1. AIFMD
Gauging the Impact
Thursday, 10 February 2011

2. INTRODUCTION - housekeeping
Introduction Peter Astleford
Into the Unknown … Jiří Król, AIMA
Depositaries Richard Frase
Remuneration, transparency
and third country issues Gus Black
Impact on fund structures Stuart Martin
What can I do to prepare? Peter Astleford
QUESTIONS

3. Introduction – selected key issues
What is an AIFM?
Will the proposed directive really have much impact?
Europe: a leader or isolated?
Impact for America, Asia, etc
Different reactions of the PE and other parts of the funds industry
Remuneration issues
also consider UCITS V

4. AIFMD Level 2 Into the unknown? Jiri Krol
Director of Policy and Government Affairs
Alternative Investment Management Association 4

5. AIFMD
Lamfalussy structure Level 1: Framework directive Level 2: Implementing measures (Commission) Level 3: ESMA guidance Level 4: Commission enforcement Some controversial Level 1 provisions Third countries – passport in 2015, phase out of NPPRs potentially in 2018 Depositaries – liability provisions may drive up costs Remuneration – interplay between CRD III Leverage – maximum leverage must be set at a ‘reasonable’ level Delegation – who is the AIFM? Potential business consequences Increase in compliance costs Restructuring of the prime broker/administrator model Decision to onshore/offshore funds

6. Level 2 Process Milestones ESMA produces technical advice
Commission drafts level 2 measures (Directives or Regulations)
Measures discussed at the European Securities Committee
Measures consulted with the EP
Adoption by the Commission
ESMA working methods
Public consultation and hearings
Impact assessment
Organisation of work into sub groups
Forms of delegation
Delegated Acts
Implementing Acts
Technical Standards

7. Level 2 – approximate timeline
European Parliament
Council of the European Union
European Commission
ESMA
Spring/Summer 2012
Final Level 2 text adopted
(COM/MS/EP)
Spring/Summer 2011
Consultation on draft technical advice
Autumn 2011
Consultation on policy orientations of Commission (not certain)
Dec 2010/Jan 2011
Publication of Call for evidence
Dec
2011
Mar
Apr
July
Aug
Sept
Oct
Nov
2012
Oct-Feb
Mar
Autumn 2011/Spring 2012
Discussion with Member States representatives in the European Securities Committee and European Parliament
Dec 2010
Mandate for drawing up technical advice
Sept 2011
Provision of final advice to COM 7 7

8. Conclusion Too early to tell where we end up Proportionality is key
UCITS/MiFID concepts an inspiration
Secondary legislation may favour particular models
Could AIFMD turn out to be half as successful as UCITS?
Or could it be as useful as the E-money directive?

9. DEPOSITARIES RICHARD FRASE

10. The Depositary The AIFM must
ensure a single depositary is appointed for each AIF it manages
notify its regulator of the identity of the depositary of each AIF it manages
AIF
Depositary
AIFM
Fund Portfolio

11. The Depositary (2) The depositary must be
an EU credit institution or MiFID firm
for a non-EU AIF only, the depositary may be
a credit institution, or
similar entity subject to effective equivalent prudential regulation and supervision
for an AIF with a 5-year investor lock, not investing in custody assets or only normally investing in non-listed companies, the depository may be
a firm, subject to mandatory professional registration, which carries out the depositary function as part of its professional or business activities

12. The Depositary (3) The depositary must NOT be the AIFM the AIF’s
prime broker
external valuer
portfolio manager, or
risk manager
unless role is completely separated from its depositary tasks and conflicts of interest are managed and disclosed

13. The Depositary (4) The Depositary must be established for an EU AIF
in the home state of the AIF
for a non-EU AIF, either
in the 3rd country where the AIF is established (subject to conditions)
in the home state of the AIFM (for a non-EU AIFM – the EU state of reference)

14. Depositary Duties
Act honestly, fairly, professionally, independently and in the interest of the AIF and its investors
Oversee the calculation of the value of the AIF’s units
Oversee the AIF’s cash flows
Carry out instructions from the AIFM
Unless they conflict with applicable law or the AIF’s constitution
Remission of consideration and application of income
Manage, monitor and disclose conflicts of interest

15. The Depositary - delegation
AIF
AIFM
Depositary
Prime Broker
Sub-Custodians
Portfolio of Securities and Cash

16. The Depositary - Delegation
Delegation is permissible only of safekeeping of custody assets and only if there is
no intention to avoid the AIFMD’s requirements
an objective reason for the delegation
exercise of due skill, care and diligence in the selection and on-going monitoring of the third party

