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Alternative Investment Fund

Managers Draft Directive

Based on December 15, 2009 version and the Gauzes report.

Content and Opportunities

January 2010

© 2010 Deloitte S.A.Alternative Investment Fund Managers Directive (“AIFMD”)2

AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6

Luxembourg’s perspective7

Deloitte’s Service Offering and Contacts8


CONTEXT OF THE AIFM DIRECTIVE

Financial Crisis

Impact on market for corporate

controlMarket

efficiency and

integrity

Systemic Risks

(Macro-prudential)

Investor protection

Micro-prudential

risks

Impact on companies controlled by AIFM

• Alternative Investment Fund Managers

(“AIFM”) are vulnerable to a wide range of

risks that directly concern investors creditors,

trading counterparties and the stability and

integrity of European financial markets.

• Currently, the activities of AIFM are regulated

at a national level which does not adequately

reflect the cross border nature of the risks.

• AIFM Directive (“AIFMD”) aims at enhancing

transparency and quality in the universe of

Alternative Investment.

• Should come into force in 2011 and is

expected to be voted by European Union

(“EU”) Parliament in July 2010.

• Transitory provision of one year

• Cover all non-UCITS structures (PE, HF, RE,

Infrastructure, commodities…)

DRAFT EU Directive on Alternative Investment Fund Managers (AIFM)


AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6




AIFM DIRECTIVE’S OBJECTIVES

! This support is based on the proposed version of the AIFMD released on 15/12/09 by the Swedish

Presidency of the Council of the European Union (aka version 3) and outline the proposal of the

Gauzès report (Parliament Reporter) that somehow differ from Presidency proposal.

Key Objectives Specific objectives

Extend regulation and oversight to all

actors and activities that embed

significant risks.

Introduce harmonized requirements at

a European level for entities engaged

in AIFM in alternative investment.

Funds domiciled within the EU can be

marketed by authorized AIFM and

benefit from AIFM Passport

Ensure that all AIFM are subject to

appropriate authorization and

registration requirements;

Provide a framework for the enhanced

monitoring of macro-prudential risks;

Improve risk management and

organizational safeguards to mitigate

micro-prudential risks;

Enhance investor protection;

Improve public accountability for

Alternative Investment Funds (“AIF”)

holding controlling stakes in

companies;

Develop the single market for AIFM.


AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6




AIFM DIRECTIVE’S SCOPE

Who is concerned

All EU AIFM which manage one or more EU AIF which can benefit

from EU passport

Partial exemptions if AIF is non-EU and/or not marketed in the EU

Several

exceptions

• AIFM managing AIF portfolios with total assets of less than €100

million

• AIFM which only manage AIF which are not leveraged and which do

not grant investors redemption rights during a period of five years

following the date of constitution of each AIF, a threshold of €500

million applies

• Supranational institutions

• National Central banks and public bodies (or others) managing

state/public pension/benefit schemes

• Special Purposes Entities (securitization)

• Intra-group exemption for AIFM in respect of AIF whose only

investors are fellow group companies of the AIFM (unless an

investor is itself an AIF)

AIF are collective investment

undertaking which are not

regulated under UCITS

directive, i.e. hedge funds,

private equity, real estate

funds, commodity funds,

infrastructure funds and

other type of institutional

funds.

Supervisory attention will be focused on the areas where risks are concentrated, which

represents 30% of hedge fund managers and 90% of EU domiciled funds.

The Gauzès report has

deleted the threshold

exemption as it currently

exists in the Swedish

Presidency proposal,

hence increasing

substantially the scope of

AIFM falling under the

Directive. The Gauzès

report underlines also

securitization vehicle

within the scope of AIFM.

No exemption under the Gauzès report


AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6




AIFM TIMELINE


AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6




AIFM IN DETAILS

Definition of investment

management services

Self-managed entity

Depositary

Delegation

Remuneration

Reporting & Leverage

Marketing/Third countries

Conditions

Agreement

AIFM


AIFM IN DETAILS-DEFINITION OF INVESTMENT MANAGEMENT

SERVICES

Investment Management

1• Portfolio management

• Risk management

Administration

2 • Legal and fund management accounting services

• Customer inquiries

• Valuation and pricing (including tax returns)

• Regulatory compliance monitoring

• Maintenance of unit-/shareholder register

• Distribution of income

• Unit/shares issues and redemptions

• Contract settlements (including certificate dispatch)

• Record keeping

Marketing

3 • Direct or indirect offering or placement at the initiative of the AIFM or on behalf on

the AIFM, of shares or unit in an AIF it manages to or with investors domiciled in the

