The 2008 financial crisis marked the beginning of a loss of investor confidence in the world of finance, and the origin of a wave of new European regulations, including the directive relative to alternative investment fund managers (AIFM directive or AIFMD for Alternative Investment Fund Managers Directive), which was transposed to Luxembourg law by the law dated 12 July 2013.
The AIFM directive is one of the key regulations drawn up by the European authorities to limit the risk of another crisis by strengthening regulations surrounding AIFM. Its main goal is to regulate the activities of the managers of investment funds that do not come within the scope of the UCITS IV standard (therefore targeting OPCVM funds). This includes, among other things, alternative management funds (hedge funds, real estate funds, private equity funds, etc.)
This directive therefore regulates, for the first time, the managers of alternative investment funds (AIF) and not the actual funds themselves.
The AIFM directive is the core of many important changes involving investment funds. For AIFM, by imposing new operating rules on them regarding their:
- Capital base
- Risk Management
- Conflicts of interest
- Management delegation (without, however, excluding the responsibility of the management company)
- Reporting to investors or the regulator (in this particular case the CSSF for Luxembourg) and custodians (for each AIF)
AIFM, following the example of the Luxembourg management companies that act on behalf of third parties (third party AIFMs), and for which accreditation is required, have been impacted by the AIFM directive, because they have been put in place surrounding all of the operational rules mentioned above. Thus, some AIF managers – whether for size or organisational reasons – will find that it is in their best interest to use the services of a third party AIFM.
Beyond the needs to meet new regulatory requirements, the major interest of third party AIFMs can be seen on two levels: that of those with access to a European passport or that of those with governance. Indeed, the AIFM Directive helps to facilitate the cross-frontier commercialisation of alternative funds to professional investors, through the intermediary of the European passport. This European passport allows European alternative fund managers to manage and commercialise their European AIFs in all the European Union’s member states without having to obtain another accreditation in addition to the one obtained in their country of origin.
This form of quality control follows in the footsteps of the UCITS funds whereby implementation is relatively easy for players in Luxembourg, and is now seen in a positive light by investors. For these reasons the transposition of the AIFM directive to Luxembourg has resulted in the setting up of special limited partnerships; companies that offer promoters of this type of fund, are given a choice of jurisdiction for the location of their funds and their holding structures. The main interest of the third party AIFM is that it allows AIFM in other countries to gain access to this passport.
The AIFM directive means that it is necessary to put in place both risk management and reporting procedures. This has inevitably had an impact on fund governance, owing to the existence of an independent risk management and investment management function.
Still in the area of governance, the requirement concerning reporting has also been strengthened, both regarding the investors and the regulator. The supervisory authorities can thus collect more data to help them monitor systemic risks. This reporting aims to guarantee the highest level of transparency regarding fund management for the investors and the supervisory authorities, for example by providing the supervisory authorities with information on the funds’ general level of leveraging.
The collection and publication of this information have been made more effective thanks to the independence of the risk and investment management functions, through the role played by the conducting officers, of which there must be at least two and whose functions have been made compulsory in each AIFM.
In terms of perspectives, there are still some regulatory and operational measures that have to be settled, particularly concerning the national private placement regimes (NPPR), the extension of the passports regime to non-European AIFMs and AIFs, and the opening up to other jurisdictions.
As a reminder, non-European AIFMs and AIFs managed by European AIFM are subject to the NPPR of each member state in which the AIF is distributed or managed. In principle, the NPPRs should come to an end in July 2018. The NPPR allows AIFMs to market AIFs that otherwise cannot be marketed under the AIFMD domestic marketing or passporting regimes.
The opening up to non EU third countries is an issue that the specialist media and certain professionals have highlighted. We have thus recently heard talk of extending the European passport to alternative investment funds based outside Europe.
The European Securities and Markets Authority (ESMA) has issued a statement to the European Commission on the extension of the AIFM passport to managers from 12 countries outside the European Union in order to grant the AIFM passport to "non-EU" AIFs: Australia, Bermuda, Canada, the United States, Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, and Switzerland.
While it seems that no major issues will be encountered with regards to Canada, Guernsey, Jersey, Japan, and Switzerland, other countries still have to make a number of legal and/or regulatory adjustments. This should be monitored with particular attention, taking into account the competitive, regulatory, and political aspects that this would entail.
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