AIFMD – One Year On

Adrian Hogg is a director of the Grant Thornton Gibraltar Group of Companies. He is a former GFIA Chairman and a specialist in investment business with over a decades experience involving various investment business structures in Gibraltar and the Caribbean

One year ago, on 22 July 2013, the Alternative Investment Fund Managers Directive (AIFMD and/or the “Directive”) became EU law. AIFMD introduced harmonised requirements for entities involved in the management of alternative investment funds (AIFs) that are managed and/or marketed to professional investors in the EU.

In terms of scope, AIFMD encompasses all EU AIFs and their managers (AIFMs) as well as all non-EU AIFMs that market to investors in the EU. AIFMD is wide reaching covering all possible strategies and legal forms and, as such, encompasses conventional “trading” funds (trading equity, options, derivatives and such like) to alternative assets classes such as real estate and private equity.

The impact of AIFMD on most existing AIFMs was deferred by a one year transitional period which ended on 22 July 2014 after which AIFs managed and/or marketed in the EU must be compliant with the Directive, unless a relevant exemption applies.

It is estimated that there are more than 1,200 firms caught by the Directive across Europe, with the largest number of firms based in the UK. The UK regulator, the Financial Conduct Authority (FCA) expects to receive in the region of 800 applications for AIFM authorisation. The actual number of AIFMD approvals across Europe has been low by comparison. Up until recently, less than 500 firms had been authorised in the UK, Ireland, Luxembourg, France, Germany and other jurisdictions throughout the EU. Despite the requirement to do so it is believed a large number of AIFMs have not yet submitted an application to their regulator. It now seems inevitable that a large number of managers will not be authorised by 22 July 2014 and, whilst not required by the Directive, it remains to be seen whether there are unintended consequences for managers that are not authorised.

What should you do if you are an AIFM that is not authorised

The Directive requires that where an AIFM is unable to ensure compliance with the requirements of AIFMD it shall immediately inform the competent authorities in its home Member State and, if applicable, the competent authorities in the host Member State of the AIF concerned. The competent authorities of the home Member State of the AIFM shall require the AIFM to take the necessary steps to remedy the situation.

If non-compliance persists, and in so far as it concerns an EU AIFM or an EU AIF, the competent authorities of the home Member State shall require that it resigns as AIFM of that AIF. In that case the AIF shall no longer be marketed in the EU. If it concerns a non-EU AIFM managing a non-EU AIF, the AIF shall no longer be marketed in the EU.

If you are an AIFM and you are not yet authorised you should carefully consider your options of which there are principally two; (a) seek an exemption from the scope of AIFMD, or (b) become compliant.

Exemptions from the scope of AIFMD

There are several exemptions to the scope of the AIFMD, the main of which being the de minimus test of an AIFM with aggregate total assets of (a) less than €100 million (including leverage); or (b) less than €500 million (unleveraged) and that does not have redemption rights during a period of five years following the date of initial investment in the AIF. Such AIFMs are referred to as “Small AIFMs”.

Become compliant

AIFMs operating under existing licenses should seek authorisation for a variation of permission from their regulator. Organisations acting as AIFMs, that have not previously been authorised, should submit an application for authorisation to their regulator. In terms of authorisation, AIFMD sets out rules that include but are not limited to conduct, capitalisation and insurance requirements. AIFMs are required to undertake portfolio management and risk management functions (one of which can be delegated under certain circumstances). As with all EU directives, there is a certain amount of complexity and legality to be observed.

The Gibraltar solution

Gibraltar is fully compliant in respect of EU investment business and fund legislation. The Gibraltar regulator, the Financial Services Commission (FSC) and the fund’s industry have been gearing up for AIFMD for years.

Gibraltar based investment firms that comply with AIFMD have access to an EU-wide marketing passport that permits promotion and marketing across the EU. This provides Gibraltar AIFMs access to a market of in excess of 500 million people.

Gibraltar also has the fastest AIFMD fund product to market with its experienced investor fund (EIF) regime whereby an AIFM can start marketing an EIF from the launch so long as within 10 business days it submits all relevant documentation to the FSC. The EIF is extremely flexible with no restrictions on asset type, diversification, investment nor borrowing. With unrivalled speed to market and flexibility, the EIF is one of the most popular fund vehicles in the EU.

Although AIFMD implementation requirements are similar across the EU, it is expected that the cost of implementation may vary from one EU jurisdiction to another. Running costs are low for Gibraltar AIFMs compared to operations based in other EU jurisdictions which are already seeing costs increase as a result of AIFMD implementation.

In addition to this, Gibraltar is also soon to launch a Small AIFM regime which will bridge the regulatory gap between Small AIFMs and fully in scope AIFMs. Gibraltar’s Small AIFM regime will provide a platform for managers to enter into the EU regulatory environment without the burden of the full AIFMD scope requirements. The Small AIFM regime will provide further depth and support to an already strong Gibraltar AIFMD offering.

One year on, Gibraltar has the legislation, rules, regulations and products in place in order to meet the requirements of AIFMD. If you are the one of many AIFMs that are struggling with AIFMD implementation look no further than Gibraltar.