By John Manning – john.manning@internationalbanker.com
The European Union implemented the Alternative Investment Fund Managers Directive (AIFMD) in July 2013, a directive that changed the regulatory framework for managing the EU’s alternative investment funds (AIFs). The EU rolled out this directive in order to create a marketplace for alternative investment funds as well as to increase protection for investors. The directive also aims to lessen the exposure to risks through a uniform framework for regulating AIFs across the region. The AIFMD allows fund managers within the EU to sell AIFs to professional investors through the use of a passporting system, in which fund managers are subjected to the regulations of their home countries.
But what is an alternative investment fund, and what assets are included under the AIFMD? The EU has defined an AIF in its directive as “a collective investment undertaking” that pulls together capital from various investors with the intention of investing said capital into a definite investment policy so that the investors will earn profits. The directive pertains to retail-investment funds but excludes UCITS (Undertakings for Collective Investment in Transferable Securities), which is an established European regulatory framework for marketing regulated funds within Europe.
The AIFMD does not cover the following: national central banks; holding companies; supranational institutions; national, regional and local governments; employee-participation systems or employee-savings schemes; special-purpose entities for securitization; institutions for occupational retirement provision; and national central banks.
The directive also defines who is considered an AIFM, or alternative investment fund manager. An AIFM is defined as any legal person whose main business is to manage a single or many AIFs. An AIFM also includes a business organization that undertakes the management of the portfolio, as well as the risk management of an AIF. The directive stresses that there should be only one AIFM for one AIF. And that an AIFM is allowed to designate tasks up to a point, with the permission of the regulating entity of the home country in which the AIFM is based.
Under the directive, AIFMs are required to seek authorization from the regulatory authorities in their EU home member states. They are required to submit several documentations to the authorities: a programme of activities; the persons conducting the business of the AIFM; the identities of the AIFM’s shareholders and direct or indirect members; arrangements made for the delegation to third parties of AIFM functions; and remuneration policies and practices
The AIFMs are also required to give the following information: investment strategies; the rules or instruments of incorporation; investment strategies; arrangements made for the appointment of the depositary; and where the AIF is established if the AIF is a feeder AIF.
Who was affected by the AIFMD? The directive covers those who are either managing or marketing alternative funds within the EU. Fund managers who are managing within the EU regardless of their home countries are subject to almost all of the provisions of the directive. These include depositary requirements, risk-management requirements, prudential-capital requirements and compensation/remuneration requirements.
On the other hand, fund managers who are managing elsewhere, such as the United States, but are marketing alternative investments in the EU are subject to certain parts of the directive. Marketing under the directive pertains to the “at the initiative of the manager or on behalf of the manager” among EU investors. This means that those who are engaged in passive marketing, or manage an AIF of which the investor initiated the purchase, are not covered by the AIFMD. But a fund manager from the US who uses a placement or distribution agent will be subjected to the directive.
What has happened then to AIFMs from the US with the implementation of the directive? US fund managers who market their products in the EU have experienced major changes in the way they market. US fund managers mainly have had to rely on each EU member country’s placement rules or mechanisms in order to market their products. These fund managers have had to make sure that the EU member states in which they are selling have a private placement regime in place and that they register with the regulators of each of those EU member countries. US fund managers also have to sign a cooperation agreement with regulators for each member state in which they are marketing as well as with other relevant EU regulators.
The passporting system of the directive will be extended to non-EU fund managers by 2015, but this is not a requirement. Non-EU fund handlers who choose to be involved in the passporting system must get authorization from a securities regulatory authority of any EU member state. Non-EU fund handlers who use the passporting system are required to follow all the provisions of the AIFMD.
At present, each EU member state has its placement regimes in place. But this could change by 2018. According to the directive, the European Securities and Markets Authority, or ESMA, has to give its opinion on the performance of the private placement regimes across all EU member states. And as such it will recommend whether the existing placement regimes should be continued.
There is a possibility that the ESMA may recommend that each private placement regime of EU member states be stopped. This would mean that the ESMA may also include in its recommendations that all AIFs being marketed within the region comply with the requirements of AIFMD, including the non-EU AIFs managed by non-EU fund managers.