An AIFM must at all times act honestly, with due care and diligence and fairly in conducting its activities. The following obligations apply to AIFMs (alternative investment fund managers).
It must act in the best interests of each AIF or its investors which it manages and the integrity of the market. It must have and employ effectively the resources and procedures necessary for the proper performance of its business activity. It must take all reasonable steps to avoid conflicts of interest. It must comply with regulatory requirements applicable to the conduct of its business so as to promote the best interests of each AIF or the investors of each AIF it manages and the integrity of the market. It must treat all AIF investors fairly.
No investor in an AIF is to obtain preferential treatment, unless this is disclosed in the AIF’s rules or instruments of incorporation. Each AIMF which is authorised to provide the service of discretionary portfolio management must not invest all or part of a client’s portfolio in shares or units of which it manages unless it receives prior approval from the client.
An AIF manger must have a remuneration policy and practice for categories of staff referred to below which are consistent with and promote sound and effective risk management. It must not encourage risk-taking which is inconsistent with the risk profiles, rules and instruments of incorporation of each AIM which it manages. The staff in question, include
Senior management, risk-takers, control functions, and any other employees receiving total remuneration that takes them into the same remuneration bracket as senior management or risk takers, whose professional activities have a material impact on the risk profiles of the AIMF or any AIF it manages. The principles under which an AIMF is to determine its remuneration policies are set out in the Schedule to the regulation.
It must take reasonable steps to identify conflicts of interests that arise in the course of managing funds between the AIFM, including its managers, employees and persons linked directly or indirectly to it by control and the AIF managed
- By it or the investors in that AIF;
- The AIF or the investors in that AIF or another AIF;
- The AIF or the investors in that AIF and another client of the manager;
- The AIF or the investors in the AIF and a UCITS managed by the AIFM or its investors in the UCITS;
- two clients of the AIFM.
It must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to identify, prevent, manage and monitor conflicts of interest and prevent them from adversely affecting the interests of each fund and its investors.
The manager must segregate, within its own operating environment, tasks and responsibilities which may be regarded as incompatible with each other and may generate systematic conflicts of interest. It must assess whether its operating conditions may involve any other material conflicts of interest and disclose them to the investors in each AIF.
Where the arrangements above are not sufficient to ensure, with reasonable confidence, that risks of damage to investors’ interests will be prevented, the AIMF must clearly disclose the general natures and sources of interests, conflicts to the investors before undertaking business on their behalf and develop appropriate policies and procedures.
Where it uses the services of a prime broker, the terms shall be set out in a written contract. In shall exercise due skill, care and diligence in the selection and appointment of prime broker. The contract must provide amongst other things for the possibility of transfer and reuse of AIF assets and should comply with AIF rules and instruments of incorporation.
The AIMF must separate functionally and hierarchically, the functions of risk management from the operating units, including the functions of portfolio management. The functional and hierarchical shall be reviewed by the Central Bank in accordance with the principles of proportionality.
The manager must in any event, be able to satisfy the Bank that specific safeguards against conflicts of interests allow for the independent performance of risk management activities and that the risk management process satisfies the requirements of the regulation and is consistently effective. The risk management systems must be reviewed at appropriate frequency at least once a year.
The manager must in any event, be able to satisfy the Bank that specific requirements against conflict of interest allow for the independent performance of risk management activities and that the risk management process satisfies the requirement of the regulations and is consistently effective.
The manger must implement adequate risk management systems in order
- to identify, measure, manage and monitor appropriately all risks relevant to
- each AIF investment strategy and to which each AIF may be exposed.
The manager must set a maximum level of leverage it may employ in relation to each AIF it manages as well as the extent of the right to reuse collateral or guarantee that could be granted under leveraging arrangement, taking into account,
- the type of the AIF, the investment strategy and the source of leverage;
- other inter-linkage or relevant relationships with other financial services institutions, which could pose systemic risk;
- need to limit the exposure to any single counterparty;
- the extent to which the leverage is collateralised, asset-liability ratio, scale, nature and extent of the activity of the manager on the markets concerned.
The manager for each AIM must that it manages which is not an unleveraged closed-ended AIF, employ an appropriate liquidity management system and adopt procedures which enable it to monitor the liquidity risk of the AIF and to ensure that the liquidity profile of the investments complies with its underlying obligations.
The manager must regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable it to assess the liquidity risks of each AIF and monitor the liquidity risk of AIF accordingly. The manager must ensure that for each AIF it manages, the investment strategy, liquidity profile and redemption policy are consistent.
An AIFM must at all times, use adequate and appropriate human and technical resources that are necessary for the proper management of each AIF. It must have sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing and adequate internal control mechanisms including, in particular, rules for personal transactions by employees, holding or management of investments in order to invest on its own account and ensuring, at least, that each transaction involving each AIF may be reconstructed according to its origin, parties, nature and time and place it was effected and that the assets of each AIF managed were invested in accordance with rules of incorporation, legal provisions in force.
