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AIFMD frequently asked questions

To clarify the key operational and organisational requirements of the AIFMD, here we provide you with some frequently asked questions and their answers.

Scope

What is the AIFMD? 
Who is subject to the AIFMD?
Can an AIF be distributed to EU retail investors?
Can an EU feeder AIF with a non EU master AIF benefit from the EU passport under the AIFMD?

Organisational requirements

Does an AIF marketed in the EU to professional investors need to be managed by an EU AIFM?
Can a UCITS management company also act as an AIFM?
Can a MiFID firm act as an AIFM?
Does an EU AIFM need to appoint an external valuator?
Is there any leverage limitation for the AIFs marketed in the EU?
Does an AIF need to appoint a depositary?
Can the depositary be the same entity charged with the risk management functions of the AIF?

Operational requirements

What are the capital requirements?
What are the general operating conditions?
What are the risk management requirements?
What are the remuneration requirements?
What are the delegation requirements?
Can an EU AIFM delegate the portfolio management to an asset manager based outside of the EU?
What are the reporting and disclosure requirements?
What are the changes to the annual report?
When must the AIFM report to regulators and what must it report?
What are the marketing routes into the EU?

 

What is the AIFMD? 
The Alternative Investment Fund Managers Directive (AIFMD) is a European Directive which is due to be transposed in UK law by 22 July 2013. It seeks to regulate the non-UCITS fund sector, in particular hedge funds, private equity funds and real estate funds. National regulators can decide to apply exemption clauses to Alternative Investment Fund Managers (AIFMs) that collectively manage Alternative Investment Funds (AIFs) with less than €100m or less than €500m which are unleveraged and do not grant investors redemption rights for a period of 5 years following the date of constitution of each AIFs.

AIFMs will need to have submitted an application for authorisation to the Competent Authority by 22 July 2014.

The Directive contains provisions on:

  • scope
  • organisational requirements
  • leverage
  • depositary
  • delegation
  • risk management
  • liquidity management
  • reporting/disclosure requirements
  • annual report

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Who is subject to the AIFMD? 
All AIFMs established in the European Union (EU), whether they manage EU or non-EU AIFs, are subject to the AIFMD. The AIFMD also governs the marketing in the EU of AIFs managed by an AIFM established outside the EU. It is important to note that a non-EU AIFM marketing outside of the EU and a non-EU fund which invests in EU equities does not come within the scope of the AIFMD.

The concept of ‘Alternative Investment Funds’ (AIFs) under the AIFMD covers all investment funds other than UCITS funds.

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Can an AIF be distributed to EU retail investors? 
The EU passport introduced by the AIFMD allows an AIFM to market the shares of an AIF to professional investors – by contract the marketing of AIFs to retail investors remains at the discretion of each Member State. Where EU Member States permit the marketing of AIFs to retail investors they can impose stricter requirements.

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Can an EU feeder AIF with a non EU master AIF benefit from the EU passport under the AIFMD?
A feeder fund only has access to the EU passport if the master fund has the ability to obtain the EU passport itself. A feeder AIF is defined as an AIF investing at least 85% of its assets into another AIF (the master AIF).

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Does an AIF marketed in the EU to professional investors need to be managed by an EU AIFM?
An AIF marketed in the EU to professional investors needs either to be:

  • managed by an EU AIFM or
  • managed by an non-EU AIFM which complies with the relevant section of the AIFMD (Disclosure) and the country where the AIFM/AIF (as appropriate) is established must fulfil 4 conditions :
    • AML standards (FATF/GAFI)
    • existence of information exchange agreement between home country and the EU Member State
    • tax information exchange standards
    • reciprocal access to markets

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Can a UCITS management company also act as an AIFM?
Authorised managers of a UCITS fund should be entitled to be authorised as an AIFM and vice versa, subject only to complying with any relevant additional requirements for the new authorisation.

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Can a MiFID firm act as an AIFM? 
Markets in Financial Instruments Directive (MiFID) firms that fall into the scope of the AIFMD will need to submit an application to re-authorise as an AIFM. The scope of MiFID services that AIFMs can undertake is narrower and includes:

  • non-core services, comprising: (i) investment advice, (ii) safe-keeping and administration in relation to shares or units of collective investment undertakings, (iii) reception and transmission of orders in relation to financial instruments, and
  • Individual portfolio management, comprising: management of portfolios of investments, including those owned by pension funds and institutions for occupational retirement provision in accordance with Article 19(1) of Directive 2003/41/EC and mandates given by investors on a discretionary, client-by-client basis.

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Does an EU AIFM need to appoint an external valuator? 
The valuation of the AIF must be done independently but the AIFM can either perform the valuation function ‘in-house’ or an external valuer may be appointed.

AIFMs are responsible for the proper valuation of AIF assets, the calculation of the net asset value and the publication of that net asset value. The AIFMs liability towards the AIF and its investors is not affected by the fact that the AIFM has appointed an external valuer. The external valuer is liable to the AIFM for any losses suffered by the AIFM as a result of the external valuer’s negligence or intentional failure to perform its tasks.

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Is there any leverage limitation for the AIFs marketed in the EU? 
Any AIFM managing one or more AIF using leverage will have to provide the Competent Authorities of its home Member State with regular information concerning its leverage.

The relevant Member State regulator will inform ESMA of the leverage limits disclosed and the latter may decide to limit the level of leverage used if it considers that the leverage employed by an AIFM may pose a substantial risk to the stability and integrity of the financial system.

