Alternative Investment Fund Managers Directive

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Alternative Investment Fund Managers Directive Alternative Investment Fund Managers Directive

Melville Rodrigues

21 July 2010

Real Estate Funds: Practical Implications

Opportunities for Competitive Advantage

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Issues Issues

1. Implementation 2. Scope

3. Authorisation

4. Key Benefit: Passporting 5. Operational Aspects

6. Third Country Matters

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Implementation Implementation

Trialogue: negotiations between Council and Parliament, and involving the

Commission - Parliament plenary vote in September or

October

Level 2 measures to be adopted

2011 2012

Directive likely to take effect, i.e. to be

transposed into national legislation

z Level 2 measures = Detailed provisions adopted by the Commission and endorsed by a qualified majority of Member States

z Level 3 guidance = Guidance issued by European Securities and Markets Authority:

harmonisation by national regulators

Level 3 guidance to be issued

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Scope Scope

z Alternative Investment Fund (AIF) means:

– any collective investment undertaking

– which raises capital from a number of investors

– with a view to investing in accordance with a defined investment policy – non-UCITS funds

§ closed-ended and open-ended

§ EU and non-EU

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z Alternative Investment Fund Manager (AIFM) means:

– any legal person

– whose regular business is managing one or more AIF – internal or external

z Managing AIF means providing investment management services

– portfolio management – risk management

Scope

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z Exemptions

– AIFM: pension funds, sovereign wealth funds, and (assets held on own account) insurers and credit institutions

– Council draft:

– Holding companies if main purpose is to carry on a business strategy by producing and selling goods and/or providing services

– Member States may exempt AIFM of:

– funds of less than €100m; and

– unleveraged funds of less than €500m with minimum 5 year term

– Parliament draft:

– unleveraged funds of less than €250m with minimum 5 year term (no depositary, valuation, delegation or third-country requirements)

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Authorisation Authorisation

z Practical implications

– Each AIFM will require specific authorisation as an AIFM

– In UK, competent authority likely to be Prudential Regulatory Authority – Information to be provided includes:

– managers, shareholders or members of the AIFM

– programme of activity & organisational structure of the AIFM;

– investment strategies, risk profiles and other characteristics of the AIF – fund rules and constitutional documents

– delegation and custodial arrangements

– Authorisation conditional: demonstrating compliance with the Directive

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z Capital adequacy requirements

– External AIFM to have capital of at least €125,000 – Internal AIFM to have capital of at least €300,000

– AIFM managing funds exceeding €250m = 0.02% of the excess amount

– 50% of own funds: may take the form of a bank/insurance company guarantee – In all cases, total capital requirement cap = €10m

– Under Council draft, AIFM managing unleveraged funds of less than €500m with minimum 5 years term that do not make regular divestments: only required to hold €50,000 in capital

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Key Benefit:

Key Benefit: Passporting Passporting

z Management passport

– AIFM authorised in a Member State may provide management services throughout the EU on a cross-border basis or through a local branch

z Marketing passport

– AIFM authorised in a Member State may market AIF EU-wide to professional investors – Member States have option to allow marketing to retail investors by EU AIFM on

a non-discriminatory basis

z Single market dynamics

– Pan European brand development

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z Depositary

– For EU AIF, independent depositary based in home Member State required

– Credit institution or investment firm, but cannot be the AIFM itself

– Under the Council draft, the depositary is strictly liable for losses caused by a sub-custodian, except where the depositary has contracted out of liability reasonably after conducting due diligence into the sub-custodian

– However, under the Parliament draft, no depositary is required for real estate funds

Operational Aspects

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z Delegate

– reputable and experienced - and Parliament draft: creditworthy

– AIFM able to demonstrate that the delegate is qualified and capable, selected with due care - capable of being monitored

– AIFM remain liable for delegated activities

– Parliament draft: the AIFM must inform investors of delegated functions

– Parliament draft: the AIFM must also notify its regulator, which has one month to reject any act of delegation

– Delegation of portfolio and risk management:

– Council draft: generally only possible to delegates authorised or registered for the purpose of asset management and subject to

regulatory supervision. But this is not required for AIFM of real estate funds - only prior authorisation from the AIFM's home regulator required – Council draft: delegation to third-country entities is only possible if

appropriate cooperation arrangements are in place between the AIFM home regulator and third-country regulator

– Parliament draft: only possible to delegates that are authorised as an AIFM to manage an AIF of the same type

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z Transparency

– Investment strategy, structure of AIFM and AIFs, delegation, valuation and custodial arrangements, fees and other information to be disclosed to investors prior to investment

– Preferential treatment of specific investors also to be disclosed

– Competent authorities and investors to be informed periodically about AIF liquidity and risk management

z Risk management

– Risk management and portfolio management must be separate – Risk in each AIF to be regularly assessed

– Under Parliament draft, arrangements with prime brokers must be appropriately documented

z Valuation

– AIF valuation must be independent, even where performed by the AIFM – Council draft: exempts AIFM of closed-ended AIF whose shares are

traded on a regulated market

– Parliament draft: periodic valuation optional for AIFM of real estate funds

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Third Country Issues Third Country Issues

z Marketing of third-country AIF

Council draft and Parliament draft take different approaches

– Council draft: national private placement regimes for third country funds managed by:-

§ AIFMs subject to 1. regulator co-operation agreement but 2. reduced depository requirements

§ third country managers subject to 1. regulator co-operation

agreement and 2. managers comply with limited aspects of Directive (disclosure/reporting)

– Parliament draft:

§ third country funds must satisfy 1. regulator co-operation agreement 2. compliance re ML & terrorism 3. OECD compliance tax information 4. reciprocal market access 5. reciprocal enforcement of judgments.

§ In addition, third country managers must “opt in” i.e. comply with the Directive and five criteria, and third country regulator must agree with ESMA to supervise compliance with Directive by Manager

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Opportunity, Opportunity, Opportunity!

z Wait and see z Investors

z Managers

z Competitive advantages

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Melville Rodrigues Partner

CMS Cameron McKenna LLP Mitre House

160 Aldersgate Street London EC1A 4DD

melville.rodrigues@cms-cmck.com D: +44 (0) 20 7367 3137

M: +44 (0) 7899 910641 S: +44(0) 20 7367 3000 F: +44(0) 20 7367 2000