The Alternative Investment Fund Managers Directive - Nabarro

The Alternative Investment
Fund Managers Directive
Practical implications for your business

Contents
AIFMD is coming… look busy! 4
Should I care about AIFMD 5
Authorisation 6
Timing 7
Impact on third country managers
and funds 8
Marketing rules 9
Operational requirements 10
Relevant experience 11
More information 13
2

Introduction
The scope of the Alternative Investment Fund Managers Directive (AIFMD) is very broad. It is not
limited by reference to asset classes or investment strategies. It captures all arrangements which look
and feel like investment funds. Nabarro has been following the implementation of the AIFMD since
the beginning and advising clients on the impact it will have on their businesses. More information on
our experience can be found later in this document.
The AIFMD is seen by many as a burden and an expense: additional regulations, more prescriptive
requirements and procedures, increased reporting and disclosure to both investors and regulators,
and increased capital requirements. But the AIFMD also presents some benefits for your business:
there will be more consistency throughout the industry; potentially you can make cost savings by
streamlining your business model; and in due course there will be a level playing field for marketing
funds and raising capital in the EU.
This document:
• Examines 10 key questions to help you understand the impact of the AIFMD on your business
and fund structures and to consider possible solutions.
• Examines timing issues and the AIFMD's impact on third country managers and funds.
• Sets out in a flowchart how the AIFMD applies to raising capital in the EU under the AIFMD.
3

AIFMD is coming... look busy!
We’ve all been talking about AIFMD for years. But now it’s time to act. Here are 10 key questions to
help you understand if and how you, your funds and your operating practices will be affected.
1. Should I care about AIFMD
Yes, if you work in the EU, in funds, joint ventures or raise
capital.
2. I’m already authorised – do I have to change my
permissions
Yes, probably. This will take about three months, but
could take longer. The UK Financial Conduct Authority
(the FSA’s successor body) will accept applications from
23 July 2013, although this may be made earlier.
3. I am not authorised. What do I do
You’ll need to apply to the FCA (or its EU equivalent) for
authorisation under AIFMD if you’re an EU manager. This
should take about three months, but may take longer.
4. What’s the hurry I thought I could wait until July
2014.
If you are managing a fund before 22 July 2013, you have
a year’s grace to get authorised. But this may not be as
great as it sounds - you might not be able to market
existing funds in the EU until you are authorised.
5. What about raising a new fund
If you are launching a fund after 22 July 2013, you will
need to comply with AIFMD in full straight away.
6. And what if I’m outside the EU
If you’re a non-EU manager or marketing a non-EU fund,
marketing will continue to be possible in the EU (initially
without requiring authorisation under AIFMD) using the
private placement regimes, but with conditions attached.
7. Will I need to increase my capital
Probably. Additional funds are also needed to cover
potential professional liability risks.
8. Do I have to appoint a depositary
Yes, unless (for now and depending on which countries you’re
marketing in) it’s for a non-EU fund that you’re not marketing
in the EU, or you’re using the private placement regimes to
market.
9. Will I have to review my compliance procedures
Yes. You will also need to look at what AIFMD means for
your business. You will need to establish separate risk
management, compliance and internal audit functions as
well as various policies and procedures (for instance,
liquidity, valuation and remuneration).
10. What if I do nothing
If you don’t comply, you will probably not be permitted to
raise or market funds.
4

Should I care about AIFMD
The short answer is yes. If you work in the EU, in funds, joint ventures or raise capital.
The AIFMD will catch real estate funds, private equity funds, hedge funds and most other
arrangements which seek to raise capital from a number of investors. A key exemption
applies to joint ventures (JV), although what constitutes a JV is open to clarification. One
of the key identifying features will be those structures in which each investor has effective
management and control over strategic decisions.
WHO DOES THE AIFMD APPLY TO
Alternative Investment Fund Managers (AIFMs), being the managers of collective
investment undertakings (listed or unlisted, open-ended or closed-ended and which invest
in any asset from securities to real estate and fine wines to precious metals) managed or
marketed in the EU. Undertakings for Collective Investment in Transferable Securities
(UCITS) are not included and are separately regulated under the UCITS Directive.
Depositaries and certain other service providers will also be subject to the AIFMD to
varying degrees.
Scope of the AIFMD
WHAT IS AN ALTERNATIVE INVESTMENT FUND (AIF)
The following diagram sets out some of the determining factors when considering if an
undertaking is an AIF. They are neither cumulative nor determinative on their own, but
demonstrate the breadth of the AIFMD.
Not an ordinary company
External manager
More than one investor
AIF
Defined investment policy
External capital
Capital pooled
EU
AIFMD will have an impact
Where is the
AIFM
established
EU
EU
AIFMD has no
impact
Non-EU
Where is the
fund
established
Non-EU
Where is the
AIF marketed
Non-EU
5

Authorisation
I’M ALREADY AUTHORISED –
DO I HAVE TO CHANGE MY PERMISSIONS
Yes, almost certainly.
In the UK, there will be new regulated activities, including
“managing an AIF” and “managing a UCITS”. You will have
to apply for these permissions through a variation of
permission application. Some of the current regulated
activities will become redundant and there will also be
limits on the types of regulated activities AIFMs can
perform (this will be particularly relevant for MiFID
investment firms).
The Financial Conduct Authority, the successor body to the
FSA from 1 April 2013 (FCA), has up to three months to
consider applications for authorisation under the AIFMD,
but it can extend this to up to six months.
Having originally proposed being open for new applications
or a variation of permissions from 23 July 2013, the FCA is
currently considering various options to minimise disruption
to your business, including accepting applications before 23
July 2013. The FCA has run an online survey to help it gauge
the number, nature and timing of applications under the
AIFMD. The survey closed on 28 March.
I AM NOT AUTHORISED. WHAT DO I DO
You’ll need to apply to the FCA (or its EU equivalent) for
authorisation under the AIFMD if you’re an EU manager.
This should take about three months, but the FCA can
extend the overall time period to six months.
Watch out for who is doing what and which parts of the
AIFMD apply. For instance:
• where no external AIFM is appointed (i.e. the board of
directors maintains responsibility for portfolio and risk
management), the AIF will be its own AIFM (an internallymanaged
AIF) and will require authorisation/registration;
and
• if an AIFM delegates investment management functions
to an extent that exceeds “by a substantial margin” those
it retains, it will be considered a “letter box entity” and
therefore, not considered as the AIFM. There are also
other criteria to consider if functions are being delegated
by the AIFM.
There may be a “marketing gap” between the implementation date
(22 July 2013) and the date you obtain authorisation during which
you will face stumbling blocks marketing and managing AIFs in
other EU member states.
6

Timing
WHAT’S THE HURRY I THOUGHT I COULD WAIT
UNTIL JULY 2014.
The “marketing gap”
If you are managing a fund before 22 July 2013, you have a
year’s grace to get authorised. But this may not be as great
as it sounds – you might not be able to market existing
funds in the EU until you are authorised. This “marketing
gap” will arise if member states do not extend the one
year’s grace period to AIFMs from other member states; in
other words if they do not allow an EU AIFM to market in
their jurisdiction without being authorised under the
AIFMD. It will not therefore be an issue for all AIFMs raising
capital in the UK alone.
AIFMs operating under this regime will not be able to take
advantage of the marketing passport.
By 22 July 2014 all EU AIFMs are required to be authorised
under the AIFMD by their home member state regulator.
However, as described above, existing AIFMs may require
earlier authorisation (i.e. from 22 July 2013) to market
existing AIFs in the EU.
Non-EU AIFMs should be able to obtain authorisation from
their member state of reference (broadly, the member
state where the AIFM intends to perform the majority of its
activities) from autumn 2015.
WHAT ABOUT RAISING A NEW FUND
If you are launching a fund after 22 July 2013, you will need
to comply with the AIFMD in full straight away. You should
be considering this when preparing your fund documents
and marketing strategy.
Transitional provisions
The AIFMD will not apply to managers of closed-ended
AIFs which have either stopped investing before 22 July
2013 or which will have both held their final closing before
22 July 2013 and terminated prior to 22 July 2016.
Small AIFM regime
For small AIFMs, the AIFMD permits member states to
operate a registration and disclosure regime. This applies to
managers whose assets under management (AUM) do not
exceed €100m, or, for certain closed-ended, unleveraged
AIFs, €500m. This threshold is calculated on an aggregated
portfolio basis, by identifying all AIFs that the AIFM
manages: it excludes UCITS managed by the AIFM and
portfolios where management has been delegated to the
AIFM, but includes AIFs where the AIFM has delegated
management to a third party.
FSA CP2
on transposing
the AIFMD
from the FCA
ESMA RTS on
types of AIFM,
key concepts &
AIFM reporting
FCA
Policy Statement
FCA to begin accepting applications
EU AIFMs need to
be authorised
unless TP applies
TP ends
All AIFMs must be
AIFMD compliant
19 March Q2 June 22 July 2013 21 July 2014
7

Impact on third country managers and funds
WHAT IF I’M OUTSIDE THE EU
If you’re a non-EU AIFM of a non-EU AIF and do not market
in the EU, the AIFMD will not affect you. In all other
scenarios it will.
If you are a non-EU manager managing and/or marketing
an EU or non-EU AIF, much of the AIFMD will not apply to
you initially. This will change from 2015 and/or 2018 when
the marketing regimes could change.
Non-EU managers can still market their funds (EU or
non-EU) in the EU (initially without requiring authorisation
under the AIFMD) using the private placement regimes,
but with conditions attached. These conditions are as
follows:
1. a co-operation agreement is in place between the
authorities of each member state where the AIF is to be
marketed, (where relevant) of the EU AIF and of the
third country where the AIFM is established; and (for
non-EU AIFs) between the authorities of the AIFM’s
home member state and of the third country where the
non-EU AIF is established;
2. the AIF’s jurisdiction must not be on an anti-money
laundering or terrorist financing list; and
3. compliance with certain other requirements in the
AIFMD (annual reports, disclosure to investors, reporting
to regulators and the provisions relating to acquiring
control of unlisted companies and asset stripping).
Member states are free to impose stricter rules under the
private placement regimes. We are aware of certain EU
member states, most notably Germany, who are planning
to make their private placement regimes much more
stringent.
When the private placement regimes are phased out,
affected AIFMs will have to comply with the AIFMD in full.
A further condition will also apply at this point – ensuring
that tax information exchange agreements are in place.
Non-EU AIFMs will be permitted to manage and/or market
any AIFs in the UK from 22 July 2013, provided they:
• notify themselves to the FCA; and
• comply with certain of the provisions in the AIFMD.
They will not, however, be able to make use of the passport
to manage or market in other EU member states.
8

