Alternative Investment Fund Managers Directive

After nineteen months of heated and controversial debates, both at an industry and at a political level, the final text of the Alternative Investment Fund Managers Directive (« AIFMD ») was adopted on its first reading in the European Parliament plenary session on 11 November 2010. The Directive was published in the Official Journal on 1 July 2011 and entered into force 20 days after its publication. The Member States are required to implement the Directive into their national laws within two years, i.e. mid-2013.

The European Securities and Markets Authority (ESMA) has been given the mandate by the EU to define Level 2 legislation in response to Level 1 text. The ESMA published on 13 July 2011 a consultation paper setting out its proposals for the detailed rules underlying the AIFMD. The consultation periods for the consultation papers closed in September 2011, leaving ESMA with the substantial task of having to review, distil and interpret over 100 responses to formulate its Final Advice to the Commission.

ESMA published its Final Advice on 16 November to the European Commission on possible implementing measures. While the Commission is not obliged to accept this Final Advice, we expect the majority to be adopted, particularly around operational and reporting requirements, however, there is some risk that in the areas of depositary obligations, treatment of collateral and third countries further movement may occur.

The expected next steps are the following:

The Commission will send its finalised draft measures to the Council and the European Parliament in March 2012;
Both the Council and the Parliament will have three months to review the draft measures, meaning that the Commission is likely to adopt the final implementing measures in July 2012;
EU Member States will need to transpose the AIFMD into their national law by July 2013; and
AIFM’s existing as of July 2013 will need to be authorised by July 2014.

The Challenge

The AIFMD will heavily affect the non-UCITS sector. Gearing up for AIFMD requires all industry participants, especially managers, to start taking action as soon as possible.

With its 71 articles, the AIFMD will result in a number of significant alterations to the current organisational structure and business practice of the non-UCITS sector. With at least 48 subsidiary pieces of technical guidelines, rule making and review to follow, many more details on how AIFMD will apply in practice will emerge. There are a number of challenges to be addressed by the AIFMs in scope of the directive and we have listed some of the most important challenges ahead:

Scope: This remains a significant area of uncertainty. As expected, the Final Advice does not touch upon the scope of AIFMD because the Commission did not include this topic in its mandate to ESMA. At first glance, the definitions of an AIFM and an AIF in the Directive seem straight-forward, but because of the diversity of entities and products within the EU, applying these definitions is far more complex. ESMA is fully aware of these issues and, to the extent that the individual Member State regulators do not deal with this issue, ESMA will hopefully address this in the technical standards it is also due to produce;
Depository: The range of responsibilities of the depositary is now much strictly defined than under the UCITS regime and will significantly increase. Rules regarding the liability of the depositary are far reaching;
Operating conditions: The AIFM will have to comply with specific substance, conflict of interest, risk management and liquidity management requirements;
Risk management: A clear risk management process needs to be implemented whereby all risks associated with the AIF will need to be measured and monitored (e.g. market risk, counterparty risk and operational risk). A strong liquidity management process will need to be put in place;
Valuation: The valuation function will need to be robust and have a high degree of operational independence;
Remuneration: The AIFM will have to adopt specific remuneration policies which are aligned to the recent EU Capital Requirements Directive for the financial services industry;
Reporting and disclosure: The AIFM will have to comply with several reporting and disclosure requirements towards the regulators and the authorities; and
Third country regime: EU AIFs and non-EU AIFs, managed either by an EU AIFM or a non-EU AIFM, and marketing to MiFID professional investors domiciled within the EU will need to review their organisational structures and business models to see how they can best fit the requirements of the AIFMD.

In addition to other conditions, there are certain requirements which may have major impacts for specific industries, like the asset stripping rules and requirements in case of investments in non-listed companies and issuers which will primarily affect the private equity industry.

How we can help?

We have a multi-disciplinary and multi-industry team of professionals in business strategy, operation and structuring, regulatory compliance, tax, remuneration and assurance services ready to assist you: identify and assess the many impacts of the Directive on your organisation and develop an integrated response to the AIFMD. Our team works closely with the PwC European AIFMD working group to ensure knowledge and best practices are shared on a Pan-European basis.

Our experts can help you in

Raising awareness and building knowledge within your organisation:

Half-day sessions on AIFM organised by PwC Academy, which are tailored with a focus towards specific industries (Hedge Funds, Real Estate or Private Equity);
Tailored Executive Workshops aligned to your specific needs.

Assessing the impact of the Directive on your organisation:

As a first step, prepare a diagnostic to understand how and where the Directive will impact your business and products;
On completion of the diagnostic, create a map of your overall structural framework focusing on the products (including investor specific issues), on entities (who is in, who is out, and how different entities may be impacted) and on relationships (both internal and external);
Provide an analysis of impacted areas, gaps and recommendations on where, from a human capital, systems and strategic perspectives, you may need to take further actions to ensure compliance moving forward taking into account the commercial imperatives;
Finally, if required, bring the necessary support and advice to assist you further with implementing any enhancements to your organisation as well as analysing any tax consequences that may arise.

Contact one of our industry professionals to discuss your unique business concerns: