Investment Management & Funds Practice AIFMD Client Memorandum February 2014

Contents 1 Introduction ................................................................................. 4 2 How do you identify the AIFM? .................................................. 5 3 Is the AIFMD applicable to you? ................................................ 6 3.1 Scope – In or out of scope .................................................................................. 6 3.2 Grand-Fathering Rules for Closed-Ended AIFs .................................................. 7 3.3 Exemptions ......................................................................................................... 7 3.4 Opt-in Possibility ................................................................................................. 9 4 What if you are a non-EU AIFM? ................................................ 9 5 Timelines ................................................................................... 10 6 Capital Requirements for the AIFM ......................................... 10 6.1 General Principle .............................................................................................. 10 6.2 Initial Capital and Own Funds Notions .............................................................. 10 6.3 Additional Own Funds Requirement ................................................................. 11 6.4 Additional Own Funds Requirement for Potential Professional Liability Risks . 12 6.5 Computation Rules ........................................................................................... 13 6.6 Risks to be Covered .......................................................................................... 13 6.7 Professional Indemnity Insurance ..................................................................... 14 7 Delegation .................................................................................. 16 7.1 Regulatory Notification ...................................................................................... 16 7.2 Sub-delegation .................................................................................................. 21 7.3 Letter-box Entity considerations ....................................................................... 21

8 Operational and Organisational Requirements ...................... 23 8.1 Operational Requirements & Policies ............................................................... 23 8.2 Organisational Requirements ........................................................................... 27 9 Transparency requirements ..................................................... 35 9.1 Annual Reporting .............................................................................................. 35 9.2 Disclosure to Investors ...................................................................................... 37 9.3 Reporting to Regulator ...................................................................................... 38 10 Conclusion ....................................................................................... 40 Third Country Conditions and Requirements ..................................... 42

4

1 Introduction This memorandum aims to provide an overview of the key elements of Directive 2011/61/EU of the European Parliament and of the European Council of 8 June 2011 on Alternative Investment Fund Managers (the AIFMD) and is written particularly for the benefit of managers of alternative investment funds. This memorandum may help you in determining the impact the AIFMD will have on the business and affairs of your investment management organisation and the funds you manage. The AIFMD entered into force as of 21 July 2011 and should have been implemented into national law by the Member States of the European Union (EU) not later than 22 July 2013. On 22 March 2013, the Level 2 Delegated Regulation supplementing the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (the Delegated Regulation) has been published in the Official Journal of the European Union. The Delegated Regulation concerns in particular rules on the calculation of assets under management, additional own funds and professional indemnity insurance, conflicts of interest, risk and liquidity management, delegation, investment in securitisation positions and internal organisational requirements. The provisions of the Regulation also apply throughout the EU. The European Securities and Markets Authority (ESMA) advised the European Commission during the legislation and implementation process and has released various consultation papers and guidelines, including inter alia on Guidelines on key concepts of the AIFMD and Guidelines on sound remuneration policies, each of which provide more information on ESMA’s views with regard to the scope of the AIFMD (collectively, the ESMA Guidelines). In addition, both the European Commission and ESMA have published Q&A’s on the AIFMD. ESMA intends to continually edit and update its Q&A in order to determine whether material deriving therefrom should be converted into ESMA guidelines or recommendations. This memorandum is based on the information set out in the AIFMD itself, in the Delegated Regulation and in the ESMA Guidelines. The final implications of the AIFMD may differ from what is set out in this memorandum as a result of national implementation. Therefore, local counsel should be consulted on the specific implications and requirements of the AIFMD for your organization in the relevant jurisdiction.

5

Although this memorandum has been compiled with great care, Loyens & Loeff cannot accept any liability for the consequences of making use of the information set out in this memorandum without further advice. The information provided is intended as general information and cannot be regarded as advice. If you wish to receive any further information regarding the AIFMD or any of the information set out in this memorandum, please let us know. We will be happy to assist you in making your business and the funds you manage AIFMD compliant. Unless specified otherwise, any reference in this memorandum to an Article is a reference to an article of the AIFMD. 2 How do you identify the AIFM? The AIFMD states that any legal person (the AIFM) whose regular business is to manage one or more AIFs (as defined below) must comply with the AIFMD unless they fall out of its scope, see paragraph 3 (Is the AIFMD applicable to you?) below. An alternative investment fund (AIF) is defined as a collective investment undertaking, or its compartments: • which raises capital from a number of investors; • with a view to investing it in accordance with a defined investment policy for the benefit

of those investors; and • which is not covered by Directive 2009/65/EC on undertakings for collective

investment in transferable securities (UCITS and the UCITS Directive). An AIFM may be either: a) ‘external’ i.e. an external manager, which is the legal person appointed by the AIF or

on behalf of the AIF and which is responsible for managing the AIF; or b) ‘internal’ i.e. where the legal form of the AIF permits an internal management and

where the AIF’s governing body chooses not to appoint an external AIFM, the AIF itself, which must then be authorised as AIFM.

6

Whereas Article 6(5)(d) states that, in order to be authorised under the AIFMD, AIFMs have to provide portfolio management functions and risk management functions, Article 4(1)(w) defines the activity of managing AIFs as performing at least portfolio management functions or risk management functions. ESMA considers that the joint reading of both articles should be interpreted as follows: • an entity performing either of the two functions (i.e. portfolio management or risk

management) is to be considered as managing an AIF according to Article 4(1)(w). Such entity must therefore seek authorisation as an AIFM under Article 6, it being understood that delegation of either the portfolio management or the risk management function is allowed as long as such delegation is in accordance with Article 20 of the AIFMD. In the explanatory memorandum preceding the Delegated Regulation, the European Commission clarifies that in the context of any delegation, the AIFM has to perform at least functions relating to either risk or portfolio management, thereby confirming ESMA’s approach1; and

• Article 6(5)(d) should be interpreted as requiring an AIFM to be capable of providing,

and to take responsibility for, both portfolio management and risk management functions in order to obtain an AIFM authorisation in accordance with the AIFMD2.

The AIFM should thus handle at least portfolio or risk management and be capable of handling both functions. 3 Is the AIFMD applicable to you?

3.1 Scope – In or out of Scope The AIFMD applies to AIFMs established in a Member State of the EU which manage one or more AIFs irrespective of where such AIFs are established. In addition, the AIFMD applies to AIFMs that are established outside of the EU to the extent that they manage AIFs established within the EU, or market AIFs (wherever these funds are located) to investors in the EU. 1 Regulation, explanatory memorandum, section 3.2.10.

2 ESMA 2012/117, 23 February 2012, Discussion Paper ‘’Key concepts of the AIFMD and types of

AIFM’’, paragraph 6.

7

Subject to transitional provisions in relation to non-EU based AIFMs (and non-EU AIFs), the AIFMD enables authorised AIFMs to freely market their alternative investment funds to professional investors (within the meaning of Directive 2004/39/EC (MiFID)) in the EU. This is commonly referred to as the AIFMD’s passport. The AIFMD does not apply to, inter alia, (i) holding companies, (ii) pension funds, and (iii) securitisation vehicles. It furthermore does not apply to AIFMs managing UCITS funds only or to non-EU AIFMs managing one or more non-EU AIFs without marketing those AIFs in the EU.

3.2 Grand-Fathering Rules for Closed-Ended AIFs The AIFMD mentions two grand-fathering rules for AIFMs managing existing AIFs of the closed- ended type that have been offered pursuant to a private placement. If such AIFs (i) do not make any additional investments after 22 July 2013, or (ii) closed their subscription period for investors prior to 21 July 2011 and if their term expires at the latest by 22 July 2016, the relevant AIFM may continue to manage such AIFs without needing an authorisation under the AIFMD.

