AIFM Directive - Happy to sit and wait in the sun?
The controversial European Alternative Investment Management Directive (AIFMD), finally adopted by the European Parliament last November, was originally expected to be published in early 2011, so triggering a two year period in which Member States would be required to get their rule books in order to ensure consistent fund management regulation across the EU. Five months on, publication of a final text is now not expected before June at the earliest. This is probably quite optimistic given that the sun is now brightly shining across Europe……
With this in mind, we thought it would be worthwhile to recap the key features of the Directive, and how it will impact fund managers in the EU and beyond; this recap we have found both useful, considering the months that have passed since the final text was agreed, and nostalgic, when recalling the numerous compromise proposals that passed over our desks in 2010.
Scope: The Directive will apply to managers of all classes of fund other than UCITs. Many previously unregulated (or lightly) sectors will shortly become regulated. So hedge funds in the same bracket as real estate funds!
Marketing: Without doubt this remains the most contentious section of AIFMD. EU Managers managing EU Funds will have the benefit of an EU wide "passport", whereas the availability of this for non-EU Managers and in relation to the non-EU Funds will be deferred until 2 years after the Directive becomes law (currently scheduled to be in 2015, but we'll see...). Private Placement regimes will remain in place until at least 2018 when they could be abandoned altogether, following which compliance with the Directive would be the only way in which private funds can be marketed. However, using private placement regimes will require limited compliance with the Directive.
Depositaries: Each Manager will be required to appoint a "depositary" for each Fund that it manages. Direct liability to investors for depositaries remains in the final draft, albeit a watered down version, as do limitations on delegation.
Remuneration: The Directive imposes limits on how management personnel may be remunerated, including a requirement that 40% of bonuses are deferred for at least 3-5 years. Interaction between these provisions and the UK FSA Remuneration Code will be an area worth keeping an eye on (together with the takings of certain high-end stores and car showrooms towards the end of each year!).
Leverage: Use of "substantial" leverage must be disclosed to local regulators, who may then impose limits on a case-by-case basis. (Let's not re-open the "systemic risk" debate that prompted this inclusion in the Directive).
Delegation: Delegation by Managers will only be permitted if it can be "objectively justified" and to delegates that are "suitably qualified". As a key point on the investor due diligence checklist, this is likely to be welcomed on the buy-side, but may have practical implications for global funds and those focusing on emerging markets.
Valuation: Managers are required to ensure that fund assets can be valued "properly and independently", although the Manager may itself value assets so long as this is done via a business unit separate from its portfolio management function. Only time will tell how effective this will really be.
Liquidity Management: Managers are required to employ appropriate liquidity management systems and subject them to regular tests. Another provision likely to be welcomed on the buy-side for its lack of clarity.
Private Equity: Special provisions for private equity funds include disclosure requirements where certain stakes in non-listed companies are acquired, and prohibitions on "asset-stripping" during a 2 year period.
The AIFMD was almost two years in the making, has been at the desks of the jurists-linguists for over 6 months, and we are still waiting for it to appear in the Official Journal. We know what the provisions themselves will look like, but expect that the already lengthy secondary rule-making process will drag on for the rest of this year. Are we happy to sit and wait for the AIFMD thundercloud to ruin the clear blue skies or do we just wish that it would hurry up and rain?