The Alternative Investment Fund Managers Directive (AIFM) is likely to be the most significant shake up of the asset management industry for sometime. Managers of Alternative Investment Funds (AIFs) – which is widely defined to include any collective arrangement that does not fall within the UCITS directive – are likely to be caught. Currently the industry is waiting for detailed rulemaking to occur under so called Level 2 measures, likely to be published by the European Commission later in the summer.
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The text of the Directive has now been agreed and accordingly EU supervisors will have relatively little scope to vary from the broad principles enshrined in the Directive. This is not the case in relation to the so called “sub-threshold” managers where national authorities have a number of options open to them and where the provisions of the proposed EU Venture Capital Fund Regime will impact.
Many sub threshold firms are currently subject to the Mifid directive and, depending on how some of the AIFM issues play out, may need to make a decision as to whether to remain in the Mifid camp or opt for the AIFM camp. It appears to be the intention of the Commission to regulate fund and “fund like” activities under UCITS and AIFM and trading and broking activities under Mifid with a clear separation between the two. While one can see some logic to this approach it does not necessarily reflect commercial reality and may lead to some firms having to split their activities between different regulated entities as one firm will not be able to be both a Mifid firm and an AIFMD firm.
FIRMS BELOW THE MARK
A sub threshold firm is an AIFM that manages AIFs whose assets under management, including assets acquired through leverage, do not exceed €100 million or manages AIFs whose assets under management do not exceed €500 million on an unleveraged basis.
Sub-threshold firms cannot benefit from the marketing passport or other benefits under the Directive (unless they decide to opt in to the Directive, in which case it will apply to them in its entirety) and will only be subject to light touch regulation under the Directive. As a minimum this means:
Registration with (as opposed to authorisation by) their home state regulator;
A requirement to provide information to their home state regulator about the AIFs that they manage (including providing information on investment strategies employed) and to update competent authorities regularly in relation to instruments traded and principal exposures and concentrations of the AIFs that they manage (in order to enable regulators to monitor systemic risk).
The precise details of the way in which these requirements will be imposed by the Financial Services Authority (FSA), for example, remains to be seen. However, the overall requirements under the Directive for sub-threshold firms, taken at face value, adds up to considerably less than the regulatory burden that small managers are currently subject to from the FSA. This raises an interesting dilemma for the UK Treasury, should it opt for the Directive minimum, with the effect that many currently FSA authorised managers would, going forward, only be subject to a light touch registration regime, or should it maintain an authorisation requirement for such firms at the risk of being accused of gold plating the provisions of the Directive? In light of a Directive that has been criticised for creating additional regulatory burdens it will be interesting to see how the Treasury responds to a Directive that potentially allows a significant reduction in regulation for sub-threshold firms. Recent consultation from UK policymakers has sought views on this point. Further, might it be the case that firms that have been subject to an authorisation regime in the UK for 25 years might feel a little uncomfortable, or even hard done by, were they to be subject to mere registration?
SELF MANAGED FUNDS
The scope of the Directive is such that as well as impacting on external managers of AIFs it also includes self managed entities (such as VCTs and Investment Trusts) within the definition of an AIF with the effect that the AIF is itself the AIFM for the purposes of the Directive. Such AIFMs are referred to as Internal AIFMs. The inclusion of Internal AIFMs within the scope of the Directive gives firms that provide investment services or advice to VCTs, Investment Trusts and the like an opportunity to influence the way in which the Directive impacts.
Firms that currently provide services to VCTs and investment trusts, or the VCTs or investment trusts themselves, may be able to decide whether the self- managed route is potentially more beneficial from a regulatory perspective than the externally managed alternative. For example, a Mifid firm that currently provides services to a VCT may be better off remaining as a Mifid firm with the VCT itself becoming an Internal AIFM rather than opting to become an AIFM itself and giving up its Mifid authorisation (this may particularly be the case if the firm concerned also undertakes other Mifid activities).
EUROPEAN VENTURE CAPITAL REGIME
A further issue to be considered by some sub-threshold mangers is the impact of the proposed EU Venture Capital Regime. Under this regime, which, if confirmed, will be available to AIFMs with assets under management of less than €500 million that invest at least 70 percent in the equity or quasi equity of “qualifying portfolio undertakings” and are happy to describe themselves as European Venture Capital Funds.
A “Qualifying portfolio undertaking” is an entity that is not listed on a regulated market, employs fewer than 250 people and either has turnover of less than €50 million or a balance sheet total of less than €43 million and which is not itself a collective investment undertaking.
A principal benefit of a European Venture Capital Fund will be the ability to market under a form of EU marketing passport not simply to professional investors (as will be the case under the AIFM Directive) but also to other investors with the proviso that the minimum investment from such investors is €100,000 and subject to certain appropriateness tests. The proposed Regulation imposes a minimum registration (as opposed to authorisation) requirement on managers, a requirement for “sufficient” own funds and light touch reporting to investors and regulators.
CONCLUSION
While the focus for larger AIFMs should remain firmly on the Level 2 arrangements and subsequent FSA requirements, there is much for smaller AIFMs to consider in the meantime from a structuring and regulatory arbitrage perspective.
Ben Blackett-Ord is chief executive of UK-based regulatory consultancy firm Bovill.
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