3.3 Exemptions The AIFMD provides for the following exemptions: a) AIFMs in so far as they manage AIFs whose only investors are their parent

undertakings, their subsidiaries or other subsidiaries of their parent undertakings, provided that none of those investors itself is an AIF (intra group exemption); or

b) AIFMs that directly or indirectly (through a company with which such AIFM is linked by

common management or control, or by a substantive direct or indirect holding) manage:

(i) AIFs whose assets under management (the AuM), including any assets acquired

through use of leverage, in total do not exceed a threshold of EUR 100 million; or

8

(ii) AIFs whose AuM in total do not exceed a threshold of EUR 500 million, that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of the initial investment in each AIF (each a de minimis exemption).

AIFMs that are exempt on the basis of a de minimis exemption must nonetheless register with the relevant supervisory authority of their home Member State (the Regulator). Such exempted AIFMs (the Exempted AIFMs) will, at the time of their registration with the relevant Regulator, identify the AIFs that they manage to the Regulator and provide information to the Regulator on the investment strategies of such AIFs. After their registration is complete, the Exempted AIFMs will have to regularly (at least annually) provide the Regulator with information on the main instruments in which they are trading, on the principal exposures and on the most important concentrations of the AIFs they manage in order to enable the Regulator to effectively monitor systemic risk. Should the Exempted AIFMs no longer fall under the de minimis exemption, they will have to notify the Regulator of such change and apply for a full authorisation. 3.3.1 AuM Calculation For the purpose of calculating the value of the AuM in light of the de minimis exemption: a) UCITS for which the AIFM acts as designated management company under the

UCITS Directive; b) foreign exchange and interest rate hedging positions that according to the

investment strategy of the AIF are not used to generate a return; and c) AIFs for which the AIFM would not require to be authorised pursuant to the

aforementioned grand-fathering rules, are excluded from the threshold calculation. AIFs investing in other AIFs (including a compartment of an AIF investing in another compartment of that same AIF) managed by the same AIFM may be excluded from the threshold calculation subject to appropriate adjustments for leveraged exposure of those AIFs.

9

The following items should be included in the threshold calculation: d) the value of the AuM of each AIF, including assets acquired through leverage (as set

out in paragraph 3.3.2 below); and e) the absolute value of each financial derivative (including derivatives embedded

in transferable securities) equivalent position in the underlying assets of that derivative.

3.3.2 Leverage Calculation The term ‘leverage’ is defined by the AIFMD as any method by which the AIFM increases the exposure of an AIF it manages whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means. The Delegated Regulation sets out two mandatory methods for calculating and reporting leverage, referred to as the "Gross Method" and the "Commitment Method". The Gross Method requires the absolute value of all positions to be calculated, converting derivatives into positions in the underlying assets without taking account of netting and hedging arrangements. The Commitment Method adjusts this by allowing a few types of derivatives not to be converted into underlying asset positions and account to be taken of a limited range of netting and hedging arrangements. Annexes to the Delegated Regulation set out methods of increasing the exposure of the AIF, conversion methodologies for some standard types of derivatives and duration netting rules. In addition the Delegated Regulation provides that AIFMs, when calculating exposure, should ‘look through’ corporate structures to the extent that those structures have recourse to the AIF via cross- collateralisation or guarantees. Therefore, exposure which is contained in any financial and/or legal structures involving third parties controlled by the relevant AIF where those structures are specifically set up to directly or indirectly increase the exposure at the level of the AIF, should always be included. Subject to the above, for AIFs whose core investment policy is to acquire control of non-listed companies or issuers, AIFMs should not include in the calculation any leverage that exists at the level of those non-listed companies and issuers, provided that the relevant AIF does not have to bear potential losses beyond its capital share in the respective company or issuer.

10

On the other hand, borrowing arrangements entered into by the AIF are excluded under any of the abovementioned methods if these: a) are temporary in nature; and

b) are fully covered by ‘capital commitments’ from investors (i.e. the contractual

commitment of an investor to provide the AIF with an agreed amount of investment on demand by the AIFM).

Revolving credit facilities should not be considered as being temporary in nature.

3.4 Opt-in Possibility When relying on the de minimis exemption, the relevant AIFM will not benefit from the AIFMD’s passport. However, there is an opt-in right for these AIFMs. To opt-in, an AIFM will have to follow the authorisation procedure outlined in Articles 7 and 8. However, once an AIFM opts-in, the AIFMD will apply to that AIFM in its entirety. 4 What if you are a non-EU AIFM? The authorisation of non-EU AIFMs is expected to become available as from July 2015. Until that date non-EU AIFMs may manage EU AIFs to the extent permitted by national laws and may continue to market AIFs in the EU subject to national placement regimes and certain additional conditions set out in the AIFMD. Following the introduction of the passport for non-EU AIFMs: a) non-EU AIFMs may either apply for authorisation under the AIFMD and market non-

EU AIFs with the AIFMD’s passport, or may continue to market non-EU AIFs to EU investors subject to national placement regimes and certain additional conditions of the AIFMD;

b) non-EU AIFMs must apply for authorisation under the AIFMD to manage EU AIFs and it appears that marketing of EU AIFs in the EU is to occur in accordance with the AIFMD’s passport.

11

As from 2018, after obtaining advice from ESMA, the European Commission may decide that national placement regimes will be withdrawn. After such time, non-EU AIFMs may only market AIFs in the EU subject to prior authorisation in the Member State of reference and in compliance with the AIFMD. Reference is made to Schedule 1 (Third Country Conditions and Requirements) summarising third country conditions and requirements. 5 Timelines In each Member State the AIFMD should have been implemented into national law on 22 July 2013. If a Member State transposed the AIFMD before that date, it could delay the application of its new law until 22 July 2013 (the Deadline). From the Deadline, if you do not fall under any of (i) the grand- fathering rules, or (ii) the exemptions set out in paragraph 3.3 (Exemptions), you will have to comply with national law stemming from the AIFMD and submit an application for authorisation at the latest by 22 July 2014 (for existing AIFMs). Please note that AIFMs set-up after the Deadline will have to comply with the national law implementing the AIFMD from day one. 6 Capital Requirements for the AIFM

6.1 General Principle As described in paragraph 2 (How do you identify the AIFM?), an AIF may either be ‘internally’ or ‘externally’ managed. The initial capital for internally managed AIFs must at least amount to EUR 300,000. Where an AIFM is appointed as external manager of one or more AIFs, the AIFM must have an initial capital of at least EUR 125,000.

6.2 Initial Capital and Own Funds Notions The notion of ‘initial capital’ refers to (i) ‘capital’ (i.e. all amounts, regardless of their actual designations, which, in accordance with the legal structure of the entity concerned, are regarded under national law as equity capital subscribed by the shareholders or other proprietors) in so far as it has been paid up, plus share premium amounts but excluding

12

cumulative preferential shares, and (ii) ‘reserves’ (i.e. (a) legal reserves, in so far as national law requires such a reserve; (b) reserves for own shares, in so far as national law requires such a reserve; (c) reserves provided for by the articles of association of the AIFM; and (d) any other reserves) and profits and losses brought forward as a result of the application of the final profit or loss. With respect to the ‘reserves’ Member States may permit the inclusion of interim profits before a formal decision has been taken only if (i) those profits have been verified by the AIFM’s auditors, and (ii) it is proven to the satisfaction of the AIFM’s Regulator that the amount thereof has been evaluated in accordance with the principles set out in Directive 86/635/EEC and is net of any foreseeable charge or dividend. The term ‘own funds’ on the other hand includes the notion of ‘initial capital’ and adds in particular (i) ‘revaluation reserves’; (ii) ‘value adjustments’; (iii) ‘other items’ within the meaning of article 63 of Directive 2006/48/EC; and (iv) fixed-term cumulative preferential shares and subordinated loan capital as referred to in article 64(3) of Directive 2006/48/EC. Own funds (including any additional own funds) must be invested in liquid assets or assets readily convertible to cash in the short term and cannot include speculative positions.

