The European Securities and Markets Authority published on May 24 its final report on guidelines for key concepts under the Alternative Investment Fund Managers Directive (please see below for a copy under related PDFs). The report reflects feedback received by ESMA following its publication of a discussion paper on key concepts and types of alternative fund managers on February 23 last year, and in particular a consultation paper issued on December 19.
The consultation paper, which received 37 responses from asset managers, banks, law firms, industry associations, a private equity administrator and public authorities, set out formal proposals for guidelines ensuring common, uniform and consistent application of the concepts in the definition of alternative investment funds in Article 4(1)(a) of the directive by providing clarification on each of these concepts. An important factor is avoiding regulatory arbitrage resulting from national regulators interpreting terms used in the directive in different ways.
A cost-benefit analysis conducted by ESMA estimates that the introduction of the guidelines will make relatively little impact on the number of EU-domiciled funds that will fall under the directive according to the definition in the legislative text, estimated at between 25,650 and 28,975. The authority believes there will be “no material impact” on the Luxembourg-domiciled funds affected, which it says number at least 2,000.
ESMA believes 50 additional funds may fall under the directive as a result in Finland, around 1,600 in France on top of up to 12,000, and no more than 33 in Italy. Up to 150 funds could be captured in or excluded from the scope of the directive in the Netherlands, and about 50 could be excluded in Portugal.
The authority says the guidelines should bring clarity to national regulators and to managers, prevent managers falling outside reporting obligations on leverage used to assess systemic risk, enable smoother application of the AIFMD passport for both EU and (after July 2015) non-EU managers, and minimise the risk on entities not targeted by the legislation falling under its scope.
The new report sets out the final form of the guidelines to be issued to national regulators. These will be translated into the official languages of the EU and the final texts be published on the ESMA website. The deadline for reporting requirements will be two months following the publication of the translations and the guidelines will apply from this date.

The European Commission published two implementing regulations forming part of the detailed framework of the Alternative Investment Fund Managers Directive in the EU Official Journal on May 15.
The regulations are automatically binding on member states without any need for transposition into national legislation. They will enter into force on June 5 and apply from July 22, the deadline for adoption of the directive into the national law of member states and the date on which it takes effect.
Commission Implementing Regulation (EU) No 447/2013   sets out the procedure for alternative fund managers that are not required to comply in full with the AIFMD but that nevertheless choose to opt for authorisation from their home regulator. The same process applies as with managers that are required to seek authorisation under the directive.
The regulation also clarifies that a manager granted AIFMD authorisation whose assets under management subsequently fall below the thresholds set out in the directive remains authorised and subject to full application of the legislation unless and until the authorisation is revoked. This will not be triggered automatically by a fall in assets below the threshold, but only at the manager’s request.
Commission Implementing Regulation (EU) No 448/2013 establishes a procedure for determining the member state of reference that will conduct regulatory oversight of a non-EU manager seeking to manage or market fund products within the union.
The regulation says that where there is more than one possible choice of jurisdiction for the non-EU manager’s member state of reference, the manager must submit a request to all of the regulators in question to decide which of them should take responsibility.
The manager must supply relevant information and documents including details of any EU-domiciled funds run by the non-EU manager, their assets under management and the domicile of those assets, and where and how they intend to market funds within EU member states.
The regulators approached are jointly responsible for reaching a decision, within a month at the latest, but the European Securities and Markets Authority should ensure that all possible member states of reference are involved, and ESMA should assist them in reaching a decision.
If the regulators in question fail to reach a decision within the stipulated period, the manager can decide itself in which member state of reference it should be regulated according to the criteria set out in the directive.

The draft legislation transposing the European Union’s Alternative Investment Fund Managers Directive into Luxembourg law was submitted to the grand duchy’s Chamber of Deputies by finance minister Luc Frieden on August 24.
Although the deadline for member states to adopt the directive into their national law is July 22, 2013, Luxembourg plans to become one of the first EU countries to implement the AIFMD, and the government expects the legislation to have been approved by parliament before the end of this year.
The Luxembourg legislation not only incorporates the directive but introduces into national law a new regime to be known as the société en commandite special, or special limited partnership, which we discuss in a separate client note.