The manager must ensure that there are appropriate and consistent procedures so that a proper and independent value of the assets of each AIF it manages can be performed in accordance with the regulation and its rules of incorporation.
The AIF rules or instruments shall set out the rules applicable to the valuation of assets and calculation of net asset value per unit or share. The manager must ensure that the net asset value per unit or share is calculated and disclosed to the investors in accordance the regulation and the AIMF rules or instruments.
The valuation procedures must ensure the assets are valued and the net asset value is calculated at least annually. If the fund is of the open-ended type, the valuations shall be carried out at a frequency which is appropriate to the assets held and its issuance and redemption frequency. Investors must be informed of the valuations and calculations as set out in the relevant AIF rules or instruments of incorporation.
The AIFM shall ensure the valuation function is either performed by an external valuer, independent of the AIF and manager and any other person with close links to them or is carried out by the AIMF itself, provided the valuation task is functionally independent from portfolio management and remuneration policy and other measures ensure that conflicts of interest are mitigated and that undue influence on employees is prevented.
The depositary shall not be appointed as an external valuer of the AIF, unless it is functionally and hierarchically separated the performance of its depositary functions from its tasks as external valuer and potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors.
The appointed external valuer shall not delegate the valuation functions. The manager shall notify the appointment of the external valuer to the Bank which may require another external valuer be appointed instead, where the valuation function is not performed by an independent external valuer, the Bank may require the manager to have its valuation procedures verified by an external valuer or where appropriate, by an auditor.
The manager is responsible for the proper valuation of AIF assets, calculation of the net asset value and publication of the net asset value. Its liability to the AIFM and its investors shall not be affected by the fact that the manager has appointed an external valuer. However, irrespective of contractual arrangements, the external valuer shall be liable to the manager for any loss suffered by the manager as a result of the external valuer’s negligence or intentional failure to perform its functions.
There are controls on the extent to which an AIMF may delegate its functions. It must give prior notice to the Central Bank. It must be able to justify its entire delegation structure to the Bank on objective grounds. The delegate must have sufficient resources to perform the delegated task.
Where the delegation relates to portfolio management or risk management, and is conferred on a third party undertaking in addition to requirements above, cooperation between the Bank and the supervisory concerned of the entity in the third country must be ensured.
The delegation must not prevent the effectiveness of supervision and in particular, it shall not prevent the manager from acting or the AIF from being managed, in the best interests of its investors. The manager must be able to demonstrate that the delegate is qualified and capable of understanding its functions selected with due care and that the manager is in the position to effectively monitor at any time the delegated activity.
The manager must review the services provided by delegate on an ongoing basis. The delegation of portfolio management or risk management shall be conferred on the depository or delegate of the depository or any other any other entities who may conflict with those of the manager or the investors, unless such entity has functionally and hierarchically separated the performance of its portfolio and risk management functions from its other potentially conflicting tasks, and potential conflict were identified, managed, monitored and disclosed to investors.
Subject to conditions, the delegate may themselves sub-delegate. There are restrictions and conditions on sub-delegation of portfolio and risk management. The delegate must review each sub-delegate’s services on an ongoing basis.
In any event, the manager shall not delegate its functions to the extent that, in essence, it can no longer be considered to be the manager and to the extent that it becomes a letterbox entity.
Each AIF manager must have a single depositary for each AIF that it manages; it must be the subject of a written contact. The depositary may be a credit institution, an authorised investment firm, an authorised investment business firm.
The Central Bank may permit in relation to an AIF which has no redemption rights exercisable during the period of five years in the initial investments in accordance with its core policy, certain other categories of depositary.
In order to avoid conflicts of interest between the depositary and the AIF manager and the AIF or between the depositary and either of them and between the depositary and the AIF and its investors, the AIMF shall not act as depositaries;
A prime broker acting as counterparty to an AIF shall not act as depositary, unless it has functionally and hierarchically separated the performance of its depositary functions from its prime broker and otherwise dealt with conflicts of issues, interest issues.
The depositary must be established for an Irish AIF in the State; for an EU AIF in the home State of the AIF; for a the third country AIF where the AIF is established or in the home Member State of the AIFM managing the AIF or in the Member State of reference of the AIMF managing the AIF.
Where the depositary is established in a third country, other provisions apply so as to ensure that the subject to the effect of a prudential regulation including minimum capital requirements equivalent to those under EU law must not be established in territories which do not have appropriate tax status in International Tax Conventions.
The depositary must ensure the cash flows are properly monitored and ensure all payments made by on behalf of investors are received and accounted for.
The assets of the fund must be entrusted to the depositary for safe-keeping. They must be appropriately segregated. Title to the asset where materialised must be held. The depositary must take positive steps to verify and satisfy itself regarding the title to assets.
