The Alternative Investment Fund Managers Directive came into force in July 2013. It followed in the wake of the 2008 financial crisis and the perception of insufficient regulation.
The Directive provides for uniform set of rules for all managers of alternative investment funds including private equity funds and venture capital funds. These have previously been largely unregulated.
The Directive applies to fund managers whether they are based in the European Union or not, who manage and market alternative investment funds in the European Union. They must be authorised by an EU regulator. Central Bank is the Republic of Ireland regulator.
The Directive on operational organisational apportionment capital requirements are more earnest that under the MiFID or the UCITS Directive.
The Regulations apply to any undertaking managing private equity or venture capital fund if it meets the definition of an alternative investment fund. An alternative investment fund is broadly defined and includes most non-UCITS funds. It would be deemed an AIF if it’s a non-UCITS collective investment where the unit holders are not operationally involved. It raises capital from a number of investors with a view to investing their capital in accordance with a defined investment policy.
An undertaking involved in commercial activity involving sale of goods and non-financial services and industrial activity or combination falls outside the definition.
The fund manager is any legal person whose regular business is managing one or more AIF. The AIF can be its own fund manager in which event it is a self-managed AIF. Alternatively, there may be an external manager, in which event it is an externally managed AIF.
There are exemptions for segregated managed accounts, family and similar private investment vehicles, joint venture schemes, insurance contracts, some securitisation SPVs, employee participations and saving schemes.
Joint ventures which have fund type characteristics by way of capital raising, passive participants and defined investments policies, may be subject to the Directive.
The Directive does not apply to fund managers who own, manage their own fund or that of a parent or subsidiary company of a parent provided none is an AIF itself.
The Regulations apply to limited partnerships. Limited partnership operates with a general partner, commonly a company as the manager. The investors are the limited partners. Formerly such partnerships were exempt on the basis of a communality of interest.
The UK view is that where there is a single limited partner making substantial contribution and a general partner making an annual contribution because it is not an AIF because it is not raising funds from a number of investors.
There are two types of regulatory statuses for approved authorised investment funds managers. Those of over certain level must be authorised. They are subject to full requirements. Once they are met, they may market throughout the EU.
Fund managers below the threshold level need to be registered and are subject to fewer requirements. However they may not market and manage throughout the EU.
A fund may opt for the higher level of regulation in order enable to market and provide management services to the EU for their fund. A sub-threshold fund is a fund manager whose assets under management do not exceed, €500 million provided the fund is not leveraged, and investors have no redemption rights for the first five years or €100 million including all leveraged assets.
A registered fund manager must register with the Central Bank. It must register details of its investment strategy. It must provide and register periodic updates of its assets and breaches of thresholds. If the fund manager breaches the thresholds and this is likely to continue for three months, he must seek follow authorisation within 30 days.
A qualifying investor alternative investment fund succeeds the qualified investor fund provided for under non-UCITS regulations. It is one which is marketed to professional and institutional investors who must meet certain requirements of terms of eligibility and minimum subscription.
A qualifying investor alternative investment fund must designate a fund manager.
Qualifying investor alternative investment funds are not subject to borrowing or leveraging limit. They are not subject to requirements for diversification. They must appoint a regulated fund manager. They may be open-ended with limited liability or closed ended.
The fund may use bridge financing. There is no minimum size rule for property funds. The initial period for property and PE fund is extended to two years.
A minimum subscription of €100,000 to €500,000 is required. €100,000 is the general limit and €500,000 applies if the fund invests more than 50% of its net assets in unregulated funds.
The qualifying investments must be either a professional client under the MiFED Directive.
An investor who receives an appraisal from an EU credit institution MiFED firm or UCITS provided that they have the requisite experience, knowledge and expertise to understand the investment.
An investor who self certifies himself as an informed investor with knowledge and experience to evaluate the risk and provides confirmation that his business involves management of assets similar to those managed by the fund manager.
The Central Bank requires that the QIAIF has at least two Irish resident directors. A management company or general partner must be appointed if there is a limited partnership.
Central Bank requires prospectus, constitutional documents, administration agreement, depositary agreement, investment management agreement, distribution agreement, application form complete, ancillary documentation.
If once authorised, the QIAIF is likely to meet most of the listing requirements of the Irish Stock Exchange. A listing may be considered.
The Directive requires the private equity and venture capital funds to have a depositary to hold the funds’ assets. It must be a written appointment. Power of the fund manager may not be depository. It must be an independent entity based in the same country as the funds. It must be authorised by the regulator in that country as a credit institution or investment firm. Accordingly in Ireland the depositary must be authorised by the Central Bank.
The depository must verify ownership of the assets and keep records. It must monitor cash flows. It has duties to consider and oversee the fulfilment of obligations. A fund valuation must be conducted either internally or externally. The fund manager may conduct evaluation. The manager must ensure that the internal valuation is conducted independently of the portfolio management function.
The portfolio manager accordingly may not value the assets in its own portfolio.
