Transcript AIFMD - Dechert LLP

AIFMD
Gauging the Impact
Thursday, 10 February 2011
© 2010 Dechert LLP
INTRODUCTION - housekeeping
1. Introduction
Peter Astleford
2. Into the Unknown …
Jiří Król, AIMA
3. Depositaries
Richard Frase
4. Remuneration, transparency
and third country issues
Gus Black
5. Impact on fund structures
Stuart Martin
6. What can I do to prepare?
Peter Astleford
QUESTIONS
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Introduction – selected key issues
• What is an AIFM?
– Will the proposed directive really have much impact?
• Europe: a leader or isolated?
– Impact for America, Asia, etc
– Different reactions of the PE and other parts of the funds industry
– Remuneration issues
• also consider UCITS V
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AIFMD Level 2
Into the unknown?
Jiri Krol
Director of Policy and Government Affairs
Alternative Investment Management Association
AIFMD
Lamfalussy structure
Level 1: Framework directive
Level 2: Implementing measures (Commission)
Level 3: ESMA guidance
Level 4: Commission enforcement
Some controversial Level 1 provisions
Third countries – passport in 2015, phase out of NPPRs potentially in 2018
Depositaries – liability provisions may drive up costs
Remuneration – interplay between CRD III
Leverage – maximum leverage must be set at a ‘reasonable’ level
Delegation – who is the AIFM?
Potential business consequences
Increase in compliance costs
Restructuring of the prime broker/administrator model
Decision to onshore/offshore funds
Level 2 Process
Milestones
ESMA produces technical advice
Commission drafts level 2 measures (Directives or Regulations)
Measures discussed at the European Securities Committee
Measures consulted with the EP
Adoption by the Commission
ESMA working methods
Public consultation and hearings
Impact assessment
Organisation of work into sub groups
Forms of delegation
Delegated Acts
Implementing Acts
Technical Standards
Level 2 – approximate timeline
European Parliament
Council of the European Union
European Commission
ESMA
Spring/Summer
2011
Consultation on
draft technical
advice
Dec 2010/Jan 2011
Publication of Call
for evidence
Dec
Dec 2010
Mandate for
drawing up
technical advice
2011
Mar
Apr
July
Spring/Summer
2012
Autumn 2011
Consultation on
policy
orientations of
Commission (not
certain)
Aug
Sept
Sept 2011
Provision of final
advice to COM
Oct
Final Level 2 text
adopted
(COM/MS/EP)
Nov
2012
Oct-Feb
Autumn 2011/Spring
2012
Discussion with
Member States
representatives in the
European Securities
Committee and
European Parliament
Mar
Conclusion
•
•
•
•
•
Too early to tell where we end up
Proportionality is key
UCITS/MiFID concepts an inspiration
Secondary legislation may favour particular models
Could AIFMD turn out to be half as successful as
UCITS?
• Or could it be as useful as the E-money directive?