Bill of law no. 6471 also contains various ‘housekeeping’ measures revising and updating Luxembourg’s investment fund regulation as a whole, especially the 2010 statute adopting the Ucits IV directive into national law, and entails amendments to a total of 14 other pieces of legislation, including the laws governing Specialised Investment Funds (SIFs) and Risk Capital Investment Companies (Sicars).
In accordance with the directive, which was agreed by the EU Council and Parliament in November 10 and formally adopted the following year, the Luxembourg legislation provides for the registration of all managers of alternative investment funds – comprising hedge funds, private equity and real estate vehicles and any other types of fund that do not fall under the Ucits regime – apart from those excluded by the directive, exempted by the fact that they fall below the directive’s thresholds for assets under management, or that benefit from grandfathering arrangements.
Managers registered under the legislation must comply with its requirements – supplemented by the European Commission’s forthcoming ‘Level 2’ regulation and guidelines drawn up by the European Securities and Markets Authority, Esma – regarding operating conditions, organisational rules and transparency.
Once the directive comes into effect next July, registration is required before any new EU-based manager can begin management of alternative funds; existing managers have a transitional period of one year within which to apply for authorisation.
From July 22, 2013, Luxembourg-based managers of EU-domiciled funds will be free to market them under an AIFMD ‘passport’ to professional investors in any other EU member state, subject to notification requirements. Although this has not yet been explicitly addressed, past practice suggests that authorised managers will be also able to market their funds to EU countries that have failed to transpose the directive into their national law by the deadline.
Luxembourg-based managers of non-EU-domiciled funds, or managers of Luxembourg funds based outside the EU, may be able to benefit from the passport as well, but not before July 2015, and only once the Commission, on advice from Esma, has passed delegated legislation to that effect.
In the meantime, funds that are not domiciled or are not managed within the EU may continue to seek distribution through national private placement arrangements, where these exist, although their managers must still comply with the directive’s requirements regarding transparency.
The Luxembourg legislation offers flexibility regarding marketing of funds to retail investors, regardless of whether the funds are EU-domiciled or not, and of whether the marketing is within Luxembourg or on a cross-border basis. The directive left this question to individual members states to decide for managers falling under their jurisdiction.
Article 46 of the legislation authorises managers based in Luxembourg, other EU countries or third countries to market alternative funds, wherever they are domiciled, to retail investors as long as the funds are subject to appropriate supervision, non-Luxembourg funds are covered by investor protection rules equivalent to those in the grand duchy, and investor eligibility rules are adhered to.
For Luxembourg, the legislation applies indirectly not only to SIFs and Sicars but also to non-UCITS funds set up under Part II of the grand duchy’s fund legislation, which may or may not follow alternative strategies or be aimed at sophisticated investors, and unregulated vehicles such as financial participation companies (Soparfis) if they call under the directive’s definition of alternative investment funds. Under the legislation, all Part II funds qualify as alternative funds, being non-Ucits. The law’s scope includes Luxembourg-based managers of alternative funds domiciled in other jurisdictions.
The legislation therefore provides for amendments to existing legislation, notably regarding rules governing the depositary, delegation of functions, valuation of assets and provision of information to investors. Legislation was passed earlier this year to amend the 2007 SIF regime and bring it into line with some of the requirements of the AIFM Directive.
Part II funds, SIFs and Sicars that qualify as an alternative investment fund under the directive may be self-managed (where their legal form permits) or appoint an external manager, and can access the pan-EU marketing passport. They are subject to the depositary regime, delegation and valuation rules, and must meet the AIFMD transparency requirements.
Where the manager of such funds is below the directive’s minimum assets thresholds, they remain under the current regulatory regime, but the manager must register with the CSSF and meet ongoing reporting requirements. Where SIFs and Sicars do not qualify as alternative investment funds, the existing regime continues to apply.
