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Pragmatic Steps to Reaching AIFMD Compliance

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Benefits of being AIFMD Compliant

The Alternative Investment Fund (AIF) passport available to fund managers by the Alternative Investment Fund Managers Directive (AIFMD) offers fund managers an excellent opportunity and is key to optimising marketing capabilities, streamlining operations costs and ensuring greater profitability. The main advantages of the passport are that it will establish a clear, standardised procedure with reduced time scales, enabling managers either to manage EU AIFs in other member states or to market EU AIFs across Europe, thereby removing the complexities and challenges of the national private placement regimes.

With the increased investor protection and transparency that it affords, it is anticipated that AIFMD will provide a 'kite mark' of quality that will leave fund managers not operating under the AIFMD at a disadvantage when marketing to potential investors.

Furthermore, with AIFMD and UCITS regulations expected to merge in the future early adoption of AIFMD will leave fund managers well place for increased regulation at a later date.

Introduction & Timetable

The collapse of Arch Cru and the Madoff scandal precipitated the demand for greater regulation of alternative investment funds. This led to the European Securities and Markets Authority (ESMA) introducing the AIFMD for governing unregulated funds with the objectives of increasing investor protection and limiting systemic risks, enhancing transparency of reporting and disclosure of risks to investors and the simplification of AIF marketing within the EU.

The European Parliament and European Council issued the final approval of the AIFMD in November 2010 and AIFMD finally came into force in July 2012. In December 2012 the European Commission adopted the Delegated Regulation with ESMA looking to each jurisdiction's regulatory authority to adopt the directives. The FCA, leading the way for other EU regulators, implemented the AIFMD with effect from 22nd July 2013.

The scope of AIFMD is broad and seeks to capture any non-UCITS funds which are either managed within the EU or marketed to investors in the EU. An AIF is defined as a collective investment undertaking which raises capital from a number of investors, with a view to investing in accordance with a defined investment policy for the benefit of those investors.

The Directive includes provisions on:

  • corporate governance
  • segregation of functions
  • leverage
  • depository
  • delegation
  • risk management
  • liquidity management
  • reporting/disclosure requirements
  • annual reporting

Firms wishing to be authorised as an Alternative Investment Fund Manager (AIFM) by the FCA will need to submit a Variation of Permission (VoP) and Regulatory Business plan, supported by AIFMD compliant policies, corporate governance and operations manuals and risk management framework by the 22nd of January to receive authorisation ahead of the close of the AIFMD transition period on the 22nd July 2014. However, firms launching any new AIFMD compliant alternative investment funds are required to have applied and received authorisation from the FCA before they can market their AIF in the EU.

AIFMD disc

In its recent AIFMD update, the FCA has re-stated that firms taking advantage of the transitional provisions set out in HM Treasury's AIFM Regulations (the HMT Regulations) "will need to be authorised or registered to continue the activity of managing an AIF from 22 July 2014." The FCA also notes that "[w]e advise firms seeking an authorisation or a VoP under AIFMD … to apply no later than 22 January 2014 in case we need a full six months to determine the application". This statement has caused concern as it significantly brings forward the date by which many firms believed that they would have to submit an application for authorisation or VoP.


AIFMD differs from the UCITS regulatory regime in that it seeks to regulate the fund manager as opposed to the fund itself.

The main provisions governing risk management under AIFMD are inspired by the risk management regulations governing UCITS and broadly the two are very similar. AIFMD, however, requires that the risk management function is functionally and hierarchically separated from the portfolio management function and other operating units to avoid conflicts of interest.

A typical AIFM structure will see the AIFM retaining responsibility for portfolio management and risk management, with the optional outsourcing of non-core activities subject to regulatory approval and management under the Delegation Policy. Additional procedures apply when there is a delegation of risk or portfolio management.

The AIFM is responsible for the proper valuation of AIF assets, the calculation of net asset values and the publication of net asset values. The valuation of the AIF must be done independently but the AIFM can either perform the valuation function 'in-house' or an external valuer may be appointed. The AIFMs liability towards the AIF and its investors is not affected by the fact that the AIFM has appointed an external valuer. However, the external valuer is liable to the AIFM for any losses suffered by the AIFM as a result of negligence or intentional failure to perform its tasks.

The AIFM also has a significant number of on-going reporting obligations to regulators, in addition to investors. These are applicable to all AIFMs marketing AIFs or managing AIFs in the EU and focus on risk / liquidity management, leverage and expenses.


A key activity of the AIFM is to appoint a depository. (The AIFM or a prime broker acting as counterparty to an AIF can never act as depository).

Depositories are an additional guarantee for investors as they:

  • Monitor all AIF cash flows
  • Keep AIF assets safe with an obligation to return financial instruments held in custody
  • Oversee (control and audit) AIFM responsibility in terms of subscription/redemption, valuation of shares/units, AIFM's instructions, timely settlement of transactions, income distribution)
  • Oversee key operational processes and procedures

The AIFMD has resulted in the launch of at least 2 new depositories with the likelihood of more launching to provide specialised services for assets such as Private equity and Real Estate. However, only depositaries with a substantial, sufficient capital base will be able to take on a high level of risk while offering a full range of services to their clients. With the deadline fast approaching, it appears to be "a sellers' market" for depository services with AIFMs that have an existing relationship or attractive scale being targeted by depositories, leaving many small AIFMs or those with complexities with the risk of not being able to find a suitable partner.


By now, firms should have determined whether it is advantageous to be authorised under AIFMD and, if so, if this would be as part of an AIFM umbrella structure or standalone AIF.

AIFMD Implementation

Fund managers would be expected to have completed the regulatory and compliance analysis and be well progressed in defining the required AIFMD compliant policies to support their submission to the FCA as well as progressing the implementation of the required AIFMD compliant processes and controls.


This will require consideration to have been given to who is best placed to provide the external valuation service, liquidity profiling and regulatory risk reporting and if new outsource arrangements are required.

The effort required to prepare the submission should not be underestimated as a clear understanding of the target operating model, including the split in responsibilities between the AIFM and appointed outsource providers, is necessary in order to complete the VoP and supporting materials.

Once the policies have been agreed the next stage is making sure all the procedures are in place to perform the tasks as stated in the policies and that the implemented procedures and controls can be evidenced through the compliance monitoring programme.

Those fund managers already managing regulated funds are at an advantage as many of their existing processes and procedures can be modified for AIFs. At this point time, there is still the opportunity to put in place an AIFMD solution that represents the most appropriate and cost effective solution for both the fund manager and the fund.

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