As you will no doubt be aware, the alternative investment fund industry is experiencing a serious shakedown in the European Union. The Alternative Investment Fund Managers Directive (AIFMD) comes into effect on July 22, 2013. It seeks to harmonize the European regulatory regime for managers of alternative investment funds, including private equity funds. Its extensive reach means that even funds based outside of the EU could potentially be affected. Funds and fund managers would be wise to ensure their house is in order to avoid non-compliance. We have noted a few points which bear thinking about.
Who is your fund manager?
- Funds are required to nominate a single fund manager, external or in-house, who will be responsible for AIFMD compliance.
- Unlike the Dodd-Frank Act, the AIFMD provides a distinction between manager and adviser. The former provides investment management services whereas the latter provides administration, marketing or other non-regulated services.
- External fund managers may also be Undertaking for Collective Investment in Transferable Securities (UCITS) management companies.
Where is your management based?
- The AIFMD looks to substance over form, meaning that letter-box entities are likely to be ineffective as the legislation will look through structures to locate the day-to-day running of the fund.
- The proportion of management operations based in the EU is relevant to whether the manager is caught by the AIFMD.
- The transfer of management operations to a non-EU jurisdiction is an option. Yet, this would only avoid the AIFMD if the fund is not marketed in the EU.
- Parallel structures can separate AIFMD-affected and non-affected funds. It is crucial to maintain genuine distance between the structures to avoid bringing the non-EU fund under the scope of the AIFMD.
Have you taken into account all of the funds that will be affected
- If a fund manager becomes authorized, all of the funds that they manage (current and future) are likely to be subject, wholly or partially, to the AIFMD.
- Before or upon authorization of a manager, it is advisable to consider the effect on all applicable funds and any changes in management before applying for authorization.
Delegation of manager functions
- Existing managers must notify the authorities of any delegation to third parties, prior to such delegation.
- It is advisable to keep records to show that the delegation is objective and the delegate is fully qualified and capable of undertaking the tasks. A system to ensure the effective supervision of such delegation is recommended.
Process in the UK for private equity funds?
- Funds need only comply with limited disclosure obligations if they meet the following three criteria:
i) Manage an aggregated value of assets of less than €500 million;
ii) Manage only unleveraged funds; and
iii) Do not allow redemption in the first five years. - Private equity funds tend to fall within the scope of the above. As such, those funds need only comply with: a) the requirement to register with the Financial Conduct Authority (FCA) from July 22, 2013; and b) to provide periodic information to the FCA on their activities (e.g., investment strategies and exposures).
Regular internal checks are advisable to ensure the fund continues to meet these three criteria to avoid the scope of full disclosure obligations. Despite front-loading compliance onto funds, the AIFMD looks set to establish a strong European quality seal for alternative investment funds and to encourage investor confidence in compliant funds.
Kavita Mehta, trainee solicitor in McDermott’s Corporate Advisory practice in the London office, contributed to this article.