The AIFMD Level 2 Regulation for Christmas
Key highlights and impact
The European Commission published yesterday (19 December 2012) its long-awaited Regulation that will provide the basis for implementing the Alternative Investment Fund Managers Directive (AIFMD) across the EU by July 2013.
The Directive, or Level 1 text, entered into force in July 2011 and the Commission’s Level 2 Regulation now provides the detailed measures for compliance. The Regulation draws on ESMA’s technical advice from November 2011 with some notable changes. Key areas of impact include:
Investment management functions cannot be delegated "to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself". Certain qualitative criteria are provided to assess the extent of delegation.
The Commission states that the AIFM “has to perform at least functions relating to either risk or portfolio management” and that “the ability to manage and control the AIF would not be ensured if the AIFM was not closely involved in the decision-making of its delegates”. Existing delegation arrangements will need to be reviewed in light of the new criteria and this could have a significant impact on the way investment managers structure their operations.
The Commission intends to monitor the application of the delegation rules and review the situation after two years. The Regulation also provides that ESMA may issue guidelines on delegation to ensure a consistent assessment of delegation structures across the EU. It may therefore fall to ESMA to further clarify the practical application of the delegation arrangements.
Collateral both received and pledged by the fund will now fall under the Directive’s strict depositary liability regime, requiring the depositary to return assets held in custody without “undue delay” in the event of loss. This change poses a significant challenge for prime brokers in terms of their ability to re-use assets. The treatment of collateral will also have significant operational impacts, effectively requiring prime brokers to be become sub-custodians to the depositary if they hold “custody assets” provided by the fund as collateral.
Leverage must be calculated according to the "gross" and "commitment" methods which may result in the disclosure of higher leverage figures than those derived from other methods. Managers will need to ensure that investors are adequately informed about these methodologies in order to avoid confusion over reported leverage figures. The Commission will consider permitting an optional "advanced" approach, only by July 2015. The Regulation has also tightened the definition of when an AIF becomes substantially leveraged (3xNAV under the commitment approach), which will trigger additional leverage reporting.
ESMA consults on types of AIFMs and the definition of an AIF
ESMA additionally published two consultation papers yesterday which provide detailed feedback on the earlier key concepts of the AIFMD discussion paper.
One of the consultations provides draft guidelines on key concepts of the AIFMD, focussing specifically on the definition of an AIF that will come within scope. Certain criteria are outlined, such as raising capital from investors and a defined investment policy. A collective investment undertaking with only one investor can meet this definition.
The draft guidelines do not address the appointment of an AIFM and the extent to which it may delegate functions, exempt AIFMs and AIFs, the treatment of UCITS management companies or the interaction with MiFID. ESMA intends to consider these topics further, taking into consideration the Level 2 Regulation before deciding on a course of action.
The other ESMA consultation paper provides draft regulatory technical standards (RTS) on the types of AIFMs. The RTS focus on distinguishing whether an AIFM is managing an AIF of the open-ended or closed-ended type in order to ensure that the rules on liquidity management, the valuation procedures and the transitional provisions of the AIFMD are applied to AIFMs in a uniform manner. Comments on both consultations are requested by 1 February 2013.
The European Parliament and Council of Ministers now have a three month period in which to object to the Commission’s Regulation. Since the Commission consulted extensively with the other EU institutions during the drafting process, the entry into force of these measures is seen as a foregone conclusion.
It is anticipated that the Commission will clarify in early 2013 certain aspects of the transitional arrangements for compliance. AIFMD must be implemented nationally by 22 July 2013 while pre-existing AIFMs are required to submit an application for authorisation by 22 July 2014. ESMA also plans to finalise its various draft RTS and guidelines for submission to the European Commission in the first half of 2013.