17. The Depositary – Delegation (2)
On-going assessment that third party meets certain standards
adequate structures and expertise
prudential regulation and periodic audit
segregation and clear identification of assets
no use of assets without prior consent of the AIF and notice to the depositary
compliance with the AIFMD core custody requirements
Exception where third country requires instruments are held in custody by a local entity and there are no local entities satisfying the requirements above
Sub-delegation is permissible on the conditions above

18. The Depositary – responsibility for AIF assets
Depositary has overall responsibility for custody of the AIF’s assets
segregation and clear identification of all registrable and bearer instruments
Verification of ownership of all other assets and maintenance of up-to-date records
No rehypothecation or re-use of assets without prior consent of AIF or AIFM

19. The Depositary – responsibility for AIF assets
AIFM
Depositary
Derivatives Positions
Derivatives Counterparty

20. Liability of the Depositary
Liability towards the AIF or its investors for any loss by the Depositary or sub-delegate
Defence of force majeure – unavoidable despite all reasonable efforts to the contrary
Liability for other losses due to negligence or intentional failure to perform properly duties under the AIFMD
Depositary will not be liable for losses of sub-custodian if
There is a written contract with the AIF allowing the sub-delegation and evidencing objective reason for same
Depositary can prove
it met the AIFMD’s delegation requirements; and
existence of a written contact explicitly transferring liability and allowing claims to be made

21. REMUNERATION TRANSPARENCY THIRD COUNTRY ISSUES GUS BLACK

22. “Gauging the impact”

23. Will the Directive’s missiles hit hard?
Remuneration
Will the Directive’s missiles hit hard?
…or just smoke the budget?
Depository
Leverage
Operational/organisational
Remuneration
Transparency
Marketing / 3rd country

24. Remuneration
Remuneration policies required for AIFM staff who have a material impact on the risk profiles of AIF they manage.
Senior management
Risk takers
Control functions, etc
Prescriptive policy guidance – Annex II
Proportionality
Disclosure requirements

25. Remuneration (2) Some potential impacts
At least 50% of variable remuneration paid in AIF interests
40% - 60% of variable remuneration to be deferred for at least 3 years
Variable remuneration must only vest if “sustainable” and “justified”

26. Transparency point of sale periodic Various disclosure obligations*
Annual report
Disclosure to Investors
point of sale
periodic
Reporting to Regulators
* Broadly apply to EU AIFM and to non-EU AIFM which are marketing to EU investors in respect of each AIF which it manages or markets.

27. Investor side letters
“No investor may obtain a preferential treatment, unless this is disclosed in the relevant fund’s rules or instruments of incorporation”
Preferential treatment, or the right to it, must be disclosed in the fund documentation, including
the type of investors benefitting
their legal or economic links to the AIF/AIFM
a description of the preferential treatment

28. Third Country Issues

29. Current private placement rules
Different approaches state by state
Generally works in practice
France / Italy / Spain?
Reverse Inquiry

30. Marketing time line
Directive in force (P)
2011
2012
2013
2014
2015
2016
2017
2018
EU AIF obtain passport
Non-EU AIF obtain passport?
No more private placements?
IF ESMA make positive recommendation, and requisite implementing legislation is passed

31. AIFM AIF Management Full authorisation and compliance Marketing
Home state marketing
Passport available straight away

32. AIFM AIF Home state marketing (Art 31)
AIFM must submit details on each AIF to home regulator
If procedure followed - can market within 20 working days
Procedure for notification/approval of changes one month prior
Marketing only to Professional Investors (except for retail exemption)

33. AIFM AIF Marketing in other member states (passport) (Art 32)
AIFM must submit details on each AIF to home regulator
If procedure followed - can market within 20 working days
Procedure for notification/approval of changes one month prior
Marketing only to Professional Investors (except for retail exemption)

34. AIFM
AIF
Art 34: Even if the non-EU fund is not marketed in the EU …
EU AIFM must comply with all AIFMD requirements except Art 21 (Depository), Art 22 (Annual report)
Co-operation agreement in place with the AIF’s regulator
A trap for the unwary who thought Directive only catches EU marketing. Careful structuring may be necessary

35. AIFM AIF Private placement (Art 36)
At member states’ discretion until 2018 (or later)
Full Directive compliance (but depository requirements relaxed)
Co-operation agreement in place between AIF and AIFM regulators;
AIF domicile must not be on FATF non-cooperative list

36. AIFM AIF EU feeder into non-EU AIF? (Art 36)
Treated as if a non-EU fund (as per previous slide)

37. AIFM AIF Marketing passport (Art 35)…. from 2015?
EU AIFM must comply with Directive
Cooperation agreements; FATF – as for private placement
OECD model tax information sharing agreement between AIF domicile and each EU state fund will be marketed in
Notification requirements (as for EU funds) at least 20 days prior (but potential for regulators to delay)

38. AIFM AIF Non-EU manager delegating to EU manager
Can the non-EU manager be the AIFM?
MiFID provision / recital 7
No letter boxes allowed
role and responsibilities of non-EU manager?
substance requirements?

