When the AIFMD came into force on 21 July 2011 that was not the end of the process – just the end of the beginning. The next phase was the implementation of the many facets of the legislation. Some milestones have passed but some are approaching – and the time to act is now.
Implementation of the Directive has taken place in four stages:
• Level 1 – the text of the Directive was put on the table in April 2009 and entered into law in July 2011.
• Level 2 – regulatory and implementing technical standards, which underpin the Directive and were published by the Commission in December 2013.
• Level 3 - the European Securities and Markets Authority (ESMA) drafts guidelines to ensure efficient supervision and uniform application of European regulatory law.
• Level 4 - Strengthened legal enforcement by ESMA and the Commission
The next levels
Member States had until July 2013 to transpose the Directive into national law. As the Level 2 implementing measures were set out as a regulation rather than as a directive, they entered into force as published and did not require transposition into national law.
|‘AIFMs who need to ensure that their own house is in order to take advantage of the EU passport’|
While legal implementation therefore took place on 22 July 2013, there are many tasks that individual firms and managers need to undertake. The Directive has given EU AIFMs until 22 July 2014 to seek the necessary variation of permissions, authorisations or registrations. All non-EU AIFMs managing EU AIFs and non-EU AIFMs marketing AIFs to EU investors must be authorised by their “relevant regulator”.
In other words the burden of implementation has effectively passed to the AIFMs who need to ensure their own houses are in order to take advantage of the passport that will allow them to market across the European Union.
Implementing the rules
All AIFMs must obtain authorisation from their home regulator. As part of the application procedure, AIFMs need to provide key information to the regulator. These tasks fall into a large number of categories of which the main ones are:
- Capital requirements
AIFM are subject to capital requirements starting at €125,000 for external AIFM and €300,000 for internally managed funds. AIFM with portfolios of more than €250 million will need provide an additional amount of own funds corresponding to 0.02% of the excess amount (subject to a cap of €10 million for initial capital and own funds). If the manager has a guarantee from a bank or insurer they may only need to provide up to half of the additional own funds. Managers will need additional own funds of 0.01% of the absolute value of the portfolios to cover potential risks of professional negligence, or take out a professional indemnity insurance.
Implementing limits on leverage has moved to the heart of financial regulations in the wake of the financial crisis. Fund managers must set leverage limits for each AIF and disclose those to investors (although the regulator must impose leverage limits if it decides that this is necessary to prevent the build-up of systemic risk in the financial system or disorderly markets).
- Risk and liquidity management
The AIFM must establish a risk function that must be separate from the portfolio management and which must implement policies and procedures to identify, monitor and manage risk at any time. It must report regularly on the current level of risk and compliance with risk limits.
ESMA published guidelines on sound remuneration policies in February 2013. AIFMs must have policies that do not encourage excessive risk taking. These must cover senior managers, risk-takers, and other staff who are in the same pay bracket as those employees. Details include:
- Guaranteed bonuses only allowed in limited circumstances.
- At least 40% of bonus payments to be deferred for at least 3-5 years
- A substantial proportion – usually at least 50% – of the bonus should be in the form of units or shares in the fund concerned.
AIFMs need to have a documented policy to ensure sound, transparent and comprehensive valuations of their assets and net asset value. The valuer must be independent and make the valuation at least annually.
While AIFMs will be allowed to delegate functions, the principle behind the regulation is that managers cannot delegate to such an extent that, in effect, they can no longer be regarded as managers. The AIFM must notify their regulator and be able to explain why they are doing so and show that the delegates are of sufficient calibre and experience to perform the tasks.
For each AIF they manage, AIFM must appoint a single depositary. The directive imposes a strict no fault liability for losses of financial instruments held in custody. For EU funds, the depositary must be established in the fund’s home member state.
Most firms implementing AIFMD will have to make significant operational changes to their businesses. They will need to consider all available options and set about implementing the new requirements.
|‘Regulators want to see firms that fall within the scope of the Directive start ensuring they comply with it as soon as possible’|
Regulators have made clear that they want to see firms that will or may fall within scope of the Directive ensuring they comply with it as soon as possible.
By Phil Thornton, Lead Consultant, Clarity Economics