Alternative Investment Funds in Europe: Law and Practice (Oxford EU Financial Regulation) [1 ed.] 0199657726, 9780199657728

Table of contents :
Preface
Edited By: Lodewijk van Setten, Danny Busch
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
List of Directive and Regulation Short Forms
Edited By: Lodewijk van Setten, Danny Busch
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
Editors
Authors
List of Contributors
Edited By: Lodewijk van Setten, Danny Busch
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
1 The Alternative Investment Fund Managers Directive
Danny Busch, Lodewijk van Setten
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
(p. 1) 1  The Alternative Investment Fund Managers Directive
I. Terms of Reference
1. The extraordinary expansion of the EU regulatory framework for investment funds and the creation of a single market for non-UCITS
A. Pre-AIFMD: UCITS, NURS, and unregulated funds
B. The AIFMD: a sweeping Directive
C. The creation of a single market for management and marketing of AIFs
2. Private law aspects of the AIFMD
3. Policy reasons for the expansion of the EU regulatory framework for investment funds
A. The stated case for the AIFMD
B. The questionable logic of the arguments for the AIFMD
C. Conclusion
4. Legislative structure
A. The Lamfalussy procedure
B. The AIFMD framework
II. General Provisions of the AIFMD
1. Subject matter and scope (Articles 1–2)
A. Subject matter (Articles 1 and 2(1))
B. Scope: what is an ‘AIF’? (Articles 2(2) and 4(1)(a))
C. Exclusions from the definition of AIF (Article 2(3))
D. Grey area: notional pools may or may not be AIFs
E. Scope: ‘managing’ an AIF (Article 4(1)(w))
F. Scope: ‘marketing’ an AIF (Article 4(1)(x))
2. Exemptions (Article 3)
3. Determination of AIFM (Article 5(1))
A. Appointment to manage an AIF
B. Internally managed versus externally managed AIFs
4. Types of AIFM and AIFs
A. Open-ended and closed-ended AIFs
B. Leveraged and unleveraged AIFs
C. Determining whether an AIF is leveraged
III. Authorization to Manage an AIF
1. Overview: EU AIFMs and non-EU AIFMs
A. Jurisdiction of a Member State
B. Scope of authorization
C. MiFID services to an AIF are not in scope of the AIFMD prohibition
D. UCITS management company
E. MiFID services by an AIFM
2. Authorization and passporting of EU AIFMs
A. Authorization of EU AIFMs (Article 6)
B. Exemptions for EU AIFMs from Articles 21 and 22 where non-EU AIFs are not marketed in the EU (Article 34)
C. Passporting by EU AIFMs of management authorization (Article 33)
3. Authorization and passporting of non-EU AIFMs
A. Authorization of non-EU AIFMs (Article 37)
B. Substitute compliance with non-EU law (Article 37(2))
C. Passporting by non-EU AIFMs of management authorization (Article 41)
4. Application for authorization by EU and non-EU AIFMs
A. Information to be provided upon application (Article 7(2))
B. Additional rules for applications by non-EU AIFMs (Article 37(5) and (8))
C. If the applicant is a UCITS management company (Article 7(4))
(p. 38) 5. Conditions for granting authorization
A. General
B. Management, shareholders/members, and head office (Article 8(1))
C. Conditions relating to initial capital and own funds (Article 9)
D. Cover for professional negligence liability (Article 9(7))
E. Exemption from capital rules for UCITS management company (Article 9(7))
6. Procedural aspects
A. Consultation of authorities in other Member States
(p. 41) B. Term for granting authorization (Article 8(5))
C. Rejection of an application (Article 8(3))
D. Restriction of authorization (Article 8(3))
E. Disagreement about authorization of a non-EU AIFM (Article 37(8))
(p. 42) F. Authorization effective (Article 8(5))
G. Changes in the scope of the authorization (Article 10)
H. Withdrawal of authorization (Article 11)
I. Central public register (Articles 7(5) and 37(10))
IV. Operating Requirements
1. Overview
2. General duties (Article 12)
A. General
B. Acting in the best interest of the AIF or the AIF’s investors and the integrity of the market
C. Due diligence
a. General
b. Illiquid assets
D. Requirements to governing body and personnel AIFM
E. Fair treatment of investors in the AIF
F. Inducements
G. Best execution
a. Execution of decisions and orders in financial instruments
b. Placing orders in financial instruments and other assets with third parties
(p. 49) H. Order handling
a. General principles
b. Aggregation and allocation of orders
I. Execution of subscription and redemption orders
(p. 51) J. Selection of counterparties and prime brokers
K. Individual portfolio management
(p. 52) 3. Remuneration (Article 13)
A. O temporae, o mores‎
B. Basic principles (Article 13 and Annex II)
C. Proportionality
D. ESMA Guidelines
(p. 56) E. Efficacy of the principles
4. Conflicts of interest (Article 14)
A. General
B. Types of conflicts of interests
C. Segregation of tasks and responsibilities
D. Conflicts of interests policy
E. Independence in conflicts management
F. Duty to inform senior management
(p. 59) G. Monitoring
H. Disclosure
I. Redemption
J. Prime brokers
K. Strategies for the exercise of voting rights
5. Risk management (Article 15)
A. Requirement to maintain an independent risk function
(p. 61) B. Risk management
C. Risk limits
D. Leverage limit
6. Liquidity management (Article 16)
A. Ability to meet payment obligations
B. Alignment of investment strategy, redemption policy, and liquidity profile
7. Investment in securitization positions (Article 17)
A. Securitizations and securitization special purpose entities (SSPEs)
B. Investment by an AIF in securities issued by an SSPE
C. Retention requirements (Articles 51 and 54 Implementing Regulation)
D. Conditions for sponsors and originators (Implementing Regulation, Article 52)
E. Conditions for AIFM (Implementing Regulation, Article 53)
8. General organizational requirements (Article 18)
9. Valuation (Article 19)
A. The net asset value (NAV) of a fund
B. Rules for determining the value of the assets and liabilities of a fund
C. Person responsible for the valuation
D. Liability for valuation
V. Delegation of AIFM Functions
1. General
2. Conditions for delegation
A. General
B. Justification delegation
C. Delegation arrangements in writing; clear allocation of rights and obligations
D. Features of the delegate
(p. 73) E. Portfolio and risk management
F. Effective supervision; AIFMD conditions not undermined
G. Selection, monitoring, and review of delegates, instruction, and withdrawal
H. Conflicts of interests
a. General
b. Types of conflicts of interests
(p. 76) c. Separation of functions
d. Identification, management, monitoring, and disclosure of conflicts of interests
3. AIFM’s liability not affected by delegation
4. AIFM may not become a letter-box entity
(p. 78) 5. Sub-delegation
VI. Depositary
1. General
2. Single depositary for each AIF
3. Depositary contract
A. Parties to the contract
B. Written form
C. Services to be provided
D. Safe-keeping and oversight function
E. Depositary liability in case of delegation
F. Period of validity, amendment, termination
G. Confidentiality
H. Transmission of information
I. Re-use of assets/rehypothecation
J. Amendment of AIF rules, instruments of incorporation, offering documents
K. Sale, subscription, redemption, issue, cancellation, and repurchase
L. Oversight and control
M. Third parties
N. Money laundering and financing of terrorism
O. Cash accounts
P. Escalation procedures
Q. Insolvency risk to third party to whom safe-keeping is delegated
R. Depositary enquiries
S. Reviewing depositary performance
T. Specification of national law
(p. 83) 4. Entities that may act as depositary
A. General
B. Depositaries for non-EU AIFs
C. Depositaries for private equity, venture capital funds, and real estate funds
D. AIFMs
E. Prime brokers
5. Location depositary
6. Monitoring by depositary of AIF’s cash flows
A. Duties of the depositary
B. Duties of the AIFM
a. Cash accounts
b. Payments regarding subscription of units or shares
(p. 87) 7. Safe-keeping of financial instruments to be held in custody
A. Financial instruments to be held in custody
B. Proper registration
C. Records and segregated accounts
D. Reconciliations
(p. 88) E. Due care
F. Custody risks throughout the custody chain
G. Fraud, poor administration, inadequate registering, or negligence
H. Verification of ownership rights
I. Delegation of custody functions
J. Look-through approach
8. Safe-keeping of assets other than financial instruments that can be held in custody
A. General
B. Provision of information to depositary
C. Access to information
D. Reliable information
E. Records
F. Verification procedures
G. Escalation procedure
H. Look-through approach
9. Oversight of operational functions
(p. 91) 10. Duty to act in the best interest of the AIF and its investors
11. Conflicts of interest
12. Re-use of assets/rehypothecation by the depositary
13. Delegation of safe-keeping functions
A. Delegation of safe-keeping functions only
B. Omnibus accounts
(p. 92) C. Entrusting functions to securities settlement systems
D. Delegation of supporting tasks
E. Conditions for delegation
a. General
b. No intention of avoiding AIFMD
c. Objective reasons for delegation
d. Selection, appointment, review, and monitoring third parties
(p. 93) e. Requirements during the performance of the tasks delegated
F. Conditions for delegation to a third party entity
G. Conditions for sub-delegation
14. Liability of depositary
A. General
B. Liability for loss of financial instruments
a. General
b. Loss of a financial instrument held in custody
c. External events beyond reasonable control
C. Liability for other losses
D. Depositary’s liability in case of delegation; discharge of liability
a. General
(p. 97) b. Delegation requirements
c. Transfer of liability
d. Objective reasons for discharge of liability
E. Depositary’s liability in case of delegation to a local entity in a third country
F. How liability can be invoked
15. Duty of information towards competent authorities; sharing of information between competent authorities
VII. Transparency Requirements
1. General
(p. 99) 2. Annual report (Article 22)
A. General
B. Content of the annual report
C. Applicable accounting standards
D. Auditing
3. Disclosure to investors (Article 23)
A. General
B. Disclosure of information prior to investment and of material changes
C. Relationship with Prospectus Directive and national prospectus legislation
D. Periodic and regular disclosure of information
4. Reporting obligations to competent authorities (Article 24)
A. General
(p. 104) B. General reporting and disclosure obligations
C. Additional disclosure requirements
VIII. AIFM Managing Specific Types of AIF
1. Leveraged AIFs (Article 25)
A. Use and sharing of information about leverage by regulators
B. Action by national regulators
C. Action by ESMA
2. AIFMs managing AIFs which acquire a (non-)controlling participation in (non-)listed companies (Articles 26–30)
A. General
B. Scope
C. Notification of the acquisition of major holdings and control of non-listed companies
D. Disclosure in case of acquisition of control
E. Specific provisions regarding the annual report of AIFs exercising control of non-listed companies
F. Asset stripping
(p. 113) IX. Marketing AIFs in the EU
1. Marketing of EU AIFs in the home Member State or the Member State of reference (Articles 31 and 39(2))
A. Scope of the marketing authority
B. Notification procedure
C. Material change
D. Marketing of EU AIFs in its Member State of reference by a non-EU AIFM (Article 39(2))
2. Marketing of EU AIFs in Member States other than the home Member State or Member State of reference (Articles 32 and 39(4))
A. Passporting rights for EU and non-EU AIFMs
B. Notification procedure
(p. 117) C. Material change
3. Marketing of non-EU AIFs in the EU (Articles 35 and 40)
A. Passporting rights for EU and non-EU AIFMs
B. Notification procedure and material change
4. Marketing of non-EU AIFs in the EU subject to national regimes by EU and non-EU AIFMs (Articles 36 and 42)
A. Marketing of non-EU AIFs pursuant to national regimes by an authorized EU AIFM (Article 36)
(p. 119) B. Marketing by a non-EU AIFM of non-EU AIFs pursuant to national regimes (Article 42)
C. Repeal of the national marketing regimes
5. Marketing to retail investors (Article 43)
X. Competent Authorities and Supervisory Powers
1. General
2. Designation, powers, and redress procedures
A. General
B. Powers of the competent authorities in the Member States
C. Powers of ESMA
3. Cooperation between different competent authorities
XI. Transitional and Final Provisions
Footnotes:
2 United Kingdom
David Rouch
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
(p. 123) 2  United Kingdom1
I. Pre-AIFMD Regulatory Framework
1. Regulation of AIFMs and national AIFs prior to the AIFMD
A. Collective investment schemes
(p. 126) B. Investment vehicles established as closed-ended bodies corporate
2. Regulation of national marketing of AIFs prior to the AIFMD
A. Collective investment schemes
B. Investment vehicles established as closed-ended bodies corporate
C. Non-mainstream pooled investment products
(p. 128) II. Regulation of National AIFs after the AIFMD
III. General Provisions of the AIFMD and the Implementing Regulation
1. Articles 2 and 3—scope and exemptions
A. Holding companies
(p. 131) B. Sub-threshold AIFMs
2. Article 5—determination of the AIFM
A. The UK regulated activity of managing an AIF
B. Internal management
C. Failure of external AIFM to comply
IV. Authorization of AIFMs
1. Articles 6 to 8—conditions and application for authorization
2. Article 9—initial capital and own funds
3. Articles 10 and 11—changes in the scope of the authorization and withdrawal
4. Consequences of violation of authorization provisions60
A. Persons who are not authorized to conduct regulated activities in the UK
B. Persons who are authorized to conduct regulated activities in the UK but do not have permission to manage AIFs
(p. 139) C. Breaches of FCA rules by persons who have permission to manage AIFs
V. Operating Conditions for AIFMs
1. Section 1 (Articles 12 to 17)—general requirements
A. Article 12—general principles
B. Article 13—remuneration
C. Article 14—conflicts of interest
(p. 142) D. Article 15—risk management
E. Article 16—liquidity management
F. Article 17—investment in securitization positions
2. Section 2 (Articles 18 and 19)—organizational requirements
A. Article 18—general principles
B. Article 19—valuation
3. Section 3 (Article 20)—delegation of AIFM functions
4. Section 4 (Article 21)—depositary
A. The method of implementation
B. The main changes brought about by the AIFMD
C. Who may be a depositary?
D. The duties of a depositary
5. Consequences of violation of operating conditions
A. Regulatory law consequences
(p. 150) B. Criminal law consequences
C. Private law consequences
VI. Transparency Requirements
1. Article 22—financial reporting
2. Article 23—disclosure to investors
3. Article 24—regulatory reporting
4. Consequences of violation of transparency requirements
VII. AIFM Managing Specific Types of AIF
1. Section 1 (Article 25)—AIFM managing leveraged AIF
2. Section 2 (Articles 26 to 30)—obligations for AIFMs managing AIFs which acquire control of non-listed companies and issuers
(p. 156) 3. Consequences of violation of provisions relating to AIFMs managing specific types of AIF
VIII. Rights of EU AIFMs to Market and Manage EU AIFs in the EU
1. Introduction
2. Article 31—marketing of shares or units of EU AIFs in the home Member State of the AIFM
(p. 159) 3. Article 32—marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM
A. Marketing into the UK by AIFMs from other Member States
B. UK AIFM marketing into other EU Member States
C. Comparison with the UCITS marketing regime
4. Article 33—conditions for managing AIFs established in other Member States
5. Consequences of violation of conditions for EU AIFMs to market and manage EU AIFs in the EU
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
(p. 163) IX. Specific Rules in Relation to Third Countries
1. Article 34—conditions for EU AIFMs that manage non-EU AIFs not marketed in the EU
2. Articles 35 and 36—conditions for marketing in the EU with and without a passport of non-EU AIFs managed by an EU AIFM
A. Article 35
B. Article 36
3. Articles 37 to 41—authorization of non-EU AIFMs and managing and marketing AIFs in the EU
4. Article 42—conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM
5. Consequences of violation of specific rules in relation to third countries
X. Marketing to Retail Investors
1. Article 43—marketing of AIFs by an AIFM to retail investors
2. Consequences of violation of national rules with respect to marketing of AIFs by AIFMs to retail investors
(p. 167) XI. Competent Authorities and Supervisory Powers
1. Designation, responsibility, and powers of competent authorities
XII. Concluding Remarks
Footnotes:
3 France
Stéphane Puel
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
(p. 169) 3  France
I. Introduction
1. Nature of the non-retail investment industry in France: facts and figures
2. Legal structures used to form national AIFs
II. Pre-AIFMD Regulatory Framework
1. Regulation of AIFMs and national AIFs prior to the AIFMD
(p. 174) 2. Regulation of national marketing of AIFs prior to the AIFMD
(p. 175) III. Regulation of National AIFs after the AIFMD
(p. 176) IV. General Provisions of the AIFMD and the Implementing Regulation
1. Implementation table
2. Articles 2 and 3—Scope and exemptions
(p. 177) 3. Article 5—Determination of the AIFM
V. Authorization of AIFMs
1. Implementation table
(p. 178) 2. Articles 6 to 8—Conditions and application for authorization
3. Article 9—Initial capital and own funds
4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal
5. Consequences of violating authorization provisions
A. Regulatory law consequences
(p. 179) B. Criminal law consequences
C. Private law consequences
(p. 180) VI. Operating Conditions for AIFMs
1. Implementation table
(p. 181) 2. Section 1 (Articles 12 to 17)—General requirements
A. Article 12—General principles
B. Article 13—Remuneration
C. Article 14—Conflicts of interest
D. Article 15—Risk management
E. Article 16—Liquidity management
F. Article 17—Investment in securitization positions
3. Section 2 (Articles 18 and 19)—Organizational requirements
A. Article 18—General principles
(p. 183) B. Article 19—Valuation
4. Section 3 (Article 20)—Delegation of AIFM functions
5. Section 4 (Article 21)—Depositary
6. Consequences of violating operating conditions
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VII. Transparency Requirements
1. Implementation table
2. Article 22—Financial reporting
3. Article 23—Disclosure to investors
4. Article 24—Regulatory reporting
5. Consequences of violating transparency requirements
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VIII. AIFM Managing Specific Types of AIF
1. Implementation table
2. Section 1 (Article 25)—AIFM managing leveraged AIF
(p. 189) 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers
4. Consequences of violating provisions relating to AIFMs managing specific types of AIF
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU
1. Implementation table
(p. 190) 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM
3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM
4. Article 33—Conditions for managing AIFs established in other Member States
(p. 191) 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
X. Specific Rules in Relation to Third Countries
1. Implementation table
(p. 192) 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU
3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by EU AIFMs
4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU
5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs
6. Consequences of violating specific rules in relation to third countries
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
XI. Marketing to Retail Investors
1. Implementation table
(p. 195) 2. Article 43—Marketing of AIFs by AIFMs to retail investors
3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors
XII. Competent Authorities and Supervisory Powers
1. Implementation table
(p. 196) 2. Designation, responsibility, and powers of competent authorities
3. Other issues
XIII. Concluding Remarks
Footnotes:
4 Germany
Christian Schmies
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
(p. 199) 4  Germany
I. Introduction
1. Nature of the national non-retail investment industry
2. Legal structures used to form national AIFs
II. Pre-AIFMD Regulatory Framework
1. Regulation of AIFMs and national AIFs prior to the AIFMD
(p. 203) 2. Regulation of national marketing of AIFs prior to the AIFMD
III. Regulation of National AIFs after the AIFMD
IV. General Provisions of the AIFMD and the Implementing Regulation
1. Implementation table
2. Articles 2 and 3—Scope and exemptions
3. Article 5—Determination of the AIFM
(p. 207) V. Authorization of AIFMs
1. Implementation table
2. Articles 6 to 8—Conditions and application for authorization
3. Article 9—Initial capital and own funds
4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal
5. Consequences of violation of authorization provisions
A. Regulatory law consequences
(p. 209) B. Criminal law consequences
C. Private law consequences
VI. Operating Conditions for AIFMs
1. Implementation table
(p. 210) 2. Section 1 (Articles 12 to 17)—General requirements
A. Article 12—General principles
B. Article 13—Remuneration
C. Article 14—Conflicts of interest
D. Article 15—Risk management
(p. 212) E. Article 16—Liquidity management
F. Article 17—Investment in securitization positions
3. Section 2 (Articles 18 and 19)—Organizational requirements
A. Article 18—General principles
B. Article 19—Valuation
4. Section 3 (Article 20)—Delegation of AIFM functions
5. Section 4 (Article 21)—Depositary
6. Consequences of violating operating conditions
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VII. Transparency Requirements
1. Implementation table
2. Article 22—Financial reporting
3. Article 23—Disclosure to investors
4. Article 24—Regulatory reporting
5. Consequences of violation of transparency requirements
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VIII. AIFM Managing Specific Types of AIF
1. Implementation table
(p. 218) 2. Section 1 (Article 25)—AIFM managing leveraged AIF
3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers
(p. 219) 4. Consequences of violation of provisions relating to AIFMs managing specific types of AIF
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU
1. Implementation table
(p. 220) 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM
3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM
4. Article 33—Conditions for managing AIFs established in other Member States
(p. 222) 5. Consequences of violation of conditions for EU AIFMs to market and manage EU AIFs in the EU
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
X. Specific Rules in Relation to Third Countries
1. Implementation table
(p. 223) 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU
3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM
4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU
5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM
6. Consequences of violation of specific rules in relation to third countries
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
XI. Marketing to Retail Investors
1. Implementation table
2. Article 43—Marketing of AIFs by AIFMs to retail investors
3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors
XII. Competent Authorities and Supervisory Powers
1. Implementation table
(p. 227) 2. Designation, responsibility, and powers of competent authorities
3. Other issues
XIII. Concluding Remarks
Footnotes:
9 Spain
Emilio Díaz Ruiz, Salvador Ruiz Bachs
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
(p. 413) 9  Spain
I. Introduction
1. Nature of the national non-retail investment industry
2. Legal structures used to form national AIFs
A. Law 35/2003 of 4 November (‘Fund Law’)
B. Law 25/2005 (‘Venture Capital Law’)
II. Pre-AIFMD Regulatory Framework
1. Regulation of AIFMs and national AIFs prior to the AIFMD
2. Regulation of national marketing of AIFs prior to the AIFMD
III. Regulation of National AIFs after the AIFMD
1. General
2. Amendment of Fund Law15
(p. 422) 3. Venture capital vehicles and other closed-ended AIFs (OSIs)16 (Closed Ended Funds Draft Law)
IV. General Provisions of the AIFMD and the Implementing Regulation
1. Implementation table
(p. 423) 2. Articles 2 and 3—Scope and exemptions
3. Article 5—Determination of the AIFM
V. Authorization of AIFMs
1. Implementation table
(p. 425) 2. Articles 6 to 8—Conditions and application for authorization
3. Article 9—Initial capital and own funds
A. General
(p. 427) B. Open-ended fund managers (UCITS or AIF)
C. Closed-ended fund managers (venture capital and others)
4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal
5. Consequences of violating authorization provisions
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VI. Operating Conditions for AIFMs
1. Implementation table
(p. 429) 2. Section 1 (Articles 12 to 17)—General requirements
A. Article 12—General principles
B. Article 13—Remuneration
C. Article 14—Conflicts of interest
D. Article 15—Risk management
E. Article 16—Liquidity management
F. Article 17—Investment in securitization positions
3. Section 2 (Articles 18 and 19)—Organizational requirements
A. Article 18—General principles
B. Article 19—Valuation
4. Section 3 (Article 20)—Delegation of AIFM functions
5. Section 4 (Article 21)—Depositary
6. Consequences of violating operating conditions
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VII. Transparency Requirements
1. Implementation table
(p. 439) 2. Article 22—Financial reporting
A. Open-ended AIFs
B. Closed-ended AIFs
3. Article 23—Disclosure to investors
A. Open-ended AIFs
B. Closed-ended AIFs
4. Article 24—Regulatory reporting
A. Open-ended AIFs
B. Closed-ended AIFs
5. Consequences of violating transparency requirements
A. Regulatory law consequences
B. Criminal law consequences
(p. 441) C. Private law consequences
VIII. AIFM Managing Specific Types of AIF
1. Implementation table
2. Section 1 (Article 25)—AIFM managing leveraged AIF
3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers
4. Consequences of violating provisions relating to AIFMs managing specific types of AIF
A. Regulatory law consequences
B. Criminal law consequences
(p. 443) C. Private law consequences
IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU
1. Implementation table
2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM
A. Open-ended AIFs
B. Closed-ended AIFs
3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM
4. Article 33—Conditions for managing AIFs established in other Member States
(p. 445) 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
X. Specific Rules in Relation to Third Countries
1. Implementation table
(p. 446) 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU
3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM
4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU
5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM
6. Consequences of violating specific rules in relation to third countries
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
XI. Marketing to Retail Investors
1. Implementation table
2. Article 43—Marketing of AIFs by AIFMs to retail investors
3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors
XII. Competent Authorities and Supervisory Powers
1. Implementation table
(p. 450) 2. Designation, responsibility, and powers of competent authorities
3. Other issues
XIII. Concluding Remarks
Footnotes:
10 Sweden
Dan Hanqvist
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch
(p. 451) 10  Sweden*
I. Introduction
1. Nature of the national non-retail investment industry
2. Legal structures used to form national AIFs
II. Pre-AIFMD Regulatory Framework
1. Regulation of AIFMs and national AIFs prior to the AIFMD
2. Regulation of national marketing of AIFs prior to the AIFMD
(p. 455) III. Regulation of National AIFs after the AIFMD
IV. General Provisions of the AIFMD and the Implementing Regulation
1. Implementation table
2. Articles 2 and 3—Scope and exemptions
3. Article 5—Determination of the AIFM
V. Authorization of AIFMs
1. Implementation table
(p. 457) 2. Articles 6 to 8—Conditions and application for authorization
3. Article 9—Initial capital and own funds
4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal
5. Consequences of violating authorization provisions
A. Regulatory law consequences
(p. 458) B. Criminal law consequences
C. Private law consequences
VI. Operating Conditions for AIFMs
1. Implementation table
(p. 459) 2. Section 1 (Articles 12 to 17)—General requirements
A. Article 12—General principles
B. Article 13—Remuneration
C. Article 14—Conflicts of interest
D. Article 15—Risk management
E. Article 16—Liquidity management
F. Article 17—Investment in securitization positions
3. Section 2 (Articles 18 and 19)—Organizational Requirements
A. Article 18—General principles
B. Article 19—Valuation
4. Section 3 (Article 20)—Delegation of AIFM functions
5. Section 4 (Article 21)—Depositary
6. Consequences of violating operating conditions
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VII. Transparency Requirements
1. Implementation table
2. Article 22—Financial reporting
3. Article 23—Disclosure to investors
4. Article 24—Regulatory reporting
5. Consequences of violating transparency requirements
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
VIII. AIFM Managing Specific Types of AIF
1. Implementation table
2. Section 1 (Article 25)—AIFM managing leveraged AIF
3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers
4. Consequences of violating provisions relating to AIFMs managing specific types of AIF
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU
1. Implementation table
2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM
3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM
4. Article 33—Conditions for managing AIFs established in other Member States
5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
X. Specific Rules in Relation to Third Countries
1. Implementation table
2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU
(p. 470) 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM
4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU
5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM
6. Consequences of violating specific rules in relation to third countries
A. Regulatory law consequences
B. Criminal law consequences
C. Private law consequences
XI. Marketing to Retail Investors
1. Implementation table
2. Article 43—Marketing of AIFs by AIFMs to retail investors
3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors
(p. 473) XII. Competent Authorities and Supervisory Powers
1. Implementation table
2. Designation, responsibility, and powers of competent authorities
3. Other issues
XIII. Concluding Remarks
Footnotes:
(p. 475) Index
Index
Edited By: Lodewijk van Setten, Danny Busch
From: Alternative Investment Funds in Europe
Edited By: Lodewijk van Setten, Danny Busch

Citation preview

Preface Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (‘AIFMD’) heralds a new, more politicized approach to financial services regulation. The original draft of the AIFMD was conceived in the first quarter of 2009, with the full brunt of the 2008 market collapse and the banking crisis very much on the Commission’s shoulders. A much more developed draft was adopted after intense debate in October 2010. Some of the impractical features of the original draft had been modified by then. The Directive was to be transposed into national law by 22 July 2013. Not all Member States have succeeded in meeting this deadline. The Directive has a broad and material impact on the manner in which managers of nonUCITS funds may, subject to a single European regime, operate and offer these funds to professional investors in the EU. Professional investor funds were previously largely unregulated. Certainly, the creation of a single EU market for the operation and marketing of professional investor funds—why a non-UCITS fund must be an ‘alternative investment fund’ is one of the AIFMD’s mysteries—makes good economic policy and is a step forward for the EU financial services market. Nevertheless, the controversial strict liability regime for depositaries may not be in anyone’s interest, may in fact create new systemic risks, and will no doubt increase the overall cost for professional investors who invest in funds operated by fund managers authorized under the AIFMD. Also, it remains to be seen to what extent the restrictions on delegation by an AIFMD authorized fund manager will hamper efficient operation of the professional investor fund industry in Europe. The AIFMD has extraterritorial effect as it seeks to regulate non-EU fund managers who wish to manage EU funds or offer their (EU or non-EU) funds to EU investors. The requirement to be authorized under the AIFMD could potentially dissuade non-EU fund managers, possibly limiting the range of investment funds that may be available to EU pension funds, insurance companies, and other institutional investors in the future. That, again, may increase systemic risk as it could concentrate EU assets in the hands of a smaller pool of fund managers. However, the Directive permits professional investors who From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

are capable and able to select funds at their own initiative to invest in funds that are not managed by an AIFMD authorized fund manager on the grounds that the fund was not ‘marketed’ to the investor. This book aims to provide a complete and practical review of the impact of the AIFMD. Chapter 1 discusses the aims and principles behind the AIFMD and offers a detailed analysis of its provisions, including ‘Level 2’ rules. The remaining chapters analyse and explain the impact of the AIFMD on the national legislation of nine EU Member States and on the creation and regulation of non-UCITS funds in those Member States. The national chapters follow a standard template, allowing for easy comparison of rules between states. The editors’ aim has been to provide the reader with fast-track access to the regulation at European and (p. vi) national level of non-retail EU and non-EU funds and fund managers, which are caught by the AIFMD. We are grateful to the authors of the national chapters for their contributions and are honoured and delighted to have been able to work with leading investment fund specialists from some of the best law firms in Europe. In the process, we learned much about the fascinating and rapidly developing field of fund management law and regulation in Europe. We would also like to acknowledge our gratitude to the editorial team at Oxford University Press, who successfully brought a complex project to completion. The law is stated as at 1 September 2013. Lodewijk van Setten Sevenoaks, England Danny Busch Nijmegen, the Netherlands

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Contents Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Table of Cases xiii Table of Legislation xv List of Abbreviations xlix List of Directive and Regulation Short Forms liii List of Contributors lv 1. The Alternative Investment Fund Managers Directive Danny Busch and Lodewijk van Setten I. Terms of Reference 1.01 II. General Provisions of the AIFMD 1.46 III. Authorization to Manage an AIF 1.130 IV. Operating Requirements 1.210 V. Delegation of AIFM Functions 1.332 VI. Depositary 1.363 VII. Transparency Requirements 1.465 VIII. AIFM Managing Specific Types of AIF 1.491 IX. Marketing AIFs in the EU 1.526 X. Competent Authorities and Supervisory Powers 1.571 XI. Transitional and Final Provisions 1.578

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2. United Kingdom David Rouch I. Pre-AIFMD Regulatory Framework 2.01 II. Regulation of National AIFs after the AIFMD 2.14 III. General Provisions of the AIFMD and the Implementing Regulation 2.19 IV. Authorization of AIFMs 2.42 V. Operating Conditions for AIFMs 2.63 VI. Transparency Requirements 2.127 VII. AIFM Managing Specific Types of AIF 2.137 VIII. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 2.143 IX. Specific Rules in Relation to Third Countries 2.169 X. Marketing to Retail Investors 2.179 XI. Competent Authorities and Supervisory Powers 2.186 XII. Concluding Remarks 2.187 (p. viii) 3. France Stéphane Puel I. Introduction 3.01 II. Pre-AIFMD Regulatory Framework 3.15 III. Regulation of National AIFs after the AIFMD 3.26 IV. General Provisions of the AIFMD and the Implementing Regulation 3.32 V. Authorization of AIFMs 3.40 VI. Operating Conditions for AIFMs 3.50 VII. Transparency Requirements 3.86 VIII. AIFM Managing Specific Types of AIF 3.96 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 3.105 X. Specific Rules in Relation to Third Countries 3.114 XI. Marketing to Retail Investors 3.130 XII. Competent Authorities and Supervisory Powers 3.135 XIII. Concluding Remarks 3.142 4. Germany Christian Schmies I. Introduction 4.01 II. Pre-AIFMD Regulatory Framework 4.15 III. Regulation of National AIFs after the AIFMD 4.23

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IV. General Provisions of the AIFMD and the Implementing Regulation 4.25 V. Authorization of AIFMs 4.36 VI. Operating Conditions for AIFMs 4.46 VII. Transparency Requirements 4.74 VIII. AIFM Managing Specific Types of AIF 4.84 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 4.92 X. Specific Rules in Relation to Third Countries 4.105 XI. Marketing to Retail Investors 4.116 XII. Competent Authorities and Supervisory Powers 4.122 XIII. Concluding Remarks 4.125 5. Ireland Michael Jackson and Dualta Counihan I. Introduction 5.01 II. Pre-AIFMD Regulatory Framework 5.33 III. Regulation of National AIFs after the AIFMD 5.64 IV. General Provisions of the AIFMD and the Implementing Regulation 5.88 V. Authorization of AIFMs 5.94 VI. Operating Conditions for AIFMs 5.111 VII. Transparency Requirements 5.140 VIII. AIFM Managing Specific Types of AIF 5.152 (p. ix) IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 5.159 X. Specific Rules in Relation to Third Countries 5.181 XI. Marketing to Retail Investors 5.190 XII. Competent Authorities and Supervisory Powers 5.192 XIII. Concluding Remarks 5.197 6. Italy Francesco Paolo Crocenzi I. Introduction 6.01 II. Pre-AIFMD Regulatory Framework 6.11 III. Regulation of National AIFs after the AIFMD 6.39 IV. General Provisions of the AIFMD and the Implementing Regulation 6.44 V. Authorization of AIFMs 6.52 VI. Operating Conditions for AIFMs 6.73

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VII. Transparency Requirements 6.127 VIII. AIFM Managing Specific Types of AIF 6.139 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 6.147 X. Specific Rules in Relation to Third Countries 6.161 XI. Marketing to Retail Investors 6.170 XII. Competent Authorities and Supervisory Powers 6.181 XIII. Concluding Remarks 6.193 7. Luxembourg Gilles Dusemon, Victorien Hémery, and Myriam Moulla I. Introduction 7.01 II. Pre-AIFMD Regulatory Framework 7.59 III. Regulation of National AIFs after the AIFMD 7.70 IV. General Provisions of the AIFMD and the Implementing Regulation 7.75 V. Authorization of AIFMs 7.92 VI. Operating Conditions for AIFMs 7.141 VII. Transparency Requirements 7.234 VIII. AIFM Managing Specific Types of AIF 7.261 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 7.267 X. Specific Rules in Relation to Third Countries 7.292 XI. Marketing to Retail Investors 7.315 XII. Competent Authorities and Supervisory Powers 7.318 XIII. Concluding Remarks 7.325 8. The Netherlands Kees Groffen and Bernard Spoor I. Introduction 8.01 II. Pre-AIFMD Regulatory Framework 8.21 (p. x) III. Regulation of National AIFs after the AIFMD 8.34 IV. General Provisions of the AIFMD and the Implementing Regulation 8.37 V. Authorization of AIFMs 8.47 VI. Operating Conditions for AIFMs 8.72 VII. Transparency Requirements 8.102 VIII. AIFM Managing Specific Types of AIF 8.114 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 8.124 X. Specific Rules in Relation to Third Countries 8.133 XI. Marketing to Retail Investors 8.148

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XII. Competent Authorities and Supervisory Powers 8.156 XIII. Concluding Remarks 8.180 9. Spain Emilio Díaz Ruiz and Salvador Ruiz Bachs I. Introduction 9.01 II. Pre-AIFMD Regulatory Framework 9.14 III. Regulation of National AIFs after the AIFMD 9.22 IV. General Provisions of the AIFMD and the Implementing Regulation 9.28 V. Authorization of AIFMs 9.37 VI. Operating Conditions for AIFMs 9.55 VII. Transparency Requirements 9.101 VIII. AIFM Managing Specific Types of AIF 9.113 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 9.124 X. Specific Rules in Relation to Third Countries 9.136 XI. Marketing to Retail Investors 9.151 XII. Competent Authorities and Supervisory Powers 9.156 XIII. Concluding Remarks 9.160 10. Sweden Dan Hanqvist I. Introduction 10.01 II. Pre-AIFMD Regulatory Framework 10.09 III. Regulation of National AIFs after the AIFMD 10.12 IV. General Provisions of the AIFMD and the Implementing Regulation 10.16 V. Authorization of AIFMs 10.22 VI. Operating Conditions for AIFMs 10.35 VII. Transparency Requirements 10.57 VIII. AIFM Managing Specific Types of AIF 10.66 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 10.74 (p. xi) X. Specific Rules in Relation to Third Countries 10.86 XI. Marketing to Retail Investors 10.101 XII. Competent Authorities and Supervisory Powers 10.103 XIII. Concluding Remarks 10.110 Index 475 (p. xii)

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Table of Cases Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

European Union Court of Justice C-591/10 Littlewoods Retail, 19 July 2012 1.19 C-604/11 Genil 48 SL, Comercial Hostelera de Grandes Vinos SL v Bankinter SA, Banco Bilbao Vizcaya Argentaria SA, 30 May 2013 1.19, 8.70

France Cass. Ass. Plé., 4 March 2005, No 03-11.725 3.48 Cass. Com., 26 February 2008, No 07-10761 3.84 Cass. Crim., 5 March 1998, No 96-85.122 3.49 Cass. Crim., 16 June 1999, No 98-83.734 3.49 Cass. Crim., 19 November 2003 3.49 Cass. Crim., 20 June 2007 3.49

Italy Corte di Cassazione, I Civil Section, judgment No 16605 of 15 July 2010, published in Pluris 6.09, 6.124 Corte di Cassazione, I Section, judgment No 3773 of 17 February 2009, published in Pluris 6.121 Corte di Cassazione, I Civil Section, judgment No 16605 of 15 July 2010 6.09, 6.124

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Corte di Cassazione, V Criminal Section, judgments No 22419 of 2 April 2003 and No 43026 of 24 September 2009, published in Pluris 6.70 Tribunale di Milano Decision dated 29 March 2012 6.10

Luxembourg Les Novelles, ‘Les Sociétés’, No 1875 + 1876, 310; Tribunal d’Arrondissement, 23 December 1987, Bulletin Cercle François Laurent, 1991, III, 23 7.134

Netherlands Decision of Minister of Finance dated 11 January 2007, nr. CPP2006/1869M, Stcrt. 2007, 15, BNB 2008/289 8.14 HR 5 May 1968, NJ 1968, 102 (Fokker/Zentveld) 8.54 HR 28 February 1992, NJ 1993, 566 (Iza/Vreerink) 8.54 HR 30 March 2007, LJN AZ7863 8.54

Spain Appeal 46/2004 judgment of the National Court of 2 November 2006 9.94, 9.95 Appeal 502/2004 judgment of the National Court of 15 December 2006 9.94, 9.95 Appeal 507/2004 judgment of the National Court of 21 January 2006 9.94 Appeal 61/2005 judgment of the National Court of 3 April 2006 9.59, 9.94 Appeal 2155/2006 decision (‘auto’) of Supreme Court, First Chamber, of 24 February 2009 9.97 Appeal 541/2008 Section 25, judgment Provincial Court of Madrid, of 7 May 2009 9.97 Appeal 684/2008 Section 20, judgment Provincial Court of Madrid, of 27 November 2009 9.97 (p. xiv) Appeal 353/2010 Section 14, judgment of Provincial Court of Madrid, 25 February 2011 9.97

United Kingdom Grant Estates Limited (in liquidation) v The Royal Bank of Scotland plc [2012] CSOH 133 2.111 Green & Rowley v Royal Bank of Scotland plc [2013] EWCA Civ 1197 2.126

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Table of Legislation Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

European Legislation Treaties and International Instruments OECD Model Tax Convention on Income and on Capital Art 26 1.392, 1.554 Treaty on the Functioning of the European Union Art 153(5) 1.257

Secondary Legislation Regulations 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards recordkeeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive (OJ 2006 L 241/1) (‘MiFID Implementation Regulation’) 1.270 Art 45(1) 1.231 Art 45(2) 1.231 24/2009 Regulation (EC) of the European Central Bank of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions (ECB/2008/30) (ECB Regulation) 1.301 Art 1(2) 1.301

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583/2010 Commission Regulation (EU) of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website (OJ 2010 L176/1) (‘UCITS Regulation’) 1.476 Arts 1–5 1.544 Art 38 1.476 1092/2010 Regulation (EU) of European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (OJ 2010 L331/1). 1.40 1093/2010 Regulation (EU) of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ 2010 L331/12) 1.39 recital (8) 1.40 Art 1(2) 1.40 Arts 54–57. 1.40 1094/2010 Regulation (EU) of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/ EC (OJ 2010 L331/48) 1.39 recital (8) 1.40 Art 1(2) 1.40 Arts 54–57. 1.40 1095/2010 Regulation (EU) of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ 2010 L331/84) (‘ESMA Regulation’) 1.39, 1.153, 3.114, 8.170, 9.156, 10.93 recital (8) 1.40 Art 1(2). 1.40, 1.43 Arts 10–14 1.43, 1.152, 1.185, 1.187, 1.201 Art 10(1) 1.44, 1.108 Art 15 1.152, 1.153, 1.185, 1.529, 1.534, 1.544, 1.545, 1.546, 1.550, 3.135, 3.141 Art 16 1.45, 10.93 (p. xvi) Art 19 1.171, 1.175, 1.203, 1.204, 1.392, 1.555, 1.562, 1.577

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Art 19(3) 1.171, 1.204, 1.555 Arts 54–57. 1.40 236/2012 Regulation (EU) of the European Parliament and the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (OJ 2012 L86/1) 1.28 231/2013 Commission Delegated Regulation (EU) of 19 December 2012 supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (OJ 2013 L83/1) (‘Implementing Regulation’) 1.42, 1.89, 1.308, 1.472, 2.16, 2.18, 2.53, 2.64, 2.80, 2.107, 2.110, 2.113, 2.114, 2.125, 3.38, 3.50, 4.47, 4.48, 4.52, 4.58, 5.122, 5.135, 6.82, 6.83, 6.85, 6.86, 6.134, 7.84, 7.108, 7.142, 7.145, 7.147, 7.154, 7.160, 7.162, 7.164, 7.171, 7.173, 7.174, 7.179, 7.196, 7.208, 7.221, 7.227, 7.237, 7.251, 7.267, 7.315, 8.35 recitals (6)–(9) 1.93 recital (11) 1.126 recital (12) 1.126 recital (14) 1.123 recital (40) 7.146 recital (41) 7.147 recital (42) 1.219 recital (45) 1.227, 1.230, 7.144 recital (46) 1.230, 1.237, 7.145 recital (51) 7.162 recital (91) 7.196 recital (132) 1.129 Chap III, section 1 1.214 Art 1(2) 1.196, 1.236, 1.270, 1.274 Arts 2–5 7.75 Art 2(1) 1.91 Art 2(1)(b) 1.92 Art 2(2). 1.91 Art 2(3) 1.92 Art 2(4)–(6) 1.91 Arts 3–(5) 1.93

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Arts 3–7 3.32, 4.25, 5.88, 6.44, 8.37, 10.16 Art 4(3) 1.93 Art 4(4) 1.93 Arts 6–11 1.121, 6.81, 7.75 Art 6(1) 1.121, 1.128 Art 6(2) 1.124, 6.81 Art 6(3) 1.122 Art 6(4) 1.123 Art 7. 1.124 Art 7(a) 1.124 Art 7(b) 1.124 Art 7(c) 1.124 Art 7(d) 1.124 Art 7(e) 1.124 Art 8 1.486 Arts 8–13 3.50, 3.97, 4.25, 5.88, 6.44, 8.37, 10.16, 10.66 Art 8(1) 1.125 Art 8(2)(a) 1.125 Art 8(2)(b) 1.125 Art 8(2)(c) 1.125 Art 8(2)(d) 1.125 Art 8(4) 1.125 Art 8(5) 1.125 Art 8(6) 1.125 Art 8(7) 1.125 Art 8(8) 1.125 Art 10 1.92, 1.124, 1.125 Art 12 2.53, 6.60 Arts 12–15 7.108, 8.47

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Art 12(1) 1.196 Art 12(2) 1.196 Art 12(3) 1.196 Art 13 1.196 Art 14 1.196 Arts 14–17 3.40, 4.36, 5.94, 6.52, 7.92, 9.37, 10.22 Art 14(2). 1.277 Art 14(3), first para 1.280 Art 14(3) second para 1.280 Art 15 1.196 Art 16 1.214, 2.78 Arts 16–30 8.72 Arts 17–29 3.50 Art 17(1) 1.215 Art 17(2) 1.216 Arts 18–30 3.50, 4.46, 5.111, 6.73, 7.141, 9.55, 10.35 Art 18(1) 1.217 Art 18(2) 1.217 Art 18(3) 1.217 Art 19 1.218, 7.146 Art 19(5) 1.327 Art 19(6) 1.327 Art 19(7) 1.328 Art 19(9) 1.328 Art 20 7.147 Art 20(1) 1.245 Art 20(2) 1.246 Art 20(2)(a) 1.246 Art 20(2)(b) 1.246

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Art 20(2)(c) 1.246 Art 20(3) 1.246 Art 20(4) 1.248 Art 21. 1.219 Art 22 1.220 Art 23 7.148 (p. xvii) Art 23(1) 1.221 Art 23(2) 1.221 Art 24(1) 1.224 Art 24(3) 1.243 Art 25(1) 1.234 Art 25(2)(a) 1.234 Art 25(2)(b) 1.234 Art 25(3) 1.235 Art 25(4) 1.236 Art 26(1) 1.243 Art 26(2) 1.243 Art 26(3) 1.243 Art 26(4) 1.244 Art 27 7.144 Art 27(1) 1.226 Art 27(2) 1.228 Art 27(2)–(5) 1.226 Art 27(2)(a)–(d) 1.228 Art 27(3) 1.229 Art 27(4) 1.229 Art 27(5) 1.229 Art 27(6) 1.229 Art 27(7) 1.226

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Art 28 7.144 Art 28(1) 1.231 Art 28(2) first para 1.231 Art 28(2) second para 1.233 Art 28(2)–(4). 1.231 Art 28(3) 1.233 Art 28(4) 1.233 Art 28(5) 1.231 Art 29(a) 1.238 Art 29(b) 1.238 Art 29(2) 1.239 Art 29(2) 1.240 Art 29(4) first para 1.241 Art 29(4) second para 1.242 Art 30. 1.270 Arts 30–37 1.212, 3.55 Art 31 7.141 Arts 31–34 1.355 Arts 31–37 8.72 Arts 31–38 3.50, 4.46, 5.111, 6.73, 7.141, 9.55, 10.35, 10.40 Art 31(1) first para 1.272 Art 31(1) second para 1.272 Art 31(2)(A) 1.273 Art 32. 1.278, 7.141, 7.160 Art 32(2)(b) 1.273 Art 33 7.141 Art 33(1) 1.274 Art 34 1.275, 7.141 Art 34(2) 1.274

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Art 34(2) in fine 1.274 Art 35 1.276, 7.141 Art 35(2) 1.276 Art 36 1.355, 7.141 Art 36(1) 1.277 Art 36(2) 1.277 Art 37 7.141 Art 37(1) 1.281 Art 37(2) 1.281 Art 37(3) 1.281 Art 38 1.284, 7.141 Arts 38–45 8.72 Art 39 1.283, 7.141 Art 39(1) 6.78 Arts 39–46 3.50, 4.46, 5.111, 6.73, 7.141, 9.55, 10.35, 10.41 Art 40 7.141 Art 40(2) 1.286 Art 40(3)(a) 1.284 Art 40(3)(d) 1.288 Art 41 1.284, 2.77, 7.141 Art 42 1.283, 7.141 Art 43 1.283, 7.141 Art 44 1.286, 7.141 Art 45 7.141 Art 45(1) 1.284 Art 46 1.291, 7.141 Arts 46–49 1.291, 8.72 Art 47 1.291, 2.79, 7.141 Arts 47–50. 3.50, 4.46, 5.111, 6.73, 7.141, 9.55, 10.35

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Art 47(1)(c) 1.291 Art 47(1)(e) 1.295 Art 48 1.291, 7.141 Art 49 6.184, 7.141 Art 49(1) 1.294, 1.295 Art 49(2) 1.294 Art 50 1.306, 7.141 Arts 50–56 1.306, 5.122, 8.72 Art 51 1.307, 1.310, 7.141 Arts 51–56 3.50, 3.61, 4.46, 5.111, 6.73, 7.141, 9.55, 10.35, 10.45 Art 51(1) 1.307 Art 51(2) 1.307 Art 52 1.310, 1.311, 7.141 Art 53 1.310, 1.312, 7.141 Art 53(1) 1.312 Art 53(2) second para 1.313 Art 53(3) 1.314 Art 53(4) 1.315 Art 53(5) 1.315 Art 54 1.307, 7.141 Art 54(1) 1.308 Art 54(2) 1.309 Arts 55–56 7.141 Art 56 1.306 Art 57 1.316 Arts 57–59 3.62 Arts 57–60 7.141 (p. xviii) Arts 57–66 7.177, 8.72 Arts 57–67 3.50, 4.46, 5.111, 6.73, 7.141, 9.55, 10.35, 10.46

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Art 58 1.316 Art 59 1.316 Art 60 1.317 Art 61 1.317, 7.141 Arts 61–63 3.62 Art 62 1.317 Arts 62–65 7.141 Art 63 1.316 Art 64 1.316 Art 65 1.316 Art 66 1.316 Art 66(1) 7.141 Art 66(2) 7.141 Art 66(3) 7.141 Art 66(4) 7.141 Art 66(5) 7.141 Art 66(6) 7.141 Arts 67–74 1.323, 7.141, 8.72 Arts 68–75 3.50, 4.46, 5.111, 6.73, 9.55, 10.35, 10.47 Art 75 6.96 Arts 75–82 3.38, 7.141, 7.191, 8.72 Art 75(a) 1.356 Art 75(b) 1.356 Art 75(c) 1.345 Art 75(e) first sentence 1.347 Art 75(e) second sentence 1.347 Art 75(e) third sentence 1.348 Art 75(f) first sentence. 1.348 Art 75(f) second sentence 1.348

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Art 75(g) 1.349 Art 75(i) 1.344 Art 75(j) 1.347 Art 75(k) 1.350 Art 75(l) 1.351 Art 76 7.194 Arts 76–81 1.327 Arts 76–83 3.50, 4.46, 5.111, 6.73, 9.55, 10.35, 10.49 Art 78 1.345 Art 78(2) 1.342 Art 78(3) 1.343 Art 80(1) 1.353 Art 80(2) 1.354 Art 80(3) 1.355 Art 81(2) 1.361 Art 82 1.360, 2.33, 2.36, 6.94, 7.196, 7.198 Art 82(1)(a)–(d) 1.359 Art 82(1)(d) 7.196 Art 82(1)(d), second sentence 1.360 Art 82(2) 1.360, 1.370 Art 82(3) 1.360, 1.370 Art 83 1.369, 5.134 Arts 83–102 3.70, 7.141 Art 83(1)(a) 1.371 Art 83(1)(b) 1.372 Art 83(1)(c) 1.373 Art 83(1)(d) 1.374 Art 83(1)(e) 1.375 Art 83(1)(f) 1.377

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Art 83(1)(g) 1.378 Art 83(1)(h) 1.379 Art 83(1)(i) 1.380 Art 83(1)(j) 1.381 Art 83(1)(k) 1.382 Art 83(1)(l) 1.383 Art 83(1)(m) 1.384 Art 83(1)(n) 1.385 Art 83(1)(o) 1.386 Art 83(1)(p) 1.387 Art 83(1)(q) 1.388 Art 83(1)(r) 1.389 Art 83(3) 1.370 Art 83(4) 1.376 Art 83(5) 1.370 Art 83(6) 1.390 Art 84 1.392 Arts 84–103 3.50, 4.46, 5.111, 6.73, 9.55, 10.35, 10.50 Art 85 1.403 Arts 85–102 8.72 Art 85(a)–(c) 1.403 Art 85(1) 1.403 Art 85(2) 1.403 Art 86(a) 1.402 Art 86(b) 1.402 Art 86(c) 1.402 Art 86(d) 1.402 Art 86(e) 1.402 Art 86(f) 1.402

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Art 87. 1.402 Art 88(1) 1.405 Art 88(2) 1.405 Art 88(3) 1.405 Art 89(1)(a) 1.406 Art 89(1)(b) 1.407 Art 89(1)(c) 1.408 Art 89(1)(d) 1.409 Art 89(1)(e) 1.410 Art 89(1)(f) 1.411 Art 89(1)(g) 1.412 Art 89(3) 1.415 Art 90(1) 1.417 Art 90(2)(a) 1.418 Art 90(2)(b) 1.419 Art 90(2)(c), last para 1.420 Art 90(2)(c)(i) 1.420 Art 90(2)(c)(ii) 1.420 (p. xix) Art 90(2)(c)(iii) 1.420 Art 90(3) 1.421 Art 90(4) 1.422 Art 90(5) 1.424 Art 91 1.399 Art 92 1.425 Art 93 1.425 Art 94 1.425 Art 95 1.425 Art 96 1.425 Art 97 1.425

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Art 98 1.439 Art 99 1.413, 1.440 Art 99(1)(a) 2.106 Art 99(3) 1.440, 2.106 Art 100 2.121 Art 100(1) 1.446 Art 100(1)(a) 1.446 Art 100(1)(b) 1.446 Art 100(1)(c) 1.446 Art 100(2) 1.448 Art 100(3) 1.446 Art 100(4). 1.447 Art 100(5) 1.446 Art 101(1)(a) 1.450 Art 101(1)(b) 1.450 Art 101(1)(c) 1.450 Art 101(1)(c)(i)–(iii) 1.450 Art 101(2) 1.451 Art 102(1) 1.460 Art 102(2) 1.460 Art 102(3) 1.461 Art 103 1.468 Arts 103–107. 4.76 Arts 103–111. 7.234 Art 103(1)(e) 1.452 Arts 104–112 4.74, 5.140, 6.127, 8.102, 9.101, 10.57 Art 104(1) 1.472 Art 104(2) 1.472 Art 104(3) 1.472

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Art 104(4) 1.472 Art 104(5) 1.472 Art 104(6) 1.472 Art 104(7) 1.472 Art 105 1.472 Art 106 1.472, 7.236, 7.239, 7.240, 7.241, 7.247 Art 106(1). 1.472, 1.478 Art 107 1.472 Art 108 2.79 Art 108(1) 1.480 Art 108(2) 1.480 Art 108(3) 1.480 Art 108(4) 1.480 Art 108(5) 1.480 Arts 109–110 10.58 Art 109(1) 1.481 Art 109(2) 1.481 Art 109(3) 1.481 Art 110(1) in fine 1.483 Art 110(1)(a) 1.483 Art 110(1)(b) 1.483 Art 110(2)(a) 1.484 Art 110(2)(b) 1.484 Art 110(2)(c) 1.484 Art 110(2)(d) 1.484 Art 110(2)(e) 1.484 Art 110(2)(f) 1.484 Art 110(3) 1.483, 1.484 Art 110(4) 1.483, 1.484

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Art 110(6) 1.483, 1.484 Art 110(7) 1.483 Art 111 1.129 Arts 111–112 10.60 Art 111(1) 1.486 Art 111(2) 1.486, 1.487, 1.488 Art 112 1.491, 2.137 Art 112(1)(c) 1.483 Art 113. 3.96, 4.84, 5.152, 6.139, 7.261, 8.114, 9.113, 10.66 Arts 113–115 7.292 Arts 114–116 3.114, 5.181, 10.86 Annex II 1.120, 1.124, 1.125 Annex II para 1 1.125 Annex II para 2 1.125 Annex II para 3 1.124, 1.125 Annex II paras 10–13 1.124, 1.125 Annex IIII 1.92, 1.124, 1.125 Annex IVIV 1.472 345/2013 Regulation (EU) of the European Parliament and of the Council of 17 April 2013 on European venture capital funds (OJ 2013 L115/1) 6.139 346/2013 Regulation (EU) of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds (OJ 2013 L115/18) 6.139 447/2013 Opt-In Implementing Regulation (EU) of 15 May 2013 establishing the procedure for AIFMs which choose to opt in under Directive 2011/61/EU of the European Parliament and of the Council (OJ 2013 L132/1) 1.42 575/2013 Regulation (EU) of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/201 (OJ 2013 L176/1) 1.192, 2.46, 2.98 (p. xx) Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products, COM (2012) 352 final, 3 July 2012 (‘Packaged Retail Investment Products Regulation’ or ‘PRIPs’) 1.69 Art 4(a) 1.69

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Directives 77/91/EEC Second Council Directive (OJ 1977 L26/1) 5.38 Art 20(1), points (b)–(h) 1.524 Art 22(2) 1.521 78/660/EEC Fourth Council Directive 5.38 85/611/EEC Council Directive of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (OJ 1985 L375/3) (the original UCITS Directive) (‘UCITS I Directive’) 1.01, 6.06, 6.57, 7.01, 7.02 Art 1 1.01 Art 2 1.01 Art 2(1)(b) 6.14 Art 57(1). 1.01 93/6/EEC Council Directive of 15 March 1993 on the capital adequacy of investments firms and credit institutions (OJ 1993 L141/1) 1.192 95/46/EC Directive of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (OJ 1995 L281/31) 6.186 97/9/EC Directive of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes (OJ 1997 L84/22) 1.250 98/26/EC Directive of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (OJ 1998 L166/45) 1.433 2000/12/EC Directive of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions (OJ 2000 L126/1) 1.402 2001/107/EC Directive of the European Parliament and of the Council of 21 January 2002 (OJ L41/20) 6.57, 7.26 2001/108/EC Directive of the European Parliament and of the Council of 21 January 2002 (OJ L41/35) 6.57 2002/14/EC Directive of the European Parliament and of the Council of 11 March 2002 establishing a general framework for informing and consulting employees in the European Community (OJ 2002 L80/29) 1.506 Art 6 1.506 2002/83/EC Directive of the European Parliament and of the Council of 5 November 2002 concerning life assurance (OJ 2002 L345/1) (Life Insurance Directive) 1.69

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2003/41/EC Directive of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (OJ 2003 L235/10) 7.97, 8.37 Art 19(1) 1.140 2003/71/EC Directive of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (‘Prospectus Directive’) OJ 2003 L345/64 1.477, 1.479, 2.11, 4.22, 5.48, 6.197, 7.65, 8.30, 8.141, 9.18, 9.146 Art 3(2) 9.18 2004/25/EC Directive of the European Parliament and of the Council of 21 April 2004 on takeover bids (OJ 2004 L142/12) (‘Takeover Directive’). 1.498, 8.116 Art 5(3) 1.505 2004/39/EC Directive of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (OJ 2004 L145/1) (‘MiFID’) 1.19, 1.43, 1.69, 1.85, 1.87, 1.141, 1.145, 1.146, 1.192, 1.208, 1.210, 1.227, 1.237, 1.249, 1.250, 1.277, 1.316, 1.342, 1.356, 1.391, 1.483, 2.45, 2.46, 2.52, 2.57, 2.63, 2.71, 2.72, 2.91, 2.98, 2.143, 2.156, 3.24, 3.50, 3.54, 3.56, 3.59, 4.33, 4.72, 4.73, 5.39, 5.52, 6.15, 6.34, 6.58, 6.74, 6.77, 6.84, 6.94, 6.95, 6.129, 6.149, 6.196, 7.26, 7.142, 7.143, 7.159, 8.30, 8.50, 8.55, 8.70, 9.64, 9.99, 10.09, 10.26, 10.39, 10.93 Art 1(1) 1.87 Art 2(2) 1.145 (p. xxi) Art 4(1) 1.187 Art 4(1)(4) 1.88 Art 4(1)(14) 1.503, 1.505, 1.507, 1.513, 1.519, 1.523 Art 5(3) 1.209 Art 6. 10.30 Art 7(1) 1.186 Art 7(2) 1.178 Art 7(3) 1.200 Art 8 10.30 Art 8(a) 1.208 Art 8(b) 1.208 Art 8(c) 1.208 Art 8(c) in fine 1.208 Art 8(d) 1.208 Art 8(e) 1.208

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Art 9 1.187 Art 10, first para 1.178 Art 10, second para 1.178 Art 10, third para. 1.201 Art 10(2), first part 1.201 Art 10(2), second part 1.201 Art 12 1.145 Art 13 1.145, 10.46, 10.49 Art 13(3). 1.212, 1.268, 10.35 Art 13(4) 10.35 Art 18 10.40 Art 18(1) 1.269 Art 18(2) 1.277 Art 19 1.145 Art 19(1) 1.212, 10.35 Art 19(4) 8.70 Art 19(5) 8.70 Art 21(1) 1.228 Art 21(2) 1.229 Art 21(4) 1.229 Art 21(5) 1.229 Art 22(1), first para 1.234 Art 22(1), second para 1.234 Art 25(1) 1.212 Art 45(6) 1.233 Annex I, section A(2) 1.88 Annex I, section A(5) 1.88 Annex I, section B. 1.391 Annex I, section C 1.85

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Annex II 7.26 2004/109/ EC Directive of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (OJ 2004 L390/38) (‘Transparency Directive’) 1.471, 1.498, 4.86, 8.116, 10.93 Art 2(1), point (d). 1.503, 1.505, 1.507, 1.513, 1.519, 1.523 Art 9 1.178, 1.187 Art 10 1.178, 1.187 Art 12(4) 1.178, 1.187 Art 12(5) 1.178, 1.187 2006/43/EC Directive of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts (OJ 2006 L157/87) 1.474, 2.129, 8.103 2006/48/EC Directive of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (OJ 2006 L177/1) (Banking Directive) 1.69, 1.141, 1.303, 1.306, 1.342, 1.391, 7.26 Art 4. 1.306 Art 4(1) 1.300, 1.301 Art 4(1)(36) 1.300 Art 4(1)(37) 1.303 Art 4(1)(38) 1.303 Art 4(1)(39) 1.300 Art 4(1)(40) 1.306 Art 4(1)(41) 1.306 Art 4(1)(43) 1.306 Art 122a(3) 1.307 2006/49/EC Directive of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) (OJ 2006 L177/201) (Capital Requirements Regulation (CRR)) 1.192, 1.208 Art 5 1.192 2006/73/EC Commission Directive of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (OJ 2006 L241/26) (‘MiFID Implementing Directive’) 1.270, 10.35, 10.40, 10.46, 10.49 Art 14(1)(b). 1.356

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Art 14(2) 1.341 Art 14(2), first para. 1.346 Art 14(2)(b). 1.347 Art 14(2)(c). 1.345, 1.348 Art 14(2)(d). 1.345, 1.347 Art 14(2)(e). 1.348 Art 14(2)(f). 1.347 Art 14(2)(g). 1.346 (p. xxii) Art 14(2)(j) 1.350 Art 14(2)(k) 1.351 Art 15(1) 1.343 Art 16 1.402, 1.406, 2.105 Art 21. 1.270 Art 22(1), first para 1.272 Art 22(1), second para 1.272 Art 22(2)(a) 1.273 Art 22(2)(b) 1.273 Art 22(3), first para 1.274 Art 22(3), second para 1.274 Art 22(4) 1.277 Art 26. 1.225 Art 44(1) 1.228 Art 45(4), first para 1.231 Art 45(5) 1.233 Art 47(1)(a). 1.235 Art 47(1)(b). 1.234 Art 47(2) 1.235 Art 47(3). 1.236 Art 48(1)(a) 1.238

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Art 48(1)(c) 1.238 Art 48(2) 1.239, 1.241 Art 49(1) 1.240 Art 49(2), first para 1.242 2007/16/EC Commission Directive of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions (OJ 2007 L79/11) Art 10 1.405 2009/65/EC Directive of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (OJ 2009 L302/32) (‘UCITS Directive’) 1.11, 1.43, 1.51, 1.74, 1.75, 1.95, 1.143, 1.144, 1.185, 1.192, 1.197, 1.200, 1.210, 1.237, 1.289, 1.316, 1.342, 1.455, 2.06, 2.10, 2.46, 2.47, 2.63, 2.71, 2.74, 2.81, 2.91, 2.154, 2.156, 2.157, 3.50, 3.54, 3.55, 3.59, 3.62, 3.68, 3.69, 3.131, 4.24, 4.52, 4.54, 4.59, 4.66, 5.111, 5.172, 6.14, 6.62, 6.74, 6.77, 6.197, 7.141, 7.142, 7.159, 7.162, 7.166, 7.177, 7.195, 7.250, 7.251, 7.261, 7.277, 7.285, 7.286, 7.287, 8.01, 8.50, 8.51, 8.55, 8.92, 8.151, 9.03, 9.05, 9.16, 9.21, 9.44, 9.45, 9.56, 9.61, 9.64, 9.86, 9.103, 9.115, 9.132, 10.11, 10.13, 10.58 Chap IV 1.218 Art 1 1.01 Art 1(6) 1.01 Art 2(1)(j) 1.178, 1.187 Art 3(b) 1.01 Art 5(1) 1.01 Art 5(4), second para 1.200 Art 6(2) 1.74 Art 6(3) 1.74 Art 6(3), last para 1.146 Art 6(3)(a) 1.144 Art 6(3)(b)(i) 1.144 Art 6(3)(b)(ii) 1.144 Art 7 6.53, 10.25, 10.30 Art 7(1), in fine 1.195 Art 7(1)(a) 1.190

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Art 7(1)(a)(i) 1.191 Art 7(1)(a)(ii) 1.193 Art 7(1)(a)(iii) 1.191 Art 7(1)(b) 1.187 Art 7(1)(c) 1.178 Art 7(1)(d) 1.187 Art 7(2), first para. 1.201 Art 7(2), second para. 1.201 Art 7(5)(a) 1.208 Art 7(5)(b) 1.208 Art 7(5)(c) 1.208 Art 7(5)(d) 1.208 Art 7(5)(e) 1.208 Art 7(5)(f) 1.208 Art 8 6.53, 10.25 Art 8(1) 1.187 Art 8(1), first para 1.178 Art 8(1), second para 1.187 Art 8(3) 1.199 Art 9 1.189 Art 12 4.59, 10.46 Art 12(1)(b) 1.268, 1.269, 10.40 Art 13 10.49 Art 13(1)(a) 1.336 Art 13(1)(b) 1.345 Art 13(1)(c) 1.342 Art 13(1)(d) 1.343 Art 13(1)(e) 1.352, 1.354 Art 13(1)(f) 1.346

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Art 13(1)(g) 1.346 Art 13(1)(g), second part 1.346 Art 13(1)(h) 1.346 Art 13(2), first sentence. 1.356 Art 13(2), second sentence 1.358 Art 14 10.35 Art 14(1)(a) 1.212 Art 14(1)(b) 1.212 Art 14(1)(c) 1.212 (p. xxiii) Art 14(1)(d) 1.212 Art 14(1)(e) 1.212 Art 14(2)(c). 10.40 Arts 16–21 6.14 Art 16(3) 1.151 Art 17(2)(a) 1.152 Art 17(2)(b) 1.152 Art 17(2)(c) 1.153 Art 17(2)(d) 1.153 Art 17(3), first para 1.154 Art 17(7). 1.156 Art 17(8). 1.160 Art 17(9). 1.160 Art 18(1)(b) 1.152 Art 18(2), first para 1.154 Art 18(2), last para 1.156 Art 18(4) 1.160 Art 23(2) 8.96 Art 23(3) 1.391 Art 23(5) 1.370

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Art 24, first para 1.443 Art 27, third para 1.187 Art 29(1) 1.190 Art 29(1)(a) 1.178 Art 29(1)(b) 1.187 Art 29(1)(c), first para 1.201 Art 29(1)(c), second para 1.201 Art 29(2) 1.200 Art 29(4)(a) 1.208 Art 29(4)(b) 1.208 Art 29(4)(c) 1.208 Art 32(2) 1.455 Art 32(3)(a) 1.425 Art 32(3)(b) 1.425 Art 32(3)(c) 1.425 Art 33(2) 1.391 Art 33(3) 1.391 Art 33(4). 1.464 Art 33(5) 1.370 Art 34 1.443 Art 51. 10.41 Art 51(3), final sub-para. 1.405 Art 68(1)(a) 1.476 Art 68(2)(a) 1.469 Art 69(1) 1.476 Art 69(3) 1.472 Arts 70–75 1.476 Art 75(1) 1.470, 1.478 Arts 78–82 1.476

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Art 91 1.01 Art 93(1), second para 1.544 Art 93(2). 1.544 Art 93(3) 2.154 Art 93(3), second para 1.545 Art 93(3), third para 1.545, 1.547 Art 93(4) 1.544 Art 93(5) 1.548 Art 93(7) 1.551 Art 93(8) 1.551 Annex I. 1.75 Annex I, Sch A 1.476 Annex I, Sch B, point 1 1.472 Annex II 1.74 2009/138/EC Directive on the taking-up and pursuit of the business of Insurance and Reinsurance (‘Solvency II’) (OJ 2009 L335/1). 8.169, 8.173, 8.178 2010/43/EU Commission Directive of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (OJ 2010 L176/42) (‘UCITS Implementing Directive’) 1.221, 1.270, 7.141, 7.183, 9.05, 10.35, 10.40, 10.41, 10.46, 10.49 Art 12 1.283 Art 17(1). 1.270 Art 18(1), first para 1.272 Art 18(1), second para 1.272 Art 18(2)(a) 1.273 Art 18(2)(b) 1.273 Art 19(1) 1.274 Art 19(2) 1.274 Art 20(1) 1.276 Art 20(2) 1.275

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Art 20(3) 1.275 Art 21(1) 1.281 Art 21(2) 1.281 Art 21(3) 1.281 Art 22(1), first para 1.212, 1.221 Art 22(1), second para 1.221 Art 22(2) 1.215 Art 22(4) 1.216 Art 23(1). 1.217 Art 23(2). 1.217 Art 23(3). 1.217 Art 24(1), first para. 1.243 Art 24(1), second para. 1.243 Art 24(2). 1.243 Art 24(4) 1.244 Art 25(1) 1.226 Art 25(2). 1.228 Art 25(2)(a)–(d) 1.228 Art 25(3) 1.229 Art 25(4) 1.229 (p. xxiv) Art 25(5) 1.229 Art 26(1) 1.231 Art 26(2) 1.233 Art 26(2), first para 1.231 Art 26(2), second para 1.233 Art 26(4) 1.233 Art 27(1). 1.270 Art 27(1), first para 1.234 Art 27(1), third para 1.235

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Art 27(1)(a), second para 1.234 Art 27(1)(b), second para 1.234 Art 27(2) 1.236 Art 28(1)(a) 2.138 Art 28(1)(b) 2.138 Art 28(3) 1.240 Art 28(4), first para 1.242 Art 29 1.225 Art 30(a). 1.372 Art 30(b). 1.380 Art 30(c). 1.377 Art 30(d) 1.378 Art 30(f) 1.389 Art 30(2) 1.239, 1.241 Art 31(1)(a). 1.381 Art 31(1)(b) 1.375 Art 31(1)(c) 1.384 Art 31(2) 1.375 Art 32(c) 1.373 Art 33 1.374 Art 34 1.390 Art 35 1.376 Art 36 1.370 Art 39(e). 1.388 2010/73/EU Directive of the European Parliament and of the Council of 24 November 2010 amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (OJ 2010 L327/1) 1.477 2010/76/EU Directive of the European Parliament and of the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital

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requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies (OJ 2010 L329/3) (CRD 3). 3.59 2010/78/EU Directive in respect of the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority) (OJ 2010 L331/120) (‘Omnibus I Directive’) 8.169, 10.93 2011/61/EU Directive of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ 2011 L174) (AIFMD) 1.04, 1.05, 1.06, 1.07, 1.08, 1.09, 1.10, 1.11, 1.12, 1.13, 1.14, 1.22, 1.23, 1.24, 1.28, 1.31, 1.32, 1.33, 1.41, 1.42, 1.43, 1.44, 1.46, 1.48, 1.50, 1.57, 1.63, 1.65, 1.66, 1.68, 1.69, 1.71, 1.72, 1.74, 1.75, 1.76, 1.82, 1.84, 1.86, 1.88, 1.93, 1.94, 1.96, 1.99, 1.101, 1.111, 1.114, 1.136, 1.138, 1.141, 1.143, 1.146, 1.150, 1.154, 1.156, 1.158, 1.159, 1.160, 1.169, 1.178, 1.182, 1.184, 1.186, 1.189, 1.192, 1.208, 1.209, 1.210, 1.225, 1.237, 1.263, 1.266, 1.282, 1.284, 1.285, 1.287, 1.289, 1.291, 1.292, 1.301, 1.304, 1.311, 1.323, 1.330, 1.333, 1.334, 1.335, 1.342, 1.343, 1.345, 1.356, 1.357, 1.363, 1.364, 1.366, 1.367, 1.376, 1.393, 1.395, 1.397, 1.398, 1.399, 1.435, 1.437, 1.443, 1.444, 1.454, 1.455, 1.458, 1.461, 1.465, 1.466, 1.467, 1.472, 1.476, 1.482, 1.499, 1.519, 1.526, 1.531, 1.535, 1.536, 1.544, 1.545, 1.551, 1.554, 1.559, 1.566, 1.567, 1.573, 1.577, 1.578, 2.01, 2.02, 2.08, 2.10, 2.14, 2.15, 2.16, 2.17, 2.19, 2.20, 2.21, 2.26, 2.27, 2.28, 2.29, 2.34, 2.36, 2.45, 2.46, 2.47, 2.48, 2.53, 2.54, 2.56, 2.59, 2.63, 2.69, 2.70, 2.71, 2.72, 2.80, 2.83, 2.87, 2.88, 2.89, 2.91, 2.94, 2.95, 2.96, 2.98, 2.99, 2.100, 2.101, 2.103, 2.104, 2.105, 2.116, 2.119, 2.124, 2.125, 2.127, 2.129, 2.131, 2.143, 2.145, 2.150, 2.154, 2.156, 2.157, 2.158, 2.159, 2.161, 2.169, 2.170, 2.171, 2.172, 2.175, (p. xxv) 2.179, 2.181, 2.186, 2.187, 3.05, 3.15, 3.17, 3.25, 3.26, 3.27, 3.29, 3.30, 3.32, 3.33, 3.34, 3.35, 3.39, 3.40, 3.41, 3.42, 3.43, 3.44, 3.46, 3.53, 3.54, 3.60, 3.62, 3.63, 3.67, 3.68, 3.72, 3.73, 3.74, 3.75, 3.78, 3.80, 3.81, 3.87, 3.90, 3.91, 3.93, 3.94, 3.96, 3.100, 3.101, 3.102, 3.105, 3.107, 3.110, 3.111, 3.114, 3.119, 3.122, 3.124, 3.125, 3.126, 3.131, 3.132, 3.135, 3.136, 3.142, 3.143, 4.01, 4.04, 4.11, 4.12, 4.14, 4.16, 4.17, 4.18, 4.23, 4.24, 4.27, 4.28, 4.29, 4.30, 4.35, 4.41, 4.42, 4.45, 4.49, 4.51, 4.52, 4.53, 4.54, 4.60, 4.62, 4.63, 4.66, 4.74, 4.77, 4.78, 4.85, 4.86, 4.92, 4.93, 4.94, 4.95, 4.96, 4.99, 4.100, 4.105, 4.106, 4.108, 4.111, 4.117, 4.118, 4.119, 4.122, 4.125, 4.126, 5.02, 5.03, 5.05, 5.10, 5.24, 5.34, 5.36, 5.37, 5.47, 5.49, 5.53, 5.54, 5.55, 5.58, 5.60, 5.61, 5.64, 5.65, 5.67, 5.68, 5.69, 5.71, 5.78, 5.79, 5.81, 5.82, 5.86, 5.87, 5.88, 5.89, 5.90, 5.91, 5.93, 5.97, 5.98, 5.100, 5.102, 5.104, 5.106, 5.109, 5.113, 5.115, 5.118, 5.126, 5.127, 5.128, 5.129, 5.130, 5.134, 5.140, 5.141, 5.142, 5.143, 5.144, 5.148, 5.152, 5.153, 5.155, 5.159, 5.160, 5.161, 5.163, 5.165, 5.167, 5.168, 5.172, 5.174, 5.175, 5.177, 5.181, 5.185, 5.186, 5.197, 6.02, 6.07, 6.11, 6.14, 6.15, 6.18, 6.19, 6.27, 6.29, 6.30, 6.31,6.36, 6.39, 6.40, 6.41, 6.42, 6.43, 6.47, 6.51, 6.57, 6.58, 6.59, 6.60, 6.62, 6.73, 6.74, 6.77, 6.82, 6.83, 6.85, 6.86, 6.91, 6.92, 6.94, 6.96, 6.98, 6.119, 6.126, 6.128, 6.130, 6.134, 6.139, 6.143, 6.151, 6.152, 6.155, 6.161, 6.163, 6.181, 6.193, 6.194, 6.195, 6.196, 6.197, 6.198, 7.17, 7.59, 7.69, 7.70, 7.71, 7.72, 7.77, 7.81, 7.84, 7.107, 7.108, 7.110, 7.142, 7.154, 7.157, 7.158, 7.159, 7.161, 7.162, 7.165, 7.166, 7.167, 7.168, 7.179, 7.186, 7.192, 7.193, 7.194, 7.198, 7.199, 7.200, 7.202, 7.205, 7.207, 7.208, 7.210, 7.211, 7.215, 7.220, 7.234, 7.242, 7.244, 7.246, 7.248, 7.249, 7.250, 7.251, 7.259, 7.270, 7.277, 7.278, 7.279, 7.280, 7.281, 7.286, 7.287, 7.294, 7.315, 7.320, 7.321, 7.325, 8.01, 8.03, 8.25, 8.32, 8.34, 8.35, 8.36, 8.37, 8.38, 8.48, 8.49, 8.55, 8.61, 8.71, 8.72, 8.74, 8.75, 8.79, 8.81, 8.82, 8.88, 8.89, 8.90–8.96, 8.116, 8.117–8.120, 8.126, 8.133, 8.135, 8.144, 8.151, 8.180, 8.183, 8.185, 9.01, 9.02, 9.05, 9.12, 9.14, 9.15, 9.16, 9.17, 9.20, 9.22, 9.23, 9.25, 9.26, 9.28, 9.30, 9.31, 9.36, 9.38, 9.40, 9.44, 9.45, 9.49, 9.50, 9.55, 9.56, 9.61, 9.62, 9.63, 9.64, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

9.67, 9.68, 9.76, 9.79, 9.81, 9.83, 9.86, 9.87, 9.88, 9.90, 9.95, 9.106, 9.118, 9.119, 9.120, 9.123, 9.124, 9.130, 9.132, 9.139, 9.161, 10.01, 10.03, 10.04, 10.07, 10.09, 10.10, 10.11, 10.12, 10.21, 10.27, 10.30, 10.34, 10.38, 10.39, 10.43, 10.50, 10.55, 10.74, 10.76, 10.77, 10.78, 10.80, 10.85, 10.87, 10.88, 10.90, 10.111, 10.113

9.99, 9.100, 9.101, 9.156, 9.158, 9.160, 10.13, 10.16, 10.18, 10.57, 10.64, 10.72, 10.94, 10.100, 10.110,

recital (1) 1.23 recital (1) 1.282 recital (3) 1.23, 1.282 recital (4) 1.09 recital (6) 1.05 recital (8) 1.61 recital (9) 1.86, 1.87, 1.141 recital (10) 1.10, 1.11, 1.12, 1.48, 7.154 recital (11) 1.49, 1.96, 1.368 recital (12) 1.212 recital (16) 1.89 recital (17) 1.90 recital (20) 1.49, 1.96, 1.98 recital (21) 1.72, 1.143, 1.146 recital (24) 1.255 recital (25) 1.264 recital (28) 1.257 recital (30) 1.333 recital (31) 1.193, 1.334 recital (32) 1.363 recital (33) 1.364 recital (34). 1.391, 1.392, 1.393 recital (35) 1.392, 1.400, 1.401 recital (37) 1.402 recital (38) 1.426 recital (39) 1.431

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recital (40) 1.431, 2.106 recital (41). 1.433 recital (42) 1.435 recital (43) 1.398, 2.102 recital (44) 1.449 recital (45) 1.458 recital (46) 1.462 recital (48) 1.469, 2.128 recital (53) 1.498 recital (55) 1.499 recital (56) 1.519 recital (58) 1.506, 1.507 recital (70) 1.82, 1.88 recital (78) 1.41 (p. xxvi) recital (86). 1.38 recital (92) 1.282 Chap II 1.178, 1.181, 3.46, 5.96, 8.47 Chap III 1.178, 1.209, 1.214, 4.70, 4.71, 5.96, 10.34, 10.55, 10.64, 10.72, 10.85, 10.100 Chap IV 1.178, 5.96 Chap V 1.178, 4.82, 4.89, 5.96 Chap VI 1.178, 5.96, 9.134 Chap VII 1.178, 4.115, 5.96, 7.82, 7.84, 7.85, 7.87, 9.148 Chap IX 1.571 Chap IX, section 1 1.571, 1.572 Chap IX, section 2 1.571, 1.576 Chap X 1.578 Art 1. 1.46, 3.32, 4.25, 5.88, 6.44, 7.75, 8.37, 9.28, 10.16 Arts 1–2 1.46 Art 1(1) 1.130

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Art 1(3)(g). 1.311 Art 2 2.20, 3.32, 4.25, 5.88, 6.44, 6.45, 7.75, 8.37, 9.28, 10.16 Art 2(1) 1.47, 8.37 Art 2(2). 1.52, 1.70, 5.88, 6.45, 9.29 Art 2(3) 1.58, 1.61, 1.89, 2.20, 4.27, 8.37 Art 2(3)(a) 1.58 Art 2(3)(b) 1.59 Art 2(3)(c)–(f) 1.60 Art 2(3)(e) 1.59 Art 2(3)(g) 1.63, 1.304 Art 3 1.41, 1.89, 2.19, 2.27, 3.32, 4.25, 4.27, 4.99, 5.88, 5.90, 6.44, 6.45, 6.46, 7.83, 7.75, 8.37, 9.28, 9.32, 10.16 Art 3(1) 1.89, 1.90, 8.37, 9.32 Art 3(2) 1.42, 3.32, 3.35, 4.25, 4.99, 5.88, 6.44, 7.75, 8.37, 8.41, 9.32, 10.16 Art 3(2)–(6) 8.40 Art 3(2)(a) 1.90 Art 3(3) 1.93, 8.03 Art 3(4) 1.42 Art 3(6) 1.91 Art 4 1.41, 3.32, 4.25, 5.88, 6.44, 7.75, 8.37, 9.28, 10.16 Art 4(1) 9.31 Art 4(1)(a) 1.51, 1.53, 1.70, 3.28, 6.30 Art 4(1)(a)(i) 1.67, 6.47 Art 4(1)(m) 1.179, 1.527, 1.540 Art 4(1)(q). 1.147, 1.181 Art 4(1)(t) 1.503, 1.505, 1.507, 1.513, 1.519, 1.523 Art 4(1)(v). 1.120 Art 4(1)(w). 1.71, 1.72, 1.95 Art 4(1)(x). 1.81, 1.88, 6.196 Art 4(1)(y). 1.179, 1.527, 1.540

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Art 4(1)(af) 1.245, 1.279 Art 4(1)(ah) 1.178, 1.187 Art 4(1)(an). 1.301 Art 4(3) 3.32, 4.25, 5.88, 6.44, 7.75, 8.37, 10.16 Art 4(a) 1.05 Art 5 2.29, 2.41, 3.32, 3.36, 3.37, 4.25, 4.29, 5.88, 5.91, 6.44, 6.48, 7.75, 7.85, 8.37, 8.43, 9.28, 9.33, 10.16, 10.19 Art 5(1) 1.94, 1.98 Art 5(1)(a). 6.49 Art 5(2) 1.96, 1.114, 2.41, 5.93, 6.51, 9.36, 10.21 Art 5(3) 1.96, 5.93, 6.51, 9.36, 10.21 Art 6 1.10, 1.137, 1.147, 3.40, 4.36, 5.94, 6.52, 7.92, 8.47, 8.55, 9.37, 10.22 Arts 6–8 2.42, 3.40, 4.36, 5.94, 6.52, 7.92, 8.47, 9.37, 9.44, 10.22 Arts 6–11 1.161, 1.181 Art 6(1). 1.132, 1.136 Art 6(1), second para 1.186 Art 6(2) 1.143, 1.144, 1.274 Art 6(3) 7.107 Art 6(4). 1.274, 2.44, 6.57, 8.50 Art 6(4)(a) 1.144 Art 6(4)(b) 1.144 Art 6(5) 2.42 Art 6(5)(a) 1.146 Art 6(5)(b) 1.146 Art 6(5)(c) 1.146 Art 6(5)(d) 1.72, 1.146 Art 6(6) 1.145 Art 6(8) 1.86, 1.87, 1.88, 1.141, 2.143, 6.94 Art 7 1.206, 3.40, 4.36, 5.94, 6.52, 6.53, 7.92, 7.100, 8.47, 8.55, 9.37, 10.22, 10.25

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Art 7(1) 1.178 Art 7(2) 1.178, 1.182 Art 7(2)(a) 1.178 Art 7(2)(b) 1.178 Art 7(2)(c) 1.178 Art 7(3) 1.179 Art 7(3)(a) 1.179 Art 7(3)(b) 1.179 Art 7(3)(c) 1.179 Art 7(3)(d) 1.179 Art 7(3)(e) 1.179 Art 7(4). 1.143, 1.185 Art 7(5) 1.209 Art 7(5), first para 1.209 Art 7(5), second para 1.209 Art 7(6), first para 1.185 (p. xxvii) Art 7(6), second para 1.185 Art 7(7), first para 1.185 Art 7(7), second para 1.185 Art 8 1.181, 3.40, 4.36, 5.94, 6.52, 6.53, 7.92, 7.100, 8.47, 8.55, 9.37, 10.22, 10.25 Art 8(1)(a) 1.186 Art 8(1)(c) 1.187, 6.52 Art 8(1)(d) 1.187, 6.52 Art 8(1)(e) 1.187 Art 8(2) 1.199 Art 8(3). 1.201, 1.202 Art 8(3)(a) 1.201 Art 8(3)(b) 1.201 Art 8(3)(c) 1.201

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Art 8(4) 1.202 Art 8(5) 1.183, 1.200, 1.205 Art 8(5), third para 1.205 Art 8(6), second para 1.187, 1.201 Art 8(6)(a) 1.201 Art 8(6)(b) 1.187 Art 8(6)(c) 1.201 Art 9 1.41, 1.99, 1.101, 2.46, 3.40, 3.41, 3.42, 4.36, 4.40, 5.94, 5.101, 5.102, 6.52, 6.59, 6.61, 7.92, 7.102, 7.107, 8.47, 8.51, 9.37, 9.48, 10.22, 10.27, 10.29 Art 9(1) 1.190, 8.51 Art 9(2) 1.190 Art 9(3) 1.191, 6.60, 8.53 Art 9(3)–(6) 2.50 Art 9(4) 1.193 Art 9(5) 1.192 Art 9(6). 1.195, 2.50, 3.42, 4.40, 5.103, 6.60, 8.53, 9.48, 10.28 Art 9(7) 1.196, 1.197, 2.53, 2.54, 3.40, 4.36, 5.94, 6.52, 6.60, 6.61, 6.119, 7.92, 8.47, 8.54, 9.37, 9.48, 10.22, 10.29 Art 9(7), first sentence 1.196 Art 9(8) 1.192, 2.55 Art 9(9)(a) 1.196 Art 9(9)(b) 1.196 Art 9(9)(c) 1.196 Art 9(10) 1.197 Art 10 1.206, 2.56, 3.40, 3.43, 4.36, 4.42, 5.94, 5.104, 6.52, 6.62, 7.92, 7.110, 8.47, 8.55, 9.37, 9.49, 9.50, 10.22, 10.30 Arts 10–11 3.43 Art 10(1) 1.203 Art 10(2) 1.204 Art 11 1.208, 2.57, 3.40, 3.43, 4.36, 4.42, 5.94, 5.104, 6.52, 6.62, 7.92, 7.110, 8.47, 8.50, 9.37, 9.49, 9.50, 10.22, 10.30

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Art 11(a) 1.208, 9.50 Art 11(b) 1.208 Art 11(c) 1.208 Art 11(d) 1.208 Art 11(e) 1.208 Art 11(f) 1.208 Art 12 1.41, 1.212, 2.63, 2.66, 2.67, 3.50, 4.46, 4.49, 5.111, 5.113, 6.73, 7.141, 8.72, 8.75, 9.55, 9.60, 10.35 Arts 12–17 2.63, 3.50, 4.46, 4.53, 4.58, 5.111, 6.73, 7.141, 8.72, 9.55, 10.35 Art 12(1) 1.214, 3.50, 4.46, 5.111, 6.73, 7.141, 7.147, 8.72, 9.55, 10.35 Art 12(1), last para 9.57 Art 12(1), last sent. 1.221 Art 12(1)(a) 1.212, 3.52, 5.112, 8.77, 9.99, 10.37 Art 12(1)(b) 1.212, 3.52, 5.112, 8.76, 9.99, 10.37 Art 12(1)(c) 1.212, 6.118 Art 12(1)(c)–(e) 3.52, 5.112, 9.94, 9.96, 9.97, 10.37 Art 12(1)(d) 1.212, 1.269 Art 12(1)(d)–(f). 8.76 Art 12(1)(e) 1.212, 6.118 Art 12(1)(f) 1.212, 1.221, 3.51, 3.52, 4.50, 5.112, 8.76, 10.36, 10.37 Art 12(2) 1.250 Art 12(2)(a) 8.76 Art 12(3) 1.214 Art 13 1.251, 1.258, 1.260, 2.69, 2.70, 3.50, 3.53, 4.46, 4.51, 5.111, 5.114, 6.73, 6.76, 7.141, 7.155, 8.72, 8.78, 9.55, 9.61, 10.35, 10.39 Art 13(1) 1.258 Art 13(2) 1.265 Art 14. 1.212, 1.268, 2.71, 2.73, 3.50, 3.55, 4.46, 4.52, 5.111, 5.116, 6.73, 6.77, 6.118, 7.141, 7.159, 8.72, 8.80, 9.55, 9.64, 9.94, 9.96, 9.97, 10.35, 10.40 Arts 14–21 1.41 Art 14(1) 1.278, 7.160

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Art 14(1), first para 1.269 Art 14(1), second para 1.268 Art 14(1), final para 1.271 Art 14(3). 9.67 Art 14(4)(a) 1.270 Art 14(4)(b) 1.272, 1.273, 1.278 Art 15 1.68, 1.282, 1.313, 2.74, 2.75, 2.76, 3.50, 3.56, 4.46, 4.53, 5.111, 5.117, 6.73, 6.78, 7.141, 7.162, 8.82, 8.81, 9.55, 9.64, 9.67, 9.68, 10.35, 10.41 Art 15(1) 1.283 (p. xxviii) Art 15(2) 1.284 Art 15(3) 1.285 Art 15(3)(b) 1.313, 1.484 Art 15(4) 1.288, 6.81 Art 16 1.68, 1.102, 1.114, 1.290, 1.291, 2.78, 3.50, 3.59, 3.60, 4.46, 4.55, 4.56, 5.111, 5.120, 6.73, 6.82, 7.141, 7.171, 8.72, 8.82, 8.85, 9.55, 9.69, 9.72, 10.35, 10.43 Art 16(1). 1.110, 1.291 Art 16(1), second para 1.484 Art 16(2) 1.292, 1.294 Art 17 1.296, 1.305, 1.311, 2.80, 3.50, 3.61, 4.46, 4.58, 5.111, 5.122, 6.73, 6.82, 7.141, 7.174, 8.72, 8.86, 9.55, 9.73, 10.35, 10.45 Art 18 1.315, 1.316, 2.81, 2.82, 2.112, 3.50, 3.62, 4.46, 4.59, 5.111, 5.123, 6.73, 6.84, 6.118, 7.141, 7.175, 8.72, 8.87, 9.55, 9.74, 9.94, 9.96, 9.97, 10.35, 10.46 Arts 18–19 2.81 Art 19 1.102, 1.318, 1.323, 1.327, 1.425, 1.478, 2.84, 3.50, 3.63, 3.64, 4.46, 4.60, 5.11, 5.123, 5.126, 6.73, 6.84, 6.87, 7.141, 8.72, 8.88, 8.89, 9.55, 9.76, 9.79, 10.35, 10.47 Art 19(1) 1.124, 1.323 Art 19(2). 1.323, 2.84 Art 19(3) 1.110, 1.323 Art 19(4) 1.326, 8.89 Art 19(10) 1.14, 1.15, 1.19, 1.329, 3.76, 6.90, 9.100

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 19(10), second para 1.18 Art 20 1.146, 1.178, 1.193, 1.327, 1.332, 2.36, 2.86, 3.50, 3.68, 4.31, 4.46, 4.61, 5.111, 5.130, 6.73, 6.91, 7.141, 7.191, 8.72, 8.90, 9.55, 9.80, 9.81, 9.83, 10.35, 10.49 Art 20(1) 1.361, 6.96 Art 20(1), first sentence 1.336 Art 20(1)(a) 1.337 Art 20(1)(b) 1.341 Art 20(1)(e) 1.345 Art 20(1)(f) 3.38, 10.20 Art 20(1)(f), first para 1.346 Art 20(1)(f), second para 1.346 Art 20(2) 1.352 Art 20(2)(b) 1.352 Art 20(3) 1.14, 1.15, 1.19, 2.86, 3.77, 4.63, 6.125, 8.90, 9.100 Art 20(3), first part. 1.356 Art 20(3), second part. 1.358 Art 20(4) 1.361 Art 20(4)(a) 1.361 Art 20(4)(b) 1.361 Art 20(4)(c) 1.361 Art 20(5), first para 1.362 Art 20(5), second para 1.362 Art 20(6) 1.361 Art 21 1.10, 1.68, 1.132, 1.148, 1.149, 1.179, 1.363, 1.558, 2.87, 3.50, 3.70, 3.71, 4.46, 4.65, 4.68, 4.105, 5.111, 5.134, 5.181, 6.73, 6.98, 7.141, 7.202, 8.72, 8.93, 8.137, 9.55, 10.35, 10.50 Art 21(1) 1.366 Art 21(2), first sentence 1.370 Art 21(2), second sentence 1.376 Art 21(3) 2.92, 6.195, 7.205

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 21(3), first para 1.391 Art 21(3), second para 1.392 Art 21(3), last para 1.393 Art 21(3)(b) 6.98 Art 21(3)(c) 6.98, 7.205 Art 21(4)(a). 1.394, 2.94 Art 21(4)(b). 1.398 Art 21(5)(a) 1.400 Art 21(5)(b) 1.401 Art 21(6), first para 1.392 Art 21(6), second para 1.392 Art 21(6)(b) 1.392 Art 21(6)(c) 8.91 Art 21(6)(e) 1.16, 6.126 Art 21(7) 1.365, 1.558, 1.561, 7.208 Art 21(7), first para 1.402 Art 21(7), second para 1.402 Art 21(8) 1.365, 1.558, 1.561, 9.90 Art 21(8)(a). 2.118, 2.121, 2.122 Art 21(8)(a)(i) 1.406 Art 21(8)(a)(i), first part 1.405 Art 21(8)(a)(i), second part 1.405 Art 21(8)(a)(ii) 2.105, 2.106 Art 21(8)(b) 1.416 Art 21(9) 1.365, 1.425, 1.558, 1.561, 6.101, 9.90 Art 21(9)(a) 1.425 Art 21(9)(b) 1.425 Art 21(9)(c) 1.425 Art 21(9)(d) 1.425

