aifmd the alternative investment fund managers directive - Alfi

the alternative investment fundmanagers directiveaifmd

table of contentsWhy a Directive on Alternative Investment Fund Managers? 4When will the Directive apply? 5Who will be subject to the Directive? 6What does the Directive regulate? 8Authorisation of AIFm 8Operating conditions 10Valuation 12Delegation of AIFm functions 14Depositary 15Transparency 18Marketing 20Summary of marketing scenarios 22Definitions 233

when ... will the directive apply?Implementation timeline11/2010 2011 2013 2014 2015 2017 2018Vote ofDirectiveEntry intoforce ofDirective(planned forJuly)CommencementofworkonsecondarylegislationImplementationofDirectiveinto nationallawPassportbecomesavailable forEU AIFMmarketingEU AIF in theEUExisting AIFMmust apply forauthorisationPassportbecomesavailable forall EU AIFMmarketingNon-EU AIF inthe EU and forNon-EU AIFMmarketing EU/Non-EU AIFin the EU (ifapproved byESMA)EUCommissionconductsreview ofapplicationand scope ofDirectivePrivateplacementregimes arereplaced bypassportregime (ifapproved byESMA)Consultation processwith industryCoexistence of passport and privateplacement regimesPrivate placement regimes for:EU AIFM marketing Non-EU AIFNon-EU AIFM marketing EU AIF/Non-EU AIF5

who ... will be subject to the directive?All-inclusive scopeThe Directive applies to:EU AIFM managing one or more EU AIF/Non-EU AIF.Non-EU AIFM managing one or more EUAIF.Non-EU AIFM marketing EU AIF/Non-EUAIF in the EU.The only scenario which does not fall withinthe scope of the Directive is the situation of aNon-EU AIFM managing and/or marketing aNon-EU AIF outside the EU given the absenceof any relationship with the EU.The Directive takes a “one-size fits all”approach by encompassing AIFM of all AIFwhich are not covered by the UCITS Directive.UCIs governed by Part II of the 2010 Law, SIFgoverned by the 2007 Law or SICAR governedby the 2004 Law are therefore in principlesubject of the Directive. The Directive may alsoimpact non-regulated investment vehicles ifthey meet the AIF definition.Whereas the Directive directly regulates AIFM,it indirectly also applies to EU and Non-EUAIF and some of their service providers. In thiscontext, one should keep in mind that theDirective defines an AIF as “an entity raisingcapital from a number of investors with a view toinvesting it in accordance with a defined investmentpolicy for the benefit of such investors”.Smaller AIF exemptedExemptions from the Directive have beenexpressly provided for AIFM managing“smaller” AIF, that is:AIFM managing AIF which are not leveragedand without redemption rights for a periodof 5 years, and with aggregate assets undermanagement below € 500 million.AIFM managing AIF whose assets undermanagement, including any assets acquiredthrough the use of leverage, do not exceed€ 100 million.Such exempted AIFM will nevertheless besubject to registration requirements with thecompetent authorities of their Home MemberState, which may also apply stricter rules inrespect of AIFM falling under one of theabove exemptions. Exempted AIFM can alsodecide to opt for the application of the Directiveand thereby benefit from the passport.Some actors excludedCertain actors are expressly excluded from thescope of the Directive: holding companies,captive funds, management of pension funds,employee participation or savings schemes,supranational institutions, national centralbanks, securitisation special purpose entities aswell as national, regional and local governmentsand bodies. In addition, the Directive does notapply to family office type arrangements,provided they do not raise external capital.Grand-fatheringThe Directive foresees the following twogrand-fathering provisions for closed-endedAIF:AIFM managing existing closed-endedAIF which do not make additional investmentsafter the final transposition date(i.e. July 2013), may continue to managesuch AIF without authorisation under theDirective.AIFM managing closed-ended AIF whosesubscription period for investors closed priorto the entry into force of the Directive andwhose term expires at the latest in 2016,may continue to manage such AIF withoutauthorisation under the Directive but mustpublish an annual report and, when applicable,comply with the disclosure requirementson acquisitions of portfolio companies.6

Determination of AIFMThe Directive regulates AIFM. Under certaincircumstances however, an AIF may be treatedas self-managed and hence be treated as anAIFM. This is the case of internally managedAIF, i.e. AIF whose legal form permits internalmanagement, such as the public limitedliability company (société anonyme) which ismanaged by a board of directors or thecorporate partnership limited by shares (sociétéen commandite par actions) which is managedby its managing general partner. If an internallymanaged AIF decides not to appoint an AIFM,then the AIF itself becomes subject to theDirective.Interaction with otherEU rulesThere is some interaction between the Directiveand other EU directives and regulationsapplicable to investment funds or their managers,as a result of which, for instance:Management companies authorised underthe UCITS Directive may apply for authorisationas AIFM under the Directive (andvice versa) in order to manage both UCITSand AIF.MiFID compliant investment firms and creditinstitutions authorised under Directive2006/48/EC are not required to obtainauthorisation under the Directive in order toprovide investment services to AIF or AIFM.However, such investment firms can onlymarket shares or units of AIF in the EU if therelevant shares or units are marketable inaccordance with the Directive.Who?One size fits all approach.Directive directly applies to EU and Non-EU AIFM marketing EU AIF/Non-EU AIF in the EU.Directive indirectly applies to EU/Non-EU AIF.Small AIF are exempt.Certain actors are excluded.Grand-fathering provisions for closed-ended funds.Directive applies to self-managed AIF (considered as AIFM) and to AIF appointing an AIFM.7

what ... does the directive regulate?The Directive is a framework piece oflegislation, establishing the core values andguide-lines for its implementation. Thissection summarizes the principal requirementsdefined at Level 1, which will need tobe supplemented with more detailed rules(i.e. delegated acts or implementing acts,as well as regulatory and/or implementingtechnical standards are expected to beadopted for almost all requirements of theDirective) to be adopted at Level 2 by the EUCommission with the assistance of ESMA.Authorisation of AIFmThe AIFM licence requirements are substantiallysimilar to those which apply to theauthorisation of UCITS management companies.Furthermore, UCITS management companiesmay also apply for an AIFM license.More specifically, the Directive expresslyprovides that management companies whichare authorised under the UCITS regimeshould not be required, when applying forauthorisation as AIFM, to provide informationor documents already provided whenapplying for authorisation under the UCITSregime, provided that such information ordocuments are still up to date. Where Luxembourgis the Home Member State of the AIFMor the Member State of reference for aNon-EU AIFM, authorisation as AIFM is tobe sought from the CSSF. The head office andregistered office of the AIFM shall be locatedin the same Member State.Authorisation is to be sought (i) by the AIFitself, if it is self-managed (and thus qualifiesas an AIFM), in which case it will only beauthorised to perform internal managementfunctions for that AIF, or (ii) by the externallyappointed AIFM which may also providemanagement functions to UCITS and certainother services listed below.Authorised AIFM will be allowed to performthe following internal management functions:Investment management functions whichcomprise at least:- Portfolio management (only if risk managementis provided).- Risk management (only if portfolio managementis provided).Other functions which may additionally beprovided (only if the investment managementfunctions are provided):- Administration (i.e. legal and accountingservices; customer inquiries; valuation andpricing including tax returns; maintenanceof unit-/shareholders register; distribution ofincome; unit/share issues and redemptions;contract settlements; record keeping).- Marketing.- Activities related to the assets of the AIF.Member States may authorise AIFM (other thanself-managed AIF) to provide the followingservices (only if the portfolio management andthe risk management functions are provided):Management of portfolios of investments,including those owned by pension fundsand institutions for the provision ofoccupational retirement in accordance withmandates given by investors on a discretionary,client-by-client basis.Non-core services (i.e. investment advice;safe-keeping and administration in relation toshares/units of UCI; reception and transmissionof orders in relation to one or more financialinstruments) (only if the managementof portfolios of investments are provided).MiFID provisions concerning the initialcapital endowment and organisationalrequirements apply to the above services ofmanagement of portfolios of investments andnon-core services.The authorisation as an AIFM will be valid inall Member States provided however that theconditions of the Directive are complied withon a continuous basis.8

Application requirements for authorisation as AIFMInformation on the persons effectively conductingthe business of the AIFM:Such persons who effectively conduct thebusiness of an AIFM shall be of sufficientgood repute and sufficiently experiencedin relation to the investment strategies pursuedby the AIF they manage.Information on the identities of the AIFMshareholders or members, whether direct orindirect, natural or legal persons, that havequalifying holdings and information on theamounts of those holdings.The shareholders of the AIFM must besuitable.A programme of activity setting out theorganisational structure of the AIFM includinginformation on how the AIFM intends tocomply with the authorisation requirements,the operating conditions, the transparencyrequirements, and where applicable, therequirements applying to leveraged AIF, toAIF acquiring control of non-listed companiesand issuers, passport conditions, thirdcountries rules and conditions for marketingto retail investors.Information on the remuneration policiesand practices.Information on arrangements made for thedelegation and sub-delegation of functionsto third parties.Information about the investment strategies.Information on where the master AIF isestablished if the AIF is a feeder AIF.The fund rules or incorporation documentsof each AIF the AIFM intends to manage.Information on arrangements made for theappointment of the depositary.Any additional information concerning disclosureto investors for each AIF the AIFMmanages or intends to manage.In addition, the AIFM will have to demonstrateto the CSSF that it has sufficient capital andown funds.Internally managed AIF will have to maintainan initial capital of €300,000 while externallyappointed AIFM will have to maintain an initialcapital of €125,000.AIFM will have to maintain appropriate ownfunds (in liquid assets only) to cover potentialliability risks, arising from professional negligence,or appropriate professional indemnityinsurance.Furthermore, externally appointed AIFM willhave to maintain own funds equal to the higher ofone quarter of the AIFM overhead costs;and0,02% of the AIF portfolio values in excessof € 250 millions (capped at € 10 millionswhich can be reduced by 50% if such amountis covered by a bank/insurers’ guarantee).No similar requirements are imposed on internallymanaged AIF other than the obligation tomaintain funds to cover potential liability forprofessional negligence, which applies toexternally appointed AIF as well.9