Marketing rules
The following flowcharts provide a summary of the AIFMD requirements to market AIFs in the EU – for EU
AIF and non-EU AIF managed by an EU AIFM or a non-EU AIFM.
FULL COMPLIANCE WITH AIFMD
DUAL SYSTEM
Is the AIF
marketed
in the EU
YES
July 2013 1
2013
July 2014 2 PASSPORT
FULL COMPLIANCE WITH AIFMD
Is the AIF
marketed
in the EU
YES
2013−2018 Private Placement Regimes
Full AIFMD compliance except on depositary 7
Some third country requirements apply
Member states may impose stricter rules
2015
PASSPORT
Full AIFMD compliance
+ all third country
requirements + MSR
EU
AIF
Where
is the
AIFM
EU
NO
July 2013
July 2014
DUAL SYSTEM
PASSPORT
NOT
APPLICABLE
Non-EU
AIF
Where
is the
AIFM
EU
NO
COMPLIANCE WITH AIFMD
To comply with all of AIFMD except for depositary
and annual report requirements
Co-operation agreement in place
PASSPORT
NOT
APPLICABLE
NON-EU
Is the AIF
marketed
in the EU
YES
2013−2018/19 Private Placement Regimes
AIFMD compliance on annual report, disclosure to
investors and reporting to regulators 3
Some third country requirements apply 4
Member states may impose stricter rules
FULL COMPLIANCE WITH AIFMD
2015
PASSPORT
Full AIFMD compliance
+ all third country
requirements 5 + MSR 6
NON-EU
Is the AIF
marketed
in the EU
YES
DUAL SYSTEM
2013−2018/19 Private Placement Regimes
AIFMD compliance on annual report, disclosure
and reporting only
Some third country requirements apply
Member states may impose stricter rules
2015
PASSPORT
Full AIFMD compliance
+ all third country
requirements + MSR
NO
[July] 2015 All third country requirements + MSR
PASSPORT NOT
APPLICABLE
NO
OUTSIDE SCOPE
1 July 2013: If you are launching a fund after 22 July 2013, you will need to comply with AIFMD in full straight away.
2 July 2014: If you are managing a fund before 22 July 2013, you have until 22 July 2014 to get authorised. Although you may need to get authorised straight away to market existing funds in the EU.
3 Requirements on controlling interests may also apply.
4 Including having cooperation arrangements in place between EU and non-EU authorities and AIFMD compliance with anti-money laundering and terrorist financing requirements.
5 In addition to those conditions applicable under the private placement regimes, a tax information exchange agreement must be in place between the EU and the non-EU authorities.
6 The AIFM must designate a member state of reference (MSR) and appoint a legal representative (to perform compliance functions for management and marketing activities).
7 Although no depositary is required, there must be an entity that complies with AIFMD in respect of monitoring cash flows, custodian and general oversight tasks.
9

Operational requirements
WILL I NEED TO INCREASE MY CAPITAL
An AIFM must maintain a minimum level of own funds
(capped at €10m) of €125,000 plus 0.02 per cent of the
amount by which the total value of its gross assets under
management (being all funds managed by the AIFM other
than funds which it manages as a sub-manager) exceeds
€250m. For internally-managed AIFMs the minimum level
of own funds is €300,000.
In addition, AIFMs will have to cover their professional
liability risks through the use of additional own funds or
professional indemnity insurance. An AIFM cannot choose
to use a combination of the two.
Where applicable, the amount of additional own funds for
covering liability risks shall be equal to at least 0.01 per
cent of the value of the AIFM’s AUM. Any professional
indemnity insurance must be sufficient to cover
aggregated annual claims equal to at least 0.9 per cent of
the AIFM’s AUM. If an AIFM is subject to the Capital
Requirements Directive, it may be required to hold more
capital than it does under the AIFMD.
DO I HAVE TO APPOINT A DEPOSITARY
Yes, unless (for now and depending which countries you’re
marketing in) it’s for a non-EU fund that you’re not
marketing in the EU, or you’re using the private placement
regimes to market. A depositary will not be required:
• for an EU AIFM in respect of a non-EU AIF – which is
either not being marketed at all, or is being marketed in
the EU member states under the private placement
regimes;
• for a non-EU AIFM in respect of an EU AIF being marketed
under the private placement regimes; and
• for a non-EU AIFM in respect of a non-EU AIF being
marketed under the private placement regimes.
The custody duties of depositaries apply to a very broad
range of financial instruments. Depositaries also have
extensive obligations to supervise the AIFM which go
beyond traditional custody functions. The depositary can
also be liable for the loss of any custody assets (subject to
a very limited defence). This applies to assets it loses, as
well as those which any delegate might lose.
WILL I HAVE TO REVIEW MY COMPLIANCE
PROCEDURES
Yes. The AIFMD will introduce change in various areas,
including: minimum capital requirements, depositaries,
delegation, professional indemnity insurance,
remuneration, valuation, leverage, marketing and third
country requirements. You will need to establish separate
risk management, compliance and internal audit functions
as well as various policies and procedures (for instance,
liquidity, valuation and remuneration). You will also need
to look at what the AIFMD means for your business in
general. For instance, the definition of “non-financial
counterparties” in EMIR on OTC Derivatives includes all
real estate funds which fall within the broad scope of the
AIFMD, regardless of size.
WHAT IF I DO NOTHING
If you don’t comply, you will probably not be permitted to
raise or market funds.
Valuation
An AIFM has to ensure a proper and independent
valuation of the AIF’s assets. The AIFM is responsible,
whether it does the valuation itself or appoints an
external valuer. The AIFM can only do the valuation itself
if this task is functionally independent from portfolio
management (and similar provisions apply if the
depositary is appointed as the external valuer).
Fair treatment of investors
The AIFM must ensure that investors are treated fairly.
This includes not charging undue costs and ensuring that
any preferential treatment given by the AIFM to one or
more investors does not result in a material
disadvantage to the other investors.
Preferential treatment disclosed to investors
Preferential treatment of an investor is only permitted
where the other investors are informed of that
preferential treatment. This may impact on an AIFM’s
and AIF’s approach to side letters and most favoured
nation provisions.
Details of how the AIFM ensures the fair treatment of
investors and of any preferential treatment will have to
be covered in any information memorandum or offering
document.
10

