The AIFM Directive: A Decade of Regulatory Reform

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Sarah Jane Leake | Bloomberg Law Key concepts of the Alternative Investment Fund Managers Directive and types of AIMF – European Securities and Markets Authority Discussion Paper ESMA/2012/117 of 25 Feb. 2012 After 18 months of controversial negotiations, the Alternative Investment Fund Managers Directive1 (AIFM Directive) finally came into force last July. All Member States have until 22 July 20132 to transpose its provisions into national law. While this deadline seems some way off, it is, nonetheless, fast approaching and much work still needs to be done by the European Commission, the European Securities and Markets Authority (ESMA), and the UK Financial Services Authority (FSA) over the next 12 months to ensure clear and timely implementation. ESMA's latest discussion paper, on key concepts of the AIFM Directive (including, importantly, clarification of the definition of an alternative investment fund manager (AIFM)), published on 25 February, while significant in its own right, represents only a small portion of the work needing to be done, and it seems that European and national authorities alike are going to be hard pushed to meet the deadline.

Scope of the AIFM Directive

Under the AIFM Directive, all EU-domiciled funds with assets under management above €100 million (or, where there is no leverage and a lock-in period in excess of five years, assets under management above €500 million) will be subject to authorisation and ongoing requirements. While AIFMs that fall under this threshold will be exempt, they will have the opportunity to opt-in, should they wish to take advantage of the Directive's passporting provisions. From 22 July 2013, EU AIFMs will be able to market EU-domiciled alternative investment funds (AIFs) on a cross-border basis within the EU. This passporting regime may be extended in 2015 to the promotion of non-EU AIFs by EU AIFMs and to the management of EU AIFs/marketing of EU and non-EU AIFs by non-EU AIFMs. Meanwhile, non-EU AIFMs may manage EU AIFs/market EU and non-EU AIFs by virtue of national private placement regimes (PPRs), which may also be used by EU AIFMs wishing to market non-EU AIFs within the EU. According to the FSA, some 1,000 UK-based firms and schemes are likely to fall within the scope of the AIFM Directive. It will affect regulated UK-based fund managers whose business is the management of AIFs,3 including UCITS4 management companies that manage AIFs, certain discretionary investment managers, operators of CIS,5 and depositaries and custodians holding AIF assets. Firms providing AIFMs with services such as prime brokerage facilities, external valuation, client administration, and the marketing/distribution of AIFs will also be affected.

Recent Developments

After extensive consultation,6 ESMA submitted its technical advice on the Directive's level 2 implementing measures to the Commission last November.7 Its advice covers general operating conditions (including the opt-in procedure), the governance of the AIF depositary, transparency (in particular, depositary liability), transparency and leverage (including, controversially, the ability of national regulators to impose specific limits on the level of leverage that an AIFM may employ with regard to each AIF under its management), and co-operation with third country authorities. The Commission is currently in the process of considering ESMA's advice, and is expected to publish formal proposals over the next few months. It is anticipated that the Commission will adopt the proposals mid-2012, most likely in the form of a regulation, which, unlike a directive, will have direct effect in all Member States. Meanwhile, the FSA, in January, launched a discussion paper setting out its initial thoughts on how to implement the AIFM Directive into UK law.8 While most of the Directive's provisions will be implemented through the revision of existing rules, or the introduction of new provisions, in the FSA Handbook, some will be implemented via regulations made by HM Treasury to amend the Financial Services and Markets Act 2000 (FSMA) and its amending secondary legislation. The FSA intends to use this opportunity to further streamline its fund management rules, which are primarily set out in its New Collective Investment Schemes sourcebook (COLL). Adopting a more strategic approach to regulation, the FSA proposes creating a new sourcebook from scratch, provisionally entitled FUND, which could contain all relevant fund management rules, including those derived from the EU UCITS framework.9 COLL would therefore be replaced by FUND, which would contain requirements for UCITS and AIFMs alike. In addition to creating greater clarity, the introduction of such an internally managed fund regime (i.e., by creating one set of common rules applicable to AIFMs and UCITS) would also bring the UK more in line with many other Member States, such as Ireland, where similar structures are already in place. The FSA's consultation closes for comment on 23 March, shortly after which the regulator will launch a consultation setting out detailed proposals and rule amendments.