39. AIFM AIF Management of EU AIF (Art 37)
Requires EU authorisation and Directive compliance (via legal representative in member state of reference)
Determination of member state of reference is uncertain

40. AIFM AIF Marketing by private placement (Art 40)
AIFM must comply with Art 22 (Annual report); Art 23 (disclosure to investors) and Art 24 (reporting to authorities)
Cooperation agreement; FATF as before
Member states free to impose stricter rules

41. AIFM AIF Marketing by passport (Art 38)… from 2015?
Requires EU authorisation and Directive compliance (via legal representative in member state of reference)
Determination of member state of reference is uncertain
Notification requirements similar to marketing by EU AIFM

42. AIFM AIF Marketing by passport (Art 39)… from 2015?
Requires EU authorisation and Directive compliance (via legal representative in member state of reference) (Art 37)
Determination of member state of reference is uncertain
Notification requirements similar to marketing by EU AIFM
Cooperation agreements; FATF; tax info sharing agreements

43. Marketing to Retail Investors – Article 41
Permissible, at the discretion of individual Member States
Commission must be notified
Stricter requirements may be imposed but no discrimination against cross-border funds
Within 3 years, Member States must report to the Commission and ESMA about the operation of their retail regimes

44. The view from Midtown…? Business as usual under NPPR (for now)
Watching brief on any erosion of NPPR
Consider EU authorisation / EU funds if EU market is important

45. The view from Mayfair…? Business as usual under NPPR (for now)
Investor preference will still drive fund domicile
Directive has pros and cons for EU and non-EU fund structures
AIFM structuring is crucial

46. IMPACT ON FUND STRUCTURES STUART MARTIN

47. Impact on Fund Structures
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way ...
Charles Dickens, A Tale of Two Cities

48. Impact on Fund Structures
Is an EU AIFM required?
Can the AIF be “self managed”?
Impact on “role” of the EU AIFM and relationship with AIF and other service providers
Impact on domicile choice
Impact of domicile on Fund Structures

49. Is an EU AIFM required? AIFM Directive applies to
EU AIFM which “manage” EU or non EU AIF
Non EU AIFM which “manage” EU AIF; and
Non EU AIFM which “market” EU or non EU AIF in the EU
“Manage” means providing at least the following Investment Management services when managing an AIF
portfolio management; or
risk management
Concept of each AIFM managed within the Directive having a single AIFM
Extends to the marketing passport for non EU AIF managed by non EU AIFM [Art 40 and, if introduced, Arts 38, 39] and
May have a helpful wider application

50. Is an EU AIFM required? (2)
AIFM Directive does not apply to individual portfolio management services provided to AIF under MiFID although such Funds may not be directly or indirectly offered or placed by investment firms in EU, if and to the extent the relevant AIF cannot be marketed in accordance with the Directive
MiFID only route
may help UK investment manager managing non EU AIF
should enable it to manage non EU AIF managed by non EU AIFM marketing under Art 40 (available from TD years)

51. MiFID Only Structure: Take One
Offshore /
Non EU Fund
Non EU
Risk Manager ？ EU
Portfolio Manager
Full discretion:
MiFID only
authorisation

52. MiFID Only Structure: Take Two
Offshore Non EU
Fund
Discretionary portfolio management
Risk management
Other “operator” services
Offshore Non EU
Manager
MiFID only authorisation
Discretion subject to review by offshore investment manager
? Marketing in EU (policy considerations) ？ 
EU Portfolio
Manager

53. Can the AIF be “self managed”?
Can an AIF be “self managed” in a similar way to a self-managed UCITS?
Under serious discussion in Luxembourg and Dublin
Corporate funds e.g. SICAVs and Irish ICVCs
Non Corporate Funds e.g. Unit Trusts, FCPs,
Limited Partnerships
Capital Advantages/Disadvantages
Initial capital of €300,000 vs €125,000
Does the “own funds” requirement of 0.02% of assets apply beyond insurance costs?
Will a Swiss model of “regulatory capital” apply?  X
CLEAR
UNCLEAR
UNCLEAR -possibly critical

