ESMA Regulation - Alternative Investment Fund Managers Directive
|Proposal Date||Passage Date||Rules in Effect|
|March 30, 2009||November, 2010||December 19, 2012|
The European Commission's Directive on Alternative Investment Fund Managers (AIFMD) is a proposed regulatory and supervisory framework for alternative fund managers (AIFMs) in Europe. The proposal, which was originally published on March 30, 2009, provides more transparency to the investors and regulators associated with alternative investment funds. The funds being discussed in the proposal include hedge funds and private equity, that are not already regulated under (UCITS Regulation), the set of directives investment in mutual funds and other collective securities.
The final draft of AIFMD was approved by the European Parliament in November 2010. On December 19, 2012,the EC adopted the Delegated Regulation supplementing the AIFMD. After a three-month scrutiny period by the European Parliament and the Council it will enter into force, provided that neither co-legislator objects, at the end of this period and the day following publication in the Official Journal.<ref>Commission adopts implementing rules for the Directive on Alternative Investment Fund Managers. Europa. Retrieved on December 21, 2012.</ref>. The comment period on hedge funds ended on January 31, 2009.
Conversations regarding the regulation of alternative investment funds began in Europe in 2006 with the creation of The Expert Group on Alternative Investment Funds.<ref>Financial services: Commission appoints experts to investment fund groups. Europa. Retrieved on January 31, 2006.</ref> This was followed by a public consultation on AIFs in November 2006, and a public consultation on hedge funds in December 2008.<ref>Commission launches public consultation on hedge funds. Europa. Retrieved on December 18, 2008.</ref>. The comment period on hedge funds ended on January 31, 2009.
On February 26 and 27 of 2009, the European Commission held its High-Level Conference on Private Equity and Hedge Funds. Investors, regulators and other participants in the hedge fund and private equity industries in Europe discussed issues like financial stability going forward, transparency as a result of regulation, and investor protection. This, in combination with the public consultations, lead to the proposal of AIFMD on April 29, 2009.<ref>Financial services: Commission proposes EU framework for managers of alternative investment funds. Europa. Retrieved on April 29, 2009.</ref>
On December 2, 2010, the commission sent a provisional request for comments to the Committee of European Securities Regulators (CESR), later replaced by the European Securities and Markets Authority (ESMA).<ref>Provisional request for a technical advice on the Directive for Alternative Investment Fund Managers (AIFM) level 2 measures (PDF). European Commission. Retrieved on December 2, 2010.</ref> The original deadline for advice was September 16, 2011, and an additional letter extended that date to November 16, 2011.<ref>[http://ec.europa.eu/internal_market/investment/docs/alternative_investments/level2/note_en.pdf Provisional request for a technical advice on the Directive for Alternative Investment Fund Managers]. European Commission. Retrieved on November 17, 2011.</ref>
According to the proposal, AIFMD was specifically set out to:
- "Establish a secure and harmonised EU framework for monitoring and supervising the risks that AIFM pose to their investors, counterparties, other financial market participants and to financial stability; and
- Permit, subject to compliance with strict requirements, AIFM to provide services and market their funds across the internal market."
Key principles of the AIFMD Proposal:
- Managers of all non-UCITS funds require authorisation under the Directive
- Does not imply a 'one size fits all' approach
- De minimis exemption for managers of small asset portfolios
- Focus on the decision making and risk-taking entities in the value chain
- AIFM will be entitled to market AIF to professional investors, including cross-border
- AIFM will be permitted to manage and market AIF domiciled in third countries
The specific content of the proposal can be found in Section 3.5 of the proposal.
The directive covers managers of alternative investment funds ("AIFs") with less than EUR 100 million in assets under management (500 million if the fund does not use leverage or prohibit redemptions within 5 years of initial investment) - hedge funds, private equity and venture capital funds, real estate funds, investment trusts and non-UCITS retail funds. Among the provisions:<ref>AIFM Directive. Linklaters. Retrieved on December 31, 2012.</ref><ref>AIFMD Technical Summary: An Overview. Deloitte. Retrieved on December 31, 2012.</ref>
- Capital Requirements: AIF should hold at least EUR 125,000, or the equivalent of one-quarter of the fund's fixed overhead, plus an additional 0.02 percent of capital if AUM is above EUR 250 million.
- Remuneration Policies: Risk activities must adhere to the AIF's risk profile. At least 50 percent of variable remuteration must consist of shares or units of the AIF, and should be at least partially deferred.
- Valuation: Valuation must be "appropriate and consistent" and must be conducted at least once a year, by an independent party, either internal or external.
- Depositary: The fund manager must appoint a depositary for each fund it manages; the depositary will be responsible for the booking of payments and verifying account values, certain recordkeeping activities.
- Delegation: An AIFM may delegate functions to a "reputable" outside party. To avoid conflicts of interest, portfolio and risk management functions may not be provided by the depositary. The AIFM is responsible for periodic review of each delegate.
- Reporting: The AIFM must report to it Member State's competent authority, as well as ESMA and the European Systemic Risk Board on such things as principal exposures and risk concentrations, changes in risk profile, its use of leverage and results of stress tests.
- Marketing: An AIFM may market to professional investors in its home state, and to such investors in other Member States provided it obtains an "EU Marketing Passport." For more on professional investors, see the MiFID page.
On July 13, 2011, ESMA released a 438-page consultation setting out proposals on implementing measures for the Alternative Investment Fund Managers Directive (AIFMD). It consists of:
- General provisions, authorization and operating conditions, including:
- influence of leverage on assets under management;
- valuation, cross-holding, registration, and capital requirements;
- conflicts of interest, risk and liquidity management, investment in securitization positions, and organizational requirements;
- Depositaries, including draft advice on the contract evidencing appointment of the depositary, de-positary functions, segregation obligations, loss of financial instruments, external events beyond reason-able control and objective reasons to contract a discharge; and
- Transparency and leverage, including the definition of leverage and appropriate methods for its calculation, the content and format of the annual report to be prepared by the AIFM, disclosure to investors, the use of information by competent authorities and limits to leverage.
The European Commission's Directive on Alternative Investment Fund Managers (AIFMD) was sent to the EC in March 2009, and proposed by the EC on April 29, 2009. It provides more transparency to the investors and regulators associated with alternative investment funds. The funds being discussed in the proposal include hedge funds and private equity, that are not already regulated under (UCITS Regulation), the set of directives investment in mutual funds and other collective securities.