March 7, 2013
This alert provides a brief overview of the European Alternative Investment Fund Managers Directive 2011/61/EU (the "AIFMD") for alternative investment fund managers ("AIFMs") whose registered office is not in a European Union Member State (a "Non-EU AIFM").
Q1: What is the AIFMD?
The AIFMD is an EU Directive which introduces a new regime to regulate managers of alternative investment funds ("AIFs"). The fundamental change introduced by the AIFMD is to require the authorization of certain AIFMS, impose certain organizational requirements and restrictions on such AIFMs (on matters such as governance, capital requirements, delegation of duties, depositary functions and management of liquidity, risk and conflicts) and other continuing obligations (e.g. reporting and disclosure). In addition, the AIFMD sets the foundation for the introduction in 2015 of a "passport" which can be utilized by AIFMs to market funds across the European Union ("EU").
Q2: Who does it impact?
The AIFMD impacts all EU AIFMs (whether or not they market their funds into the EU) and all Non-EU AIFMs who either: (i) manage an EU AIF (being a fund which is authorized or registered in an EU Member State OR a fund which has its registered and/or head office in a Member State); or (ii) market non-EU AIFs to EU investors. Remember, that the use of intermediaries to market AIFs to EU Investors will not take the AIFM outside the ambit of the AIFMD.
Q3: What is an "AIFM"?
As the entry point into application of the AIFMD is by reference to the AIFM and its activities, it is essential to identify who the AIFM is for purposes of the AIFMD. The Directive itself does not offer much by way of guidance other than to define the AIFM as "the legal person whose business is managing one or more AIFs". Some AIFs are internally managed – in this case, identification of the AIFM is straightforward. For many groups however, the AIF appoints an external manager. The AIFM will be the legal entity with ultimate responsibility for risk portfolio management of the fund. If a firm is appointed by or on behalf of an AIF to bear responsibility for these functions, it will be the AIFM. If it is only a delegate of a person so appointed, it will not be the AIFM. Remember, an AIF can only have one AIFM.
Q4: What are the key exemptions and threshold issues for non-EU AIFMs?
Size: There are partial exemptions for AIFMs managing small AIFs, that is, AIFs with assets under management which do not exceed either (i) €500m (provided the AIFs are not leveraged and investors have no redemption rights in the first five years); (ii) €100m (including assets acquired through leverage). To determine if the exemption applies, the AIFM has to aggregate all the AIFs which it manages (and are marketed to EU investors). Note: Certain regulatory reporting requirements will continue to apply and the AIFM will need to check that its Home Member State has not imposed stricter requirements.
End of Life: There is also an exemption available for AIFMs managing certain closed-end funds in run-off (i.e. making no further investments after 22 July 2013) or with a limited life (i.e. having a lifespan which expires by 22 July 2016 and whose subscription period ended before 21 July 2011). These may be relevant to Non-EU AIFMs managing EU AIFs. Note that, even in the case of an AIF with a limited life, certain regulatory disclosure obligations will apply.
Marketing in the EU: If a non-EU AIFM does not intend to "market" a non EU-AIF to investors domiciled or with a registered office in the EU, the AIFMD will not apply to it. "Marketing" under the AIFMD means an offering (direct or indirect) or placement of units or shares of an AIF to or with such investors. As such, in the absence of the existence of a fund (with units or shares to be marketed), there is no "marketing". Non "marketing" activities however, may well be caught under other securities regulatory requirements of EU Member States, for example, rules relating to financial promotion. The definition of "marketing" under the AIFMD also excludes "reverse solicitation", that is, situations where the investor approaches the AIF or AIFM or other with a view to investing in the relevant fund.
Q5: When must it be implemented? What are the key dates?
22 July 2013: In broad terms, the AIFMD has three key impact dates. The first date which as at the date of this alert, is final, is 22 July 2013. By this date, the AIFMD comes into (direct) effect in the EU and all EU Member States must have implemented the AIFMD. It was also originally envisaged that all EU AIFMs would have sought and become authorized by Member States by this first date however this is unlikely to be achieved (see Q6 below).
September 2015: The next key date is September 2015. On and from September 2015, Non-EU AIFMs managing EU AIFs (whether or not marketing the same) will need to be authorized by their Relevant Regulator (as defined in Section B below). Further, on and from September 2015, Non-EU AIFMs, marketing non-EU AIFs to EU investors will need to be authorized by their Relevant Regulator. The "passport" to market into other EU Member States will also be available on and from this date (but not earlier). This will allow the AIFM to market its funds into all EU Member States using the passport (without the need for compliance with individual Member State private placement/ marketing rules).
Q5A: Does that mean that Non-EU AIFMs cannot market AIFs to EU investors until 2015? No – The AIFMD grants each Member State the ability to allow Non-EU AIFMs to market to professional investors in their jurisdiction under what is termed as the "private placement regimes" SUBJECT TO (i) compliance with the reporting obligations and restrictions set out in section C. below; (ii) appropriate Co-operation Agreements existing between the relevant Member State and the supervisory authority of the third country(ies) where the Non-EU AIFM is established and (if applicable) the non-EU AIF is established; and (iii) the third country(ies) where the Non-EU AIFM and Non-EU AIF is established not appearing on the list of Non-Cooperative Country and Territory by FATF.
September 2018: The ability to use private placement regimes to market into other EU Member States may come to an end.
Q6: Are all EU Member States ready to implement by 22 July 2013?
No, however, as noted above, the AIFMD has direct effect across the EU and if a particular Member State has not introduced specific implementing legislation to implement the AIFMD, it will still have effect in the Member State. The delay in national implementation has come about due to a delay in publication of the Delegated Regulation or "Level 2 measures" implementing the AIFMD which was only issued by the European Commission on 19 December 2012. Some EU Member States published draft implementing legislation before this date but have since made modifications to the same. Further, the European Securities and Markets Authority ("ESMA") has yet to publish material guidelines on certain detailed aspects of the AIFMD (due out Q1 2013). The delay has also meant that some Member States are not yet ready to accept applications for authorization by AIFMs seeking registration as an EU AIFM. In the UK, for example, the Financial Conduct Authority has stated that it hopes to be in a position to accept applications for authorization or variations of permission from 23 July 2013.
It should be noted that the AIFMD does envisage that Member States may impose additional requirements and/or restrictions in certain areas including marketing to retail investors and, generally, the conditions under which Non-EU AIFMs are permitted to market their funds in their jurisdiction with a passport.
Q7: What are the private placement regimes? What else do non-EU AIFMs need to note in relation to activities undertaken in other EU Member States?
The private placement regime is the individual regime in Member States which regulates the placement of units or shares of AIFs to investors in that jurisdiction. A number of EU Member States are using implementation of the AIFMD as an opportunity to review their existing private placement regime – in some cases to tighten their rules.
To date, the manner in which Non-EU AIFMs have marketed their funds to EU investors is by compliance with the relevant securities rules and regulations in each EU Member State in which they conduct their business, on a Member State by Member State basis. This analysis should be done by reference to the nature of the activities being conducted by the AIFM in that jurisdiction. Remember: certain EU Member States may have rules and regulations in place which impact other activities of Non-EU AIFMs (e.g. distribution of materials to potential investors into that jurisdiction), which do not amount to "marketing" of an AIF. It is important for all Non-EU AIFMs to identify the relevant activities and the applicable regulations for each Member State in which they conduct business.
Q8: Are there differences in implementation and the relevant rules in different EU Member States?
Yes, there may well be in relation to the areas where the AIFMD permits the imposition of stricter rules as referred to in Q7 above and in relation (as is already the case) in relation to the private placement rules and "financial promotion" (or equivalent) rules.
