January 11, 2013

The Alternative Investment Fund Managers Directive - A Guide for non-EU Managers

Background – What Has Happened?

The European Commission recently published its Level 2 implementing regulation which contains much of the detail European regulatory authorities need to implement the requirements of the directive. Whilst the directive is mainly intended for managers of funds where either the manager or the fund is established in the European Union it does, however, also have implications for non-European managers of non-European funds (for example, non-EU managers of Cayman funds) where the manager looks to obtain European investors after July 22, 2013.

There are two questions that will need to be asked from that date forward.  First, may European investors be approached at all?  Second, where some form of European marketing is permitted, what do non-EU managers need to do to comply with the directive?

Permitted Marketing

Non-EU managers will be permitted to market (or have third-party agents do it on their behalf) only where the fund is established in a permitted jurisdiction. In brief, for a country to be a permitted jurisdiction, there must be a cooperation agreement in place (in accordance with international standards) between the regulatory authorities in the relevant European country where the marketing is to take place and the country of the fund’s establishment that provides for the free exchange regulatory information. We expect that such agreements will be in place for the major offshore countries (such as Cayman), but it remains to be seen whether they are in place in time for July. Currently, Switzerland is the only third country to have such an agreement in place with the EU.

Conditions for Marketing

Member states may allow, under their own local private placement regimes, non-EU funds established in permitted jurisdictions to be marketed to European investors but only where the following conditions are complied with.  The directive does not state what the consequences of non-compliance are, but, presumably, member states will make it a criminal offence not to provide the required information.

Annual Report

Managers must prepare, and make available to investors on request, an annual report no later than six months following the end of the financial year. The accounting information must be audited in accordance with international auditing standards.

This annual report must contain the following information:

  • A balance sheet or a statement of assets and liabilities;
  • An income and expenditure account for the financial year;
  • A report on the activities of the financial year;
  • Any material changes in the information disclosed to investors under the following section;
  • The total amount of remuneration for the financial year, split into fixed and variable remuneration, paid by the manager to its staff, and, where relevant, carried interest paid by the fund; and
  • The aggregate amount of remuneration broken down by senior management and members of staff of the manager whose actions have a material impact on the risk profile of the fund.

Disclosure to Investors

Managers must provide the following information to investors, together with any material changes thereto:

  • A description of the investment strategy and objectives of the fund, a description of the types of assets in which the fund may invest, the techniques it may employ and all associated risks, any applicable investment restrictions, the circumstances in which the fund may use leverage, the types and sources of leverage permitted and the associated risks, any restrictions on the use of leverage and any collateral and asset reuse arrangements, and the maximum level of leverage which the manager is entitled to employ on behalf of the fund;
  • A description of the procedures by which the fund may change its investment strategy or investment policy, or both;
  • A description of the main legal implications of the contractual relationships entered by the fund;
  • The identity of the manager, the fund’s depositary, auditor and any other service providers and a description of their duties and the investors’ rights;
  • A description of any professional indemnity insurance arrangements taken out by the manager;
  • A description of any delegated management services and any conflicts of interest that may arise from such delegations;
  • A description of the fund’s valuation procedure and of the pricing methodology for valuing assets, including the methods used in valuing hard-to-value assets;
  • A description of the fund’s liquidity risk management, including the redemption rights both in normal and in exceptional circumstances, and the existing redemption arrangements with investors;
  • A description of all fees, charges and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors;
  • A description of how the manager ensures a fair treatment of investors and, whenever an investor obtains preferential treatment or the right to obtain preferential treatment, a description of that preferential treatment, the type of investors who obtain such preferential treatment and, where relevant, their legal or economic links with the fund or manager;
  • The latest annual report;
  • The procedure and conditions for the issue and sale of units or shares;
  • The latest net asset value of the fund or the latest market price of the unit or share of the fund;
  • Where available, the historical performance of the fund; and
  • The identity of the prime broker and a description of any material arrangements of the fund with its prime brokers and the way the conflicts of interest in relation thereto are managed and the provision in the contract with the depositary on the possibility of transfer and reuse of fund assets, and information about any transfer of liability to the prime broker that may exist.

Properly prepared marketing material is likely to provide much of this information already, although perhaps not to the level required under the directive.

Reporting to Regulators

The manager of each fund will be required to report to the regulatory authorities in each country in which marketing takes place:

  • The percentage of the fund’s assets which are subject to special arrangements arising from their illiquid nature;
  • Any new arrangements for managing the liquidity of the fund;
  • The current risk profile of the fund and the risk management systems employed by the manager to manage the market risk, liquidity risk, counterparty risk and other risks including operational risk;
  • Information on the main categories of assets in which the fund invested; and
  • The results of the stress tests performed in by the manager relating to liquidity management and risk management.

It is not yet clear how much detail the regulatory authorities will expect to see as part of the report but, at least to start with, it is likely to be a reasonably onerous task.

Private Equity Funds

Managers of private equity funds are subject to requirements additional to those set out in the Conditions for Marketing section above. For these purposes, a “private equity fund” is any fund that has acquired interests in any non-listed company other than real estate SPVs and small/medium-sized enterprises. The category of small- and medium-sized enterprises (“SMEs”) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.


The manager must notify the relevant regulatory authorities when a fund that it manages acquires more than 10% of the voting rights in an unlisted company. There are additional notification bands of 20%, 30%, 50% and 75%.

Where that holding provides control (more than 50% of the voting rights), the manager needs also to inform the company itself and any other shareholders whose names and address are available to the manager upon a reasonable search. This disclosure will also require information regarding the manager’s policy on conflicts of interests and various other matters relating to the company’s employees and the manager’s future plans regarding the company.

Asset Stripping

Funds investing in unlisted companies will also face curbs on “asset stripping.” For two years following the acquisition of control, the manager will be obliged to use its best efforts to prevent distributions, capital reductions, share redemptions and/or the acquisition of its own shares by the company which would breach net assets or profits tests prescribed by the directive.


In principle, the regime described above is only temporary. It is intended, subject to advice from the European Securities and Markets Authority (“ESMA”) to the contrary, that the European private placement regimes will be withdrawn in 2018 and replaced by the provisions that will apply to European managers from 2013, namely that the manager will need to establish a presence in the EU and be authorised in that state. Other rules in the directive will also apply, for example the rules on remuneration and the appointment of depositary for each fund that the manager manages.