Alternative Funds [EU]

AIF Managers Authorisation

A 2011 directive regulates managers of alternative investment funds.  The purpose is to ensure an internal market for these managers while putting in place a harmonized regulatory framework.

Alternative investment fund managers are entrusted with portfolio management and risk investment of alternative investment funds (AIFs). They may additionally perform the duties of administration and marketing.

AIFMs must apply to the competent authority for authorization.  This requires disclosure and assessment of

  • information regarding the persons conducting the business
  • The identity of shareholders and direct and indirect members
  • Program of activity,
  • remuneration policies and practices,
  • arrangements for delegation to third parties of AIFM functions.

They must submit information on the AIF they manage including

  • investment strategies
  • where the AIF is established,
  • if the AIF is a feeder fund
  • rules or instruments of incorporation
  • arrangements made for the appointment of the depository

A delegated regulation (to the Commission) provides certain supplementary rules for  alternative investment fund managers including

conditions and procedure for defining authorized alternative fund managers and  governing their authorization  requirements including regarding own funds

  • operating conditions for managers including rules and remuneration, conflicts of interest risk and liquidity management as well as valuation and investment and securitization positions
  • conditions for delegating manager functions
  • rules on depositories for carrying out their task and responsibility
  • detailed requirements concerning the calculation of managed assets, methods and the calculation of leverage
  • reporting obligation as regards competent authorities and investors
  • rules covering cooperation agreements with third parties

Requirements

They must have an initial capital of at least €300,000 in the case of internally managed AIF.  External managers of AIFs must have a capital of at least €125,000.

AIFMs must separate the functional and hierarchical terms, risk management task for operational units and from portfolio management.  At least annually they must scrutinize the risk management systems in place.

AIFMs must adopt procedures which enable them to monitor liquidity risk and guarantee compliance with the liquidity profile of the AIF.  AIFMs must conduct stress tests regularly.

The AIMF must keep abreast of the principal markets and instruments in which they trade on behalf of the AIFs they manage.

They are to put in place appropriate and coherent valuation procedures.  They must comply with the requirements with respect to asset valuation and calculation of the net asset value per unit or share.

For each AIF it manages, the AIFM must establish a depository, the task of which is to monitor the AIFs cash flow.  The depository may be a credit institution and investment firm compliant with capital adequacy requirements or other types of entity subject to prudential regulation and permanent supervision.

In the case of AIFMs managing leveraged AIFs, the competent authorities of the AIFM’s home state must use information that the AIFM provides and audits to determine whether the leverage contributes to increasing systematic risk in the financial system.  AIFMs must demonstrate that the leverage limits for each AIF they manage are reasonable.

AIFMs managing AIFs which acquire control of non-listed companies and issuers must make notification of the acquisition of control.

Remuneration policies must not encourage excessive risk-taking.  The ESMA in cooperation with the European Banking Authority must ensure that remuneration practices comply with principles set out in the directive and EU Commission recommendations on remuneration policies in financial sectors.

Remuneration policies must not encourage excessive risk-taking.  The ESMA in cooperation with the European Banking Authority must ensure that remuneration practices comply with principles set out in the directive and EU Commission recommendations on remuneration policies in financial sectors.

Marketing of AIF Units / Shares

AIFMs may market units or shares of any AIF they manage.  They must notify the authorities of their home state in respect of each AIF they intend to market.  Directive sets out required documentation which must be provided to investors.

They may manage third-party AIFs which are not marketed in the EU provided that certain rules are complied with and corporation agreements are in place between the competent authorities of the home state and the third state.

Accounts and Information

The AIFM must publish annual accounts for each financial year for each AIF they manage no later than six months after the end of the year. The AIFs must make the following information available to investors.

  • Description of strategy and objectives of AIF
  • Description of all fees, charges, and expenses
  • Description of the main legal implications of the contractual relationship
  • Identify of the AIFM, AIF depository and auditor
  • Identify of the prime broker

The following must be disclosed periodically to investors

  • percentage of the fund\’s assets subject to special arrangements
  • arrangements for managing the liquidity of the AIF
  • the current risk profile of AIF

 

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