Operating conditionsWhile the Directive might have onerouspractical implications on certain AIFM and toa certain extent the AIF they manage, manyprinciples enshrined in the Directive are notnew and are generally UCITS or MiFIDinspired.General principlesThe Directive contains several principle-basedrules on general operating conditions. Insummary, the general operating principles thatapply to AIFM are similar to the rules ofconduct laid down in the UCITS Directive forself-managed SICAVs and/or their designatedmanagement companies. For example, theDirective requires that an AIFM will acthonestly, with due skill, care and diligence andin the best interests of the AIF or its investorsand the integrity of the market.In addition, the Directive requires that AIFMshall treat all investors fairly. Preferentialarrangements may still be possible as long asthis is disclosed to all investors through theAIF’s rules or incorporation documents. Thismight impact the way side-letter arrangementsare currently drafted. In particular, investorsmust be informed on how the AIFM ensuresthe fair treatment of investors and, wheneveran investor obtains preferential treatment orthe right to obtain preferential treatment, adescription of that preferential treatment, thetype of investors who obtain such preferentialtreatment as well as, where relevant, their legalor economic links with the AIF or AIFM, willhave to be provided.Conflicts of interestThe general requirement to identify and manageconflicts of interest that arise in the course ofmanaging AIF is not a new concept. However,the Directive imposes specifically that: (i) conflictsof interest notably between the AIFM and itsmanagers and employees and the AIF managed bythe AIFM (or, for example between the investorsof the AIF and another client of the AIFM) areidentified, (ii) organisational and administrativearrangements designed to identify, prevent,manage and monitor conflicts of interest be putin place, and (iii) where the above mentionedarrangements are not sufficient to ensure that risksof damage to investors’ interests will be prevented,the AIFM shall clearly disclose the general natureor sources of conflicts of interest to the investorsbefore undertaking business on their behalf, anddevelop appropriate policies and procedures.RemunerationIn order to address the potentially detrimentaleffect of poorly designed remuneration structureson the sound management of risk, andcontrol of risktaking behaviour by individuals,AIFM must establish and maintain remunerationpolicies and practices in line with theDirective for those categories of staff whoseprofessional activities have a material impact onthe risk profiles of the AIF they manage (i.e. atleast senior management, risk takers, controlfunctions and employees receiving a globalremuneration that puts them in the sameremuneration bracket as senior managementand risk takers). In particular, AIFM will needto include aggregate information on remuneration(split into fixed and variable and, whererelevant, amounts paid by the AIF) in theannual report (as part of the transparencyrequirements of the AIFMD). The Directiveallows AIFM to apply the relevant provisions ofthe Directive in different ways according to theirsize and the size of the AIF they manage, theirinternal organisation and the nature, scope andcomplexity of their activities.The principles laid out in the Directive areconsistent with the principles governing soundremuneration policies set out in the CommissionRecommendation of 30 April 2009 on remunerationpolicies in the financial services sector,which will serve as a basis for ESMA whenimplementing guidelines on sound remuneration10

policies to comply with the principles set out inAnnex II to the Directive, which lists the specificremuneration requirements.It is worth mentioning in this context that theCSSF has already implemented the aboveCommission Recommendation via CSSFCircular 10/437 regarding guidelines concerningremuneration policies in the financialsector, which applies namely to managers ofcollective investment schemes.Risk managementAIFM are required to functionally and hierarchicallyseparate the functions of risk managementfrom the operating units, including theportfolio management.There is a general requirement to implementadequate risk management systems which shallbe reviewed and adapted as needed and at leastannually. The following minimum requirementswill thus apply:Conducting due diligence when investing onbehalf of the AIF, according to the investmentstrategy, the objectives and risk profileof the AIF.Ensuring that the risk associated to eachinvestment position of the AIF and theiroverall effect on the AIF’s portfolio can beproperly identified, measured and monitoredon an ongoing basis including through theuse of appropriate stress testing procedures.Ensuring that the risk profile of the AIF isconsistent with the size, portfolio structureand investment strategies and objectives ofthe AIF, as laid down in the AIF rules orincorporation documents, prospectus andoffering documents.LeverageAIFM will be required to set a maximum levelof leverage and a limit on the re-use of collateralor guarantees that could be granted undera leveraging arrangement taking into account,i.a., the type of AIF, their strategy, the sourcesof their leverage, the relationship with financialservices institutions that could pose systemicrisk, counterparty exposure, and the extent towhich the leverage is collateralised.Liquidity managementExcept for AIFM of unleveraged closed-endedfunds, AIFM are required for each AIF theymanage, to apply appropriate liquiditymanagement systems and procedures, includingregularly conducting stress tests undernormal and exceptional conditions. Inaddition, AIFM shall ensure that for eachAIF they manage, the investment strategy,the liquidity profile and the redemption policyare consistent.Operating conditionsPrinciple-based rules of conduct.Identification and management of conflicts of interests.Remuneration policies and practices consistent with sound and effective risk management.Adequate liquidity and risk management systems.11