EU

AIFMD gives a list of tasks an AIFM can perform/ delegate


Conditions

1

• AIF should be managed internally either by governing body (Board) or by other

internal resource

• No external AIFM has been designated

Consequences

2 • Therefore, the AIF is also the AIFM and should comply with AIFM’s requirements

for AIFM

• However, an AIF internally managed can decide to appoint an external AIFM

AIFMD recognizes the case where the AIF is internally managed (art. 5a)

AIFM IN DETAILS-SELF-MANAGED ENTITY

! An AIFM which is an internally managed AIF cannot

be the external manager of another AIF


Depository tasks

1

Type of depositories

2

AIFM IN DETAILS-DEPOSITARY

Loss on assets

3

Other information

4

AIFM has to ensure that following depositary tasks are fulfilled (art. 17)

• All payments to be done at subscription/redemption are correctly booked

• Safe-keeping of AIF’s financial instruments and other securities (“assets”)

• Check on none re-use of financial instruments without AIFM consent (rehypothecation issue)

• Issue, redemption, cancellation and NAV of shares/are done according to national laws and AIF

instruments of incorporation

Depositary could be either:

• A credit institution or an investment firm (as defined under MIFID Directive) established within the EU or

a supervised legal person with guarantees and prudential regulation

• Custody can only be delegate if objective reasons can be demonstrated

• Sub-depositary from third country can be appointed for safe-keeping tasks if:

Supervised in its jurisdiction;

It has structures and expertise that are adequate and proportional to the nature, scale and

complexity of the AIF;

It is subject to periodic audit to assess assets possession;

It segregates assets from its own ones;

It cannot use AIF’s assets without its consent; and

Depositary shall perform due diligences and review on an ongoing basis

In case of loss on assets, depositary has to return financial instruments of the

identical type or corresponding cash amount without undue delay

• Delegation to sub-depositary has no impact

• Depositary, may on a contractual basis, discharge from its liability if it can

prove it has fulfilled its obligations (selection and review of sub-

depositary) and there’s objective reasons for such discharge

- This would further be detailed by Level 2 regulation

• Depositary is liable to AIFM, AIF and AIF investors for any other loss following its failure to perform its

obligation defined in the AIFMD

• Depositary shall be established in the same EU country as the AIF

Not in the Gauzès

report

The Gauzès report

seeks to align the

responsibilities with

those of the UCITS

directive


Conditions

AIFM is the legal person who manages AIF and is responsible for compliance with AIFMD

AIFM IN DETAILS-DELEGATION

Has to obtain regulatory approval prior notify to authorities if wants to delegate and

has to make due diligences on an ongoing basis (art. 18)

• third party must be experienced and of good repute;

• delegation should not conflict with investors best interests

• AIFM must be able to demonstrate he performed due

diligences and that he can monitor, give instruction and

withdraw delegation at any time

• delegation of portfolio and/or risk management:

delegate has to be authorised or registered for this purpose and subject to

supervision

if in a third country, need for effective cooperation between supervisory

authorities

No delegation of portfolio management or risk management to the depositary and no

delegation leading to a conflict of interests (unless they can be managed, will be

clarified in Level 2 regulation).

Sub-delegation is possible as long as above rules are fulfilled. However and in any

case, AIFM keeps ultimate responsibility

Moreover, delegation should not result in a simple letter-box activity of the AIFM

( needs for substance, cfr UCITS regulations)

The Gauzès report:

• Only delegate to AIFM

(i.e.: domiciled in EU)

• Introduces liquidity

management


Conditions

• The Gauzès report and the Swedish Presidency report state the requirement of remuneration

policies and practices regarding remuneration policies

• Adoption of the G20 recommendations on pay for banks & financials institutions

• Swedish Presidency report considers these should be consistent

with effective risk management and do not encourage non

appropriate risk-taking:

‒ Remuneration policy should be in line with nature, scale and

complexity of AIFM activities and AIFs managed

‒ At least 40% of the variable pay should be deferred over

the life-cycle and redemption period of the fund

‒ Remuneration should also be disclosed in the fund’s

annual reports

AIFM IN DETAILS-REMUNERATION


Conditions

• AIFM shall report/disclose periodically on the following (inter alia):

‒ Any contractual discharge applicable with the Depositary

‒ Percentage of illiquid assets

‒ Strategies, assets types, pricing methodology, fees policies,

‒ Organisational, risk and liquidity management arrangements

‒ Degree of leverage employed (on quarterly basis to investors)

‒ Controlling interest acquired in companies > 50% reportable

‒ Strategies, assets types, pricing methodology, fees policies,

redemption/subscription rules, AIF historical performance,

liquidity risk management description to investors

• Audited annual report for each AIF available within four months after financial year end

• Home MS should assess risks and impose limits on level of leverage employed by an AIFM

AIFMD recognizes the case where the AIF is internally managed (art. 5a)

!• The Gauzès report has requested that fund promoters should define and limit the amount of

leverage undertaken by an AIFM. These limits must be disclosed to the fund’s national regulator.