6.3 Additional Own Funds Requirement In addition to the initial capital, where the value of the portfolios of externally managed AIFs – all managed by the same AIFM – exceeds EUR 250 million, the AIFM must provide an additional amount of ‘own funds’ equal to 0.02% of the amount by which the value of the portfolios of the AIFM exceeds EUR 250 million without the sum of the required initial capital and the additional own funds exceeding EUR 10 million. Member States may authorise AIFMs not to provide up to 50% of the additional amount of own funds if they benefit from a guarantee of the same amount given by a credit institution or an insurance undertaking which has its registered office in a Member State, or in a third country where it is subject to prudential rules considered by the competent authorities as equivalent to those laid down in EU rules and regulations. The AIFM’s own funds may never be less than the amount equivalent to one quarter of its’ fixed overheads during the preceding year. Regulators may adjust that requirement in the event of a material change in an AIFM's business since the preceding year.

13

6.4 Additional Own Funds Requirement for Potential Professional Liability Risks

In addition to the rules on additional own funds as explained above, AIFMs must either: a) have additional own funds which are appropriate to cover potential liability risks arising

from professional negligence; or

b) hold professional indemnity insurance against liability arising from professional negligence which is appropriate to the risks covered,

to cover potential professional liability risks resulting from activities such AIFM may carry out pursuant to the AIFMD. The additional own funds requirement for liability risk is equal to 0.01% of the value of the portfolios of AIFs managed by the AIFM. The own funds requirement must be recalculated and adjusted (if need be) on a yearly basis at the end of each financial year. The Delegated Regulation provides that each Regulator may either: a) authorise an AIFM to lower such threshold to 0.008% if the AIFM can demonstrate

(based on its historical loss data and a minimum historical observation period of three years) that liability risks have been adequately captured (which provision aims at incentivising AIFMs to implement adequate operational risk management systems) by the AIFM; or

b) increase the threshold requirement if liability risks have not been adequately captured by the AIFM.

In order to adequately capture a risk, an AIFM will have to implement and keep up-to-date appropriate internal control mechanisms and risk management policies and procedures for the risks mentioned below under paragraph 6.6 (Risks to be Covered). This also includes, where appropriate considering the size and organisation of the AIFM and the nature, scale and complexity of its business, the implementation of a separate operational risk management function which ensures independent internal oversights and the implementation of the four-eye principle to ensure that failures cannot be hidden. A log/database for operational failures, losses and damage experience must be kept in order to assess the operational risk profile of the relevant AIFM. The operational risk

14

management policies and procedures and measurement systems must be subject to regular review, at least on an annual basis.

6.5 Computation Rules For computation purposes, AIFs managed by the AIFM, including AIFs for which the AIFM has delegated functions in accordance with Article 20 but excluding AIF portfolios that the AIFM is managing under delegation, are deemed to be the portfolios of the AIFM.

6.6 Risks to be Covered The potential liability risks to be covered are the risks of losses arising from the activities of the AIFM for which the AIFM has legal responsibility. This encompasses the AIFM’s directors, officers or staff or third parties for whom the AIFM has vicarious liability. There are two main types of such risks: (i) risks in relation to investors, products and business practices, and (ii) risks in relation to business disruption, system failures, and process management. It should be noted that the lists below are not exhaustive. 6.6.1 Risks relating to Investors, Products & Business Practices These risks may include in particular: a) negligent loss of documents evidencing title of assets of the AIF;

b) misrepresentations and misleading statements made to the AIF or its investors by the

AIFM or the AIFM’s directors, officers or staff or third parties for whom the AIFM has vicarious liability;

c) negligent acts, errors or omissions by the AIFM resulting in a breach of: (i) obligations according to law and regulatory framework, (ii) duty of skill and care to the AIF when carrying out its professional activities, (iii) fiduciary duties, (iv) confidentiality obligations, (v) AIF rules or instruments of incorporation, or (vi) terms of the appointment of the AIFM by the AIF (except for internally-managed AIFs);

d) failure by the AIFM’s senior management to establish, implement and maintain appropriate procedures to prevent dishonest, fraudulent or malicious acts by the AIFM’s directors, officers or staff or third parties for whom the AIFM has vicarious

15

liability (i.e. if an AIFM negligently failed to carry out sufficient due diligence on an investment which turned out to be a fraud (e.g. a pyramid scheme)) - the AIFM's liability to third parties must also be covered; and

e) improper valuation of the relevant AIF’s assets and calculation of unit/share prices. Any such risks when materialised may lead to losses arising from a negligent failure to meet a professional obligation to specific investors and clients. This is of course distinct from the risk of an investment losing value due to adverse market conditions, which does not have to be covered. 6.6.2 Risks relating to Business Disruption, System Failures, Process Management Such risks may also lead to losses and must therefore be adequately captured and covered in case of materialisation.

6.7 Professional Indemnity Insurance As an alternative to the additional own funds requirement for potential professional liability risks as mentioned in paragraph 6.3 (Additional Own Funds Requirement), the AIFM may take out and maintain at all times professional indemnity insurance complying with the following cumulative requirements (the Insurance Policy Requirements): a) the insurance policy must have an initial term of no less than one year and a notice

period for cancellation of at least 90 days;

b) the cover provided by the policy must be wide enough to include the liabilities of the AIFM’s directors, officers or staff or third parties for whom the AIFM has vicarious liability;

c) the liability risks listed in paragraph 6.6 (Risks to be Covered) must be covered;

d) any defined excess must be covered by own funds which are in addition to the own funds to be provided as set out in paragraph 6.3 (Additional Own Funds Requirement) and paragraph 6.4 (Additional Own Funds Requirement for Potential Professional Liability Risks);

16

e) the insurance must be taken out with an insurance undertaking authorised to transact professional indemnity insurance, which is subject to prudential regulation and on-going supervision. The insurance undertaking may be EU or non-EU based subject to authorisation under EU law or national law, respectively. There is a presumption of solvency for EU regulated insurance undertakings. In case of non-EU regulated insurance undertakings, the AIFM has to demonstrate to the Regulator that those requirements are fulfilled and that the insurance undertaking has sufficient financial strength with regard to its claims paying ability; and

f) the insurance must be provided by a third party entity. The coverage of the insurance per claim must be adequate for the individual AIFM’s liability risk. The Delegated Regulation states that the insurance should have the following minimum coverage: (i) 0.7% of the value of the AIFs’ portfolios for an individual claim and (ii) 0.9% of the value of the AIFs’ portfolios for claims in aggregate per year. Overall, the minimum coverage given through professional indemnity insurance may be higher than the amounts calculated as 'own funds' pursuant to paragraph 6.4 (Additional Own Funds Requirement for Potential Professional Liability Risks). This can be explained by higher uncertainty and risk in relation to the insurance coverage (e.g. higher legal and contractual uncertainty, possible insolvency of the insurer) and aims to compensate this disadvantage. The AIFM must review the insurance policy and its compliance with the above requirements (i) at least once a year, and (ii) in the event of any change which affects compliance of the policy with the requirements. 7 Delegation

7.1 Regulatory Notification An AIFM may delegate some of its management functions, even where it concerns portfolio and risk management, under the following conditions: a) the contemplated delegation has to be notified to the Regulator prior to the delegation

arrangement becoming effective; and

17

b) the AIFM does not become a ‘letter-box entity’ (as explained in paragraph 7.3 (Letter-

box Entity Issue) as a consequence of the delegation.