The depository should ensure that all sales, issues, redemptions, cancellations of shares and units are undertaken in accordance with applicable and the AMF rule.
They must ensure the value of the units are calculated in accordance with applicable law and the AIF rules. It must carry out the instructions of the manager unless they conflict with national law or AIM rules.
In the context of their respective roles, the AIM, AIF manager and the depository shall each act honestly, fairly, professionally, independently in the interest of the AIF and their investors. They shall not allow conflicts of interests. Where conflicts arise, they must be identified.
An AIF manager for each EU AIF it manages, must make available an annual report for each financial year not more than six months following the end of the year. It will provide investors, to investors on request. It must be made available to the Central Bank and other relevant competent authority.
Where the fund is obliged to make public annual financial report, only such additional information as is required below need be provided to investors on request and may be provided separately or in additional part of the annual financial report.
The annual return must at least contain a balance sheet or statement of assets and liabilities, income and expenditure for the financial year, report on activities, material changes and certain key information, total remuneration paid by the AIMF to its staff, number of beneficiaries and carried interest paid, aggregate amount of remuneration broken down by senior management and members of staff whose actions have a material impact on the risk profile of the AIMF.
The accounting information must be prepared in accordance with accounting standards of the home State or AIF in accordance with the accounting standards or in accordance with the accounting standards of the third country where the AIF is established or with the accounting rules laid down in the AIF instrument of incorporation.
An AIFM for every EU AIF it manages or markets in the EU must make available to persons, in accordance with its rules of incorporation, the following information before they invest, as well as any material changes thereof:
- description of investment strategies and objectives,
- description of type of assets in which the AIF may invest, techniques it applies and associated risks,
- any applicable investment restrictions, circumstances where the AIF may use leverage, types and sources of leverage permitted, any collateral and asset reuse arrangements and the maximum level of leverage permitted to be employed;
- description of the procedures by which AIF may change its investment strategy or policy;
- description of the main legal implications of the contractual relationship entered for the purpose of investment, including information on jurisdiction, on the applicable law and the existence of it otherwise of legal instruments providing for recognition and enforcement of judgments in the territory where the AIF is established;
- the identity of the AIMF, the AIM’s depositary, auditor and other service provider and a description of their duties;
- a description of how the AIMF is complying with certain key requirements;
- description of any delegated management function of the specified type;
- description on valuation procedure;
- description of liquidity risk management, including redemption rights both in normal and in exceptional circumstances;
- description of all fees, charges and expenses and maximum amounts which may be directly or indirectly borne by investors;
- description of how the manager ensures fair treatment of investors and whenever an investor obtains preferential treatment or a right to preferential treatment, a description of that preferential right;
- latest annual report;
- procedure for sale and issue of shares;
- latest net asset value or latest market price;
- where available, historical performance;
- identity of prime broker and description of any material arrangements with the prime broker;
- a description of how and when information required below shall be disclosed.
Where the AIF is required to publish a prospectus, only such information referred to in above which is in addition to that contained in a prospectus shall be separately or additionally disclosed in the prospectus.
Where the fund is established in the EU, a market in the EU, it must periodically disclose to investors:
- percentage of the assets which are subject to special arrangements arising from their illiquid nature;
- any new arrangements for managing liquidity;
- current risk profile of the fund and the risk management systems used.
An AIMF shall regularly report to the Bank and the principal markets and instruments in which it trades behalf of each AIF it manages.
It shall provide information on the main instruments in which it trades, on markets of which it is a member or where it actively trades and on the principal exposures and most important concentrations of each AIF it manages.
An AIFM shall, for each AIF it manages which is EU-based or marketed in the EU provide to the Bank:
- percentage of the fund’s assets which are subject to special arrangements arising from liquidity; new arrangements for managing the liquidity; any new arrangements;
- current risk profile and risk management systems used;
- information on the main categories of assets in which it invests;
- results of required stress tests.
The manager shall, on request, provide the following information to the Central Bank:
- annual report of each EU AIM managed by it or marketed in the EU;
- for the end of each quarter, a detailed list of every AIF which it manages;
An AIF manager managing alternative investment funds employing leverage on a substantial basis shall make available to the Bank information about the overall level of leverage employed in each AIF it manages, a break-down between leverage arising from borrowing of cash or securities and leverage embedded in financial derivatives and the extent to which the AIF’s assets have been reused under leveraging arrangements.
The information shall include the identity of the five largest source of cash borrowed and securities for each AIF managed by the manager, and the amounts of leverage received from each of those sources for each AIF.
The Bank may require a manager to provide information in addition to that above where in the opinion it is necessary for the effective monitoring of systemic risk, when requested to do so by ESMA for the purpose of the stability and integrity of the financial system, or to promote long term growth.
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