Magazine Issues » September 2012

LEGAL EASE: Focus on managers

James TinworthThe Alternative Investment Fund Managers  Directive (Aifmd) applies to alternative investment fund managers, not to the funds that they manage.

This is a fundamental point. For example, the directive does not require EU alternative investment funds to have a depository; it requires an authorised alternative investment fund manager to ensure that a depository is appointed by each EU alternative fund that it manages.

According to the Aifmd, a smaller alternative manager does not have to be authorised as an alternative investment fund manager under the directive where it can rely on one of the exemptions in Article 3(2). The first of these applies to fund managers who manage funds with assets under management (including any assets acquired through leverage) that do not exceed €100 million. The second applies to managers who manage funds that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment and whose assets under management do not exceed €500 million. Such a fund manager can instead be “registered” with its regulator and may only be required to comply with Article 3(3).

It is important to note that the directive’s exemption for such “registered Aifms” is “without prejudice to any stricter rules adopted by member states”. For instance, the UK authorities have stated that they are considering two options: full application of the directive to smaller managers, or the application of “a lighter regime selectively, differentiating between Aifm”. The regulators have indicated they are minded to choose the latter option. In the UK, therefore, smaller funds managers could be subject to registration only, selective application of the Aifm directive authorisation requirements or full Aifmd authorisation.

Even if the directive only required a manager to be registered, the assumption is that the UK would require the fund to be authorised and regulated in accordance with the current Financial Services Authority (FSA) standards. The directive’s management passport, however, will only be available to fully authorised alternative investment managers. It will, therefore, be a matter for national law as to whether a manager that is registered in one member state (even one that is regulated to the current FSA standards) would be able to manage an alternative fund that has been established in another member state.

Even if it were possible for a fund manager that is registered in one member state to be able to manage an alternative fund that has been established in another member state, would any registered manager want to manage a European Union alternative investment fund?

The most popular EU non-Ucits fund vehicles are the Irish qualifying investor fund, the Luxembourg specialist investor fund and the Maltese professional investor fund. Each of these jurisdictions are amending the regulatory regimes that apply to these fund vehicles to become “Aifmd-ready”.

This approach is disregarding the fundamental point made in the first sentence of this article: the Aifm Directive applies to managers, not to the funds that they manage.

Registered alternative managers, to whom most of the directive’s requirements may not apply, may not be required to manage an “Aifmd-ready” EU alternative fund and the increased costs of managing an “Aifmd-ready” EU alternative fund would not be feasible for many.

Recently, there have been very few large fund start-ups, which would require full directive authorisation, but many more smaller fund start-ups, which would fall in the exemption for registered alternative fund managers.

It is crucial the EU continues to offer a fund vehicle that is appropriate for registered alternative managers: one that is regulated but not to the exacting requirements of the Aifm directive. If not, the high barriers to entry of having to manage an “Aifmd-ready” EU alternative fund will result in almost all smaller EU start-ups choosing to manage non-EU alternative funds.

James Tinworth is a partner at Stephenson Harwood

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