Q9: What happens after September 2015?
All Non-EU AIFMs who wish to market EU or Non-EU AIFs to EU investors, must obtain authorization by their Member State of Reference if they wish to market an EU AIF or to market using a passport. After this date, a Non-EU AIFM may still be permitted to utilize the private placement of a Member State (without obtaining authorization) if it markets only a non-EU AIF into that Member State, but subject to the requirements outlined in Section C below.
Q10: What happens after summer 2018?
The EU Commission will publish the date when national private placement regimes may come to an end. On and from this date, Non-EU AIFMs will be required to obtain authorization and undertake full AIFMD compliance when marketing both EU and Non-EU AIFs.
1. Identify the AIFM: Identify who is the "AIFM" in your group for purposes of the AIFMD. See Q3 in Section A above. If the AIFM’s registered office is not in an EU Member State, continue to read on as this alert is aimed at such non-EU AIFMs. If the AIFM’s registered office is an EU Member State, the full AIFMD compliance may apply to the AIFM – please contact us to discuss.
2. Marketing EU AIFs? Will you as a Non-EU AIFM manage an EU AIF (whether or not marketed to EU or non-EU investors) after July 2013? If so, you will need to comply with certain aspects of the AIFMD as noted in section C below.
3. Marketing Non-EU AIFs? Will you as Non-EU AIFM market a non-EU AIF to EU investors after July 2013? If so, you will need to comply with certain aspects of the AIFMD as noted in section C below.
4. Identify AIFMD Member State: Identify your ‘Member State of Reference’ or ‘Home Member State’. Article 37 of the AIFMD sets out the relevant criteria for determining your Member State of Reference. If you are marketing one non-EU AIF to several Member States, you have the unfettered choice to determine your Member State of Reference. If you are marketing several EU and non-EU AIFs or several non-EU AIFs to several Member States, then your Member State of Reference is where you intend to develop effective marketing for most of those AIFs. In all other cases, Article 37 prescribes the criteria for determining your Member State of Reference. If you have a choice as outlined above, we would recommend choosing a Member State of Reference which is suited to your overall business and operational set up (taking into account key personnel who may be based in that jurisdiction, reporting language to the competent authority of your Home Member State and similar).
5. Identify Relevant Regulators: Once you have identified your Member State of Reference or Home Member State, you will be able to determine who the competent authority is in your Home Member State (the "Relevant Regulator") for purposes of both (i) satisfying disclosure obligations in relation to the AIFs marketed; and (ii) satisfying notification obligations in relation to acquisition of major or controlling interests in certain EU portfolio companies. The Relevant Regulator for both purposes may be the same entity. For example, in the United Kingdom, the Relevant Regulator (for both purposes) from 1 April 2013, will be the new Financial Conduct Authority ("FCA").
6. Review Private Placement & "Financial Promotion" Regimes in Relevant EU Member States: It is important that you undertake a review of each of the EU Member States you currently "market" into or conduct other investment (pre-marketing, promotional or other) activities with a view to identifying: (i) if there are any changes to their private placement and other applicable securities regimes being introduced in conjunction with the AIFMD implementation; (ii) if you are still able to take advantage of these regimes ; (iii) if that Member State(s) has the relevant Co-operation Agreements referred to in Q5A of Section A above in place; and (iv) what you need to do to ensure your within the regime/ compliance with the (new) private placement regime(s).
There are four key areas that you need to be prepared for. First, you will need to consider what information you provide to potential investors you are marketing to in the EU. Second, you will need to consider what information you have to provide or make available on an ongoing basis to all investors in AIFs you have marketed to in the EU. Third, you will have ongoing reporting obligations to the relevant EU regulator(s) in respect of the AIFs marketed in the EU and in respect of interests acquired by the AIFs in non-listed EU companies (major holdings or controlling stakes). If you do acquire such interests, you will have additional reporting obligations to or in relation to the relevant companies themselves. Fourth and finally, you will need to ensure that (if relevant to the fund business model) internal policies are changed to ensure the "asset-stripping" rules of the AIFMD are not breached in relation to certain non-listed and listed EU portfolio companies. These requirements are set out in Articles 22-24 and 26-30 of the AIFMD.