DEPOSITARIES
RICHARD FRASE
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The Depositary
• The AIFM must
– ensure a single depositary is appointed for each AIF it manages
– notify its regulator of the identity of the depositary of each AIF it
manages
AIF
AIFM
Depositary
Fund Portfolio
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The Depositary (2)
• The depositary must be
– an EU credit institution or MiFID firm
– for a non-EU AIF only, the depositary may be
• a credit institution, or
• similar entity subject to effective equivalent prudential regulation
and supervision
– for an AIF with a 5-year investor lock, not investing in custody assets
or only normally investing in non-listed companies, the depository
may be
• a firm, subject to mandatory professional registration, which
carries out the depositary function as part of its professional or
business activities
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The Depositary (3)
• The depositary must NOT be
– the AIFM
– the AIF’s
• prime broker
• external valuer
• portfolio manager, or
• risk manager
unless role is completely separated from its depositary tasks and
conflicts of interest are managed and disclosed
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The Depositary (4)
•
The Depositary must be established
– for an EU AIF
• in the home state of the AIF
– for a non-EU AIF, either
1. in the 3rd country where the AIF is established (subject to
conditions)
2. in the home state of the AIFM (for a non-EU AIFM – the EU
state of reference)
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Depositary Duties
• Act honestly, fairly, professionally, independently and in the
interest of the AIF and its investors
• Oversee the calculation of the value of the AIF’s units
• Oversee the AIF’s cash flows
• Carry out instructions from the AIFM
– Unless they conflict with applicable law or the AIF’s constitution
• Remission of consideration and application of income
• Manage, monitor and disclose conflicts of interest
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The Depositary - delegation
AIF
AIFM
Depositary
Prime Broker
Sub-Custodians
Portfolio of Securities and Cash
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The Depositary - Delegation
• Delegation is permissible only of safekeeping of custody assets
and only if there is
– no intention to avoid the AIFMD’s requirements
– an objective reason for the delegation
– exercise of due skill, care and diligence in the selection and on-going
monitoring of the third party
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The Depositary – Delegation (2)
– On-going assessment that third party meets certain standards
• adequate structures and expertise
• prudential regulation and periodic audit
• segregation and clear identification of assets
• no use of assets without prior consent of the AIF and notice to
the depositary
• compliance with the AIFMD core custody requirements
– Exception where third country requires instruments are held in
custody by a local entity and there are no local entities satisfying the
requirements above
• Sub-delegation is permissible on the conditions above
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The Depositary
– responsibility for AIF assets
• Depositary has overall responsibility for custody of the AIF’s
assets
– segregation and clear identification of all registrable and bearer
instruments
– Verification of ownership of all other assets and maintenance of upto-date records
– No rehypothecation or re-use of assets without prior consent of AIF
or AIFM
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The Depositary
– responsibility for AIF assets
AIF
AIFM
Depositary
Derivatives
Counterparty
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Derivatives
Positions
Liability of the Depositary
• Liability towards the AIF or its investors for any loss by the
Depositary or sub-delegate
• Defence of force majeure – unavoidable despite all reasonable
efforts to the contrary
• Liability for other losses due to negligence or intentional failure to
perform properly duties under the AIFMD
• Depositary will not be liable for losses of sub-custodian if
– There is a written contract with the AIF allowing the sub-delegation
and evidencing objective reason for same
– Depositary can prove
• it met the AIFMD’s delegation requirements; and
• existence of a written contact explicitly transferring liability and
allowing claims to be made
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REMUNERATION
TRANSPARENCY
THIRD COUNTRY ISSUES
GUS BLACK
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“Gauging the impact”
© 2010 Dechert LLP
Remuneration
Will the Directive’s missiles hit hard?
- Depository
- Leverage
- Operational/organisational
- Remuneration
- Transparency
- Marketing / 3rd country
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…or just
smoke the
budget?
Remuneration
• Remuneration policies required for AIFM staff who have a material
impact on the risk profiles of AIF they manage.
•
Senior management
•
Risk takers
•
Control functions, etc
• Prescriptive policy guidance – Annex II
• Proportionality
• Disclosure requirements
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Remuneration (2)
Some potential impacts
• At least 50% of variable remuneration paid in AIF interests
• 40% - 60% of variable remuneration to be deferred for at
least 3 years
• Variable remuneration must only vest if “sustainable” and
“justified”
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Transparency
Various disclosure obligations*
• Annual report
• Disclosure to Investors
– point of sale
– periodic
• Reporting to Regulators
* Broadly apply to EU AIFM and to non-EU AIFM which are marketing to EU
investors in respect of each AIF which it manages or markets.
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Investor side letters
• “No investor may obtain a preferential treatment, unless
this is disclosed in the relevant fund’s rules or
instruments of incorporation”
• Preferential treatment, or the right to it, must be
disclosed in the fund documentation, including
– the type of investors benefitting
– their legal or economic links to the AIF/AIFM
– a description of the preferential treatment
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Third Country Issues
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Current private placement rules
• Different approaches state by state
• Generally works in practice
• France / Italy / Spain?
• Reverse Inquiry
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Marketing time line
Directive in
force (P)
2011
2012
2013
EU AIF obtain
passport
2014
2015
2016
2017
Non-EU AIF
obtain passport?
IF ESMA make positive
recommendation, and
requisite implementing
legislation is passed
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2018
No more private
placements?
AIFM
Management
• Full authorisation and compliance
Marketing
• Home state marketing
• Passport available straight away
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AIF
AIFM
AIF
Home state marketing (Art 31)
• AIFM must submit details on each AIF to home regulator
• If procedure followed - can market within 20 working
days
• Procedure for notification/approval of changes one
month prior
• Marketing only to Professional Investors (except for
retail exemption)
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AIFM
AIF
Marketing in other member states (passport) (Art 32)
• AIFM must submit details on each AIF to home regulator
• If procedure followed - can market within 20 working
days
• Procedure for notification/approval of changes one
month prior
• Marketing only to Professional Investors (except for
retail exemption)
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AIFM
AIF
Art 34: Even if the non-EU fund is not marketed in the EU …
• EU AIFM must comply with all AIFMD requirements
except Art 21 (Depository), Art 22 (Annual report)
• Co-operation agreement in place with the AIF’s regulator
A trap for the unwary who thought Directive only catches EU
marketing. Careful structuring may be necessary
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AIFM
AIF
Private placement (Art 36)
• At member states’ discretion until 2018 (or later)
• Full Directive compliance (but depository requirements
relaxed)
• Co-operation agreement in place between AIF and AIFM
regulators;
• AIF domicile must not be on FATF non-cooperative list
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AIFM
AIF
EU feeder into non-EU AIF? (Art 36)
• Treated as if a non-EU fund (as per previous slide)
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AIFM
AIF
Marketing passport (Art 35)…. from 2015?
• EU AIFM must comply with Directive
• Cooperation agreements; FATF – as for private placement
• OECD model tax information sharing agreement between AIF
domicile and each EU state fund will be marketed in
• Notification requirements (as for EU funds) at least 20 days prior
(but potential for regulators to delay)
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AIFM
AIF
Non-EU manager delegating to EU manager
• Can the non-EU manager be the AIFM?
• MiFID provision / recital 7
• No letter boxes allowed
– role and responsibilities of non-EU manager?
– substance requirements?
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AIFM
AIF
Management of EU AIF (Art 37)
• Requires EU authorisation and Directive compliance (via
legal representative in member state of reference)
• Determination of member state of reference is uncertain
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AIFM
AIF
Marketing by private placement (Art 40)
• AIFM must comply with Art 22 (Annual report); Art 23
(disclosure to investors) and Art 24 (reporting to
authorities)
• Cooperation agreement; FATF as before
• Member states free to impose stricter rules
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AIFM
AIF
Marketing by passport (Art 38)… from 2015?
• Requires EU authorisation and Directive compliance (via
legal representative in member state of reference)
• Determination of member state of reference is uncertain
• Notification requirements similar to marketing by EU
AIFM
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AIFM
AIF
Marketing by passport (Art 39)… from 2015?
• Requires EU authorisation and Directive compliance (via legal
representative in member state of reference) (Art 37)
• Determination of member state of reference is uncertain
• Notification requirements similar to marketing by EU AIFM
• Cooperation agreements; FATF; tax info sharing agreements
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Marketing to Retail Investors – Article 41
• Permissible, at the discretion of individual Member
States
• Commission must be notified
• Stricter requirements may be imposed but no
discrimination against cross-border funds
• Within 3 years, Member States must report to the
Commission and ESMA about the operation of their
retail regimes
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The view from Midtown…?
• Business as usual under NPPR
(for now)
• Watching brief on any erosion of
NPPR
• Consider EU authorisation / EU
funds if EU market is important
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The view from Mayfair…?
• Business as usual under
NPPR (for now)
• Investor preference will still
drive fund domicile
• Directive has pros and cons
for EU and non-EU fund
structures
• AIFM structuring is crucial
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IMPACT ON FUND STRUCTURES
STUART MARTIN
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Impact on Fund Structures
It was the best of times, it was the worst of times, it was
the age of wisdom, it was the age of foolishness, it
was the epoch of belief, it was the epoch of incredulity,
it was the season of Light, it was the season of
Darkness, it was the spring of hope, it was the winter
of despair, we had everything before us, we had
nothing before us, we were all going direct to Heaven,
we were all going direct the other way ...
Charles Dickens, A Tale of Two Cities
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Impact on Fund Structures
• Is an EU AIFM required?
• Can the AIF be “self managed”?
• Impact on “role” of the EU AIFM and relationship with AIF and
other service providers
• Impact on domicile choice
• Impact of domicile on Fund Structures
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Is an EU AIFM required?
• AIFM Directive applies to
– EU AIFM which “manage” EU or non EU AIF
– Non EU AIFM which “manage” EU AIF; and
– Non EU AIFM which “market” EU or non EU AIF in the EU
• “Manage” means providing at least the following Investment
Management services when managing an AIF
– portfolio management; or
– risk management
• Concept of each AIFM managed within the Directive having a
single AIFM
– Extends to the marketing passport for non EU AIF managed by non EU AIFM
[Art 40 and, if introduced, Arts 38, 39] and
– May have a helpful wider application
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Is an EU AIFM required? (2)
• AIFM Directive does not apply to individual portfolio management
services provided to AIF under MiFID . . . although such Funds
may not be directly or indirectly offered or placed by investment
firms in EU, if and to the extent the relevant AIF cannot be
marketed in accordance with the Directive
• MiFID only route
– may help UK investment manager managing non EU AIF
– should enable it to manage non EU AIF managed by non EU AIFM
marketing under Art 40 (available from TD + 2 + 3 years)
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MiFID Only Structure: Take One
Offshore /
Non EU Fund
Non EU
Risk Manager
EU
Portfolio Manager
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Full discretion:
MiFID only
authorisation
？
MiFID Only Structure: Take Two
Offshore Non EU
Fund
Offshore Non EU
Manager
- Discretionary portfolio
management
- Risk management
- Other “operator” services
- MiFID only authorisation
EU Portfolio
Manager
- Discretion subject to
review by offshore
investment manager
- ? Marketing in EU (policy
considerations)
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？
Can the AIF be “self managed”?
• Can an AIF be “self managed” in a similar way to a self-managed
UCITS?
• Under serious discussion in Luxembourg and Dublin
– Corporate funds e.g. SICAVs and Irish ICVCs
– Non Corporate Funds e.g. Unit Trusts, FCPs,
Limited Partnerships

X
• Capital Advantages/Disadvantages
– Initial capital of €300,000 vs €125,000
CLEAR
– Does the “own funds” requirement of 0.02% of assets apply beyond
UNCLEAR
insurance costs?
– Will a Swiss model of “regulatory capital” apply? UNCLEAR possibly critical
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Can the AIF be “self managed”?
• Anti Letter Box Provisions
AIFM may not delegate functions to the extent it can no longer
be considered to be the manager of the AIF and to the extent it
becomes a letter box entity
• What will Level 2 provisions permit?
 certainly minimum operational and substance requirements
at level of the AIF
 manner of any outsourcing may be relevant
 may be easier to achieve “self management” by including
“risk management” rather than “portfolio management”
function within AIF
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Impact on External AIFM Role/Relationship with
AIF and Key Fund Service Providers
• AIFM responsible for portfolio management and/or risk
management
• AIFM may choose to perform the following functions
– operator functions including :
 legal and fund management accounting services
 customer enquiries
 valuation and pricing
 regulatory and compliance monitoring
 maintenance of unit/share register
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Impact on External AIFM Role/Relationship with
AIF and Key Fund Service Providers
 distribution of income
 contract settlements
 record keeping
 marketing
 activities related to the assets of the AIF
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Impact on External AIFM Role/Relationship with
AIF and Key Fund Service Providers
• But AIFM directly assumes “operational” and “investor facing”
operator type obligations eg
 due diligence etc. in selection and appointment of prime brokers
 taking steps to identify, prevent, manage and monitor conflicts of
interest
 ensure investment strategy, liquidity profile and redemption policy of
AIF are consistent
 ensure appropriate and consistent procedures are established for the
proper and independent valuation of the AIF
 responsibility for valuation of assets and calculation and publication
of net asset value
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Impact on External AIFM Role/Relationship with
AIF and Key Fund Service Providers
 ensure appointment of depositary (possible AIFM liability to
investors)
 preparation of annual report
 minimum “point of sale” and “periodic” minimum disclosure
obligations to investors
 reporting obligations to competent authorities
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Impact on External AIFM Role/Relationship with
AIF and Key Fund Service Providers
•
External AIFM may need to “change” the contractual relationship with the
AIF and certain key service providers eg
 Investment Management Agreement
compliance undertakings/authorities from AIF beyond portfolio
management matters
 Administration Agreement
potential for AIFM to seek direct compliance undertakings from
Administrator
 Prime Broker and Depositary Agreements
Potential for AIFM to be a party to these Agreements
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•
Remedies for breach eg resignation?
•
Need to ensure AIFM retains “central management and control” for UK
tax purposes
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Impact on Fund Domicile Choice
•
The case for Cayman
– AIFM managing non EU AIF (no EU marketing)
no need to comply with annual report or depositary requirements
 AIFM managing non EU AIF (EU passport marketing)
potential for future access marketing passport from TD + 2 years (with
possible delay)
 AIFM managing non EU AIF (reliance on existing private placement regimes)
exemption from certain of the depositary requirements
from TD + 2 +3 years
•
The case for an EU domicile
– possibility of self managed AIF within EU
– investor sentiment?
– access to marketing passport from TD vs continuance of private
placement regimes for TD + 2 + 3
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Impact of Domicile on Fund Structure
• Corporate Funds
– Cayman
– EU eg Ireland, Luxembourg, Malta (EU ManCo as AIFM)
• Master Feeder Structures
– Cayman: master funds may be limited partnerships, unit trusts or
corporates which “check the box”
– Ireland: QIF master funds may be unit trusts, limited partnerships
etc. but corporates cannot currently “check the box” but …
local regulated management company/general partner required but
may be AIFM
– Luxembourg: SIF master funds may be FCPs or private SICAVs
which “check the box”
local regulated management company required for FCP but optional
for private SICAV. Local management company may be AIFM
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The Master Feeder Structure
Non US Investors / US tax
exempt investors
Onshore (US)
Feeder
US Taxpayer
Investors
directly or via
US wrapper
feeder
If Master Fund
is LP
Offshore Fund
(EU/Non EU)*
Maste
r
Fund*
Lux / Irish
Management
Company
(AIFM)
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Offshore
ManCo /
General
Partner
UK Investment
Manager
(AIFM/MiFID)
WHAT CAN I DO TO PREPARE?
PETER ASTLEFORD
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What can I do to prepare?
• Consider re-domiciling funds
• Investors’ preference
• FIN 48
• Dual fund ranges – EU and a second cheaper,
better performing non EU range?
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What can I do to prepare?
- Alternative Domiciles
• Ireland
• Luxembourg
• Malta
• UK
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What can I do to prepare? (cont)
• Consider whether your strategy works in a platform
that is outside the scope of the AIFMD
– UCITS / Newcits
– managed accounts
– future staffing needs
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What can those outside the EU do
to prepare?
• Consider setting up/growing an office in Europe
– there should be time (say 2 years)
• Consider all delegation currently undertaken
– would it meet the new requirements?
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QUESTIONS?
Peter Astleford, Gus Black, Richard Frase, Jiří Król, Stuart Martin
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