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Key features of the AIFM Directive

The AIFM Directive provides for a set of rules for the authorisation, ongoing operation and transparency of managers of alternative investment funds (AIF), that is to say any collective investment undertaking which is not a UCITS and which raises capital from a number of investors and invests capital in accordance with a defined investment policy.

The Directive has an extensive scope as it applies to AIFM established in a EU Member State which manages one or more alternative investment funds irrespective of where such funds are established. In addition, the Directive applies to AIFM which are non EU based to the extent that they manage AIF’s which are established within the EU.

The AIFM Directive features following key provisions:

1. As regards operating conditions:

• The AIFM must obtain an authorisation from the competent authorities in its home EU Member State. Once granted, such authorisation will be valid for all Member States (passport principle). It is expected that as from 2015 subject to a positive advice from the European Securities and Markets Authority (ESMA) non-EU managers may opt to apply for authorization under the Directive in their Member State of reference.

• A depositary which operates pursuant to a written contract must be appointed for each AIF managed by an AIFM. The depository must either be a credit institution or an investment firm having their registered office in the European Union or another institution which is subject to prudential regulation and ongoing supervision. The role of the depositary includes ensuring the AIF’s cash flows are properly monitored, that all payments made by or on behalf of investors upon the subscription of shares or units in the AIF have been received and verifying the ownership and maintaining a record of the assets of the AIF.

• The minimum initial capital requirements AIFM are subject to are (i) EUR 300,000 for managers which internally manage an AIF or (ii) EUR 125,000 for externally managed AIF’s. In addition, managers must maintain a qualifying professional indemnity insurance (or additional own funds).

• Minimum own funds requirements apply to external AIFM in addition to the minimum capital requirements. In such a case, own funds should be maintained equal to the higher of (i) ¼ of fixed annual overheads and (ii) if the total value of AIF portfolios under management exceeds EUR 250 million, 0.2% of the amount by which EUR 250 million is exceeded, subject to a maximum of 10 million.

• The remuneration of AIFM’s must be (i) reviewed periodically, (ii) balanced appropriately, (iii) payable, as regards at least 40% of the variable remuneration, depending on the AIF’s financial situation and over a “sustainable” period, (iii) payable, as regards at least 50% of the variable remuneration, in shares of the fund, (iv) subject to claw-back for poor performance of the fund and (v) capped as regards guaranteed bonuses.

• Valuations of the assets of the AIF must be carried out on a proper and independent basis at least once a year in accordance with the applicable law of the country where the AIF has its registered office or in accordance with the rules or constitutional documents governing the AIF. The valuation may either be performed by the manager or by an independent external valuer or auditor.

• Distributions to shareholders in excess of a portfolio company’s distributable equity as available at the closing date of the last financial year (known as asset stripping), are prohibited.

2. As regards transparency:

• Extensive disclosure to investors is required of each AIFM of EU AIF’s and for each AIF marketed in the EU. Such information relates notably to investment strategies, objectives, techniques and associated risks, the use of leverage and collateral, identity of service providers, description of delegated functions and potential conflicts of interests related thereto, valuation procedure and pricing methodology, description of all fees, charges and expenses to be borne by the investors, latest annual reports etc.

• Annual reports must be issued at least once a year within six month following the end of the financial year for each EU AIF managed and each non EU AIF marketed in the EU.

• Notification of interests in non-listed portfolio companies must be made by the AIFM to the competent authority for crossing thresholds of 10%, 20%, 30%, 50% and 75%.

• Notification to the competent authority must also be made by the AIFM where the AIF acquires control (i.e. more than 50% of voting rights) of a portfolio company.

3. As regards fundraising

Before an authorised AIFM starts fundraising it must notify the competent authorities of its home Member State or, in case of a non EU manager, of its Member State of reference. The AIFM shall not proceed with fundraising before the competent authorities have granted their approval. The notification procedure should take no longer than 20 working days.

4. As regards non EU AIFM’s and AIF’s

After a time period of two years after the implementation deadline of the Directive, third country funds may be marketed across the EU by authorized managers subject to the AIF’s and their managers satisfying requirements of the Directive. Conditional private placement regimes remain for the time being.