PRIMER: Alternative Investment Fund Managers Directive

aifmd eu reg

Having been adopted in 2011, the Alternative Investment Fund
Managers Directive (AIFMD) is about to go through some its
biggest adjustments yet – whether the proposed AIFMD 2 or the
choices for both regulators and fund managers when it comes to
dealing with the UK’s potential

IFLR spoke with market participants about what we can expect

What is the AIFMD?

AIFMD is a directive requiring all covered AIFMs to obtain
authorisation from national competent authorities (NCA) while
making disclosures in line with compliance requirements.

Its creation followed the 2008-9 financial crisis. Fund
managers had never been regulated like this before.

“AIFMD has contributed to a more uniform, harmonised
European market,” said a spokesperson for the Netherlands
Authority for the Financial Markets (AFM). “The European
passport is often used as a way to access the markets of
various member states, while many firms effectively engage in
cross-border activities based on the regime provided by

However, the spokesperson added that there is still room for
improvement, for example, through further harmonisation of
passporting procedures and costs, as well as a more harmonised
explanation of definitions and specific regulatory requirements
– some of these already being accounted for in the
cross-border distribution directive and regulation.

“The directive creates a much more level playing field, even
though member states such as Ireland and Germany have
goldplated the rules in some specific areas,” pointed out
Dentons partner Michael Huertas. “It’s created a
minimum common understanding that is quite advanced, while
having flexibility for different kinds of funds.”

Huertas added that its levelling effect has allowed asset
managers to scale their business in a way they
hadn’t before.

Is it business as usual by now?

“A reasonable amount of firms, particularly in the UK and
US, were unhappy at the start,” said Sidley Austin partner and
co-head of their EU Financial Services Regulatory group,
Leonard Ng. “However, if you said to fund managers now that
this would be up for a complete overhaul, they’d
probably say don’t.”

Ng continued that some improvements could be made, but firms
fundamentally don’t want more change, considering
they have put a lot of time and expense into the new framework,
something that was echoed by Chiara Sandon, senior policy
advisor at the European Fund and Asset Management Association
(EFAMA). “When it comes to the review of this directive, tweaks
would be welcome but we are not pushing for a complete
reopening of level one,” she said. “This has now been in place
for some time and if there are to be changes made, then they
must be targeted toward the provisions that need to be

Sandon referenced
KMPG’s 2018 report
into the efficiencies of
the regulation, which indicated that improvements could be made
in harmonising laws between member states, as well as
disclosure reporting overlaps.

“The biggest challenge with AIFMD was the initial
implementation and the compliance costs that those in scope
came up against,” said Sandon. “The various data fields in
Annex IV proved time consuming and demanding.”

Gibson Dunn partner Michelle Kirschner added that while a
lot of US managers decided to give Europe a wide berth, firms
are now marketing again. “We now know where the disparities
are, which in the immediate aftermath of implementation
wasn’t the case,” she said, adding that the client
advice has shifted to issues such as Brexit and the upcoming
EEA cross-border marketing reforms.

What do firms struggle with most?

 “We’ve seen many managers are struggling
with the AIFMD reporting requirements, and there is work to be
done on this topic,” said a spokesperson for the Swedish
regulator Finansinspektionen.

article 24
, it is required that ‘an AIFM shall regularly
report to the competent authorities of its home Member State on
the principal markets and instruments in which it trades on
behalf of the alternative investment funds (AIFs) it
manages’. The reporting guidelines have been
issued by ESMA under
annexe IV

“Although most information as required in annexe IV will be
available to firms, specific formats, levels of aggregation or
reporting frequencies usually require a substantial operational
effort,” agreed the AFM spokesperson. This includes information
on the main instruments in which it is trading, on the markets
that it operates in, and where it actively trades. It is also
required to report on the principal exposures and most
important concentrations of each of the funds it manages.

“One issue has been the disclosure of leverage –
this proves tricky for some firms,” added Ng. The directive
provides a list of items managers must disclose to investors,
which includes a disclosure of the maximum level of

According to Article 4, which covers definitions, leverage
is defined as the ‘method by which the AIFM increases the
exposure of an AIF it manages whether through borrowing of cash
or securities, or leverage embedded in derivative positions or
by any other means’.

However, while EU-authorised AIFMs are required to set a
maximum level of leverage, non-EU managers marketing into the
EU do not. “This means the disclosure is not the same, and
might be confusing for some investors,” Ng pointed out.

Kirschner agreed. “The definition of leverage has been
industry driven, with firms coalescing around how to interpret
it,” she added. “The regulators have never explicitly said ‘yes
we agree’ but equally haven’t taken
another point of view.”

