It is probably fair to assume that some readers will not know much about AIFMD (Alternative Investment Fund Managers Directive) other than it doesn’t trip off the tongue like MiFID or UCITS.
The directive hopes to “harmonise” the approach to managing these types of funds,
However the coverage of AIFMD is broad and will have been project managed through fund management businesses to ensure compliance. Primarily it covers the management, administration and marketing of alternative investment funds (AIFs). Put simply an AIF is a collective which is not a UCITS, so could be a hedge fund, REIT or private equity fund for example. The directive hopes to “harmonise” the approach to managing these types of funds, and so seeks to regulate the AIF manager (AIFM) rather than the AIF itself, and includes new requirements for firms acting as depositaries for AIFs.
The aims of AIFMD are to:
- Enhance supervision to prevent market instability
- Improve investor protection through new standards and transparency of disclosure and reporting
- Foster competition
So what are the requirements for firms managing AIFs?
- They will need to be authorised (full scope AIFM) or registered under the lighter touch if their AUM falls below a certain threshold. This may mean that some fund managers are regulated for the first time
- They will need to review conduct of business activities to ensure they are meeting requirements for fair treatment of investors with appropriate disclosure including details of remuneration (AIFM Remuneration Code which requires every AIFM to disclose the remuneration of its entire staff membership, split by fixed and variable pay, and a single total remuneration figure for each of its senior managers and every other member of its ‘code staff’ i.e. every important risk-taker)
- Meet initial capital requirements, including their own funds and professional indemnity insurance
- Ensure the safe keeping of investments through the appointment of depositaries and custodians and have appropriate systems and controls in place when they delegate activities e.g. portfolio management
- Only market AIFs to professional investors in the EEA and have the controls in place to ensure that this is the case
- Be aware that EEA regulators will have the power to restrict leverage (detailed as any method by which the AIFM increases exposure of an AIF it manages through borrowing of cash or securities, or leverage embedded in derivative positions or any other means) to avoid the build-up of systemic risk.
As at the time of writing, we are now in the “transitional period” as the deadline for AIFMD to be implemented in a EEA member state was 22 July 2013. By 22nd July 2014 all AIFMs will need to have the permissions, authorisation or registration in place, to run AIFs in the UK with all applications received by the FCA no later than 22nd January 2014.
AIFMD has brought into existence a new FCA sourcebook (FUNDS – the Investment Funds) within the Handbook as well as changes in SYSC and CASS. The focus however, is clearly upon senior managers taking responsibility for the development of appropriate funds to market.