54. Can the AIF be “self managed”?
Anti Letter Box Provisions
AIFM may not delegate functions to the extent it can no longer be considered to be the manager of the AIF and to the extent it becomes a letter box entity
What will Level 2 provisions permit?
certainly minimum operational and substance requirements at level of the AIF
manner of any outsourcing may be relevant
may be easier to achieve “self management” by including “risk management” rather than “portfolio management” function within AIF

55. Impact on External AIFM Role/Relationship with AIF and Key Fund Service Providers
AIFM responsible for portfolio management and/or risk management
AIFM may choose to perform the following functions
operator functions including :
legal and fund management accounting services
customer enquiries
valuation and pricing
regulatory and compliance monitoring
maintenance of unit/share register

56. Impact on External AIFM Role/Relationship with AIF and Key Fund Service Providers
distribution of income
contract settlements
record keeping
marketing
activities related to the assets of the AIF

57. Impact on External AIFM Role/Relationship with AIF and Key Fund Service Providers
But AIFM directly assumes “operational” and “investor facing” operator type obligations eg
due diligence etc. in selection and appointment of prime brokers
taking steps to identify, prevent, manage and monitor conflicts of interest
ensure investment strategy, liquidity profile and redemption policy of AIF are consistent
ensure appropriate and consistent procedures are established for the proper and independent valuation of the AIF
responsibility for valuation of assets and calculation and publication of net asset value

58. Impact on External AIFM Role/Relationship with AIF and Key Fund Service Providers
ensure appointment of depositary (possible AIFM liability to investors)
preparation of annual report
minimum “point of sale” and “periodic” minimum disclosure obligations to investors
reporting obligations to competent authorities

59. Impact on External AIFM Role/Relationship with AIF and Key Fund Service Providers
External AIFM may need to “change” the contractual relationship with the AIF and certain key service providers eg
Investment Management Agreement
compliance undertakings/authorities from AIF beyond portfolio management matters
Administration Agreement
potential for AIFM to seek direct compliance undertakings from Administrator
Prime Broker and Depositary Agreements
Potential for AIFM to be a party to these Agreements
Remedies for breach eg resignation?
Need to ensure AIFM retains “central management and control” for UK tax purposes

60. Impact on Fund Domicile Choice
The case for Cayman
AIFM managing non EU AIF (no EU marketing)
no need to comply with annual report or depositary requirements
AIFM managing non EU AIF (EU passport marketing)
potential for future access marketing passport from TD + 2 years (with possible delay)
AIFM managing non EU AIF (reliance on existing private placement regimes)
exemption from certain of the depositary requirements
from TD years
The case for an EU domicile
possibility of self managed AIF within EU
investor sentiment?
access to marketing passport from TD vs continuance of private placement regimes for TD

61. Impact of Domicile on Fund Structure
Corporate Funds
Cayman
EU eg Ireland, Luxembourg, Malta (EU ManCo as AIFM)
Master Feeder Structures
Cayman: master funds may be limited partnerships, unit trusts or corporates which “check the box”
Ireland: QIF master funds may be unit trusts, limited partnerships etc. but corporates cannot currently “check the box” but …
local regulated management company/general partner required but may be AIFM
Luxembourg: SIF master funds may be FCPs or private SICAVs which “check the box”
local regulated management company required for FCP but optional for private SICAV. Local management company may be AIFM

62. The Master Feeder Structure
Non US Investors / US tax exempt investors
Onshore (US)
Feeder
Offshore ManCo /
General
Partner
Offshore Fund
(EU/Non EU)*
Master Fund*
US Taxpayer Investors
directly or via US wrapper feeder
UK Investment
Manager (AIFM/MiFID)
If Master Fund is LP
Lux / Irish
Management
Company (AIFM)

63. WHAT CAN I DO TO PREPARE? PETER ASTLEFORD

64. What can I do to prepare? Consider re-domiciling funds
Investors’ preference
FIN 48
Dual fund ranges – EU and a second cheaper, better performing non EU range?

65. What can I do to prepare? - Alternative Domiciles
Ireland
Luxembourg
Malta UK

66. What can I do to prepare? (cont)
Consider whether your strategy works in a platform that is outside the scope of the AIFMD
UCITS / Newcits
managed accounts
future staffing needs

67. What can those outside the EU do to prepare?
Consider setting up/growing an office in Europe
there should be time (say 2 years)
Consider all delegation currently undertaken
would it meet the new requirements?

68. Peter Astleford, Gus Black, Richard Frase, Jiří Król, Stuart Martin
QUESTIONS?
Peter Astleford, Gus Black, Richard Frase, Jiří Król, Stuart Martin