Background
On 19 December the European Commission issued the long-awaited Level 2 rules (the Rules) relating to the Directive on Alternative Investment Fund Managers (AIFMD).
The Rules supplement certain elements of AIFMD and cover:
- conditions and procedure for the determination and authorisation of alternative investment fund managers (AIFMs), including the capital requirements applicable to AIFMs;
- operating conditions for AIFMs, including rules on remuneration, conflicts of interest, risk management, liquidity management, investment in securitisation positions, organisational requirements, rules on valuation;
- conditions for delegation;
- rules on depositaries, including the depositary's tasks and liability;
- reporting requirements and leverage calculation;
- rules for cooperation arrangements.
Delegation arrangements
One of the main areas of debate leading up to the adoption of the Rules was the "letter box" provisions in Article 82 of the Rules. AIFMD prohibits an AIFM from delegating its functions to the extent that, in essence, it can no longer be considered to be the manager of the AIF and to the extent that it becomes a letter-box entity. Article 82(d) states that an AIFM shall be deemed a letter-box entity in a number of situations, including where the AIFM "delegates the performance of investment management functions to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself". When assessing the extent of delegation, EU member states regulators shall assess the entire delegation structure taking into account not only the assets managed under delegation but also the following qualitative criteria:
- the types of assets the alternative investment fund (AIF) or the AIFM acting on behalf of the AIF is invested in, and the importance of the assets managed under delegation for the risk and return profile of the AIF;
- the importance of the assets under delegation for the achievement of the investment goals of the AIF;
- the geographical and sectoral spread of the AIF's investments;
- the risk profile of the AIF;
- the type of investment strategies pursued by the AIF or the AIFM acting on behalf of the AIF;
- the types of tasks delegated in relation to those retained; and,
- the configuration of delegates and their sub-delegates, their geographical sphere of operation and their corporate structure, including whether the delegation is conferred on an entity belonging to the same corporate group as the AIFM.
Commission review after 2 years and possibility of ESMA guidelines
The Rules state that the Commission shall monitor, in the light of market developments, the application of these letter box provisions. It shall review the situation after two years and, if necessary, further specify the conditions under which the AIFM shall be deemed to have delegated its functions to the extent that it becomes a letter box entity.
The Rules expressly acknowledge that the assessment of a delegation structure is a complex exercise that has to be based on a series of criteria in order for the competent authorities to form their judgement. The combination is necessary to take into account the variety of fund structures and investment strategies across the EU. The Rules go on to provide that ESMA may issue guidelines to ensure a consistent assessment of delegation structures across the EU.
Next Steps
The Level 2 rules are now subject to a three-month scrutiny period by the European Parliament and the Council and will enter into force, provided that neither co-legislator objects, at the end of this period and the day following publication in the Official Journal. It is considered unlikely that any such objections will be raised.
It is key now for managers of AIFs to consider in detail the effect of the Rules. In particular, external AIFMs and internally-managed AIFs should consider their existing delegation arrangements and what, if any, modifications need to be made to comply with AIFMD. The UCITS delegation model already applied successfully in Ireland should form a useful basis for this. This analysis should also take into account the development by the Central Bank of Ireland of the AIF Handbook to implement AIFMD.
We will continue to analyse the detail of the Rules and issue further client updates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