ESMA's Latest Consultation

ESMA has just published a further discussion paper,10 seeking views on a number of ideas, to help ensure the alignment of supervisory practices across the EU on the interpretation of certain key concepts in the AIFM Directive. The consultation closes for comment on 23 March, the same day as the FSA's consultation comes to an end. All feedback received will help ESMA finalise its policy approach and will, moreover, feed directly into its proposals for draft regulatory technical standards pursuant to Article 4(4) of the AIFM Directive,11 which are anticipated to be published by July and then finalised and submitted to the Commission for endorsement by the end of the year. ESMA's latest discussion paper on the AIFM Directive discusses a number of areas, including:
  • The definition of an AIFM, including clarification of the functions that a manager may carry out under the AIFM Directive and to what extent it may delegate to third parties;
  • Guidance on the AIFM's Directive's definition of an AIF, which may be relevant to national competent authorities and financial market participants when determining whether an entity falls within the definition and therefore within the scope of the legislation;
  • Guidance on the interaction between the AIFM Directive and the UCITS Directive, especially with regard to whether a management company authorised under one of these two directives may provide services under the other; and
  • Clarification that MiFID12 firms and credit institutions authorised under the Banking Consolidation Directive13 may not be authorised as AIFMs, but may nonetheless provide certain investment services, such as individual portfolio management, without falling within the scope of the AIFM Directive.

Future Developments

The Financial Conduct Authority (FCA), the conduct of business regulator in the UK coalition Government's new regulatory framework for financial services, is expected to come into existence in early 2013, once the Financial Services Bill receives Royal Assent. It will, shortly thereafter, publish a formal policy paper setting out how the AIFM Directive and its implementing measures will be transposed into, and reflected in, UK law and detail all Handbook amendments to be made. Similarly, HM Treasury will be due to publish draft regulations amending FSMA (as amended). At present, it is anticipated that the FCA will be ready to receive applications for registration under the AIFM Directive from around mid-2013, which will benefit those AIFMs wishing to make use of the EU-wide passport from 22 July next year. All EU AIFMs within the scope of the Directive must ensure that they are authorised by 22 July 2014. By 22 July 2015, some four years after the AIFM came into force, ESMA is required to have reviewed the implementation and functioning of the Directive, and issue to the European Parliament, Council, and the Commission an opinion on: (1) the EU passporting regime for EU AIFMs managing and/or marketing EU AIFs under the EU passport; and (2) the PPR for the marketing of non-EU AIFs by EU AIFMs, and the management of EU AIFs/marketing of EU and non-EU AIFs by non-EU AIFMs. It must also give advice on potentially extending the EU passporting regime to the marketing of non-EU AIFs by EU AIFMs, and the management of EU AIFs/marketing of EU and non-EU AIFs by non-EU AIFMs. Depending on ESMA's advice, the Commission may, should it see benefit in extending the EU passport regime in this way, adopt a delegated act specifying the date on which the regime will be extended. This should be completed before 22 October 2015, and therefore the EU-wide marketing passport should, shortly thereafter, be available to non-EU AIFMs. By July 2017, the Commission is obliged to review the overall impact of the AIFM Directive on the alternative investment sector across the EU, and assess the extent to which the objectives of the Directive have, by that stage, been met. Should the passporting regime be extended, ESMA is required, by late October 2018, to review the functioning of the extended regime, and issue to the European Parliament, Council, and the Commission an opinion on: (1) the EU passport regime for the marketing of non-EU AIFs by EU AIFs, and the management of EU AIFs/marketing of EU and non-EU AIFs by non-EU AIFMs; and (2) the PPR for the marketing of non-EU AIFs by EU AIFMs, and the management of EU AIFs/marketing of EU and non-EU AIFs by non-EU AIFs. Should ESMA recommend the termination of the PPR, the Commission must, by February 2019, adopt a delegated act specifying the date on which the regime will come to an end.


Since its initial proposal back in 2009, the AIFM Directive has faced significant hostility from the alternative investment sector, and also from some corners of the regulatory community. In light of the lessons learned from the financial crisis, however, the reforms to be brought about by the Directive are not unnecessary European interference, but instead represent part of a wider agenda to better protect investors and maintain financial stability. To ensure seamless transition, and also protect the UK's reputation as one of the world's leading financial centres, the FSA urges stakeholders to become more actively involved in shaping the new regulatory environment by participating as fully as possible in both national and European consultations.14DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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