ValuationApplicable rules to valuationof assets and NAVcalculationFrequencyWho can perform valuationfunctions?Independence of thevaluation functionLiabilityThe Directive requires that AIFM establishappropriate and consistent procedures in respectof each AIF they manage to ensure that a “properand independent” valuation of the AIF’s assetscan be performed in accordance with applicablenational rules (i.e. rules laid down in the lawof the country where the AIF has its registeredValuation of the assets and calculation of theNAV per share or unit shall be performed atleast once per year.For open-ended AIF, such valuation andcalculation shall be carried out at a frequencywhich corresponds to the type of assets andValuation may be performed by either:An independent (and suitably qualified)external valuer; the AIFM must notifyits competent authority of the valuer’sappointment; orThe AIF’s depositary cannot be appointedas its external valuer unless it has functionallyand hierarchically segregated itsdepositary function from its valuationfunction.The AIFM is ultimately liable for the valuationof the AIF’s assets and for the calculation andpublication of the AIF’s NAV and is, therefore,liable to the AIF and its investors. However,office), and/or with such AIF’s rules (i.e. ruleslaid down in the AIF documentation).Calculation of the NAV per share or unit of theAIF and disclosure of such NAV to the investorsshall also follow such rules along with therules set forth in the Directive.to the frequency of the issuance/redemptionof shares or units.For closed-ended AIF, such valuation andcalculation shall be carried out in case ofincrease or decrease of capital.The AIFM itself, but the competent authorityof the Home Member State of the AIFM mayrequire such AIFM to have its valuation,procedures and/or valuations verified by anexternal valuer or an independent auditor.An externally appointed valuer cannot delegatethe valuation function to a third party.When performing the valuation functionsitself, the AIFM must ensure that thevaluation task is functionally independentfrom portfolio management and from theremuneration policy.Appropriate measures must be taken tomitigate conflicts of interest.where an external valuer is used, the valueris liable to the AIFM for losses suffered as aresult of the valuer’s negligence or intentionalfailure to perform its tasks.12

ValuationProper and independent valuation.At least once a year (valuation frequency depends on type of assets).Independent external valuation or by the AIFM (subject to conditions).AIFM is liable for valuation.13

Delegation of aifmfunctionsAIFM may, subject to strict limitations andrequirements, delegate part (but not all) oftheir management functions to third parties soas to increase the efficiency of their business.Subject to the same limitations and requirements,including the approval of the AIFM,sub-delegation may be allowed. Here again,the rules provided by the Directive in thisregard are to a large extent carried over fromthe UCITS Directive.AIFM will have to be able to justify the entiredelegation structure with objective reasons tothe competent authorities of their HomeMember State, and to demonstrate that thedelegatee is qualified and capable ofundertaking the delegated functions.No delegation or sub-delegation of portfoliomanagement or risk management may bemade to the depositary or a delegatee of thedepositary, nor to any other entity which maygive rise to potential conflicts of interest,unless a functional and hierarchical segregationfrom other potentially conflicting tasks isensured and the latter are properly identified,managed, monitored and disclosed to theinvestors of the AIF.The rules regarding the delegation of portfolioand risk management functions are similar tothe rules applicable to existing businessmodels of UCITS outsourcing the portfoliomanagement function. For example, wherethe delegation concerns the portfolio managementor the risk management, the delegateemust be authorised or registered for thepurpose of asset management and subject toprudential supervision in its home country.In addition, if the delegatee is located in aNon-EU jurisdiction, a cooperation agreementmust be in place between the EU competentauthorities and the competent authorities ofthe Non-EU jurisdiction. This means that aLuxembourg AIFM will be able to delegateportfolio and risk management functions toan investment manager who does not qualifyas an AIFM 1 .AIFM shall at all times remain responsible forthe proper performance of their functions andcompliance with the rules set out in theDirective. Their liability towards the AIF andits investors may in no case be affectedby the fact that the AIFM has delegatedfunctions to a third party, or by any furthersub-delegation. AIFM will thus have to closelymonitor at any time any delegatee’s activities,to give at any time further instructions to thedelegatee and to withdraw the delegation withimmediate effect when this is in the interest ofthe AIF investors.DelegationPart of the management functions may be delegated.Sub-delegation is possible.Delegation rules similar to UCITS provisions.AIFM remains liable in case of delegation.1The delegation of portfolio and risk management functions must not be confused with the designation by an internallymanaged AIF of an external AIFM. Please refer to the section entiteld “Who?” under “Determination of AIFM”.14

DepositarySingle depositary ruleThe Directive introduces the appointment of asingle depositary for each AIF managed by anAIFM.Who may not act asdepositary?The Directive stresses the need to separate thesafekeeping functions from the managementfunctions and to segregate the investor’s assetsfrom those of the AIFM. For this reason, anAIFM is not allowed to act as depositary.Who may act as depositary?The depositary of an EU AIF shall either be (i) acredit institution or (ii) a MiFID investment firmwhich also provides ancillary services ofsafekeeping and administration of financialinstruments (which satisfies minimum capitaladequacy requirements), or (iii) other categoriesof institutions subject to prudential regulationand ongoing supervision and which are eligibleto act as a depositary under the UCITS Directive).The depositary of an EU AIF must have itsregistered office or a branch in the same countryas the AIF. However, the competent authoritiesof the Home Member State of the AIF or theAIFM may, during a period of four years fromthe implementation of the Directive (i.e. until2017), allow that the depositary (which must bean EU credit institution) be established inanother Member State.The depositary of a Non-EU AIF can also be acredit institution or any other entity (of thesame nature as the entities under (i) and (ii)above for an EU AIF) which is subject toeffective prudential regulation and supervisionof the same effect as the provisions laid downin EU law and which are effectively enforced.The depositary of a Non-EU AIF must beestablished (i) in the third country where theAIF is established (provided certain conditionsare complied with) or (ii) in the Home MemberState of the AIFM managing the AIF or (iii) inthe Member State of reference of the Non-EUAIFM managing the AIF.Member States may in addition allow that forcertain AIF which (i) have no redemptionrights exercisable during a period of five yearsfrom the date of the initial investments; and(ii), in accordance with their core investmentpolicy, generally do not invest in assets thatmust be held in custody or generally invest inissuers or non-listed companies in order topotentially acquire control over such companies,such as private equity funds, venturecapital funds and real estate funds, the depositarymay be an entity which carries outdepositary functions as part of its professionalor business activities. Such entity must besubject to mandatory professional registrationrecognised by law or to legal or regulatoryprovisions or rules of professional conduct,furnish sufficient financial and professionalguarantees to be able to effectively perform therelevant depositary functions, and meet thecommitments inherent to those functions (suchas notaries, lawyers or registrars).Prime brokersA prime broker may be appointed as a depositaryif i.a. it has functionally and hierarchicallyseparated its tasks as prime broker from itsdepositary functions, and potential conflicts ofinterest are properly identified, managed anddisclosed to the investors of the AIF.15