• Level 2 regulation expected to define/clarify several issues with leverage:

‒ Occasional excess of the threshold during the year

‒ What is leverage used on a systematic base and how to be calculated

AIFM IN DETAILS-REPORTING & LEVERAGE

The Swedish Presidency

has suggested that the

« controlling influence »

threshold be set at 50% for

unlisted companies. The

Gauzès report removed

thresholds currently and

focus merely on effective

controlling influence,

especially for private equity

funds.

From the Gauzès report, significant short

positions must be reported to MS authorities


Application of AIFMD

1

National Private Placement

2

AIFM IN DETAILS-MARKETING OF AIF and THIRD COUNTRIES

The AIFM proposes a number of measures in relation to the marketing of AIF to

professional investors ::

• AIFM that manage AIF established in a EU Member State benefit from the EU

passport. This provision should not be circumvented through a master-feeder

structure.

• An EU Member State may allow the marketing of AIF to retail investors on their

territory.

• An authorized AIFM may manage AIF based in a non-EU country only if that

country has legislation which is in line with international standards and that there is

appropriate cooperation between the countries. The AIFM may then distribute this

non-EU AIF to professional investors on a private placement basis.

little difference between the current requirements on the distribution of non-EU

AIF and those proposed by the current draft AIFM Directive. Under existing

regulations, non-UCITS funds can be widely distributed in a number of EU

countries on a private placement basis.


Conduct of Business

1

Capital Requirements

2

AIFM IN DETAILS-CONDITIONS

Organizational Requirements

2

Conflicts of interest

Risk management: implement systems (i.e.: due diligence process, stress testing

procedure, risk profile compliance) to measure and monitor all risks associated to

each AIF investment strategy and to which each AIF is or can be exposed to. Should

be reviewed at least once a year.

Liquidity management: employ an appropriate liquidity management system and

procedure (stress tests and redemption policy appropriate) only for open-ended funds

Minimum capital of EUR 125.000:

• but additional capital is required if the assets under management exceed EUR

250 million (0.02% above EUR 250 million) with a 10 million cap (but possibility

to benefit from guarantee from credit institution/insurance up to 50%)

• For self-managed AIF, capital requirement set at minimum EUR 300.000 (same

rules as above)

Valuation: appropriate and consistent procedures

established by the AIFM for proper valuation of assets

managed, at least yearly or more frequently (for open-

ended funds considering assets types and

subscriptions/redemptions policies). AIFM has to ensure

functional independence. If no external valuator, authorities

can ask procedures/valuation review from external valuator

or auditor

The Gauzès report

provides exemption of

this rule for private

equity funds


To market shares or units of AIF to professional investors in the home Member State, AIFM will have to obtain

authorization from the competent authority of their home Member State.

The AIFM shall submit a notification in respect of each AIF that it intends to market.

Objective Demonstrate that they are suitably qualified to provide AIF management services

How ? Provide detailed information:

• the planned activity of the AIFM,

• the identity and characteristics of the AIF managed,

• the governance of the AIFM (at least 2 conducting officers with knowledge of underlined

strategy)

• arrangements for the valuation of assets,

• arrangements for safekeeping the assets,

• the systems of regulatory reporting, where required.

Ensure that the risks linked to AIFM activities are managed to satisfy the competent authority

of the robustness of internal arrangements

! Due to the diversity of AIFM investment strategies, there will be a

common set of basic provisions and some specific provisions.

