On 11 November 2010, the European Parliament (the "EU Parliament") voted to approve the controversial new Directive on Alternative Investment Fund Managers (the "AIFM Directive") by an overwhelming majority (513 to 92 votes),1 concluding many months of highly politicised and contentious negotiations among the European Union ("EU") regulators, individual Member States, and the industry.2
The AIFM Directive forms part of a number of EU regulatory initiatives stemming from the global financial crisis and aimed at improving investor protection and oversight of systemic risk. At the same time, it is also designed to create a single EU market for alternative investment funds ("AIFs"), similar to one which exists for undertakings for collective investments in transferable securities ("UCITS"). As such, it introduces a harmonised regulatory regime for the management and marketing of AIFs to professional investors in the EU, to be implemented by all Member States from January 2013.
The full implications of the AIFM Directive will largely depend on the Level 2 implementing measures ("delegated acts") which the European Commission (the "Commission") is mandated to adopt over the next four years, on the basis of advice from the new European Securities and Markets Authority ("ESMA"),3 the successor to the Committee of European Securities Regulators.
Nevertheless, managers of hedge funds, private equity, and other firms falling within the scope of the AIFM Directive would be well-advised to start preparing for the fundamental changes which will impact their operations and consider their compliance costs and options, including possible restructuring. We summarise below the key features of the new AIFM Directive.
The AIFM Directive applies to:
all EU alternative investment fund managers ("AIFMs") managing any EU or non-EU AIFs; and all non-EU AIFMs managing an EU AIF or marketing any EU or non-EU AIFs in the EU. An AIF is defined as any fund that is not regulated under the UCITS Directive.4 It therefore includes hedge funds; private equity (i.e., large buy-out funds, mid-cap investment funds, and venture capital funds); real estate funds; commodity funds; infrastructure funds; and other types of funds in various legal forms. The definition of an AIFM is also wide, covering any legal person whose regular business involves managing (i.e., providing portfolio and risk management services to) one or more AIF.
However, the AIFM Directive will not apply to holding companies, financial vehicles in which the only investors are group companies, employee participation or saving schemes, pension fund managers (which are covered by the EU Pensions Directive),5 or securitisation special purpose entities. In addition, a "small fund manager" which is regulated by its home Member State will be exempt from the majority of the provisions of the AIFM Directive, where the cumulative assets of the AIFs it manages do not exceed €100 million (or €500 million if it only manages unleveraged funds that may not be redeemed for the first five years).
Authorisation and Capital Requirements
All AIFMs must be authorised before they may start providing management services to EU or non-EU AIFs, unless an exemption applies. To obtain authorisation, an EU AIFM must apply to the competent authority of the Member State where it has its registered office ("home Member State") and submit detailed information to demonstrate its qualification and ability to fulfill the conditions of the AIFM Directive, including, inter alia: (i) the persons effectively conducting the business; (ii) the AIFM's shareholders or members and their holdings; (iii) the planned programme of activity, setting out the organisational structure of the AIFM; (iv) the remuneration policies and practices; and (v) any arrangements for the delegation of functions to third parties.
Moreover, it must further provide information on the characteristics of each AIF it intends to manage, such as the investment strategies (including the types of underlying funds if the AIF is a fund of funds) and leverage policy, risk profiles and domicile, its fund rules or instruments of incorporation, the appointment of a depositary, as well as where the master AIF is established if the AIF is a feeder AIF. A "feeder AIF," defined as an AIF that invests (or otherwise has an exposure of) at least 85% of its assets in one or more other AIFs with the same investment strategies (each a "master AIF"), may only benefit from the marketing passport if the master AIF is also an EU AIF managed by an authorised EU AIFM.
An initial capital of at least €300,000 is required for an AIFM which is an internally managed AIF, and €125,000 is required for an externally appointed AIFM. In addition, an AIFM must have an additional amount of "own funds" (to be invested only in liquid assets) equal to 0.02% of the amount by which the value of the portfolios of AIFs it manages exceeds €250 million. However, the AIFM is not required to hold initial capital and additional own funds in excess of €10 million. Up to 50% of the additional own funds can be waived to the extent that the AIFM is covered by a financial guarantee (from an appropriately regulated EU credit or insurance institution).
Operating Conditions for AIFM
The AIFM Directive lays down detailed operational requirements in the following areas:
AIFMs subject to the AIFM Directive must implement remuneration policies and practices for their staff whose activities materially impact the risk profiles of the AIFs it manages, in accordance...