7.1.1 General Principles for Delegation If there is to be a delegation of functions, the following conditions must be met:

a) objective reasons: the AIFM must be able to justify its entire delegation structure on

the basis of objective reasons. To comply with this obligation the AIFM should be able to demonstrate that the delegation is done for the purpose of the more efficient conduct of the AIFM’s management of the AIF. Objective reasons for delegating tasks include, but are not limited to: (i) optimising of business functions and processes, (ii) cost saving, (iii) expertise of the delegate, and (iv) access of the delegate to global trading capabilities;

b) sufficient resources and experience and sufficiently good repute of the delegate: the

AIFM has to evaluate in this regard whether:

(i) the delegate has sufficient resources to perform the delegated tasks by verifying whether the delegate employs sufficient personnel with the skill, knowledge and expertise necessary for the discharge of the tasks delegated to it and has the appropriate organisational structure for the delegated tasks;

(ii) the persons who effectively conduct the business of the delegate are:

− sufficiently experienced; and

− of sufficiently good repute (where the delegate is regulated in respect of its

professional services within the EU, the AIFM may presume that this ‘sufficiently good repute’ factor is satisfied);

c) the delegation must not prevent the effectiveness of supervision of the AIFM: a

delegation would prevent the effective supervision of the AIFM under certain circumstances, e.g. if the AIFM, its auditors and the relevant competent authorities do not have effective access to data related to the delegated functions, as well as to the business premises of the delegate or if the delegate does not cooperate with the competent authorities of the AIFM in connection with the delegated functions;

18

d) the delegation must not prevent the AIFM from acting, or the AIF from being managed,

in the best interests of its investors: a delegation would prevent the AIFM from acting, or the AIF from being managed, in the best interests of its investors where the interests of the delegate may conflict with those of the AIFM or the investors of the AIF unless the potential conflicts of interest are properly identified, managed and monitored;

e) capability of the delegate and monitoring of the delegate: the AIFM must be able to

demonstrate that:

(i) the delegate is qualified and capable of undertaking the functions in question and was selected with all due care. In any event, even if the delegate is duly qualified:

− the delegation should not result in the delegation of ‘senior management’s sole

responsibility’ i.e. senior management cannot exclude its liability for the delegated tasks and should ensure that the delegated tasks continue to meet the performance and quality standards that would apply if the tasks were carried out by the AIFM itself;

− the obligations of the AIFM towards the AIF and its investors under the AIFMD

should not be altered due to the delegation. For instance, the delegation should not undermine the condition of ‘sufficiently good repute and experience’ of senior management; and

− the conditions with which the AIFM must comply in order to be authorised and

remain so under the AIFMD, should not be undermined;

(ii) the AIFM is in a position to monitor effectively at any time the delegated activity, to give at any time further instructions to the delegate and to withdraw the delegation with immediate effect when this is in the interest of investors. In particular, the AIFM should ensure that:

19

− the delegate carries out the delegated functions effectively and in compliance with applicable laws and regulatory requirements. This is done by establishing methods for reviewing the services provided by each delegate on an on-going basis. The AIFM should take appropriate action if it appears that the delegate is not carrying out the functions effectively or not in compliance with applicable laws and regulatory requirements;

− the AIFM retains the necessary expertise and resources to supervise the

delegated tasks effectively and manage the risks associated with the delegation. The AIFM should also ensure that the delegate properly supervises the carrying out of the delegated functions it received and adequately manages the risks associated with the delegation;

− continuity and quality of the delegated tasks are maintained also in case of the

termination of a delegation either by transferring the delegated tasks to another third party or by incorporating it into the AIFM; and

− the respective rights and obligations of the AIFM and the delegate are clearly

allocated and set out in a written agreement. In particular, the AIFM must contractually ensure that the delegate grants the AIFM the right of information, inspection, admittance and access as well as instruction and monitoring. The AIFM should be able, if necessary, to terminate the delegation through the provision of flexible termination rights. The agreement should make sure that sub-delegation can take place only with the AIFM’s prior written specific consent. A ‘general consent’ given in advance by the AIFM to any sub- delegation would be considered as insufficient.

7.1.2 Conditions to the Delegation of Portfolio and/or Risk Management Functions Where the delegation concerns portfolio management or risk management, the following additional conditions must be met: a) the delegation must be in accordance with the investment policy of the AIF. The

delegate should be instructed by the AIFM how to implement the investment policy and the AIFM should monitor whether the delegate complies with it on an on-going basis;

20

b) such delegation must be conferred only on undertakings which are authorised or registered for the purpose of asset management and subject to supervision3 or, where that condition cannot be met, only subject to the prior approval of the Regulator; and

c) if the delegation is conferred on a third-country undertaking, a cooperation

agreement between the relevant AIFM’s Regulator and the delegate’s Regulator must be ensured.

No delegation of portfolio or risk management may be conferred on (i) the depositary or a delegate of the depositary, or (ii) any other entity whose interests may conflict with those of the AIFM or the investors of the AIF, unless such entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from its other potentially conflicting tasks and the potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF. The portfolio or risk management tasks should be considered as functionally and hierarchically separated from other potentially conflicting tasks where the following conditions are satisfied: a) those engaged in portfolio management tasks are not engaged in the performance of

potentially conflicting tasks, such as controlling tasks; b) those engaged in risk management tasks are not engaged in the performance of

potentially conflicting tasks, such as operating tasks; c) those engaged in risk management tasks are not supervised by those responsible for

the performance of the operating tasks; and d) the separation is ensured up to the governing body of the delegate/sub-delegate. The criteria whether potential conflicts are properly identified, managed, monitored and disclosed to the investors of the AIF are the following: 3 i.e. (i) management companies authorised under the UCITS Directive, (ii) investment firms authorised

under MiFID to perform portfolio management, (iii) credit institutions authorised under Directive

2006/48/EC having the authorisation to perform portfolio management under MiFID, and (iv) externally-

appointed AIFMs authorised under the AIFMD.

21

a) the delegate/sub-delegate should take all reasonable steps to identify, manage and monitor conflicts of interest that may arise between the delegate/sub-delegate and the AIFM or the investors of the AIF; and

b) the delegate/sub-delegate should disclose potential conflicts of interest as well as the

procedures and measures to be adopted by it in order to manage such conflicts to the AIFM, which should disclose them to the investors of the relevant AIF.

7.2 Sub-delegation The conditions set-out in paragraph 7.1 (Regulatory Notification) apply mutatis mutandis where the delegate sub-delegates any of its functions to a sub-delegate. The AIFM will have to demonstrate its consent to each sub-delegation in writing and prior to the sub-delegation. A ‘general consent’ given in advance by the AIFM to any sub-delegation does not suffice.

