Self-Managed Alternative Investment Funds: A New AIFMD-Compliant Structure?*

Author:Mr Declan O'Sullivan and Aaron Mulcahy
Profession:Dechert
 
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As part of the European Commission's efforts to reform the European financial regulatory environment in the wake of the financial crisis, on 11 November 2011, the European Parliament voted to adopt the Alternative Investment Fund Managers Directive ("AIFMD"). The AIFMD is due to be implemented across the EU by July 2013 and will have a significant effect on a large cross-section of alternative investment fund managers ("AIFMs") that manage and/or market alternative investment funds ("AIFs") within the EU, including managers of hedge and private equity, venture capital, commodity, infrastructure and real estate funds.1

In November 2011, the European Securities and Markets Authority ("ESMA") published its technical advice to the European Commission on possible implementing measures of the AIFMD ("Level II"). This marked a significant milestone in the four-stage legislative framework and added significant substance to the Level I measures represented by the AIFMD itself.2

Following adoption of the AIFMD, there has been significant discussion among industry participants as to whether it might be possible to comply with the provisions of the AIFMD by structuring the AIF as a self-managed investment company, in the same way that UCITS3 self-managed investment companies ("SMICs") are managed.4

Prior to the publishing of Level II, there was not much direction given about how a self-managed AIF (referred to in this article as a "SMAIF") might look in terms of AIFMD implementing measures. There were also concerns that, notwithstanding the very important UCITS precedent, the delegation that would be inherent in a SMAIF might be such that it would become a "letterbox" entity in contravention of AIFMD.

Level II provides helpful guidance on the complexion of a SMAIF and goes into detail in respect of the general operating conditions for AIFMs, including SMAIFs.

Why Are SMAIFs Important?

Quite simply, structuring an AIF as a SMAIF means that the fund is both an EU AIF and an EU AIFM, which, from July 2013, subject to compliance with the provisions of the AIFMD, will be able to take advantage of the passporting provisions of the AIFMD in a similar manner to a UCITS.

Earlier drafts of the AIFMD provided that AIFMs could delegate only to other AIFMs. This position was changed in subsequent drafts so that, as a general rule, delegation of portfolio management or risk management is permitted where: (i) the delegate is authorised or registered for the purpose of asset management and subject to regulatory supervision; and (ii) cooperation is ensured (see discussion below) between the competent authority of the home Member State...

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