Core duties of thedepositaryMost of the requirements of the Directive areUCITS inspired and therefore familiar to anumber of initiators and promoters of regulatedinvestment funds. However, some of thecore functions have been adapted and/orclarified by the Directive.Monitoring of cash flow: The depositaryshall be responsible for the proper monitoringof the AIF’s cash flows and for ensuringthat investor money and cash belonging tothe AIF is booked correctly on accountsopened in the name of the AIF, the AIFMacting on behalf of the AIF, or the depositaryacting on behalf of the AIFM.Safekeeping of assets: The Directive clarifiesthe concept of safekeeping. The depositaryis responsible for the safekeeping of assetsof the AIF, including (i) the holding incustody of all financial instruments that canbe registered in a financial instrumentsaccount opened in the depositary’s booksand that can be physically delivered to thedepositary and registered in its books withinsegregated accounts, and (ii) the verificationof ownership of all other assets of the AIF(which cannot be held in custody) for whichthe depositary shall maintain up-to-datesrecords.Oversight duties: In addition to the abovetasks, the depositary must perform oversightduties which are similar to those performedby UCITS depositaries, except that they allapply irrespective of the corporate orcontractual form of the AIF. The depositarymust (i) ensure that the sale, issue, repurchase,redemption and cancellation of sharesor units of the AIF are carried out in accordancewith applicable national law and theAIF rules or incorporation documents, (ii)ensure that the value of the shares or unitsof the AIF is calculated in accordance withthe applicable law of the AIF and its rules orincorporation documents, (iii) carry out theinstructions of the AIFM, unless they conflictwith applicable national law or the AIF rulesor incorporation documents, and (iv) ensurethat, in transactions involving the AIF’sassets, any consideration is remitted to theAIF within the usual time limits. Depositaryagreements of existing SIF and SICAR fallingwithin the scope of the Directive will have tobe reviewed as the 2007 Law and 2004 Lawcurrently do not foresee such additionaloversight duties. Existing corporate UCIssubject to Part II of the 2010 Law will alsoneed to amend their depositary agreementsin order to add the oversight functionsmentioned under (iii) and (iv).DelegationThe depositary may only delegate the safekeepingduty as defined above to a third partywhich in turn and under the same conditions,may sub-delegate this function. Delegation ofthe safekeeping functions is strictly circumscribedby the Directive. Both delegation andsub-delegation must be objectively justified andare subject to stringent requirements in relationto the suitability of the third party entrustedwith this function as well as to the due skill,care and diligence that the depositary mustemploy to select, appoint and review the thirdparty to whom the depositary wants todelegate part of its functions.However, where the law of a third countryrequires that certain financial instruments areheld in custody by a local entity that does notsatisfy the delegation requirements, theDirective exceptionally authorises thedepositary to delegate its safekeeping functionsto such local entity provided certain conditionsare met and notably that the investors of therelevant AIF have been duly informed of thisdelegation and that the AIF or the AIFM onbehalf of the AIF instructed the depositary toappoint such local entity.16

Liability of the depositaryThe Directive considers that the depositaryshould be liable for the losses incurred in theperformance of its obligations, suffered by theAIFM, the AIF and its investors. It distinguishesbetween the loss of financial instrumentsheld in custody (“strict liability”), andany other losses (“liability for fault”):In the case where the depositary holds theassets in custody and those assets are lost,the depositary has an obligation to return afinancial instrument of the identical type orthe corresponding amount to the AIF or, asthe case may be, the AIFM acting on behalfof the AIF, without undue delay, unless itcan prove that the loss arose as a result ofan external event beyond its reasonablecontrol, the consequences of which wouldhave been unavoidable despite all reasonableefforts to the contrary.For any other losses, the depositary shall beliable to the AIF or the investors of the AIF,as the case may be, as a result of its negligentor intentional failure to properlyperform its obligations.The depositary’s liability shall not be affectedby any delegation to a third party. Where thefinancial instruments held in custody by suchthird party are lost, the depositary wouldtherefore remain liable. However, providedthat the depositary can show that the delegationwas made in accordance with the Directiveand where (i) a written contract betweenthe depositary and the AIF or the AIFM actingon behalf of the AIF expressly allows such adischarge, and (ii) a written contract with thethird party delegate expressly transfers suchliability and permits the AIF or the AIFM tomake a claim directly against the delegatee, thedepositary can discharge itself in such case ofits liability.DepositarySingle depositary per AIF.In principle, AIFM may not act as depositary.Only limited eligible entities may act as depositary.Core functions:- Monitoring of cash flow.- Safekeeping of assets.- Oversight duties.Delegation possible, but strictly circumscribed.Two-pronged liability regime:- Strict liability.- Liability for fault.17