7.3 Letter-box Entity considerations An AIFM would become a ‘letter-box entity’ and could no longer be considered to be the manager of an AIF if: a) the AIFM no longer retains the necessary expertise and resources to supervise

the delegated tasks effectively and manage the risks associated with the delegation. This may be the case where the AIFM only retains few resources to supervise the delegated tasks in proportion to the extent to which it has delegated tasks and these resources are not sufficient for an effective supervision of the delegated tasks;

b) the AIFM no longer has the power to:

(i) take decisions in key areas which fall under the responsibility of the senior management; or

22

(ii) perform senior management functions. Senior management functions include, inter alia (i) the implementation of and compliance with the relevant AIF’s general investment policy and investment strategies, (ii) ensuring that valuation procedures in accordance with Article 19 are in place, (iii) ensuring that the AIFM has a permanent and effective compliance function, and (iv) approving and periodically reviewing risk management policies and processes.

c) the AIFM loses its contractual rights to inquire, inspect, have access or give

instructions to its delegates or the exercise of such rights becomes impossible in practice; or

d) the AIFM delegates the performance of investment management functions to an extent

that exceeds by a substantial margin the investment management functions performed by the AIFM itself. When assessing the extent of delegation, competent authorities must assess the entire delegation structure taking into account not only the assets managed under delegation but also the following qualitative criteria:

(i) the types of assets the AIF or the AIFM acting on behalf of the AIF is invested in

and the importance of the assets managed under delegation for the risk and return profile of the AIF;

(ii) the importance of the assets under delegation for the achievement of the

investment goals of the AIF; (iii) the geographical and sectoral spread of the AIF's investments,

(iv) the risk profile of the AIF;

(v) the type of investment strategies pursued by the AIF or the AIFM acting on behalf

of the AIF;

(vi) the types of tasks delegated in relation to those retained; and

(vii) the configuration of delegates and their sub-delegates, their geographical sphere of operation and their corporate structure, including whether the delegation is conferred on an entity belonging to the same corporate group as the AIFM.

23

To ensure a consistent assessment of delegation structures across the Member States, ESMA has been given the right to issue guidelines. The Delegated Regulation states that the European Commission will monitor, in the light of market developments, the application of these letter box provisions. It will review the situation after two years and, if necessary, further specify the conditions under which an AIFM will be deemed to have delegated its functions to the extent that it becomes a letter box entity. 8 Operational and Organisational Requirements

8.1 Operational Requirements & Policies AIFMs must use appropriate human and technical resources at all times to ensure the proper management of the AIFs, including: a) sound administrative and accounting principles; and b) adequate internal control mechanisms. These administrative organisation and internal control principles (AO/IC) should be documented and address, inter alia, the following matters that are broadly similar to MiFID and the UCITS Directive: a) fair treatment of investors of the AIF to ensure that no investor obtains preferential

treatment that has an overall material disadvantage to other investors; b) best execution; c) market integrity;

d) personal transactions;

e) conflicts of interests;

f) liquidity management except to the extent that the AIF is closed-ended and does not

employ leverage;

24

g) strategy for exercise of voting rights;

h) record of operational failures;

i) recording of portfolio and subscription and redemption transactions to ensure that

these are notified, in a durable medium, to investors;

j) permanent compliance and internal audit function; and

k) due diligence to ensure that investment decisions on behalf of the AIF are carried out in compliance with the objectives, investment strategy and, where applicable, risk limits of the AIF.

Below we have summarised some of these elements in more detail. 8.1.1 Rules on Personal Transactions The AIFM must implement adequate arrangements in relation to personal transactions by any person who is involved in activities that may give rise to a conflict of interest or who has access to inside information or other confidential information relating to an AIF or transaction with or for an AIF. These must prevent such persons from entering into certain personal transactions, advising or inducing any other person to enter into such personal transactions or disclosing any such information or opinion to any other person, as a consequence whereof such other person would enter into such personal transactions or would advise or induce another person to do so. 8.1.2 Conflict of Interest Management The AIFM must implement a procedure in order to identify, prevent, manage, monitor and disclose conflicts of interest that arise in the course of managing one or more AIF between (i) the AIFM, an AIF and its investors (ii) several AIFs, and (iii) AIF/investors on the one hand and another client of the AIFM on the other, (iv) AIF/investors, and (v) the AIFM’s clients. In line with the approach considered in the UCITS Directive and MiFID, the AIFM should adopt procedures and measures to ensure that relevant persons engaged in different business activities that could involve conflicts of interest carry out these activities on an appropriately independent level. This level should be in proportion to the size and organisation of the AIFM and the nature, scale and complexity of its business. Where the

25

AIFM is a member of a group, the procedures and measures should also take into account any circumstances of which the AIFM is or should be aware which may give rise to a conflict of interest resulting from the structure and business activities of other members of the group. An AIFM that manages an open-ended AIF must identify, manage and monitor conflicts of interest arising between investors wishing to redeem their investments and investors wishing to maintain their investment in the AIF. Where the organisational or administrative arrangements made by the AIFM are not sufficient to ensure that risks of damage to the interests of the AIF or investors in the AIF are prevented, the senior management or other competent internal body of the AIFM must be promptly informed in order to take any necessary decision or action. 8.1.3 Liquidity Management The AIFM needs to adopt appropriate liquidity management policies and procedures for each AIF managed that is not an unleveraged closed-ended AIF. These should enable the AIFM to monitor the liquidity risk of each AIF and comply with their underlying obligations to investors, counterparties, creditors and other parties and should take into account the investment strategy, the liquidity profile and the redemption policy of each AIF. Liquidity policies are required only for leveraged open-ended funds. The AIFM must, where appropriate and considering the nature, scale and complexity of each AIF it manages, implement and maintain adequate limits for the liquidity or illiquidity of the AIF consistent with its underlying obligations and redemption policy and regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable the AIFM to assess the liquidity risk of each AIF under its management. The AIFM must review the liquidity management policies and procedures on at least an annual basis and update them for any changes or new arrangements. 8.1.4 Strategy for Exercise of Voting Rights The AIFM should develop adequate and effective strategies for determining when and how any voting rights held in the managed portfolios are to be exercised to the exclusive benefit of the AIF concerned and its investors. Although strategies for the exercise of voting rights should be developed, this does not exclude the possibility of not exercising voting rights if this is to the exclusive benefit of the AIF and its investors.

26

8.1.5 Record of Operational Failures Any operational failures and loss experience must be recorded and an historical loss database must be set up by the AIFM. 8.1.6 Recording of Portfolio Transactions The AIFM should produce a record of information without delay for each portfolio transaction relating to an AIF which record is sufficient to reconstruct the details of the order and the executed transaction or of the agreement. With regard to portfolio transactions by the AIF outside an execution venue (e.g. in case of private equity AIFs, where no 'order' will be placed to purchase partnership interests but rather a sale and purchase agreement will be negotiated), the record must include: a) the name or other designation of the AIF; b) the legal and other documentation that forms the basis of the portfolio transaction,

including in particular the agreement as executed; and c) the price. With regard to portfolio transactions by the AIF on an execution venue, the record must include the name or other designation of the AIF, the asset, the quantity (where relevant), the type of the order or transaction, the price, the date and exact time of the transmission of the order (for orders), the name of the person transmitting the order or executing the transaction (where applicable), the reasons for the revocation of an order (where applicable) and for executed transactions the counterparty and execution venue identification. In addition, the AIFM should ensure that the required records referred to above are retained for a period of at least five years, unless the relevant national law provides for a longer retention period.

27

8.1.7 Permanent Compliance Function and Internal Audit Function The AIFM must establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the AIFM to comply with its obligations and the associated risks and put in place adequate measures and procedures designed to minimise such risk and to enable the competent authorities to exercise their powers effectively. The AIFM will, in addition, establish and maintain a permanent and effective compliance function which operates independently and monitors the adequacy and effectiveness of such policies and procedures and the actions taken to address any deficiencies in the AIFM’s compliance with its obligations. The AIFM must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of collective portfolio management activities undertaken in the course of that business, establish and maintain an internal audit function separate and independent from the other functions and activities of the AIFM.