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Does an AIF need to appoint a depositary? 
Only EU AIFs need to appoint a depositary. Non-EU AIFs must appoint a depositary if they wish to make use of the EU Marketing Passport (estimated to be available from 2015) which permits marketing across the EU on the basis of one authorisation in the home Member State of the AIFM.

For an EU AIF:

A depositary of an EU AIF must have its registered office in the EU Member State of the AIF.

The Competent Authorities of the home Member State of an AIF or in the case where the AIF is not regulated, the Competent Authorities of the home Member State of an AIFM may allow depositaries to be established in another Member State until 22 July 2017.

For a non-EU AIF (using the EU passport from 2015):

A depositary of a non-EU AIF managed by an authorised AIFM must be either in the country where the AIF is established or in the home Member State of the AIFM.

Where a depositary is established outside the EU there are a number of conditions required of that jurisdiction (Article 21 (6)).

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Can the depositary be the same entity charged with the risk management functions of the AIF?
AIFM cannot delegate the risk management or portfolio management functions to the depositary.

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What are the capital requirements? 
The own funds requirement is the higher of (up to a maximum of €10m):

  • ¼ fixed overheads requirements and
  • €125k (€300k for internally managed AIF) plus 0.02% of the amount by which the value of the portfolios of the AIFM exceeds €250m.

Additional own funds, or professional indemnity insurance will be required to cover risks arising from professional negligence.

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What are the general operating conditions? 
The general principles for AIFMs are broadly similar with the MiFID and UCITS Directive, this include provisions on:

  • fair treatment of investors of the AIF
  • best execution
  • inducements
  • conflicts of interests
  • market integrity
  • internal audit
  • record retention
  • recording of portfolio / subscription and redemption transactions
  • due diligence

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What are the risk management requirements? 
The main provisions governing the risk management under AIFMD are inspired by the risk management regulations governing UCITS and broadly the two are very similar. The AIFMD however requires that the risk management function is functionally and hierarchically separated from the portfolio management function and other operating units so to avoid conflicts of interest.

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What are the remuneration requirements? 
Member States shall require AIFMs to have remuneration policies and practices for those categories of staff, including senior management, risk takers, control functions, and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. These risk takers include those individuals whose professional activities have a material impact on the risk profiles of the AIFMs or of the AIFs they manage, that are consistent with and promote sound and effective risk management and do not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the AIFs they manage. The application of these requirements will depend on ESMA guidelines.

Remuneration of the staff of the AIFM (including carried interests) should be reported in the financial statements of the AIF.

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What are the delegation requirements? 
AIFMs must comply with several requirements prior to delegating certain functions. Additional procedures apply when there is a delegation of risk or portfolio management and; there are certain preconditions where this entity is outside the EU. In general this requirement may bring into scope additional delegation arrangements than under MiFID because the scope of the AIFMD is broader and places increased responsibility on the AIFM.

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Can an EU AIFM delegate the portfolio management to an asset manager based outside of the EU?
Yes, however there are a number of conditions, including that it must only be delegated to undertakings which are authorised or registered for the purpose of asset management and subject to supervision or, where that condition cannot be met, only subject to prior approval by the Competent Authorities of the home Member State of the AIFM. In addition to these requirements there must be cooperation arrangements between the Competent Authorities of the home Member State of the AIFM and the supervisory authority of the undertaking.

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What are the reporting and disclosure requirements? 
There are a significant number of ongoing reporting obligations to regulators, in addition to investors. These are applicable to all AIFMs marketing AIFs or managing AIFs in the EU and focus on risk / liquidity management, leverage, and expenses.

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What are the changes to the annual report?
The AIFMs staff remuneration must be disclosed within the annual report of the AIF; this includes a breakdown of the fixed and variable elements and a split between different levels of employees.

There must be minimum line items on the face of the financials but broadly these are in line with IFRS, US GAAP and other local GAAPs. In addition the annual report should disclosure material changes in the information provided to investors upon investment in the fund i.e. fees, risk management policies, liquidity arrangements.

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When must the AIFM report to regulators and what must it report?
EU AIFMs (for each AIF they manage) and non-EU AIFMs (for each AIF it markets in the EU), must report exposures, leverage and other fund centric figures to regulators on a quarterly basis. Additional disclosure is required where the AIF employs leverage on a substantial basis. The information is reported to the regulator that initially authorised or registered the AIFM.

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What are the marketing routes into the EU? 
Private placement
- The Directive permits national regulators to continue with their existing private placement regime, on the condition that AIFMs comply with the disclosure/transparency regime, including the annual report requirements. Cooperation agreements will need to be in place between the FSA and the jurisdictions where non-UK AIFs/AIFMs are domiciled. I.e. for a Cayman fund there must be a cooperation agreement (containing certain minimum elements) between the UK FSA and CIMA.

The private placement route may be turned off in 2018, but this depends on a decision from ESMA.

EU passport - The EU passport should be available for EU AIFMs and EU AIFs as soon as the Directive is implemented in 2013. This means that AIFMs will be able to market AIFs across the EU on the basis of one authorisation with their home Member State. The EU passport may become available to non-EU AIFMs and non-EU AIFs from 2015, but this is subject to an opinion from ESMA.

Offshore structures – The domicile of the non-EU AIFM/AIF must meet certain requirements as a precondition for either of the above two marketing routes.

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