Noted below are some of the key issues which we believe you need to consider in complying with these four areas. We have not provided an exhaustive list of all requirements or issues – please do contact us if you wish to discuss the details as they apply to your firm.
1. Information to (Potential) Investors Before they Invest in the AIF
Pre-Investment Disclosures: You must make available for each EU AIF managed and each non-EU AIF marketed certain information to EU investors (including material changes thereof). These requirements are set out in Article 23. The information requirements include: (i) a description of the investment strategy and objectives of the AIF, types of assets invested in, use of leverage and associated risk; (ii) description of the main legal relationship(s) entered into for the purposes of making investments including enforcement issues; (iii) the AIF’s valuation procedure and of the pricing methodology for valuing assets (including hard-to-value assets); (iv) all fees and charges directly or indirectly borne by investors; (v) specific information where any assets are subject to special arrangements due to their illiquid nature; (vi) full disclosure of risk profile, risk management systems; (vii) a description of how you ensure a fair treatment of investors and, whenever an investor obtains preferential treatment, information regarding that preferential treatment and the relevant investors; and (viii) an annual report prepared in compliance with the AIFMD. We would expect that most of these items would already be disclosed by AIFMs in their private placement memoranda (or similar), other marketing material and/or annual reports. However, there may be some items and detail (e.g. in relation to valuation methodology, comprehensive risk management, equality of treatment of investors) which are not routinely monitored and/or disclosed to investors before they invest in the AIF.
Annual Report: Article 22 sets out the specific content and disclosure requirement regarding the annual report for each EU AIF managed and each AIF marketed to investors in the EU. The annual report must be made available no later than 6 months following the end of the financial year. The accounting information in the report must be prepared in accordance with the accounting standards of the Home Member State of the AIFM (or third country where the AIF is established) and may be audited in accordance with the international auditing standards in force in the country where the AIF has its registered office. The annual report content requirements are what you would expect in relation to P&L and balance sheet information. The key content requirement which you may need to consider in closer detail is the requirement to disclose the total amount of remuneration (split into fixed and variable) paid by you to your staff, carried interest (if any) paid by the AIF and the aggregate amount of remuneration broken down by senior management and members of staff whose "actions have a material impact on the risk profile of the AIF".
2. Information to Investors in EU AIFs or AIFs marketed to EU Investors
As in 1 above. The requirement which may substantially increase the compliance burden is the ongoing requirement to disclose "material changes" to all of the information required to be disclosed to investors as outlined in Article 23. AIFMs should have in place policies and procedures for identifying and disclosing "material changes". The obligation to disclose "material changes" may well also have an impact when the AIF is being marketed to investors if and to the extent there are "material changes", say to the investment terms/ applicable restrictions, fees, charges and expenses, before the investor actually invests in the AIF. These involve careful consideration of the scope of the AIFMD and the "marketing" being undertaken by you. We are available to advise on these matters and provide detailed guidance if required.
3. Information to Relevant Regulator & Other Interested Parties
General Reporting to Regulator: Article 24 sets out reporting obligations to your Relevant Regulator in relation to each EU AIF managed or any non-EU AIF marketed in the EU. The reporting obligations cover, inter alia, information on principal markets and instruments in which you trade on behalf of these relevant AIFs. This market/ asset information (e.g. information on assets subject to special arrangements, risk profile and management, stress testing) must be provided to your Relevant Regulator. In addition, if your regulator requests, you must provide annual report(s) published in accordance with Article 22 and for the end of each quarter, a detailed list of the relevant AIFs you manage. Additional reporting obligations may come into play if stability and integrity of the financial markets merit the same.