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 21(9)(e) 1.425 Art 21(10) 2.94 Art 21(10), first para 1.426, 9.92 Art 21(10), second para 1.427 Art 21(10), third para 1.428 Art 21(11) 1.379, 1.387, 2.101, 7.215 Art 21(11), first para 1.429 Art 21(11), third para (a), (b) 1.441 Art 21(11), fourth para 1.429, 1.442 Art 21(11), fifth para 1.433 Art 21(11)(a) 1.437 Art 21(11)(a)–(d) 2.101 (p. xxix) Art 21(11)(b) 1.438, 2.102 Art 21(11)(c) 1.439 Art 21(11)(d)(i) 1.440 Art 21(11)(d)(ii) 1.440, 1.441 Art 21(11)(d)(iii) 1.440, 2.106 Art 21(11)(d)(iv) 1.440 Art 21(11)(d)(v) 1.440 Art 21(12) 1.14, 1.18, 1.19, 1.392, 2.118, 2.119, 2.121, 2.122, 2.123, 3.79, 6.126, 8.91, 8.98, 9.92, 9.100 Art 21(12), first para 1.445, 2.118 Art 21(12), second para 1.445, 1.449, 2.118 Art 21(12), third para 1.454 Art 21(13) 1.14, 1.15, 1.19, 1.373, 1.392, 1.442, 1.453, 1.478, 2.120, 2.123, 3.79, 5.134, 6.126, 8.91, 9.92, 9.100 Art 21(13), first para 1.455 Art 21(13)(a) 1.456 Art 21(13)(b) 1.457, 6.126 Art 21(13)(c) 1.459, 2.120

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Art 21(14) 1.373, 1.453, 1.462, 2.120 Art 21(14)(e) 6.126 Art 21(15) 1.463, 6.126 Art 21(16), first sentence 1.464 Art 21(16), second sentence 1.464 Art 22 1.10, 1.132, 1.148, 1.149, 1.467, 1.478, 1.520, 2.127, 2.129, 3.86, 4.74, 4.105, 5.140, 5.141, 5.181, 6.127, 7.234, 8.102, 9.101, 9.102, 9.107, 10.57 Arts 22–24 1.10, 1.41, 1.315, 1.561, 6.135, 6.138 Art 22(1) 1.485, 1.522 Art 22(1), first para 1.469, 1.470 Art 22(1), first para, second sentence 1.470 Art 22(1), first para, third sentence 1.470 Art 22(1), second para 1.471 Art 22(2) 8.102 Art 22(2), second sentence 1.376 Art 22(2)(a) 1.472 Art 22(2)(b) 1.472 Art 22(2)(c) 1.472 Art 22(2)(d) 1.472 Art 22(2)(e) 1.472 Art 22(2)(f) 1.472 Arts 22(2)(A)–(E) 3.86, 4.74, 5.140, 6.127, 7.234, 8.102, 9.101, 10.57 Art 22(3) 1.475, 8.103, 9.102, 9.107 Art 22(3), first para 1.473 Art 22(3), second para 1.474 Art 22(4) 8.102 Art 23 1.472, 1.476, 2.130, 3.86, 3.88, 4.74, 4.78, 4.79, 4.83, 5.140, 5.144, 5.161, 6.127, 6.128, 7.234, 7.237, 7.239, 7.244, 7.245, 7.246, 8.102, 8.105, 9.101, 9.102, 9.103, 9.119, 10.57, 10.58 Art 23(1) 1.179, 1.478, 1.479, 1.529, 8.105 Art 23(1)–(3) 8.105

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Art 23(1)(a) 1.478 Art 23(1)(b) 1.478 Art 23(1)(c) 1.478 Art 23(1)(d) 1.478 Art 23(1)(e) 1.478 Art 23(1)(f) 1.478 Art 23(1)(g) 1.478 Art 23(1)(h) 1.478 Art 23(1)(i) 1.478 Art 23(1)(j) 1.478 Art 23(1)(k) 1.478 Art 23(1)(l) 1.478 Art 23(1)(m) 1.478 Art 23(1)(n) 1.478 Art 23(1)(o) 1.478 Art 23(1)(p) 1.478 Art 23(2) 1.478, 1.479, 8.105 Art 23(3) 1.479, 6.130 Art 23(4) 1.286, 1.478, 3.86, 4.74, 5.140, 6.127, 7.234, 8.102, 8.106, 9.101, 10.57 Art 23(4)–(6) 8.106 Art 23(4)(a). 1.480 Art 23(4)(b). 1.480 Art 23(4)(c). 1.480 Art 23(5) 1.478, 8.106 Art 23(5)(a) 1.481 Art 23(5)(b) 1.481 Art 23(6) 8.106 Art 24 1.482, 1.491, 2.132, 2.134, 3.86, 3.90, 3.92, 4.74, 4.80, 5.140, 5.148, 6.127, 6.134, 7.234, 7.251, 8.102, 8.107, 9.101, 9.104, 9.106, 10.57, 10.60

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 24(1) 3.86, 4.74, 5.140, 6.127, 7.234, 8.102, 9.101, 10.57 Art 24(1), first para 1.483 Art 24(1), second para 1.483 Art 24(2) 1.484 Art 24(2)(a) 1.484 Art 24(2)(b) 1.484 Art 24(2)(c), first part 1.484 Art 24(2)(c), second part 1.484 Art 24(2)(d) 1.484 Art 24(2)(e) 1.484 Art 24(3)(a) 1.485 Art 24(3)(b) 1.485 Art 24(4) 1.129, 5.154 Art 24(4), first para 1.486 Art 24(4), second para 1.487 Art 24(4), third para 1.488 Art 24(5), first para. 1.489 Art 24(5), second para. 1.490 Art 25 1.41, 1.114, 1.282, 1.491, 2.137, 3.96, 4.84, 5.152, 6.139, 7.261, 8.114, 9.113, 9.114, 10.66 (p. xxx) Art 25(1) 1.491 Art 25(1)–(4) 9.116 Art 25(2) 1.492 Art 25(3). 1.286, 1.494, 3.96, 3.98, 4.84, 5.152, 6.139, 7.261, 8.114, 9.113, 10.66 Art 25(4) 1.494 Art 25(5) 1.495 Art 25(6) 1.495 Art 25(7) 1.496, 9.116 Art 25(8) 1.497, 9.116

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Art 26 3.96, 4.84, 5.152, 6.139, 7.205, 7.261, 8.114, 9.113, 9.119, 10.66 Arts 26–30 1.10, 1.498, 1.500, 1.501, 1.506, 1.507, 1.561, 2.139, 3.100, 4.85, 5.155, 6.140, 7.263, 8.115, 9.117, 9.118, 10.68 Art 26(1) 1.500, 1.503, 1.561 Art 26(2). 1.503 Art 26(2)(a) 1.501 Art 26(2)(b) 1.501 Art 26(3) 1.502 Art 26(4) 1.503 Art 26(5), first para 1.504 Art 26(5), second para 1.504 Art 26(5), third para 1.504 Art 26(5), fourth para 1.505 Art 26(6) 1.506 Art 26(7) 1.507 Art 27 1.498, 3.96, 4.84, 5.152, 6.139, 7.261, 8.114, 9.113, 10.66 Arts 27–29 2.139 Art 27(1) 1.502, 1.508, 9.119 Art 27(2) 1.509, 9.119 Art 27(3) 1.510 Art 27(4) 1.511 Art 27(5) 1.512 Art 28 1.498, 3.96, 4.84, 5.152, 6.139, 7.261, 8.114, 10.66 Art 28(1) 9.119 Art 28(1), first para 1.513 Art 28(1), second para 1.514 Art 28(1)–(3) 1.503, 1.505 Art 28(2) 1.515, 9.119 Art 28(3) 1.516 Art 28(4), first para 1.517

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Art 28(4), second para 1.518 Art 28(5) 1.519 Art 29 1.498, 3.96, 4.84, 5.152, 6.139, 7.261, 8.102, 8.114, 9.113, 9.119, 10.66 Arts 29–32 2.87 Art 29(1) 1.520 Art 29(1)(c) 1.342 Art 29(1)(d) 1.343 Art 29(2) 1.521 Art 29(3) 1.521 Art 30 1.498, 1.503, 1.505, 2.139, 3.96, 4.84, 4.87, 5.152, 6.139, 7.261, 8.114, 9.113, 9.119, 10.66 Art 30(1) 1.523 Art 30(2). 1.524 Art 30(2)(b). 1.524 Art 30(2)(c). 1.524 Art 30(3)(a) 1.524 Art 31 1.10, 1.527, 1.537, 1.539, 1.544, 1.556, 2.146, 3.105, 4.92, 4.94, 5.159, 5.160, 5.162, 6.147, 6.148, 7.267, 8.124, 9.124, 9.126, 9.151, 10.74 Art 31(1) 1.526, 5.161 Art 31(1), first para 1.526 Art 31(1), second para 1.527 Art 31(2), first para. 1.529 Art 31(2), second para. 1.529, 1.544 Art 31(3), first para, first sentence 1.530 Art 31(3), first para, second sentence 1.531 Art 31(3), first para, third sentence 1.532 Art 31(3), second para 1.533 Art 31(4) 5.163 Art 31(4), first para 1.534 Art 31(4), second para 1.535

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 31(4), third para 1.536 Art 31(5) 5.164 Art 31(5), second para. 1.529, 1.534 Art 31(5)(a) 1.529 Art 31(5)(b) 1.534 Art 31(6) 1.528 Art 31(7). 5.172 Art 32 1.10, 1.539, 1.541, 1.556, 2.150, 2.153, 3.105, 3.106, 4.92, 4.95, 4.98, 5.159, 5.167, 5.173, 6.147, 6.149, 7.267, 7.274, 8.124, 8.125, 9.124, 9.128, 9.129, 9.151, 10.74 Art 32(1) 1.539 Art 32(1), first para 1.539 Art 32(1), second para 1.539 Art 32(2) 1.541 Art 32(3). 1.545, 1.546, 2.154 Art 32(4) 1.547, 1.549, 2.150 Art 32(5) 1.544, 2.152, 2.153 Art 32(6) 1.544, 1.546, 1.548 Art 32(7) 2.151 Art 32(7), first to third paras 1.550 Art 32(7), fourth para 1.551 Art 32(8) 1.544, 1.545, 1.546 Art 32(8), second subpara 1.550 Art 32(8)(a) 1.544 Art 32(8)(b) 1.546 Art 32(8)(c) 1.545 Art 32(8)(d) 1.550 Art 32(9). 1.543 Art 33 1.10, 1.133, 1.137, 1.151, 1.177, 2.156, 3.105, 3.109, 4.92, 4.100, 5.159, 5.174, 6.147, 6.153, 7.267, 7.283, 8.124, 8.127, 9.124, 9.131, 10.74 (p. xxxi) Art 33(1) 1.151

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Art 33(2)(a) 1.152 Art 33(2)(b) 1.152 Art 33(3)(a) 1.153 Art 33(3)(b) 1.153 Art 33(3)(c) 1.153 Art 33(4), first para 1.154 Art 33(4), second para 1.155 Art 33(4), third para 1.155 Art 33(4), fourth para 1.156 Art 33(5) 1.156, 5.175 Art 33(6), first para 1.157 Art 33(6), second para 1.158 Art 33(6), third para 1.159 Art 33(6), fourth para 1.160 Art 33(7), first para 1.152, 1.153 Art 33(7), second para 1.152, 1.153 Art 33(8), first para 1.152, 1.153 Art 33(8), second para 1.152, 1.153 Art 34 1.10, 1.132, 1.137, 1.148, 2.169, 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 9.137, 10.86 Arts 34–37 1.41 Arts 34–42 8.133 Art 34(1) 1.148, 1.528, 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86 Art 34(1)(b). 1.150 Art 35 1.10, 1.136, 1.552, 1.553, 1.557, 1.565, 1.574, 2.170, 3.114, 3.116, 4.105, 4.106, 5.181, 5.182, 6.161, 6.162, 7.292, 7.295, 7.296, 8.133, 8.137, 9.136, 9.138, 10.86, 10.87, 10.89 Art 35(1) 1.552 Art 35(2) 1.554, 1.555, 3.114, 4.105, 4.106, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86 Art 35(3) 1.556

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Art 35(4) 1.556 Art 35(5)–(9) 1.556 Art 35(10) 1.556 Art 36 1.10, 1.553, 1.557, 1.560, 1.561, 1.562, 1.564, 2.146, 2.150, 2.153, 2.171, 3.114, 3.116, 3.123, 4.105, 4.106, 4.107, 5.181, 5.182, 5.183, 6.161, 6.162, 7.292, 7.296, 7.299, 8.133, 8.137, 9.136, 9.138, 9.140, 10.86, 10.87, 10.89 Arts 36–42 2.177 Art 36(1) 1.557, 3.114, 4.105, 4.107, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86 Art 36(1)(a) 1.558, 1.561 Art 36(1)(b) 1.559 Art 36(1)(c) 1.559 Art 36(2) 1.557, 5.183, 8.137 Art 37 1.10, 1.134, 1.135, 1.136, 1.137, 1.161, 1.560, 1.574, 3.114, 3.129, 4.106, 5.181, 5.185, 6.161, 7.292, 8.133, 8.138, 9.136, 10.86 Arts 37–41 1.10, 1.136, 1.565, 2.174, 3.123, 4.109, 5.184, 6.164, 7.301, 8.138, 9.143, 10.90 Art 37(2) 1.10, 1.168, 1.182, 1.184, 1.186 Art 37(4) 1.162, 1.167 Art 37(4), final para 1.166 Art 37(4)(a) 1.163 Art 37(4)(b) 1.163 Art 37(4)(c) 1.164 Art 37(4)(d) 1.165 Art 37(4)(e) 1.164 Art 37(4)(f) 1.165 Art 37(4)(g) 1.164 Art 37(4)(h) 1.166 Art 37(5) 1.161, 1.181, 1.187 Art 37(7)(b). 1.184 Art 37(7)(c). 1.184 Art 37(7)(D) 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86

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Art 37(8) 1.161, 1.178, 1.181, 1.203 Art 37(8)(a) 1.180, 1.182 Art 37(8)(b) 1.179 Art 37(8)(c) 1.186, 1.187 Art 37(8)(c)–(e) 1.181 Art 37(8)(e) 1.180 Art 37(8), final para 1.203 Art 37(9). 1.170 Art 37(9), final para 1.171 Art 37(10). 1.209 Art 37(11) 1.172, 1.174 Art 37(12). 1.173, 1.174, 1.175 Art 37(13) 1.14, 1.21, 9.100 Art 37(14) 1.42 Art 38 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86, 10.93 Arts 38–45 1.282 Art 38(5) 10.93 Art 38(6) 10.93 Art 39 1.10, 1.162, 1.538, 1.542, 1.550, 1.574, 3.114, 4.105, 5.181, 5.185, 6.161, 7.292, 8.133, 9.136, 10.86 Art 39(1) 1.537 Art 39(2) 1.537 Art 39(2)(A) 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86 Art 39(3) 1.537 Art 39(4). 1.539, 1.541 Art 39(4)–(8). 1.541 Art 39(5) 1.545 Art 39(5), second para 1.546 Art 39(6), first para 1.547 Art 39(6), second para 1.549

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Art 39(7) 1.544 Art 39(8). 1.544 Art 39(8), first para 1.546 Art 39(8), second para 1.548 (p. xxxii) Art 39(9) 1.537, 1.541 Art 39(10) 1.546 Art 39(10), second para 1.544, 1.545 Art 39(10)(a) 1.544 Art 39(11) 1.543 Art 40 1.10, 1.41, 1.162, 1.552, 1.553, 1.560, 1.574, 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86 Art 40(2) 1.554 Art 40(2), final para 1.555 Art 40(2)(a) 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86 Art 40(3) 1.556 Art 40(4). 1.556 Art 40(5)–(9) 1.556 Art 40(10) 1.556 Art 41 1.10, 1.134, 1.136, 1.161, 1.176, 1.177, 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 9.136, 10.86 Art 41(4) 8.139 Art 42 1.10, 1.41, 1.136, 1.538, 1.542, 1.553, 1.557, 1.560, 1.561, 1.564, 1.574, 2.175, 2.176, 3.114, 3.124, 4.105, 4.112, 5.181, 5.186, 6.161, 6.166, 7.292, 7.311, 8.133, 8.141, 8.142, 8.180, 9.136, 9.146, 9.147, 10.86, 10.94 Art 42(1) 3.114, 4.105, 5.181, 6.161, 7.292, 8.133, 8.140, 9.136, 10.86 Art 42(1), final para 1.562 Art 42(1)(a) 1.483, 1.561 Art 42(2) 1.560, 5.186, 8.144 Art 43 1.528, 1.543, 1.566, 2.179, 3.130, 4.94, 4.116, 5.190, 6.170, 7.315, 7.316, 8.148, 9.151, 9.154, 9.155, 10.101 Art 43(1) 3.133

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Art 43(1), first para 1.566 Art 43(1), second para, first sentence 1.567 Art 43(1), second para, second sentence 1.568 Art 43(1)(a) 7.316 Art 43(1)(b) 7.316 Art 43(2), first para. 1.569 Art 43(2), second para. 1.570 Art 44 3.135, 4.122, 5.192, 6.181, 7.318, 8.156, 8.157, 9.156, 10.103 Arts 44–45 5.192 Arts 44–46 3.137, 6.181, 8.156 Arts 44–47 1.572 Arts 44–49 1.571 Art 45 3.135, 4.122, 5.192, 6.181, 7.318, 8.156, 8.158, 9.156, 10.103 Art 46. 1.159, 1.536, 3.135, 4.122, 5.106, 5.192, 6.181, 7.318, 8.156, 8.159, 9.156, 10.103 Art 46(2) 1.573 Art 47(4) 1.574 Art 47(5) 1.575 Art 48 3.135, 4.122, 5.192, 7.312, 8.156, 8.160, 9.156, 10.103 Arts 48–55 6.181, 8.156 Art 49 3.138, 4.124, 8.167 Art 50. 1.492, 1.494, 3.135, 3.138, 4.122, 5.192, 6.181, 7.312, 8.156, 8.168, 8.169, 9.156, 10.103 Arts 50–54 1.576 Arts 50–55 1.571 Art 50(4) 1.554 Art 51 3.135, 3.138, 4.122, 5.192, 6.181, 7.318, 8.156, 8.171, 9.156, 10.103 Art 52 3.135, 3.139, 4.122, 5.192, 6.181, 7.318, 8.156, 8.175, 8.176, 9.156, 10.103 Art 53 3.135, 3.139, 4.122, 5.192, 6.181, 7.318, 8.156, 8.177, 9.156, 10.103 Art 53(1) 10.103

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Art 53(2) 1.313, 10.103 Art 53(3) 10.103 Art 53(4) 10.103 Art 54 3.135, 3.140, 4.122, 5.192, 6.181, 7.318, 8.156, 8.177, 9.156, 10.103 Art 55 1.577, 1.576, 1.577, 3.135, 3.141, 4.122, 5.192, 6.181, 6.191, 7.324, 7.318, 8.156, 8.179, 9.156, 10.103, 10.108 Art 56 1.41, 1.214, 1.270 Arts 56–71 1.578 Art 57 1.214, 1.270 Art 58. 1.38, 1.214, 1.270 Art 61 1.102 Art 61(1) 8.49 Art 64(1)(b) 5.182 Art 66 1.578 Art 66(3) 1.10, 1.136 Art 66(4) 1.10, 1.564, 8.140 Art 67 2.170 Art 67(1) 1.10, 1.136 Art 67(6) 1.10, 1.136 Art 68(1) 1.10, 1.564 Art 68(6) 1.10, 1.564, 8.140 Art 70 1.578 Art 75(d) 1.339 Art 76(1) 1.338 Art 76(2) 1.338 Art 77(1). 1.341 Art 77(2). 1.341 Art 77(3), first para. 1.341 Art 77(3), second para. 1.341 Art 78(h) 1.340

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Art 81(1) 1.361 Arts 104–112 3.86 Arts 113–115 1.150 (p. xxxiii) Annex I 1.75, 1.78, 1.95, 1.101, 1.144, 1.334, 1.478 Annex I, para 1 1.72 Annex I, para 1(a) 10.19 Annex I, para 1(b) 10.19 Annex I, para 2 2.32 Annex I, para 2(a) 1.75, 1.138 Annex I, para 2(b) 1.75 Annex I, para 2(c) 1.139 Annex II 1.258, 1.259, 1.260, 1.264, 1.265, 1.529, 3.53, 5.114, 6.76 Annex II, para 1 1.264 Annex II, para 1(a) 1.260 Annex II, para 1(b) 1.260 Annex II, para 1(c) 1.261 Annex II, para 1(d) 1.261 Annex II, para 1(e) 1.261 Annex II, para 1(f) 1.261 Annex II, para 1(g) 1.263 Annex II, para 1(h) 1.263 Annex II, para 1(i) 1.263 Annex II, para 1(j) (‘Remuneration Policy’) 1.263, 8.79 Annex II, para 1(k) 1.263 Annex II, para 1(l)–(o) 1.263 Annex II, para 1(p) 1.263 Annex II, para 1(q) 1.263 Annex II, para 1(r) 1.263 Annex II, para 2 1.259

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Annex II, para 3 1.262 Annex III. 5.161 Annex IV 1.544 Annex IV, point (h) 5.170 2013/36/EU Directive of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ 2013 L176/338) (Capital Requirements Directive IV (CRD IV)) 1.192, 1.208, 1.267, 2.46, 2.98, 2.156 recital (98) 1.192 Art 9 1.391 Art 20(1) 1.391 Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and amending Directives 2004/39/ EC and 2009, COM(2009) 207 final 1.10, 1.24, 1.30 Explanatory Memorandum 1.24 Explanatory Memorandum, para 1.1 1.10 Proposal of the European Commission for MiFID II of 20 October 2011 (COM (2011) 656 final) 1.144, 1.225 Art 9. 1.219 Art 25(5) 1.225 Art 25(6) 1.225 Annex I, section A, sub (9) 1.144 Annex I, section B, sub (7) 1.144 Proposed Directive for amending Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, (OJ 2009 L302/32) (UCITS V) 1.455, 3.72, 7.157, 7.158, 8.96 Art 22(1) 1.366 Art 22(2), first sentence 1.370 Art 22(2), second sentence 1.376 Art 22(3)(a) 1.425 Art 22(3)(b) 1.425 Art 22(3)(c) 1.425

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Art 22(3)(d) 1.425 Art 22(3)(e) 1.425 Art 22(4), opening words 1.402 Art 22(4), last para 1.402 Art 22(4)(a) 1.402 Art 22(4)(c) 1.402 Art 22(5)(a)(i) 1.405 Art 22(5)(a)(ii) 1.406 Art 22(5)(b) 1.416 Art 22(7) 1.429 Art 22(7), second para, (a) 1.437 Art 22(7), second para, (b) 1.438 Art 22(7), second para, (c) 1.439 Art 22(7), third para, (a) 1.440 Art 22(7), third para, (b) 1.440 Art 22(7), third para, (c) 1.440 Art 22(7), third para, (d) 1.440 Art 22(7), third para, (f) 1.440 Art 22(7), fourth para, (a) 1.441 Art 22(7), fourth para, (b) 1.441 Art 22(7), fifth para, (a) 1.442 Art 22(7), sixth para 1.433 Art 23(2) 1.391 Art 24 1.443 Art 24(1), first para 1.445 Art 24(1), second para 1.445, 1.449 Art 24(1), third para 1.445, 1.454 Art 24(2) 1.455 Art 24(5) 1.463

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Art 25(2), second para 1.352 Art 26a 1.464

(p. xxxiv) Decisions 2004/5/EC Commission Decision and revised by Commission Decision 2009/78/EC 1.39 2004/6/EC Commission Decision and revised by Commission Decision 2009/79/EC 1.39 2001/527/EC Commission Decision and revised by Commission Decision 2009/77/EC 1.39

France Civil Code Art 1147 3.83 Data Protection and Freedom of Information Law of 6 January 1978 art 6 point 5° 3.135 Financial Security Act (Law No 2003-706 of 1 August 2003) 3.17 General Regulations of the AMF 3.15, 3.16, 3.24, 3.29, 3.30, 3.42, 3.56, 3.70, 3.72, 3.77, 3.84, 3.133 Book IV 3.88, 3.89 art 143-1 3.135 art 313-77 3.68 art 314-30 3.25 art 316-1 3.30 art 316-3 3.40 art 316-4 3.40 art 316-5 3.40 art 316-6 3.40 art 316-7 3.40 art 316-11 3.114 art 317-2 3.40, 3.42 art 317-3 3.40 art 318-1 3.50

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art 318-3 3.50, 3.62 art 318-4 3.50, 3.62 art 318-6 3.50 art 318-11 3.50, 3.62 art 318-13 3.50, 3.55 art 318-15. 3.50, 3.55 art 318-36 3.50 art 318-38. 3.57 art 318-43. 3.50, 3.57 art 318-44 3.50 art 318-44–318-46. 3.60 art 318-45 3.50 art 318-46 3.50 art 318-48 3.50 art 318-58 3.38, 3.50, 3.68, 3.77 art 318-58 VII 3.38 art 319-3 3.50 art 319-3 7º 3.50 art 319-7º–319-9 3.50 art 319-8 3.50 art 319-9 3.50 art 319-10 3.50, 3.53 art 319-11 3.86 art 319-21 3.50, 3.55 art 319-58 VII 3.50 art 320-24(4) 3.50 art 323-23 3.50 art 323-25 3.50 art 323-30 3.50

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art 323-32 3.50 art 323-34 3.50 art 323-35 3.50 art 411-20 3.09 art 411-126 3.25 art 421-7 3.114 art 421-13 3.130, 3.133 art 421-13-1 3.114, 3.124 art 421-14 3.105, 3.106 art 421-15 3.114 art 421-18 3.114 art 421-21 3.114 art 421-22 3.114 art 421-23 3.114 Insurance Code art L.325-1 3.135 MFC (code monétaire et financier) 3.10, 3.15, 3.23, 3.24, 3.27, 3.39, 3.70, 3.72, 3.84, 3.119 Book II 3.29 Book III 3.29 Book IV 3.29 Book V 3.29 art D.214-32 3.114, 3.123 art D.214-32-1 3.114 art D.214-32-2 3.114 art D.214-32-4 3.114 art D.214-32-5 3.86, 3.87 art D.214-32-6 3.96 art D.214-32-7 3.96 art D.214-32-7-1 3.96

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art D.214-32-7-6–D.214-32-7-9 3.96 art D.214-32-7-10–D.214-32-7-12 3.96 art D.214-32-7-13–D.214-32-7-15 3.96 art D.214-32-8 3.96 art L.214-7 3.09 art L.214-7-4 3.09, 3.135 art L.214-8 3.09 art L.214-8-7 3.09, 3.135 art L.214-12 3.135 art L.214-24 3.22, 3.32, 3.37 art L.214-24-1 I§1 3.105, 3.114 art L.214-24-1 I§2 3.114 art L.214-24-1 III. 3.130 art L.214-24-2 I 3.105, 3.106, 3.114 (p. xxxv) art L.214-24-2 II 3.105 art L.214-24-2 II, § 2 3.114 art L.214-24-2 IV 3.105 art L.214-24-2 V 3.105 arts L.214-24-3–L.214-24-12 3.50 art L.214-24-10 3.79 art L.214-24-11 3.28, 3.79 art L.214-24-13 3.76, 3.79 arts L.214-24.13–L.214-24-18 3.50 art L.214-24-19 3.86 art L.214-24-20 3.86 arts L.214-24-13–L.214-24-17 3.64 art L.214-24-20 3.92 art L.214-24-20 VI 3.32 art L.214-24-21-I 3.96

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art L.214-24-22 3.96 art L.214-24-23 3.96 art L.214-126 3.135 art L.214-147 3.12 art L.214-158 3.12 art L.421-16-II 3.19 art L.532-6 3.135 art L.532-9 3.32, 3.40 art L.532-9(1) 3.135 art L.532-9 I 3.31, 3.36, 3.40, 3.43 art L.532-9 IV 3.32 art L.532-9 V 1-7 3.32 art L.532-10 3.43, 3.135 art L.532-10–L.532-13 3.40 art L.532-12 first para 3.135 art L.532-21-3 3.135 art L.532-21-3 I 3.105 art L.532-25-1 I 3.105 art L.532-29 3.114 art L.532-30–L.532-42 3.114 art L.532-41 3.129 art L.532-42-1 3.114 art L.532-46 3.135 art L.533-10-1 3.50, 3.96 art L.533-11 3.83 art L.612-47 3.135 art L.621-1 3.96 art L.621-7 3.135 art L.621-8-4 3.135

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art L.621-9 3.135 art L.621-9 I 3.135 art L.621-9 II 3.44, 3.74, 3.93, 3.101, 3.110, 3.126, 3.135 art L.621-10 3.135 art L.621-12 3.135 art L.621-13 3.32, 3.37, 3.135 art L.621-13-1 3.32, 3.37 art L.621-13-2 3.135 art L.621-14 3.32, 3.37, 3.135 art L.621-14 I 3.135 art L.621-14 II 3.135 art L.621-15 I 3.135 art L.621-15 III 3.135 art L.621-15 V 3.135 art L.621-18-8 3.96 art L.621-20-1 3.135 art L.621-25 3.135 art L.631-2-1 3.96, 3.135 art L.631-2-2 3.96 art L.632-1 3.96, 3.135 art L.632-1(1) 3.135 art L.632-1(2) 3.135 art L.632-2(1)–(3) 3.135 art L.632-5 3.135 art L.632-6 3.135 art L.632-6-1 3.96, 3.135 art L.632-6-2 3.135 art L.632-7 IV 3.135 art L.632-8 3.96, 3.135

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art L.632-16 3.135 art L.632-16(1) 3.135 art R.532-12-1 3.32 art R.532-13 3.40 art R.532-25-1 3.105 art R.532-30 3.105 arts R.532-32–R.532-35 3.114 art R.621-15 III 3.135 art R.621-31 I 3.135 art R.621-42 3.135

Germany Asset Investment Act (Vermögensanlagengesetz) 4.75 Banking Act (Gesetz über das Kreditwesen) 4.19, 4.20 Capital Investment Code (Kapitalanlagengesetzbuch—‘KAGB’) 4.01, 4.14, 4.23, 4.24, 4.26, 4.27, 4.28, 4.29, 4.36, 4.37, 4.43, 4.47, 4.48, 4.57, 4.58, 4.62, 4.63, 4.65, 4.68, 4.69, 4.71, 4.76, 4.79, 4.81, 4.83, 4.88, 4.97, 4.102, 4.105, 4.113, 4.115, 4.117, 4.123, 4.124 § 1 4.25 § 1(1) 4.25 § 2 4.25, 4.27 § 5 4.122 § 5(6) 4.69, 4.81, 4.88 § 9 4.84, 4.122 § 10 4.122 § 11 4.122 § 12 4.84 § 14 4.122 § 15 4.43, 4.113 § 17 4.25, 4.29 § 20 4.36 § 22 4.36

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(p. xxxvi) § 23 4.36 § 25 4.36 § 25(1) 4.40 § 26 4.46 § 26(2) 4.49 § 27 . 4.46, 4.52 § 28 4.46, 4.59 § 29 4.46, 4.52 § 29(4) 4.54, 4.84 § 30 4.46, 4.55 § 30(1) 4.56 § 34 4.105 § 35 4.74, 4.84 § 36 4.46, 4.62 § 36(4) 4.63, 4.64 § 37 4.46 § 39 4.36, 4.42 § 53 4.92, 4.100 § 54 4.92, 4.101 § 55 4.105 § 56 4.105 § 64 4.105 § 65 4.105, 4.110 § 77 4.68 §§ 80–90 4.46 § 88 4.68 § 101 4.76 § 162(2) no 1 KAGB 4.84 § 165(2) no 6 KAGB 4.84

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§ 169 4.46 § 170 4.46 § 215 4.84 § 216 4.46 §§ 261–272 4.24 § 261(1)–(3) 4.24 § 261(4) 4.24 § 262 4.24 § 263 4.24, 4.84 § 274 4.84 § 279 4.46 § 287 4.84 §§ 287–290 4.85 § 288 4.84 § 289 4.84 § 290 4.84 § 291 4.84 § 292 4.84, 4.87 § 306 4.83 § 307 4.74, 4.79 § 307(1) no 5 KAGB 4.84 § 307(3) 4.83 § 308 4.74 § 314 4.102, 4.113 § 316 4.92, 4.116 § 316(1)1 4.92 §§ 317–320 4.116 § 319(1) 4.120 § 321 4.92

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§ 321(1) 4.92 § 321(1)1 4.93 § 322 4.105, 4.106 § 323 4.92 § 324 4.92, 4.105 § 325 4.105, 4.111 § 326 4.105 § 327 4.105, 4.111 § 328 4.105, 4.111 § 330 4.105, 4.107 § 330a 4.99 § 330(1) 4.112 § 331 4.92, 4.96 § 339 4.44 § 340 4.122 Capital Investment Conduct and Organization Regulation (Kapitalanlage-Verhaltensund Organisationsverordnung— ‘KAVerOV’) 4.48 Investment Act (Investmentgesetz—‘InvG’) 4.01, 4.02, 4.03, 4.04, 4.05, 4.06, 4.10, 4.11, 4.15, 4.16, 4.20, 4.21, 4.22, 4.23, 4.32, 4.57, 4.74, 4.57, 4.59, 4.63, 4.78, 4.80, 4.92, 4.116, 4.117 § 9a 4.59 Securities Prospectus Act (Wertpapierprospektgesetz) 4.22 Stock Corporation Act § 20. 4.86

Ireland Central Bank Act 1942 5.107, 5.137, 5.143, 5.148, 5.149, 5.156, 5.178, 5.187 Central Bank AIF Rulebook July 2013. 5.13, 5.15, 5.19, 5.20, 5.60, 5.65, 5.66, 5.67, 5.70, 5.71, 5.76, 5.77, 5.79, 5.81, 5.82, 5.86, 5.87, 5.93, 5.99, 5.100, 5.101, 5.104, 5.159, 5.184, 5.185, 5.86, 5.92, 5.95, 5.96, 5.97, 5.117, 5.143, 5.159, 5.170, 5.182, 5.183 Chap 2, Pt III 5.184 Chap 3 5.181

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s 33AQ 5.196 Central Bank Reform Act 2010 s 50 5.03 Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2010 (SI 437 of 2011) 5.95 Central Bank (Supervision and Enforcement) Act 2013 5.110, 5.147, 5.196 Code for Advertising, Promotional and Direct Marketing in Ireland. 5.63 (p. xxxvii) Companies Act 1990 5.38 Pt XIII 5.13, 5.33 Consumer Protection Code 5.190 Corporate Governance Code for Collective Investment Schemes and Management Companies 5.03, 5.57 European Union (Alternative Investment Fund Managers) Regulations 2013 (SI 257 of 2013) (‘Irish AIFMD Regulations’) 5.91, 5.93, 5.96, 5.98, 5.103, 5.106, 5.107, 5.108, 5.110, 5.111, 5.123, 5.127, 5.129, 5.137, 5.138, 5.139, 5.149, 5.150, 5.151, 5.153, 5.156, 5.157, 5.158, 5.159, 5.178, 5.179, 5.180, 5.181, 5.187, 5.188, 5.189, 5.191, 5.192, 5.194, 5.195 reg 2 5.88 reg 3 5.88 reg 4 5.88 reg 5 5.88 reg 6 5.88 reg 7 5.94 reg 8 5.94, 5.96 reg 9 5.94 reg 10 5.94 reg 10(6) 5.103 reg 11 5.94 reg 12 5.94 reg 12(b) 5.106 reg 13 5.111 reg 14 5.96, 5.111

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reg 15 5.111 reg 16 5.111 reg 17 5.111 reg 18 5.111 reg 19 5.111 reg 20 5.111 reg 21 5.96, 5.111 reg 22 5.111, 5.184 reg 23 5.140 reg 24 5.140 reg 25 5.140 reg 26 5.152 reg 27 5.152 reg 28 5.152 reg 29 5.152 reg 30 5.152 reg 31 5.152 reg 32 5.159, 5.160 reg 33 5.159, 5.167 reg 34 5.159 reg 35 5.181 reg 36 5.181, 5.182 reg 37 5.181, 5.183 reg 38 5.181, 5.185 reg 39 5.181 reg 40 5.181, 5.185 reg 41 5.181 reg 42 5.181 reg 43 5.181, 5.186

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reg 44 5.190 reg 45 5.192 reg 46 5.192 reg 46(1)(b) 5.192 reg 47 5.192 reg 48 5.192 reg 54 5.192 reg 55 5.192 reg 56 5.192 reg 57 5.192 reg 58 5.192 Finance Act 2013 5.06 Investment Funds, Companies and Miscellaneous Provisions Act 2005 5.19, 5.29, 5.30, 5.33 Investment Limited Partnership Act 1994 (‘ILP Act’) 5.20, 5.22, 5.23, 5.33, 5.47 s 6(2) 5.23 s 6(3) 5.23 s 6(4) 5.23 Limited Partnership Act 1907 5.47 Unit Trusts Act 1990 5.15, 5.33

Italy BOI/CONSOB Regulation: the joint regulation of the Bank of Italy/CONSOB of 29 October 2007 6.44, 6.52, 6.78, 6.84, 6.85, 6.86, 6.88 Title I, Pt II 6.73 Title II, Chap I 6.52 Section II, Title III, Chap III 6.52 Section VI.4, Title IV, Chap IV 6.52 Section VI.5 6.52 Section VI.6 6.52 Arts 4–18 6.73

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Art 8(1)(f) 6.73, 6.76 Art 12 6.73 Art 12.1 6.88 Art 13 6.73 Art 19 6.95 Art 21 6.44, 6.73, 6.96 Art 21.5 6.97 Art 33 6.44, 6.73, 6.96 Art 34 6.73 Arts 35–39 6.73 Arts 37–40 6.73 Art 44 6.73 BOI Regulation 2012: the Bank of Italy Regulation of 8 May 2012 on Collective Savings Managements 6.22, 6.23, 6.26, 6.44, 6.52, 6.58, 6.60, 6.83, 6.84, 6.85, 6.86, 6.89, 6.99, 6.100, 6.132, 6.139, 6.170, 6.183 Title II, Chap 1, section II 6.59 (p. xxxviii) Title II, Chap V 6.52 Title IV, Chap III. 6.73 Title IV, Chap IV. 6.127 Title IV, Chap VI. 6.127 Title V, Chap I 6.127 Title V, Chap II 6.147 Title V, Chap III 6.73 Title V, Chap IV 6.44, 6.73 Title V, Chap VIII 6.73 Title VI 6.161 Title VI, Chap II 6.147, 6.161 Title VI, Chap III. 6.147 Title VI, Chap V 6.147, 6.161 Civil Code (CC) 6.71, 6.72, 6.120, 6.121

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Art 1176(1) 6.120 Art 1176(2) 6.120 Art 2043 6.72, 6.118, 6.120, 6.124, 6.138, 6.159, 6.180 Art 2634 6.112 Art 2635 6.113 Art 2638 6.137 CONSOB Regulation No 11971/1999 of 14 May 1999 for the implementation of Legislative Decree No 58 of 24 February 1998 in relation to the discipline of the Issuers of financial instruments 6.139, 6.170, 6.174, 6.176 art 34-ter 6.176 Annex I 6.127 CONSOB Regulation No 17297/2010. 6.97 DM 228: Ministerial Decree (Treasury, now Economy and Finance) No 228 of 24 May 1999 6.17, 6.18, 6.19, 6.20, 6.25, 6.27, 6.30, 6.35, 6.36, 6.41, 6.44, 6.79, 6.80, 6.81, 6.83, 6.139, 6.161, 6.170 art 3 6.127 art 8 6.21 art 9 6.22 art 12 6.24 art 12 bis 6.24 art 15 6.25 art 15.3 6.25 art 15 bis 6.26 art 16 6.27 DM 228R: the draft revised DM 228 for the implementation of the AIFMD 6.19, 6.30, 6.41, 6.44 DM 468: Ministerial Decree of 11 November 1998 6.52 DM 469: Ministerial Decree of 11 November 1998 6.52 Law No 77 of 23 March 1983 6.05 Law No 130 of 30 April 1999 6.83 Law No 190 of 6 November 2012 (‘Law 190’) 6.103, 6.105 Legislative Decree 231/2001 of 8 June 2001 (‘D Lgs 231’). 6.63, 6.103–6.106

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Legislative Decree 196/2003 (‘D Lgs 196’) 6.181, 6.186, 6.187 Legislative Decree No 44 of 4 March 2014 (‘Decree 44’) 6.41, 6.44 TUF: Consolidated Law on Finance—Legislative Decree No 58 of 24 February 1998 (Testo unico delle disposizioni in materia di intermediazione finanziaria (‘TUF’)) 6.06, 6.07, 6.11, 6.18, 6.32, 6.33, 6.34, 6.36, 6.40, 6.41, 6.42, 6.43, 6.44, 6.57, 6.58, 6.64, 6.66, 6.69, 6.84, 6.86, 6.104, 6.105, 6.110, 6.121, 6.129, 6.140, 6.174, 6.176, 6.181, 6.183, 6.188 Title III, Pt II 6.12 art 1.1(n) 6.12, 6.48 art 1.1(o) bis 6.91 art 1.1(1) 6.12 art 1.1(2) 6.12 art 1.6(a) 6.58 art 2 6.161, 6.181, 6.185 art 4 6.191, 6.192 art 4 quater. 6.190 art 4(º) 6.161 art 4.5 bis 6.189 art 7 6.183 art 10 6.181 art 23.6 6.121, 6.122 art 33 6.14, 6.44, art 33.1 6.43, 6.48 art 33.3 6.92, 6.125 art 34 6.44, art 36.3 6.08 art 36.6 6.08 art 37 6.17 art 37.1(a) 6.17 art 37.1(b) 6.17 art 37.1(c) 6.17

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art 38 6.44, 6.102, 6.126 art 38.1 6.101 art 38.2 6.126 art 40 6.44, 6.75, 6.178 art 40.1(b) 6.107 art 41 6.44, 6.147, 6.161 art 41(*) 6.161 art 42.5 6.37, 6.44 art 43 6.44 art 44.1 6.171 art 50. 6.07 art 56. 6.52 art 57 6.52 art 60 bis 6.52 art 100 6.176 art 166 6.69, 6.115 art 166.1(b) 6.157, 6.179 (p. xxxix) art 167 6.111, 6.115 art 168 6.114, 6.115 art 173 bis 6.116 art 187 octies. 6.187 art 187 quinquiesdecies 6.181 arts 188–191 6.181 art 190 6.108, art 191.1 6.177 art 195 6.181 TUFR: TUF as amended in connection with the implementation of the AIFMD by the Legislative Decree No 44 of 4 March 2014 (‘Decree 44’) 6.11, 6.27, 6.31, 6.37, 6.40, 6.41, 6.42, 6.44, 6.46, 6.51, 6.58, 6.75, 6.80, 6.91, 6.105, 6.108, 6.109, 6.121, 6.149 art 1 6.43

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art 1.1(k) 6.47 art 1.1(n) 6.13 art 1.1 o-bis. 6.16 art 2 6.181 art 4 6.181, 6.185 art 4 quater. 6.139 art 4 quinquies 6.139 art 6.1(c)(2) 6.79, 6.139 art 6.1(c)(2)(º) 6.139 art 8 6.127, 6.183 art 10 6.183 art 13 6.52 art 14 6.52 art 32 quater 6.43, 6.44, 6.48, 6.52 art 33 6.147 art 33.2 6.58 art 33.4 6.73, 6.91, 6.93 art 34 6.43, 6.52, 6.54 art 34.1(f) 6.54 art 35 6.52 art 35 bis 6.52 art 35 bis.1(c) 6.52 art 35 decies 6.73, 6.75, 6.84 art 35 decies.1(b) 6.73, 6.107 art 35 undecies 6.44 art 37 6.127 art 37.5 6.132 art 38 6.91 art 39.2(b) 6.127

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art 41 6.147, 6.154, 6.161 art 41 quater 6.161 art 41 quater.1 6.164 art 41 quater.2 6.164 art 41 ter 6.147, 6.153 art 43. 6.147, 6.161, 6.173 art 43.2 6.147, 6.148 art 43.3 6.147, 6.148 art 43.8 6.149 art 44 6.29, 6.147, 6.161, 6.170 art 45 6.139, 6.146 art 45.1 6.141 art 45.4 6.143 art 44.5 6.173 art 45.5(c) 6.139 art 45.5(d) 6.139, 6.144 art 46. 6.139, 6.146 art 47 6.98 arts 47–49 6.73 art 48 6.102 art 48.3(b) 6.73 art 49 6.126 art 49.1 6.90 art 49.3 6.126 arts 51–53 6.52 art 54 6.156, 6.177 art 60 bis 6.105 art 94 6.127, 6.170 art 98 quater.1(a) 6.131

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art 98 ter 6.171 art 98 ter. 6.127, 6.170, 6.171 art 98 ter.1 6.131 art 190 6.135, 6.146, 6.155 art 190.1 6.107, 6.110, 6.178

Luxembourg Circular CSSF 2000/8 of 15 March 2000, Protection of investors in the event of errors in the calculation of the NAV and compensation for non-compliance with the investment restrictions applicable to UCIs 7.186 Circular CSSF 02/77 of 27 November 2002, Protection of investors in case of NAV calculation error and correction of the consequences resulting from non-compliance with the investment rules applicable to UCIs. 7.186, 7.187 Circular CCSF 02/80 of 5 December 2012, Specific rules applicable to Luxembourg UCIs pursuing alternative investment strategies 7.13, 7.46, 7.47 Circular CCSF 05/177 6 April 2005, Abolition of any prior control by the CSSF of advertising material used by persons and companies supervised by the CSSF 7.11, 7.12 Circular CSSF 06/241 of 5 April 2006, The concept of risk capital under the Law of 15 June 2004 relating to the investment company in risk capital (SICAR) 7.25 Circular CSSF 08/356 of 4 June 2008, Rules applicable to UCIs, when they employ certain techniques and instruments relating to transferable securities and money market instruments 7.47, 7.49, 7.50, 7.51, 7.52 (p. xl) Circular CSSF 10/437 of 1 February 2010, Guidelines concerning the remuneration policies in the financial sector 7.156 Circular CSSF 11/509 of 15 April 2011, New notification procedures to be followed by a UCITS governed by Luxembourg law wishing to market its units in another Member State of the European Union and by a UCITS of another Member State of the European Union wishing to market its units in Luxembourg 7.280 Circular CSSF 11/512 of 30 May 2011, Presentation of the main regulatory changes in risk management following the publication of CSSF Regulation 10-4 and ESMA clarifications 7.51 Circular CSSF 12/546 7.185, 7.193, 7.197, 7.198, 7.199, 7.200, 7.258 CSSF Regulation 10-4 transposing Commission Directive 2010/43/EU, as specified in Circular CSSF 12/546 of 24 October 2012, Authorisation and organisation of the Luxembourg management companies subject to Chapter 15 of the 2010 UCI Law of 17 December 2010 and to investment companies which have not designated a management company within the meaning of art 27 of the 2010 UCI Law (‘Circular CSSF 12/546’) 7.141, 7.185

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Circular IML 91/75 of 21 January 1991, Revision and remodeling of the rules to which Luxembourg undertakings governed by the Law of 30 March 1988 on UCI are subject 7.02, 7.11, 7.12, 7.42 Chap 1. 7.11 Civil Code art 1134 7.230 art 1149–1151 7.137 art 1166. 7.140 art 1184 7.130 art 1382. 7.134, 7.135 art 1383 7.134, 7.135 Law of 10 August 1915 on commercial companies (‘1915 Company Law’) 7.20, 7.24, 7.34, 7.56, 7.58, 7.59, 7.85, 7.91, 7.126, 7.131, 7.133 art 59-1 7.132 art 59-2 7.132 Law of 30 March 1988 on undertakings for collective investment (‘1988 UCI Law’) 7.01, 7.04 Pt I 7.02 Pt II 7.02, 7.04 Law of 19 July 1991 concerning UCIs, the securities of which are not intended to be placed with the public (‘1991 UCI Law’) 7.217, 7.219 Law of 11 November 1991 (‘UCI 1991’). 7.03, 7.04, 7.05, 7.07, 7.35 Law of 5 April 1993 on the Financial Sector, as amended from time to time (‘1993 Financial Sector Law’) 7.117, 7.119, 7.201 art 26-1 7.205 Law of 15 June 2004 on the investment company in risk capital, as amended (the ‘2004 SICAR Law’) 7.07, 7.09, 7.18, 7.24, 7.54, 7.57, 7.58, 7.59, 7.70, 7.79, 7.85, 7.88, 7.133, 7.161, 7.202, 7.204, 7.217 art 8(3) 7.217 Law of 10 July 2005 on prospectuses for securities, as amended (‘Prospectus Law’) 7.64, 7.65, 7.66 Law of 13 February 2007 (‘2007 SFI Law’) 7.06, 7.07, 7.08, 7.09, 7.15, 7.18, 7.33, 7.34, 7.35, 7.36, 7.53, 7.54, 7.57, 7.58, 7.59, 7.70, 7.79, 7.85, 7.88, 7.150, 7.202, 7.204, 7.217, 7.219, 7.238 Law of 13 July 2007 on markets in financial instruments, as amended (the ‘MiFID Law’) 7.110, 7.112, 7.114, 7.115, 7.116, 7.117, 7.118, 7.155

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Law of 17 December 2010 on undertakings for collective investment, as amended (‘2010 UCI Law’) 7.01, 7.08, 7.15, 7.18, 7.34, 7.42, 7.57, 7.58, 7.59, 7.70, 7.79, 7.81, 7.82, 7.84, 7.85, 7.99, 7.102, 7.110, 7.111, 7.114, 7.115, 7.116, 7.117, 7.118, 7.119, 7.141, 7.150, 7.155, 7.177, 7.183, 7.195, 7.201, 7.202, 7.204, 7.285, 7.286, 7.287 Pt II . 7.09, 7.39, 7.70, 7.79, 7.84, 7.259, 7.271 Chap 15 7.79, 7.81, 7.82, 7.99, 7.198 Chap 16. 7.79, 7.81, 7.82, 7.99, 7.259 art 43(2). 7.51 art 102 7.102 art 110 7.194 art 125-1 7.79, 7.82 art 125-2 7.79 art 129(7). 7.111 Law of 8 April 2011 concerning the implementation of a Consumer Code 7.63 Law of 26 March 2012 amending the law of 13 February 2007 relating to SIFs 7.08 Law of 12 July 2013 on alternative investment fund managers (the ‘AIFM Law’). 7.17, 7.19, 7.23, 7.29, 7.32, 7.37, 7.38, 7.54, 7.56, 7.70, 7.72, 7.73, 7.74, 7.75, 7.76, 7.77, 7.78, 7.79, 7.82, 7.84, 7.85, 7.87, 7.91, 7.92, 7.94, 7.99, 7.100, 7.102, 7.108, 7.110, 7.111, 7.112, 7.113, 7.114, 7.115, 7.116, 7.117, 7.118, 7.119, 7.120, 7.121, 7.125, (p. xli) 7.126, 7.131, 7.133, 7.135, 7.137, 7.138, 7.141, 7.148, 7.149, 7.155, 7.171, 7.173, 7.174, 7.193, 7.198, 7.201, 7.203, 7.204, 7.205, 7.207, 7.208, 7.209, 7.210, 7.213, 7.215, 7.218, 7.221, 7.224, 7.227, 7.234, 7.239, 7.244, 7.254, 7.256, 7.263, 7.265, 7.273, 7.276, 7.277, 7.281, 7.286, 7.288, 7.289, 7.293, 7.294, 7.313, 7.316, 7.317 Chap 2 7.120, 7.121, 7.126, 7.129, 7.223, 7.225, 7.226, 7.255, 7.266, 7.270, 7.290, 7.314 Chaps 2–4 7.253 Chap 3 7.223, 7.224, 7.225 Chap 4 7.254, 7.255 Chap 5 7.264, 7.265, 7.266, 7.313 Chap 6 7.288, 7.289, 7.290, 7.291, 7.317 Chap 7 7.312, 7.314 art 1(39) 7.18 art 1er 7.75 art 2(1). 7.75

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art 2(2). 7.75 art 3. 7.75 art 3(3) 7.93, 7.120 art 4. 7.75 art 4(2) 7.120 art 5. 7.92 art 5(2) 7.98, 7.120 art 5(3) 7.99, 7.120 art 5(4) 7.97 art 5(5) 7.120 art 5(7) 7.120 art 6. 7.92, 7.101 art 6(4) 7.98. 7.99 art 7. 7.92 art 8. 7.92, 7.102, 7.120 art 8(7). 7.108 art 8(8) 7.108 art 9. 7.92, 7.111 art 9(1) 7.120 art 10. 7.92 art 11 7.141 art 12 7.141 art 13 7.141 art 14 7.141 art 15 7.141 art 16 7.141, 7.175 art 17 7.141, 7.189 art 17(1) 7.228 art 17(10) 7.229, 7.232

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art 18 7.141 art 18(3) 7.228, 7.229 art 19 7.141, 7.218 art 19(3)(i) 7.205 art 19(6)(e) 7.231 art 19(7). 7.208 art 19(9) 7.218 art 19(11) 7.215 art 19(12) 7.228, 7.233 art 19(13) 7.228, 7.231 art 20 7.234 art 21 7.234 art 21(1) 7.268, 7.275 art 22 7.234 art 23 7.261 art 23(3) 7.262 art 24 7.261 art 25 7.261 art 26 7.261 art 27 7.261 art 28 7.261 art 29 7.267 art 30 7.267, 7.274 art 32 7.267, 7.283 art 34 7.292, 7.293 art 35 7.292 art 36 7.292 art 37 7.292, 7.299 art 38 7.292

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art 39 7.292 art 40 7.292 art 41 7.292 art 42 7.292 art 43 7.292 art 44 7.292 art 45 7.292 art 46 7.270, 7.315 art 47 7.318 art 48 7.318 art 50 7.318 art 51 7.141, 7.223, 7.241, 7.253, 7.264, 7.312, 7.318 art 52 7.318 art 53 7.318 art 54 7.318 art 55 7.318 art 56 7.318 art 57 7.318, 7.323 art 59 7.125, 7.318 Annex III 7.268 Annex IV 7.275 Product Laws (2004 SICAR Law: 2007 SIF Law: 2010 UCI Law) 7.59, 7.60, 7.70, 7.72, 7.80

Netherlands CITA (Wet op de vennootschapsbelasting 1969) art 2(1)(b) 8.11 art 2(1)(f) 8.15 art 2(2) 8.15, 8.19 art 6a 8.08 art 21(1)(a). 8.08

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art 28 8.08 (p. xlii) Civil Code (DCC) Book 2 8.22, 8.34 Book 2, Title 3 8.09 Book 2, Title 4 8.06 Book 2, Title 5 8.06 art 2:76a 8.07 Decree Market Access Financial Enterprises 8.124 art 34 8.133 art 56a 8.133 art 56c 8.124, 8.125, 8.133 art 56d 8.124, 8.127, 8.133 art 56f 8.133 Dividend Tax Act 1965 (Wet op de dividendbelasting 1965: DTA) art 1(2) 8.15 Economic Offences Act (Wet op de economische delicten: EO Act) 8.63, 8.69 Financial Markets Supervision Act (Wet op het financieel toezicht: FMSA) 8.03, 8.21, 8.27, 8.29, 8.30, 8.34, 8.35, 8.36, 8.37, 8.38, 8.47, 8.49, 8.53, 8.55, 8.56, 8.59, 8.61, 8.62, 8.63, 8.65, 8.69, 8.70, 8.72, 8.74, 8.88, 8.107, 8.119, 8.133, 8.137, 8.138, 8.144, 8.171 para 2.2.7.1 8.37, 8.124, 8.133 para 2.3.4b. 8.133 para 4.3.1.4a 8.115, 8.116 para 4.3.1.4b 8.115, 8.116 Pt 1 8.34 Pt 2 8.34, 8.47 Pt 3 8.34 Pt 4 8.34 Pt 5 8.34 art 1:1 8.21, 8.37 art 1:12 8.29

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art 1:13 8.37 art 1:13a 8.37 art 1:13b 8.133 art 1:13b(3) 8.133 art 1:23 8.70 art 1:24 8.156, 8.157, 8.158, 8.161 art 1:25 8.156, 8.157, 8.161 art 1:51 8.156, 8.169, 8.174, 8.178 art 1:51e 8.156, 8.169, 8.173, 8.177, 8.178 art 1:51i 8.114 art 1:52 8.156, 8.159 art 1:55 8.156, 8.159, 8.174, 8.178 art 1:56 . 8.156, 8.159, 8.174, 8.178 art 1:58 8.156, 8.158, 8.159, 8.169 art 1:59 8.156, 8.159 art 1:65 8.156, 8.175, 8.176 art 1:69 8.133, 8.139, 8.156, 8.159, 8.169 art 1:74 8.72, 8.156, 8.158, 8.162 art 1:75 8.56 art 1:77a 8.163 art 1:79 8.56, 8.156, 8.160 art 1:80 8.56, 8.156, 8.160 art 1:81 8.56, 8.156, 8.160 art 1:81(1) 8.62 art 1:81(3) 8.62 art 1:90 8.156, 8.171 art 1:97(1) 8.60 art 1:97(3) 8.60 art 1:104 8.60

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art 1:110 8.156 art 2:65. 8.42, 8.47 art 2:66. 8.32, 8.133 art 2:66a 8.37, 8.40, 8.41, 8.149, 8.150 art 2:67 8.47 art 2:67a 8.47 art 2:67a(2) 8.50 art 2:67b 8.133, 8.139 art 2:69 8.133, 8.139 art 2:69a 8.31, 8.133, 8.139 art 2:69b 8.31 art 2:73 8.32 art 2:97. 8.47 art 2:121c 8.124, 8.125, 8.133 art 2:121d 8.124, 8.127, 8.139 art 2:121e 8.133 art 2:121f 8.133 art 2:121g 8.133 art 2:121h 8.133, 8.139 art 3:17 8.72, 8.81, 8.86, 8.114 art 3:17(3) 8.72, 8.82, 8.86 art 3:18 8.114 art 3:18b. 8.114 art 3:52. 8.47, 8.51 art 3:57. 8.47, 8.51 art 3:74c 8.102, 8.107 art 3:258(1) 8.72 art 4:1 8.156 art 4:9 8.72

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art 4:10 8.72 art 4:11 8.72, 8.80 art 4:13 8.47 art 4:14 8.72, 8.80, 8.81 art 4:16 8.72, 8.90 art 4:25 8.72, 8.76 art 4:26 8.47 art 4:26(5) 8.55 art 4:37b 8.133 art 4:37c 8.124, 8.133 art 4:37d 8.37 art 4:37e 8.72, 8.80 art 4:37f 8.72 art 4:37g 8.72 art 4:37h 8.72 art 4.37j. 8.95 art 4:37k 8.72, 8.89 art 4:37l 8.102, 8.105 (p. xliii) art 4:37m 8.102, 8.106 art 4:37n 8.102, 8.107 art 4:37o 8.102, 8.104 art 4:37o(1) 8.102 art 4:37p 8.148 art 4:37q 8.114 art 4:37r 8.114 art 4:37s 8.114 art 4:37t 8.114 art 4:37u 8.114 art 4:37v 8.114

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art 4:37w 8.114 art 4:37x 8.114 art 4:37y 8.114 art 4:37z 8.114 art 4:42 8.93 art 4:44 8.95 art 4:46a 8.88 art 4:51. 8.102 art 4:52a 8.88 art 4:100f 8.47 art 4:104. 8.47 art 5:19a 8.102, 8.105 art 5:25c 8.102 art 5:25c(6) 8.102 art 5:33–5:52 8.117 art 5:38 8.119 art 5:39. 8.119 art 34 8.136 Explanatory Memorandum. 8.37, 8.39, 8.53 Financial Markets Supervision Act (FMSA) amending Act (Kamerstukken II), 2011– 2012, 33 235 nr. 3 (Memorie van Toelichting); (‘Explanatory Memorandum’) 27 8.03 nr. 13 (Amendement van het lid Huizing c.s.) 8.38 Financial Markets Supervision Act (FMSA) Exemption Decree (Vrijstellingsregeling Wft) art 4. 8.29 Financial Markets Supervision Act (FMSA) Market Conduct Decree (Besluit Gedragstoezicht financiële ondernemingen Wft) 8.35, 8.72, 8.98, 8.133, 8.148 para 10.3.1.1 8.148, 8.153 art 29a 8.72, 8.87 art 33a 8.72, 8.81

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art 37a. 8.72, 8.90 art 37a(2) 8.72 art 83a 8.76 art 83a(1) 8.72 art 83a(2) 8.72 art 83b 8.72 art 83c 8.72 art 86b. 8.78 art 88a 8.47 art 88b. 8.124 art 115 8.72 art 115b 8.124 art 115c 8.72, 8.80 art 115d 8.72 art 115e 8.72 art 115e(1) 8.98 art 115e(2) 8.98 art 115f 8.72 art 115h 8.72 art 115i 8.89 art 115j 8.102, 8.105 art 115k 8.102, 8.106 art 115l 8.102, 8.107 art 115m 8.102, 8.114 art 115n 8.114 art 115o 8.114 art 115q 8.153 art 115y 8.110

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Financial Markets Supervision Act (FMSA) Prudential Decree (Besluit prudentiële regels Wft). 8.35, 8.72 Pt 4.2 8.72 art 26(1) 8.72 art 26.1(2) 8.81, 8.85 art 48 8.47 art 50 8.47 art 51 8.47 art 63 8.47 art 63b 8.47, 8.54 art 90 8.47 art 91 8.47 art 135 8.102 General Administrative Law Act (Algemene wet bestuursrecht) 8.167 arts 5:15–5:20 8.163 art 6:7 8.167 art 8:1 8.167 State Taxes Act (Algemene wet inzake rijksbelastingen: STA) art 2(3)(c) 8.14

Spain Civil Code 9.100 art 1101 9.100, 9.112, 9.155 Civil Code on the agency contract (contrato de mandato) 9.82 arts 1709–1739. 9.82 Closed Ended Funds Draft Law 9.22, 9.24, 9.26, 9.28, 9.29, 9.32, 9.34, 9.35, 9.37, 9.41, 9.44, 9.47, 9.50, 9.61, 9.67, 9.68, 9.72, 9.73, 9.84, 9.89, 9.100, 9.108, 9.119, 9.133, 9.140, 9.141, 9.143, 9.144, 9.145, 9.147, 9.153, 9.156 (p. xliv) art 1 9.28, 9.30 art 3. 9.28, 9.33 art 4 9.35 art 4.8. 9.60

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art 5 9.37 art 7 9.37 art 7.1 9.74 art 7.1(c) 9.55 art 7.4 9.55, 9.88 art 8 9.37 art 9 9.37, 9.51 art 12 9.55, 9.60 art 13 9.55 art 14 9.55, 9.67 art 15 9.55 art 17 9.55, 9.76, 9.79 art 18 9.55, 9.79 art 19 9.102 art 19.3 9.101, 9.104, 9.107 art 20 9.101 art 21 9.101, 9.104, 9.107 art 23 9.113, 9.117, 9.119 art 24 9.28 art 28 9.126 art 29 9.101 art 48 9.55, 9.73 art 69 et seq 9.156 art 73 9.110 art 73 et seq 9.156 art 79 9.113, 9.116 art 81 9.124, 9.127, 9.151 art 82 9.124 art 83 9.136, 9.139

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art 86 9.124 art 87 9.124 art 88. 9.136 CNMV Circular 1/2006 of 3 May 2006 on IlCILS and IIC of IlCILS. 9.05, 9.55, 9.65, 9.69 r 7 9.78 CNMV Circular 3/2008 of 11 September 2008 on accounting rules, annual reports, and confidential financial statements of collective investment schemes 9.77, 9.106 CNMV Circular 7/2008 of 26 November 2008 on annual accounts and restricted information reports 9.11 CNMV Circular 11/2008 of 30 December 2008 on accounting rules and restricted information regarding the capital entities. 9.11, 9.77, 9.108 CNMV Circular 3/2009 of 25 March 2009 on the semi-annual report of the depositories of collective investment schemes. 9.86 CNMV Circular 6/2009 of 9 December 2009 on internal control of managing companies 9.55, 9.65, 9.69, 9.74 CNMV Circular 3/2010 of 14 October 2010 9.105 CNMV Communiqué of 18 July 2013 (the ‘Communiqué’) 9.05 Commercial Code on Commercial Agency (Comisión Mercantil) 9.82 arts 244–280 9.82 Criminal Code 9.111 art 282 bis 9.111 Fund Regulations 1082/2012 (‘Fund Regulations’) 9.03, 9.04, 9.05, 9.10, 9.23, 9.45, 9.56, 9.64, 9.73, 9.89, 9.90, 9.91, 9.92, 9.114 art 5.2 9.58 art 22 9.101 art 22 in fine. 9.101, 9.106 art 25 9.101 art 26 9.101 art 72 9.03, 9.28 art 73 9.20 art 74 9.20 art 74.1.j 9.20

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art 98.4 9.82 art 100 9.37 art 106 9.74 art 111 9.37 art 112 9.37 art 117 9.37 art 122 9.136 art 141. 9.55 Law 24/1988, dated 28 July 1988, of the Securities Market (‘Securities Market Law’ or ‘LMV’) 9.09, 9.18, 9.59, 9.94, 9.130, 9.156, 9.158 art 30 bis 9.18 art 84 9.156 art 85 9.156 art 91 et seq 9.156 Law 35/2003 of 4 November (‘Fund Law’) 9.03, 9.04, 9.05, 9.06, 9.09, 9.10, 9.15, 9.17, 9.22, 9.23, 9.28, 9.30, 9.34, 9.37, 9.38, 9.41, 9.49, 9.55, 9.61, 9.64, 9.65, 9.73, 9.80, 9.85, 9.86, 9.88, 9.90, 9.91, 9.92, 9.94, 9.98, 9.109, 9.113, 9.118, 9.122, 9.144, 9.145, 9.147, 9.152, 9.156 Chap V 9.55 art 2 9.28 art 3 9.07 art 15 bis 9.124 art 15 ter 9.136, 9.139 art 17.4 9.101 arts 40–43 9.37 (p. xlv) art 40.5 9.55 art 41.2 9.55 art 43 9.55 art 43.i.j. 9.55 art 43.i.k 9.55 art 43.l 9.74

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art 44 9.37 art 46.2 9.55 art 46.3. 9.55 art 49 9.37, 9.51 art 54.6 9.136 art 54 bis 9.124 art 55 bis 9.124 art 56. 9.143 art 56 bis 9.136, 9.137 art 58 9.85 art 60 ter 2 9.90 art 62 9.92 art 65.1.a 9.59 art 77 et seq 9.156 arts 77–94 9.132 art 80 9.109, 9.148 art 80.m. 9.132 art 80.n. 9.132 art 80.u. 9.132, 9.152 art 80.z. 9.132 art 138 9.55 Law 25/2005 of 24 November 2005 governing venture capital entities and management companies (‘Law 25/2005’ or ‘Venture Capital Law’) 9.11, 9.15, 9.37, 9.50, 9.72, 9.85, 9.94, 9.98, 9.118, 9.122, 9.130, 9.156 art 10.2.a 9.74 art 26 9.102 art 42.1.c 9.74 art 46 9.81 art 52. 9.95 art 53 9.92

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art 88 9.137 Law 31/2011 of 4 October 2011 implementing the UCITS IV Directive in Spain 9.03, 9.132, 9.152 Open Ended Funds Draft Law 9.22, 9.23, 9.26, 9.37, 9.44, 9.51, 9.61, 9.84, 9.100, 9.101, 9.103, 9.109, 9.125, 9.140, 9.141, 9.143, 9.152 Order EHA/596/2008 of 5 March 2008 regulating certain legal aspects of depositories of collective investment schemes and investors’ position statements 9.86 Order of the Ministry of Economy and Finance 1199/2006 of 25 April 2006. 9.05 Royal Decree 217/2008 of 15 February 2008 9.64 Royal Decree 1082/2012 of 13 July 2012, approving the regulations of the Fund Law (RD 1082/2012 or ‘Fund Regulations’) 9.03, 9.05, 9.09, 9.17, 9.80, 9.86, 9.101, 9.103 arts 22–25 9.103 art 26 9.101 art 44 9.71 art 72 9.16 art 73 9.55 art 75. 9.71 art 93 9.71 art 98 9.55, 9.80 Venture Capital Draft Law 9.38, 9.158

Sweden Alternative Investment Funds Managers Act 2013 (lag (2013:561) om förvaltare av alternativa investeringsfonder) (the ‘AIFMA’) 10.04, 10.12, 10.14, 10.32, 10.43, 10.48, 10.52, 10.53, 10.56, 10.61, 10.62, 10.65, 10.69, 10.70, 10.73, 10.83, 10.93, 10.98, 10.104 Chap 1, s 1 10.16 Chap 1, s 2, fourth para 10.16 Chap 1, ss 2–11 10.16 Chap 1, s 3 10.16 Chap 1, s 9 10.103 Chap 1, s 12 10.16 Chap 1, s 13, first para 10.16

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Chap 1, s 13, second para 10.16 Chap 2, ss 3–5 10.16 Chap 3, s 1 10.05, 10.16, 10.22 Chap 3, ss 3–9 10.22 Chap 3, s 3, second para 10.05 Chap 3, s 5 10.22 Chap 3, s 10 10.16, 10.22 Chap 4, s 1 10.74 Chap 4, s 1 10.74 Chap 4, s 3 10.86 Chap 4, s 4 10.101 Chap 4, s 5 10.86 Chap 4, ss 5–7 10.74 Chap 4, s 6 10.86 Chap 5, s 1 10.74 Chap 5, s 3 10.74 Chap 5, s 4 10.74 Chap 5, s 5 10.86 Chap 5, s 6 10.101 Chap 5, s 7, second para 10.74, 10.86 Chap 5, s 9 10.86 Chap 5, ss 10–15 10.86 Chap 5, s 17 10.86 (p. xlvi) Chap 5, s 18 10.86 Chap 5, s 19 10.86 Chap 5, s 21 10.86 Chap 5, s 22 10.86 Chap 5, s 23, first para 10.86 Chap 5, s 23, second para 10.86

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Chap 6, s 1 10.74 Chap 6, s 2 10.74, 10.86 Chap 6, s 3, first para 10.74 Chap 6, s 3, second para 10.74 Chap 6, s 4 10.74, 10.86 Chap 6, s 5 10.74, 10.86 Chap 6, s 6 10.86 Chap 7, ss 1–6 10.22 Chap 7, s 4, third para 10.28 Chap 8, s 1 10.35, 10.36, 10.37, 10.38, 10.46 Chap 8, s 2 10.35, 10.46 Chap 8, s 3 10.35, 10.43 Chap 8, s 4 10.35, 10.41 Chap 8, s 5 10.35, 10.66 Chap 8, s 6 10.66 Chap 8, s 7 10.35 Chap 8, ss 7–13 10.47 Chap 8, s 8 10.35 Chap 8, s 10 10.35 Chap 8, s 12 10.35 Chap 8, s 14 10.35 Chap 8, ss 14–18 10.49 Chap 8, s 15–18 10.35 Chap 8, s 19 10.40 Chap 8, s 20 10.35, 10.40 Chap 8, ss 20–22 10.35 Chap 8, s 22 10.39 Chap 8, s 23 10.35 Chap 8, s 24 10.35

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Chap 8, s 27 10.32 Chap 8, ss 28–31 10.56, 10.65, 10.73 Chap 9, ss 1–21 10.35 Chap 9, s 12 10.48 Chap 9, 13–16 10.50 Chap 9, 17–23 10.56, 10.65, 10.73 Chap 9, s 23 10.35 Chap 10, s 1 10.57 Chap 10, ss 4–7 10.57 Chap 10, ss 8–10 10.57 Chap 11, ss 1–4 10.66 Chap 11, ss 4–7 10.66 Chap 11, s 8 10.66 Chap 11, s 10 10.66 Chap 11, s 98 10.66 Chap 12, s 1 10.05 Chap 12, s 2 10.05 Chap 12, s 13, second para 10.06 Chap 12, s 18 10.05 Chap 13, ss 2–7 10.60 Chap 13, s 10 10.103, 10.105, 10.107 Chap 13, s 11 10.103, 10.105 Chap 13, s 12 10.103, 10.106 Chap 13, s 13 10.105, 10.108 Chap 14 10.21, 10.31, 10.52, 10.61 Chap 14, s 1 10.103 Chap 14, s 2 10.57 Chap 14, s 3 10.57 Chap 14, s 5 10.57

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Chap 14, s 6 10.57 Chap 14, s 7 10.35 Chap 14, s 9 10.103 Chap 14, s 10 10.103 Chap 14, s 11 10.86, 10.103 Chap 14, s 12 10.103 Chap 14, s 14 10.35, 10.86, 10.103 Chap 15, s 1 10.22, 10.103 Chap 15, s 3 10.103 Chap 15, s 4 10.22 Chap 15, s 7 10.103 Chap 15, s 8 10.103 Chap 15, ss 9–16 10.103 Chap 15, s 14 10.103 Chap 15, s 17 10.103 Chap 15, s 19 10.103 Chap 16 10.104 Chap 16, s 1 10.74, 10.86 Alternative Investment Funds Managers Regulations (Finansinspektionen) (SFSA) regulations (föreskrifter (FFFS 2013:10) om förvaltare av alternativa investeringsfonder) of 2 July 2013 (the ‘Swedish AIFM Regulations’) 10.04, 10.07, 10.15, 10.22, 10.40, 10.41, 10.47, 10.49, 10.50 Chap 9. 10.39, 10.60 Chap 15, s 11 10.57 Chap 15, s 12 10.57 Chap 16 10.57 Constitution. 10.34, 10.55, 10.64, 10.72, 10.85, 10.100 Investment Funds Act 2004 (as amended) (lag (2004:46) om investeringsfonder) 10.04, 10.09, 10.12 Investor Protection Act s 3 10.35

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Mutual Funds Act (lag om värdepappersfonder) (‘MFA’) 10.04, 10.06 Chap 5, s 23 10.05 Chap 9, s 1 10.05 Chap 9, s 2 10.05 Public Access and Official Secrets Act 2009 (as amended) (Offentlighets- och sekretesslagen (2009:400) 10.103, 10.109 Chap 8, ss 1–3 10.103 Chap 30, s 4. 10.103

(p. xlvii) United Kingdom Statutes Financial Services Act 2012 s 89 2.135, 2.166 Financial Services and Markets Act 2000 (FSMA) 2.02, 2.14, 2.41, 2.57, 2.58, 2.60, 2.62, 2.94, 2.96, 2.108, 2.109, 2.125, 2.145, 2.163 Pt 4A 2.45, 2.62, 2.96, 2.97, 2.107, 2.172 Pt VI 2.11 Pt XVII, Chap III 2.10 Pt XVII, Chap IV 2.10 s 1E 2.32 s 20 2.60 s 20(3) 2.60 s 21 2.08, 2.59 s 23 2.58 s 25 2.58 s 30 2.59, 2.168 ss 55A et seq 2.45 s 55J 2.41, 2.57, 2.61 s 55J(1)(b) 2.57 s 55J(6A) 2.107 s 55J(6A)(a) 2.57 s 55J(6A)(b) 2.62

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s 55J(6A)(c) 2.62 s 55L. 2.41, 2.61, 2.107 s 66 2.109 s 138D 2.60, 2.111, 2.113, 2.114, 2.115, 2.125, 2.126, 2.135, 2.142, 2.167 s 138D(5) 2.62 s 138E(1) 2.110 s 168 2.163, 2.164, 2.165 ss 204A–206A 2.107 s 235 2.03 s 238 2.10 s 241 2.167 s 264 2.10, 2.182 s 270 2.10, 2.179 s 272 2.10, 2.179, 2.182 s 277A 2.183 s 279 2.185 s 380 2.107 s 382 2.107 s 384 2.107 s 398 2.62, 2.135 s 424A 2.143 Limited Partnerships Act 1907 2.39

Statutory Instruments Alternative Investment Fund Managers (Amendment) Regulations 2013 (SI 2013/1797) 2.15, 2.170 Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773) (‘UK AIFM Regulations’) 2.15, 2.16, 2.17, 2.19, 2.87, 2.107, 2.109, 2.110, 2.115, 2.124, 2.125, 2.126, 2.127, 2.139, 2.143, 2.144, 2.145, 2.148, 2.162, 2.163, 2.165, 2.168, 2.170, 2.177 Pt 5 2.139, 2.175 Pt 6 2.143, 2.144

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reg 2(1). 2.125 reg 2(2) 2.21 reg 2(2)(a) 2.19 reg 2(2)(c) 2.143, 2.163 reg 3 2.20 reg 4 2.20 reg 4(1) 2.40 reg 6 2.41 reg 9 2.176 reg 10(2) 2.28 reg 24(4) 2.115 reg 26(1) 2.33 reg 28(1) 2.115 reg 30 2.121, 2.125, 2.126 reg 31 2.124, 2.125, 2.126 reg 31(1) 2.125 reg 31(2) 2.124 reg 33 2.169 reg 35 et seq. 2.139 reg 44 2.142 reg 45 2.145 reg 47 2.145 reg 49 2.145, 2.150 reg 50 2.145 reg 52 2.168 reg 53 2.163, 2.167 reg 53(3) 2.163, 2.165 reg 54 2.146 reg 54(2) 2.148

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reg 54(3) 2.149 reg 54(4) 2.149 reg 55 2.149 reg 57 2.173 reg 58. 2.176 reg 59 2.175 reg 59(1) 2.175 reg 68 2.137 reg 68(2) 2.141 Explanatory memorandum, Annex A 2.17 Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062). 2.03 Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (SI 2005/1529) 2.08 Pt II, Sch 1 2.168 (p. xlviii) Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060) 2.10, 2.13 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544)(‘RAO’) 2.15, 2.87, 2.96 art 51ZC 2.29 art 51ZC(3) 2.33 art 51ZD(1)(a) 2.96 art 51ZG 2.30, 2.31 Sch 8, para 1 2.19 Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256) 2.111 Open Ended Investment Companies Regulations 2001 (SI 2001/1228) 2.10 United Kingdom Listing Authority UKLA Listing Rules LR 15 2.12 United Kingdom Listing Authority (UKLA) Prospectus Rules 2.11

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List of Abbreviations Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

AFM The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) AIF alternative investment fund AIFM alternative investment fund manager AIFMA Alternative Investment Funds Managers Act 2013 AIFMD Alternative Investment Fund Managers Directive AMF Autorité des marchés financiers AUM assets under management BaFIN German Federal Financial Services Supervisory Authority BOI Bank of Italy

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BV besloten vennootschap met beperkte aansprakelijkheid (private company with limited liability) CBO collateralized bond obligations CC civil code CCF common contractual fund CdC Corte di Cassazione CEBS Committee of European Banking Supervisors CEIOPS Committee of European Insurance and Occupational Pensions Supervisors CESR Committee of Service Regulators CIS collective investment scheme CITA Wet op de vennootschapbelasting CLO collateralized loan obligations CMO collateralized mortgage obligations CNMV Association of Spanish Investment and Pension Funds COBS FCA’s Conduct of Business Sourcebook COLL Collective Investment Schemes Handbook CONSOB National Commission for the Companies and the Stock Exchange

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CPM collective portfolio management CPMI collective portfolio management investment CSSF Commission de Surveillance du Secteur Financier CV commanditaire vennootschap (limited partnership) DCB De Nederlandsche Bank DCC Dutch Civil Code DM Ministerial Decree EBA European Banking Authority ECB European Central Bank EEA European Economic Area EIOPA European Insurance and Occupational Pensions Authority ESA European Supervisory Authority ESFS European System of Financial Supervision ESMA European Securities and Markets Authority ESRB European Systemic Risk Board (p. l) EU European Union FATA

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Financial Action Task Force FCA Financial Conduct Authority FCI Fondo Comune di Investimento (common investment fund) FCP fonds commun de placement FDI financial derivative instrument FGR fonds voor gemene rekening (common fund) FMSA Financial Markets Supervision Act FSA Financial Services Authority FSMA Financial Services and Markets Act 2000 FUND Investment Funds Sourcebook GAAP generally accepted accounting principle IFIA Irish Funds Industry Association IICIL instituciones de inversion colectiva de inversión libre (free investment funds) ILP investment limited partnership InvG Investmentgesetz (German Investment Act) IPISC Investor Protection and Intermediaries Standing Committee KAG Kapitalanlagegesellschaft (German asset management company)

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KAGB Kapitalanlagengesetzbuch (German Capital Investment Code) KID key information document KIID key investor information document LMV Securities Markets Law MFA Mutual Funds Act MFC code monétaire et financier MFN most favoured nation MiFID Markets in Financial Instruments Directive NAV net asset value NURS non-UCITS retail scheme NV naamloze vennootschap (public company with limited liability) OECD Organization for Economic Cooperation and Development OEIC open-ended investment company OTC over the counter PERG Perimeter Guidance Sourcebook PIF professional investor fund PII

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personal indemnity insurance PRIP packaged retail investment product PRIPs Packaged Retail Investment Products Regulation QIAIF qualifying investor AIF QIF qualifying investor fund QIS qualified investor scheme RAO Financial Services and Markets Act (Regulated Activities) Order 2001 REIT real estate investment trust RFP request for proposal RIAIF Retail Investor Alternative Investor Fund RTS regulatory technical standards SA société anonyme S.à r.l société à responsabilité limitée (p. li) SCA société en commandite par actions SCS société en commandite simple SCSp société en commandite spéciale SFSA Swedish Financial Supervisory Authority

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SGP sociétés de gestion de portefeuille SGR Società di Gestione del Risparmio SICAF société d’investissement à capital fixe/Società di Investimento a Capitale Fisso SICAR société d’investissement en capital à risqué SICAV société d’investissement à capital variable/Società di Investimento a Capitale Variabile/Sociedad de Inversión de Capital Variable SIF specialized investment funds SOPARFI société de participations financières SPV special purpose vehicle SSPE securitization special purpose entity TUF Testo unico delle disposizioni in materia di intermediazione finanziaria (Consolidated Law on Finance Intermediation) TUFR TUF renumbered articles UCI undertaking for collective investment UCITS undertaking for collective investment in transferable securities UKLA UK Listing Authority (p. lii)

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List of Directive and Regulation Short Forms Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

AIFMD

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ 2011 L174/1)

ESMA Regulation

Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority) amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC

Implementing Regulation

Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (OJ 2013 L83/1)

MiFID

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (OJ 2004 L145/1)

MiFID Implementing Directive

Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (OJ 2006 L241/26)

MiFID Implementation Regulation

Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards record keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purpose of that Directive (OJ 2006 L241/1)

Omnibus I Directive

Directive 2010/78/EU in respect of the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European

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Supervisory Authority (European Securities and Markets Authority) (OJ 2010 L331/120) Opt-In Implementing Regulation (EU) No 447/2013

Commission Implementing Regulation (EU) No 447/2013 of 15 May 2013 establishing the procedure for AIFMs which choose to opt in under Directive 2011/61/EU of the European Parliament and of the Council (OJ 2013 L 132/1)

UCITS Directive

Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (OJ 2009 L302/32)

UCITS I Directive

Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (OJ 1985 L375/3)

Packaged Retail Investment Products Regulation (PRIPs)

Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products COM (2012) 352 final, 3 July 2012

Prospectus Directive

Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (OJ 2003 L345/64)

Takeover Directive

Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (OJ 2004 L142/12)

Transparency Directive

Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (OJ 2004 L390/38)

UCITS Implementing Directive

Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/ EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (OJ 2010 L176/42)

UCITS Regulation

Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website (OJ 2010 L176/1)

(p. liv)

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List of Contributors Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Editors Lodewijk van Setten is Managing Director and International Chief Operating Officer to Morgan Stanley’s Investment Management business, and Visiting Professor of Law at King’s College, London. He wrote, among other publications, The Law of Institutional Investment Management (Oxford University Press, 2009) and is wellknown in the investment management industry in the United Kingdom, which is the principal European place of business for managers of alternative investment funds. Danny Busch is Professor of Financial Law and Director of the Institute for Financial Law, Radboud University Nijmegen, the Netherlands. He has published widely. He recently published Liability of Asset Managers (Oxford University Press, 2012). After having graduated with highest honours in Dutch law from Utrecht University in 1997, he was awarded the degree of Magister Juris in European and Comparative Law by the University of Oxford (St John’s College) in 1998. From 1998 until 2001 he held the position of lecturer and researcher at the Molengraaff Institute of Private Law in Utrecht. In 2002 he defended his PhD in Utrecht (Indirect Representation in European Contract Law, Kluwer Law International, 2005). From 2002 until 2010 he was an attorney-at-law (advocaat) with the leading Dutch international law firm De Brauw Blackstone Westbroek in Amsterdam where he practised banking and securities law (both the private law and regulatory aspects). He is extensively engaged in the provision of training to attorneys-at-law and financial professionals in the Netherlands.

Authors Dualta Counihan is a partner in the Asset Management and Investment Funds Group at Matheson. He practises financial services law and advises many of the world’s leading financial institutions, investment banks, asset management

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companies, and service providers carrying on business in Ireland or through Irish vehicles. Francesco Paolo Crocenzi is a founding partner of Studio Legale Crocenzi e Associati. He practises corporate law with a focus on financial law, securities regulations, and EU laws and regulations. Francesco is a member of the Monterey Funds Club, a network of international lawyers specialized in financial law, and a member of the International Bar Association. Emilio Díaz Ruiz is a partner in the Madrid office of Uría Menéndez. His practice specializes in banking, capital markets, securitizations, project finance, and financial regulatory matters, including undertakings for collective investment. He acts as external counsel to many banks and investment companies and has participated in the drafting of securities market regulations. Gilles Dusemon is a partner in the private equity & real estate practice of Arendt & Medernach, where he specializes in the structuring and formation of alternative investment funds (AIF) and alternative investment fund managers (AIFM), advising domestic and (p. lvi) international clients on the corporate, regulatory, and compliance aspects, with a particular focus on the private equity and real estate asset classes. Kees Groffen is a partner at De Brauw Blackstone Westbroek NV. He specializes in investment management including providing regulatory advice to domestic and foreign investment funds and asset managers, and advising on the structuring and restructuring of investment funds, including retail and private equity funds. Dan Hanqvist is a Stockholm-based finance and regulatory counsel specializing in banking and debt capital markets, with a specific regulatory focus. Dan has extensive experience of advising financial institutions and other organizations on regulatory matters. He also regularly advises clients in financial derivatives and netting related questions. Victorien Hémery is a senior associate in the private equity & real estate practice of Arendt & Medernach. Victorien focuses on the structuring and formation of alternative investment funds (AIF) and alternative investment fund managers (AIFM), advising domestic and international clients on the regulatory, corporate, and organizational aspects relating thereto with a specialization in private equity and real estate asset classes. He also advises domestic and international clients on the regulatory aspects of the structuring and formation of pension funds and pension pooling vehicles. Michael Jackson is a partner in the Asset Management and Investment Funds Group at Matheson. He is a member of the IFSC Funds Group established by the Department of An Taoiseach (the Irish Prime Minister) to consider and advise on legislative and other changes which are necessary or desirable to facilitate the continued growth of the Irish investment funds industry. He is chairman of the legislative sub-group of the IFSC funds group. Myriam Moulla is a senior associate in the investment funds practice of Arendt & Medernach, where she specializes in collective asset management and investment funds, in the formation of UCITS funds and alternative investment funds (AIF). She

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was actively involved throughout all the phases of the Luxembourg implementation of the AIFM Directive. Stéphane Puel is the managing partner of Gide Loyrette Nouel. Stéphane advises French and international financial institutions on all regulatory matters, and in particular on structuring, setting up, documenting, and distributing regulated and non-regulated French and foreign law open-end and closed-end investment funds, such as hedge funds, real estate investment trusts (REITs), private equity funds, infrastructure funds, and distressed debt funds. David Rouch is a partner in the Global Financial Institutions Group at Freshfields Bruckhaus Deringer. David frequently advises on some of the market’s most pressing issues, such as the relationship between culture and regulation in financial institutions and new regulatory approaches to product governance. He has been involved in the consultation on the AIFMD, including work on submissions by the Financial Markets Law Committee and the UK Investment Management Association. He served on the FSA’s AIFMD legal experts group. Salvador Ruiz Bachs is a partner at the Banking and ICM department in Allen & Overy, Madrid. He has wide experience in asset management and funds and in the regulation and contractual matters of financial institutions, financial instrument markets, OTC, clearing and settlement systems, custody, and a wide range of financial products. His practice focuses (p. lvii) on financial regulation, asset management funds, derivatives and structured products and banking restructuring. Christian Schmies is a partner in the Frankfurt office of Hengeler Mueller. He studied in Bonn, Bologna, and Washington DC. Dr Schmies holds a doctorate degree (Dr. jur) from the University of Bonn and a Master of Arts from the Paul H. Nitze School of Advanced International Studies (SAIS) in Washington DC. He was admitted to the Bar in 2007 and has since practised law in Hengeler Mueller’s Frankfurt office. Dr Schmies specializes in investment fund law, banking and capital markets, financial institutions, compliance as well as M&A transactions in the financial sector. Bernard Spoor is a partner in the Investment Management Group at De Brauw Blackstone Westbroek NV. Bernard specializes in the structuring of investment funds, corporate structuring, and corporate finance transactions involving investment institutions. He also advises pension funds on governance matters and outsourcing transactions. (p. lviii)

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1 The Alternative Investment Fund Managers Directive Danny Busch, Lodewijk van Setten From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Advertising and marketing and funds — Hedge fund — Supervision

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(p. 1) 1  The Alternative Investment Fund Managers Directive I. Terms of Reference 1.01 1. The extraordinary expansion of the EU regulatory framework for investment funds and the creation of a single market for non-UCITS 1.01 2. Private law aspects of the AIFMD 1.13 3. Policy reasons for the expansion of the EU regulatory framework for investment funds 1.23 4. Legislative structure 1.35 II. General Provisions of the AIFMD 1.46 1. Subject matter and scope (Articles 1–2) 1.46 2. Exemptions (Article 3) 1.89 3. Determination of AIFM (Article 5(1)) 1.94 4. Types of AIFM and AIFs 1.102 III. Authorization to Manage an AIF 1.130 1. Overview: EU AIFMs and non-EU AIFMs 1.130 2. Authorization and passporting of EU AIFMs 1.147 3. Authorization and passporting of non-EU AIFMs 1.161 4. Application for authorization by EU and non-EU AIFMs 1.178 5. Conditions for granting authorization 1.186 6. Procedural aspects 1.198 IV. Operating Requirements 1.210 1. Overview 1.210 2. General duties (Article 12) 1.212 3. Remuneration (Article 13) 1.251 4. Conflicts of interest (Article 14) 1.268 5. Risk management (Article 15) 1.282 6. Liquidity management (Article 16) 1.290 7. Investment in securitization positions (Article 17) 1.296 8. General organizational requirements (Article 18) 1.316 9. Valuation (Article 19) 1.318 V. Delegation of AIFM Functions 1.332 1. General 1.332 2. Conditions for delegation 1.336

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3. AIFM’s liability not affected by delegation 1.356 4. AIFM may not become a letter-box entity 1.358 5. Sub-delegation 1.361 VI. Depositary 1.363 1. General 1.363 2. Single depositary for each AIF 1.366 3. Depositary contract 1.369 4. Entities that may act as depositary 1.391 5. Location depositary 1.400 6. Monitoring by depositary of AIF’s cash flows 1.402 7. Safe-keeping of financial instruments to be held in custody 1.405 8. Safe-keeping of assets other than financial instruments that can be held in custody 1.416 9. Oversight of operational functions 1.425 10. Duty to act in the best interest of the AIF and its investors 1.426 11. Conflicts of interest 1.427 (p. 2) 12. Re-use of assets/rehypothecation by the depositary 1.428 13. Delegation of safe-keeping functions 1.429 14. Liability of depositary 1.443 15. Duty of information towards competent authorities; sharing of information between competent authorities 1.464 VII. Transparency Requirements 1.465 1. General 1.465 2. Annual report (Article 22) 1.467 3. Disclosure to investors (Article 23) 1.476 4. Reporting obligations to competent authorities (Article 24) 1.482 VIII. AIFM Managing Specific Types of AIF 1.491 1. Leveraged AIFs (Article 25) 1.491 2. AIFMs managing AIFs which acquire a (non-)controlling participation in (non-)listed companies (Articles 26–30) 1.498 IX. Marketing AIFs in the EU 1.526 1. Marketing of EU AIFs in the home Member State or the Member State of reference (Articles 31 and 39(2)) 1.526 2. Marketing of EU AIFs in Member States other than the home Member State or Member State of reference (Articles 32 and 39(4)) 1.539 3. Marketing of non-EU AIFs in the EU (Articles 35 and 40) 1.552

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4. Marketing of non-EU AIFs in the EU subject to national regimes by EU and non-EU AIFMs (Articles 36 and 42) 1.557 5. Marketing to retail investors (Article 43) 1.566 X. Competent Authorities and Supervisory Powers 1.571 1. General 1.571 2. Designation, powers, and redress procedures 1.572 3. Cooperation between different competent authorities 1.576 XI. Transitional and Final Provisions 1.578

I. Terms of Reference 1. The extraordinary expansion of the EU regulatory framework for investment funds and the creation of a single market for non-UCITS A. Pre-AIFMD: UCITS, NURS, and unregulated funds 1.01  Since 19891 it has been possible to seek authorization as an ‘undertaking for collective investment in transferable securities’ (UCITS) for EU based, open-ended collective investment arrangements that invest in a diversified portfolio of transferable securities and seek to offer participations to the public.2 Authorization of an investment fund as a UCITS will permit the offering of participations in the UCITS to the public in Member States other than the Member State under the laws of which the UCITS is organized without further authorization by the host Member State.3 1.02  The regulation of collective investment arrangements that are not UCITSs—including investment funds offered to the public in only one Member State, known as non-UCITS (p. 3) retail schemes or ‘NURSs’—traditionally has been left to the Member States’ national initiative. The Member States took different positions in relation to the scope of their national regulatory frameworks for investment funds and otherwise similar schemes received different regulatory treatment under the national frameworks. What was a ‘collective investment fund’ was decided by reference to different criteria and, where arrangements were caught as collective investment funds, national frameworks tended to treat the exclusions or exemptions from the offering of participations in these funds differently. Equally, ‘managing a collective investment scheme’ other than a UCITS fund was not a regulated activity in all jurisdictions. 1.03  This resulted in a diverse collection of regulatory frameworks ranging from the fairly liberal—which seek to regulate only investment funds that are offered to the public, thus leaving certain qualified investors free to invest in unregulated investment funds—to the conservative—which prohibit the offering of any unregulated investment funds in any circumstances. For instance, a closed-ended investment trust was not treated as a ‘collective investment scheme’ in the UK, but would have been an ‘investment institution’ in the Netherlands. Equally, the Netherlands and the UK exempted the offering of (foreign) funds to qualifying investors subject to certain criteria, but Italy and France offered no such exemptions for foreign funds.

B. The AIFMD: a sweeping Directive 1.04  The implementation of the Alternative Investment Fund Managers Directive4 (AIFMD) has introduced maximum (sometimes permitting Member State ‘gold-plating’) harmonizing regulatory standards into the previously diverse landscape. The AIFMD brings the managing of ‘alternative investment funds’ (AIFs) from the EU, and the offering of units,

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shares, or other participations rights in AIFs to professional investors (ie non-retail investors) based in the EU, within the scope of pan-EU regulatory framework. 1.05  AIFs are very broadly defined as ‘collective investment undertakings’ which are offered to ‘a number of investors’, invest the collective assets ‘in accordance with a defined investment policy’ and do not require authorization as a UCITS.5 The definition purposefully does not limit the catchment area.6 Simply put, the AIFMD captures all arrangements that have some collective investment characteristic and are not a UCITS. The definition ignores whether the arrangement is open-ended or closed-ended, what legal form it has, whether or not the participation rights are listed, and, notwithstanding the name of the Directive,7 what it invests in.8 (p. 4) 1.06  The AIFMD is aimed at the managers of AIFs, referred to in the AIFMD as ‘Alternative Investment Fund Managers’ (AIFMs), rather than the AIFs they manage.9 AIFs may continue to be regulated and supervised at the national level. It is the AIFM’s, not the AIF’s, responsibility to ensure that the management and offering of the AIF complies with the AIFMD. The AIFMD applies to the EU or non-EU manager of an AIF regardless of whether the AIF is an EU AIF or a non-EU AIF, although non-EU AIFs may be exempted from certain provisions, particularly if the non-EU AIF is not marketed in the EU. But EU AIFMs will always need some form of authorization under the AIFMD. 1.07  Subject to de minimis and other exemptions, and an implementation period for nonEU managers and for (EU and non-EU) managers of non-EU AIFs, the AIFMD sets aside all qualified investor, private placement, or similar exclusions or exemptions that operated on the offering of funds that were not authorized to be offered to the public at national level prior to the AIFMD coming into force. Outside the limited de minimis exemptions, there are no options left for operators of non-UCITS investment funds to offer participations within the parameters of these types of regulatory safe havens. 1.08  The implementation of the AIFMD, therefore, amounts to an extraordinary expansion of the EU regulation of the management and offering of non-UCITS collective investment schemes. Had the European legislator wanted to give the Directive a more meaningful name, it should have been called the ‘Professional Investor Fund Manager Directive’ or maybe even the ‘Non-UCITS Fund Manager Directive’.

C. The creation of a single market for management and marketing of AIFs 1.09  One of the aims of the AIFMD is to ensure that, once fully operative, it will create a single market in which EU and non-EU AIFMs authorized by one Member State may also manage AIFs in all other Member States and market their AIFs freely to professional investors in the EEA subject to a harmonized offering regime.10 1.10  The AIFMD makes a distinction between authorization of EU AIFMs and authorization of non-EU AIFMs, and a further distinction between the management and marketing of EU AIFs and the management and marketing of non-EU AIFs. As a result, the regulatory framework has become complex. The table below is designed to assist in the navigation of the AIFMD maze. EU AIF EU AIFM

Managing

•  Art 6: authorization by home Member State to manage EU AIF established in Member State. •  Art 33: subject to notification, authorized EU AIFM may manage EU AIFs established in another

Non-EU AIF •  Art 6: authorization by home Member State to manage non-EU AIFs, if marketed under Art 35. •  Art 34: authorization by home Member State to manage non-EU AIF if it is not marketed in EU. Non-EU AIF must be AIFMD-

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EU AIF

Marketing to professional investors

Member State (European passport).

compliant except Arts 21 (depositary) and 22 (disclosure).

•  Art 31: authorized EU AIFM may market (feeders into) EU AIFs in home Member State.

•  Art 35 * : subject to notification, authorized EU AIFM may market (feeders into) non-EU AIF in home and other Member States (European passport).

•  Art 32: subject to notification, authorized AIFM may market any EU AIF cross-border (European passport).

NonEU AIFM

Managing

Non-EU AIF

•  Art 37 * : authorization by Member State of reference to manage EU AIFs established in Member State of reference. Non-EU AIFM must comply with AIFMD, but potential non-compatibility relief per Art 37(2).

•  Art 36 ** : authorized EU AIFM on a per-Member-State basis may be permitted to market (feeders into) non-EU AIFs in accordance with national regimes (‘private placement’). Non-EU AIF must be AIFMD compliant except Art 21 (depositary).

•  Art 37 * : if non-EU AIFM manages non-EU AIFs only, but intends to market these in EU per Art 40 * , the same rules apply as apply to non-EU AIFMs managing EU AIFs.

•  Art 41 * : subject to notification, authorized nonEU AIFM may manage EU AIF established in a Member State other than the Member State of reference (European passport).

Marketing to professional investors

•  Art 39 * : subject to notifications, authorized nonEU AIFM may market (feeders into) non-EU AIF in Member State of reference and other Member States (European passport). •  Art 42 ** : subject to compliance with transparency requirements in Arts 22–24, and provisions of Arts 26–30, Member States may permit marketing of EU and non-EU AIFs by non-EU AIFMs in accordance with national regimes (‘private placement’).

•  Art 40 * : subject to notifications, authorized non-EU AIFM may market (feeders into) non-EU AIF in Member State of reference and other Member States (European passport). •  Art 42 ** : same rules as apply to non-EU AIFM marketing EU AIFs.

*  Article 66(3) delays implementation of Article 35 and Articles 37–41 until activated by a Commission delegated act made pursuant to Article 67(6). The delegated act must be adopted three months after the European Securities and Markets Authority (ESMA) has given positive advice pursuant to Article 67(1) about extending passporting rights for the marketing of non-EU AIFs by EU AIFMs within the meaning of Article 35 and Articles 37– 41. ESMA must give advice by 22 July 2015.

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**  Article 66(4) provides for termination of Articles 36 and 42 by a Commission delegated act made pursuant to Article 68(6). The delegated act must be adopted three months after ESMA has given positive advice pursuant to Article 68(1) about terminating the national regimes, if any, made under Articles 36 and 42. ESMA’s advice must follow three years after the 22 July 2015 advice relating to extending passporting rights for the marketing of nonEU AIFs by EU AIFMs within the meaning of Article 35 and Articles 37–41. In other words, ESMA must give termination advice by 22 July 2018. (p. 5) (p. 6) 1.11  Unlike the UCITS Directive, the AIFMD does not seek harmonization of the constitution and operation of the AIF. This was deemed to be ‘disproportionate’.11 In other words, the AIFMD, subject to delayed implementation for non-EU AIFs and non-EU AIFMs, introduces a single market for the managing and marketing of EU and non-EU AIFs by authorized and passported EU and non-EU AIFMs without imposing a fully harmonized operating regime on the AIFs. 1.12  The fact that a Member State may or may not regulate an AIF established in its jurisdiction does not restrict an authorized AIFM’s rights under the AIFMD to market that AIF in another Member State. For example, if an AIFM authorized by the competent regulator in the UK manages an Irish qualifying investor fund (QIF) and seeks to market that QIF in France pursuant to its passporting rights, the French authorities cannot impose additional requirements on the Irish QIF nor the UK AIFM in respect of that QIF.12

2. Private law aspects of the AIFMD 1.13  The AIFMD is regulatory law and therefore, by its very nature, a public law. It prescribes rules for AIFMs, who are persons who engage in activities that are regulated pursuant to the AIFMD. Accordingly, the purpose of the rules is to prescribe general conduct and organizational standards to which the regulated firm must adhere in order to be authorized to conduct its regulated business. 1.14  The purpose of regulatory law is not to create private law rights and liabilities between the regulated firm and third parties, be they clients of the firm or otherwise. Nevertheless, the AIFMD includes provisions that appear to reference private law rights of the AIF and of the investors in the AIF in Article 19(10) (liability of the AIFM for the valuation function), Article 20(3) (liability of the AIFM for a delegated function), and Article 21(12) and (13) (liability of the depositary). In addition, Article 37(13) (jurisdiction clause) appears to imply a mandatory forum choice into any contractual relationship. 1.15  Article 19(10) provides in the first paragraph that ‘AIFMs are responsible for the proper valuation of AIF assets, the calculation of the net asset value and the publication of that net asset value. The AIFM’s liability towards the AIF and its investors shall, therefore, not be affected by the fact that the AIFM has appointed an external valuer’. Similarly, Article 20(3) provides that the ‘AIFM’s liability towards the AIF and its investors shall not be affected by the fact that the AIFM has delegated functions to a third party’, and under Article 21(13) the ‘depositary’s liability shall not be affected by any delegation’. 1.16  These provisions could be read as regulatory requirements on AIFMs and depositories not to seek to avoid responsibility for delegated functions. Indeed, Article 21(6) (e) specifies as one of the conditions for the appointment of the depository that it must ‘by contract be liable to the AIF or to the investors of the AIF, consistently with paragraphs 12 and 13’. (p. 7) 1.17  If the provisions must be read as regulatory requirements, an AIFM or depository that seeks to contractually exclude liability for the delegated function would be breaching regulatory requirements, but that breach per se would not also invalidate or subvert the contractual arrangement. If the applicable private law recognizes some form of limitation on the ability of a party contractually to exclude liability, it is conceivable that From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

breach of a regulatory requirement would be interpreted by the competent court to constitute a failure of the contractual exclusion to meet the applicable test for, eg, fairness or reasonableness, and therefore, that the attempted exclusion of liability is set aside. 1.18  However, other provisions use much more direct language. The second paragraph of Article 19(10) reads: ‘notwithstanding the first subparagraph and irrespective of any contractual arrangements providing otherwise, the external valuer shall be liable to the AIFM for any losses suffered by the AIFM as a result of the external valuer’s negligence or intentional failure to perform its tasks’. Article 21(12) provides in the first paragraph that the ‘depositary shall be liable to the AIF or to the investors of the AIF, for the loss. . .of financial instruments held in custody’ and in the third paragraph that the ‘depositary shall also be liable to the AIF, or to the investors of the AIF, for all other losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations pursuant to this Directive’.13 1.19  This liability language is plain in intention and purpose. It purports to create or preserve, as the case may be under the applicable national private law, private rights of action against the AIFM and the depositary for the AIF and its investors. If challenged in the national courts, the European principle of effectiveness, known as effet utile, will probably operate to the effect that contractual arrangements or rules of national private law that seek to exclude, mitigate, or alter any liability of the AIFM or depositary as envisaged by Article 19(10), 20(3), or 21(12) and (13) will be set aside.14 1.20  It is not clear, however, what the nature of these private rights of action is. Is it a statutory right of action? Is it to be implied in the contractual relationship, if any, between the injured parties and the AIFM or the depositary, or does it set a negligence standard that gives separate actions in tort to the injured parties? Further, are the rights of action meant to be independently enforced by investors in the AIF or is it a collective action? And if it is a collective action, is the AIF responsible for enforcement? 1.21  Article 37(13) contains a jurisdiction clause and provides that ‘Any disputes between the [non-EU] AIFM or the AIF and EU investors of the relevant AIF shall be settled in (p. 8) accordance with the law of and subject to the jurisdiction of a Member State’. Again, it is not clear how this provision is intended to work in the context of national civil procedure rules. Are contrary contractual choices of law clauses set aside? What law of which Member State applies? Does this affect conflicts of laws forum selection rules in the context of tortious liability? 1.22  It would appear that these matters have not been given much consideration by the draftsmen of the AIFMD. National implementation and judicial interpretation will have to provide clarity.

3. Policy reasons for the expansion of the EU regulatory framework for investment funds A. The stated case for the AIFMD 1.23  The first three recitals of the AIFMD aim to make the case for expansion of the scope of the EU regulatory framework for investment funds. Recital (1) notes that managers of AIFs are ‘responsible for the management of a significant amount of invested assets in the Union, account for significant amounts of trading in markets for financial instruments, and can exercise an important influence on markets and companies in which they invest’. Recital (2) asserts that the ‘impact of AIFMs on the markets in which they operate is largely beneficial, but recent financial difficulties have underlined how the activities of AIFMs may also serve to spread or amplify risks through the financial system’; and recital (3) concludes that ‘[r]ecent difficulties in financial markets have underlined that many AIFM strategies

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are vulnerable to some or several important risks in relation to investors, other market participants and markets’. 1.24  More detail relating to the policy rationale can be found in an Explanatory Memorandum to the Commission’s April 2009 proposal for the AIFMD. Here, the Commission wrote:15 The financial crisis has exposed a series of vulnerabilities in the global financial system. It has highlighted how risks crystallising in one sector can be transmitted rapidly around the financial system, with serious repercussions for all financial market participants and for the stability of the underlying markets. . . .The proposed legislation will introduce harmonised requirements for entities engaged in the management and administration of alternative investment funds (AIFM). 1.25  The Commission justifies the need for ‘closer regulatory engagement with this sector’ with a reference to reports produced by the European Parliament16 and the High-Level Group on Financial Supervision chaired by Jacques de Larosière.17 Neither report, however, appears to suggest that there is a need to expand the regulatory framework for investment funds in the EU to the level the AIFMD has ultimately introduced. The reports merely note the need for governments and regulators to gain a better understanding of the level of leverage (p. 9) and the size of the investments made by (specifically) hedge funds and private equity funds. The limited findings of the Rasmussen and De Larosière reports do not appear to provide a proper basis for the Commission’s policy rationale for the introduction of the AIFMD in its final form. 1.26  The Commission further observes in the Explanatory Memorandum that the ‘financial crisis has underlined the extent to which AIFMs are vulnerable to a wide range of risks’ and that these risks are ‘of direct concern to the investors in those funds, but also present a threat to creditors, trading counterparties and to the stability and integrity of European financial markets’. 1.27  The Commission lists the following risk categories. (a)  Macro-prudential (systemic) risks, defined as ‘direct exposure of systemically important banks to the AIFM sector’ and ‘pro-cyclical impact of herding and risk concentrations in particular market segments and deleveraging on the liquidity and stability of financial markets’. (b)  Micro-prudential risks, defined as ‘weakness in internal risk management systems with respect to market risk, counterparty risks, funding liquidity risks and operational risks’. (c)  Investor protection risks, defined as ‘inadequate investor disclosures on investment policy, risk management, internal processes’ and ‘conflicts of interest and failures in fund governance, in particular with respect to remuneration, valuation and administration’. (d)  Market efficiency and integrity risks, defined as the ‘impact of dynamic trading and short selling techniques on market functioning’ and the ‘potential for market abuse in connection with certain techniques, for example short-selling’. (e)  Risks relating to the impact on market for corporate control, defined as ‘lack of transparency when building stakes in listed companies, e.g. through use of stock borrowing, contracts for difference, or concerted action in “activist” strategies’.

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(f)  Impact on companies controlled by AIFMs, defined as the ‘potential for misalignment of incentives in management of portfolio companies, in particular in relation to the use of debt financing’ and the ‘lack of transparency and public scrutiny of companies subject to buy-outs’.

B. The questionable logic of the arguments for the AIFMD 1.28  Of the risk categories listed by the Commission in the Explanatory Memorandum, only (b) and (c) appear special to the fund industry. Categories (a), (d), (e), and (f) are general matters that concern all market participants, whether or not they are fund vehicles. The question may be asked, therefore, whether the risks cited in categories (a), (d), (e), and (f) can serve properly as (part of) the policy rationale for EU legislation that aims to regulate the fund industry. Prima facie, it would appear not. In this context, it is worth noting that short-selling risks (see category (d)) are specifically addressed in a separate European short-selling regulation applying to all market participants.18 1.29  Other arguments made by the Commission are similarly questionable. The Explanatory Memorandum states that ‘AIFM were not the cause of the crisis’, but that the ‘risks associated (p. 10) with their activities have manifested themselves throughout the AIFM industry over recent months and may in some cases have contributed to market turbulence’. By way of example, the Commission observes that ‘hedge funds have contributed to asset price inflation and the rapid growth of structured credit markets’, and that the ‘abrupt unwinding of large, leveraged positions in response to tightening credit conditions and investor redemption requests has had a pro-cyclical impact on declining markets and may have impaired market liquidity’.19 Forced selling by funds will certainly have increased the pressure on market, thus decreasing liquidity. This would qualify as a category (a) risk. However, forced selling in distressed market conditions is not special to investment funds and it is not clear why operators of AIFs, or indeed the investors in AIFs, ought to be singled out for regulation on this basis. All market participants contribute to asset price inflation. 1.30  Equally, the fact that funds-of-hedge-funds have ‘faced serious liquidity problems’ causing ‘some funds-of-hedge-funds to suspend or otherwise limit redemptions’, as the Commission notes,20 does not constitute a meaningful policy reason for regulation of AIF in the manner proposed. In the event that the markets in which assets comprised in the pool ceases, temporarily or permanently, to be accessible or reliable, the operator of the scheme may need to suspend redemptions and contributions. That is a feature of investment in the particular market, not a feature special to collective investment arrangements. Any participant in that particular market, whether or not an ‘alternative investment fund’, would be faced with a dearth of trading opportunities as well as challenges to obtaining a reliable price. 1.31  While there may be good reasons in relation to particular types of AIFs, notably funds that operate a highly leveraged investment strategy, to seek transparency from the operators of those types of AIFs in relation to the AIFs’ trading positions—as argued in the Rasmussen and De Larosière reports—the policy reasons put forward by the Commission to justify the proposed regulatory intervention in the non-UCITS investment fund industry appear to lack focus. Even if there were special systemic risks associated with AIFs as defined in the AIFMD, for which the Commission has provided no evidence, it remains unclear why such risks justify, for instance, broad-brush strict restitutionary liability for depositaries of AIFs that fail—in a singularly uninformed manner—to recognize the complex legal reality of cross-border custody services.

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C. Conclusion 1.32  It is difficult to avoid the conclusion that the AIFMD is the product of rushed and opportunistic rule-making, driven by the political environment du jour rather than considered and informed policy. Indeed, the name of the Directive is a stark reminder of the (initial) lack of political focus. It wrongly and opportunistically brands the AIFMD as merely designed to regulate private equity funds and hedge funds.21 (p. 11) 1.33  As a result, while the broad notions of regulating (the management of) nonUCITS funds and creating a single market for the offering of these funds to professional investors undoubtedly make good economic policy, the AIFMD presents a chequered landscape that lacks intellectual coherence. 1.34  When it concerns the ability of pension funds, insurance companies, and other financial intermediaries to access the world’s asset managers so as to ensure optimized portfolio selection—which is the best guarantee for optimized risk-return calibration— investors and product providers alike should be able to expect law-making based on careful consideration of broad-based empirical evidence and technically sound and informed analysis. European lawmakers, high-minded in the wake of a financial crisis, did not quite manage to apply the care and diligence required to make responsible law for the financial markets—the life blood of the modern economical cycle for allocation of capital from household savings and investments.

4. Legislative structure A. The Lamfalussy procedure 1.35  Since the mid-2000s, EU financial services legislation is created at several ‘levels’. This process is known as the ‘Lamfalussy procedure’.22 Level 1 constitutes framework legislation, typically in the form of a directive of the Council and the European Parliament that must be implemented by the Member States through national legislation. 1.36  Level 2 consists of implementing measures that are made by the Commission, referred to as ‘delegated acts’. Delegated acts are typically made in a combination of regulations, which apply directly in the Member States, and directives, which must be implemented through national legislation. 1.37  Level 3 consists of specialist work of various bodies made up of representatives of national regulators. The Level 3 bodies make regulatory guidelines that apply to market participants and national regulators directly, as well as technical standards to assist the Commission in making delegated acts. 1.38  The operative Lamfalussy organizing principle is that certain rules are clarified into further detail at a later stage, thus leaving the setting of main principles at primary legislative level, ie the European Council and the European Parliament, and permitting specialist rules to be made at Level 2 and Level 3 without the need to seek ratification from the Level 1 legislative bodies, although these bodies are typically given the right to object to proposals within a certain period.23 1.39  The original Level 3 bodies were the Committee of European Banking Supervisors (CEBS),24 the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS),25 and the Committee of European Securities Regulators (CESR).26 These committees have recently been abolished and replaced by newly formed ‘European Supervisory Authorities’ (p. 12) (ESAs), operative since 1 January 2011. The ESAs are the European Banking Authority (EBA),27 the European Insurance and Occupational Pensions Authority (EIOPA),28 and the European Securities and Markets Authority (ESMA).29

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1.40  The ESAs form part of the newly conceived ‘European System of Financial Supervision’ (ESFS). The ESFS is designed as an integrated network of national and EU supervisory authorities, leaving day-to-day supervision to the national level. It seeks to ‘overcome deficiencies’ in the pan-European regulatory framework and to ‘provide a system that is in line with the objective of a stable and single Union financial market for financial services, linking national supervisors within a strong Union network’.30 Apart from the ESAs, the ESFS comprises the European Systemic Risk Board (ESRB),31 the Joint Committee of the European Supervisory Authorities,32 and the national regulators.33

B. The AIFMD framework 1.41  The AIFMD constitutes Level 1 framework legislation. The AIFMD empowers and instructs the Commission to make further Level 2 rules by way of delegated acts. It concerns: Article 3 (exemptions), Article 4 (definitions), Article 9 (initial capital and own funds), Articles 12 and 14–21 (operating conditions for AIFMs), Articles 22–24 (transparency requirements), Article 25 (leverage), Articles 34–37, 40, 42, and 67–68 (nonEU AIFs and AIFMs), and Article 57 (exchange of information between regulators).34 1.42  To date, the Commission has adopted three regulations to supplement the rules in the AIFMD. The bulk of the Level 2 measures are contained in Regulation No 231/2013 of 19 December 2012 (Implementing Regulation).35 The Implementing Regulation deals with most matters that are delegated to the Commission under the AIFMD, except (p. 13) the opt-in procedure for AIFMs that meet the exemption conditions of Article 3(2)36 and the selection of the Member State of reference for certain non-EU AIFMs.37 1.43  The relevant ESA under the AIFMD is ESMA. Articles 10–14 of the ESMA Regulation empower ESMA to make regulatory technical standards in relation to matters in which the Commission has been given the power to make delegated acts.38 1.44  The regulatory technical standards must be ‘technical’ so as not to ‘imply strategic decisions or policy choices’ and their scope is delineated by the scope of the delegated acts to which they relate.39 ESMA must conduct public consultations and cost/benefit analyses in relation to draft technical standards, except if disproportionate or in matters of urgency.40 The Commission may reject ESMA’s proposed technical standards and ask for variations, and, indeed, has done so in relation to a number of areas in connection with the AIFMD. 1.45  Article 16 of the ESMA Regulation empowers ESMA to make guidelines and recommendations. These apply to national regulators and/or market participants. The objective is to further the consistency, efficiency, and efficacy of the ‘supervisory practices within the European System of Financial Supervision’ (ESFS) and to ensure ‘the common, uniform and consistent application of Union law’.41 Here, too, ESMA must conduct public consultations and cost/benefit analyses in relation to draft guidelines and recommendations, except if disproportionate or in matters of urgency.42

II. General Provisions of the AIFMD 1. Subject matter and scope (Articles 1–2) A. Subject matter (Articles 1 and 2(1)) 1.46  Article 1 sets the scene: the AIFMD creates a regulatory framework for the authorization and regulation of ‘managers of alternative investment funds (AIFMs) which manage and/or market alternative investment funds (AIFs) in the Union’. 1.47  Article 2(1) puts beyond doubt that any connection of an AIFM with the EU, either because the AIFM is based in the EU or, if not, manages an EU AIF or markets an AIF in the EU, will bring the AIFM in scope. Accordingly, EU AIFMs which manage one or more EU or non-EU AIFs, non-EU AIFMs which manage one or more EU AIFs, and non-EU AIFMs which

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market one or more EU or non-EU AIFs in the EU, subject to applicable exclusions and exemptions, all need authorization under the AIFMD. (p. 14) 1.48  The AIFMD, therefore, is not directed at AIFs per se.43 It seeks to regulate the operators, or ‘managers’, of AIFs—the AIFMs. Naturally, certain elements of the constitution and operation of AIFs are regulated indirectly by requiring the AIFM as part of its continued authorization to ensure that its AIFs are AIFMD-compliant. 1.49  Unless the AIF is a ‘self-managed’ AIF, so that it is also authorized as the AIFM,44 the compliance of the AIF will not ultimately be within the control of the AIFM. The AIFM will be required to resign as manager to the AIF in the event that the AIF fails to comply with the AIFMD.45 1.50  Accordingly, the scope of the AIFMD depends on three operative concepts: ‘AIF’, ‘managing’ an AIF in the EU, and ‘marketing’ an AIF in the EU. These definitions are addressed in turn.

B. Scope: what is an ‘AIF’? (Articles 2(2) and 4(1)(a)) 1.51  An ‘AIF’ is defined in Article 4(1)(a) of the AIFMD as a collective investment undertaking, 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 does not require authorization pursuant to the UCITS Directive.46 1.52  Article 2(2) makes it clear that the structure of the arrangement, form (legal structure), or substance (open-ended or closed-ended) is of no consequence to the determination of whether or not an arrangement is an AIF. 1.53  The definition is clearly, and presumably purposefully, broad and inclusive. ESMA has made guidelines on the meaning of AIF,47 but this guidance is of a very general nature and does little to bring more certainty. ESMA does not wish (unintentionally) to narrow the scope of Article 4(1)(a).48 1.54  Accordingly, the only certainty is that UCITSs are not AIFs. All other elements—ie ‘collective investment’, ‘undertaking’, ‘raising capital’, ‘from a number of investors’, ‘with a view to investing’, ‘defined investment policy’, and ‘investing for the benefit of the investors’—are capable of variable interpretations ensuring that unless there is some form of exclusion, any arrangement that has collective investment characteristics is potentially in scope. 1.55  For instance, the notions of ‘collective investment’, ‘investing for the benefit of the investors’, and ‘defined investment policy’ are de facto largely non-descript. At first blush, it may be tempting to conclude that this is about arrangements that enable a number of participants, the investors, to ‘pool’ their assets and have the combined assets managed as a single fund in accordance with a certain investment objective so that they may share equally, pro rata to their participation, in the profits and losses of the pool as well as the cost of operation. However, many commercial arrangements are based on the notion of pooling resources and sharing profits and losses. 1.56  Even determining, for purposes of the definition of AIF, whether an undertaking has a number of investors or only one investor is not straightforward. Except where the undertaking is (p. 15) legally prevented, for example by law or its constitutional instrument, from raising capital from more than one investor, it should be considered an AIF notwithstanding that, de facto, there is only one investor.49 Naturally, if the sole investor is funded by multiple investors, look-through applies.50

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1.57  In practice, it will be necessary for providers of investment and other financial products to consider each product offered in the EU carefully to assess whether it is caught by the AIFMD. That means screening against the implementation rules of the Member State in which the AIFM manages the AIF as well as the rules of each Member State in which the AIF may be offered.

C. Exclusions from the definition of AIF (Article 2(3)) 1.58  Certain arrangements have been excluded from the definition of AIF by Article 2(3) AIFMD. The most obvious exclusion is the company, ie a business enterprise that participates in commerce in contractual or corporate form and seeks capital funding, privately or publicly, by way of a fixed number of equity participations. Where the enterprise concerns farming, building, manufacturing, or the sale of goods or services, it will not be difficult to identify the factors that distinguish the company from a collective investment arrangement.51 If, however, the company’s enterprise is the purchase and sale of financial investments, for its own account, the matter is less straight forward. Holding companies are therefore excluded from the definition of AIF.52 But the definition of holding company itself leaves grey areas. 1.59  Pension funds also operate collective investment arrangements. A defined benefit scheme disconnects the participants’ entitlements from the actual investment return and may be characterized more properly as a form of insurance. Defined contribution schemes, however, often offer participants a choice of investment options which are each organized and managed as a pool and may in some manner be characterized as investment funds. Most pension schemes would qualify as AIFs but for the exclusion from the definition of AIF.53 1.60  Other exclusions are supranational and national governmental bodies, including central banks and bodies that manage assets meant to fund social security obligations, as well as, helpfully, employee participation and savings schemes.54 1.61  Equally, unit-linked insurance policies, which pay out by reference to the value of a portfolio of investment funds that the policyholder may select during the life of the policy to invest the insurance premiums in, are well within reach of the definition of AIF. Interestingly, Recital (8) of the AIFMD observes that the Directive ‘should not apply to the management of pension funds; employee participation or savings schemes; supranational institutions; national central banks; national, regional and local governments and bodies or institutions which manage funds supporting social security and pension systems; securitisation special purpose entities; or insurance contracts and joint ventures’.55 All these arrangements have been (p. 16) listed as excluded from the definition of ‘AIF’ in Article 2(3), with the exception of insurance contracts. Notwithstanding, presumably, insurance services and insurance contracts are intended to be excluded from the scope of the AIFMD.

D. Grey area: notional pools may or may not be AIFs 1.62  The distinction between financial arrangements that constitute collective investment proper, and other financial arrangements, which operate to pay the participants a share of the profit and loss but are not collective investment, is most clearly obfuscated in the case of (off-balance sheet) asset-backed securitizations and (on-balance sheet) ‘structured debt’ instruments. 1.63  In the case of asset-backed securitizations, a special purpose vehicle will issue debt instruments. The proceeds of the issue will be used to buy a portfolio of assets from the originator, the arranger of the securitization, for example credit card debts or mortgaged loans. The returns of the portfolio of assets are used to fund the payments due under the

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issued debt instruments. The AIFMD does not aim to capture these arrangements and ‘securitisation special purpose entities’ have been excluded from the definition of AIF.56 1.64  Unlike securitization vehicles, structured debt arrangements are not excluded and may, prima facie, be caught. Structured debt arrangements entail a financial institution that has the benefit of a commercial credit rating to issue debt expressed to pay interest and principal by reference to the return of a notional pool of assets. 1.65  Consequently, all debt holders will share equally in the rise and fall of the reference value. Similarly, total return swap transactions may reference baskets of financial instruments arrangements. If the swap provider writes a number of swaps referencing an identical basket, the swap counterparties will share in the return of that basket. From some perspective, it may be said that these series of bilateral contractual arrangements amount to collective investment and are therefore AIFs. That conclusion, however, would not be right and appropriate in view of the definition of ‘AIF’ in the AIFMD, certainly not if interpreted in the context of the AIFMD’s stated rationale. 1.66  The primary raison d’être for the AIFMD is the management of systemic risk. Structured debt and swap transactions are balance sheet events for the issuer. The proceeds are not used to invest in an actual pool of assets for the benefit of its counterparties. The reference value remains a notional pool and the issuer will typically ensure that it can make payments by entering into swap and other investment transactions that will protect the issuer from any adverse movement in the value of the notional pool. 1.67  It is difficult to see how, in these arrangements—per Article 4(1)(a)(i)—capital has been raised from a number of investors ‘with a view to investing it’. The proceeds of the transactions—‘it’ in the definition of AIF—are not invested but will fund the issuer’s general operations and will be used by the issuer as principal, not as operator of a collective investment scheme. Systemic risk arising from these arrangements should be addressed as a matter of the regulation of the operations of the issuer as a financial institution, for example a credit institution, not as an AIFM. 1.68  The secondary aim of the AIFMD is investor protection. It concerns protection from certain market and other operational risks. In that context, the AIFMD seeks to impose operational (p. 17) requirements on the AIFM that aim to mitigate the potential impact of certain events. In particular, the AIFMD imposes risk and liquidity management and requirements in Articles 15 and 16 and a depositary requirement in Article 21. 1.69  These risk mitigation requirements are not meaningful in the context of a notional pool. Again: the proceeds, ‘it’, are not invested. The AIFMD, therefore, is not the right tool to regulate investment products which are bilateral contracts that determine the product provider’s payment obligations by reference to a notional pool of assets. A better approach is to regulate the governance of these products, and risk mitigation, as a matter of the regulated business of the issuer, ie either in the context of authorization as an investment firm under MiFID or in the context of the authorization as a credit institution under the Banking Directive.57 Indeed, the governance of unit-linked insurance policies is left to be regulated under the Life Insurance Directive.58 Naturally, a level playing field should be preserved in terms of operative conduct of business rules and product restrictions on market access.59 1.70  It may perhaps also be argued in certain circumstances that contracts that pay out by reference to notional pools are not ‘undertakings’ within the meaning of Article 4(1)(a). However, it is not clear what is meant by an ‘undertaking’. Article 2(2) refers to any ‘legal form’, which seems to make clear that the AIF does not need to have a legal personality, but not whether and to what extent an arrangement must have a separate existence of some description to constitute an AIF. Since capital must be raised from ‘a number of investors’ in

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order for there to be an AIF, arrangements that do not have legal personality should at least be a multi-partite arrangement to be considered as an AIF.

E. Scope: ‘managing’ an AIF (Article 4(1)(w)) 1.71  The AIFMD lists the key components of ‘managing an AIF’ in Article 4(1)(w) and Annex I, which together stipulate that ‘managing AIFs’ means performing ‘at least’ the ‘investment management functions’ of ‘portfolio management’ or ‘risk management’ for one or more AIFs. 1.72  The drafting gives rise to confusion because Article 4(1)(w) appears to suggest that to be the AIFM, it is sufficient to be appointed either as the portfolio manager or as the risk manager. (p. 18) The wording in paragraph 1 of Annex I of the AIFMD does not use the word ‘or’, however, and Article 6(5)(d) provides that an AIFM must be appointed by the AIF to perform both functions in order to be authorized under the AIFMD.60 1.73  For a collective investment scheme to run properly, in essence, three different categories of functions must be performed: portfolio management functions (the investment and reinvestment of the assets of the collective investment scheme); administrative functions (the valuation of the assets, pricing of the shares or units, and cancellation and issue of units or shares, including settlement of the transactions with the investors, an activity known as ‘transfer agency’); and marketing and distribution functions. 1.74  In this context, it is instructive to compare the AIFMD’s definition of ‘managing an AIF’ to the UCITS Directive’s definition of ‘managing a UCITS’. Annex II of the UCITS Directive is clear on the point that ‘managing a UCITS’, also referred to as ‘collective portfolio management’, includes all three categories.61 In other words, the person who seeks to ‘manage a UCITS’ must be appointed by that UCITS to perform, and must have assumed responsibility to the UCITS for the performance of, all three categories of functions, together defined as ‘collective portfolio management’ by Annex II of the UCITS Directive. 1.75  The AIFMD takes a different approach. Although Annex I uses the words ‘collective management of an AIF’ and clearly implies that this concept is similar to the concept of ‘collective portfolio management’ used in the UCITS Directive,62 Annex I also implies that, unlike a management company authorized under the UCITS Directive, it is not mandatory for an AIFM to be appointed by the AIF to perform the administrative or marketing functions. Responsibility for investment management functions, ie portfolio management and risk management as defined in Annex I of the AIFMD, is sufficient. 1.76  Portfolio management and risk management are not defined in the AIFMD. Some confusion may therefore arise about the meaning of ‘portfolio management’ in the context of ‘management of a collective investment undertaking’ (be that a UCITS or an AIF). 1.77  It is clear that there is no functional difference between managing a portfolio of investments that belongs to an individual and managing a portfolio of investments that belongs to a collective investment undertaking. In both cases the portfolio manager is responsible for the investment and reinvestment of the portfolio, on a discretionary basis, with a view to pursuing a certain investment objective. 1.78  A person who manages the investment and reinvestment of the portfolio of an AIF is therefore not necessarily the ‘manager’ of that AIF, ie the AIFM. If that were true, all persons who provide MiFID portfolio management services to an AIF would be managing the AIF within the meaning of the AIFMD, and they are not.63 For a person to be the AIFM, there needs to be an additional, collective element. That must logically mean that the AIFM is the person who has assumed responsibility for the overall performance of the various

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functions listed in Annex I of the AIFMD in the context of the operation of the collective investment scheme. (p. 19) 1.79  For instance, where it concerns portfolio management, responsibility for portfolio liquidity management in view of expected redemptions and contributions is a collective element in the management of the portfolio that is not present in individual portfolio management. This distinguishes the portfolio management role of an AIFM, or indeed a UCITS management company, from the portfolio management role of a MiFID investment firm. Naturally, the AIFM (or UCITS management company) can delegate the responsibility to a MiFID investment firm. 1.80  Merely advising the AIF is not sufficient, even if that function is accompanied by risk management.64 There must be discretionary investment powers, ie the AIFM must have discretion to make investment decisions within the boundaries of the agreed investment policy and the investment restrictions.

F. Scope: ‘marketing’ an AIF (Article 4(1)(x)) 1.81  ‘Marketing’ is defined in Article 4(1)(x) AIFMD as a ‘direct or indirect offering or placement’, made ‘at the initiative of the AIFM’ or ‘on behalf of the AIFM’, to or with investors who are domiciled in the EU or who have a registered office in the EU, ‘of units or shares of an AIF’ managed by the AIFM. 1.82  The offering or placement must be made ‘at the initiative of the AIFM’ or persons in its distribution channel. Accordingly, if the units or shares are purchased at the investor’s initiative, commonly referred to as ‘reverse solicitation’, no ‘marketing’ within the meaning of the AIFMD has occurred. Recital (70) clarifies that the AIFMD is not intended to apply if an EU-based professional investor ‘invests in AIFs on its own initiative, irrespective of where the AIFM and/or the AIF is established’. 1.83  Pension funds and other institutional investors are often assisted by professional consultants who solicit product information from investment managers through so-called ‘requests for proposals’ or ‘RFPs’. It is very likely that investments in AIFs pursuant to these RFPs properly qualify as having been made at the initiative of the investor, rather than the AIFM. Much of this is fact and context bound, of course, and will also depend on national implementation and guidance from the national regulators. 1.84  Given that the offer or placement must be made ‘at the initiative of the AIFM’ or ‘on behalf of the AIFM’, it follows that the AIFM is only responsible for offerings or placements made through a distribution channel controlled by the AIFM. If a person, for example a broker, who is not authorized by or on behalf of the AIFM (eg by way of a distribution agreement or otherwise), offers or places units or shares in an AIF to or with an investor in the EU, the offering or placement does not cause the AIFM to be in breach of the AIFMD. 1.85  That would potentially leave a hole in the regulatory net because an AIF is a collective investment scheme and, therefore, units or shares in an AIF are financial instruments within the meaning of Section C of Annex I to MiFID. Investment firms authorized under MiFID and credit institutions authorized to provide MiFID services would therefore be able to offer or place units in non-compliant AIFs in the EU in accordance with their regulatory permissions. 1.86  The AIFMD deals with the potential gap in Article 6(8), which provides that ‘investment firms’, which ‘directly or indirectly, offer units or shares of AIFs to, or place such units or (p. 20) shares with, investors in the EU, may only do so to the extent the units or shares can be marketed in accordance with’ the AIFMD.65

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1.87  In view of recital (9) AIFMD, the term ‘investment firm’ as used in Article 6(8) ought to be interpreted within the meaning of Article 1(1) MiFID, without reference to any exemptions so as to capture all firms that engage in investment services within the meaning of MiFID, regardless of whether or not these firms are based in the EU, and regardless of whether or not they are authorized under MiFID. 1.88  The wording of Article 6(8) suggests that the prohibition on ‘offering’ or ‘placing’ of units by an investment firm is limited to activities that amount to marketing. Therefore, an investment firm should be free to advise a client within the meaning of Article 4(1)(4) of MiFID to purchase units in an AIF,66 even if that AIF could not otherwise be marketed to that client in accordance with the AIFMD. Equally, per the definition of ‘marketing’ in Article 4(1)(x) and recital (70), if the firm executes an order on behalf of but at the initiative of the client,67 the resulting transaction ought not to amount to offering or placing.

2. Exemptions (Article 3) 1.89  Separately from the exclusions in Article 2(3), the AIFMD offers a number of exemptions in Article 3. Group company investment vehicles are exempted and the AIFMD does not apply to the extent that the AIF’s only investors are the AIFM or its group companies, provided these are not themselves AIFs.68 1.90  In addition, the AIFMD operates a materiality threshold and does not apply to an AIFM to the extent that: (a)  in the case of AIFs that employ leverage, the aggregate value of the long assets of all the leveraged AIFs under common control of the AIFM does not exceed EUR 100 million; 69 (b)  in the case of AIFs that do not employ leverage and are closed-ended for a period of at least five years, the aggregate value of the long assets of all the AIFs under common control of the AIFM does not exceed EUR 500 million. 70 1.91  The Commission has made Level 2 rules in relation to the calculation, monitoring, and reporting of the assets under management by an AIFM who seeks to avail of the materiality threshold exemptions.71 In summary: annually, the AIFM must calculate the aggregate value of all the assets held in each AIF it manages under common control, including those portfolios delegated to third parties, but UCITS portfolios, portfolios delegated to the AIFM by third parties, and cross-investments between the AIFs or their sub-funds, are excluded.72 1.92  The assets must be valued in accordance with the rules that apply to the AIF per its constitutive documents and the laws of its place of organization.73 Derivative instruments, however, including (p. 21) instruments with embedded derivatives such as convertible bonds, must be valued in accordance with the ‘conversion methodology’ set out in the Commission’s Implementing Regulation.74 1.93  AIFMs who have the benefit of the materiality threshold exemption are not fully exempted from the AIFMD: the AIFM must register with its national regulator and regularly provide information about its AIFs, the investment strategies, and the holdings and the principal activities, as well as monitor the value of the assets under management and notify its regulator immediately in the event that the AIFM fails to continue to qualify for the exemption due to a breach of the applicable threshold.75 Breaches that are expected to be temporary may not disqualify the AIFM if the AIFM is able to provide reasonable justification for its assessment that the breach is temporary in nature.76 However, breaches that are likely to continue for longer than three months are not considered to be temporary in nature.77

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3. Determination of AIFM (Article 5(1)) A. Appointment to manage an AIF 1.94  Article 5(1) of the AIFMD directs the Member States to ensure that each AIF ‘shall have a single AIFM, which shall be responsible for ensuring compliance with [the AIFMD]’. To be the AIFM, a person must ‘manage the AIF’. 1.95  As discussed in paragraph 1.75, Article 4(1)(w), in conjunction with Annex I, implies that, unlike a management company authorized under the UCITS Directive, it is not mandatory for an AIFM to be appointed by the AIF to perform the administrative or marketing functions. Responsibility for investment management functions, ie portfolio management and risk management as defined in Annex I of the AIFMD, is sufficient. 1.96  The Directive’s splitting of ‘investment management functions’ (portfolio management and risk management) from other collective management functions reconciles with the fact that the AIFMD does not regulate AIFs directly. Unless an AIF is ‘selfmanaged’, so that it is also authorized as the AIFM,78 the compliance of the AIF will not ultimately be within the control of the ‘external’ AIFM. Instead, the AIFMD requires the AIFM, rather than each AIF, to ensure that the AIFs under its purview comply with the Directive.79 The AIFM will be required to resign as manager of the AIF in the event that the AIF fails to comply with the AIFMD.80 1.97  The ability to allocate certain collective management functions to different persons will allow the depositary to assume responsibility for the administrative functions. This makes sense as, in practice, it is the depositary who performs the valuation and transfer agency functions for the AIF.

B. Internally managed versus externally managed AIFs 1.98  Article 5(1) permits the AIFM to be either a person which is appointed separately by or on behalf of the AIF to manage the AIF (‘external AIFM’), or to be the AIF itself, if its legal (p. 22) form permits a governance structure that allows for self-management of the AIF (‘internal management’) by a governing body of the AIF and the governing body has not decided to appoint an external AIFM.81 1.99  The distinction between the self-managed, or ‘internally managed’, AIF and an AIF that is ‘externally managed’, ie has appointed an AIFMD management company, is of particular consequence for the capital requirements imposed by Article 9. 1.100  In practice, investment funds are structured in one of four forms: in corporate form as a company with variable capital; in contractual form as a partnership operated by a (usually incorporated) general partner; in contractual form as a common fund held by a depositary company and managed by a management company; or in the form of a (unit) trust operated by a (usually incorporated) trustee. Only the company with variable capital has a governance structure that permits self-management through its governing bodies, the board of directors, and/or shareholders. 1.101  AIFs that exist in contractual or trust form do not normally have independent governing bodies. They are managed through their general partner, management company, or trustee who, therefore, would in the first instance qualify as the AIFM. However, nothing in the AIFMD suggests that authorization as an internally managed AIF of a trust or contractual common fund is not permitted if the constitutive documents of the AIF establish a board or other governing body that is charged with the Annex I investment management functions. For purposes of Article 9, it is conceivable that the capital requirement of EUR 300,000 would be contributed to the trust or contractual common fund by the sponsor of

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the AIF by way of subordinated units or shares that are only redeemable if all ordinary unit or shareholders have been paid in full.

