The Alternative Investment Fund Managers Directive (AIFMD) is a regulatory framework for alternative investment fund managers (AIFMs), including managers of hedge funds, private equity firms and investment trusts.
The AIFMD was implemented in the UK on 22 July 2013. Its scope is broad and, with a few exceptions, covers the management, administration and marketing of alternative investment funds (AIFs). Its focus is on regulating the AIFM rather than the AIF.
An AIF is a ‘collective investment undertaking’ that is not subject to the UCITS regime, and includes hedge funds, private equity funds, retail investment funds, investment companies and real estate funds, among others.
The AIFMD establishes an EU-wide harmonised framework for monitoring and supervising risks posed by AIFMs and the AIFs they manage, and for strengthening the internal market in alternative funds. It also includes new requirements for firms acting as a depositary for an AIF.
Aims of the AIFMD
- to enhance supervisory practices among EEA competent authorities to support timely and pre-emptive action to prevent market instability and the build-up of systemic risk in the European financial system
- to improve investor protection by imposing new depositary standards and enhanced transparency through new investor disclosure rules and mandatory reporting to competent authorities
- to foster efficiency and cross-border competition by deregulating national barriers and creating level playing fields through harmonised rules on an EEA-wide passport for full-scope EEA AIFMs to market and manage AIFs from 22 July 2013
Requirements included in the AIFMD
- the authorisation of the fund manager (full scope AIFM) or, alternatively, registration subject to a lighter regime for AIFMs managing AIFs with ‘assets under management’ below certain thresholds. Sub-threshold AIFMs may not benefit from the AIFMD’s marketing and management passports; however, they have the right to opt-in to full authorisation to access AIFMD passports
- conduct of business (fair treatment of investors, conflicts of interest, remuneration, risk management, valuation, disclosure to investors and regulators)
- regulatory capital – initial capital, ‘own funds’ and professional indemnity insurance requirements
- the safekeeping of investments (via the mandatory appointment of depositaries and custodians)
- controls over delegation of certain tasks, including portfolio management and risk management
- the marketing of AIFs to professional investors within the EEA
- the use of leverage by AIFMs for all AIFs under management. EEA regulators will have new powers to intervene, placing restrictions on leverage and other supervisory restrictions where needed to avoid the build-up of systemic risk
Changes under the AIFMD
Some of the main changes were that:
- a number of fund managers in the UK hold a permission to manage investments. It is likely that some of these firms, dependent on business models, will need to be re-authorised under the AIFMD to operate as AIF managers. These may include:
- MiFID firms carrying out portfolio management and/or risk management for EEA funds that are not UCITS funds or funds located offshore in third-country jurisdictions, such as the US and Cayman Islands, and
- operators of collective investment schemes that are not UCITS funds carrying out portfolio management and/or risk management in-house
- the AIFMD will mean certain fund managers are being regulated for the first time. For example, investment companies that do not employ an external manager will need to be authorised or registered with us under the AIFMD
- depositaries of AIFs will have to comply with new requirements
- the AIFMD brings in significant changes to the management/administration of AIFs in the EU and introduces new EU-wide passports for authorised full-scope AIFMs to market and manage AIFs from 22 July 2013
- marketing and management passports will not be available to non-EEA managers of AIFs or to EEA managers in respect of their non-EEA AIFs (this may be adopted from 2015 subject to ESMA reports and Commission delegated acts). Marketing of such funds to professional investors is allowed under national private placement (NPP) regimes. It is envisaged that existing NPP regimes will be phased out after the non-EEA passport regime becomes operational, although not before 2018