© 2009 Dechert LLP On the Road to Compromise? Recent Developments regarding the AIFM Directive 2 December 2009

2 Our Dechert Panel Today JENNIFER WOOD DICK FRASE ANDREW HOUGIE JIM BAIRD STUART MARTIN

3 The European Legislative Process So Far… 30 April Commission proposal sent to Parliament and Council under co-decision procedure Parliament assigns proposal to Committee on Economic and Monetary Affairs (ECON) – Rapporteur Jean-Paul Gauzès Council of Ministers – Swedish Presidency Compromise Proposal –Original Proposal Withdrawn –Revised Proposal Published –to be discussed at meeting of Economic and Financial Affairs Council (ECOFIN) 23 November 2009 – Gauzès report published –12 April 2010 – Gauzes report scheduled for adoption in ECON by simple majority voting –14 June 2010 – Parliament plenary session – simple majority required –Opinion then sent to Council – qualified majority voting

4 Which Version Will Prevail? The Commission Proposals The Swedish Compromise The Gauzès Amendments

5 Agenda Changes to Scope and Authorisation Model New Restrictions on Remuneration Changes to Depositary Requirements Valuation, Delegation and Third Party Management Marketing Changes to Leverage, Transparency and Reporting Requirements Changes Affecting Fund Operations

© 2009 Dechert LLP Changes to Scope and Authorisation Model Stuart Martin and Richard Frase

7 Changes to Scope: Definition of AIF Original Commission Proposal AIFM Directive applies to AIFM established in the Community which provide management services to one or more AIF Definition of AIF retained Non UCITS collective investment undertakings which raise capital from a number of investors with a view to investing in accordance with a defined investment policy. Swedish Presidency and Gauzès have dropped the requirement for risk spreading.

8 Changes to Scope: Management Services Original Commission Proposal Definition of management services covers the activities of managing and administering (not defined) Swedish Presidency Proposal Propose a definition of management covering core services of portfolio management and risk management. Gauzès Proposal Defines management services to include investment management and administration services (e.g. valuation and pricing, issue and redemption of units and marketing)

9 Changes to Scope: The AIFM as Operator? Original Commission Proposal: –“implied” an operator role for the AIFM –Multiple AIFM responsible for compliance with Directive Swedish Presidency: –Single AIFM responsible for compliance with Directive –Self managed and externally managed AIF (but note anti letter box provisions) –AIFM authorised to undertake core investment management services (but may also undertake non core services of administration, marketing and discretionary management)

10 Changes to Scope: The AIFM as Operator? Gauzès Proposal –Single AIFM responsible for compliance with Directive –Self managed and externally managed AIF? –Introduction of concept of a single operator responsible for management and administration services and, potentially, marketing

11 Changes to Scope: Exemptions Swedish Presidency and Gauzès Proposals: –Exempt management of non pooled portfolios –Exemptions relating to supranational institutions –Swedish Presidency Proposal does not exempt banks and insurance companies and Gauzès proposals limit exemptions relating to these institutions Gauzès Proposal drops de minimus exemption for AIFM which manage AIF with assets of less than €100 million or €500 million for non leveraged AIF with no redemption rights within 5 years

12 Changes to Scope: Exemptions Exemption for AIFM which manage AIF neither established nor marketed in the EU? –Commission Proposal Exemption of limited value due to definition of marketing including non solicited sales –Exemption removed under Gauzès Proposal –Swedish Presidency Proposal effectively limits exemption to compliance with Depositary requirements and annual reports

13 Changes to Authorisation Model Commission Proposals: –Authorisation to provide management services to all or certain types of AIF –Authorisation for proposed delegations to third parties required –Detailed disclosures relating to AIFM, AIF and AIFM Operating procedures –Two month approval process –Prior approval of changes (including changes to investment strategy and policy of AIF managed by AIFM) on one month notice Gauzès Proposals –Model substantially unchanged –Extension of initial approval process from two to three months

14 Changes to Authorisation Model Swedish Presidency Proposals –Extension of initial approval process from two to six months –Possible two stage application process: Initial authorisation (minimum information relating to AIFM, programme of activity and available information on AIF managed or intended to be managed) following provision of initial capital; Subsequent filing (information relating to AIF to be managed, delegation arrangements, safe keeping arrangements etc. - management of such AIF may not commence earlier than one month after filing –Prior approval period for changes extended to three months (one month for changes to investment strategies of AIFM)