4. Types of AIFM and AIFs A. Open-ended and closed-ended AIFs 1.102  Application of Article 16 (liquidity management), Article 19 (valuation), and Article 61 (transitional provisions) of the AIFMD differs depending on whether the AIFM’s AIFs are open-ended or closed-ended. 1.103  Open-ended collective investment funds do not normally have a fixed term, and permit investors to make contributions and request redemptions at certain times during the life of the fund. The number of units or shares issued to an investor in return for contributions to the fund and the amount payable to the investor by the fund upon cancellation of units of shares following a redemption request are based on the price of the unit or share on the day of the contribution or redemption (known as the ‘dealing day’). The price is calculated by dividing the net asset value of the fund—ie the assets minus the liabilities as determined based on prevailing market prices and in accordance with the rules applicable to the fund under its constitutive documents and the law of its place of organization—by the number of outstanding units or shares on the dealing day. The contribution, or the redemption amount, as the case may be, is payable upon the contribution or redemption becoming binding on the investor and the fund. 1.104  Closed-ended collective investment funds have a fixed term and do not permit additional contributions of privately offered closed-ended funds after the fund has closed following the capital-raising cycle. During the capital-raising period, each investor agrees on the amount of (p. 23) capital it will commit to the fund. Once the aggregate of the investors’ capital commitments reaches a certain threshold determined by the manager of the fund, the capital-raising cycle ends and the fund is said to be ‘closed’. The next phase is the investment phase, in which the manager will seek out investment opportunities. The investment will, apart from bank borrowing, be funded by ‘drawing down’ capital commitments, or, later in the life of the fund, by the proceeds from the sale of earlier investments. This will continue until the manager has invested the entire committed capital. In the final phase, the manager will sell the investments of the fund one by one and return capital, plus or minus the return on the particular investment, to the investors. 1.105  Accordingly, open-ended and (privately offered) closed-ended funds have fundamentally different modi operandi. Open-ended funds accept contributions and will permit investors to take their capital out on a continuous, all be it not always high frequency, basis. The share of the investor in the pool is valued based on prevailing market prices that will be obtained from public sources. Closed-ended funds are not open for continuous contributions and redemptions and are perhaps best described as a series of collective investments in individual assets that are funded by the investor and lenders at the time of purchase. Capital is only returned once the investment is sold. Thus, the values of the capital contributions to, and the redemptions from, open-ended funds are determined based on estimated prices, notwithstanding the fact that the manager will normally have to sell fund assets to meet the redemption request. The values of the capital draw-downs and return from closed-ended funds, on the other hand, are based on actual prices. 1.106  Different operational processes have different implications for the liquidity profile and valuation of the fund. The manager of an open-ended fund is concerned with meeting redemption requests out of the portfolio and ensuring that the valuation of the redeemed units is accurate and fair to the remaining investors; the redeeming investor should not be over- nor underpaid. The manager of the closed-ended fund, on the other hand, returns the proceeds of the actual divestment to all investors once the asset has been successfully sold. Liquidity does not play a role in that process and the valuation is a mere calculus event

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based on the actually achieved price, not an estimation based on a collection of prevailing market values. 1.107  Naturally, the ability to operate an open-ended fund depends on the availability of reliable market prices, as well as relatively liquid markets for the assets in which the fund invests so that the manager may sell assets to meet the redemption requests. If the assets are less liquid, the manager must limit the frequency of the dealing days. Some funds that invest in illiquid hedge fund strategies operate with annual or even less frequent dealing days. At some point, it is tempting to conclude that the fund cannot be said to be openended. 1.108  Indeed, this is what ESMA, after consultation, wrote into its initial draft ‘regulatory technical standards’ (RTS) relating to ‘types of AIFM’.82 Recital (3) of ESMA’s initial draft RTS observes that the distinction between open-ended and closed-ended funds should be determined based on ‘an appropriate threshold for the frequency of redemption opportunities offered to AIF investors given the particular relevance thereof to the rules on liquidity management and valuation procedures’ and that given ‘current market practice, it is appropriate to consider as open-ended those AIFs which offer redemption frequencies of at least yearly’. (p. 24) 1.109  As demonstrated, however, exactly because of the fundamental difference between valuation of investor interests in open-ended and closed-ended funds, the redemption opportunity, no matter how infrequent, would appear to be the wrong determinant. Rather, what matters is whether contributions and redemptions are driven by the manager’s investment opportunity and consequently by funding needs or liquidation proceeds of actual investment transactions. 1.110  The Commission concurs. In a letter dated 4 July 2013, the Commission wrote to ESMA that it has ‘serious doubts’ whether the frequency of the ability to redeem is a criterion that can be used to distinguish between open-ended and closed-ended funds. The Commission observed that Articles 16(1) and 19(3) of the AIFMD, in conjunction, denote a closed-ended fund as a fund which carries out valuations ‘in case of an increase or decrease of the capital by the relevant AIF’, and concludes that in case of a closed-ended fund, the ‘valuation and calculation frequency is therefore linked solely to increases or decreases of its capital’. 1.111  ESMA disagreed with the Commission’s response to its initial draft RTS for several reasons, mostly based on the practical implications of the liquidity and valuation rules for funds that have a low dealing frequency, ie less than once a year.83 Notwithstanding, ESMA submitted re-drafted RTS to the Commission ‘in order to ensure a timely implementation of the AIFMD provisions and move the process forward’.84 1.112  Article 1(2) of the re-drafted RTS provides that an open-ended AIF is an ‘AIF the shares or units of which are, at the request of any of its shareholders or unit holders, repurchased or redeemed prior to the commencement of its liquidation phase or winddown’. Under Article 1(3) of the re-drafted RTS, a closed-ended AIF is an AIF that is not an open-ended AIF within the meaning of Article 1(1). 1.113  This approach—to base the distinction on whether the fund returns capital to investors after a sale of investment rather than at the request of the investor—is in line with what the market will in practice deem to be the difference between open-ended and closedended funds.85

B. Leveraged and unleveraged AIFs

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1.114  In addition to the distinction between internally and externally managed AIFs, and between open-ended or closed-ended AIFs, the application of the AIFMD may differ depending on whether the AIF is considered to be (substantially) leveraged or unleveraged. This affects the application of Article 5(2) (exemptions) and Article 16 (liquidity management). Separately, AIFMs managing leveraged AIFs are subject to special duties under Article 25 (AIFMs managing leveraged AIFs). 1.115  The dictionary definition of ‘leverage’ describes it as the mechanical advantage gained by the use of a lever. A lever permits the use of the benefit of momentum so that less force is required to lift an object than if the object were lifted directly. In the context of investment, leverage denotes the momentum that is experienced when the market exposure of the investment of own funds is increased through the use of financial levers, ie financial transactions that result in the ability to make profits, or incur losses, from market movements of certain defined investments without investing own funds equal to the principal value of those investments at the time of the transaction. (p. 25) 1.116  Leveraged exposure can be achieved in different ways. The most straightforward is to invest borrowed money. If the lender is prepared to provide an unsecured loan, the investor does not need own funds and has maximum momentum. More commonly, the lender will require the purchased investment as collateral and require the investor to invest own funds in addition to the borrowed funds, thus creating a buffer in the value of the collateral and protecting the lender against adverse market movements. 1.117  A common way to achieve leveraged market exposure is to enter into a forward contract or future. For instance, the purchaser of an index future will typically be required to provide only 10% of collateral value against the purchased value. EUR 10.00 thus permits the conclusion of a forward contract that gives EUR 100.00 market exposure. Similarly, someone who writes a put or a call option on an index may only have to provide collateral to the tune of 10% of the value to which the put or call relates. The buyer of the option is in a slightly different position, as only the premium is due and the option will naturally only be exercised if it is in the money. 1.118  Swap agreements can also provide leverage. For instance, an unfunded total return swap will permit the purchaser against the payment of a periodic fee calculated as a rate, for example LIBOR plus 0.30%, applied on the value of the reference asset, known as the ‘notional value’, to gain market exposure to virtually any asset class, limited only by the requirement to collateralize the future payments due to the provider of the total return swap. 1.119  A more complex and common set of transactions that give leveraged exposure is called ‘shorting’. The investor sells EUR 100.00 of certain financial instruments that are not actually owned and borrows the instruments from a third party to satisfy the delivery obligation. The proceeds of the short sale, plus any top-up with own funds as may be required by the lender, are provided as collateral for the securities loan. If the lender permits it, the short-seller may also choose to use the proceeds to buy different financial instruments and provide those as collateral instead of the cash proceeds of the short transaction, in which case the short-seller is said to have both a ‘long’ and a ‘short’ exposure to the market.

C. Determining whether an AIF is leveraged 1.120  The term ‘leverage’ is defined in Article 4(1)(v) of 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’. This broad definition captures the numerous ways in which any market participant,

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collective investment fund, or otherwise, can seek to gain exposure to certain investments without investing own funds to the value of those investments.86 1.121  As instructed in Article 4(1)(3), the Commission has duly provided rules on the measurement and calculation of leverage in Articles 6–11 of the Implementing Regulation. Article 6(1) of the Implementing Regulation provides that leverage of an AIF shall be expressed as the ratio between its exposure and its net asset value. 1.122  It is important to note that it concerns the exposure of the AIF and not the exposure of issuers of instruments in which the AIF is invested. While investments with embedded derivatives, for example convertible bonds, are captured, investment in a leveraged issuer is not a leveraged transaction for the AIF. This matters in the context of closed-ended funds, which invest, for example, in private equity or real estate, as they tend to make investments through (p. 26) portfolio companies for tax and ring-fencing reasons. Portfolio companies typically obtain bank loans to fund their investments. The AIF would become exposed, however, if it agreed to guarantee any of the loans made to the portfolio companies.87 1.123  In addition, calculation of exposure excludes ‘any borrowings that are temporary in nature and fully covered by capital commitments from investors’,88 permitting the avoidance of settlement failures through temporary bridging facilities without tipping the AIF into a leveraged AIF regime. 1.124  The exposure must be calculated in two ways: using the gross methodology and using the commitment methodology.89 Gross exposure is the ‘sum of the absolute values of all positions’ of the AIF,90 but excludes cash and cash equivalents and unused cash borrowings.91 Positions are to be valued in accordance with the rules set out in the AIF’s constitutive documents and the laws under which the AIF is organized,92 but derivative instruments are valued using the conversion methodology set out in Annex I and II of the Implementing Regulation.93 Positions funded through the reinvestment of cash borrowings are to be valued at the higher of the value of the cash borrowing or the position funded with the proceeds of the borrowing.94 Repurchase and securities lending agreements are valued in accordance with paragraphs (3) and (10) to (13) of Annex I.95 1.125  The commitment methodology also starts with the sum of the absolute values of all positions of the AIF.96 However, all cash and cash borrowings are included. Again, positions are to be valued in accordance with the rules set out in the AIF’s constitutive documents and the laws under which the AIF is organized.97 Derivative instruments are to be valued using the conversion methodology set out in Annex I and II,98 except that total return swaps written by the AIF are not included,99 forward contract or futures purchased by the AIF if fully covered with cash positions are not included,100 and foreign exchange forward contracts, if used for currency hedging purposes, are not included.101 Positions funded through cash borrowings are to be valued at the higher of the value of the cash borrowing or the position funded with the proceeds of the borrowing.102 Repurchase and securities lending agreements are valued in accordance with paragraphs 3 and 10–13 of Annex I of the Implementing Regulation.103 Next, opposite positions must be netted where applicable104 and qualifying hedging arrangements must be taken into account.105 (p. 27) 1.126  The rationale put forward for the use of these two methodologies is that the combination is the best basis for ‘an objective overview of the leverage used’.106 The idea is that the gross method provides the overall exposure while the commitment method ‘gives insight in the hedging and netting techniques used’.107 1.127  There is something to be said for that, as the gross calculation adds up all positions, minus cash, regardless of whether the position is long or short, thus showing the absolute value of the market exposure, treating cash as nil exposure. The commitment method shows the relative value of the market exposure, including cash, but neutralizing all positions that may be properly regarded as hedged or netted. If the commitment exposure is equal to the net asset value (NAV), the AIF can be said to be not leveraged as it has not increased its From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

market exposure beyond the value of its own funds. Notwithstanding, the gross exposure may still show whether or not the AIFM extensively employs derivatives for hedging and market exposure purposes. 1.128  As noted, Article 6(1) of the Implementing Regulation provides that the leverage of an AIF ‘shall be expressed as the ratio between the exposure of the AIF and its net asset value’. It does not clarify what the position is if the ratio is 1 based on the commitment exposure, suggesting that the AIF is not leveraged, but greater than 1 if based on the gross exposure. This could happen if the AIF uses derivatives to hedge positions, for example foreign exchange forward contracts (‘fx forwards’), and gain fully funded market exposure. 1.129  The AIF is considered to be ‘substantially leveraged’ if the ratio of the commitment exposure to NAV exceeds 3.108 In that case, Article 24(4) of the AIFMD imposes special reporting duties.

III. Authorization to Manage an AIF 1. Overview: EU AIFMs and non-EU AIFMs A. Jurisdiction of a Member State 1.130  Under Article 1(1), the AIFMD’s objective is to ensure that it is prohibited to ‘manage an AIF’ in the EU without prior authorization. In practical terms, this means that each Member State must ensure that ‘managing an AIF’ is a regulated activity that requires a licence or some other form of authorization if it is carried out in that Member State. 1.131  An activity is carried out in a Member State if the AIFM is domiciled in the Member State or a foreign AIFM manages an AIF that is domiciled in that Member State. The foreign AIFM may seek to establish a branch or representative office. 1.132  In the case of a domestic AIFM, authorization from the home Member State is required pursuant to Article 6(1) of the AIFMD. Subject to conditions, an exemption from compliance with Articles 21 (depositary) and 22 (disclosure requirements) applies by virtue of Article 34 to the extent that the domestic AIFM manages non-EU AIFs which are not marketed in the EU. (p. 28) 1.133  In the case of a non-domestic EU AIFM, that AIFM may rely on its home state authorization to provide management services cross-border into another Member State under Article 33. An EU AIFM may also establish a branch in another Member State. 1.134  Non-EU AIFMs that manage an EU AIF will be required to be authorized by their Member State of reference pursuant to Article 37. Non-EU AIFMs may rely on such authorizations to provide management services cross-border into another Member State under Article 41. 1.135  A non-EU AIFM that is managing a non-EU AIF, logically, is not ‘managing an AIF in the EU’. However, if the non-EU AIFM wishes to market its non-EU AIF in one or more Member States, it would need authorization to manage the AIF from its Member State of reference under Article 37. 1.136  Articles 37 and 41 of the Directive will not come into force until July 2015.109 It is not immediately clear from the text of the AIFMD what the position is in relation to authorization of non-EU AIFMs ad interim. On the face of Article 6(1), which refers to AIFMs without distinction between EU AIFMs and non-EU AIFMs, it would appear that until Article 37 comes into force, Member States have to treat non-EU AIFMs that manage domestic AIFs as domestic AIFMs. However, given that Article 42 permits marketing of both EU and non-EU AIFs managed by non-EU AIFMs subject to a special (partly national) regime, the better interpretation is that the authorization of non-EU AIFMs remains subject

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to national authorization regimes until Article 37 comes into force. Indeed, that appears to be the position most Member States are taking. 1.137  The application of Articles 6, 33, 34, and 37 are discussed in detail in section III.2.

B. Scope of authorization 1.138  Authorization to manage an AIF includes portfolio management and risk management, and may include non-core AIFMD administrative services (valuation and transfer agency) and marketing.110 1.139  In addition, under Annex I, paragraph 2(c) of the AIFMD, authorization for non-core services may include authority to engage in ‘activities related to the assets of AIFs’. These are defined as: services necessary to meet the fiduciary duties of the AIFM, facilities management, real estate administration activities, advice to undertakings on capital structure, industrial strategy and related matters, advice and services relating to mergers, and the purchase of undertakings and other services connected to the management of the AIF and the companies and other assets in which it has invested. These are all activities that are usual in the context of closed-ended funds that invest in real estate, private equity, and infrastructure projects.

C. MiFID services to an AIF are not in scope of the AIFMD prohibition 1.140  Individual portfolio management by investment firms or credit institutions of portfolios owned by collective investment funds or collective pension schemes is the norm rather than the exception. Typically, an MiFID portfolio manager is appointed as a delegated manager (p. 29) by the fund if it is self-managed, or by the management company of the fund if it is managed externally, to manage the fund’s assets.111 1.141  Article 6(8) of the AIFMD provides that investment firms authorized under MiFID and credit institutions authorized under the Banking Directive do not require authorization under the AIFMD to provide MiFID investment services, such as individual portfolio management, to AIFs. Similarly, investment firms established in a third country, which, under the applicable national law may provide investment services in respect of AIFs, do not require separate AIFMD authorization.112 1.142  It is not obvious why the European legislator deemed it necessary to provide explicitly for this exclusion. Investment services such as investment advice and portfolio management are clearly not ‘management of an AIF’.

D. UCITS management company 1.143  UCITS management companies authorized under the UCITS Directive must also be authorized under the AIFMD if they wish to manage and market AIFs or take up any other activities as an AIFM.113 However, the competent authorities do not require UCITS companies to provide information or documents which the UCITS management company already provided when applying for authorization under the UCITS Directive (provided that such information or documents remain up to date).114

E. MiFID services by an AIFM 1.144  Member States have the option of authorizing an external AIFM to carry out certain MiFID services. The authorization would concern the core business of ‘individual’ portfolio management,115 and may include the non-core businesses of investment advice,116 safekeeping, and administration in relation to shares or units of collective investment undertakings,117 and reception and transmission of orders in relation to financial instruments.118

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(p. 30) 1.145  AIFMs authorized to carry out MiFID services must comply, inter alia, with the MiFID initial capital requirements, organizational requirements, and conduct of business obligations.119 Accordingly, the AIFM will have to meet both MiFID and AIFMD initial capital requirements, organizational requirements, and the conduct of business obligations.120 1.146  There are some restrictions. AIFMs may not be authorized for MiFID business only.121 Further, the MiFID authorization must at least include portfolio management to permit authorization for the non-core MiFID business.122 This makes sense, as the core business of an AIFM should be management of the AIF. In addition, the AIFM is not authorized only to perform the non-core AIFMD services.123 Finally, AIFMs are not authorized to provide the AIFMD core service of collective portfolio management without also providing the AIFMD core service of risk management, or vice versa.124 Both these restrictions may be explained by the fact that the core business of an AIFM should always be collective portfolio and risk management. However, these restrictions do not prevent an AIFM from delegating collective portfolio and risk management in accordance with the AIFMD.125

2. Authorization and passporting of EU AIFMs A. Authorization of EU AIFMs (Article 6) 1.147  A Member State will require an AIFM domiciled in its territory and which manages one or more AIFs, regardless of the location of its AIFs and regardless of whether its AIFs are marketed in the EU, to be authorized by the Member State’s national regulator. In these circumstances, the Member State is the ‘home Member State’ of the AIFM.126

B. Exemptions for EU AIFMs from Articles 21 and 22 where non-EU AIFs are not marketed in the EU (Article 34) 1.148  To facilitate the domestic EU management industry that provides services outside the EU, Article 34(1) of the AIFMD provides for a partial exemption for EU AIFMs that manage non-EU AIFs not marketed in the EU. 1.149  The EU AIFM is exempted from compliance with Articles 21 (depositary) and 22 (disclosure requirements) in respect of those AIFs if it complies with all other requirements, and (p. 31) appropriate cooperation arrangements are in place between the national EU regulator and the supervisory authorities of the third country where the non-EU AIF is established. 1.150  The purpose of the cooperation agreements is ‘to ensure at least an efficient exchange of information that allows competent authorities of the home Member State of the AIFM to carry out their duties’ under the AIFMD.127

C. Passporting by EU AIFMs of management authorization (Article 33) 1.151  Member States must ensure that an EU AIFM authorized by another Member State may manage EU AIFs established in their territory either on a cross-border basis or by establishing a branch, provided that the AIFM is authorized by the other Member State to manage that type of AIF.128 1.152  An AIFM intending to manage EU AIFs established in another Member State for the first time must notify its national regulator of the Member State in which it intends to manage AIFs directly, or establish a branch,129 and provide a ‘programme of operations’ stating in particular the services which it intends to perform and identifying the AIFs it intends to manage.130

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1.153  If the AIFM intends to establish a branch, it must provide additional information on: the organizational structure of the branch;131 the address in the home Member State of the AIF from which documents may be obtained;132 and the names and contact details of the 134 persons responsible for the management of the branch.133 ,134 1.154  The competent authorities of the home Member State of the AIFM must, within one month of receiving the notification in the case of direct management, or within two months in the case of establishment of a branch, transmit the complete notification file to the competent (p. 32) authorities of the host Member State of the AIFM. Such transmission must occur only if the AIFM’s management of the AIF complies, and will continue to comply, with the AIFMD and the AIFM otherwise complies with the AIFMD.135 1.155  The competent authorities of the AIFM’s home Member State must enclose a statement to the effect that the AIFM is authorized by that state.136 The competent authorities of the home Member State must immediately notify the AIFM about the transmission.137 1.156  Upon receipt of the transmission notification the AIFM may start to provide its services in its host Member State.138 The host Member State of the AIFM must not impose any additional requirements on the AIFM in respect of the matters covered by the AIFMD.139 1.157  In the event of a change to any of the information communicated in the notification file, an AIFM must give written notice of that change to the competent authorities of its home Member State at least one month before implementing planned changes, or immediately after an unplanned change has occurred.140 1.158  If, pursuant to a planned change, the AIFM’s management of the AIF would no longer comply with the AIFMD, or the AIFM would otherwise no longer comply with the AIFMD, the competent authorities of the AIFM’s home Member State must inform the AIFM without undue delay that it is not to implement the change.141 1.159  If a planned change is implemented notwithstanding the above in paragraphs 1.157 and 1.158, or if an unplanned change has taken place pursuant to which the AIFM’s management of the AIF would no longer comply with the AIFMD or the AIFM otherwise would no longer comply with the AIFMD, the competent authorities of the AIFM’s home Member State must take all due measures in accordance with Article 46.142 1.160  If the changes are acceptable because they do not affect the compliance of the AIFM’s management of the AIF with the AIFMD, or the compliance by the AIFM with the AIFMD otherwise, the competent authorities of the AIFM’s home Member State must, without undue delay, inform the competent authorities of the AIFM’s host Member States of those changes.143

3. Authorization and passporting of non-EU AIFMs A. Authorization of non-EU AIFMs (Article 37) 1.161  Article 37(5) and (8) of the AIFMD provides that the non-EU AIFM must apply for authorization to its Member State of reference and follow the procedures and comply with the conditions set out in Articles 6–11, subject to certain amendments set out in Article 37(8).144 (p. 33) 1.162  Article 37(4) sets out the rules for determining the Member State of reference of a non-EU AIFM that seeks authorization to manage one or more EU AIFs or to manage a non-EU AIF marketed in the EU. There are three reference points, set out in this table.

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EU AIFs

Non-EU AIFs

Not marketing

[box 1]

[not relevant]

Marketing with passport

[box 2]*

[box 3]**

*  Marketing in accordance with Article 39 (EU AIFs). **  Marketing in accordance with Article 40 (non-EU AIFs). 1.163  If the non-EU AIFM ticks box 1, it is not marketing the EU AIF in the EU and the home Member State of the AIF is the Member State of reference where the EU AIF is established. If it concerns multiple AIFs in multiple Member States, the Member State of reference is either the Member State where most of the AIFs are established or the Member State where the largest amount of assets is being managed.145 1.164  If the non-EU AIFM ticks box 2 and it concerns only one EU AIF to be marketed in only one Member State, the Member State of reference, if the AIF is registered or authorized, is the home Member State of the AIF or the Member State where the AIFM intends to market the AIF, or, if the AIF is not authorized or registered in a Member State, the Member State where the AIFM intends to market the AIF. If an EU AIF is to be marketed in several Member States, the Member State of reference is the home Member State of the AIF where the AIF is registered or authorized, or one of the Member States where the AIFM intends to develop effective marketing, or, if the AIF is not authorized or registered in a Member State, one of the Member States where the AIFM intends to develop effective marketing. If it concerns several EU AIFs to be marketed in several Member States, the Member State of reference is, if they are all registered or authorized in the same Member State, that home Member State or the Member State where the AIFM intends to develop effective marketing for most of the AIFs, or, if the AIFs are not all registered or authorized in the same Member State, the Member State where the AIFM intends to develop effective marketing for most of those AIFs.146 1.165  If the non-EU AIFM ticks box 3 and it concerns only one non-EU AIF to be marketed in only one Member State, the Member State of reference is that Member State. But if the non-EU AIF is to be marketed in different Member States, the Member State of reference is one of those Member States.147 1.166  If the non-EU AIFM ticks both box 2 and box 3, the Member State of reference is the Member State where it intends to develop ‘effective marketing’ for most of the AIFs.148 The non-EU AIFM may prove its intention to develop effective marketing in a particular Member State by disclosing its marketing strategy to the national regulator of that Member State.149 (p. 34) 1.167  If the rules point to more than one Member State of reference, the Member States shall require that the non-EU AIFM submits a request to the national regulators of all of the eligible Member States, who must jointly determine, within one month of receipt, which will be the Member State of reference for that non-EU AIFM. If the non-EU AIFM is not duly informed of the decision within seven days of the decision or if the decision is not made within the one-month period, the non-EU AIFM may choose its Member State of reference itself based on the criteria set out in Article 37(4).

B. Substitute compliance with non-EU law (Article 37(2)) 1.168  In principle, the authorized non-EU AIFM must comply with all the provisions of the AIFMD. Article 37(2) permits relief if compliance with one or more provisions of the AIFMD

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is incompatible with compliance with the foreign law under which the non-EU AIFM and/or the non-EU AIF marketed in the EU is organized. 1.169  If the AIFM can demonstrate that the foreign law is mandatory, it is ‘impossible’ to comply with both the AIFMD and the foreign law, the foreign law provides for an ‘equivalent rule having the same regulatory purpose and offering the same level of protection to the investors of the relevant AIF’, and the non-EU AIFM and/or the non-EU AIF complies with the equivalent rule, the non-EU AIFM does not have to comply with that rule of the AIFMD. 1.170  Article 37(9) provides a procedure which must be followed by the Member State of reference where it considers that a non-EU AIFM is eligible for substitute compliance, which involves consultation with ESMA. 1.171  In the event of disagreement between the Member State of reference and another Member State that has an interest in the matter, the authority in question has the right to petition to ESMA, which may act in accordance with the powers conferred on it under the arbitration procedure provided by Article 19 of the ESMA Regulation.150Where the national regulators cannot reach agreement, ESMA may make a binding decision.151 1.172  Article 37(11) of the AIFMD provides that further business development by the nonEU AIFM in principle does not change the Member State of reference. However, in the event that the AIFM seeks to change its business plan within two years from the original determination of the Member State of reference such that it would affect that determination, the AIFM must notify the national regulator in the original Member State of reference of the intention before permitting the change to be implemented, indicating which Member State would be the Member State of reference if the change were implemented. It must then change its legal representative to a person in the new Member State of reference. The updating determination procedures are the same as the procedures that apply to the original determination, including consultation of ESMA.152 1.173  After the two-year period, the AIFM has the option but not the obligation to redetermine its Member State of reference in case of a change of business plan.153 (p. 35) 1.174  A competent regulator may initiate the procedure of Article 37(11) if the AIFM fails to do so following a change in its business.154 1.175  In the event of disagreement between the Member State of reference and another Member State that has an interest in the matter, the arbitration procedure in Article 19 of the ESMA Regulation applies.155

C. Passporting by non-EU AIFMs of management authorization (Article 41) 1.176  Article 41 of the AIFMD provides that an authorized non-EU AIFM may manage EU AIFs established in a Member State other than the non-EU AIFM’s Member State of reference either directly or via the establishment of a branch, provided that the AIFM is authorized to manage that type of AIF. 1.177  Article 41 is the mirror image of Article 33, which gives the same rights to an EU AIFM who wishes to manage AIFs in a Member State other than the EU AIFM’s home Member State. Accordingly, the notification procedure for authorized non-EU AIFMs under Article 41 is essentially identical to the notification procedure in Article 33 and discussed in paragraphs 1.151 to 1.156.

4. Application for authorization by EU and non-EU AIFMs A. Information to be provided upon application (Article 7(2))

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1.178  Article 7(1) of the AIFMD provides that an AIFM that seeks authorization must apply to the competent authority of its home Member State. Pursuant to Article 7(2), the application must include information about: (a)  the persons effectively conducting the business of the AIFM;

156

(b)  the identities of the AIFM’s shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings and the amounts of those holdings; 157 (c)  the business plan setting out the organizational structure of the AIFM, 158 including information on how the AIFM intends to comply with its key obligations under the AIFMD; 159 (p. 36) (d)  the remuneration policies and practices; and (e)  arrangements made for the delegation and sub-delegation to third parties of functions as referred to in Article 20 (delegation). 160 1.179  The application must also include information about the AIFs the AIFM intends to manage.161 It concerns information about: (a)  the investment strategies, including the types of underlying funds if the AIF is a fund of funds, and the risk profiles and other characteristics of the AIFs it manages or intends to manage, including information about the Member States or third countries in which such AIFs are established or are expected to be established; 162 (b)  the location of the master AIF if the AIF is a feeder AIF; (c)  the rules or instruments of incorporation of each AIF;

163

164

(d)  the arrangements made for the appointment of the depositary in accordance with Article 21 (depositary) for each AIF; 165 and (e)  any additional information referred to in Article 23(1) (disclosure to investors) for each AIF the AIFM manages or intends to manage. 166 1.180  An application is deemed complete if the AIFM has submitted the information described in the previous paragraphs.167

B. Additional rules for applications by non-EU AIFMs (Article 37(5) and (8)) 1.181  Article 37(5) of the AIFMD provides that a non-EU AIFM that seeks authorization must apply to the competent authority of its Member State of reference. The provisions of Chapter II (Articles 6–11) apply mutatis mutandis,168 provided that references to an AIFM’s home Member State in those provisions are to be read as references to the applying non-EU AIFM’s Member State of reference.169 (p. 37) 1.182  In addition to the information required under Article 7(2), the non-EU AIFM must include the following information in its application:170 (a)  a justification by the AIFM of its determination of the Member State of reference; (b)  a list of the provisions of the AIFMD with which compliance is ‘impossible’ within the meaning of Article 37(2); 171 (c)  written evidence in accordance with regulatory technical standards developed by ESMA that the law of the AIFM provides for a rule equivalent to the provisions for which compliance is impossible and that it has the same regulatory purpose and offers the same level of protection to the investors of the relevant AIFs and that the AIFM complies with that equivalent rule, supported by a legal opinion regarding the

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incompatible mandatory provision in the law of the AIFM that includes a description of its regulatory purpose and the nature of the investor protection afforded by it; and (d)  the name and location of the legal representative of the AIFM. 1.183  The regulator who receives a request for authorization from a non-EU AIFM must decide whether the AIFM’s determination of its Member State of reference is correct. If the regulator disagrees, the application will be refused with reasons. If the regulator agrees with the AIFM, the regulator must seek advice from ESMA, which must opine within one month, during which the term in Article 8(5) is suspended.172 1.184  The non-EU AIFM must appoint a ‘legal representative’ in its Member State of reference, who will be responsible for liaison with the national regulator in the Member State of reference and the EU investors of the relevant AIF in relation to AIFMD-compliance matters. The legal representative, together with the AIFM, must perform the compliance function in respect of the management and marketing activities of the AIFM under the AIFMD.173

C. If the applicant is a UCITS management company (Article 7(4)) 1.185  A management company authorized under the UCITS Directive which seeks dual authorization does not have to provide information or documents which the UCITS management company has already provided when applying for authorization under the UCITS Directive, provided that such information or documents are up to date.174

(p. 38) 5. Conditions for granting authorization A. General 1.186  The AIFM’s national regulator must not authorize the AIFM unless it is satisfied that it will be able to meet the conditions of the AIFMD.175 AIFMs authorized in accordance with the AIFMD must meet the conditions for authorization at all times, ie on an ongoing basis.176

B. Management, shareholders/members, and head office (Article 8(1)) 1.187  The persons who effectively conduct the business of the AIFM must be of sufficiently good repute and sufficiently experienced in relation to the investment strategies pursued by the AIFs managed by the AIFM. The names of those persons and of every person succeeding them in office must be communicated to the competent authorities of the AIFM’s home Member State. Conduct of business must be decided by at least two persons meeting these conditions (the ‘four eyes’ principle).177 1.188  The shareholders or members of the AIFM that have qualifying holdings must be suitable, taking into account the need to ensure the sound and prudent management of the AIFM.178 The head office and the registered office of the AIFM must be located in the same Member State.179

C. Conditions relating to initial capital and own funds (Article 9) 1.189  The AIFMD requires AIFMs to have a minimum amount of initial capital and own funds. In addition, as an alternative to additional own funds, the AIFM may hold a professional indemnity insurance (PII) against liability arising from professional negligence. (p. 39) 1.190  An internally managed AIF must have an initial capital of at least EUR 300,000.180 Where an AIFM is appointed as an external manager of AIFs, the AIFM must have an initial capital of at least EUR 125,000.181

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1.191  If the value of the portfolios of AIFs managed by the AIFM exceeds EUR 250 million, the AIFM must provide an additional amount of own funds. That additional amount of own funds must be equal to 0.02% of the amount by which the value of the portfolios of the AIFM exceeds EUR 250 million but where the required total of the initial capital and the additional amount does not exceed EUR 10 million.182 1.192  Irrespective of the foregoing, own funds of the AIFM may never be less than the amount required under the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR).183,184 Own funds, including any additional own funds, must be invested in liquid assets or assets readily convertible to cash in the short term and may not include speculative positions.185 1.193  AIFs managed by the AIFM, including AIFs for which the AIFM has delegated portfolio or risk management functions,186 but excluding AIF portfolios that the AIFM is managing under delegation, are deemed to be the portfolios of the AIFM.187 1.194  Given the cap on variable capital requirements, if a firm manages multiple AIFs, it makes sense to concentrate the management of those AIFs in a single AIFM. Indeed, the industry would appear to be heading in the direction of ‘super AIFMs’. 1.195  Member States may permit AIFMs to cover up to 50% of the variable capital with a guarantee from an EU credit institution or insurance undertaking. A non-EU institution is also (p. 40) eligible if it is subject to prudential rules considered by the competent authorities as equivalent to EU law.188

D. Cover for professional negligence liability (Article 9(7)) 1.196  AIFMs must have appropriate cover for professional liability arising from negligence in connection with the management of AIFs by a relevant person189 for which the AIFM has legal responsibility.190 The cover may be provided either by way of an appropriate amount of additional own funds191 or by way of a professional indemnity insurance.192

E. Exemption from capital rules for UCITS management company (Article 9(7)) 1.197  With the exception of the requirements on coverage of potential professional liability risks and the requirement that own funds must be invested in liquid assets, the rules on initial capital and own funds do not apply to AIFMs that are also UCITS management companies.193 These requirements already apply to UCITS management companies under the UCITS Directive.

6. Procedural aspects A. Consultation of authorities in other Member States 1.198  Where a subsidiary of (the parent undertaking of) an AIFM, a UCITS management company, an investment firm, a credit institution, or an insurance undertaking is authorized in another Member State, the national regulators of that other state must be consulted before authorization is granted. 1.199  The national regulator of another Member State must also be consulted before authorization is granted to: a company controlled by the same natural or legal persons as those that control an AIFM, a UCITS management company, an investment firm, a credit institution, or an insurance undertaking, if any of these entities is authorized in that other Member State.194

(p. 41) B. Term for granting authorization (Article 8(5)) 1.200  The competent authorities of the AIFM’s home Member State must inform the applicant in writing within three months of the submission of a complete application, whether or not authorization has been granted. The competent authorities may prolong this

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period for up to three additional months where they consider it necessary due to the specific circumstances of the case and after having notified the AIFM accordingly.195

C. Rejection of an application (Article 8(3)) 1.201  Authorization must be refused if the effective exercise of their supervisory functions is prevented by close links between the AIFM and other natural or legal persons,196 the laws, regulations, or administrative provisions of a third country governing natural or legal persons with which the AIFM has close links,197 or difficulties involved in the enforcement of those laws, regulations, and administrative provisions.198

D. Restriction of authorization (Article 8(3)) 1.202  The scope of the authorization may be restricted, in particular in relation to the range of investment strategies of AIFs the AIFM has permission to manage.199

E. Disagreement about authorization of a non-EU AIFM (Article 37(8)) 1.203  If a competent national regulator disagrees with the authorization granted by the competent regulator of a non-EU AIFM’s Member State of reference, the regulator has the right to petition to ESMA, which may act in accordance with the powers conferred on it under ESMA Regulation, Article 19.200 1.204  Article 19 of the ESMA Regulation provides for an arbitration procedure. Where the national regulators cannot reach agreement, ESMA may make a binding decision.201

(p. 42) F. Authorization effective (Article 8(5)) 1.205  AIFMs may engage in the business of managing an AIF with investment strategies described in the application as soon as the authorization is granted, but not earlier than one month after submitting any missing information about: (i) (sub-)delegation arrangements, (ii) the rules or instruments of incorporation of each AIF the AIFM intends to manage, (iii) depositary arrangements, and (iv) disclosure to investors with respect to each AIF the AIFM manages or intends to manage.202

G. Changes in the scope of the authorization (Article 10) 1.206  Before implementation, AIFMs must notify the competent authorities of their home Member State of any material changes to the conditions for initial authorization, in particular material changes to the information provided in accordance with Article 7 (application for authorization) AIFMD.203 1.207  If the competent authorities of the home Member State impose restrictions or reject those changes, they must, within one month of receipt of that notification, inform the AIFM. The competent authorities may prolong that period for up to one month where they consider this necessary because of the specific circumstances of the case and after having notified the AIFM accordingly. The changes must be implemented if the competent authorities do not oppose the changes within the relevant assessment period.204

H. Withdrawal of authorization (Article 11) 1.208  The authorization may be withdrawn if the AIFM: (a)  does not make use of the authorization within 12 months, expressly renounces the authorization, or has ceased the activity covered by the AIFMD for the preceding six months, unless the Member State has provided for authorization to lapse in such cases; 205 (b)  obtained the authorization by making false statements or by any other irregular means; 206

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(c)  no longer meets the conditions under which authorization was granted;

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(d)  no longer complies with CRD IV and CRR if its authority also covers the MiFID service of individual portfolio management; 208 (e)  has seriously or systematically infringed the provisions adopted pursuant to the AIFMD; 209 or (p. 43) (f)  falls within any of the cases where national law, in respect of matters outside the scope of the AIFMD, provides for withdrawal. 210

I. Central public register (Articles 7(5) and 37(10)) 1.209  Each national regulator must, on a quarterly basis, inform ESMA of authorizations granted or withdrawn in accordance with Chapter III (authorization of AIFMs) of the AIFMD.211 ESMA must keep a central public register identifying each AIFM authorized under the AIFMD, a list of the AIFs managed and/or marketed in the European Union by such AIFMs, and the competent authority for each such AIFM. The register must be made available in electronic format.212

IV. Operating Requirements 1. Overview 1.210  The general operation conditions for AIFMs draw heavily on those established in the MiFID and the UCITS Directive. The AIFMD aims to strike a balance between a level of consistency with those Directives, while taking into account the diversity of AIFs and the different types of assets they invest in.213 1.211  Existing MiFID firms and UCITS management companies that consider they will be AIFMs should be aware of several new general principles, including additional due diligence responsibilities, requirements relating to the appointment of counterparties and prime brokers, and the introduction of a fair treatment definition.214

2. General duties (Article 12) A. General 1.212  AIFMs must at all times: (a)  act honestly, with due skill, care, and diligence and fairly in conducting their activities; (b)  act in the best interests of the AIFs or the investors of the AIFs and the integrity of the market; 216

215

they manage

(p. 44) (c)  have and employ effective resources and procedures that are necessary for the proper performance of their business activities; 217 (d)  take all reasonable steps to avoid, identify, manage, monitor, and disclose conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their investors and to ensure that the AIFs they manage are fairly treated; 218 (e)  comply with all regulatory requirements applicable to the conduct of their business activities so as to promote the best interests of the AIFs or the investors of the AIFs and the integrity of the market; 219 and (f)  treat all AIF investors fairly.

220

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1.213  The duties set out under (a)–(f) will collectively be referred to as ‘duty of care and diligence’. 1.214  When assessing the compliance of the AIFM with the duty of care and diligence set out in paragraphs 1.212 and 1.213, the competent authorities must use at least the criteria laid down in Chapter III (operating conditions for AIFMs), section 1 (general principles) of the Implementing Regulation.221 ‘At least’ means that these criteria are minimum standards and do not intend to provide maximum harmonization. Member States may impose additional requirements.

B. Acting in the best interest of the AIF or the AIF’s investors and the integrity of the market 1.215  In order to act in the best interest of the AIF or its investors and the integrity of the market, AIFMs must apply policies and procedures for preventing malpractices, including those that might reasonably be expected to adversely affect the stability and integrity of the market, such as market timing and late trading.222 1.216  AIFMs must also ensure that the AIFs they manage or the investors in the AIFs are not charged undue costs.223

C. Due diligence a. General 1.217  AIFMs must: (i) apply a high standard of diligence in the selection and ongoing monitoring of investments;224 (ii) ensure that they have adequate knowledge and understanding of the (p. 45) assets in which the AIF is invested;225 and (iii) establish, implement, apply, and regularly review and update written policies and procedures on due diligence and implementing effective arrangements for ensuring that investment decisions on behalf of the AIFs are carried out in compliance with the objectives, investment strategy, and, where applicable, risk limits of the AIF.226

b. Illiquid assets 1.218  Where AIFMs invest in assets of limited liquidity and such investment is preceded by a negotiation phase, the AIFM must, in relation to the negotiation phase, in addition to the requirements in paragraph 1.217: (a)  set out and regularly update a business plan consistent with the duration of the AIF and market conditions, seek and select possible transactions consistent with such business plan, and monitor the performance of the AIF with respect to such business plan; (b)  assess the selected transactions in consideration of opportunities, if any, and overall related risks, all relevant legal, tax-related, financial, or other value affecting factors, human and material resources, and strategies, including exit strategies; and (c)  perform due diligence activities related to the transactions prior to arranging execution. AIFMs must retain records of these activities for at least five years. 227

D. Requirements to governing body and personnel AIFM

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1.219  In order to establish whether an AIFM conducts its activities honestly, fairly, and with due skills, the competent authorities must assess, at least (ie no maximum harmonization is intended), whether the following conditions are met: (a)  The governing body of the AIFM must possess adequate collective knowledge, skills, and experience to understand the AIFM’s activities, in particular the main risks involved in those activities and the assets in which the relevant AIF invests. (b)  In line with the Commission’s Green Paper on corporate governance in the financial sector, 228 the members of the governing body must commit sufficient time to properly perform their functions in the AIFM. (c)  Each member of the governing body must act with honesty, integrity, and independence of mind. (d)  The AIFM must devote adequate resources to the induction and training of members of the governing body. 229 Similar requirements are currently230 not in place for UCITS management companies and investment firms. (p. 46) 1.220  AIFMs must employ sufficient personnel with the skills, knowledge, and expertise necessary for discharging the responsibilities allocated to them. For this purpose, AIFMs must take into account the nature, scale, and complexity of their business and the nature and range of services and activities undertaken in the course of that business.231 Similar requirements are not in place for UCITS management companies and investment firms.

E. Fair treatment of investors in the AIF 1.221  AIFMs must treat all AIF investors fairly.232 An AIFM must ensure that its decisionmaking procedures and organizational structure ensure fair treatment of investors.233 No investor in an AIF may obtain preferential treatment unless such treatment is disclosed in the relevant AIFs rules or instruments of incorporation. However, the preferential treatment accorded by an AIFM to one or more investors cannot result in an overall material disadvantage to other investors.234 1.222  In its advice to the Commission, ESMA recognizes that fair treatment by an AIFM requires a degree of subjectivity on the part of the assessor and it has therefore elected not to set out a prescribed maximum harmonizing definition of what fair treatment means in practice. ESMA’s approach recognizes that most national regulatory frameworks contain a principle of fair treatment, and that introducing a strict definition may prevent competent authorities from taking the necessary steps to prevent customer detriment where it is evident from the circumstances of a particular case that an investor has not been treated fairly. 1.223  ESMA’s approach to fair treatment is based on the underlying principle that investors should be treated equally. No investor should obtain preferential treatment causing an overall material disadvantage to other investors. However, it is recognized that fair treatment does not prevent AIFMs from treating certain customers differently, such as ‘seed’ investors having better terms than those who invest later.235 Also, it does not appear that equal treatment means equal financial treatment. Pricing differentiation ought to be permitted, as long as it does not prejudice other investors’ interests.

F. Inducements

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1.224  AIFMs are not regarded as acting honestly, fairly, and in accordance with the best interests of the AIFs they manage or the investors in these AIFs if they do not comply with the inducement rules.236 1.225  An AIFM may not give or receive inducements (whether in the form of a fee, commission, or any non-monetary benefit) in relation to the performance of AIFMD services except where: (i)  the inducement is paid to or received from the AIF or a person acting on behalf of the AIF; (p. 47) (ii)  an inducement paid to or received from a third party or a person acting on his behalf is disclosed in full, is designed to enhance the quality of the relevant service, and does not impair compliance with the AIFM’s duty to act in the best interests of its AIF or the investors of the AIF; (iii)  where proper third party fees enable or are necessary for the provision of the relevant service and cannot, by their nature, give rise to conflicts with the AIFM’s duties to act honestly, fairly, and in accordance with the best interests of the AIF or the investors of the AIF. 237

G. Best execution a. Execution of decisions and orders in financial instruments 1.226  AIFMs must act in the best interests of their AIFs or investors of the AIFs they manage when executing decisions to deal on behalf of the AIFs in the context of the management of their portfolio.238 1.227  Recital (45) of the Implementing Regulation observes that investors in AIFs should benefit from protection similar to that of AIFM clients to whom AIFMs provide the MiFID service of individual portfolio management, but that notwithstanding, the differences between the various types of assets in which AIFs are invested should be taken into account, since best execution is not relevant, for instance, when the AIFM invests in real estate or partnership interests and the investment is made after extensive negotiations on the terms of the agreement. 1.228  Whenever AIFMs buy or sell financial instruments or other assets for which best execution is relevant, they must take all reasonable steps to obtain the best possible result for their AIFs or investors, taking into account (i) price, (ii) costs, (iii) speed, (iv) likelihood of execution and settlement, (v) size, (vi) nature, or (vii) any other consideration relevant to the execution of the order (‘best execution’).239 1.229  With a view to complying with the best execution rules, AIFMs must establish and implement effective arrangements. In particular, they must establish in writing and implement an (p. 48) execution policy to allow AIFs and their investors to obtain, for AIF orders, best execution.240 AIFMs must be able to demonstrate that they have executed orders on behalf of the AIF in accordance with their execution policy.241 1.230  Recitals (45) and (46) of the Implementing Regulation clarify that best execution and order handling obligations will not apply where there has been an extensive negotiation of the terms of a particular investment (eg in real estate, partnership interests, or (in respect of order handling obligations) non-listed companies).

b. Placing orders in financial instruments and other assets with third parties 1.231  Similar best execution rules apply when an AIFM does not execute orders on behalf of managed AIFs itself, but instead places them with third parties. When doing so, the AIFM must act in the best interest of its AIFs or their investors.242 AIFMs must take reasonable

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steps to obtain best execution, taking into account the factors that also apply to AIFMs executing orders themselves (see paragraphs 1.226 to 1.230).243 1.232  With a view to complying with the best execution rules, AIFMs must establish, implement, and apply an order-placing policy to enable them to comply with the best execution rules. The order-placing policy must identify, in respect of each class of instruments, the entities with which the orders may be placed. An AIFM may only enter into arrangements for execution where such arrangements are consistent with the best execution rules. 1.233  The AIFM must make appropriate information on the order-placing policy, including any material changes to the policy available to the investors in its AIFs.244 AIFMs must be able to demonstrate that they have placed orders on behalf of the AIF in accordance with the order-placing policy.245

(p. 49) H. Order handling a. General principles 1.234  AIFMs must establish, implement, and apply procedures and arrangements which provide for the prompt, fair, and expeditious execution of orders on behalf of the AIF.246 These procedures and arrangements must (i) ensure that orders executed on behalf of AIFs are promptly and accurately recorded and allocated247 and (ii) be executed sequentially and promptly unless the characteristics of the order or the prevailing market conditions make this impracticable, or the interests of the AIF or its investors require otherwise.248 1.235  The financial instruments, sums of money, or other assets, received in settlement of the executed orders must be promptly and correctly delivered to or registered in the account of the relevant AIF.249 1.236  An AIFM may not misuse information related to pending orders (ie front-running) and must take all reasonable steps to prevent the misuse of such information by any of its 251 relevant persons.250 ,251 1.237  The AIFMD order-handling rules correspond to those in MiFID and the UCITS Directive for reasons of consistency. The rules should not apply where the investment in assets is made after extensive negotiations on the terms of the agreement, such as investment in real estate, partnership interests, or non-listed companies, as in such cases no order is executed.252

b. Aggregation and allocation of orders 1.238  AIFMs may only carry out an AIF order in aggregate with an order of another AIF, a UCITS, or a client or with an order made when investing their own funds, where (i) it can be reasonably expected that the aggregation of orders will not work overall to the disadvantage of any AIF, UCITS, or clients whose order is to be aggregated253 and (ii) an order allocation policy is established and implemented, providing in sufficiently precise terms for the fair allocation (p. 50) of aggregated orders, including how the volume and price of orders determines allocations and the treatment of partial executions.254 1.239  If an AIFM is allowed to aggregate an AIF order with one or more orders of other AIFs, UCITSs, or clients and the aggregated order is partially executed, it must allocate the related trades in accordance with its order allocation policy.255 1.240  When transactions for the account of the AIF itself are involved, the following rules apply. First, the AIFM, which has aggregated transactions for its own account with one or more orders of AIFs, UCITSs, or clients, may not allocate the related trades in a way that is detrimental to the AIF, UCITS, or client.256

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1.241  Second, where an AIFM aggregates an order of an AIF, UCITS, or another client with a transaction for its own account and the aggregated order is partially executed, it must allocate the related trades to the AIF, UCITS, or client in priority to those for its own account.257 1.242  However, if the AIFM is able to demonstrate to the AIF or client on reasonable grounds that it would not have been able to carry out the order on such advantageous terms without aggregation, or at all, it may allocate the transaction for its own account proportionally, in accordance with its order allocation policy.258

I. Execution of subscription and redemption orders 1.243  Where AIFMs have carried out a subscription or a redemption order from an investor, they must promptly provide the investor, by means of a durable medium, with the essential information259 concerning the execution of that order or the acceptance of the subscription offer, as the case may be.260 1.244  AIFMs must supply the investor, upon request, with information about the status or the order or the acceptance of the subscription offer, or both, as the case may be.261

(p. 51) J. Selection of counterparties and prime brokers 1.245  When selecting and appointing counterparties and prime brokers262 AIFMs must exercise due skill, care, and diligence before entering into an agreement and on an ongoing basis by considering the full range and quality of their services.263 1.246  AIFMs must select prime brokers or counterparties of an AIFM or AIF in an OTC derivatives transaction, securities lending, or repurchase agreement which (i) are subject to ongoing supervision by a public authority,264 (ii) are financially sound,265 and (iii) have the necessary organizational structure and resources for performing the services which are to be provided by them to the AIFM or AIF.266 To determine whether a prime broker is ‘financially sound’, the AIFM must consider whether or not the counterparty or prime broker is subject to prudential regulation, including sufficient capital requirements and effective supervision.267 This requirement restricts the universe of eligible counterparties considerably. 1.247  The list of selected prime brokers must be approved by the AIFM’s senior management. AIFMs must appoint prime brokers from the list. However, in exceptional cases prime brokers not included in the list can be appointed provided that they meet the requirements set out in paragraph 1.246 and subject to subsequent approval by senior management. 1.248  The AIFM must be able to demonstrate the reasons for selection and the due diligence it exercised in selecting and monitoring prime brokers.268 The strict requirements with respect to prime brokers may be explained by the fact that during the credit crisis many AIFs suffered loss due to the insolvency of prime broker Lehman Brothers in September 2008.

