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The EU’s AIFMD and Your Road Show

May 14, 2013

The Alternative Investment Fund Managers’ Directive comes into effect in the European Union this July. Accordingly, Global Perspectives has posted the first part of a planned two-part white paper about compliance.  One of the major points the report makes is that this is an EU development that is necessarily a matter of concern far from Europe’s shores.

The author, Shane Brett, is no stranger to readers of AllAboutAlpha, and he has helped us keep track of AIFMD as it has moved toward implementation step by step. Now he addresses several questions about compliance: first, the issue of identification. It isn’t always obvious who is the manager of a particular AIF within an investment group, yet it is critically important because it is the AIFM who is legally responsible for compliance with the AIFMD.

The AIFMD itself leaves us with a somewhat vague test for identification. The manager is he party who carries out “management functions.”


Whoever the AIFM is: one of the directive’s features is that it obligates the manager to appoint a depositary to safeguard investor funds. The depositaries, Brett writes, “will work like super-charged custodians who will closely monitor the assets in the fund, reconcile daily cash movements and provide independent verification that the fund is being run properly and the assets are where the manager says they are.”

These depositaries will have to be large companies with deep pockets, because only such an institution could take on the liabilities the AIFMD assigns with the role. Depositaries are “on the hook” to make investors whole even if a problem arises “in a sub-custody network outside of their control,” Brett writes.

One worry is that the depositary requirements may have an impact on strategies for covered AIFMs: “Some depositaries may not be willing to support an investment strategy weighted toward emerging markets or exotic securities,” where the custodial function can prove more difficult.

European AIFMs have until one year after the directive becomes law; they have until July 2014, to apply for authorization from their home country regulators. Managers must even now “be familiarizing themselves with the full spectrum of AIFMD and how it will impact their business.”

The Non-European World

But here we come to the question of the range of managers to whom the directive applies, where Brett makes the point that “the non-European world” is in no position to ignore this development. It applies to any non-UCITS fund either managed or marketed in the EU. The implementation with regard to so-called “Third Countries” (all non-EU countries) will be gradual. But by 2018 any manager from anywhere who wants to bring his road show to a European city will have to be fully compliant.

Managers under AIFMD are responsible for the delegation of their managerial functions to third parties such as administrators. Given the nature of the directive, there will be a number of cumbersome “due diligence visits and checks, either by managers or of managers.

Brett also touches upon the issue of remuneration, the subject of “some of AIFMD’s most controversial new rules,” requiring that remuneration policies be disclosed to investors and regulators, and that bonuses be weighted toward long-term incentives. The directive also requires the creation of a remuneration committee for a manager with total assets under management of €1.25 billion. All of this represents, as Brett says, a “huge change.”

Finally (for the purpose of this first paper of the planned duo) there is the matter of leverage. A Value at Risk method of calculating the leverage of a manager is simply unacceptable under the directive. The EU allows managers two choices: gross leverage or commitment leverage. The gross method means what it sounds like. The commitment method, Brett says, “focuses more on the hedging and netting techniques used by the fund manager.”