15 Changes to Regulatory Capital Requirement

16 Initial Capital (Article 14) Own funds of €125, % on AUM of €250 million. Applies when management is delegated. Not applicable to Self Managed AIFs which must have initial capital of €300,000. Own funds to be invested in liquid assets or assets readily convertible to cash. Own funds capped at €10 million. Clarifies no application to sub- managers. Guarantee for up to 50% of 0.02% as an alternative. Relaxation of 0.02% requirement for private equity

© 2009 Dechert LLP New Remuneration Restrictions Richard Frase and Stuart Martin

18 An AIFM must have remuneration policies which are proportionate and do not encourage risk-taking above ‘tolerated’ risk levels of the AIFM or the AIF it manages. CESR must ensure existence of sound remuneration policies which comply with Annex II and the Commission recommendation of 30 April Firms to have a formal remuneration policy consistent with risk profiles of its AIF, addressing conflicts and balancing fixed and variable elements. Policy to be monitored and reviewed annually. Staff engaged in risk management should be remunerated independently. Restrictions on golden hellos and goodbyes. Remuneration (Article 9a plus Annex II)

19 Remuneration assessed over a multi-year framework appropriate to the life cycle of the AIF and takes account of its redemption policies and risks. Performance used to calculate variable remuneration should include adjustment for all types of current and future risks % of the variable element to be deferred over an appropriate period (no longer fixed at 3 years) and to reflect the performance of the AIFM or AIF Performance related remuneration to be based on the performance of the individual, the business unit and the overall results of the AIFM, taking account of financial as well as non-financial criteria. Emphasis is on remuneration at AIF level but rules are also expressed to apply to remuneration paid by the AIF (carried interest). Application to LP structures Tax implications Gauzes Report: –General principles only for remuneration policies. –Rules should be compatible with those applicable to credit institutions and investment firms. –Specific reference to Financial Stability Board Principles and COM (2009) 0211

© 2009 Dechert LLP Changes to Requirements Regarding Depositaries Richard Frase

21 Depositaries (Article 17) Depositary must be a credit institution. Depositary to receive payments and safe-keep financial instruments. Depositary must be an EU credit institution or investment firm (plus lighter requirements for private equity fund). Appointment of depositary to an AIF must be approved by home state of AIF or for a non-EU AIF by home state of AIFM. Detailed requirements on safekeeping of securities traded on a recognised market or MTF, and for other OTC instrument. Depositary has responsibility for subscriptions and redemptions, valuations, compliance with national law and constitution of AIF.

22 Depositaries cont. Sub-custodians to be subject to regulation equivalent to the Directive and subject to prudential regulation, cooperation etc Liability for losses due to depositary’s failure to perform its obligations. Strict liability for sub-custodians Rules on duty of care in delegating custody. Implementing directive to cover equivalence of other countries. Sub-custodian to be supervised and appropriate A depositary can contract not to be liable for sub-custodian loss of assets if it can prove it took due care and this is in its contract. AN EU AIF must have its depositary in its home member state. A non-EU AIF must have an EU depositary or a non-EU depositary authorised in a jurisdiction approved by the Custodian. Implementing directive to cover segregation, safe-keeping, supervision, delegation and approval. Similar provisions to be applied for UCITS depositaries (Gauzes Report). Application of general delegation requirements of Article 18?

© 2009 Dechert LLP Valuation, Delegation and Third Party Management Jennifer Wood and Stuart Martin

24 Valuation Appointment of a separate valuator required? AIFM and depositary jointly responsible for valuation AIFM to ensure independence in process Disapplication to private equity funds Implementing measures to be adopted

25 Delegation Prior authorisation vs notification (with right to reject) Delegation of liquidity management Ability to withdraw delegations with immediate effect Avoid becoming a letter-box entity Sub-delegations

26 Management of AIF Established Outside Home Member State of the AIFM Management of EU AIF through branch or “free provision of services” (direct) –Home Member State has one month rather than 10 working days to send materials to host Member State –Host member state to be responsible for supervising compliance, including arrangements made for marketing Under Swedish proposal, management of third country AIF allowed only if: –any relevant legislation in the third country Is in line with standards set by international organisations or the AIFM can demonstrate that the AIF in the third country complies with these standards; and –appropriate cooperation agreements are in place between the competent authorities of the home Member State of the AIFM and the supervisory authority of the third country where the AIF is established

