AIFMD

The Alternative Investment Fund Managers Directive (AIFMD) aims to establish a comprehensive regulatory and supervisory framework for Alternative Investment Fund Managers (AIFMs) and the Alternative Investment Funds (AIFs) they manage.

First drafted in April 2009, the Directive came into force on 22nd July 2011. Each EU Member State was required to adopt the Directive into national legislation by the 22nd July 2013. There is, however, a transitional period that extends the implementation deadline to 22nd July 2014.

An AIF is defined as a ‘collective investment undertaking that is not governed by the UCITS Directive. This includes hedge funds, private equity funds and both retail investment and estate funds. It also includes both open and closed funds, as well as listed and non-listed funds. There is no strict legal definition for a ‘collective investment undertaking’ but it is typically deemed to be a vehicle that contains pooled capital, a defined investment policy and pooled returns. The Directive details specific fund types that are excluded from this legislation.

The AIFM Directive covers several key themes:

Organisational requirements
This includes a range of standards that must be in place, for example “appropriate and consistent procedures…” regarding the valuation of an AIF. It ensures there is no conflict of interest between the appointed external valuer and the appointed depository for the AIF.

Depository standards
A single independent depository must be appointed by the AIFM for each AIF it manages. The depository carries out several safekeeping functions, such as monitoring AIF cash flows; holding financial instruments that can be held in custody and verifying ownership of those assets that cannot. Additional depositary responsibilities have been defined that include ensuring the value of shares or units of the AIF is calculated in accordance with national laws within the Member States.

Leverage requirements
The leverage requirements focus on the portfolio management aspects of the AIF and also determine the thresholds of what funds fall under the full scope of the AIFMD rather than a subset of restrictions. The leverage is calculated as the ratio between a fund’s exposure and its NAV. The Directive sets out the following two methods that must be used:

Gross method – This measures the absolute exposure of the AIF and includes any transaction which would increase the overall exposure of the fund. This calculation does not permit any hedging arrangements.

Commitment method – Similar to the UCITS commitment approach, this exposure calculation takes into account a series of hedging and netting arrangements based on a strict set of criteria.

Increased transparency
Detailed requirements have been defined regarding the information that must be given to investors and regulators. For example, annual reports must be issued to investors on request for each AIF and these reports must be filed with the appropriate authority for the Member State in which the AIF is operating.

Marketing and cross-border authorisation
The marketing of EU AIFs to professional investors within the EU is permitted for AIFMs authorised under the Directive. In addition, such authorisation includes the ability for AIFMs to manage AIFs across Member States.

Remuneration Policy
A number of principles have been introduced regarding firms’ remuneration policies and practices. This aims to ensure they are “consistent and promote sound and effective risk management and do not encourage risk-taking”.

Key AIFMD dates:

  • 30th April 2009 – European Commission proposed the first draft of the Directive
  • 1st July 2011 – AIFMD published in the Official Journal of the European Union
  • 22nd July 2011 – Directive came into force
  • 22nd July 2013 – Deadline for the Directive to be transposed into national law
  • 22nd July 2014 – End of transitional period to transpose the Directive into local legislation
  • 21st July 2015 – European Commission to have reviewed leverage calculation methods to ensure they are sufficient for all AIFs

Last updated 11th March 2014

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