Authorization could also be granted to allow:

• marketing of AIF to retail investors and/or in other Member States*

• provision of management services in other Member States*

* The directive explicitly provide Specific rules in relation to third countries

AIFM IN DETAILS-AGREEMENT


AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6




AIFM DIRECTIVE – COMMENTS FROM THE MARKETS

EVCA representing the Private Equity

industries

1.Scope and thresholds: concern with the

abolition of the thresholds and hence

disadvantaging small funds

2.Capital requirements: welcome the EUR 10 cap

but still argue that the variable capital

requirements is unjustified

3.Valuation: welcome the abolition of the external

valuer

4.Transparency: Still concern with the treatment

of confidential information. In favour of Gauzès

report that portfolio companies should not be

more stringent than other companies but still

need to see this in the articles of the directive

5.Remuneration: Strongly opposed this

6.Depositary: Remains unsatisfactory and not

sufficiently tailored to private equity

7.Distribution: Most stringent rules removed but

still concern on the free movement of capital

particularly the case for third party AIFM to

benefit from passport even if regulated

AIMA representing the Hedge

Fund industries (views on the

Gauzès report)

1.Scope and thresholds: No

specific comment. Agree with the

removal of thresholds

2.Leverage : Lacks clarity

3.Short-selling: Should be taken

out of the Directive as it is a

market wide issue

4.Remuneration: Welcome the

emphasis on aligning the Directive

with the G20 principles

5.Depositary: Lacks clarity

6.Distribution: Find concerning the

restriction on fund of funds 30%

rule where the target fund is a

third country AIF

Comments

from

the market


AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6




AIFM DIRECTIVE – LUXEMBOURG'S PERSPECTIVE

Current trends Products Industry

• Trends «Offshore to Onshore»

or «Unregulated to Regulated»

are not new and will be

reinforced by the AIFMD

• The AIFMD aims at granting a

EU passport to AIF: Luxembourg

is a recognized Centre of

Excellence for cross-border

offerings

• Luxembourg industry (regulator,

advisers, auditors, custodians,

administrators) have in debt

know-how/experience in relation

to regulated structures

• All-encompassing approach of

the AIFMD (open end and closed

end funds; hedge funds, fund of

hedge funds, real estate funds,

private equity funds; etc.) will

require flexibility in structuring

• Luxembourg industry

(regulator, advisers, auditors,

custodians, administrators)

have in debt

knowhow/experience in

relation to all alternative

asset classes

• Luxembourg’s legal

framework permits easy

redomiciliations/relocations

to Luxembourg and industry

participants have extensive

practical experience in

arranging/handling

redomiciliations

• Possibilities for listing on the

Luxembourg Stock

Exchange

• Luxembourg’s existing legal

framework ( SIF regime) copes

already with most of the

requirements imposed by the

AIFMD on AIFs

• Luxembourg’s offering (FCP/

Sicav/SCA, umbrella structure,

multiple classes) is well adapted

to the needs of the various

strategies and asset classes

• In the structuring of

Luxembourg AIFMs,

Luxembourg can leverage on

existing UCITS management

companies

• Non-UCITS management

companies can be easily

adapted to the requirements of

the AIFMD7.


AGENDA

Objectives2

Scope3

Timeline4

AIFMD in details5

Context1

Impacts on markets6




3. Multidisciplinary approach

1. Market knowledge

• Serving 30 out of the 40 Top fund

promoters

• Advised or assisted on most of the

largest transactions on the market

during the last 5 years

• Providing Strategy and Operational

support to all the leading third party

clients service providers

• Balance and synergies between the 3

service lines (Audit, Tax and

Consulting)

• Cross-service expertise in key

functional or topical areas (e.g.

Investment Management, Alternative

investments, Banking operations,

etc.)

2. Strong expertise

• Proficient operational expertise

across the complete value chain

• Continuous research and publication

efforts to support industry

developments

• A mix of project/consulting expertise

with hands-on industry experience

Deloitte’s

Investment

Management

Services

DELOITTE - INVESTMENT MANAGEMENT SERVICES

Regulatory, Compliance and

Fund Registration

Fund & Tax reporting

Fund Systems

IFRS AdvisoryForensic Services

Capital Markets for Funds

SAS 70 Certification

Strategy & Organization

Deloitte’s

Investment

Management

Services


Luxembourg – Investment Management ServicesVincent Gouverneur

Partner – EMEA Investment Management Leader

Tel: + 352 451 452 451

Email: [email protected]

Philippe Lenges

Partner

Tel: + 352 451 452 414


Lou Kiesch

Partner

Tel: + 352 451 452 456


Benjamin Lam

Partner

Tel: + 352 451 452 429


Johnny Yip

Partner

Tel: +352 451 452 489


Xavier Zaegel

Partner

Tel: +352 451 452 748


Benjamin Collette

Partner

Tel: +352 451 452 809


YOUR DELOITTE KEY CONTACTS

Luxembourg – TaxRaymond Krawczykowski

Partner –

Tel: + 352 451 452 500


Pascal Noel

Partner

Tel: +352 451 452 571


mailto:[email protected]


















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