The Alternative Investment Fund Managers Directive (AIFMD) aims to ensure that non UCITS funds such as hedge funds and private equity are appropriately supervised by an EU regulatory body.
It has been designed to allow investors to benefit from improved safeguards and greater transparency, with compliant providers able to passport their products across Europe.
AIFMD focuses on the alternative fund managers rather than the funds themselves with the provisions covering the management, administration and marketing of these specialist investments. The legislation establishes an EU-wide framework for monitoring and supervising the associated risks and for strengthening the internal market.
Once the new rules are fully operational they will require all alternative funds sold in Europe to meet higher levels of disclosure and governance. The marketing and communications literature will become a lot more detailed and many firms will have to improve their risk management.
Long, drawn out process
It has been a long, drawn out process with the European Commission’s initial proposal for a Directive dating back to April 2009. The aim of this new legislation was to create a comprehensive and effective regulatory and supervisory framework for AIFMs at the European level.
Alternative investment funds are a complex area and many of the measures have been hotly contested by powerful lobby groups acting on behalf of the affected parties. It was not until November 2010 that final agreement was reached on the framework directive (‘Level 1’) and it then came into force on 21 July 2011.
This still left much of the detail relating to the implementation to be resolved by the Commission through delegated acts. Most of these measures were finally published in a single regulation (‘Level 2’) on 19 December 2012.
Member States had until 22 July 2013 to transpose the Directive into national law, although there was no such requirement for the Level 2 implementing measures as these were set out as regulations. There was then a 6 month transitional period for firms to submit their applications for authorization, which was later extended to a year.
Research by the consultants, KPMG, suggests that as many as 16 of the 28 EU states failed to meet the 22 July 2013 deadline. The only ones to comply on time were: Austria, Croatia, Cyprus, Denmark, Germany, Ireland, Latvia, Luxembourg, Malta, the Netherlands, Sweden and the UK.
In France, the responsibility for the implementation was left to its financial regulator, which decided that the best approach was to significantly revise the rules concerning the country’s investment funds. Elsewhere, in countries such as Belgium, Finland and Spain, only draft legislation had been published by the July deadline.
Alternative fund managers operating in countries that have not incorporated AIFMD into their national rules will not be able to register and may find themselves limited in terms of which countries they can passport their funds into.
On a more positive note, the European Securities and Markets Authority (ESMA) has said that those funds that comply with the legislation can be marketed in any State regardless of the compliance status of the country being targeted.
AIFMD requires additional safeguards such as risk and liquidity management limits, as well as improved reporting and disclosure requirements. There are also pay curbs that are designed to limit the excessive remuneration that is synonymous with parts of the hedge fund industry.
The Directive proposed a transitional period of a year that runs until 22 July 2014. All AIFMs that were in operation before the start of this period are required to submit an application for authorization ahead of the deadline. New alternative fund managers have to be compliant from the moment that they are established.
Externally managed regulated Alternative Investment Funds have until the moment their external manager obtains its authorization, or until the end of the transitional period to take all necessary measures to comply with the AIFMD product rules. New funds have to comply as soon as they are setup.
The transitional provisions require that AIFMs submit their applications for authorization by 22 July 2014. Unfortunately the various EU jurisdictions have taken different approaches regarding the deadline for granting the authorization.
In the UK, HM Treasury has announced that it intends to amend the country’s legislation so that AIFMs that submit their application ahead of the deadline, but that haven’t received authorization from the Financial Conduct Authority by that date, can continue to manage their funds pending the decision.
Another important aspect of the legislation is the Private Placement Regime. PPR allows the marketing of alternative investment funds that are not allowed to be marketed under the AIFMD domestic marketing or passporting regimes. It principally relates to non-EU AIFs and AIFs run by managers outside of the EU.
The plan is that PPR will remain unchanged until at least 22 July 2018, although Member States may consider ending the regime before this date. After July 2015, a non-EU passport may be introduced to replace it, but this depends on a number of conditions as set out in the Directive.
The July 2014 deadline approaches
Originally the transitional period was due to finish on 22nd January, but it was extended by a further 6 months to give firms longer to comply. In spite of the delay there is a great deal of confusion in this area with a lot of work still to be done to meet the new requirements.
In January, BNY Mellon, which is one of the largest hedge fund administrators, announced that up to a fifth of fund managers had not yet submitted the relevant information to the regulators.
AIFMD requires hedge funds to appoint an independent depository within the EU. The appointee then has to obtain the relevant data from the administrators or transfer agents to oversee the fund management.
The hedge fund industry has been one of the most vociferous opponents of the Directive and has raised numerous concerns regarding the additional requirements and the cost of compliance.
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