8.2 Organisational Requirements In addition the AIFMD introduces the following key organisational requirements: 8.2.1 Risk Management The AIFM must establish and maintain a permanent risk management function, which may be performed by a third party. This risk management function is to be functionally and hierarchically separate from the functions of risk management from the operating units, including the portfolio management. In order to ensure such separation: a) the persons engaged in the performance of the risk management function must not be

supervised by those responsible for the performance of the operating units nor engaged in the performance of activities within the operating units;

b) the persons engaged in the performance of the risk management function are to be

compensated in accordance with the achievement of the objectives linked to that function, independently of the performance of the operating units; and

28

c) the remuneration of senior officers in the risk management function should be directly overseen by the remuneration committee, if established.

The risk management function must have the necessary authority and access to all relevant information to fulfill its tasks. If, in light of the size and business of the AIFM, a full functional and/or hierarchical separation of the risk management function is not feasible, the AIFM should take such measures as are necessary to mitigate any adverse consequence thereof. The AIFM must implement adequate risk management systems in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF’s investment strategy and to which each AIF is or can be exposed (including appropriate stress testing procedures). The governing body of the AIFM and, where it exists, the supervisory function, must review the risk management function at least once a year. The AIFM must assess, monitor and periodically, at least once a year, review, inter alia, the adequacy and effectiveness of the risk management policy, the degree of compliance by the AIFM with the risk management policy and the adequacy and effectiveness of measures taken to address any deficiencies in the performance of the risk management processes. The AIFM must update the risk management systems on the basis of the outcome of such reviews and notify the competent authority of its home Member State of any material changes to the risk management policy. Before designing risk management systems, the AIF should first of all draw up a risk profile for the AIFs under management that corresponds to the size, portfolio structure and investment strategies and objectives of the AIFs. Secondly, as part of risk management, the AIFM should implement an appropriate, documented and regularly updated due diligence process when investing on behalf of each AIF. Lastly, the AIFM should review the control and safeguard arrangements for electronic data processing that are in place. Within the risk management framework, the AIFM should make use of its historical internal loss data and, where appropriate, of external data, scenario analysis and factors reflecting the business environment and internal control systems. The AIFM should also establish and implement quantitative or qualitative risk limits, or both, for each AIF it manages, taking into account all relevant risks and covering market risks, credit risks, liquidity risks, counterparty risks and operational risks.

29

8.2.2 Valuation The AIFM must ensure that, for each AIF it manages, appropriate and consistent written policies and procedures are established for the proper and independent valuation of the assets of the AIFs and that the net asset value of the AIFs’ assets per share or unit is calculated and disclosed to investors. The valuation policies and procedures must set out the obligations, roles and responsibilities of all parties involved in the valuation process and address, inter alia, the competence of the personnel involved in the valuation of assets, the escalation channels for resolving differences or other problems in the valuation of assets and the appropriate frequency for valuing assets. The AIFM must not invest in a particular type of asset for the first time unless an appropriate valuation methodology has been identified for that specific type of asset. The valuation may either be performed by the AIFM or by an independent external valuer. Such external valuer , in general, should not be the depositary appointed for the relevant AIF (unless it, inter alia, has functionally and hierarchically separated its depositary functions from its tasks as external valuer). Where an external valuer is appointed, the valuation policies and procedures must set out a process for the exchange of information between the AIFM and the external valuer to ensure that all necessary information required for the purpose of performing the valuation task is provided. The AIFM must conduct an initial and periodic due diligence on such external valuer. External valuers must provide, upon request, professional written guarantees to demonstrate their ability to perform the valuation function. If the AIFM carries out the valuation itself, it must ensure the (functional) independence of the portfolio management and valuation function. Also, the AIFM must put in place measures to mitigate conflicts of interests in connection with in-house valuations. Member States may require verification of in-house valuations by an external valuer or auditor. Valuations must be performed in accordance with the applicable law of the country where the AIFs have their registered office or in accordance with the rules or constitutional documents governing the AIFs. Valuations must be performed at least once a year. In addition, a valuation must be established:

30

a) in respect of financial instruments held by open-ended funds, upon each issuance or subscription or redemption or cancellation of units or shares;

b) in respect of other assets held by open-ended funds, every time there is evidence that

the last determined value is no longer fair or proper; and c) in respect of closed-ended funds, in case of an increase or decrease of capital. The valuation policies and procedures will be reviewed at least annually and the AIFM should at all times be able to demonstrate that the portfolio of AIFs it manages is properly valued. 8.2.3 Remuneration Policy The AIFM must have remuneration policies and practices that promote sound and effective risk management for those categories of staff whose professional activities have a material impact on the risk profiles of AIFs they manage. These categories of staff should at least include senior management, risk takers, control functions and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. The remuneration of those engaged in the performance of the risk management function should reflect the achievement of the objectives linked to the risk management function, independently of the performance of the business areas in which they are engaged. The AIFM must set up remuneration policies and practices in accordance with the principles listed in Annex II to the AIFMD setting forth, inter alia, that: a) guaranteed variable remuneration is exceptional and may only occur in the context of

hiring new staff and must be limited to the first year; b) subject to the legal structure of the AIF, a substantial portion and in any event 50% of

any variable remuneration consists of units or shares of the AIF concerned or equivalent ownership interests unless the management of the AIF accounts for less than 50% of the total portfolio managed by the AIFM, in which case the minimum of 50% does not apply; and

31

c) a substantial portion, and in any event at least 40%, of the variable remuneration component is deferred over a period which is appropriate in view of the life cycle and redemption policy of the AIF concerned and is correctly aligned with the nature of the risks of the AIF in question; this period should be a least three to five years; and in cases where the variable remuneration component are of a particularly high amount, at least 60% of the amount is deferred.

Compliance with these principles may take into account the appropriateness of the principles considering the size, internal organisation and the nature, scope and complexity of the AIFM. Carried interest is subject to the remuneration requirements but under th remuneration guidelines proposed by ESMA, carried interest that is payable after investors have received their capital contributions plus a hurdle (if any)and that is subject to a clawback would meet many of the requirements, including (b) and (c) above. 8.2.4 Remuneration Committee In the event the AIFM qualifies as significant in terms of its size or the size of the AIFs it manages, its internal organisation and the nature, the scope and the complexity of its activities, the AIFM will need to establish a remuneration committee. ESMA has clarified in its Remuneration Guidelines that, inter alia, AIFM with €1,25 billion or less in assets under management and 50 or fewer employees are deemed not to be significant. The remuneration committee is responsible for the preparation of decisions regarding remuneration, including those which have implications for the risk and risk management of the AIFM or the AIFs concerned and which are to be taken by the management body in its supervisory function. The members of the committee must be members of the management body who do not perform executive functions in the AIFM. 8.2.5 Depositary The AIFM must ensure that a single depositary is appointed for each AIF it manages. This depositary must operate pursuant to a written contract. A depositary for an EU AIF must be one of the following:

32

a) an EU credit institution; b) an EU investment firm (MiFID) subject to the same capital requirements as credit

institutions; c) or d) a prudentially regulated and supervised institution of a type that is eligible to be a

depositary according to the UCITS Directive. In respect of a non-EU AIF, the depositary can be a credit institution or investment firm of the same nature located in a third country, provided that it is subject to effective prudential regulation and supervision to the same effect as that under EU law. In order to determine whether the prudential regulation and supervision in the third country has the same effect as that provided for in the EU, the following elements will be taken into account: a) whether the depositary is subject to authorisation and on-going supervision by a

competent public authority; b) the criteria for authorisation as a depositary laid down by the law of the third country; c) the capital requirements imposed on the depositary in the third country;

d) the operating conditions applicable to the depositary in the third country; e) the requirements regarding the performance of the specific duties as AIF depositary

established in the law of the third country; and f) the enforcement actions provided for by the law of the third country in the event of a

breach by the depositary of these requirements and conditions. There is a lighter depositary regime for closed-ended funds with long lock-ins (at least five years) and with assets that generally are not required to be held in custody or which generally invest in issuers or non-listed companies in order to potentially acquire control over such companies. In such circumstances, Member States may allow that the depositary is an entity which carries out depositary functions as part of its professional or business activities and is subject to mandatory professional registration recognized by law or to legal or regulatory provisions or rules of professional conduct and can furnish

