AIFMD Countdown:
Breakfast Briefing No. 2
Key pressure points in the Directive
Gus Black
Richard Frase
Ana Gallo-Alvarez
Stuart Martin
© 2012 Dechert LLP
Agenda Today
1. Update on EU timetable and UK implementation
2. The status of implementation in the EU
3. Impact on management structures and the
delegation restrictions
4. Impact on prime brokerage model
5. Remuneration provisions
6. Questions
2
AIFMD Countdown:
Update on EU timetable
and UK implementation
© 2012 Dechert LLP
Timetable – Level 1
By way of reminder:
• Level 1: Primary Directive became EU law on 21
July 2011
• Must be implemented by Member States by 22 July
2013
4
Timetable – Level 2
• Level 2: ‘regulations’ – publication and adoption still
outstanding
–
Have ‘direct effect’
–
Contain wide ranging implementing measures
• What is the likely adoption timetable?
5
EU legislative process – the Lamfalussy
process
Level 1: Adoption of Directives and Regulations
•
Framework and key political principles of the legislation - adopted by
“ordinary legislative procedure” jointly by the Council and the European
Parliament on a proposal from the Commission
Level 2: Adoption of implementing measures
•
Commission adopts secondary legislation – Regulations and Directives
(level 2) (under delegated power from the Council and the European
Parliament) with assistance from ESMA (acting as technical advisor) and
consultation with industry
•
Before adoption the Commission sends the text to the Council and
European Parliament for informal consultation
EU legislative process – the Lamfalussy
process
• At this point, the Commission is not bound by ESMA advice
• The European Parliament or the Council can reject Level 2
measures within three months of their adoption if the measures are
not in line with the objectives of the underlying Level 1 legislation
EU legislative process – lobbying
How does a successful lobbying process work?
• It has to be based on clear, concise and relevant
policy, legal and business arguments that can appeal
to the legislator
• The arguments deployed need to find a common
ground so the legislator can feel his policy objectives
will be met one way or the other
EU legislative process – lobbying
• Lobbying successfully is not to express our views - however loud –
it is to convince the legislator to change his
• It should be constructive – not confrontational
• It has to cover all levels of the policy-making; from desk officer to
Cabinet or MEPs
• It has to be carefully planned with strategic and clearly defined
steps
Timetable – Authorisation
• FSA should accept applications “from Q2 2013”
• Existing EU managers: submit application by 22 July
2013 or by 22 July 2014? (the transitional period)
• What does transitional period mean?
– Authorisation required to use EU marketing passport.
– AIFM authorisation not required to operate, but MiFID
authorisation will be required. Extent of interim
compliance obligations are unclear.
• Start-up managers: best timing?
10
AIFMD Countdown:
The status of
implementation
in the EU
© 2012 Dechert LLP
EU implementation
Luxembourg
• Luxembourg expects to adopt its AIFMD
implementing bill by the end of 2012
• In addition to transposing the Directive, has introduced a new
fully tax transparent limited partnership vehicle. With the new
limited partnership vehicle, carried interest will not be treated as
salary but as “speculative income” (taxed at 25% of income tax
rate) and co-investment returns will potentially be tax exempt,
subject to conditions
• New category of depositary for private equity funds
• FCPs (non-UCITS funds) still need an authorised Luxembourg
management company
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EU implementation
Germany
• Germany has published a draft implementing bill which goes
beyond word-for-word transposition:
•
private placement rules revised so that all marketing (whether public or
private) is subject to AIFMD/UCITS rules – effectively abolishing existing
private placement regime
•
all investment funds currently placed under “private placement” regime will
have to retroactively submit registration notifications
•
no exemptions for small funds as per the Directive
• Unclear whether abolition of private placement regime is
intentional policy decision
13
EU implementation
Ireland
• Implementation of Directive expected by 1 January 2013 (before
Ireland assumes Presidency of the EU)
• Implementation will be based on the existing QIF regime and
principle of no gold plating
• Expect Promoter requirement to be removed
• Legislation also expected to introduce Irish SICAV to meet US
tick the box requirements
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Private placement chart
COUNTRY/MEMBER STATE
PRIVATE PLACEMENT/SOLICITED
SALES
UNSOLICITED SALES
United Kingdom
Yes
Yes
Austria
Yes
Yes
Belgium
Yes
Yes
Denmark
No
Yes
Finland
Yes
Yes
France
No
Yes
Germany
Yes
No?