© 2009 Dechert LLP Changes Regarding Marketing Jim Baird

28 Changes to Marketing Definition of “Marketing” and “Professional Investor” –reverse solicitation no longer “marketing” –Intermediaries? –websites –Persons “treated as” professional clients Home State Marketing Rights – Professionals –limited to EU domiciled funds –requirements for master/feeders –potential for marketing of non-EU funds subject to local law Home State Marketing Rights – Retail –discretion of individual member states retained –cross-border basis? –extent of permitted restrictions –restrictions on funds of funds

29 Changes to Marketing Passport –EU domiciled funds only –no review after 3 years –Restrictions on master/feeders and funds of funds Private Placement Regimes –indications that private placement will be permitted –impact of deletion of Article 39 –professional investors only? –requirement for cooperation agreements –need for further clarity

© 2009 Dechert LLP Changes to Leverage, Transparency and Reporting Requirements Andrew Hougie and Jim Baird

31 Changes to Leverage, Transparency and Reporting Requirements Definition and Application of Leverage –references to for netting removed? –tailoring to level of risk? Pre-Set Maximum Levels –will pre-set maximum levels be required? –disclosure of pre-set maximums Emergency Measures to Impose Leverage Limits –potential for caps retained –power rested with Commission or local regulators? –European Securities and Markets Authority and European Systemic Risk Board Scope of Application –All AIFM or those using “high levels of leverage”? Other Restrictions –Ability to impose “other restrictions” on management of AIF

32 Annual Report to Investors and Competent Authorities Swedish Presidency –Technical changes to reduce compliance burden –Disclosure of remuneration – including number of beneficiaries and future breakdown Gauzès Proposals –Disclosure of remuneration paid (split by fixed and variable)

33 Disclosure to investors – minimum information requirements for pre-sale disclosure Swedish Presidency –Technical changes to reduce compliance burden –Some additional information of a kind that would ordinarily be given –A relaxation where the Prospectus Directive applies –Additional specific disclosure regarding use of leverage

34 Reporting to competent authorities Swedish Presidency –Technical changes to reduce compliance burden –Additional specific disclosure regarding use of leverage –Cross disclosure to other competent authorities by home authority Gauzès Proposals –Cross disclosure to other competent authorities by home authority

35 Scope AIFM manage AIF which control 30% or more of a listed or unlisted company (other than small or medium-sized) Swedish Presidency –Control defined as >50%. Scope limited to unlisted companies Gauzès Proposals –Control defined as “controlling influence” to be “consistent with EU company law”

36 Obligation of AIFM to notify target and other shareholders within four trading days (non-listed companies) Swedish Presidency –Technical changes to reduce compliance burden –Timing changed to ten working days

37 Additional disclosures to target Swedish Presidency –Reduction of amount of information required to be disclosed Gauzès Proposals –Minor changes only

38 Article 28a Swedish Presidency –Details of target debt to be disclosed to AIF investors and competent authorities once control reached and at 6 months and 12 months thereafter

39 Detailed information in AIF’s annual report for each company it controls Swedish Presidency –Some additional requirements and some reductions – still detailed information requirements Gauzès Proposals –Some additional requirements and some reductions – still detailed information requirements

40 Transparency Directive applies to listed company for two years after de-listing Swedish Presidency –Deleted Gauzès Proposals –Reduced to one year

© 2009 Dechert LLP Changes Affecting Fund Operations Jennifer Wood and Stuart Martin

42 Changes affecting fund operations Additional general duties

43 Changes affecting fund operations Additional general duties in Article 9 –have and employ effectively the resources and procedures that are necessary for the proper performance of its business activities –try to avoid conflicts of interests and, when they cannot be avoided, ensure that the AIF it manages are fairly treated –comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of the AIF or the investors of the AIF it manages and the integrity of the market Contrast Article 15 –AIFM shall, at all times, use adequate and appropriate human and technical resources that are necessary for the proper management of AIF

44 Changes affecting fund operations Additional general duties Conflicts of interest

45 Changes affecting fund operations Additional general duties Conflicts of interest -- under Swedish proposal, an AIF is to take all reasonable steps to identify conflicts –between the AIFM (and its managers, employees and control persons) and the AIF OR the investors in the AIF –between on AIF and another –between the AIF OR the investors of the AIF and another client of the AIFM

46 Changes affecting fund operations Additional general duties Conflicts of interest Separation of risk management and portfolio management Short selling Liquidity management – differentiating closed-end funds

© 2009 Dechert LLP Any questions? Thank you for your attention