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TalkingPoint: Update On The AIFM Directive « Back
August 2012
FW moderates an online discussion focusing on the AIFM Directive between Stuart McLaren, a partner at Deloitte LLP, Peter Stapleton, a partner at Maples and Calder, and Neil Robson, an associate at Schulte Roth & Zabel International LLP.

FW: In your own words, could you provide a brief overview and background on the AIFM Directive (AIFMD) in its present form?

McLaren: The AIFMD was born out of European politicians’ understanding of the financial crisis and was a way to implement the G20’s commitment to regulate hedge funds. The AIFMD has been on the table for over three years now. During that time the hedge fund, real estate and private equity communities have been drip fed various versions, culminating in the publication of ‘Level 1’ in July 2011. The final directive contained over 100 areas where European Commission (EC) or ESMA were required to put flesh on to the bones of ‘Level 1’. This process started in December 2010 with the EC’s “request for advice” to ESMA and will imminently end when the EC publishes its implementing regulation. During the first half of this year ESMA’s technical advice had been put through the political mangle without appropriate technical debate and we are keenly awaiting the implementing regulation’s publication. It is important not to forget ESMA’s Discussion paper on Key concepts of the Alternative Investment Fund Managers Directive and types of AIFM, and the Consultation paper on Guidelines on sound remuneration policies under the AIFMD. These papers from ESMA will help shape the types of firms within the scope of the AIFMD and the extent to which the Level 1 remuneration provisions will apply.

Stapleton: The financial crisis in 2008 exposed a series of vulnerabilities in the financial system. Across the globe, politicians and regulators undertook a review of supervisory frameworks for global financial markets and decided to introduce a new set of rules resulting in, inter alia, Dodd-Frank, FATCA, UCITS V and of course, AIFMD. The new rules have been subjected to heavy criticism from their inception. Many commentators felt that they were rushed and an overly zealous ‘one-size-fits-all’ reaction to failures in heavily regulated sectors, including investment banking and insurance. Proponents of this view argued that proper supervision and enforcement of existing regulation rather than a completely new playbook was the way to go. However, that argument has lost out and the final position taken by the G20, European Commission and other international bodies was that all relevant actors in the financial markets needed to be subject to new regulation and oversight. The perceived wisdom was just because some sectors had not been directly responsible for the credit crisis did not mean that they would not be the cause of the next crisis. Within the EU a key area of focus was the activity of alternative investment fund managers and the alternative investment funds (AIFs) they managed – roughly defined as all non-UCITS funds. While the European Commission noted that the impact of AIFMs on markets had been largely beneficial, they also held the view that their activities could serve to spread or amplify risks through the financial system, particularly as the sector had grown exponentially in recent years to a point where it managed trillions of euros. Therefore, AIFMD was designed to establish a harmonised and stringent framework to cover the activities of all AIFMs managing or marketing in the EU, irrespective of whether their registered office was within the EU or in a ‘third country’ and to cover all domiciles of the AIFs they managed. This entailed the drafting of common requirements governing the authorisation, operation and supervision of AIFMs and, indirectly, their AIFs and other service providers. A ‘Level 1’ text in the form of Directive 2011/61/EU was adopted on 8 June 2011 (the ‘Directive’). EU Member States have until 22 July 2013 to implement it into domestic law although some, including Ireland, are likely to implement it at a much earlier date. Pursuant to the transitional provisions of Chapter X of the Directive AIFMs will have an additional year to comply with its terms and further transitional measures will exempt some existing funds, mainly closed-ended AIFs. In between now and 22 July 2013 the European Commission will finalise regulations (the ‘Regulations’) designed to implement detailed technical measures and guidelines supplementing the broad principles set out in the Directive (the ‘Level 2’ measures). At the time of writing, drafts of the Level 2 measures have been widely circulated are causing the most controversy. Many industry participants feel that the draft Level 2 is being used to rewrite certain provisions of the Level 1 text and go beyond the scope initially envisaged by AIFMD. There is also disappointment that they do not follow, in all respects, the detailed technical advice which ESMA provided to the European Commission in November of 2011.

Robson: The European Commission released the first draft of the AIFMD on 30 April 2009. The AIFMD requires the authorisation of managers in the EU providing management services to AIFs including hedge funds, real estate funds, private equity funds, non-UCITS regulated funds and funds of hedge funds – the definition is so broad that it pretty much encompasses all funds that are not UCITS funds. The AIFMD also subjects AIFMs to certain operational, organisational, reporting and capital requirements, all of which are more stringent than under the current EU MiFID rules under which EU-based fund managers are already regulated. The AIFMD also regulates the marketing of AIFs in the EU by non-EU AIFMs. The genesis of the AIFMD was the 2007-08 financial crisis, but with EU lawmaking set against a heavily politicised background and subject to intense lobbying and extreme criticism, it took over two years of debate to get it into an agreed form. However, as at the date of publication the AIFMD is still not finalised as we have already had in excess of a year of further debate on the subordinate regulation which lies underneath the AIFMD, and which provides much of the detailed rules with which AIFMs managing AIFs in the EU or AIFMs trying to market their AIFs into the EU will be required to comply. The final subordinate rules are anticipated to be published in September 2012, after which the full extent – and the detail – of the new AIFMD regime will be known.
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