The regulations apply to
- an AIMF established in the State which manages one or more AIF irrespective whether it is an EU AIF or non-EU AIF.
- A non-EU AIF whose Member State of reference is the State,
- An AIMF from another Member State which markets one or more EU AIFs in the State.
- An AIMF from another State which manages one Irish AIF of another Member State that is —
- An AIMF from another Member State which markets one or more non-EU AIFs in the State.
- A non-EU AIMF which markets one or more than AIM in the State.
The regulations do not apply to holding company, institutions for occupational retirement provision, supranational institutions, the Central Bank, State authorities, local authorities, employee schemes, securitisation SPVs.
Limited parts of the regulation only apply to AIMFs with funds under investment of €100 million or €500 million as above. In the case of funds below the thresholds, their obligations are to register with the bank, identify itself on the alternative funds it manages, provide information on the investment strategy it manages and provide at regular intervals information on the main instruments on which it trades and on the principle exposures and most important concentration it manages in order to enable the Bank to monitor systematic risks and have notified the Bank in the event that it fails to continue to meet these requirements.
Bank may impose requirements as it considers appropriate on an AIFM which stands registered under the regulation and it must comply. They should be no onerous than those which apply to an authorised AIMF.
An AIF manager must be authorised by the Central Bank in accordance with the regulation. An internally managed AIF shall engage only in activities — internal activities and certain other activities subject to limited conditions.
An external AIM fund manager may provide following services:
- management of portfolio investments,
- non-core services comprising investment advice;
- safe-keeping and administration in relation to shares and units;
- reception and transmission of orders.
Various conditions were applicable to other services which may be provided.
The AIF manager must provide the Bank with information required to monitor compliance with the applicable conditions. An investment firm or credit institution is not required to obtain authorisation to provide investment services such as individual portfolio management in respect of AIF. However an investment firm shall directly or indirectly offer units or shares of alternative investment funds to or place such units only to the extent that they can be marketed in accordance with the regulations.
The application for authorisation must provide
- information on persons conducting the business,
- the identity of the shareholders, members, directly or indirectly that have qualifying holdings and amount of the holdings,
- program of activity setting out the organisational structure including information on how it intends to comply with regulations,
- information on remuneration policies and practice,
- information on arrangements for the delegation and sub-delegation of certain functions.
An AIF manager must provide information containing the investment strategies of underlying funds if the AIF is a fund or funds, the AIFMs policies in regards to leverage, risk, profiles and characteristics of each AIF it manages;
- information of whether the master AIF is established if the AIF is a feeder;
- rules or instruments of incorporation of each AIM and AIMF it intends to manage;
- information on arrangements for appointments of a depository.
Where the management company is authorised under the UCITS regulation and applies for authorisation under the AIMF regulations, it shall not require information or documents already provided under the former authorisation.
The Bank in granting an authorisation must be satisfied that the AIMF is able to meet the conditions of the regulations, has sufficient initial capital in own funds as required by the regulations;
- the persons who conducted business are of sufficiently good repute and are sufficiently experienced in relation to investment strategies pursued by each AIMF;
- shareholders and members who have qualifying holdings and are suitable taking into account the need to ensure sound and prudent management;
- head office and registered office are in the state.
Conditions may be attached to the authorisation as the Bank considers appropriate. Further conditions may be attached after the grant of the authorisation. Conditions may be altered or revoked.
The Bank must consult the competent authorities of other Member States before it grants authorisations to subsidiaries of another AIMF UCITS management company of an investment firm of a credit institution or insurance undertaking authorised in another State or the subsidiary of a parent of such undertaking or controlled by such entity.
The Bank is to inform the applicant in writing within three months whether or not the authorisation has been granted. This may be extended for up to three more months where it considered necessary. The application is deemed complete provided certain information has been submitted. Otherwise it is not deemed made until requisite minimum information is furnished.
An AIMF which is internally managed must have initial capital of at least €300,000. Where it has appointed an external manager of alternative investment funds, the AIFM must have an initial capital of at least €120,000.
Where the value of the portfolios of the alternative investment funds managed exceeds €250 million, it shall provide an additional amount of its own funds. This is 0.02% of the amount by which the value of the portfolio exceeds €250 million provided that the required total of the initial capital and the additional capital is to exceed €10 million.
Subject to conditions the requirement for capital may be relieved or reduced if guarantees are provided by credit institutions or insurance undertakings in the EU or in a third country subject to prudential rules considered as equivalent to those provided under EU law.
An internally managed AIF and an external AIFM must have either additional owned funds which are appropriate to cover potential liability arising from professional negligence or hold professional indemnity insurance against liability for professional negligence appropriate to the risks.
There are provisions for changes in the scope of the authorisation. Applicable conditions may be altered.
The Bank may withdraw authorisation where
- it is not used within 12 months,
- where false statements were made,
- it no longer complies with conditions there has been a contravention of regulations of serious and systematic nature.
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