33

sufficient financial and professional guarantees to be able to effectively perform the relevant depositary functions and meet the commitments inherent to those functions. A depositary of an EU AIF must be established in the AIF’s home country. The depositary of a non- EU AIF must generally be established in the home Member State of the AIFM managing the AIF or its Member State of reference or, subject to additional conditions, in the country where the AIF is established. Delegation or sub-delegation of depositary functions may be established, but must comply with the detailed safeguarding provisions of the AIFMD. A depositary should, for instance, implement and apply an appropriate documented due diligence procedure for the selection and on-going monitoring of the delegate and must take measures which are in the best interest of the AIF and its investors where the delegate no longer complies with the requirements. Where a depositary has delegated its custody functions to a third party, the monitoring of the third party’s compliance with its obligations should ensure that the financial instruments belonging to its clients are protected from any insolvency of that third party. The depositary has several functions and tasks, including: a) depending on the type of assets, the depositary has certain safekeeping tasks in

relation to the AIF’s assets. Where the assets of the AIF can be held in custody, the depositary must hold all financial instruments that can be registered in an account opened in the depositary’s books within segregated accounts and must hold all physical financial instruments. Where the assets of the AIF cannot be held in custody, the depositary must verify the ownership of such assets and must maintain a record of those assets. Furthermore, the depositary must ensure that there are procedures in place so that assets, for which it is satisfied that the AIF or the AIFM acting on behalf of the AIF holds the ownership, cannot be assigned, transferred, exchanged or delivered without the depositary having been informed of such transaction. Except for fund of fund and master feeder structures, the depositary’s safekeeping duties will apply on a look-through basis to underlying assets held by financial and, as the case may be, or legal structures established or controlled (directly or indirectly) by the AIF or the AIFM acting on behalf of the AIF;

34

b) the depositary has certain oversight functions in order to ensure that the AIF acts in accordance with applicable national law, AIF rules and instruments of incorporation. The depositary must, for instance, ensure that the issue and redemption of shares or units or valuations are made in compliance with the applicable law and rules governing the AIF. At the time of its appointment, the depositary must assess the risks associated with the nature, scale and complexity of the AIF’s strategy and the AIFM’s organisation in order to devise oversight procedures which are appropriate to the AIF and the assets in which it invests and which are then implemented and applied. The depositary must ensure that appropriate procedures are set up and implemented to reconcile subscription and redemption orders, to verify that the AIF and AIFM comply with applicable laws and regulations and to control the timely remittance of considerations related to the operations of the assets of the AIF or AIFM. The depositary must also verify the AIF’s valuation policies and procedures on an on- going basis;

c) the depositary must monitor the AIF’s cash flows. In particular, the depositary is to

ensure the receipt of funds from investors on one or more cash accounts. The depositary should, therefore, have access to all information related to each such cash account opened with a third party. The depositary must be informed, upon its appointment, of all existing cash accounts opened in the name of or on behalf of the AIF and should be informed of any new cash accounts opened by or on behalf of the AIF. The depositary must implement effective and proper procedures to reconcile all cash flow movements and check the consistency of its own records of cash positions with those of the AIFM;

d) the depositary should at all times ensure that the assets of its clients are clearly

identified as belonging to these clients. The depositary should therefore ensure that, where cash accounts are opened in the name of the depositary acting on behalf of the AIF, none of its own cash may be booked on such accounts.

The AIFMD stipulates that the depositary will generally be liable to the AIF or its investors on a no fault basis for the loss of financial instruments that are held in custody, with limited exculpation possibilities for the depositary. Such a loss of financial instruments will be deemed to have taken place when: a) a stated right of ownership of the AIF is demonstrated not to be valid because it either

ceased to exist or never existed;

35

b) the AIF has been definitively deprived of its rights of ownership over the financial

instrument, unless this instrument is substituted by or converted into another financial instrument or instruments; or

c) the AIF is definitively unable to directly or indirectly dispose of the financial instrument. Once a loss is ascertained, it must be notified immediately to investors in a durable medium. In all other circumstances the depositary will be liable for losses as a result of its negligent or intentional failure to properly perform its obligations. No such liability will be triggered if the depositary can prove that all the following conditions are met: a) the event which led to the loss is not the result of any act or omission of the depositary

(e.g. natural events beyond human control or the adoption of any law, regulation or decision by any governmental body which impacts the financial instruments held in custody);

b) the depositary could not have reasonably prevented the occurrence of the event which

led to the loss despite adopting all precautions incumbent on a diligent depositary as reflected in common industry practice (e.g. war, riots or other major upheavals); and

c) despite rigorous and comprehensive due diligence, the depositary could not have

prevented the loss. 9 Transparency requirements

9.1 Annual Reporting Annual reports must be prepared at least once a year and within six months following the end of the financial year, for each EU AIF managed and each AIF marketed in the EU by the AIFM. The annual reports will be provided to investors upon request as well as to the competent authorities of the home Member State of the AIFM and the AIF (if different). The annual report must include: a) an audited balance sheet or statement of assets and liabilities containing at least:

36

(i) the assets, comprising resources controlled by the AIF as a result of past events

and from which future economic benefits are expected to flow to the AIF;

(ii) the liabilities, comprising present obligations of the AIF arising from past events, the settlement of which is expected to result in an outflow from the AIF of resources embodying economic benefits; and

(iii) the net assets, representing the residual interest in the assets of the AIF

after deducting all its liabilities; b) an audited income and expenditure account containing at least:

(i) income, representing any increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in net assets other than those relating to contributions from investors;

(ii) expenses, representing decreases in economic benefits during the accounting

period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in net assets, other than those relating to distributions to investors; and

(iii) net income or expenditure, representing the excess of income over expenditure

or expenditure over income, as applicable; c) report on the AIF's activities over the year containing at least an overview of the AIF’s

portfolio, its investment activities and the performance of the AIF during the relevant year;

d) any material changes, during the financial year covered, in respect of the

information required to be disclosed and a change will be deemed material if there is a substantial likelihood that a reasonable investor, becoming aware of such information, would reconsider its investment in the AIF;

e) the total remuneration for the financial year split into fixed and variable remuneration

paid by the AIFM to its staff, together with the following information:

37

(i) the total remuneration of the entire staff and the number of beneficiaries;

(ii) the total remuneration of the staff who are fully or partly involved in the activities

of the AIF and the number of beneficiaries;

(iii) the proportion of the total remuneration of the staff attributable to the AIF and the number of beneficiaries; and

(iv) where relevant, details of carried interest paid by the AIF; and

f) the aggregate amount of remuneration broken down by senior management and

members of staff whose actions have a material impact on the risk profile of the AIF. AIFs subject to Directive 2004/109/EC (the Transparency Directive) must either include these details in their public annual report or in a separate report to be made available to investors upon request. The accounting information provided in the annual accounts should comply with the accounting standards laid down in the AIF rules or instruments of incorporation and with the relevant accounting standards of the home Member State of the AIF or those of the relevant third country in the case of a non-EU AIF. All information provided should be presented in a manner that provides materially relevant, reliable, comparable and clear information. If an AIFM is marketing a non-EU AIF, the Member States may allow compliance with the auditing standards in force in the country where the AIF has its registered office instead of the standards applicable in the country of the AIFM. The accounting information contained in the annual reports should be audited by professional auditors and the auditor’s report must be included in the annual report.