K. Individual portfolio management 1.249  If an AIFM is authorized to provide MiFID (ie individual rather than collective) portfolio management, the AIFM must not invest all or part of any client’s portfolio in units or shares of its AIFs unless it receives prior general approval from the client. 1.250  The AIFM’s MiFID services will be subject to Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes269 with regard to the MiFID services of (i) individual portfolio management, (ii) investment advice,

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(iii) safe-keeping in relation to shares or units in collective investment undertakings, and (iv) reception and transmission of orders in relation to financial instruments.270

(p. 52) 3. Remuneration (Article 13) A. O temporae, o mores 1.251  Populist belief appears to hold that ‘the bankers’ created the financial crisis through greed and indifference. While greed and indifference, as common human traits, are certainly featuring in the financial services industry, to suggest that this is the root cause of the financial crisis is to ignore that, in essence, it concerned a fairly standard credit cum asset speculative bubble, be it a sizeable one, that benefited all lenders and borrowers until the bubble burst. ‘The bankers’ were a component part of the speculation that created the bubble, not the root cause of it. Market euphoria, temporary madness of a crowd of investors, causes speculative excess. 1.252  JK Galbraith may be quoted instructively: The more obvious features of the speculative episode are manifestly clear to anyone open to understanding. Some artefact or some development, seemingly new and desirable—tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan—captures the financial mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. . . .The speculation building on itself provides its own momentum.271 The operative notion is that the crowd converts the individual ‘from reasonably good sense to stupidity’, against which the ‘very Gods Themselves contend in vain’.272 The artefact or development that fuelled the speculative excess that ended in 2008 was the belief that market risk, in particular credit risk, could be measured with some precision. 1.253  After the stupidity has been and gone, a cause must be identified. However, ‘those who are involved never wish to attribute stupidity to themselves. . . .The least important questions are the one most emphasized: What triggered the crash? Were there some special factors that made it so dramatic or drastic? Who should be punished?’.273 This is typically followed by the question: What, if anything, should be done? Given the ample precedent of recurring financial euphoria, Galbraith must be right when he observes that: beyond a better perception of the speculative tendency and the process itself, there probably is not a great deal that can be done. Regulation outlawing financial incredulity or mass euphoria is not a practical possibility. If applied generally to such human condition, the result would be an impressive, perhaps oppressive, and certainly ineffective body of law. 1.254  Galbraith wrote this in the early 1990s, but it is certainly an observation that applies to the aftermath of 2008. Politicians and regulators alike, guided by the recurrent adage ‘never again’, have been busily writing an ‘impressive, perhaps oppressive’ body of rules to tame the financial services industry. Whether this body of rules will prove to be ineffective is perhaps too early to tell. However, assuming that the all-too-repetitive patterns in the history of financial euphoria are a useful guidance, the answer is most likely that it will be. (p. 53) 1.255  The regulation of remuneration of senior management and ‘risk takers’ in the financial services industry has been a hotly debated and much politicized component part of the new rules that ‘will’ prevent speculative excess. Recital (24) of the AIFMD observes that to:

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address the potentially detrimental effect of poorly designed remuneration structures on the sound management of risk and control of risk-taking behaviour by individuals, there should be an express obligation for AIFMs to establish and maintain, for those categories of staff whose professional activities have a material impact on the risk profiles of AIFs they manage, remuneration policies and practices that are consistent with sound and effective risk management. 1.256  Given its rhetorical nature, it is difficult to contend with this proposition. Naturally, remuneration structures should not be ‘poorly designed’. As is the case in the context of the propositions made pursuant to the notion that ‘systemic risk’ must be managed, however, the Commission is not really able to put forward empirical evidence or arguments that persuasively underpin the chosen cause of action. What is or is not a poorly designed remuneration structure remains a mystery. The most that can be gleaned from the rules is that the underlying driver appears to be the desire to limit the variable component of the remuneration relative to the fixed component. Why this is better is not explained properly. 1.257  The remuneration principles, therefore, constitute remarkable legislative action, particularly given the fact that interference with market-set remuneration, ie interference with the valuation mechanism for skill and talent, is not only contrary to the basic tenets on which a capitalist market model is organized but could also have unintended consequences.274 It must be concluded that the remuneration principles are a plain example of the typical post-euphoria action so clearly specified by Galbraith, aimed at perceived mischief, but utterly besides the point. The last bubble was created, as were all previous bubbles, because the perception of risk was converted ‘from reasonably good sense to stupidity’. Remuneration principles designed to change risk-taking based on the financial incentives are ineffective logically if the underlying perception of risk that drives the behaviour is in error.

B. Basic principles (Article 13 and Annex II) 1.258  Pursuant to Article 13(1) of the AIFMD (remuneration), AIFMs must have remuneration policies and practices for employees that ‘have a material impact on the risk profiles of the AIFMs or of the AIFs they manage’. This includes 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 policies must be ‘consistent with and promote sound and effective risk management and. . .not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the AIFs they manage’. (p. 54) 1.259  The AIFMs must set the remuneration policies and practices in accordance with a detailed list of principles set out in Annex II. The principles apply to ‘remuneration of any type paid by the AIFM, to any amount paid directly by the AIF itself, including carried interest, and to any transfer of units or shares of the AIF’ made to staff that is in scope.275 1.260  Annex II sets out three categories of principles. The first category reinforces the key tenets of Article 13 of the AIFMD, ie that the remuneration policy must be consistent with and promote ‘sound and effective risk management and does not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the AIFs’.276 The remuneration policy must be in line with the business strategy, objectives, values, and interests of the AIFM, and the AIFs or the investors of such AIFs, and include measures to avoid conflicts of interest.277 1.261  The second category addresses the governance structure. The remuneration policy must be adopted, implemented, and periodically reviewed, at least annually, by the management body of the AIFM.278 The compensation of staff engaged in control functions,

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ie compliance and risk functions, must be set independently of the performance of the business areas they control and be overseen by the remuneration committee.279 1.262  By paragraph 3 of Annex II, in principle, AIFMs must establish an independent remuneration committee. However, the provision applies only to those AIFMs that are ‘significant in terms of their size or the size of the AIFs they manage, their internal organisation and the nature, the scope and the complexity of their activities’. The remuneration committee must be organized in a way that enables it to exercise competent and independent judgment on remuneration policies and practices and the incentives created for managing risk. The remuneration committee advises the management body about remuneration decisions and must be chaired by a non-executive member of the management.280 1.263  The third category sets principles in relation to payment structures. These address: (a)  performance-related pay in the context of the returns of the AIF and the overall results of the AIFM (including in a multi-year framework appropriate to the life cycle of the AIFs); 281 (b)  guaranteed variable remuneration, which must be exceptional and limited to the hiring of new staff and to the first year; 282 (c)  fixed and variable components of total remuneration, which must be ‘appropriately balanced’ and the fixed component must represent ‘a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy, on variable remuneration components, including the possibility to pay no variable remuneration component’; 283 (p. 55) (d)  payments relating to early termination of a contract, which must ‘not reward failure’; 284 (e)  the measurement of performance used to calculate variable remuneration, mandatory minimum 50/50 cash/equity split of variable compensation, mandatory deferral of at least five years of at least 40% of variable compensation, the operation of a retention policy on variable compensation, malus, or claw-back arrangements; 285 (f)  the pension policy, which must have a mandatory retirement benefit pay-out structures, etc; 286 (g)  anti-avoidance principles, such as a prohibition on use of personal hedging strategies and remuneration- and liability-related insurance if that would ‘undermine the risk alignment effects embedded in their remuneration arrangements’, and a prohibition on the payment of variable remuneration ‘through vehicles or methods that facilitate the avoidance of the requirements’ of the AIFMD. 287

C. Proportionality 1.264  Paragraph 1 of Annex II introduces the principle of proportionality. AIFMs must comply with the Annex II principles ‘in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities’. The ESMA Guidelines provide guidance on how this concept of proportionality is to be applied.288

D. ESMA Guidelines 1.265  Article 13(2) of the AIFMD instructs ESMA to make guidelines on sound remuneration policies which comply with Annex II. The guidelines must take into account the principles on sound remuneration policies set out in Recommendation 2009/384/EC, the size of the AIFMs and the size of AIFs they manage, their internal organization and the

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nature, scope, and complexity of their activities. ESMA must cooperate closely with the European Supervisory Authority (European Banking Authority) (EBA). 1.266  ESMA has made ‘Guidelines on sound remuneration policies under the AIFMD’.289 The Guidelines cover, among other things, identification of staff covered by the guidelines, application of the proportionality principle, the governance structure (including remuneration of members of the management body and shareholders’ involvement, and the periodic review), the remuneration committee (set-up, composition, role, process, and reporting lines), the control functions (roles and remuneration), the general requirements on risk alignment, the general remuneration policy (including the pension policy, discretionary pension benefits, and severance pay), personal hedging, various payment structures (including specific requirements on risk alignment, policy on variable remuneration, the performance and risk measurement process, the award process, the payout process and time horizons), and certain transparency requirements requiring publication of remuneration information.

(p. 56) E. Efficacy of the principles 1.267  Many of the remuneration principles are similar to the principles set out for credit institutions and investment firms in the Capital Requirements Directive. However, the activities of managers of collective investment schemes, who invest their investors’ money, not proprietary money, are different in nature and purpose from the activities of banks and broker-dealers. It is probably justified to suggest that the traditional fee structures of managers of collective investment schemes already align interests. It remains to be seen how the new principles are applied in practice in view of the proportionality principle. The focus on variable versus fixed component in the context of asset management incentives seems ill-conceived. In practice, the parallel application of principles designed in the context of banking and broker-dealer activities may frustrate the effectiveness of the existing payments structures in the asset management industry.

4. Conflicts of interest (Article 14) A. General 1.268  AIFMs must maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage, and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their investors.290

B. Types of conflicts of interests 1.269  AIFMs must take all reasonable steps to identify conflicts of interest that arise in the course of managing AIFs between: (a)  the AIFM (including its managers, employees, or any person directly or indirectly linked to the AIFM by control) and the AIF managed by the AIFM or the investors in that AIFM; (b)  the AIF or the investors in that AIF, and another AIF or the investors in that AIF; (c)  the AIF or the investors in that AIF, and another client of the AIFM; (d)  the AIF or the investors in that AIF, and a UCITS managed by the AIFM or the investors in that UCITS; or (e)  two clients of the AIFM.

291

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1.270  For the purpose of identifying the types of conflicts of interest set out in paragraph 1.269, an AIFM must take into account, in particular, whether the AIFM, a relevant person,292 or a person directly or indirectly linked by way of control to the AIFM: (a)  is likely to make a financial gain, or avoid a financial loss, at the expense of the AIF or its investors; (p. 57) (b)  has an interest in the outcome of a service or an activity provided to the AIF or its investors or to a client or of a transaction carried out on behalf of the AIF or a client, which is distinct from the AIF interest in that outcome; (c)  has a financial or other incentive to favour the interest of (a) a UCITS, a client or group of clients, or another AIF over the interest of the AIF; (b) one investor over the interest of another investor or group of investors of the same AIF; (d)  carries out the same activities for the AIF and for another AIF, a UCITS, or client; or (e)  receives or will receive from a person other than the AIF or its investors an inducement in relation to collective portfolio management activities provided to the AIF, in the form of monies, goods, or services other than the standard commission or fee for that service. 293

C. Segregation of tasks and responsibilities 1.271  AIFMs must segregate, within their own operating environment, tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest. AIFMs must assess whether their operating conditions may involve any other material conflicts of interest and disclose them to the investors of the AIFs.294

D. Conflicts of interests policy 1.272  The AIFM must establish, implement, and apply an effective conflicts of interests policy. That policy must be set out in writing and must be appropriate to the size and organization of the AIFM and the nature, scale, and complexity of its business.295 Where the AIFM is a member of a group, the policy must also take into account any circumstances of which the AIFM is or should be aware which may give rise to conflicts of interests resulting from the structure and business activities of other members of the group.296 1.273  The conflicts of interests policy must include: (a)  the identification of the circumstances which constitute or may give rise to conflicts of interests entailing a material risk of damage to the interests of the AIF or its investors, with reference to the activities carried out by or on behalf of the AIFM, including activities carried out by a (sub-)delegate, external valuer, or counterparty; 297 and (p. 58) (b)  procedures to be followed and measures to be adopted in order to prevent, manage and monitor such conflicts. 298

E. Independence in conflicts management 1.274  The procedures and measures established for the prevention or management of conflicts of interests must be designed to ensure that the relevant persons299 engaged in different business activities involving conflicts of interests carry out these activities having a degree of independence which is appropriate to the size and activities of the AIFM and of

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the group to which it belongs, and to the materiality of the risk of damage to the interests of the AIF or its investors.300

F. Duty to inform senior management 1.275  If the organizational or administrative arrangements of the AIFM are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of an AIF or investors in the AIF will be prevented, the senior management or other competent internal body of the AIFM must be promptly informed in order for them to take any necessary decision or action to ensure that the AIFM acts in the best interests of the AIF or its investors.301

(p. 59) G. Monitoring 1.276  The AIFM must keep and regularly update a record of the types of activities undertaken by or on behalf of the AIFM in which conflicts of interests entailing a material risk of damage to the interests of one or more AIFs or its investors have arisen or, in the case of an ongoing activity, may arise. Senior management must receive, on a frequent basis and at least annually, written reports on these activities.302

H. Disclosure 1.277  If the organizational arrangements of the AIFM that relate to identification, prevention, management, and monitoring of conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to investors’ interests will be prevented, the AIFM must clearly disclose the general nature or sources of conflicts of interest to the investors before undertaking business on their behalf, and develop appropriate policies and procedures.303

I. Redemption 1.278  The AIFM of an open-ended AIF must identify, manage, and monitor conflicts of interests between (i) investors wishing to redeem their investments and investors wishing to maintain their investments in the AIF, and (ii) any conflicts between the AIFM’s incentive to invest in illiquid assets and the AIF’s redemption policy.304

J. Prime brokers 1.279  If the AIFM uses the services of a prime broker on behalf of an AIF,305 the terms must be set out in a written contract. In particular, any possibility of transfer and re-use of AIF assets (‘rehypothecation’) must be provided for in the contract and must comply with the AIF rules or instruments of incorporation. 1.280  The contract must provide that the depositary is informed of the contract.306 AIFMs must exercise due skill, care, and diligence in the selection and appointment of prime brokers with (p. 60) whom a contract is to be concluded.307 Although these duties are no doubt useful and necessary in order to protect the AIF and its investors, it is unfortunate that it is not made clear how these duties relate to conflicts of interest.

K. Strategies for the exercise of voting rights 1.281  The AIFM must develop adequate and effective strategies for determining when and how any voting rights held in its AIF portfolios are to be exercised, to the exclusive benefit of the AIF and its investors.308 Those strategies must determine measures and procedures for: (i) monitoring relevant corporate actions; (ii) ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant AIF; (iii) preventing or managing any conflicts of interest arising from the exercise of voting

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rights.309 A summary description of the strategies and details of the actions taken on the basis of those strategies must be made available to the investors on their request.310

5. Risk management (Article 15) A. Requirement to maintain an independent risk function 1.282  Among the principle objectives of the AIFMD are improving the management of systemic risks associated with AIFs’ participation in the market and improving the management of operational risk of individual AIFs through an AIFM’s organizational setup.311 Accordingly, Article 15 of the AIFMD addresses the risk management framework that individual AIFMs must have in place. The Commission has made Level 2 implementing measures which are set out in Articles 38–45 of the Implementing Regulation. Article 25 of the AIFMD addresses the systemic aspects and is discussed later. 1.283  As part of its operations, an AIFM must create and maintain a risk function, which is functionally and hierarchically separate and independent from the AIFM’s business functions, including, in particular, portfolio management. Whether or not an AIFM’s set-up is compliant is a matter for the AIFM’s national regulator, who must apply proportionality principles in assessing the risk functions.312 Notwithstanding proportionality, an AIFM must demonstrate at least that there is effective separation and that there are effective safeguards against conflicts of interest so as to ensure independent performance of risk management activities.313 This requirement corresponds to the requirements imposed on UCITS management companies.314

(p. 61) B. Risk management 1.284  The risk function must be supported by appropriate risk management systems.315 These systems must be designed to ‘identify, monitor and manage appropriately’ in respect of an AIF ‘all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed’.316 The risk management policy must set out the processes that are designed to address these risk matters.317 The risk management systems must be monitored and periodically reviewed.318 1.285  In principle, therefore, it is left to the AIFM’s risk function to determine which risks are relevant to its AIF. The risks faced by an open-ended equity fund are very different from the risks faced by a closed-ended real estate fund. Notwithstanding, the AIFMD prescribes a number of core risk tasks the AIFM must perform for its AIFs. The AIFM must have a documented investment due diligence process in place, measure and manage position risks, and ensure that the risk profile of the AIF corresponds to the investment profile of the AIF as described in its offering documents.319

C. Risk limits 1.286  The risk function must set a limit for, as well as measure and manage, market, credit, liquidity, counterparty, and operational risks.320 The risk limits must be aligned with the risk profile disclosed to investors under Article 23(4) of the AIFMD. An AIFM must demonstrate to its regulator that the leverage limits set by it for each AIF it manages are reasonable and that it complies with those limits at all times.321 1.287  It is probably fair to say that these core risk tasks may be regarded as a codification of common sense basic principles for a standard of care expected of a professional, reasonable, and prudent operator of a collective investment scheme. As is true for many other organizational and conduct principles set out in the AIFMD, these are only indicative parameters. Custom and practice of day-to-day regulatory supervision and guidance will set more detailed norms. This will take time and will lead to national differences.

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D. Leverage limit 1.288  The risk function must also set a leverage limit for each AIF. The limit must include the extent to which a counterparty may re-use collateral or the guarantee the AIF could give in the context of the leveraging, taking into account, inter alia, the nature of the AIF, its investment strategy, and sources of leverage, systemic risks posed by interrelationships, the need to limit concentration of exposure to a single counterparty, collateralization, and the AIF’s asset-liability ratio.322 (p. 62) 1.289  Therefore, although the AIFMD, unlike the UCITS Directive, in principle does not aim to create a harmonized framework for the AIF’s investment and borrowing powers, the imposition of risk management requirements has established common parameters around AIFs’ use of leverage techniques. The limits are, nevertheless, very specific to the purpose and situation of each individual AIF. It will be for the national regulators to give guidance and create benchmarks.

6. Liquidity management (Article 16) A. Ability to meet payment obligations 1.290  Article 16 of the AIFMD deals with liquidity requirements. In this context, liquidity denotes the ability of the AIF to meet its payment obligations. An AIF’s payment obligations originate either from investor redemption requests or from transactions with counterparties. Naturally, therefore, closed-ended unleveraged AIFs are exempted from the requirements of Article 16. They control their redemption payments and do not have (contingent) liabilities to counterparties at the level of the AIF. 1.291  The ability of the AIF to meet payment obligations out of its assets depends on the rate at which obligations arise and the corresponding liquidity profile of the AIF’s assets, ie the speed with which they may be sold. AIFMD, Art 16 and Articles 46–9 of the Implementing Regulation set out the framework requirements. For all AIFs other than unleveraged closed-ended AIFs, the AIFM must employ an appropriate liquidity management and monitoring system so as to ensure that the liquidity profile of the investments of the AIF meets the expected rate of redemption and other payments.323 The AIFM must conduct regular stress tests to ensure that the liquidity profile and the implied assumptions remain accurate.324 The AIFM must demonstrate to its national regulator that the requirements of Article 16 have been met.325

B. Alignment of investment strategy, redemption policy, and liquidity profile 1.292  Article 16(2) of the AIFMD provides that the AIFM must ensure that the investment strategy, the liquidity profile, and the redemption policy are consistent.326 Note that the rules are not seeking to be specific about the level of liquidity an AIFM must maintain. The AIFMD directs the AIFM to ensure that the various operative components line up properly and that reasonable and justifiable investor expectations, as set out in the offering documentation and other disclosures made by the AIFM about the AIF, are met. 1.293  Normally, the AIF’s offering documents will have provisions to address liquidity problems. These provisions typically divide into ‘gating provisions’, which means that the AIFM may reduce redemptions to, for example, not more than 10% of the net asset value (NAV) on a single dealing day, and ‘market distress’ provisions, which permit the AIFM to close the AIF to redemptions altogether in the event that the markets in which the AIF’s assets are (p. 63) traded are distressed such that no reliable price can be obtained or are insufficiently liquid. Separately, the offering documentation may allow for side-pockets, ie mechanisms whereby certain illiquid assets are segregated from the main portfolio of the fund for separate and independent liquidation on behalf of the investors.

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1.294  Article 49(1) of the Implementing Regulation provides that, for purposes of AIFMD, Article 16(2), the ‘investment strategy, liquidity profile and redemption policy of each AIF managed by an AIFM shall be considered to be aligned when investors have the ability to redeem their investments in a manner consistent with the fair treatment of all AIF investors and in accordance with the AIF’s redemption policy and its obligations’. The fairness considerations should include the price impact on redemption.327 1.295  Article 49(1) therefore supports the continued use of customary redemption policies, including side-pockets. AIFMs should ensure that the terms of the redemption policies are fair in view of the interplay between investment strategy and the liquidity profile of the AIF and in line with investors’ reasonable and justifiable expectations.328

7. Investment in securitization positions (Article 17) A. Securitizations and securitization special purpose entities (SSPEs) 1.296  Debt securities are issued by a variety of institutions, such as governments and governmental agencies, supranational bodies, financial institutions, and companies, and normally rank pari passu so that they are repayable from the issuer’s general income and assets. 1.297  Debt securities may also be issued by separate and independent asset-backed schemes that are arranged by an interested party, normally referred to as the originator. The debt is issued by a securitization special purpose entity (SSPE). The payment of interest and the repayment of the par value upon maturity are funded by, calculated by reference to, or contingent upon, the return of an underlying portfolio of assets acquired by the SSPE, typically from the originator, with the proceeds of the issue, and typically held by the issuer in respect of that issue. Asset-backed schemes are referred to as ‘securitizations’, which is a reference to the fact that the portfolio of assets passes from the originator to the SSPE, causing the economic risk of the portfolio to be passed to the holders of the debt securities, effectively ‘securitizing’ the portfolio. 1.298  The SSPE will issue the debt securities in ‘tranches’ that are subordinated top-down, breaking creditor pari passu, at least between tranches. The highest tranche is called the ‘senior’ tranche. The holders of notes in other tranches are subordinated to the holders of the senior tranche. This reduces the senior note holders’ credit risk, which means that the note will carry a lower interest rate than the subordinated tranches. The holders of the lowest tranche will only receive payment after the more senior note holders have been paid. 1.299  Thus, the defining features of a securitization are the segregation of a portfolio of assets in the hands of an SSPE through the purchase of that portfolio by the SSPE with the proceeds of the issue of SSPE debt, the servicing of the SSPE debt by the income and capital from that portfolio, and the tranching of the SSPE into senior and junior creditor ranks. The (p. 64) activities of the SSPE must (as it says on the tin) be restricted to securitization services without cross-contamination, ie note holders must only have recourse to the assets comprised in the reference portfolio and only in accordance with their tranche rank. 1.300  These features are recognized by Article 4(1) of the Banking Directive, which defines ‘securitization’ as: a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having the following characteristics: (a) payments in the transaction or scheme are dependent upon the performance of the exposure or

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pool of exposures; and (b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme.329 An SSPE is defined as an entity other than a bank, which is: organised for carrying on a securitisation or securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator [bank], and the holders of the beneficial interests in which have the right to pledge or exchange those interests without restriction. 1.301  A similar definition can be found in Article 1(2) of the European Central Bank’s Securitisation Regulation (ECB Regulation),330 which is relevant because Article 4(1)(an) of the AIFMD incorporates that definition into the Directive. The ECB Regulation defines ‘securitization’ as a: ‘transaction or scheme whereby an asset or pool of assets is transferred to an entity that is separate from the originator and is created for or serves the purpose of the securitisation and/or the credit risk of an asset or pool of assets, or part thereof, is transferred to the investors in the securities, securitisation fund units, other debt instruments and/or financial derivatives issued by an entity that is separate from the originator and is created for or serves the purpose of the securitisation, and: (a)  in case of transfer of credit risk, the transfer is achieved by: the economic transfer of the assets being securitised to an entity separate from the originator created for or serving the purpose of the securitisation. This is accomplished by the transfer of ownership of the securitised assets from the originator or through sub-participation, or the use of credit derivatives, guarantees or any similar mechanism; and (b)  where such securities, securitisation fund units, debt instruments and/or financial derivatives are issued, they do not represent the originator’s payment obligations. Although more elaborate, this definition is, thankfully, not materially different from the definition in Article 4(1) of the Banking Directive. 1.302  A variety of securitizations have been created and sold in the market place over the years. The variety derives from the mix of asset classes held by the SSPE, the use of derivatives, the (p. 65) manner in which the securitized portfolio is funded or covered, and the manner in which the obligations of the issuer under the debt securities are secured.331 1.303  The definitions in the Banking Directive recognize the distinctions. Article 4(1)(37) defines a ‘traditional securitisation’ as a: securitisation involving the economic transfer of the exposures being securitised to a securitisation special purpose entity which issues securities. This shall be accomplished by the transfer of ownership of the securitised exposures from the originator credit institution or through sub-participation. The securities issued do not represent payment obligations of the originator credit institution. Further, Article 4(1) (38) defines a ‘synthetic securitisation’ as a ‘securitisation where the tranching is achieved by the use of credit derivatives or guarantees, and the pool of exposures is not removed from the balance sheet of the originator credit institution’.332

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B. Investment by an AIF in securities issued by an SSPE 1.304  As discussed in paragraph 1.63, given the definition of ‘AIF’, a securitization arrangement would usually fall within the scope of the AIFMD and the SSPE would need to seek authorization as an AIFM but for the exclusion in Article (2)(3)(g). 1.305  This does not mean, however, that SSPEs fully escape the AIFMD. Article 17 instructs the Commission, ‘in order to ensure cross-sectoral consistency and to remove misalignment between the interest of. . .originators. . .and AIFMs that invest in those securities or other financial instruments on behalf of AIFs’, to adopt delegated acts providing conditions that need to be fulfilled by ‘the originator, the sponsor or the original lender’ before it is permitted for an AIFM to invest the AIF in the securitization, which includes a condition that the originator, the sponsor, or the original lender retains a net economic interest of not less than 5%. In addition, the Commission must make a delegated act providing the ‘qualitative requirements’ an AIFM must meet to be permitted to invest the AIF in securitization positions. 1.306  The Commission has adopted the delegated acts through Articles 50–56 of the Implementing Regulation, which incorporate the definitions of ‘securitisation’, ‘securitisation position’, ‘sponsor’, and ‘tranche’ used in Article 4 of the Banking Directive.333 Further, Article 56 of (p. 66) the Implementing Regulation (interpretation) provides that in the absence of interpretation by ESMA or by the Joint Committee of the ESAs, the provisions of Articles 50–56 of the Implementing Regulation, must be interpreted in a manner consistent with the corresponding provisions of the Banking Directive and the Guidelines to Article 122a of the Capital Requirements Directive, as amended.

C. Retention requirements (Articles 51 and 54 Implementing Regulation) 1.307  Article 51 of the Implementing Regulation requires that the originator, sponsor, or original lender retains, and explicitly discloses to the AIFM that it retains, a net economic interest of not less than 5%, which must be held in the form of notes in the tranches or by way of direct interest in the underlying exposures held by the SSPE. The ‘net economic interest’ is to be measured at origination, maintained on an ongoing basis, may not be subject to any credit risk mitigation or any short positions or any other hedge, and may not be sold.334 The retention requirement does not apply if the SSPE’s portfolio consists of ‘claims or contingent claims on or fully, unconditionally and irrevocably guaranteed by’ one or more banks.335 1.308  Article 54(1) of the Implementing Regulation expects the AIFM to take ‘such corrective action as is in the best interest of the investors in the relevant AIF’ if they discover that the determination and disclosure of the retained interest did not meet the requirements of the Implementing Regulation. 1.309  Similarly, Article 54(2) expects the AIFM to take ‘such corrective action as is in the best interest of the investors in the relevant AIF’, if the retained interest moves below the 5% threshold at a given moment, except if it is caused by the normal payment mechanism of the transaction.

D. Conditions for sponsors and originators (Implementing Regulation, Article 52)

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1.310  Article 52 of the Implementing Regulation deals with the qualitative requirements concerning sponsors and originators. Prior to investment in a securitization the AIFM must verify the sponsor’s and originator’s organizational set-up and ‘ensure’ that the sponsor and the originator: (a)  grant credit based on sound and well-defined criteria and clearly establish the process for approving, amending, renewing, and refinancing loans to exposures to be securitized as they apply to exposures they hold; (b)  have in place and operate effective systems to manage the ongoing administration and monitoring of their credit risk-bearing portfolios and exposures, including for identifying and managing problem loans and for making adequate value adjustments and provisions; (c)  adequately diversify each credit portfolio based on the target market and overall credit strategy; (d)  have a written policy on credit risk that includes their risk tolerance limits and provisioning policy and describes how it measures, monitors, and controls that risk; (e)  grant readily available access to all materially relevant data on the credit quality and performance of the individual underlying exposures, cash flows, and collateral supporting (p. 67) a securitization exposure and such information that is necessary to conduct comprehensive and well informed stress tests on the cash flows and collateral values supporting the underlying exposures. For that purpose, materially relevant data shall be determined as at the date of the securitization and, where appropriate, due to the nature of the securitization thereafter; (f)  grant readily available access to all other relevant data necessary for the AIFM to comply with the requirements laid down in Article 53; (g)  disclose the level of their retained net economic interest as referred to in Article 51, as well as any matters that could undermine the maintenance of the minimum required net economic interest as referred to in that Article. 1.311  In view of the use of the words ‘shall ensure’, Article 52 places a material compliance obligation on the AIFM in respect of the securitization, which makes the AIFM effectively responsible for many operative aspects of the securitization that are outside the control of the AIFM. In practice, therefore, AIFMs will require substantial comfort letters from the originators and sponsors before making investments in securitizations. Article 1(3) (g) of the AIFMD may exclude securitizations per se from the scope of the Directive, but in many respects, Article 17 of the AIFMD and the Implementing Regulation’s implementing rules extend the Directive’s reach to securitizations in a different manner.

E. Conditions for AIFM (Implementing Regulation, Article 53) 1.312  Article 53(1) of the Implementing Regulation specifies the qualitative requirements that AIFMs must meet before they can invest an AIF’s assets in securitization positions. The AIFM must be able to demonstrate to its national regulator in respect of each securitization position that the AIFM has ‘a comprehensive and thorough understanding of those positions’ and has implemented formal policies and procedures ‘appropriate to the risk profile of the relevant AIF’s investment in the securitised positions’, and which concern the analysis and recording of: (a)  information about retention of economic interest by originators or sponsors;

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(b)  the risk characteristics of the individual securitization position and the underlying exposures of the SSPE; (c)  the reputation and previous securitization losses of the originators or sponsors in the relevant exposure classes; (d)  the statements and disclosures made by the originators or sponsors, or their agents or advisors, about their due diligence on the securitized exposures and, where applicable, on the quality of the collateral supporting the securitized exposures; (e)  where applicable, the methodologies and concepts on which the valuation of collateral supporting the securitized exposures is based and the policies adopted by the originator or sponsor to ensure the independence of the valuer; (f)  all the structural features of the securitization that could have a material impact on the return of the securitization position, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default. 1.313  Per Article 53(2) of the AIFMD, the AIFM must make the management of the securitization position part of its risk management efforts established in accordance with Article 15 of the Directive and regularly perform stress tests appropriate to the securitization positions in accordance with Article 15(3)(b). The stress test must be ‘commensurate with the (p. 68) nature, scale and complexity of the risk inherent in the securitisation positions’. In addition, the AIFM must monitor the underlying exposures of the securitization positions.336 If the underlying exposures are themselves securitization positions, AIFMs must also look through and monitor the next layer of underlying exposures. 1.314  Article 53(3) of the Implementing Regulation is specific about correlation risks. It expects the AIFM, for the purpose of appropriate risk and liquidity management, to identify, measure, monitor, manage, control, and report the risks that arise because of mismatches between the assets and liabilities of the AIF, concentration risk, or investment risk arising from these instruments. The AIFM must ensure that the risk profile of the securitization positions corresponds to the size, overall portfolio structure, investment strategies, and objectives of the AIF as laid down in the AIF rules or instruments of incorporation, prospectus, and offering documents. 1.315  Article 53(4) references the general organizational requirements of Article 18 of the AIFMD and stresses that there must be ‘an adequate degree of internal reporting to the senior management so that senior management is fully aware of any material assumption of exposure to securitisations and that the risks arising from those exposures are adequately managed’. Equally, Article 53(5) insists that AIFMs treat information about securitization positions as relevant in the context of the AIFM’s transparency obligations under Articles 22–24 of the AIFMD. Arguably, the reporting and transparency requirements relating to securitization positions addressed in Article 53(4) and (5) of the Implementing Regulation would apply under Articles 18 and 22–24 of the Directive without the obiter dictum, but it clarifies how important the Commission deems the risk management, monitoring, and reporting of securitization positions of an AIF to be.

8. General organizational requirements (Article 18) 1.316  Article 18 of the AIFMD imposes general organizational requirements on the AIFM, much in line with MiFID and UCITS Directive. Accordingly, an AIFM must have ‘adequate and appropriate human and technical resources’ necessary for the ‘proper management’ of AIFs. These include, without prejudice to the proportionality principle, sound administrative and accounting procedures,337 control and safeguard arrangements for electronic data processing,338 and adequate internal control mechanisms including,339 in particular, rules From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

for personal transactions by its employees,340 as well as proper portfolio record-keeping systems.341 The AIFM is also responsible for the transfer agency records.342 (p. 69) 1.317  Naturally, the AIFM must maintain a sound governance structure and apportion responsibility for all significant business processes and functions properly to the senior management of the AIFM.343 It must also establish independent compliance and audit functions.344

9. Valuation (Article 19) A. The net asset value (NAV) of a fund 1.318  The accurate valuation of the assets and liabilities and the calculation of the net asset value (NAV) of an open-ended AIF is absolutely critical to the proper functioning of the AIF. 1.319  The price of a share or unit in the AIF on any dealing day is used to determine the contribution or redemption amount due to or from the fund. The unit or share price is calculated by dividing the NAV on that dealing day by the number of outstanding units or shares. If the price is not accurate, contributing investors will pay either too little for their participation, to the detriment of the existing investors, or too much, to the detriment of the contributing investor. The position is reversed if the investor is redeeming. 1.320  The NAV is used to calculate the fees due to the AIFM and other service providers periodically. The NAV is also used to calculate the investment performance of the AIF periodically and underpins its track record. 1.321  The matter is much less important for closed-ended AIFs as contributions (‘drawdowns’) and redemptions are driven by the actual cost of a purchased asset or proceeds of a sale of an asset.345 Fees are calculated based on the original commitment of each investor, ie a fixed number. Investors may, however, from time to time need an estimate of the value of their investment in the closed-ended AIF.

B. Rules for determining the value of the assets and liabilities of a fund 1.322  The EU Member States do not impose specific rules for the valuation of assets and liabilities or the calculation of the net asset value of collective investment funds, including UCITS funds. Typically, the valuation is driven by a combination of rules contained in the fund’s constitutive documents, the generally accepted accounting principles (GAAPs) used for that type of entity in the jurisdiction in which the fund is organized, and market practice. This makes sense as the manner of valuation is a function of the type of assets and liabilities a fund has and the variety is therefore infinite. 1.323  Accordingly, the AIFMD requires that an AIFM has ‘consistent procedures’ for each AIF that permit the accurate and ‘independent valuation’ of the assets and liabilities of the AIF, and the calculation of its NAV pursuant to: the rules laid down in Article 19, the law of the AIF’s jurisdiction of organization, and the AIFs rules or instruments of incorporation.346 The valuation procedures and the NAV must be disclosed to investors periodically. The valuation (p. 70) and NAV calculation must occur at least once a year and on each dealing day, if the AIF is open-ended, or each draw-down or return of capital, if the AIF is closedended.347

C. Person responsible for the valuation 1.324  The AIFM may perform the valuation itself or appoint an external valuer. Independency of the valuation is naturally important. Therefore, the external valuer must be an independent third party that does not have close links with the AIFM.

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1.325  The AIF’s depositary may not be the external valuer, unless it can demonstrate that its valuation function is functionally and hierarchically separate from its depositary functions. Potential conflicts of interest must be properly identified, managed, monitored, and disclosed to the investors of the AIF. 1.326  Equally, the AIFM may only perform the valuation function itself if it can demonstrate that the task is performed by a separate function that is independent, in particular from the portfolio management function. Independency must be safeguarded by the manner in which the function is remunerated and by other measures that mitigate conflicts of interest and prevent undue influence.348 1.327  The AIFM may not appoint an external valuer unless it can demonstrate that the external valuer is a licensed practitioner and legally subject to professional conduct rules. The external valuer must provide ‘sufficient professional guarantees’ certifying that it is able to perform the valuation function as required. The AIFM and the external valuer must comply with the outsourcing rules set out in Article 20 of the AIFMD and Articles 76–81 of the Implementing Regulation.349 Sub-delegation is not permitted.350 Note that a data vendor is not an external valuer for purposes of Article 19 of the Directive. 1.328  The AIFM must inform its national regulator of the appointment of an external valuer, who may reject the appointment if it deems it not in compliance with the requirement outlined in the previous paragraph.351 If the AIFM values internally, its national regulator may require verification of the valuation procedures and/or valuations by an external valuer or auditor.352

D. Liability for valuation 1.329  Article 19(10) of the AIFMD appears to create or preserve private rights of actions for an AIF and its investors in connection with losses arising from valuation errors and other failures of the AIFM or a professional valuer to whom the AIFM has delegated valuation functions, to perform the valuation responsibilities. 1.330  The AIFMD’s liability provisions raise general questions about their legal nature and operation.353 1.331  The most common source for losses in open-ended funds are NAV errors, which cause the units or shares to be over- or underpriced. That causes losses for the contributing or (p. 71) redeeming investor, or the existing or remaining investors in the fund, depending on the direction of travel. The fund’s operator will usually make the fund whole if there is an overpriced redemption or an underpriced contribution, and reimburse the investor if it is the other way around.

V. Delegation of AIFM Functions 1. General 1.332  In practice, a fund management company tends to delegate the performance of the investment management, administrative, and marketing functions to other, specialist, financial services providers. The custodian of the fund, normally a credit institution, is typically also appointed to perform valuation and often transfer agency functions. Consequently, although the delegation may not detract from the fund management company’s liability for the performance of the collective management functions, the fund management company’s de facto task will be to select, monitor, and supervise the specialist providers. 1.333  The AIFMD recognizes that an AIFM that wishes to manage its business efficiently may delegate responsibility for the performance of its AIF management functions.354 Subdelegation is also permitted, subject to the AIFMD’s conditions. AIFMs, however, remain

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responsible for the proper performance of the delegated functions and compliance with the Directive at all times.355 1.334  The AIFMD delegation conditions only apply to the delegation of the core management functions specified in Annex I of the AIFMD, ie collective portfolio management and risk management. Delegation of supporting tasks, such as administrative or technical functions performed by the AIFM as a part of its management tasks, should not be subject to the specific limitations and requirements set out in the Directive.356 1.335  The AIFMD delegation regime is based on a mixture of the MiFID and UCITS delegation rules, but the AIFMD requires advance notification to the competent authorities before delegation arrangements may become effective. It also imposes requirements in relation to functional and hierarchical separation within the AIFM, where portfolio or risk management is delegated to an entity that may have conflicting interests to the AIFM or its investors.357

2. Conditions for delegation A. General 1.336  AIFMs that intend to delegate to third parties the task of carrying out functions on their behalf must notify the competent authorities of their home Member State before the delegation (p. 72) arrangements become effective.358 In addition, to be able to delegate, an extensive list of positive and negative conditions must be met. These are set out in the following sections.

B. Justification delegation 1.337  The AIFM must be able to justify the delegation structure with an objective rationale.359 Accordingly, it must provide the competent authorities with a detailed description, explanation, and evidence of the objective reasons for the delegation. 1.338  The following criteria must be considered when assessing whether the delegation structure is based on objective reasons: (i) optimizing of business functions and processes; (ii) cost saving; (iii) expertise of the delegate in administration or in specific markets or investments; (iv) access of the delegate to global trading capabilities.360 Upon request from the competent authorities the AIFM must provide further explanations and provide documents proving that the entire delegation structure is based on objective reasons.361

C. Delegation arrangements in writing; clear allocation of rights and obligations 1.339  The delegation arrangements must be in the form of a written agreement concluded between the AIFM and the delegate.362 1.340  The respective rights and obligations of the AIFM and the delegate must be allocated clearly and specified in the agreement. In particular, the AIFM must contractually ensure its instruction and termination rights, its rights of information, and its right to inspections and access to books and premises. The agreement must make sure that subdelegation can take place only with the consent of the AIFM.363

D. Features of the delegate 1.341  The delegate must have sufficient resources to perform the respective tasks, and the persons who effectively conduct the business of the delegate must be of sufficiently good repute and sufficiently experienced.364

(p. 73) E. Portfolio and risk management

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1.342  Where the delegation concerns portfolio or risk management, it must be conferred only on undertakings which are authorized or registered for the purpose of asset management and subject to supervision or, where that condition cannot be met, only subject to prior approval by the competent authorities of the AIFM’s home Member State.365 1.343  Where the delegation concerns portfolio or risk management and is conferred on a third-country undertaking, in addition to the requirements set out in paragraph 1.342, cooperation between the competent authorities of the home Member State of the AIFM and the supervisory authority of the undertaking must be ensured.366 1.344  Where it concerns portfolio management, the delegation must be in accordance with the investment policy of the AIF. The delegate must be instructed by the AIFM how to implement the investment policy and the AIFM must monitor whether the delegate complies with it on an ongoing basis.367

F. Effective supervision; AIFMD conditions not undermined 1.345  The delegation must not prevent the effectiveness of supervision of the AIFM, and, in particular, must not prevent the AIFM from acting, or the AIF from being managed, in the best interests of its investors.368 In line with this, the conditions with which the AIFM must (p. 74) comply in order to be authorized and carry out activities in accordance with the AIFMD must not be undermined.369

G. Selection, monitoring, and review of delegates, instruction, and withdrawal 1.346  The AIFM must be able to demonstrate (i) that the delegate is qualified and capable of undertaking the functions in question,370 (ii) that it was selected with all due care and (iii) that the AIFM is in a position (a) to monitor effectively at any time the delegated activity,371 (b) to give at any time further instructions to the delegate,372 and (c) to 374 withdraw the delegation with immediate effect when this is in the interest of investors.373 ,374 The AIFM must review the services provided by each delegate on an ongoing basis.375 1.347  The AIFM must ensure that the delegate carries out the delegated functions effectively and in compliance with applicable law and regulatory requirements and must establish methods and procedures for reviewing, on an ongoing basis, the services provided by the delegate.376 The AIFM must ensure that the delegate discloses to the AIFM any development that may have a material impact on the delegate’s ability to carry out the delegated functions effectively and in compliance with applicable laws and regulatory requirements.377 The AIFM must take appropriate action if it appears that the delegate may not be carrying out the functions effectively or not in compliance with applicable laws and regulatory requirements.378 1.348  The AIFM must supervise the delegated functions and manage the risks associated with the delegation effectively.379 For this purpose the AIFM must have at all times the necessary expertise and resources to supervise the delegated functions.380 The AIFM must set out in the agreement its right of information, inspection, admittance, and access and its instruction and monitoring rights against the delegate. The AIFM must also ensure that the delegate properly supervises the performance of the delegated functions, and adequately manages the risks associated with the delegation.381 (p. 75) 1.349  The AIFM must ensure that the continuity and quality of the delegated functions or of the delegated task of carrying out functions are also maintained in the event of a termination of the delegation either by transferring the delegated functions or the delegated task of carrying out functions to another third party or by performing them itself.382

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1.350  The AIFM must ensure that the delegate protects any confidential information relating to the AIFM, the AIF affected by the delegation, and the investors in that AIF.383 1.351  The AIFM must ensure that the delegate establishes, implements, and maintains a contingency plan for disaster recovery and periodic testing of backup facilities while taking into account the types of delegated functions.384

H. Conflicts of interests a. General 1.352  Delegation of portfolio management or risk management will not be conferred on: (i) a 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 (a) such entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from its other potentially conflicting tasks, and (b) the potential conflicts of interest are properly identified, managed, monitored, and disclosed to the investors of the AIF.385

b. Types of conflicts of interests 1.353  The criteria to assess whether a delegation conflicts with the interests of the AIFM or the investors of the AIF must at least include: (a)  where the AIFM and the delegate are members of the same group or have any other contractual relationship, the extent to which the delegate controls the AIFM or has the ability to influence its actions; (b)  where the delegate and an investor of the AIF are members of the same group or have any other contractual relationship, the extent to which this investor controls the delegate or has the ability to influence its actions; (c)  the likelihood that the delegate makes a financial gain, or avoids a financial loss, at the expense of the AIFM or the investors of the AIF; (d)  the likelihood that the delegate has an interest in the outcome of a service or an activity provided to the AIFM or the AIF; (e)  the likelihood that the delegate has a financial or other incentive to favour the interest of another client over the interests of the AIFM or the investors of the AIF; (f)  the likelihood that the delegate receives or will receive from a person other than the AIFM an inducement in relation to the collective portfolio management activities provided to the AIFM and its AIFs in the form of monies, goods, or services other than the standard commission or fee for that service. 386

(p. 76) c. Separation of functions 1.354  The portfolio or risk management function may be considered to be functionally and hierarchically separated from other potentially conflicting tasks only where the following conditions are satisfied: (a)  persons engaged in portfolio management tasks are not engaged in the performance of potentially conflicting tasks such as controlling tasks; (b)  persons engaged in risk management tasks are not engaged in the performance of potentially conflicting tasks such as operating tasks; (c)  persons engaged in risk management functions are not supervised by those responsible for the performance of operating tasks;

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(d)  the separation is ensured throughout the whole hierarchical structure of the delegate up to its governing body and is reviewed by the governing body and, where it exists, the supervisory function of the delegate. 387

d. Identification, management, monitoring, and disclosure of conflicts of interests 1.355  Potential conflicts of interest are deemed properly identified, managed, monitored, and disclosed to the investors of the AIF only if: (a)  the AIFM ensures that the delegate takes all reasonable steps to identify, manage, and monitor potential conflicts of interest that may arise between itself and the AIFM, the AIF, or the investors of the AIF. The AIFM must ensure that the delegate has procedures in place corresponding to those set out in Articles 31–34 of the Implementing Regulation; (b)  the AIFM ensures that the delegate discloses potential conflicts of interest as well as the procedures and measures to be adopted by it in order to manage such conflicts of interest to the AIFM, which must disclose them to the investors of the AIF in accordance with Article 36 of the Implementing Regulation. 388

3. AIFM’s liability not affected by delegation 1.356  The AIFM’s liability towards the AIF and its investors is not affected by the fact that the AIFM has delegated functions to a third party, or by any further sub-delegation.389 In line with the rule that the AIFM’s liability towards the AIF and its investors is not affected by (sub-)delegation, the AIFMD framework also provides that (i) the delegation structure does not allow for the circumvention of the AIFM’s responsibilities or liability390 and (ii) the obligations of the AIFM towards the AIF and its investors must not be altered as a result of the delegation.391 (p. 77) 1.357  The AIFMD’s liability provisions raise general questions about their legal nature and operation.392

4. AIFM may not become a letter-box entity 1.358  The AIFM may not delegate its functions to the extent that, in essence, it can no longer be considered to be the manager of the AIF so that it has become a ‘letter-box entity’.393 1.359  An AIFM is deemed no longer to be the manager of the AIF if at least (ie minimum harmonization; Member States may impose stricter rules) any of the following situations occur: (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; (b)  the AIFM no longer has the power to take decisions in key areas which fall under the responsibility of the senior management or no longer has the power to perform senior management functions, in particular in relation to the implementation of the general investment policy and investment strategies; (c)  the AIFM loses its contractual rights to inquire, inspect, have access to, or give instructions to its delegates or the exercise of such rights becomes impossible in practice;

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(d)  the AIFM delegates the performance of investment management functions to an extent that exceeds the investment management functions performed by the AIFM by a substantial margin. 394 1.360  When assessing the extent of delegation referred to at (d), competent authorities must assess the delegation structure in its entirety, taking into account not only the assets managed under delegation but also the following: (a)  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; (b)  the importance of the assets under delegation for the achievement of the AIF’s investment goals; (c)  the geographical and sectoral spread of the AIF’s investments; (d)  the risk profile of the AIF; (e)  the type of investment strategies pursued by the AIF or the AIFM acting on behalf of the AIF; (f)  the types of tasks delegated in relation to those retained; and (g)  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. 395

(p. 78) 5. Sub-delegation 1.361  The third party may sub-delegate any of the functions delegated to it provided that (i) the AIFM consented prior to the sub-delegation,396 (ii) the AIFM notified the competent authorities of its home Member State before the sub-delegation arrangements become effective,397 and (iii) the conditions set out in Article 20(1) are met (see paragraphs 1.336 to 1.355), on the understanding that all references to the ‘delegate’ are read as references to the ‘sub-delegate’.398 Where the sub-delegate further delegates any of the functions delegated to it, these conditions apply mutatis mutandis.399 1.362  Similar to the conditions for delegation, portfolio management or risk management may not be sub-delegated to the depositary or a delegate of the depositary, or any other entity whose interests may conflict with those of the AIFM or the investors of the AIF, unless (a) such entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from its other potentially conflicting tasks, and (b) the potential conflicts of interest are properly identified, managed, monitored, and disclosed to the investors of the AIF.400 Also in a similar vein as with respect to delegation, the relevant delegate must review the services provided by each sub-delegate on an ongoing basis.401

VI. Depositary 1. General 1.363  The AIFMD depositary regime has been the subject of much discussion, especially the strict liability of the depositary. The depositary regime is a direct response to the Madoff affair. This can be gleaned from recital (32) of the AIFMD, which observes that:

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[r]ecent developments underline the crucial need to separate asset safekeeping and management functions, and to segregate investor assets from those of the manager. Although AIFMs manage AIFs with different business models and arrangements for, inter alia, asset safekeeping, it is essential that a depositary separate from the AIFM is appointed to exercise depositary functions with respect to AIFs.402 1.364  The provisions of the AIFMD relating to the appointment and the tasks of a depositary apply to all AIFs managed by an AIFM subject to the AIFMD and therefore to all AIF business models. They should, however, be adapted to the specificities of different business models. For some business models certain depositary tasks are more relevant than for (p. 79) others, depending on the type of assets the AIFs are investing in and the tasks related to those assets.403 1.365  The depositary has three primary functions: (1) cash monitoring;404 (2) safekeeping of an AIF’s assets;405 and (3) oversight of certain operational functions.406

2. Single depositary for each AIF 1.366  The AIFM is responsible for ensuring that each AIF has a single depositary appointed in accordance with the AIFMD regime.407 1.367  In some fund structures, AIFMs are not responsible for appointing the depositary, for instance an AIF in corporate form that is externally managed by the AIFM. The AIFM does not control whether a depositary is in fact appointed. Since the AIFMD does not regulate AIFs, it cannot require an AIF to appoint a depositary. In cases of failure of an AIFM to ensure compliance with the applicable requirements of an AIF or another entity on its behalf, the competent authorities should require the AIFM to take the necessary steps to remedy the situation. 1.368  If, despite such steps, the non-compliance persists, and in so far as it concerns an EU AIFM or an authorized non-EU AIFM managing an EU AIF, the AIFM should resign as manager of that AIF. If the AIFM fails to resign, the competent authorities of its home Member State should require such resignation, and the marketing in the Union of the AIF concerned should no longer be permitted. The same prohibition should apply to authorized non-EU AIFMs marketing non-EU AIFs in the Union.408

3. Depositary contract A. Parties to the contract 1.369  A contract appointing the depositary must be made between the depositary, on the one hand, and the AIFM and, as the case may be, or the AIF, on the other hand.409

B. Written form 1.370  The appointment of the depositary must be evidenced by a written contract.410 Unless otherwise provided by national law, there is no obligation to enter into a specific written agreement for each AIF; it is possible for the AIFM and the depositary to enter into a framework agreement listing the AIFs managed by the AIFM to which the agreement applies.411 (p. 80) The details that must at least be addressed are described in the contract appointing the depositary or in any subsequent amendment to the contract, which must also be in writing.412 These details are set out in the following sections.