Our relevant experience
We have advised numerous clients on how the AIFMD will affect their businesses. This includes
UK-based managers and non-EU fund managers on issues relating to scope, authorisation,
restructuring, marketing and more.
NABARRO LEADING THE DEVELOPMENT OF AIFMD
Our lawyers have been active participants in the
development of the AIFMD which means that we fully
understand the issues and challenges faced by clients
relating to the directive.
• Adrian Brown has assisted the British Property Federation,
the Property Industry Alliance, the Association of Real
Estate Funds and the European Public Real Estate
Association in lobbying the FSA, the European
Commission and various other organs of the European
Union about the AIFMD.
• Adrian is also a member of the Investment Property
Forum’s Regulation and Legislation group and led the
IPF’s response to the FSA’s consultation paper on the
AIFMD.
• Darren Stolzenberg is a member of the INREV Public
Affairs Committee focusing on the impact of the AIFMD.
• Nabarro also has partners who are members of the
INREV management committee and members of the
FSA’s Legal Experts Group which aims to facilitate a
smooth transition of the AIFMD into UK law.
REGULATORY
The ever-increasing level of regulation in the financial
services sector, and the need to protect hard-won
reputations, means that clear, high quality and relevant
advice is a must for regulated firms. We advise a broad range
of clients on all aspects of financial services regulation. We
have a wide range of recent relevant experience including:
• Advising various fund managers on the effect of the
AIFMD (see previous case study).
• Mountgrange – advising on the impact of the AIFMD on
existing fund structures, including in the context of a
company reorganisation.
• Santander Asset Management – advising on the impact
of the AIFMD on its existing regulated funds (Non-UCITS
Retail Schemes), developing an implementation and action
plan, liaising with legal, compliance, risk and other teams.
• Confidential – advising a US private equity fund and its
manager on the impact of the AIFMD on marketing the
fund in the EU, asset stripping provisions and
coordinating advice on the private placement regimes in
20 global jurisdictions using our network on international
law firms.
• Confidential – advising on the establishment of a unique
regulated fund, including drafting all the necessary
constitutional documents and prospectus to comply with
the FSA’s rules on disclosure to investors (similar to new
requirements under the AIFMD).
• Aimar Capital – assisting with application for
authorisation for this soon to be established sister
company of a US private equity fund management
company.
• AXA – advising on the regulatory issues in structuring a
new fund.
• German bank – advice on the establishment of a UK
branch and passporting under the Markets in Financial
Instruments Directive; drafting UK terms of business and
internal policies and procedures.
11

