Alternative Investment Fund Managers to be regulated under European proposals

Following much media comment on an earlier leaked draft, on 29 April 2009 the European Commission has published its proposed Directive on Alternative Investment Fund Managers (AIFMs). The proposed Directive focuses on managers of funds established in the EU managing portfolios with total alternative fund assets under management exceeding €100 million, or €500 million where funds have no leverage and a lock-in period of five years or more. The Commission hopes that the principles embodied in the proposal will make a significant contribution to the debate on global financial supervision, in the context of the G20 discussions and elsewhere. The proposed Directive has already generated considerable debate and concern about how the proposals will fit within the global regulatory environment. As the proposed Directive moves on in the legislative process, it is likely that the debate over its contents will continue. So far, the international commentary the proposal has attracted since its publication has not resulted in formal statements by the AFM or Dutch fund industry bodies, although its impact on the Dutch fund industry may be considerable. The proposed Directive will affect all EU managers of the larger private equity and hedge funds and other AIFs, including managers that may currently benefit from the exemptions of exceptions in the Dutch Financial Supervision Act (Wet op het financieel toezicht) when offering shares or units of an AIF in the Netherlands. In this alert we highlight the key business impacts of the proposed Directive and further examine its scope and contents in a briefing prepared together with our alliance partner Herbert Smith.

The key business impacts are:

• Managers established in the EU of any non-UCITS fund (wherever domiciled) will require authorisation in order to manage and market AIFs if total AIF assets under management exceed:
   
  • €100 million; or
  • €500 million where the AIFs have no leverage and with no redemption rights exercisable during a period of five years following the date of constitution of each AIF.
     
• AIFMs will be required to make regular disclosures to investors and regulators.
   
• Where AIFs take controlling stakes in companies or utilize high levels of leverage, further disclosures will be required.
   
• Compliance is likely to be costly: there will be a need for independent valuations and depositary arrangements as well as minimum capital requirements.
   
• AIFMs established in the EU will enjoy new passporting rights to market AIFs within the EU.
   
• Rules allowing AIFMs to market non-EU funds in the EU, if the third country has signed an agreement with the Member State on the exchange of tax matters, will come into force three years after the Directive comes into force. In the meantime, national rules will continue to apply.
   
• Marketing of AIFs by non-EU AIFMs will be restricted unless there are equivalent regulations in the AIFM's home state and cooperation agreements exist.
   
• The Directive could come into force in 2011, if political approval is reached by the end of this year.

The proposals are outlined in FAQs published by the Commission.

Click here to access our full briefing.

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