Reporting to Relevant Regulator, Shareholders, Company: You must notify the Relevant Regulator in the event a relevant AIF managed and/or marketed by you, disposes or acquires of the following interests in EU registered non-listed companies: (i) voting rights exceeding or falling below the thresholds of 10%. 20%, 30%, 50% and 75%; and (ii) (on its own or jointly with another party(ies) more than 50% of the voting rights ("Control"). In the latter case, you must also disclose: (i) the fact of the Control position to both the relevant non-listed EU incorporated company and its shareholders; (ii) other information to each of the Relevant Regulator, company and its shareholders including identity of the controllers, policies to manage related party transaction, policy on communication to employees and intentions with regard to the future of the business of that company. If you are an AIFM which typically does or may (whether on your own or jointly with others) acquire Control positions, you need to consider carefully the impact of these disclosure and reporting obligations and ensure mechanisms are put in place to comply with the same.
4. Compliance with Asset Stripping Rules
You will need to ensure that any EU AIF managed by you or a non-EU AIF marketed by you after the implementation date to EU Investors comply with the "asset stripping" rules set out in Article 30 of the AIFMD.
These rules apply where the relevant AIF (on its own or jointly with other(s)) acquires Control, for a period of 24 months following the acquisition of Control of either a non-listed EU registered company OR a legal entity with its registered office in the EU and whose shares are admitted to trading on an EU regulated market (a "Relevant Company"). You will not be allowed to facilitate, support or instruct, vote in favour of and should use best efforts to prevent certain (i) distributions (e.g. payment of dividends and interest relating to shares), (ii) capital reductions, (iii) share redemptions and/or acquisition of own shares, in the Relevant Company.
The prohibition above applies only in the event of the following: (i) the effect of the distribution is such that the net assets on the closing date of the financial year would become lower than the subscribed capital plus undistributable reserves; (ii) the proposed distribution would exceed the amount of the profits at the end of the financial year PLUS any profits brought forward and sums to be drawn from reserves (for purposes of the distribution) LESS any losses brought forward and sums required to be placed in reserve; or (iii) the number of shares subject to the proposed share redemption or acquisition of own shares (if permitted) PLUS any shares previously acquired by (or on behalf of) the Relevant Company, would have the effect of reducing the net assets below the level in (i) above. We expect that for some AIFMs the implementation of the asset-stripping rules will require a change in operational procedures in relation to AIFs they manage or market.
We are advising a number of Non-EU AIFMs on the impact of the AIFMD to their business and prospective business activities in the EU including detailed analysis to assess the impact of the AIFMD, to what extent changes need to be made to existing systems, controls, policies and procedures (including "on the ground" assistance to help implement these changes) and going forward, preparing for authorization requirements. We are also assessing the merits and nature of "optional compliance" for Non-EU AIFMs in respect of certain requirements of the AIFMD which will not apply to them in Phase 1 (July 2013 – September 2015). Please contact us if you wish to discuss the nature of the service and advice we can provide to suit your individual requirements.
 For purposes of this alert, a "Member State" is any member of the European Union (from time to time)
 NB: In many fund structures, such persons are often known as the "investment adviser"
 These are relevant for UK entities currently authorized by the UK Financial Services Authority to conduct certain regulated activities who wish to extend this to management of funds
 Note for example, some Member States are tightening up on their regimes in relation to Non-EU AIFMs marketing Non-EU AIFs
 Annex IV of the Level 2 Measures referred to under Q6 in Section A above, provides a pro forma reporting template on which Relevant Regulators can base their reporting forms for AIFMs
 There is an exemption for certain small and medium-sized enterprises and for special purpose vehicles established to purchase, hold or administer real estate
 The same exemption as in footnote 6 above applies
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you work or the authors in the firm’s London office:
Authors of this alert:
Other key contacts:
© 2013 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.