Regulatory updates

Will an AIF’s Investment Manager be subject to AIFMD? Probably not!

The European Securities and Markets Authority (ESMA) have published its Level 2 technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive (‘AIFMD’). The report sets out ESMA's advice regarding the specific issues identified in the European Commission's request.

The key questions for Hedge Funds (i.e. Alternative Investment Funds (‘AIF’)) and their Investment Managers are; a) when to adopt the AIFMD and, b) which entity does so. It has become increasingly clear that, in effect, the Alternative Investment Fund Manager (’AIFM’) will perform a similar role to that of the UCITS Management Company (the so called ManCo) but for AIF. Essentially this is a policing role.  As a consequence it seems most likely that an AIFM would be best, in most cases, advised not to be the Investment Manager but a separate entity just as is typically the case for the ManCo in the UCITS environment. What, principally, drives this is the benefit from not being jointly subject to the provisions of both MiFID and AIFMD. For example the AIFM would be subject to the AIFMD’s regulations concerning Capital and Remuneration and not those, which are different, under MiFID/CRD. This is possible because the regulations that are likely to apply to AIFM’s delegation powers are now much clearer and would allow an AIFM to delegate the Investment Management and Risk Management to separate MiFID Investment Firms (which would not be subject to the provisions of the AIFMD).

A further advantage gained by keeping the AIFM and Investment Manager separate is that an AIF may only appoint one AIFM but the AIFM may appoint as many Investment Managers as they wish.

For Third Country AIF, e.g. those established in Cayman, two ways forward appear to exist, the choice being driven by the marketing strategy of the AIF.

Third Country AIF managed in part or in whole by a UK MiFID Investment Manager but closed to new subscriptions from EU Investors

The AIF may appoint a Third Country AIFM, e.g. the existing Cayman Manager, who then, as now, would be permitted to delegate the Investment Management of the AIF to an EEA MiFID Investment Manager.  The EEA MiFID Investment Manager would be permitted, as now, to undertake investment management of the AIF and would not, directly, be subject to the AIFMD provisions but the AIF could not be marketed to EEA investors.

Third Country AIF open to new subscriptions from EU Investors

In these circumstances it would seem most effective that the AIF appoint an EEA AIFM which could then appoint as many Investment Managers as necessary (EEA MiFID and/or suitably authorised Third Country Investment Managers).  This would permit the Third Country AIF to be marketed, via the current EU Member State Private Placement regimes at least until 22 July 2018, to EEA Investors.  In the event that the Third Country Passport is implemented, this would be from 22 July 2015, then the EEA AIFM would be permitted to market the Third Country AIF to any, permitted, EU Investor under an AIFMD Passport (e.g. a UK AIFM may market the AIF into any other EU Member State on an equal footing, even those with restrictive Private Placement legislation).

The report from ESMA is divided into four sections, and a full update with a detailed summary of important elements of ESMA’s Level 2 advice on AIFMD can be found by clicking here.

To discuss in more detail please contact Andrew Lowin.