AIFMD compliance should now be business as usual. However, the Annex IV reporting regime continues to present a particular challenge and non-European firms still await the switching on of the EU passport.
What is AIFMD?
The Alternative Investment Fund Managers Directive (AIFMD) proposal came into effect on 22 July 2013, although cross EU border sales for non-EU domiciled firms (‘third country firms’) remained deferred.
The Directive’s objectives are as follows.
- Ensure that all Alternative Investment Fund Managers (AIFMs) are subject to appropriate authorisation and registration requirements.
- Provide a framework for the enhanced monitoring of macro-prudential risks, for example, through sharing of relevant data among supervisors.
- Improve risk management and organisational safeguards to mitigate micro-prudential risks.
- Enhance investor protection.
- Improve public accountability for Alternative Investment Funds (AIFs) holding controlling stakes in companies.
- Develop the single market for AIFMs.
AIFs are considered to be all collective investment funds that are not UCITS funds.
Annex IV Reporting
AIFMD requires firms, either quarterly, half-yearly or annually (depending on assets under management and whether the funds are leveraged) to provide both quantitative and qualitative data to the regulator.
These reports provide information on the main instruments in which the firm is trading, the markets of which it is a member or where it actively trades, and the principal exposures and most important concentrations of each of the AIFs it manages. Other information that has to be disclosed includes:
- the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature
- any new arrangements for managing the liquidity of the AIF
- the AIF’s current risk profile and the risk management systems employed by the AIF
- the results of the stress tests performed.
Meeting the reporting requirements of AIFMD Annex IV means significant investment in software and skills. Furthermore, determining how and what you need to report is complex and depends on your structure and assets under management.
Third Country Firms
Unless you are an EU AIFM with EU AIFs, you are yet to benefit from AIFMD’s new Pan-European passport regime.
In July 2016, ESMA has published its Advice in relation to the application of the passport to non-EU AIFMs and AIFs in twelve countries: Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, Switzerland, and the United States. According to ESMA’s advice:
- there are no significant obstacles impeding the application of the AIFMD passport to Canada, Guernsey, Japan, Jersey and Switzerland
- if ESMA considers the assessment only in relation to AIFs, there are no significant obstacles impeding the application of the AIFMD passport to AIFs in Hong Kong and Singapore. However, ESMA notes that both Hong Kong and Singapore operate regimes that facilitate the access of UCITS from only certain EU Member States to retail investors in their territories
- For details of the other countries, please see the report.
We hope that soon, the AIFMD pan-European passport may be available to both third country AIFMs and EU-AIFMs with AIFs domiciled outside the EU. However, the European Commission has yet to confirm the switching-on of this passport. Assuming it does, you will be able to opt in, but you will need to comply with the full AIFMD requirements.
Alternatively, you can choose to continue to market in the EU under national private placement regimes (NPPRs), subject to them remaining available – this is down to member state discretion and some have more onerous requirements than others. Dual marketing is expected to operate until late 2018 to early 2019, after which NPPRs are expected to be abolished.
AIFMD Asset Segregation
With the aim of improving investor protection, AIFMD requires that AIF assets are entrusted with a depositary and segregated from certain separate accounts. Depositaries may sub-delegate their responsibility for safe-keeping to third parties, on the condition that those third parties maintain proper asset segregation. Industry practitioners have, however, raised questions regarding the interpretation of this condition. Specifically, AIFMD does not clarify if third parties must segregate the accounts of AIFs sub-delegated by separate depositaries. To address these concerns, ESMA discussed five possible solutions in its 2014 Consultation Paper and expressed a preference for two:
- Option 1: the account in which the AIF’s assets are kept by the third party may only include assets of the AIF and the assets of other AIFs sub-delegated by the same depositary
- Option 2: the third party is not required to segregate the accounts of AIFs sub-delegated from separate depositaries
ESMA found that the majority of respondents to the December 2014 Consultation Paper objected to their preferred options for segregation – they instead preferred some of the options in the accompanying cost-benefit analysis. Separately, the new UCITS V Directive has recently introduced asset segregation requirements which are broadly aligned to the AIFMD. Therefore asset segregation issues have become relevant to both AIFs and UCITS. ESMA have therefore decided to carry out a further consultation.
They have issued a call for evidence which has a broader scope and also covers the asset segregation rules under the UCITS Directive and any residual uncertainty on how the depositary delegation rules apply to central securities depositaries. They are also seeking views on any asset segregation regime which ensures the assets are clearly identifiable as belonging to the AIF or UCITS and which provides robust protection for investors in the event of insolvency. Responses can be seen here. ESMA will now consider the feedback received with the aim of finalising its work on asset segregation by the end of 2016.
Under Article 69 of the AIFMD, the Commission must start a review of its application and scope by 22 July 2017. The Commission is required to:
- analyse the experience of applying the AIFMD;
- understand its impact on investors, AIFs or AIFMs, and in the EU and in third countries; and
- the consider the degree to which the AIFMD’s objectives have been achieved.
How can Bovill help?
We can help with all aspects of AIFMD compliance:
- Technical advice on interpreting and applying AIFMD requirements
- Completing your Annex IV returns – we can help from the initial completion of the Annex IV templates to the validation and the submission of the ‘xml’ formatted file directly to the FCA
- While we wait for the passport to be switched on, we can watch NPPR developments in key EU markets or target markets to ascertain timing of applying for full authorisation and passports
- We can help you in undertaking a gap analysis of AIFMD requirements to identify scale of change and then develop a project plan.