Starting gun fired for alternative asset managers as AIFMD enters “into force” in July 2011

On 1 July 2011 the Alternative Investment Fund Managers Directive (“AIFMD” or “the Directive”) was published in the Official Journal of the European Union (“EU”). Under EU procedure, the Directive comes “into force” 20 days later, on 21 July 2011.  The deadline for Member States to implement the Directive into national law is 22 July 2013 and firms affected will have a year from then (i.e. 22 July 2014) to secure their necessary authorisation.

The Directive is the outcome of 18 months of intense negotiation between spring 2009 and autumn 2010 which produced 17 compromise texts.  An agreement by EU Finance Ministers on the final wording in October 2010 paved the way for its approval by the European Parliament on 11 November 2010.  The Council of the EU adopted the final AIFMD text on 27 May 2011.

The AIFMD is one of the EU’s main responses to the global financial crisis, the full extent of which manifested in 2008.  The publication of the Directive this month is an appropriate milestone at which to recap on what AIFMD will mean for alternative asset managers before looking at what will be happening next.

Scope of AIFMD

AIFMD’s requirements will arise in relation to the activities of managing the assets of or marketing an alternative investment fund (an “AIF”). An AIF is defined as any “collective investment scheme” which is not a UCITS. A perimeter of all non-UCITS funds has a very broad application indeed and serves to demonstrate that AIFMD is much more than a hedge fund directive.

In terms of activity and jurisdiction, AIFMD will apply to:

• Alternative Investment Fund Managers (“AIFMs”) established in the EU which manage one or more AIF, irrespective of where the AIFs are located; and
• AIFMs established outside the EU which manage one or more AIF established in the EU or which market one or more AIF (irrespective of where the AIF is located) within the EU.

There is a partial exemption for EU AIFMs with aggregate AUM of EUR 100m or, if the funds are unleveraged and have no redemption rights within 5 years, EUR 500m.  Of note is the fact that the EU recently consulted on a possible, additional exemption for managers of “venture capital” funds.

Impact of AIFMD

AIFMD introduces a common authorisation and supervisory regime for AIFMs and requires AIFs to appoint a depositary to have custody of their assets.  Other notable features include:

• Conduct of Business rules similar to those under MiFID
• certain structural requirements such as the need to separate key functions and comply with prescribed delegation rules
• an increase in minimum capital thresholds from EUR 50,000 to EUR 125,000
• a set of rules relating to Remuneration additional to those under the Capital Requirements Directive already in force
• disclosure requirements vis a vis both investors and the national regulator
• a valuation regime
• the power of regulators to cap leverage
• so called “asset stripping” protections.

The silver lining to this billowing regulatory cloud is the ability, in certain circumstances, to obtain a cross border passport in order to lawfully market AIFs to professional investors throughout the EU which is a huge improvement on a fund marketer’s current need to take legal advice in relation to the regime applicable in each target jurisdiction.

Next steps

The AIFMD itself is a framework directive to which much detail still needs to be added in 2011 and 2012 by the “Level 2” secondary rules. In December 2010, the European Commission issued a request for guidance to the newly formed European Securities and Markets Authority (“ESMA”).  ESMA is expected to deliver this guidance in November 2011 enabling the European Commission to issue final supplementary legislation.  Look out for an ESMA consultation(s) on the draft advice within the next few weeks. The consultation period will run for a couple of months, enabling ESMA to meet its November 2011 deadline.

What should I do?

AIFMD is one of a number of regulatory developments evolving at the moment and stemming directly from the financial crisis. A huge number are due to come into force in 2013.  Some sooner. With so much going on, firms will clearly wish to prioritise their response to regulatory developments with regard to relevance, impact and most importantly, due date.

In respect of AIFMD, managers of non-UCITS should now determine whether they fall within the scope of the Directive and start planning with reference to its timeline.  Priority items to consider include:

• the ability to meet what may be an increased capital requirement
• the adequacy of current key functions like compliance, risk management, valuation
• the adequacy of current levels of due diligence on  third parties to which essential functions are delegated e.g. administrators, sub-managers
• a consideration of the jurisdiction in which the AIFM is located and where its AIFs reside with reference to the passporting regime which will develop between 2013 and 2019.

“Small” AIFMs currently under the size thresholds might consider the likelihood of them crossing the thresholds and also whether it would be advantageous to opt-into the Directive in any event.

We will keep you updated on any developments relating to AIFMD including related consultations and publication of the implementing legislation as and when they arise.