFID 9
  10. 10. Definition of Professional ClientMiFID’s Annex II defines several categories: – Certain types of investors, including financial institutions, pension funds and other institutional investors – Undertakings meeting certain minimum size criteria – Government bodiesIn addition, other clients may ask to be treated asprofessional investors if they: – Trade frequently – Have a substantial investment portfolio – Have worked in the financial sector 10
  11. 11. Marketing Under AIFMD• Marketing is very broadly defined as any action taken by a manager to raise money• AIFMD applies to funds marketed to E.U. investors – not marketing within the European Union – Funds marketed to E.U. investors outside the European Union are still subject to the AIFMD 11
  12. 12. Registration Under AIFMD• E.U. AIFMs must register with their member state of domicile• Non-E.U. AIFMs must register with their “member state of reference” – This is the country where the AIFM intends to offer most of its funds – An AIFM does not choose its member state of reference 12
  13. 13. Regulatory Options• In some cases, an AIFM may opt to continue to be regulated under the national PPR• However, AIFMD has a timetable for transitioning away from national PPRs – National PPRs will be completely eliminated by July 2018• In addition, some countries, including Germany, are expected to eliminate their PPR before July 2018 13
  14. 14. Capitalization• AIFMD establishes capitalization requirements – Minimum of €125,000 per AIF – May be higher depending on type and size of fund 14
  15. 15. RegulationsOther Key Provisions 15
  16. 16. Other Key Provisions Functions and Conduct of Service Business Providers SpecificTransparency Provisions 16
  17. 17. Conduct of BusinessAIFMs must:• Establish remuneration (compensation) committees• Establish remuneration policies that conform with AIFMD guidelines• Identify and monitor conflicts of interest 17
  18. 18. Functions and Service ProvidersAIFMs must:• Establish valuation procedures that conform with AIFMD guidelines• Implement a risk management system• Implement a liquidity management system• Appropriately monitor the performance of 3rd parties with delegated duties• Appoint a depository (custodian) meeting AIFMD requirements, which includes assumption of liability 18
  19. 19. TransparencyAIFMs must:• Provide an annual report to investors no later than 6 months after the end of the year – AIFMD specifies the information to be included in the report, such as compensation disclosure• Provide prospective investors with information about the fund – AIFMD specifies the information to be included• Provide certain information to regulators 19
  20. 20. Specific ProvisionsAIFMs must:• Demonstrate that leverage limits are appropriate – Regulators may limit leverage• Follow certain disclosure procedures when acquiring significant positions in firms 20
  21. 21. European PassportThe Advantage of AIFMD 21
  22. 22. The CarrotWhile AIFMD carries a big stick, it also includes acarrot: – AIFs registered in one member state can be sold throughout the European Union – AIFMs registered in one member state can manage money throughout the European UnionIn addition, member states may permit marketingof AIFs to retail investors, though possibly withadditional restrictions 22
  23. 23. Fund StructureA Look at Alternatives 23
  24. 24. Analysis of 4 StructuresUS investment adviser US investment adviser Cayman fund Luxembourg fund Luxembourg Luxembourgmanagement company management companyUS investment adviser US investment adviser Cayman fund Luxembourg fund 24
  25. 25. US investment advisor Cayman fund EU investors 25
  26. 26. US Investment Adviser Cayman Fund• Typical structure today – Relies on PPRs – Can defer compliance with AIFMD only as long as those PPRs remain in place• Under AIFMD, requires a large number of cooperation agreements: – Between U.S. and each of E.U. countries where AIFM is sold – Between Cayman and each of E.U. countries where AIFM is sold 26
  27. 27. US investment adviser Luxembourg fund EU investors
  28. 28. US Investment Adviser Luxembourg Fund• Needs to begin complying with AIFMD in July 2013• Under AIFMD, requires only a single cooperation agreement: between U.S. and Luxembourg 28
  29. 29. Luxembourgmanagement Cayman fund companyDelegates portfolio managementUS investment EU investors adviser
  30. 30. Luxembourg Management Company U.S. Investment Adviser Cayman Fund• Luxembourg management company must comply with AIFMD from the start – However, there is no European passport because of the Cayman fund 30
  31. 31. Luxembourgmanagement Luxembourg fund companyDelegates portfolio managementUS investment EU investors adviser
  32. 32. Luxembourg Management Company U.S. Investment Adviser Luxembourg Fund• Luxembourg management company must comply with AIFMD from the start – but gets the benefit of the passport immediately• ALFI recommended structure 32
  33. 33. TimelineWhat’s Next? 33
  34. 34. AIFMD Timeline July 2011 AIFMD adopted by European Parliament European Parliament adopts Level 2 measures inDecember 2012 the form of a regulation July 2013 EU AIFMs with AIFs may start using passport July 2014 EU AIFMs with AIFs must use passport July 2015 Non-EU entities may use passport Non-EU entities must use passport; July 2016 National PPRs eliminated 34
  35. 35. Summary AIFMD has a broad scope It imposes new requirements on private fund mangers AIFMD has a carrot in the form of a European passport Fund structure will be critical to avoiding costs and capturing benefits EU entities can start using the passport in July 2013 35
  36. 36. Keep Up on the Trends Through NICSA @NICSAPres NICSA LinkedIn group Facebook: NICSAOnline 36
  37. 37. Keep Up on the Trends Through ALFI @ALFIfunds 37