TransparencyThe Directive ensures increased transparencyin 3 different ways:The AIFM must prepare an annual report foreach of the AIF it manages or markets in theEU. This report must be completed within6 months following the end of the financialyear of the relevant AIF.Disclosure to investors: some informationmust be disclosed to investors before theyinvest in the AIF. The content thereof mustinclude, inter alia, the investment strategyof the AIF, a description of the delegationof management functions as applicable,the valuation procedure and the percentageof assets held in a “side pocket”.Disclosure to the regulator: AIFM mustreport, for each AIF, inter alia, the marketsin which they trade, any potential “sidepockets”, the risk profile of the AIF, the riskmanagement systems in place, the level ofleverage and the liquidity management tools.Leveraged AIFAIFM are required to set a leverage ratio foreach AIF they manage and this ratio must becomplied with at all times. AIFM that useleverage for investment purposes are subject toadditional disclosure requirements. Indeed,AIFM shall periodically disclose to theirinvestors the amount of leverage used for eachAIF they manage as well as any changes to themaximum level of leverage which may be usedon behalf of each AIF.Disclosure on leverage must also be made to theregulator which shall be informed about theleverage conditions of each AIF, including theoverall amount of leverage used by each AIF andits five principal lenders of cash/securities (withthe corresponding amounts). The regulator has acontrolling power over these leverage limits andmay request such ratio to be adjusted if it considersit as unreasonable or likely to contribute tothe risk of creating market disorder.Portfolio companydisclosuresThe Directive imposes reporting obligationswhen an AIF acquires, individually or jointly, asubstantial stake in a non-listed company(other than a SME). The acquisition thresholdsare set at 10%, 20%, 30%, 50% and 75% ofthe voting rights of the portfolio company. Inother words, if an AIF reaches any of thesethresholds when acquiring a non-listedcompany, the AIFM shall, as soon as possible,notify such information to the portfoliocompany itself, its shareholders as well as thecompetent regulator. Similar disclosure shall bemade to the representative(s) of the employeesof the portfolio company.Similar notification obligations are imposed onAIFM when the relevant AIF acquires, individuallyor jointly, control of a non-listedcompany (“control” being understood as theholding of more than 50% of the voting rightsof the non-listed company). In such case, theinformation to be disclosed must contain theidentity of the AIFM which manages the AIFacquiring control, the policy set-up withrespect to preventing and managing conflictsof interest and the policy with respect tocommunications to employees. In addition, theAIFM shall disclose its intentions with respectto the future business of the portfolio companyas well as any implications this may have onemployment. Again, the notification must bemade as soon as possible to the portfoliocompany itself, its shareholders, the representativeof its employees as well as to the competentregulator (the latter, along with theinvestors of the AIF, shall also receive informationon the financing of the acquisition).Finally, “asset stripping” is limited by theprovisions of the Directive which impose onthe AIFM to use its best efforts to preventredemptions, capital reductions and certaindistributions during a period of 2 yearsfollowing the acquisition of control of theportfolio company.18

TransparencyEnhanced transparency through annual reports, disclosure to investors and regulators.Additional disclosure requirements for leveraged AIF.Specific reporting obligations applicable to portfolio companies.19

MarketingMarketing is to be understood as any direct orindirect offering or placement at the initiative ofthe AIFM or on behalf of the AIFM of units orshares of AIF it manages, to or with investorsdomiciled in the EU. Investments made at theinitiative of professional investors are thereforenot covered by the Directive. They may thuscontinue to invest at their own initiative in AIFsubject to compliance with domestic privateplacement rules. Retail investors are also notcovered by the Directive. In this regard, MemberStates may at their discretion allow AIFM tomarket AIF they manage to retail investors ontheir territory, irrespective of whether AIF aremarketed on a domestic or cross-border basis orwhether they are EU or Non-EU AIF.The marketing provisions of the Directive donot apply to the marketing of shares or units ofAIF which are subject to a current offer to thepublic under a prospectus drawn up andpublished according to the Prospectus Directivebefore 2013 as long as this prospectus is valid.The different scenarios below explain thefunctioning of the passport regime introducedby the Directive and the private placementrules which will continue to apply or coexistduring a certain period, as well as the timing inrelation thereto. The dates indicated arehowever indicative and will depend on theprogress of the Level 2 implementationprocess.Scenario 1:Passeport for EU AIFMmarketing EU AIF in theEU as from mid-2013EU AIFM will benefit from a passport tomarket EU AIF to professional investors inthe EU immediately upon transposition of theDirective into national law i.e., in principle,no later than mid-2013. Such marketing acrossthe EU will be subject to a straightforwardnotification procedure, which will be furtherspecified through technical standards developedby ESMA at Level 2.EU AIFM will therefore no longer be able tomarket EU AIF to professional investors in theEU via private placement regimes.Scenario 2:EU AIFM marketingNon-EU AIF in the EUPassport regime as from 2015The Directive intends to make the passportregime available to EU AIFM marketing Non-EUAIF to professional investors in the EU in 2015,i.e. after a period of 2 years as from the latestdate of transposition of the Directive intonational law. EU AIFM willing to market aNon-EU AIF in the EU via the passport will haveto comply with the Directive and a notificationprocedure. In addition, appropriate cooperationagreements for efficient exchange of information,including in tax matters, will need to existbetween the EU and Non-EU competent authoritiesand between the Non-EU AIF home jurisdictionand the Member State of the AIFM. Also,the Non-EU country of the Non-EU AIF mustnot figure on the FATF blacklist.Private placement regime between2013 and 2018Between 2013 and 2015, Non-EU AIF whichare managed by EU AIFM may continue to bemarketed under the national private placementregimes (on a country-by-country basis), as thepassport shall become available as from 2015only. During a transitional period of 3 years(i.e. from 2015-2018), the passport regimewill coexist with the private placement regime.Thereafter, the private placement regimes shallbe replaced by the passport regime.EU AIFM willing to market a Non-EU AIF inthe EU under private placement rules mustcomply with the Directive save for the provisionson depositaries. However, in this respect,one or more entity(ies) must be appointed toperform some of the depository functions andthe identity of such entity(ies) must be communicatedto the supervisory authority of theAIFM. Furthermore, a cooperation agreementfor the purpose of systemic risk oversight mustexist between the relevant EU and Non-EUcompetent authorities. Finally, the Non-EUcountry must not figure on the FATF blacklist.20