Under the 2010 Luxembourg fund legislation that brought Ucits IV into national law, there are two options for management companies. A Ucits management company under Chapter 15 of the 2010 law may act as an external manager of an alternative investment fund under a double licencing arrangement, which means there is no obligation to supply the CSSF with information or documents already provided during the Ucits authorisation procedure. A firm in this position also enjoys access to the management company passport under both Ucits and AIFMD regimes.
A non-Ucits management company authorised under Chapter 16 of the 2010 law may, without further authorisation, act as management company to investment vehicles that fall outside the scope of the directive or for alternative funds if it falls below the assets threshold.
It may act as management company for FCPs, Sicavs and Sicafs that are alternative funds if it designates a manager authorised under the directive, or it can seek licensing under the directive, again without the obligation to provide information or documents already supplied under its earlier authorisation procedure. It can also benefit from the AIFMD management company passport.
A Chapter 16 entity may only act as management company for investment vehicles outside the scope of the directive if the vehicles in question have their own specific regulatory framework, such as SIFs or Sicars, or if it also acts as management company for alternative funds that do not reach the directive’s minimum asset threshold or that have an external manager authorised under the directive.
A non-Ucits management company that manages alternative funds in the terms of the directive must seek authorisation as an alternative fund manager if it exceeds the thresholds and if it has not designated a manager authorised under the directive.
The legislation also amends Luxembourg’s 1993 legislation that created the status of financial sector professional (PSF). Article 178 creates a new category of specialist PSF that may act as depositary to alternative funds, for the most part private equity vehicles, that have a lock-up of at least five years from the date of the original investments and that generally do not invest in financial instruments that the directive requires to be held in custody, or that usually takes controlling stakes in issuers or non-listed companies.
The availability of this option under the directive reflects current practice in various EU member states, notably Germany. Luxembourg’s decision to incorporate this into its legislation may give it the opportunity to increase its share of closed-ended alternative fund business.
This new type of PSF status can be combined with others such as fund administrator, transfer agent, client communication agent or domiciliation agent, although not with management of Ucits or alternative funds. However, depositary and administration functions within the same entity should be hierarchically separated in order to identify and manage potential conflicts of interest between the depositary and the fund, its investors and manager.
Article 179 provides for the abolition of the PSF status of managers of non-co-ordinated funds, used by managers of foreign non-Ucits funds, which will become obsolete since the vast majority of such funds will qualify as alternative investment funds under the directive. This means that their managers must in future be authorised under the AIFMD and will be treated as an alternative investment fund manager under Luxembourg law.
It also amends the 2005 legislation on institutions for occupational retirement provision, to allow Asseps and Sepcavs (equivalent in legal form to FCPs and Sicavs respectively) to delegate asset management to Luxembourg or other EU managers that are authorised to carry out portfolio management under the directive.
The various sections of the legislations are as follows:
Articles 1-4: General dispositions of the law, comprising definitions, its purpose and scope, exemptions and exclusions, and the criteria for determining the manager of an alternative investment fund.
Articles 5-9: Authorisation of alternative investment managers, including preliminary conditions, the authorisation request procedure, authorisation conditions, capital requirements, amendments to the authorisation, and withdrawal of authorisation and liquidation.
Articles 11-15: Conditions managers must adhere to, including general principles such as honesty and integrity, remuneration practices, conflicts of interest, risk management and liquidity management.
Articles 16-17: Organisational requirements, including IT capabilities and valuation.
Articles 18-19: Delegation of the manager’s functions to third-party providers, and the role and functions of a fund’s depositary.
Articles 20-22: Transparency, comprising the requirement to publish an annual report and its content, investor information and reporting to the CSSF.
Articles 23-28: Employment of leverage within funds, use of leverage information by regulators, obligations on managers of private equity or other alternative funds that acquire control over companies, notification of transactions conferring control, special reporting requirements of such funds, and ‘asset-stripping’ restrictions.
Articles 29-30: Marketing of shares or units in alternative funds run by Luxembourg-based managers in the grand duchy and in other EU member states, and the marketing of funds run by non-Luxembourg managers in the grand duchy.
Articles 31-32: Management by Luxembourg-based managers of funds domiciled in other member states, and by non-Luxembourg managers of Luxembourg funds.