9.2 Disclosure to Investors For each EU AIF it manages and for each AIF it markets in the EU, an AIFM is required to disclose certain information to investors prior to their investment in such AIF. Such information relates, inter alia, to the AIF’s investment strategy and objectives, techniques it may employ and associated risks, the use of leverage and collateral and the procedures for issue and sale of shares/units. In addition the AIFM must clearly disclose the roles and

38

functions carried out by any third parties in respect of the AIF. To this end disclosure is required of the identity of service providers and a description of their duties and the investors’ rights as well as a description of delegated functions and potential conflicts of interests in that respect. Further aspects that need to be disclosed are the AIF’s valuation procedure and pricing methodology, a description of liquidity risk management and redemption arrangements, a description of all fees, charges and expenses and maximum amounts thereof which are directly or indirectly borne by the investors, the policy on ensuring fair treatment of investors and a description of any preferential treatment of investors. Finally, an AIF is required to furnish its investors on request with the latest annual report and disclose at least annually the AIF's net asset value or market price of its shares/units and, if available, the AIF’s historical performance. Any material changes of any such information should also be communicated to the investors.

9.3 Reporting to Regulator The AIFM must, on behalf of each EU AIF managed and each AIF marketed in the EU by it, regularly report to the competent authorities of its home Member State on the main instruments in which it is trading, the markets of which it is a member or where it actively trades and the diversification of the AIF’s portfolio. In addition the AIFM is required to disclose certain information to such authorities. Such information relates to the percentage of the AIF's assets which are subject to special arrangements arising from their illiquid nature, any new liquidity management arrangements, the AIF's risk management systems, the AIF’s current risk profile, information on the AIF's main categories of assets and the results of any stress tests. The following AIFMs must report such information with respect to the following AIFs on the following basis (as soon as possible and not later than one month after the end of the respective period):

39

Respective AIFM Reporting frequency4 Information to be provided with respect to the following AIF

AIFMs managing one or more unleveraged AIFs that invest in non-listed companies and issuers in order to acquire control

Annually Each unleveraged AIF which invests in non-listed companies and issuers in order to acquire control

AIFMs managing AIFs with AuM above the thresholds mentioned in paragraph 3.3 (Exemptions), but below EUR 1 billion.

Semi-annually Each EU AIF managed and each AIF marketed in the EU

AIFMs managing AIFs with AuM above the thresholds mentioned in paragraph 3.3 (Exemptions), but below EUR 1 billion.

Quarterly Each AIF whose AuM, including any assets acquired through the use of leverage, exceed EUR 500 million.

AIFMs managing AIFs with AuM above EUR 1 billion.

Quarterly Each EU AIF managed and each AIF marketed in the EU

Upon request of the competent authorities of its home Member State, the AIFM will provide such authorities with: a) a detailed list of all AIFs managed by it; b) the annual report of each EU AIF managed and each AIF marketed in the EU by it;

and c) any additional information which is necessary for the effective monitoring of systemic

risk.

4 The competent authorities of the home Member State of the AIFM may deem it appropriate and

necessary for the exercise of its function to require all or part of the information to be reported on a more

frequent basis.

40

In exceptional circumstances ESMA may request the competent authorities of the AIFM's home Member State to impose additional reporting requirements in order to ensure the stability and integrity of the financial system, or to promote long-term sustainable growth. 10 Conclusion How to make sure you are compliant? The AIFMD and its implementing rules and regulations is a complicated set of legislation that may appear overwhelming at first. Particularly for fund managers who used to be unregulated, compliance with the AIFMD and its implementing rules and regulations means a significant change in their organisation and operating practices. Since many of the principles and operating requirements under the AIFMD are based on the requirements for managers of liquid assets existing under MiFID and the UCITS Directive, they often do not readily fit an illiquid (closed-ended) fund context. With the Delegated Regulation most fund managers can determine whether they will fall within the scope of the AIFMD and how they can best adjust their current practices to fit a regulated environment for the future. We would be most happy to assist you in making this transition.

41

If you have any further questions regarding this memo or the AIFMD in general, please contact our AIFM Task Force at AIFM-taskforce@loyensloeff.com, or: For the Netherlands:

For Luxembourg:

Mark van Dam T: +31 20 578 54 60 E: mark.van.dam@loyensloeff.com

Thibaut Partsch T: +352 46 623 02 33 E: thibaut.partsch@loyensloeff.com

Joep Ottervanger T: +31 20 578 59 79 E: joep.ottervanger@loyensloeff.com

Johan Terblanche T: +352 46 623 02 45 E: johan.terblanche@loyensloeff.com

Aleid Doodeheefver T: +31 20 578 53 40 E: aleid.doodeheefver@loyensloeff.com

Marc Meyers T: +352 46 623 03 06 E: marc.meyers@loyensloeff.com

Loyens & Loeff N.V. is an independent full service firm of civil lawyers, tax advisers and notaries, where

civil law and tax services are provided on an integrated basis. The civil lawyers and notaries on the one

hand and the tax advisers on the other hand have an equal position within the firm. This size and purpose

make Loyens & Loeff N.V. unique in the Benelux countries.

The practice is primarily focused on the business sector (national and international) and the public sector.

Loyens & Loeff N.V. is seen as a firm with extensive knowledge and experience in the area of, inter alia,

tax law, corporate law, mergers and acquisitions, stock exchange listings, privatisations, banking and

securities law, commercial real estate, employment law, administrative law, technology, media and

procedural law, EU and competition, construction law, energy law, insolvency, environmental law,

pensions law and spatial planning.

Over 1400 people work at Loyens & Loeff N.V., including over 800 civil lawyers, tax advisers and notaries.

The firm has five offices in the Benelux countries and eleven in important financial centres of the world.

Although this publication has been compiled with great care, Loyens & Loeff N.V. and all other entities,

partnerships, persons and practices trading under the name 'Loyens & Loeff', cannot accept any liability

for the consequences of making use of this issue without their cooperation. The information provided is

intended as general information and cannot be regarded as advice.

42

Third Country Conditions and Requirements The regime for non-EU AIFMs to market EU and non-EU AIFs can be summarised as follows:

Based Marketed AIFMD applicable

AIFM regime Requirements applicable to AIFM and AIF

AIFM AIF

Non- EU EU EU Yes National PPRs (present to 2018)

Provisions on transparency and major holdings and control*

Authorisation & Passport (2015)

Complete AIFMD

Non- EU EU Non-EU Yes National Regimes (present to 2015)

Authorisation (2015)

Complete AIFMD

Non- EU Non- EU EU Yes National PPRs (present to 2018)

Provisions on transparency and major holdings and control (if applicable)*

Authorisation & Passport (2015)

Complete AIFMD

Non- EU Non- EU Non-EU No None None * subject to the following additional requirements:

(1) Cooperation arrangements between the competent authorities of the AIFM home Member State and

the supervisory authorities of the AIF third country.

(2) The AIF third country must not be listed as a non-cooperative country and territory (NCCT) by the

Financial Action Task Force (FATF).

(3) OECD Model tax convention information sharing agreement between non-EU AIF third country, AIFM

home Member State and each other Member State in which the non-EU AIF is proposed to be

marketed.

(4) The local law of the manager’s jurisdiction may not prevent effective supervision.

Amsterdam Arnhem Aruba Brussels Curaçao Dubai Geneva Hong Kong London Luxembourg New York Paris Rotterdam Singapore Tokyo Zurich

www.loyensloeff.com