Greece
No
Yes
Ireland
No
Yes (depending on legal structure)
Italy
No
Yes
Luxembourg
Yes
Yes
Norway
No
Yes
Portugal
Yes
Yes
Spain
Yes
No
Yes
Sweden
Yes
Yes
Switzerland
Yes
Yes
The Netherlands
Yes
Yes
Member of the European Union
Member of the European Economic Area/European Free Trade Association
15
15
Yes
6 April 2011
Key pressure points:
Impact on management
structures and
delegation restrictions
© 2012 Dechert LLP
AIF/AIFM pressure points
Traditional Managed Account Structure (no
pooling)
Single or
multiple clients
Custodian
Investment
Manager
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AIF/AIFM pressure points
Managed Account Platform
AIF?
Vehicle for
single or
multiple clients
PB/custodian
AIFM?
Investment
Manager
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Risk Manager
AIF/AIFM pressure points
Typical Fund Structure
“Third Country”
Investment
Manager
Fund
Onshore
Investment
Manager
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Onshore v offshore AIFM - the
implications of having an onshore AIFM
EU fund – Directive heavy
Non-EU fund – Directive light
EU Manager must be
authorised. Once authorised,
the marketing passport is
available (depending on timely
implementation by member
states).
EU Manager must be authorised. No
requirement to appoint a depositary or
produce fund annual report, unless the
fund is marketed in the EU. If the fund
is marketed in the EU, note the reduced
depositary regime - AIFM must appoint
one or more entities to fulfil the
depositary functions, but the strict
liability regime is not applicable.
Private placement not
available.
No marketing passport – private
placement the only means for
marketing.
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Onshore v offshore AIFM - the
implications of having an offshore AIFM
• Private placement is the only means for marketing until
2015
• Directive “super light”?
21
The delegation challenge
• Where does the delegation concern come from?
– A general anti-avoidance mechanism
– Outsourcing rules in MiFID Implementing Directive
• To what extent can you delegate investment
management?
22
What will happen to MiFID authorised
firms?
• A MiFID authorised firm cannot be the appointed AIFM
nor obtain authorisation under the AIFMD.
• However, it may:
(i) provide portfolio management services as the AIFM’s
delegate, subject to the delegation restriction; and
(ii) market an AIF on behalf of an AIFM.
• Change authorisation to AIFM?
• How possible is offshore or MiFID-only structuring?
23
Key pressure points:
Impact on prime
brokerage model
© 2012 Dechert LLP
Prime brokerage
• Depositary liability
• Assets within the custody function
• Possible future structures and practical
implications
25
Prime brokerage
• Directive sees a conflict of interest between the
depositary function (custody and supervision) and
the prime broker (counterparty and lender)
• Prime broker can act as depositary if it has
“functionally and hierarchically separated the
performance of its depositary functions from its
task as prime broker”
Depositary liability
• What is the new depositary liability regime?
• The depositary is liable for loss of assets unless:
- it can prove that the loss had arisen as a result
of an external event beyond its reasonable
control; or
- the depositary, sub-custodian and the fund have
entered into contractual arrangements to ensure
that the sub-custodian is directly liable to the
fund in the event of loss of assets – and subject
to further conditions
What assets are within the custody
function?
