February 2011

LEGAL EASE: plus ça change

CatalanoPassporting provision represents the biggest upside for EU-based alternative fund managers, says Eliana Catalano from Bonelli Erede Pappalardo The Alternative Investment Fund Managers (AIFM) Directive comes into force in early 2011, with EU member states required to implement it into local law by early 2013. The directive applies to managers of alternative investment funds which includes hedge, private equity, commodity, real estate, debt and infrastructure funds, that are either based in the EU or manage and/or market such funds in the EU. The directive does not apply to managers managing alternative investment funds (“AIFs”) that either have total assets of less than €10m or that have total assets of less than €500m subject to the AIFs not being leveraged and having no redemption rights during a period of five years. What does it say?
EU-based AIFs will need to be authorised by the regulator in their home EU member state and will need to comply with the directive’s requirements. Once this is the case, they can manage and market their EU-based AIFs across the EU under a passport system.  Pursuant to the more important provisions, each manager will be required to:
  • Save a minimum initial capital (€125,000 for externally managed funds and €300,000 for internally managed funds) and provide an additional amount of own funds where the assets are worth more than €250m;
  • Have remuneration policies for senior staff and risk-takers which promote sound and effective risk management;
  • Separate risk management and valuation functions from the operational part of the AIF;
  • Notify its regulator before delegating functions and ensure that a series of conditions are satisfied;
  • Appoint a single depositary for each fund which shall be subject to a strict liability regime;
  • Demonstrate that its leverage limits are reasonable (with regulators empowered to impose leverage limits on funds); and
  • Produce an annual report and periodically update regulators with information such as the principal exposures, liquidity, risk profile and leverage of its funds.
In relation to private equity funds acquiring stakes in non-listed companies above a certain size, a manager is required to:
  • Disclose to its regulator when its stake crosses certain thresholds;
  • On gaining control, inform the company and its shareholders of its intentions with regard to the future of the business and the likely repercussions on employment, and will also have to provide its regulator with information on the financing of the acquisition; and
  • Not, for a period of two years following the acquisition of the company, extract money from its capital (to prevent “asset-stripping”).
What are the practical effects?
The AIFM Directive will introduce additional burdens for fund managers from an operation and compliance perspective. The directive transparency and reporting requirements will generate extra ongoing costs: the increase in potential liability for depositaries may mean an increase in fees.

A number of provisions of the AIFM Directive will have a direct impact on the fund managers’ operations. With regard to private equity funds, the transparency provisions may entail the disclosure of information which previously would have been regarded as confidential and the restrictions on “asset-stripping” may affect the strategies employed by certain funds.

On a more positive note, the passporting provision represents the biggest upside for EU-based alternative fund managers as they will now be able to market their EU-based funds across the EU without having to satisfy local requirements. 

The passport system for marketing in the EU will only initially be available to EU-based alternative managers managing EU-based funds.  EU-based managers that manage non-EU-based funds and non-EU-based managers will temporarily be allowed to market their funds in individual member states if they satisfy the local rules of that state (the National Private Placement Regimes or NPRR), as well as certain requirements of the directive which crucially exclude the onerous depositary rules.

However, it is expected that starting from 2018, the NPRR will be abolished and also EU-based fund managers who manage non-EU-based funds and non-EU-based fund managers funds will only be allowed to market themselves in the EU if they have a passport and therefore fully comply with the directive. What should the industry be aware of?
The final text of the directive only represents part of the journey to a comprehensive set of rules because the European Commission is due to implement secondary legislation over the next two years, the Level 2 phase. This legislation includes criteria for the valuation of assets and remuneration policies, and the circumstances in which local authorities can impose leverage limits on funds. The true impact of the directive can only be properly assessed when the Level 2 phase has been completed. For now, the details outlined in this article should serve as a helpful guide for the industry. Eliana Catalani is partner at Bonelli Erede Pappalardo ©2011 funds europe

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