AIFM is a shortcut for
“alternative investment funds manager”. The EU regulation, which
shall be adopted by national European governments this summer,
therefore addresses fund managers, not funds themselves. For example,
structure and portfolio composition of AIF will remain regulated on a
national level. This is, at least, what the directive explicitly
promises. However, as you can imagine, the limits are blurry. For
example, when the directive sets maximum levels of leverage for
alternative investment funds (AIF) managed by AIFM, it also regulates
indirectly AIF.
Following my recent post
about UCITS, I will look, from an AIFM directive perspective, at
three questions – Why does the EU regulate? (Rationale), When does
the directive apply? (Scope of application), and What do you have to
respect? (Consequences of application).
Rationale
The AIFM directive
pursues a triple rationale:
- establish common requirements for AIFM and create an internal market for AIFM;
- ban risks for financial markets in the EU;
- ensure investor protection.
Scope of
application
The AIFM directive will
apply if AIFM manage AIF.
First, what is an
alternative investment funds (AIF)?
Basically, the notion of
AIF wants to cover any fund that is not covered by the EU UCITS
directive. More specifically, your fund must answer two cumulative
conditions: collective investment undertaking (A vehicle with a
unique investor is not covered.) and defined investment policy. In
other words, the AIFM directive will apply to you if you raise
capital from a number of people to invest it for their benefit,
applying a defined investment policy.
Pension funds, social
security funds, employee participation or savings schemes, and
securitization special purpose vehicles are, nevertheless, explicitly
excluded from the directive's scope of application.
Some criteria explicitly
don’t matter: The directive applies to both open-ended and
closed-ended funds, to any legal form, and to listed and not listed
funds.
Second, what is an
alternative investment fund manager (AIFM)?
The notion refers to any
entity managing AIF on a regular basis and which is not a
supranational institution, national central bank, or national
government. In addition, the fund manager must have some relationship
with the EU: It can be an EU-AIFM, manage EU-AIF, or market AIF in
the EU.
Consequences of
application
Authorization of
AIFM
To be authorized under
the directive, an AIFM must have sufficient initial and subsequent
capital from suitable shareholders, hire experienced employees to
conducts its business, and either have its head office or be
registered in an EU member state.
Once authorized in an EU
member state, an AIFM can do business in any EU member state. This is
called the harmonized passport system for EU and non-EU AIFM.
Operating
Conditions for AIFM
Operating conditions for
AIFM is a core regulation of the directive. They include general
requirements, organizational requirements, delegation of AIFM
functions, and depositary requirements.
General requirements
can be seen as guidelines when interpreting other provisions of the
directive.
For example, AIFM must
- act honestly and with due skill, care, and diligence;
- act in the best interest of investors and market integrity;
- avoid or, if not avoidable, manage conflicts of interest;
- treat all AIF investors fairly.
Risk management and
operating activities must be carried out in different functions and
hierarchies. In the same vein, AIFM are bound to set maximum levels
of leverage for each AIF.
Finally, appropriate
liquidity management systems must be in place and regular stress
tests be conducted.
Organizational
requirements refer to appropriate human an technical resources
and proper and independent annual valuation of assets. The valuation
function must be independent from portfolio management. Under
specific conditions, it can be outsourced.
AIFM functions can be
delegated and sub-delegated.
However, this should not lead to “a
de facto circumvention of the AIFM directive” or “turn the AIFM
into a letter-box entity”. Even though an AIFM delegates some of
its functions, it remains ultimately liable for the management of
AIF.
Asset safe-keeping and
asset management functions must be separated. This is where the
depositary comes into play: He holds financial assets in
custody, manages cash flows, ensures any sale, issue, re-purchase,
redemption, and cancellation of AIF units or shares, ensures proper
valuation of AIF units or shares, and applies AIF income. Depositary
functions are usually exercised by a credit institution or investment
firm. Exceptionally, other professionals such as notaries and lawyers
might also be chosen. The depositary must belong to the EU member
state of the AIF or, in case of a non-EU AIF, to the country of the
AIFM. He can delegate his functions to a suitable third party if he
remains ultimately liable.
Transparency
Requirements
Transparency requirements
ask AIFM to
- disclose information on the leverage employed by an AIF if it is substantial;
- pass special information to employees of companies controlled by an AIF;
- prepare annual reports for each AIF;
- communicate with potential investors on elements such as AIF investment strategy, liquidity risk management, fee structure, and depositary function;
- report to administrative authorities.
Marketing of funds
Reading this section of
the AIFM directive is definitely not funny. To guide you through the
detailed stipulations, the following schema might help you:
A common trait of these
marketing possibilities is the distinction between professional and
retail investor. As a general rule, the directive allows distributing
AIF units to professional investors only. However, individual EU
member states can still admit marketing all or certain types of AIF
to retail investors within their territory, provided the conditions
for such distribution are stricter than those fixed by the AIFM
directive for professional investors.
Resource:
