Kam Dhillon of Gowling WLG provides a guide to the AIFMD, including the directive requirements and penalties, as well as how Brexit could affect the European marketing passport introduced under the regulations
Basics of AIFMD
The Alternative Investment Fund Managers Directive (AIFMD) came into force in July 2011, and was implemented into UK law in July 2013 via the Alternative Investment Fund Managers Regulations and the FCA Handbook. Its scope is broad and covers the management and marketing of alternative investment funds (AIFs) to investors in the European Economic Area (EEA).
What is an alternative investment fund?
It is a collective investment undertaking, which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors (and does not require authorisation under the UCITS Directive). This includes hedge funds, private equity funds, real estate funds, fund of funds and investment companies. However holding companies and securitisation special purpose entities are expressly excluded from the definition of an AIF.
What requirements does it introduce?
AIFMD regulates alternative investment fund managers (AIFMs). Under AIFMD, an AIF must be managed by an AIFM. Managing, for these purposes, means providing at least portfolio management and risk management services to the AIF.
The obligations on the AIFM vary, depending on its aggregate assets under management and where the AIFM and the investors are located. In summary, full scope AIFMs (with assets under management over a prescribed threshold) in the UK are subject to authorisation and supervision by the Financial Conduct Authority (FCA) and must comply with rules on conduct of business, transparency, reporting, remuneration, valuation, regulatory capital, marketing and the safekeeping of investments. Sub-threshold AIFMs are subject to a lighter touch registration regime and limited reporting.
AIFMD introduces a European marketing “passport”. The passport is currently available to full scope EEA AIFMs marketing EEA AIFs to professional investors in the EEA, however in due course we expect it to be extended to non-EEA AIFMs. Where no passport is available under AIFMD, AIFs must be marketed to professional investors in the EEA using the national private placement regime (NPPR) (to the extent that it is available).
Post-Brexit, what will be the status of the marketing passport for UK AIFMs?
Once the UK withdraws from the European Union, and assuming there are no transitional arrangements in place, the UK is likely to become a “third country” and UK AIFMs will be classified as non-EEA AIFMs and UK AIFs as non-EEA AIFs. Pending access to the marketing passport as a non-EEA AIFM, UK AIFMs will have to market on a country-by-country basis using the NPPR.
Penalties for breaching AIFMD as implemented in the UK
The FCA has publicly pledged itself to a policy of “credible deterrence” and is placing the alternative fund management sector under greater scrutiny than ever before. The FCA has already begun investigating a number of AIFMs for a range of alleged regulatory breaches. The range of penalties for beach of AIFMD, as implemented in the UK, includes public censure, suspension or cancellation of authorisation, fines and imprisonment. In addition, any agreements entered into as a result of unlawful marketing may be unenforceable.
Working with regulators to ensure compliance and best practice
UK AIFMs authorised by the FCA have an on-going duty to comply with the general principles and operating conditions set out in AIFMD. This includes acting honestly, with due skill, care and diligence and fairly in conducting their activities. It also includes complying with all regulatory requirements applicable to the conduct of their business activities so as to promote the best interests of the AIFs or the investors of the AIFs they manage and the integrity of the market. Further, UK AIFMs have an on-going duty to keep the FCA informed of any material changes to the conditions for their authorisation.
The alternative investment fund sector is still developing best practices to address the various requirements imposed by the AIFMD. While market practice continues to evolve, AIFMs should nonetheless take steps to ensure that they can sufficiently demonstrate compliance with AIFMD.
Kam Dhillon is principal associate at Gowling WLG.
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