Scenario 3:Non-EU AIFM marketingAIF in the EUAuthorisation requirements and passportregime for marketing EU AIF/Non-EU AIFin the EU as from 2015Non-EU AIFM intending to market EU orNon-EU AIF in the EU via the passport regimemust be authorised under the Directive by theirMember State of reference, which is determinedin accordance with a certain number of criterialaid down in the Directive, such as e.g. the HomeMember State of the AIF managed by theNon-EU AIFM, or the Member State where mostof the AIF managed by the AIFM are established.The Non-EU AIFM will have to comply with theDirective, except if a provision of the Directive isincompatible with the law to which the Non-EUAIFM and/or the Non-EU AIF marketed in theEU is submitted. In this case, the Non-EUAIFM will however need to prove that i.a. theregulatory purpose of the local law theNon-EU AIFM and/or Non-EU AIF is subjectto, offers the same level of protection.A Non-EU AIFM will also have to appoint alegal representative in the Member State ofreference (i.e. contact point of the Non-EUAIFM in the EU who will perform the compliancefunction in relation to management andmarketing activities in the EU).Non-EU AIFM intending to manage EU AIFwithout however marketing them in the EUshall also need to obtain an authorisation bythe relevant Member State of reference.The authorisation by the Member State ofreference shall be subject to a number ofadditional conditions, such as the Non-EUcountry of the Non-EU AIFM not being listedon the FATF blacklist, appropriate cooperationagreements being in place between the competentauthorities of the Member State of reference,the competent authorities of the EU AIFand of the Non-EU AIFM. Furthermore,cooperation arrangements for effective exchangeof information in tax matters between theNon-EU country of the Non-EU AIFM with theMember State of reference must also be in place,and effective supervision must not be preventedby the national laws or regulations of theNon-EU AIFM.The passport in these cases shall be available asfrom 2015, i.e. after a period of 2 years as fromthe date of transposition of the Directive intonational law, subject to a notification procedure.In case the Non-EU AIFM wishes to marketNon-EU AIF in the EU via the passport regime,cooperation agreements must be in placebetween the competent authorities of theMember State of reference and the competentauthorities of the Non-EU AIF, the country ofthe Non-EU AIF must not figure on the FATFblacklist and there must be cooperationarrangements for effective exchange of informationin tax matters between the country ofthe Non-EU AIF, the Member State of referenceand the Member States in which theNon-EU AIF shall be marketed.Private placement regime between2013 and 2018Between 2013 and 2015, Non-EU AIFM maycontinue to market EU AIF or Non-EU AIFunder the national private placement regimes(on a country-by-country basis). During atransitional period of 3 years (i.e. from 2015-2018), the private placement regime will coexistwith the passport regime. Thereafter, it isintended to replace the private placement regimeby the passport regime.Non-EU AIFM willing to market an EU AIF ora Non-EU AIF in the EU under private placementrules must comply with the transparencyrequirements and the reporting obligationsunder the Directive, as well as, if applicable,with the requirements regarding AIFM managingAIF which acquire control of non-listedcompanies and issuers. Additionally, cooperationagreements for the purpose of systemic riskoversight must be agreed between the relevantEU and Non-EU competent authorities. TheNon-EU country of the Non-EU AIFM/Non-EUAIF must not figure on the FATF blacklist.21

Summary of marketing scenariosScenario 1EU AIFMEU AIF2013Passport for marketingin the EU to professionalinvestorsScenario 2EU AIFMNon-EU AIF2013 - 2015Private placement inthe EU2015Passport for marketingin the EU to professionalinvestors2015 - 2018Private placement in theEU and passport willcoexistScenario 3Non-EU AIFMEU AIF/Non-EU AIF2013 - 2015Private placement inthe EU2015Passport for marketingin the EU to professionalinvestors2015 - 2018Private placement regimeand passport will coexist22