The spokesperson added that the authorisation process has
also been a challenge for some market participants. “Some
managers have had difficulties adopting a business model in
line with the requirements in the AIFMD,” he said.

To gain authorisation, an AIFM has to provide information on
personnel, direct and indirect shareholders as well as a
programme of activity that sets out the organisational
structure of the fund manager. This includes information on how
it will comply with its obligations considering the
directive’s requirements.

How to market?

One of the crucial issues that has come with AIFMD has been
the marketing requirements. Marketing is defined in Article 4
as a ‘direct or indirect offering or placement at the
initiative of the AIFM or on behalf of the AIFM of units or
shares of an AIF it manages to or with investors domiciled or
with a registered office in the Union’.

The AIFMD was impactful in creating a single marketplace for
AIF marketing, known as the marketing passport.

“There is an issue with the dividing line between marketing
and pre-marketing, only the former being covered by AIFMD,”
argued Kirschner. Pre-marketing is interpreted as the
promotional activities a fund manager can undertake that fall
short of the marketing definition.

She added that this has given rise to lots of different
interpretations of pre-marketing and has meant that different
member states have taken a different point of view –
though jurisdictions such as the UK and the Netherlands have
been more liberal. “The upcoming cross border marketing regime
is intended to address this disparity, in particular by
introducing a harmonised definition of pre-marketing,” she

“Stumbling blocks may exist around more trivial matters, but
there’s no major roadblocks that we know of,” said
Sandon, referencing the informal notification requirement by
the AIFM to its NCA within two weeks from the de facto start of
the pre-marketing regime in a given jurisdiction was deemed

“We understand why the Commission wanted a pre-notification
requirement in place, even if via an informal letter,” she
continued. “However, two weeks risks being too little time for
prospective investors to decide if they want to invest into an
AIF or not.”

What about AIFMD2 and Brexit?

AIFMD is being reviewed by the European Commission, with
proposals expected in early 2021.

“Most managers don’t appear to want to a
complete change, but they do want harmonisation on a
cross-border basis,” said Ng. For example, if
you’re a non-EEA AIFM and you market your funds
into the trading bloc, you need to do a private placement in
each member state under Article 42.

“The issue here is that the directive is implemented
differently in different member states, resulting in multiple
forms and processes for reporting, for example, the Annex IV
reports,” Ng continued, with firms arguing it would make sense
for it to be one single form, submitted via Esma.

“How players decide to move after Brexit is something that
will take time – considering marketing and
fundraising. If there is a move by the asset management
industry to not branch out into Europe with a physical
presence, then you will have to consider where, when and how
quickly to get a private placement regime approval,” said
Huertas. “There is also the argument that some EU-domiciled
asset managers could start new or expand existing UK
operations, but at present I see this as less likely for
smaller firms.”

“What we do think is essential is for continental funds to
be allowed to delegate the management of a portfolio to a
non-EU domicile,” said Sandon, adding that EFAMA has found ESMA
is concerned about continental funds being managed out of
non-EU entities. “Cooperation agreements between continental
authorities and their non-EU counterparts are already in place
to verify whether any activities have been delegated to
so-called letterbox entities, so limiting delegation agreements
would be harmful and disproportionate.”

Sandon’s colleague, senior regulatory policy advisor
Federico Cupelli said that, on the opportunity to introduce a
third-country passport, the association feels it should not
happen until an agreement is reached. “The national private
placement regimes should remain in place. Until the
negotiations are finalised, it would be counterproductive for
the Commission to change the system.”

Debate has also begun on whether the UK should or will
remain aligned. Sources suggest that authorities in the UK are
waiting on the Commission’s review to take place
before they decide. The AIFMD has a disproportionately negative
impact on UK firms, given the concentration of fund managers in

“The UK was one of the key drivers for MiFID II and the
Investment Firms Directive/Regulation, so divergence there is
less likely,” said Ng. “However, the UK government has already
signalled its intent to go its own way, perhaps so that it can
compete on its own terms with other fund management centres
like New York.”

“As of yet we’ve not seen an interest in UK
AIFMs moving business to Sweden,” said the
Finansinspektionen. “There are however a number of
AIFMs and AIFs in UK that will need to apply to a new marketing
licence should they wish to continue to carry out marketing in
Sweden following a potential no-deal Brexit.”

The current stance of the regulator is to hold off with any
such Brexit-driven applications, at least until July 1 2020,
depending on whether the transition period will be


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