Academic journal article Business Law International

New Requirements Imposed on the European Alternative Investment Funds Industry

Academic journal article Business Law International

New Requirements Imposed on the European Alternative Investment Funds Industry

Article excerpt

On 19 December 2012, the European Commission (the 'Commission') adopted implementing measures ('Level 2' or the 'Regulation')1 in relation to the Directive on Alternative Investment Fund Managers (the 'AIFMD' or 'Directive') .2 The Regulation supplements certain elements of the Directive and contains implementing rules that will have direct effect in European Economic Area ('EEA') Member States on application without the need for national implementing legislation.

In step with the current push by European regulators for a single rulebook for financial services in Europe, the Level 2 measures are set out as a regulation, rather than directive, meaning that they are directly applicable without the need for implementing legislation at the European Member State level. Although it leaves Member States with only the most limited amount of flexibility in implementation, the disadvantages of this restriction are outweighed, according to the Commission, by the measure ensuring a 'level playing field' through maximum harmonisation.3

The Regulation was published in final draft form, subject to a three-month scrutiny period by the European Parliament and the Council during which objections to the measures could have been raised. No objections were lodged during the scrutiny period, and the Regulation was published in the OjfidalJournalon 22 March 2013, to be implemented by European Member States concurrently with the Directive on 22 July 2013.

The Regulation covers a range of topics, although, frustratingly, the European Commission was not mandated to cover definitional or scoping issues regarding funds and managers covered by the Directive. The Regulation provides detail on:

* the calculations of assets under management (AuM) ,4 leverage5 and capital requirements in relation to professional liability risks6 applicable to alternative investment fund managers (AIFMs);

* operating conditions for AIFMs, including general principles,7 conflicts of interest,8 risk management,9 liquidity management,10 investment in securitisation positions,11 organisational requirements12 and rules on valuation;13

* conditions for delegation;14

* rules on depositaries, including the depositary's tasks and liability;15

* transparency, reporting and disclosure requirements;16 and

* rules for cooperation arrangements.17

The published implementing measures are extensive and will bring about significant changes in the manner in which the alternative investment fund industry operates; this article highlights some of the key points coming out of the Regulation.

Calculating assets under management

The Directive applies only to fund managers with total AuM in excess of certain prescribed thresholds: euro100 million in aggregate where alternative investment funds (AIFs) under management are leveraged, or euro500 million in aggregate where AIFs under management are unleveraged and have no redemption rights exercisable for a period of five years following the date of initial investment.18 Level 2 provides further detail on the calculation of AuM used to determine whether a fund manager has hit the relevant threshold.

In the Commission's view, because the Directive refers to AuM 'in total',19 liabilities are not to be deducted from the calculation; that is to say, the calculation is not based on net asset value (NAV).20 Further deviating from current standard practice in the industry, derivatives are to be valued at the equivalent position in the underlying assets,21 rather than at the mark-tomarket value, which may present some additional costs for fund managers as this is not currently a common way of valuing derivatives.22 Managers making heavier use of derivatives will see their AuM calculation increase potentially significantly over a NAV/mark-to-market-based calculation, and more AIFMs of leveraged AIFs are expected to fall within the scope of the Directive as a result of these Level 2 requirements, especially smaller AIFMs investing heavily in derivatives who would have fallen below the relevant threshold on an industry standard AuM calculation. …

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