• Directive states that “all financial instruments that can
be registered in a financial instruments account” must
be held in depositary
• Draft Level 2 regulations state that financial
instruments which are provided as collateral to a third
party (e.g. the broker) have to be held in custody as
long as they are owned by the AIF
• So, assets subject to a security interest in favour of the
broker are held in custody, but re-hypothecated assets
(i.e. title transfer collateral) are not held in custody
Prime brokerage – the existing structure
• Prime broker acts as lender and custodian – this
assures the broker’s ability to settle fund’s trades,
re-hypothecate and take security
• Prime broker waives liability for failures by subcustodians and there is (generally) no recourse from
the PB to sub-custodian
Fund
Prime broker and
custodian
Sub-custodians
(affiliates and
non-affiliates)
29
Prime brokerage – possible future
structures (1)
Fund
Depositary
Prime broker and
sub-custodian
Sub-subcustodians
30
Possible future structures – prime
broker as delegate of depositary
• Reflects some existing structures – prime brokers can
continue to settle their client’s trades into accounts
controlled by the broker, can continue to re-hypothecate
(i.e. transfer title) and can enforce a security interest over
the account.
• However:
- separation of functions rule applies to sub-custodians
- depositary will not want to take liability in the event of
insolvency of the prime broker – so contractual passthrough of liability from the depositary to the prime
broker?
31
Prime brokerage – possible future
structures (2)
Prime broker
Fund
Depositary
Sub-custodians
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Possible future structure – depositary
jointly appointed by fund and PB
• Fund and prime broker together appoint the
depositary
• Security interest in favour of the broker
• Depositary follows instructions of broker, save
where broker is in default
• Broker may re-hypothecate (i.e. title transfer) as
and when allowed
33
Application of the depositary rules (pre2015)
EU Manager
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Non-EU Manager
EU fund
Non-EU fund
EU or Non-EU fund
Manager must be
authorised as AIFM
and must comply
with the Directive,
including
depositary
requirements.
Manager must be
authorised as AIFM. A
depositary is not
required if fund is not
marketed in the EU.
If the fund is marketed
in the EU, a depositary is
required, but note
relaxation of strict
liability requirements.
As manager cannot be
authorised under
Directive, a depositary is
not required, whether or
not marketed in the EU.
Key pressure points:
Remuneration
provisions
© 2012 Dechert LLP
Remuneration
• Where did the remuneration rules derive from?
– Capital Requirements Directive III (for banks)
– AIFMD requires ESMA to develop guidelines on sound
remuneration policies which comply with Annex II to the
AIFMD
• ESMA’s Consultation Paper on guidelines for
sound remuneration policies under the Directive –
June 2012
• ESMA will publish a final report with final text of
the guidelines by the end of 2012
36
Remuneration
• Proportionality - but no ability to disapply
requirements
• How will all asset managers issue 50% of variable
remuneration in non-cash instruments?
• Are new arrangements future-proof?
• Will I need new compensation structures (e.g.
RemCom)?
37
Remuneration – disclosure
requirements
• A manager will need to disclose in the fund’s
annual report:
– Total remuneration (fixed and variable) paid to entire
staff, and the number of staff
– Total remuneration paid to senior management and staff
“whose actions have a material impact on the risk
profile”
– An allocation of the above information in relation to each
fund
38
Remuneration – carried interest
• Carried interest, but not the proceeds of coinvestment, is subject to the Remuneration
Provisions.
• As “variable” remuneration:
– calculation must include an adjustment to deal with
future risks
– at least 50% must consist of interests in the underlying
fund
– at least 40% must be deferred to match the life cycle of
the fund
39
Remuneration – carried interest
• How do you apply these rules in the context of
carried interest schemes?
• ESMA’s view is that a classic whole fund carried
interest structure will satisfy all the risk alignment
requirements.
40
Gus Black, Richard Frase, Ana Gallo-Martinez
and Stuart Martin
Dechert LLP
gus.black@dechert.com
richard.frase@dechert.com
ana.gallo@dechert.com
stuart.martin@dechert.com
QUESTIONS?
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