Articles 34-35: Third country rules, comprising management by Luxembourg-based managers of funds domiciled outside the EU and not marketed within it, and marketing of such funds in Luxembourg or other EU countries under the passporting regime.
Articles 36-37: Marketing in Luxembourg under a passport of a third-country-fund run by a manager from another EU member state, and private placement distribution in Luxembourg of third-country funds run by EU managers.
Articles 38-39: Authorisation of third-country managers in Luxembourg as member state of reference, and marketing in the EU of funds run by a third-country manager where Luxembourg is the manager’s member state of reference.
Articles 40-42: Marketing in Luxembourg of funds run by a third-country manager where Luxembourg is not the member state of reference; marketing in other EU countries of funds run by a third-country manager where Luxembourg is the member state of reference; and marketing in Luxembourg of third-country funds run by a third-country manager where Luxembourg is not the member state of reference.
Articles 43-45: Management of funds domiciled in other member states by non-EU managers whose member state of reference is Luxembourg; management of funds domiciled in Luxembourg by non-EU managers where Luxembourg is not the member state of reference; and private placement marketing of funds in Luxembourg by non-EU managers.
Article 46: Marketing of alternative funds to retail investors.
Articles 47-52: Regulatory powers, the CSSF’s responsibility regarding Luxembourg managers or the marketing and marketing of funds by managers from other EU countries through a branch, oversight and investigative power, administrative penalties, and the right to appeal.
Articles 53-57: Duty of co-operation between regulators, personal information, exchange of information with third-country regulators, exchange of information on systemic risks, and co-operation on regulatory oversight.
Article 58: Transitional arrangements.
Article 59: Penal measures.
Articles 60-125: Amendments to 2010 investment fund legislation.
Articles 126-152: Amendments to 2007 Specialist Investment Fund legislation.
Articles 153-172: Amendments to 2004 Risk Capital Investment Company legislation.
Articles 173-175: Amendments to 2005 pension fund legislation.
Articles 176-208: Amendments to other Luxembourg legislation.
Articles 209-211: Entry into force.
Appendix I: Obligatory and optional functions of an alternative investment fund manager.
Appendix II: Remuneration policy.
Appendix III: Documentation required for marketing authorisation in Luxembourg.
Appendix IV: Documentation required for marketing authorisation in another EU member state.

The European Securities and Markets Authority has issued a discussion paper on its proposed approach to implementing measures of the European Union’s Alternative Investment Fund Managers Directive.
Esma is soliciting views from market participants on the policy options it is proposing to recommend to the European Commission, which is responsible for drafting so-called Level 2 regulations and subsidiary directives setting out the details of how the AIFM Directive should be applied.
Last December the Commission requested advice on Level 2 measures from Esma’s predecessor body, the Committee of European Securities Regulators. Following delays to the finalisation of the directive’s text, the deadline for Esma to submit its advice to the Commission has been put back to November 26.
Due to the broad scope of the directive, the Commission’s request for advice has been divided into four parts. Part I covers general provisions, authorisation and operating conditions, Part II the role of the depositary, Part III transparency requirements and leverage, and Part IV supervision.
The discussion paper notably asks for stakeholders’ views on how to identify the portfolios of alternative investment funds under management by a particular fund manager and the calculation of the total value of assets under management, how leverage influences assets under management, how to determine the value of a fund’s assets under management for a given calendar year, and how to treat potential cases of crossholding among funds.
It seeks the industry’s views on how to treat managers whose total assets occasionally exceed and/or fall below the relevant threshold for authorisation under the directive, and what registration requirements should exist for entities falling below the threshold.
The paper also invites comment on how the obligation on managers to register with national authorities should be implemented, suitable mechanisms for gathering information, and what procedures should exist for small managers to opt in to regulation under the directive.
Market participants have until May 16 to respond to the discussion paper. Contributions should be submitted online at www.esma.europa.eu under the heading ‘Consultations’.
Esma says the responses it receives will help to narrowing down its policy approach and develop a formal proposal for possible implementing measures for the AIFM Directive in the summer of 2011. This proposal will be subject to a public consultation, whose results will be used by Esma to finalise its advice to the Commission.