Our relevant experience
FUNDS AND INDIRECT REAL ESTATE
Our Investment Funds team is top-ranked by Chambers for
real estate funds and was voted the Best European Law
Firm for transactions at the 2011 Global Private Equity Real
Estate Awards. Recent major fund highlights include:
• Cordea Savills – establishment of Prime London
Residential Development LP.
• Tristan Capital Partners – establishment of European
Property Investors Special Opportunities 3 LP.
• Tristan Capital Partners – establishment of Curzon
Capital Partners III LP.
• Rockspring – establishment of Rockspring TransEuropean
Property V.
• AXA – establishment of AXA’s UK Long Lease Property
Unit Trust.
• Aviva Investors – acting on the establishment of the
REaLM series of funds established offshore and looking to
invest in different UK sectors.
• Duet/Forum – acting for the co-sponsor on the
establishment of the Duet Credit Opportunities Fund.
• Duet/Forum – acting for the co-sponsor on the Duet
European Debt Fund.
• APG – acting for the cornerstone investor on the
establishment of Pramerica Real Estate Investors I.
•
OUR CLIENTS
We act for a broad range of clients. Our fund manager
clients include AXA, Aviva Investors, CBRE Global Investors,
Cordea Savills, Frogmore, Grosvenor, Hermes, Mansford,
Melford, Mountgrange, Rockspring, Standard Life, Tristan
Capital Partners, UBS and UNITE. Our institutional investor
clients include Middle Eastern Sovereign Wealth Funds,
Canadian and Malaysian Pension Funds, UK multi
managers including CBRE GMM, Henderson and LaSalle
and Alecta, APG, ATP and Hermes.
CASE STUDY
Impact of the AIFMD on a global fund
manager
A leading fund manager client engaged us to
advise on the impact of the AIFMD on its
corporate structures. The structures included a
number of joint ventures, fund vehicles, holding
companies and master/feeder funds. The client
was particularly concerned over the lack of
available law and guidance on the treatment of
joint ventures.
We met with the client to discuss its primary
concerns and carried out an analysis of the
various structures. We advised the client on the
appropriate categorisation of each structure and
set out how the AIFMD would impact each
structure: identifying the AIFs and AIFMs within
the structure and advising on any potential
problems regarding delegation to other advisers.
We continue to work with this client on
implementing the AIFMD in the most effective
and cost efficient way; advising on possible
options for restructuring the arrangements and
making changes to the client’s structures.
12

More information
If you’re caught by the AIFMD, and need any help assessing its impact on your structures, shaping your
implementation plans, applying for authorisation or developing appropriate policies, procedures and
actions, please call us.
Adrian Brown
Partner
T +44 (0)20 7524 6400
aj.brown@nabarro.com
Darren Stolzenberg
Partner
T +44 (0)20 7524 6191
d.stolzenberg@nabarro.com
Andrew Wylie
Partner
T +44 (0)20 7524 6011
a.wylie@nabarro.com
Chris Luck
Partner
T +44 (0)20 7524 6294
c.luck@nabarro.com
13

For further information visit:
www.nabarro.com
London
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London WC1X 8RW
T +44 (0)20 7524 6000
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Belgium
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22-01 Singapore Land Tower
Singapore 048623
T +65 6645 3280
Alliance firms:
France August & Debouzy
Gilles August
T +33 (0)1 45 61 51 80
www.august-debouzy.com
Germany GSK Stockmann + Kollegen
Rainer Stockmann
T +49 (30) 20 39 07 - 0
www.gsk.de
Italy Nunziante Magrone
Gianmatteo Nunziante
T +39 06 695181
www.nunziantemagrone.it
Spain Roca Junyent
Miquel Roca Junyent
T +34 93 241 92 00
www.rocajunyent.com
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Nabarro LLP
Registered office: Lacon House, 84 Theobald’s Road, London, WC1X 8RW.
Nabarro LLP is a limited liability partnership registered in England and Wales (registered number OC334031). It is a law firm authorised and regulated by the
Solicitors Regulation Authority. A list of members of Nabarro LLP and of the non-members who are designated as partners is open to inspection at the registered
office. The term partner is used to refer to a member of Nabarro LLP or to an employee or consultant with equivalent standing and qualifications in one of Nabarro
LLP’s affiliated undertakings.
Detailed specialist advice should be obtained before taking or refraining from any action as a result of the comments made in this publication, which are only
intended as a brief introduction to the particular subject. This information is correct on the date of publication.
© Nabarro LLP 2013
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