AIFMD: An update on recent developments

10 March 2014

The 22 July 2014 deadline for compliance with the Alternative Investment Fund Managers Directive (AIFMD) is fast approaching. Our fund management experts report on a few interesting developments.

AIFMD application deadline extended - compliance deadline remains the same

In December 2013, HM Treasury indicated an intention to extend slightly the deadline for existing managers to apply for authorisation as an AIFM.

When the Alternative Investment Fund Managers Regulations 2013 were first published, transitional managers (ie those managers who managed AIFs immediately before 22 July 2013 and who are still doing so today) had to submit their authorisation/registration applications to the Financial Conduct Authority (FCA) in sufficient time to allow the FCA to determine them before 22 July 2014.

The Treasury has recognised that many fund managers will not be in a position to submit their application that far in advance of the 22 July 2014 deadline. The Treasury has issued an announcement stating that it intends "to amend the Alternative Investment Fund Managers Regulations 2013 to provide that, if a transitional manager's application for authorisation or registration is submitted without sufficient time for the FCA to determine the application by 22 July 2014 (the end of the transitional year), that manager will be able to continue managing AIFs until the FCA has determined the application. The requirement to submit an application before 22 July 2014 will remain in place and all managers will, in any event, be required to comply with all relevant AIFMD requirements from 22 July 2014, even if their application has not yet been determined".

While this extended deadline, if it goes through, will be welcome in many quarters, managers must guard against complacency. In particular, as the Treasury has made clear, the AIFMD will still come fully into force on 22 July 2014 and all those managers who fall within its scope will have to comply with it from that date. This includes those managers who applied before 22 July 2014 but who are waiting for a determination. A delay in making the application would not lead to a delay in having to comply.

All managers who come within the AIFMD's scope should endeavour to get their applications in as soon as possible and to contact the FCA if they think that they are likely to miss the applicable deadline.

ESMA publish Q&A regarding the application of the AIFMD

In February 2014, the European Securities and Markets Authority (ESMA) published a "Questions and Answers" document regarding the application of the AIFMD. This Q&A should not be confused with the answers that the European Commission has issued to questions received by them relating to the transposition of the AIFMD.

ESMA's Q&As are chiefly directed at competent authorities in EU member states (namely the FCA in the UK) to promote a common supervisory approach and practice. However, the responses will also be useful for fund managers as they are likely to provide clarity on the approach to be taken by the authorities on topical issues.

ESMA's intention is to update the Q&A as and when appropriate. The current draft covers matters such as

  • Whether AIFMs that wish to market new investment compartments of AIFs (when the AIF is already notified) undertake a new notification? See question 4, but the answer given is yes;
  • When applying the new remuneration rules for the first time, which accounting period should be used by AIFMs that have (i) performed activities under the AIFMD before 22 July 2013 and (ii) submitted an application for authorisation under the AIFMD between 22 July 2013 and 22 July 2014? This is covered in question 1a, and the answer confirms that the relevant rules start applying as of the date of authorisation, however, in relation to variable remuneration, AIFMs should apply the rules for the calculation of payments relating to new awards of variable remuneration to their identified staff (as defined in the Remuneration Guidelines) for performance periods following that in which they become authorised. So the AIFMD regime on variable remuneration should apply only to full performance periods. The Q&A provides a few worked examples in order to explain this further.

While this document will not answer every question it should be counted among the resources to which firms may turn for additional guidance about the application of the AIFMD.

FCA Guidance on proportionality in the operation of certain remuneration provisions

In January 2014, the FCA issued guidance on proportionality in the operation of certain remuneration provisions.

The remuneration provisions have been among the AIFMD's most controversial elements. Three of these provisions, in particular, have attracted industry attention:

  1. retained structures,
  2. deferral and
  3. performance adjustment.

Subject to various conditions, the retained structures rules require full scope AIFMs to ensure that at least 50% of any variable remuneration consists of units or shares (or of equivalent ownership interests etc) of the AIF concerned.

The deferral provisions require full scope AIFMs to ensure that at least 40% of the variable remuneration component is deferred over an appropriate period given the AIF's life cycle and redemption policy, and that it is correctly aligned with the AIF's risk profile.

The performance adjustment provisions require full scope AIFMs to ensure that any variable remuneration, including a deferred portion, is only paid if it is sustainable bearing in mind the financial situation of the AIFM as a whole and if it is justified according to the performance of the AIF, the business unit and the individual concerned.
These three sets of provisions are collectively known and the 'Pay-out Process Rules'.

Some managers have taken some comfort from the proportionality rule which provides that "an AIFM must comply with the AIFM remuneration principles in a way and to the extent that is appropriate to its size, internal organisation and the nature, scope and complexity of its activities". The FCA has recently published guidance on how it believes that proportionality rule should operate.

The starting point is the value of the assets under management (AuM) of the given AIFM's AIFs.

  Type of firm AuM threshold Presumption
1 AIFMs which manage portfolios of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF Less than £5 billion It is appropriate to disapply the Pay-out Process Rules
Greater than £5 billion It is not appropriate to disapply the Pay-out Process Rules
2 AIFMs which manage portfolios of AIFs in other cases, including any assets acquired through the use of leverage Less than £1 billion It is appropriate to disapply the Pay-out Process Rules
Greater than £1 billion It is not appropriate to disapply the Pay-out Process Rules

Managers should note, however, that these are only presumptions. In addition to the value of the AuM, there are various other proportionality considerations that may mean that the presumptions above are set aside. The considerations include the number of the AIFM's partners, members etc; whether the AIFM is listed and traded on a regulated market; the level of risk and the nature of certain fee structures. Consideration of these (and other factors) may mean that an AIFM with AuM below the relevant threshold may have to apply the Pay-out Process Rules and that an AIFM with AuM above the relevant threshold may be entitled to disapply the Pay-out Process Rules.

According to FCA guidance, each AIFM has a responsibility "to assess its own characteristics and to develop and implement remuneration policies and practices which appropriately align the risks faced and provide adequate and effective incentives to its staff". This FCA guidance adds that AIFMs "should, if requested, be able to explain to the FCA the rationale for how they apply the AIFM remuneration proportionality rule, particularly where they have concluded that it is appropriate for certain rules to be disapplied".

This is a complicated area and AIFMs would be well-advised to seek advice on how to proceed.

Wragge & Co's Funds team is a specialist team comprising tax, corporate, finance, regulatory and dispute resolution experts advising on every aspect of a fund's lifecycle. The team is involved in a mix of domestic and international fund structures. It provides advice to investors (including pension funds), fund managers, fund vehicles, sponsors and operators. The team was a finalist in the category of Funds Team of the Year at The Lawyer Awards 2013.


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