definitionsAIFAIFMAlternative Investment Fund(s)Alternative Investment Fund Manager(s)Commission Directive 2006/73/EC of 10 August 2006 Commission Directive 2006/73/EC of 10 August 2006implementing Directive 2004/39/EC of the EuropeanParliament and of the Council as regards organisationalrequirements and operating conditions for investmentfirms and defined terms for the purposes of that DirectiveCSSFDirective 2006/48/ECESMAEUEU AIFMFATFHome Member State of an AIFHome Member State of an AIFMMember StateMember State of referenceMiFIDNAVCommission de Surveillance du Secteur FinancierDirective AIFM Directive of the European Parliament and ofthe Council on Alternative Investment Fund Managers andamending Directives 2003/41/EC and 2009/65/ECDirective 2006/48/EC of the European Parliament andof the Council of 14 June 2006 relating to the taking upand pursuit of the business of credit institutions (recast)European Securities and Markets AuthorityEuropean UnionMeans any AIFM which has its registered office in aMember State of the European UnionFinancial Action Task ForceMeans (i) the Member State in which the AIF is authorisedor registered under applicable national law, or in case ofmultiple authorisations or registrations, the Member State inwhich the AIF has been authorised or registered for the firsttime; or (ii) if the AIF is not authorised or registered in aMember State, the Member State in which the AIF has itsregistered office and/or head officeMeans the Member State in which the AIFM has itsregistered officeMember State of the European UnionMeans the Member State of reference for a Non-EUAIFMDirective 2004/39/EC of the European Parliament and of theCouncil of 21 April 2004 on markets in financial instrumentsamending Council Directives 85/611/EEC and 93/6/EEC andDirective 2000/12/EC of the European Parliament and of theCouncil and repealing Council Directive 93/22/EECNet Asset Value23

Non-EU AIFMParliamentProfessional InvestorProspectus DirectiveSICARSIFSMEUCIUCITSUCITS DirectiveMeans any AIFM which is not an EU AIFMEuropean ParliamentMeans any investor which is considered to be aprofessional client or may be treated as a professionalclient on request within the meaning of MiFIDDirective 2003/71/EC of the European Parliament and ofthe Council of 4 November 2003 on the prospectus tobe published when securities are offered to the public oradmitted to trading and amending Directive 2001/34/ECSociété d’investissement en capital à risque (investmentcompany in risk capital)Specialised investment fundSmall and medium sized enterpriseUndertaking for collective investmentMeans an undertaking for collective investment intransferable securities authorised in accordance withArticle 5 of Directive 2009/65/EC of the EuropeanParliament and of the Council of 13 July 2009 on thecoordination of laws, regulations and administrativeprovisions relating to undertakings for collectiveinvestment in transferable securities (UCITS)Directive 2009/65/EC of the European Parliament andof the Council of 13 July 2009 on the coordination oflaws, regulations and administrative provisions relatingto undertakings for collective investment in transferablesecurities (UCITS) which shall repeal Directive 85/611/EEC,as amended, with effect from 1 July 20112002 Law Law of 20 December 2002 on undertakings for collectiveinvestment, as amended2004 Law Law of 15 June 2004 on investment companies in riskcapital (SICAR), as amended2007 Law Law of 13 February 2007 on specialised investmentfunds (SIF), as amended2010 Law Law of 17 December 2010 on undertakings for collectiveinvestment (UCI)© Arendt & Medernach, 201124

alfi – association of the luxembourg fund industryThe Association of the Luxembourg FundIndustry (ALFI), the representative body forthe Luxembourg investment fund community,was founded in 1988. Today it represents overa thousand Luxembourg-domiciled investmentfunds, asset management companies and a widevariety of service providers including depositarybanks, fund administrators, transfer agents,distributors, law firms, consultants, tax advisers,auditors and accountants, specialist IT providersand communications agencies.Luxembourg is the largest fund domicilein Europe and its investment fund industryis a worldwide leader in cross-border funddistribution. Luxembourg-domiciledinvestment structures are distributed inmore than 50 countries around the globe,with a particular focus on Europe, Asia,Latin America and the Middle East.ALFI defines its mission as to “Lead industryefforts to make Luxembourg the mostattractive international centre”.Its main objectives are to:Foster dedication to professionalstandards, integrity and qualityInvestor trust is essential for success incollective investment services and ALFI thusdoes all it can to promote high professionalstandards, quality products and services,and integrity. Action in this area includesorganising training at all levels, defining codesof conduct, transparency and good corporategovernance, and supporting initiatives tocombat money laundering.Promote the Luxembourg investmentfund industryALFI actively promotes the Luxembourginvestment fund industry, its products and itsservices. It represents the sector in financialand in economic missions organised by theLuxembourg government around the worldand takes an active part in meetings of theglobal fund industry.For more information, visit our website atwww.alfi.luHelp members capitalise on industrytrendsALFI’s many technical committees andworking groups constantly review andanalyse developments worldwide, as well aslegal and regulatory changes in Luxembourg,the EU and beyond, to identify threats andopportunities for the Luxembourg fundindustry.Shape regulationAn up-to-date, innovative legal and fiscalenvironment is critical to defend andimprove Luxembourg’s competitive positionas a centre for the domiciliation, administrationand distribution of investment funds. Strongrelationships with regulatory authorities,the government and the legislative body enableALFI to make an effective contribution todecision-making through relevant inputfor changes to the regulatory framework,implementation of European directivesand regulation of new products or services.26

ALFI thanks Arendt & Medernach, which produced the content of this brochure,for its authorisation to reprint. Arendt & Medernach is a member of ALFI.July 2011alfi | association of theluxembourg fund industry12, rue ErasmeL-1468 LuxembourgTel: +352 22 30 26 - 1Fax: +352 22 30 93info@alfi.luwww.alfi.lu