What is the AIFMD?
The Alternative Investment Fund Managers Directive (AIFMD), is a European directive which came into force on July 22, 2013. It prescribes rules for the authorisation, operating conditions and transparency obligations to be applied to alternative investment fund managers (“AIFMs”) and for the marketing of alternative investment funds (“AIFs”) to professional investors throughout the EU. The directive currently offers a marketing ‘passport’ to compliant EU AIFMs of EU AIFs. The AIFMD regulates AIFMs; it does not regulate AIFs directly.
The AIFMD sets standards for marketing around raising private capital, remuneration policies, risk monitoring and reporting, and overall accountability.
The AIFMD has two major objectives built into it. First and foremost, the AIFMD seeks to protect investors by introducing stricter compliance around how and what information is disclosed. This includes conflicts of interest, liquidity profiles and an independent valuation of assets. The directive points out that alternative investment funds (AIF) are intended for professional investors only, as adopted from the Markets in Financial Instruments Directive (“MiFID”), although some member states can choose to make these funds available to retail investors as long as additional safeguards are applied at a national level, such as ‘well informed’ status.
What is an AIF?
AIFs are collective investment undertakings (excluding Undertakings for Collective Investment in Transferable Securities [UCITS]) which:
- raise capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of investors.
- do not require authorisation under the UCITS Directive
Therefore, hedge funds, private equity funds, real estate funds, venture capital funds and others all fall within the scope of the AIFMD.
The phrase ‘collective investment undertaking’ is not defined but it is clear that a fund may be an AIF whether it is open or closed-ended and whether it is constituted under contract law, trust law, under statute or any other legal form.
What is an AIFM?
An AIFM is defined as an entity that provides, at a minimum, portfolio management and risk management services to one or more AIFs as its regular business, irrespective of where the AIFs are located or what legal form the AIFM takes.
The directive provides that the AIFM shall be either an external manager, or the AIF itself, where its legal form permits an internal management and where the AIF’s governing body chooses not to appoint an external AIFM and it is considered a sub-threshold AIF. In such a case, the AIF shall then be authorised as the AIFM (referred to as an internally managed AIF).
The AIFM is responsible for ensuring compliance with the Directive in respect of each AIF it manages, even where such compliance may be outside of its control. The AIFMD requires all EU AIFMs to be authorised by the regulatory authority of the Member State in which they are incorporated and, subsequent to authorisation, to comply with a number of on-going obligations.
In general terms, AIFMs are required to continue to meet the conditions for authorisation at all times thereafter. They are also required to comply with certain other general conditions similar to those imposed on UCITS fund managers.
- acting honestly, fairly and with due skill, care and diligence
- acting in the best interests of the AIFs under management, their investors and the integrity of the market
- effectively employing the resources and procedures necessary for the performance of the AIFM's business activities
- compliance with all regulatory requirements applicable to the conduct of the AIFM's business
- fair treatment of all investors