C. Services to be provided 1.371  The agreement must contain a description of the services to be provided by the depositary and the procedures to be adopted for each type of asset in which the AIF may invest and which must then be entrusted to the depositary.413

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D. Safe-keeping and oversight function 1.372  The agreement must contain a description of the way in which the safe-keeping and oversight function must be performed depending on the types of assets and the geographical regions in which the AIF plans to invest. With respect to the custody duties this description must include country lists and procedures for adding or, as the case may be, withdrawing countries from that list. This must be consistent with the information provided in the AIF rules, instruments of incorporation, and offering documents regarding the assets in which the AIF may invest.414

E. Depositary liability in case of delegation 1.373  The agreement must contain a statement that the depositary’s liability is not affected by any delegation of its custody functions unless it has discharged itself of its liability in accordance with the requirements of Article 21(13) or (14) of the AIFMD.415

F. Period of validity, amendment, termination 1.374  The agreement must contain the period of validity and the conditions for amendment and termination of the contract including the situations which could lead to the termination of the contract and details regarding the termination procedure and, if applicable, the procedures by which the depositary should send all relevant information to its successor.416

G. Confidentiality 1.375  The agreement must contain the confidentiality obligations applicable to the parties in accordance with prevailing laws and regulations. These obligations do not impair the ability of Member States’ competent authorities to have access to the relevant documents and information.417

H. Transmission of information 1.376  The contract must regulate the flow of information deemed necessary to allow the depositary to perform its functions for the AIF for which it has been appointed as depositary, as set out in the AIFMD and in other relevant laws, regulations, or administrative provisions.418 The (p. 81) parties may agree to transmit part or all of the information that flows between them electronically provided that proper recording of such information is ensured.419 1.377  The agreement must contain the means and procedures by which the depositary transmits to the AIFM or the AIF all relevant information that it needs to perform its duties including the exercise of any rights attached to assets, and in order to allow the AIFM and the AIF to have a timely and accurate picture of the AIF’s accounts.420 1.378  The agreement must also contain the means and procedures by which the AIFM or the AIF transmits all relevant information or ensures that the depositary has access to all the information it needs to fulfil its duties, including the procedures ensuring that the depositary will receive information from other parties appointed by the AIF or the AIFM.421

I. Re-use of assets/rehypothecation 1.379  The agreement must contain information on whether or not the depositary, or a third party to whom safe-keeping functions are delegated in accordance with Article 21(11) of the AIFMD, may re-use the assets it has been entrusted with and, if any, the conditions attached to any such re-use (‘rehypothecation’).422

J. Amendment of AIF rules, instruments of incorporation, offering documents

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1.380  The agreement must contain the procedures to be followed when an amendment to the AIF rules, instruments of incorporation, or offering documents is being considered, detailing the situations in which the depositary is to be informed, or where the prior agreement of the depositary is needed to proceed with the amendment.423

K. Sale, subscription, redemption, issue, cancellation, and repurchase 1.381  The agreement must contain all necessary information that needs to be exchanged between the AIF, the AIFM, or a third party acting on behalf of the AIF or the AIFM, on the one hand, and the depositary, on the other hand, related to the sale, subscription, redemption, issue, cancellation, and re-purchase of units or shares of the AIF.424

L. Oversight and control 1.382  The agreement must contain all necessary information to be exchanged between the AIF, the AIFM, a third party acting on behalf of the AIF or the AIFM, and the depositary relating to the carrying-out of the depositary’s oversight and control function.425

M. Third parties 1.383  Where the parties to the contract envisage appointing third parties to carry out parts of their respective duties, the agreement must contain a commitment to provide, on a regular basis, details of any third party appointed and, upon request, information on the criteria used to (p. 82) select the third party and the steps envisaged to monitor the activities carried out by the selected third party.426

N. Money laundering and financing of terrorism 1.384  The agreement must contain information on the tasks and responsibilities of the parties to the contract in respect of obligations relating to the prevention of money laundering and the financing of terrorism.427

O. Cash accounts 1.385  The agreement must contain information on (i) all cash accounts opened in the name of the AIF or in the name of the AIFM on behalf of the AIF and (ii) the procedures ensuring that the depositary will be informed at the opening of any new account in the name of the AIF or in the name of the AIFM acting on its behalf.428

P. Escalation procedures 1.386  The agreement must contain details on the depositary’s escalation procedure(s), including the identification of the persons to be contacted within the AIF and, as the case may be, the AIFM by the depositary when it launches such a procedure.429

Q. Insolvency risk to third party to whom safe-keeping is delegated 1.387  The agreement must contain a commitment by the depositary to notify the AIFM when it becomes aware that the segregation of assets is not, or is no longer, sufficient to ensure protection from insolvency of a third party, to whom safe-keeping functions are delegated pursuant to Article 21(11) of the AIFMD, in a specific jurisdiction.430

R. Depositary enquiries 1.388  The agreement must contain the procedures ensuring that the depositary, in respect of its duties, has the ability to enquire into the conduct of the AIFM and, as the case may be, the AIF and to assess the quality of information transmitted including by way of having access to the books of the AIF and, as the case may be, the AIFM or by way of onsite visits.431

S. Reviewing depositary performance

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1.389  The agreement must contain the procedures ensuring that the AIFM and, as the case may be, the AIF can review the performance of the depositary in respect of the depositary’s contractual obligations.432

T. Specification of national law 1.390  The national law applicable to the contract appointing the depositary and any subsequent agreement must be specified.433

(p. 83) 4. Entities that may act as depositary A. General 1.391  Given the importance of the custody function, the depositary must be a credit institution having its registered office in the Union and authorized in accordance with the Banking Directive (revised), or an investment firm having its registered office in the Union, subject to capital adequacy requirements in accordance with Article 20(1) of the Capital Requirements Directive, including capital requirements for operational risks and authorized in accordance with MiFID and which also provides the ancillary service of safe-keeping and administration of financial instruments for the account of clients in accordance with MiFID, Annex 1, section B, point (1). Such investment firms must in any case have own funds not less than the amount of initial capital referred to in Article 9 of the Capital Requirements Directive; or another category of institution that is subject to prudential regulation and ongoing supervision and which, on 21 July 2011, falls within the categories of institution determined by Member States to be eligible to be a depositary under Article 23(3) of the UCITS Directive.434

B. Depositaries for non-EU AIFs 1.392  For non-EU AIFs only, the depositary may also be a credit institution or any other entity of the same nature as the entities set out in paragraph 1.391, as long as it is subject to effective prudential regulation and supervision which have the same effect as Union law and are effectively enforced.435

C. Depositaries for private equity, venture capital funds, and real estate funds 1.393  For AIFs (i) that have no redemption rights exercisable during the period of five years from the date of the initial investments and (ii) that, in accordance with their core investment policy, (a) generally do not invest in assets that must be held in custody in accordance with the AIFMD (p. 84) or (b) generally invest in issuers or non-listed companies in order potentially to acquire control over such companies in accordance with the Directive, such as private equity, venture capital funds, and real estate funds, Member States may allow a notary, lawyer, registrar or another entity to be appointed to carry out depositary functions.436

D. AIFMs 1.394  In order to avoid conflicts of interest between the depositary, the AIFM, and/or the AIF, and/or its investors, an AIFM may not act as depositary.437

E. Prime brokers 1.395  The AIFMD takes account of the fact that many AIFs, and in particular hedge funds, make use of a prime broker. Prime brokerage services comprise central settlement and financing services. The industry grew out of brokers who offered to act as central settlement agents and settle client transactions (cash transactions as well as futures and fx forward transactions) that are executed away from the prime broker, but given up to the prime broker for settlement. The prime brokers also offer financing services, lending cash

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or securities to the fund so that it may settle its leveraged and ‘short’ positions, respectively, with the borrowed cash or securities. 1.396  The benefit of using a prime broker is that all exposures can be centralized in the prime broker, which permits netting and a much more efficient use of collateral. To maximize service efficiency and facilitate collateralization, the prime broker will usually act as custodian to the fund so that all its assets are held by the prime broker and can be used as collateral. Typically, the fund will permit the prime broker to ‘use’, ie borrow, the custodied assets from the fund, also known as re-hypothecation, permitting a much lower financing rate to the fund, which brings down the expense ratio for the investors. Ergo, if the prime broker cannot act as depositary to an AIF, it will have to separate the custody function from the prime broker function, which would undermine efficiency and raise the financing rate for the AIF substantially. 1.397  The AIFMD ensures that AIFs may continue to use the function of prime brokers. However, unless (i) it has functionally and hierarchically separated the performance of its depositary functions from its tasks as prime broker and (ii) the potential conflicts of interest are properly identified, managed, and disclosed to the investors of the AIF, no prime broker should be appointed as a depositary, since prime brokers act as counterparties to AIFs and therefore cannot at the same time act in the best interest of the AIF as is required of a depositary. 1.398  Depositaries should be able to delegate custody tasks to one or more prime brokers or other third parties in accordance with the AIFMD. In addition to the delegated custody tasks prime brokers should be allowed to provide prime brokerage services to the AIF. Those prime brokerage services should not form part of the delegation arrangement.438 (p. 85) 1.399  If a prime broker has been appointed, the AIFM must ensure that from the date of that appointment an agreement is in place pursuant to which the prime broker is subject to extensive reporting obligations towards the depositary with respect to the value of the assets the safekeeping of which has been delegated to the prime broker in accordance with the AIFMD.439

5. Location depositary 1.400  For EU AIFs, the depositary must be established in the home Member State of the AIF.440 1.401  For non-EU AIFs, the depositary must be established (i) in the third country where the AIF is established, (ii) in the home Member State of the AIFM managing the AIF, or (iii) in the Member State of reference of the AIFM managing the AIF.441

6. Monitoring by depositary of AIF’s cash flows A. Duties of the depositary 1.402  The depositary must in general ensure that the AIF’s cash flows are properly monitored,442 and must at least ensure: (a)  that all payments made by or on behalf of investors upon the subscription of units or shares of an AIF have been received; 443 (b)  that all cash of the AIF has been booked in cash accounts opened (i) in the name of the AIF, (ii) in the name of the AIFM acting on behalf of the AIF, or (iii) in the name of the depositary acting on behalf of the AIF 444 at: (1) a central bank; (2) a credit institution authorized in accordance with Directive 2000/12/EC; 445 (3) a bank authorized in a third country; or (4) as regards cash held in a third country, another

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entity of the same nature, in the relevant market where cash accounts are required; 446

(c)  to implement effective and proper procedures to reconcile all cash flow movements and perform such reconciliations on a daily basis or, in the case of infrequent cash movements, when such cash flow movements occur; 447 (p. 86) (d)  to implement appropriate procedures to identify at the close of business day significant cash flows and in particular those which could be inconsistent with the AIF’s operations; 448 (e)  to review periodically the adequacy of those procedures, including through a full review of the reconciliation process at least once a year and ensuring that the cash accounts opened in the name of the AIF, in the name of the AIFM acting on behalf of the AIF, or in the name of the depositary acting on behalf of the AIF are included in the reconciliation process; 449 (f)  to monitor on an ongoing basis the outcomes of the reconciliations and actions taken as a result of any discrepancies identified by the reconciliation procedures and notify the AIFM if an irregularity has not been rectified without undue delay and also the competent authorities if the situation cannot be clarified and, as the case may be, or corrected; 450 and (g)  to check the consistency of its own records of cash positions with those of the AIFM. The AIFM must ensure that all instructions and information related to a cash account opened with a third party are sent to the depositary, so that the depositary is able to perform its own reconciliation procedure. 451

B. Duties of the AIFM a. Cash accounts 1.403  The AIFM must ensure that the depositary is provided, upon commencement of its duties and on an ongoing basis, with all relevant information it needs to comply with its obligations regarding the cash accounts maintained or opened (i) in the name of the AIF, (ii) in the name of the AIFM acting on behalf of the AIF, or (iii) in the name of the depositary acting on behalf of the AIF.452 The depositary must have access to all information regarding the AIF’s cash accounts.453

b. Payments regarding subscription of units or shares 1.404  The AIFM must ensure that the depositary is provided with information about payments made by or on behalf of investors upon the subscription of units or shares of an AIF the moment (i) the AIFM, (ii) the AIF, or (iii) a party acting on behalf of it (such as a transfer agent) receives the payments or an order from the investor. The AIFM must ensure that the depositary gets all further relevant information it needs to make sure that the payments are then booked in cash accounts opened (a) in the name of the AIF, or (b) in the name of the AIFM acting on behalf of the AIF, or (c) in the name of the depositary.

(p. 87) 7. Safe-keeping of financial instruments to be held in custody A. Financial instruments to be held in custody 1.405  Financial instruments of the AIF or the AIFM acting on behalf of the AIF that can be held in custody must be entrusted to the depositary for safe-keeping. The depositary must hold in custody (i) all financial instruments that can be registered in a financial instruments account opened in the depositary’s books454 and (ii) all financial instruments that can be physically delivered to the depositary.455

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B. Proper registration 1.406  The depositary must ensure that all financial instruments that can be registered in a financial instruments account opened in the depositary’s books are registered in the depositary’s books within segregated accounts in accordance with the principles set out in Article 16 of the MiFID Implementation Directive (safeguarding of client financial instruments and funds), opened in the name of the AIF or the AIFM acting on behalf of the AIF, so that they can be clearly identified as belonging to the AIF in accordance with the applicable law at all times.456

C. Records and segregated accounts 1.407  Records and segregated accounts must be maintained in a way that ensures their accuracy, and must in particular record the correspondence to the financial instruments and cash held for AIFs.457

D. Reconciliations 1.408  Reconciliations must be conducted on a regular basis between the depositary’s internal accounts and records and those of any third party to whom custody functions are delegated.458

(p. 88) E. Due care 1.409  Due care must be exercised in relation to the financial instruments held in custody to ensure a high standard of investor protection.459

F. Custody risks throughout the custody chain 1.410  All relevant custody risks throughout the custody chain must be assessed and monitored and the depositary must inform the AIFM of any material risk identified.460

G. Fraud, poor administration, inadequate registering, or negligence 1.411  The depositary must introduce adequate organizational arrangements to minimize the risk of the loss or diminution of the financial instruments, or of rights in connection with those financial instruments as a result of fraud, poor administration, inadequate registering, or negligence.461

H. Verification of ownership rights 1.412  The depositary must verify the AIF’s ownership right or the ownership right of the AIFM acting on behalf of the AIF over the assets.462

I. Delegation of custody functions 1.413  Where a depositary has delegated its custody functions to a third party it remains subject to the requirements set out in sections C–F. It must also ensure that the third party complies with the requirements set out in sections C–H and the segregation obligations laid down in Article 99 of the Implementing Regulation.

J. Look-through approach 1.414  The depositary’s safe-keeping duties apply on a look-through basis to underlying assets held by financial and, as the case may be, legal structures controlled directly or indirectly by the AIF or the AIFM acting on behalf of the AIF. 1.415  This does not apply to fund of funds structures or master-feeder structures where the underlying funds have a depositary which keeps in custody the assets of these funds.463

8. Safe-keeping of assets other than financial instruments that can be held in custody

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A. General 1.416  For assets other than financial instruments that can be held in custody, the depositary (i) must verify the ownership of the AIF or the AIFM acting on behalf of the AIF of such assets and (ii) must maintain a record of those assets for which it is satisfied that the AIF or the AIFM acting on behalf of the AIF holds the ownership of such assets. The assessment whether the AIF or the AIFM acting on behalf of the AIF holds the ownership must be based on information (p. 89) or documents provided by the AIF or AIFM and, where available, on external evidence. The depositary must keep its record up to date.464

B. Provision of information to depositary 1.417  An AIFM must provide the depositary, upon commencement of its duties and on an ongoing basis, with all relevant information the depositary needs in order to comply with its safe-keeping obligations with respect to assets other than financial instruments that can be held in custody, and ensure that the depositary is being provided with all relevant information by third parties.465

C. Access to information 1.418  The depositary must have access without undue delay to all relevant information it needs in order to perform its ownership verification and record-keeping duties, including relevant information to be provided to the depositary by third parties.466

D. Reliable information 1.419  The depositary must possess sufficient and reliable information for it to be satisfied of the AIF’s ownership right over the assets, or of the ownership right of the AIFM acting on behalf of the AIF.467

E. Records 1.420  The depositary must maintain a record of those assets for which it is satisfied that the AIF or the AIFM acting on behalf of the AIF holds the ownership. In order to comply with this obligation, the depositary must: (i) register in its record, in the name of the AIF, assets, including their respective notional amounts, for which it is satisfied the AIF or the AIFM acting on behalf of the AIF holds the ownership of those assets; and (ii) be able to provide at any time a comprehensive and up-to-date inventory of the AIF’s assets, including their respective notional amounts.468

F. Verification procedures 1.421  A depositary must ensure that the AIFM has and implements appropriate procedures to verify that the assets acquired by its AIF are appropriately registered in the name of the AIF or in the name of the AIFM acting on behalf of the AIF, and to check consistency between the positions in the AIFM’s records and the assets for which the depositary is satisfied the AIF or the AIFM acting on behalf of the AIF holds the ownership. The AIFM must ensure that all instructions and relevant information relating to the AIF’s assets are sent to the (p. 90) depositary, so that the depositary is able to perform its own verification or reconciliation procedure.469

G. Escalation procedure 1.422  A depositary must set up and implement an escalation procedure for situations where an anomaly is detected, including the notification of the AIFM and of the competent authorities if the situation cannot be clarified and, as the case may be, corrected.470

H. Look-through approach

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1.423  The depositary’s safe-keeping duties apply on a look-through basis to underlying assets held by financial and, as the case may be, legal structures established by the AIF or the AIFM acting on behalf of the AIF for the purposes of investing in the underlying assets which are controlled directly or indirectly by the AIF or by the AIFM acting on behalf of the AIF. 1.424  This does not apply to fund of funds structures and master-feeder structures where the underlying funds have a depositary which provides ownership verification and recordkeeping functions for the fund’s assets.471

9. Oversight of operational functions 1.425  The depositary must also: (a)  ensure that the sale, issue, repurchase, redemption, and cancellation of units or shares of the AIF are carried out in accordance with the applicable national law and the AIF rules or instruments of incorporation; 472 (b)  ensure that the value of the units or shares (NAV) of the AIF is calculated in accordance with the applicable national law, the AIF rules, or instruments of incorporation and the procedures laid down in Article 19 of the AIFMD; 473 (c)  carry out the instructions of the AIFM, unless they conflict with the applicable national law or the AIF rules or instruments of incorporation; 474 (d)  ensure that in transactions involving the AIF’s assets any consideration is remitted to the AIF within the usual time limits; 475 (e)  ensure that an AIF’s income is applied in accordance with the applicable national law and the AIF rules or instruments of incorporation. 476

(p. 91) 10. Duty to act in the best interest of the AIF and its investors 1.426  In the context of their respective roles, the AIFM and the depositary must act honestly, fairly, professionally, independently, and in the interest of the AIF and its investors.477

11. Conflicts of interest 1.427  A depositary must not carry out activities with regard to the AIF or the AIFM on behalf of the AIF that may create conflicts of interest between the AIF, the investors in the AIF, the AIFM, and itself, unless the depositary has functionally and hierarchically separated the performance of its depositary 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.478

12. Re-use of assets/rehypothecation by the depositary 1.428  The assets of the AIF may not be re-used by the depositary without the prior consent of the AIF or the AIFM acting on behalf of the AIF.479

13. Delegation of safe-keeping functions A. Delegation of safe-keeping functions only 1.429  A depositary may not delegate its functions, except for the safe-keeping of assets to a third party which, in its turn, may delegate that function.480

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1.430  This means that a depositary may not delegate the monitoring of cash flows or functions such as the calculation of the NAV. This means that the depositary remains in charge with respect to the transactions performed on behalf of the AIFs.481 1.431  Delegation and sub-delegation of safe-keeping of assets must be objectively justified and are subject to strict requirements in relation to the suitability of the third party entrusted with the delegated function, and in relation to the due skill, care, and diligence the depositary must employ to select, appoint, and review that third party.482

B. Omnibus accounts 1.432  A third party to whom the safe-keeping of assets is delegated must be able to maintain a common segregated account for multiple AIFs, a so-called ‘omnibus account’.483

(p. 92) C. Entrusting functions to securities settlement systems 1.433  Entrusting the custody of assets to the operator of a securities settlement system as designated for the purposes of Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems484 or entrusting the provision of similar services to third-country securities settlement systems are not considered to be a delegation of custody functions.485

D. Delegation of supporting tasks 1.434  The strict limitations and requirements to which the delegation of tasks by the depositary is subject apply to the delegation of its specific functions as a depositary, namely the monitoring of the cash flow (which may not be delegated), the safe-keeping of assets (which may be delegated), and the oversight functions (which may not be delegated). 1.435  Delegation of supporting tasks that are linked to its depositary tasks, such as administrative or technical functions performed by the depositary as a part of its depositary tasks, is not subject to the specific limitations and requirements set out in the AIFMD.486

E. Conditions for delegation a. General 1.436  The depositary may delegate to third parties its safe-keeping functions subject to the following conditions.

b. No intention of avoiding AIFMD 1.437  The depositary’s tasks must not be not delegated with the intention of avoiding the requirements of the AIFMD.487

c. Objective reasons for delegation 1.438  The depositary must demonstrate that there is an objective reason for the delegation.488

d. Selection, appointment, review, and monitoring third parties 1.439  The depositary must exercise all due skill, care, and diligence in the selection and appointment of any third party to whom it wishes to delegate parts of its tasks, and exercise all due skill, care, and diligence in the periodic review and ongoing monitoring of any third party to whom it has delegated parts of its tasks and of the arrangements of the third party in respect of the matters delegated to it.489

(p. 93) e. Requirements during the performance of the tasks delegated

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1.440  The depositary must ensure that the third party meets the following conditions at all times during the performance of the tasks delegated to it: (a)  the third party has the structures and expertise that are adequate and proportionate to the nature and complexity of the assets of the AIF or the AIFM acting on behalf of the AIF which have been entrusted to it; 490 (b)  for custody of financial instruments, the third party is subject to effective prudential regulation (including minimum capital requirements) and supervision in the jurisdiction concerned and to an external periodic audit to ensure that the financial instruments are in its possession; 491 (c)  the third party segregates the assets of the depositary’s clients from its own assets and from the assets of the depositary in such a way that they can at any time be clearly identified as belonging to clients of a particular depositary; 492 (d)  the third party does not make use of the assets without the prior consent of the AIF or the AIFM acting on behalf of the AIF and prior notification to the depositary; 493 and (e)  the third party complies with the general obligations and prohibitions set out in Article 21(8) and (10) (safe-keeping of assets and duty to act in the best interest of the AIF and its investors: see paragraphs 1.405 to 1.424 and paragraphs 1.426 to 1.428 ). 494

F. Conditions for delegation to a third party entity 1.441  As a general rule, the depositary may delegate its custody functions to a third party provided that the third party is subject to effective prudential regulation and supervision in the jurisdiction concerned for custody of financial instruments and to an external periodic audit to ensure that the financial instruments are in its possession.495 However, where the law of a third country requires that certain financial instruments be held in custody by a local entity and no local entities satisfy these delegation requirements,496 the depositary may delegate its functions to such a local entity only to the extent required by the law of the third country and only for as long as there are no local entities that satisfy the delegation requirements, and subject to the following requirements: (a)  the investors of the relevant AIF must be duly informed that such delegation is required due to legal constraints in the law of the third country and of the circumstances justifying the delegation, prior to their investment; and (p. 94) (b)  the AIF, or the AIFM on behalf of the AIF, must instruct the depositary to delegate the custody of such financial instruments to such local entity. 497

G. Conditions for sub-delegation 1.442  The third party may, in turn, sub-delegate safe-keeping functions, subject to the same requirements (see paragraphs 1.436 to 1.441). In such a case, Article 21(13) of the AIFMD on the depositary’s liability in the case of delegation of functions applies mutatis mutandis to the relevant parties.498

14. Liability of depositary A. General 1.443  The depositary is liable for the losses suffered by the AIFM, the AIF, and the investors. The AIFMD distinguishes between the loss of financial instruments held in

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custody, and any other losses. The strict depositary liability regime is one of the most controversial elements of the AIFMD.499 1.444  The AIFMD’s liability provisions raise general questions about their legal nature and operation.500

B. Liability for loss of financial instruments a. General 1.445  The depositary is liable to the AIF or to the investors of the AIF for the loss of financial instruments by (i) the depositary or (ii) a third party to whom the custody of financial instruments held in custody has been delegated.501 In the case of such a loss, the depositary must return a financial instrument of identical type or the corresponding amount to the AIF or the AIFM acting on behalf of the AIF without undue delay.502

b. Loss of a financial instrument held in custody 1.446  Loss of a financial instrument held in custody is deemed to have taken place when, in relation to a financial instrument held in custody by the depositary or by a third party to whom the custody of financial instruments has been delegated, any of the following conditions (p. 95) is met, irrespective of whether they are the result of fraud, negligence, or non-intentional behaviour:503 (a)  a stated right of ownership of the AIF is demonstrated not to be valid because it either ceased to exist or never existed; 504 (b)  the AIF has been definitively deprived of its right of ownership over the financial instrument; 505 and (c)  the AIF is definitively unable to directly or indirectly dispose of the financial instrument. 506 1.447  In the event of insolvency of the third party to whom the custody of financial instruments held in custody has been delegated, the loss of a financial instrument held in custody must be ascertained by the AIFM as soon as one of the conditions set out in paragraph 1.446 is met with certainty. Such certainty exists at the latest at the end of the insolvency proceedings. The AIFM and the depositary must closely monitor the insolvency proceedings to determine whether all or part of the financial instruments entrusted to the third party to whom the custody of financial instruments has been delegated are effectively lost.507 1.448  The ascertainment by the AIFM of the loss of a financial instrument must follow a documented process readily available to the competent authorities. Once a loss is ascertained it must be notified immediately to investors in a durable medium.508

c. External events beyond reasonable control 1.449  The depositary is not liable if it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary.509 In this context, a depositary should not, for example, be able to rely on internal situations such as a fraudulent act by an employee to discharge itself of liability.510

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1.450  The depositary is not liable provided it 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 or of a third party to whom the custody of financial instruments held in custody has been delegated. 511 (b)  The depositary could not have reasonably prevented the occurrence of the event which led to the loss despite the adoption of all precautions incumbent on a diligent depositary as reflected in common industry practice. 512 (p. 96) (c)  Despite rigorous and comprehensive due diligence, the depositary could not have prevented the loss. 513 1.451  The requirements under (a) and (b) may be deemed to be fulfilled in the following circumstances: (i) natural events beyond human control or influence; (ii) the adoption of any law, decree, regulation, decision, or order by any government or governmental body, including any court or tribunal which impacts the financial instruments held in custody; (iii) war, riots, or other major upheavals.514 1.452  The requirements under (a) and (b) are deemed not to be fulfilled in cases such as: (i) an accounting error; (ii) operational failure; (iii) fraud; and (iv) failure to apply the segregation requirements at the level of the depositary or a third party to whom the custody of financial instruments held in custody has been delegated.515 1.453  These conditions apply mutatis mutandis to the delegate when the depositary has contractually transferred its liability in accordance with Article 21(13) and (14) of the AIFMD.

C. Liability for other losses 1.454  The depositary is also liable to the AIF, or to the investors of the AIF, for all other losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations pursuant to the AIFMD.516

D. Depositary’s liability in case of delegation; discharge of liability a. General 1.455  The depositary’s liability is not affected by any delegation of custody functions. However, in case of a loss of financial instruments held in custody by a third party pursuant to a delegation of the depositary’s custody functions, the depositary may discharge itself of liability if it can prove that the following conditions are satisfied.517

(p. 97) b. Delegation requirements 1.456  All requirements for the delegation of its custody tasks have been met (see paragraphs 1.436 to 1.440).518

c. Transfer of liability 1.457  A written contract between the depositary and the third party expressly transfers the liability of the depositary to that third party and makes it possible for the AIF or the AIFM acting on behalf of the AIF to make a claim against the third party in respect of the loss of financial instruments or for the depositary to make such a claim on their behalf.519 1.458  In other words, the AIFMD intends such contract to have external effects, making the third party liable to the AIF or to the investors of the AIF for the loss of the financial instruments held in custody.520

d. Objective reasons for discharge of liability

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1.459  A written contract between the depositary and the AIF or the AIFM acting on behalf of the AIF expressly allows a discharge of the depositary’s liability and establishes the objective reason to contract such a discharge.521 1.460  The objective reasons for contracting a discharge must be (i) limited to precise and concrete circumstances characterizing a given activity and (ii) consistent with the depositary’s policies and decisions.522 The objective reasons must be established each time the depositary intends to discharge itself of liability.523 1.461  The depositary is deemed to have objective reasons for contracting the discharge of its liability when it can demonstrate that it had no other option but to delegate its custody duties to a third party. In particular, this is the case where: (i) the law of a third country requires that certain financial instruments be held in custody by a local entity and local entities exist that satisfy the delegation criteria laid down in the AIFMD; or (ii) the AIFM insists on maintaining an investment in a particular jurisdiction despite warnings by the depositary as to the increased risk this presents.524

E. Depositary’s liability in case of delegation to a local entity in a third country 1.462  Where the law of a third country requires that certain financial instruments are held in custody by a local entity and there are no local entities that satisfy the delegation requirements, the depositary can discharge itself of liability provided that the following conditions are met: (a)  the rules or instruments of incorporation of the AIF concerned expressly allow for such a discharge under the conditions set out in this paragraph; (p. 98) (b)  the investors of the relevant AIF have been duly informed of that discharge and of the circumstances justifying the discharge prior to their investment; (c)  the AIF or the AIFM on behalf of the AIF instructed the depositary to delegate the custody of such financial instruments to a local entity; (d)  there is a written contract between the depositary and the AIF or the AIFM acting on behalf of the AIF, which expressly allows such a discharge; and (e)  there is a written contract between the depositary and the third party that expressly transfers the liability of the depositary to the local entity and makes it possible for the AIF or the AIFM acting on behalf of the AIF to make a claim against that local entity in respect of the loss of financial instruments or for the depositary to make such a claim on their behalf. 525

F. How liability can be invoked 1.463  Liability to the investors of the AIF may be invoked directly or indirectly through the AIFM, depending on the legal nature of the relationship between the depositary, the AIFM, and the investors.526

15. Duty of information towards competent authorities; sharing of information between competent authorities 1.464  On request, the depositary must make available to its competent authorities all information which it has obtained while performing its duties and which may be necessary for the competent authorities of the AIF or AIFM.527 If the competent authorities of the AIF or AIFM are different from those of the depositary, the competent authorities of the depositary must share the information received without delay with the competent authorities of the AIF and AIFM.528

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VII. Transparency Requirements 1. General 1.465  One of the main objectives of the AIFMD is to increase the transparency of AIFMs vis-à-vis investors and competent authorities. The financial crisis has highlighted the range of risks to which investors in investment funds are exposed. The AIFMD seeks to introduce safeguards to ensure that investors in AIFs are well informed and adequately protected. 1.466  To that end, the AIFMD provides minimum requirements regarding the annual report of the AIF, disclosure to investors before they invest into the AIF as well as on a periodic basis thereafter, and reporting to competent authorities.529 These requirements are set out in the following section.

(p. 99) 2. Annual report (Article 22) A. General 1.467  The annual reporting provisions aim to ensure that investors and regulators remain properly informed about the financial and business affairs and the risk profiles of AIFs under management. The AIFMD does not specify much detail in the annual reporting requirements, but does list a minimum set of mandatory information to be provided to investors, competent authorities of the AIFMs, and, in some circumstances also the competent authority of the AIFs.530 1.468  All information provided in the annual report must be presented in a manner that provides materially relevant, reliable, comparable, and clear information. The annual report must contain the information investors need in relation to particular AIF structures.531 1.469  An AIFM must, for each of (i) the EU AIFs it manages and (ii) the AIFs it markets in the Union, make available an annual report for every financial year no later than six months following the end of the financial year.532 The six-month period is without prejudice to the right of the Member States to impose a shorter period.533 1.470  The annual report must (i) be provided to investors on request,534 (ii) be made available to the competent authorities of the home Member State of the AIFM, and, where applicable, (iii) be made available to the home Member State of the AIF.535 1.471  Where the AIF is required to make public an annual financial report in accordance with the Transparency Directive, only such additional information set out in paragraph 1.472 needs to be provided to investors on request, either separately or as an additional part of the annual financial report. In the latter case the annual financial report must be made public no later than four months following the end of the financial year.536

B. Content of the annual report 1.472  The annual report for each AIF managed or marketed in the EU must at least (ie minimum harmonization) contain the following information: (a)  a balance sheet or statement of assets and liabilities;

537

(b)  an income and expenditure account for the financial year; (c)  a report on the activities of the financial year;

538

539

(p. 100) (d)  any material changes in the information listed in Article 23 of the AIFMD (disclosure to investors: see paragraphs 1.476 to 1.481 ) during the financial year covered by the report; 540

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(e)  the total amount of remuneration for the financial year, split into fixed and variable remuneration, paid by the AIFM to its staff, the number of beneficiaries, and, where relevant, carried interest paid by the AIF; 541 (f)  the aggregate amount of remuneration broken down by senior management and members of staff of the AIFM whose actions have a material impact on the risk profile of the AIF. 542

C. Applicable accounting standards 1.473  The accounting information given in the annual report must be prepared in accordance with (i) the accounting standards of the home Member State of the AIF or (ii) in accordance with the accounting standards of the third country where the AIF is established and in accordance with the accounting rules laid down in the AIF rules or instruments of incorporation.543

D. Auditing 1.474  The accounting information given in the annual report must be audited by one or more persons empowered by law to audit accounts in accordance with Directive 2006/43/ EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts.544 The auditor’s report, including any qualifications, must be reproduced in full in the annual report.545 1.475  By way of derogation from the foregoing, Member States may permit AIFMs marketing non-EU AIFs to subject the annual reports of those AIFs to an audit meeting international auditing standards in force in the country where the AIF has its registered office.546

3. Disclosure to investors (Article 23) A. General 1.476  AIFMs are required to make available certain information to investors before they invest in an AIF. Article 23 (disclosure to investors) of the AIFMD does not prescribe any format for this; unlike the UCITS regime, the AIFMD regime does not require the publication of a prospectus in the traditional sense547 or a key investor information document (KIID).548 (p. 101) 1.477  The overall disclosure requirement will vary according to AIF type and to the extent that it is already subject to other EU disclosure requirements, such as those contained in the Prospectus Directive.549 In addition, AIFs authorized in a Member State will be subject to national requirements where these apply. UK-authorized funds (NURSs and QISs) will be subject to any additional FSA rules that apply.550

B. Disclosure of information prior to investment and of material changes 1.478  AIFMs must (i) for each of the EU AIFs they manage and (ii) for each of the AIFs they market in the Union, make available to AIF investors, in accordance with the AIF rules or instruments of incorporation,551 the following information before they invest in the AIF, as well as any material changes552 thereof:553 (1)  a description of the investment strategy and objectives of the AIF; (2)  information on where any master AIF is established and where the underlying funds are established if the AIF is a fund of funds; (3)  a description of the types of assets in which the AIF may invest;

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(4)  the techniques it may employ and all associated risks; (5)  any applicable investment restrictions; (6)  the circumstances in which the AIF may use leverage, the types and sources of leverage permitted and the associated risks, any restrictions on the use of leverage, any collateral and asset re-use arrangements, and the maximum level of leverage which the AIFM are entitled to employ on behalf of the AIF; 554 (7)  a description of the procedures by which the AIF may change its investment strategy or investment policy, or both; 555 (8)  a description of the main legal implications of the contractual relationship entered into for the purpose of investment, including information on jurisdiction, on the applicable law, and on the existence or not of any legal instruments providing for the recognition and enforcement of judgments in the territory where the AIF is established; 556 (9)  the identity of the AIFM, the AIF’s depositary, auditor, and any other service providers and a description of their duties and the investors’ rights; 557 (p. 102) (10)  a description of how the AIFM is complying with the duty to cover potential professional liability risks; 558 (11)  a description of any delegated management function as referred to in Annex I of the Directive by the AIFM and of any safe-keeping function delegated by the depositary, the identification of the delegate, and any conflicts of interest that may arise from such delegations; 559 (12)  a description of the AIF’s valuation procedure and of the pricing methodology for valuing assets, including the methods used in valuing hard-to-value assets in accordance with Article 19 (valuation; see paragraphs 1.318 to 1.331 ); 560 (13)  a description of the AIF’s liquidity risk management, including the redemption rights both in normal and in exceptional circumstances, and the existing redemption arrangements with investors; 561 (14)  a description of all fees, charges, and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors; 562 (15)  a description of how the AIFM ensures a fair treatment of investors and, whenever an investor obtains preferential treatment or the right to obtain preferential treatment, a description of that preferential treatment, the type of investors who obtain such preferential treatment, and, where relevant, their legal or economic links with the AIF or AIFM; 563 (16)  the latest annual report referred to in Article 22 (see paragraphs 1.467 to 1.475 ); 564 (17)  the procedure and conditions for the issue and sale of units or shares;

565

(18)  the latest net asset value of the AIF or the latest market price of the unit or share of the AIF, in accordance with Article 19 (see paragraphs 1.318 to 1.331 ); 566 (19)  where available, the historical performance of the AIF;

567

(20)  the identity of the prime broker and a description of any material arrangements of the AIF with its prime brokers and the way the conflicts of interest in relation thereto are managed and the provision in the contract with the depositary on the

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possibility of transfer and re-use of AIF assets (ie rehypothecation), and information about any transfer of liability to the prime broker that may exist; 568 (21)  a description of how and when the information required under Article 23 (4) and (5) (see paragraphs 1.480 to 1.481 ) will be disclosed. 569 (p. 103) (22)  The AIFM must inform the investors, without delay: (i) before they invest in the AIF, of any arrangement made by the depositary to contractually discharge itself of liability in accordance with Article 21(13) (see paragraphs 1.455 to 1.461 ); (ii) of any changes with respect to depositary liability. 570

C. Relationship with Prospectus Directive and national prospectus legislation 1.479  Where the AIF is required to publish a prospectus in accordance with the Prospectus Directive or in accordance with national law, only such information referred to in Article 23(1) and (2) (see paragraph 1.478) which is in addition to that contained in the prospectus needs to be disclosed separately or as additional information in the prospectus.571

D. Periodic and regular disclosure of information 1.480  AIFMs must, for each of the EU AIFs they manage and for each of the AIFs they market in the Union, periodically disclose to investors: (a)  the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature; 572 (b)  any new arrangements for managing the liquidity of the AIF;

573

(c)  the current risk profile of the AIF and the risk management systems employed by the AIFM to manage those risks. 574 1.481  AIFMs that manage EU AIFs employing leverage or that market in the EU AIFs employing leverage must, for each such AIF, disclose, on a regular basis (i) any changes to the maximum level of leverage which the AIFM may employ on behalf of the AIF as well as any right of the re-use of collateral or any guarantee granted under the leveraging arrangement575 and (ii) the total amount of leverage employed by that AIF.576

4. Reporting obligations to competent authorities (Article 24) A. General 1.482  During the events at the end of 2008, regulators and governments globally did not always have all the information they needed to make effective intervention decisions, nor could they get to that information efficiently or expediently.577 The AIFMD seeks to plug that gap by imposing substantial reporting obligations on AIFMs, permitting regulators to monitor the market activities of AIFs in a manner similar to the monitoring of other regulated financial institutions. The increased transparency should facilitate the detection and response to risks in the relevant markets, including, in particular, systemic risk.578

(p. 104) B. General reporting and disclosure obligations 1.483  An AIFM must inform its national regulator579 regularly about its trading activities.580 The reports581 must include information about the instruments the AIFM is trading,582 the markets where it trades,583 and the principal exposures and most important concentrations of each of its AIFs.584

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1.484  An AIFM must, for each of the EU AIFs it manages and the AIFs it markets in the Union, provide the following information585 to its national regulator: the percentage of the AIF’s assets which are subject to special arrangements, ie side-pockets, arising from their illiquid nature;586 any new arrangements for managing the liquidity of the AIF;587 the current risk profile of the AIF588 and the risk management systems employed by the AIFM to manage the market risk, liquidity risk, counterparty risk, and other risks including operational risk;589 information on the main categories of assets in which the AIF invested;590 and the results of the stress tests performed in normal and exceptional circumstances, in accordance with Article 15(3)(b) and Article 16(1), second paragraph of the AIFMD.591 1.485  The AIFM must, on request, provide to its national regulator an annual report of each EU AIF managed and of each AIF marketed by the AIFM in the Union, for each financial year, in accordance with Article 22(1)592and, for the end of each quarter, a detailed list of all AIFs managed by the AIFM.593 1.486  An AIFM that manages AIFs employing leverage on a substantial basis594 must inform its national regulator about: the overall level of leverage employed by each AIF it manages; a breakdown of leverage arising from borrowing of cash or securities and leverage embedded (p. 105) in financial derivatives; and the extent to which the AIF’s assets have been re-used under leveraging arrangements.595 1.487  The information listed in paragraph 1.486 must include the identity of the five largest sources of borrowed cash or securities for each of the AIFs managed by the AIFM, and the amounts of leverage received from each of those sources for each of those AIFs.596 1.488  For non-EU AIFMs, the reporting obligations on leverage are limited to EU AIFs managed and non-EU AIFs marketed by them in the Union.597

C. Additional disclosure requirements 1.489  Where necessary for the effective monitoring of systemic risk, an AIFM’s national regulator may periodically, or ad hoc, require additional information. The national regulators must inform ESMA about the additional information requirements.598 1.490  In exceptional circumstances and where required in order to ensure the stability and integrity of the financial system or to promote long-term sustainable growth, ESMA may request the national regulators to impose additional reporting requirements.599

VIII. AIFM Managing Specific Types of AIF 1. Leveraged AIFs (Article 25) A. Use and sharing of information about leverage by regulators 1.491  The Member States are responsible for ensuring that the national regulators use the information gathered pursuant to Article 24 of the AIFMD to identify and monitor the buildup of systemic risk in the financial system, any risk of disorderly markets, or any risks to the long-term growth of the economy.600 1.492  The national regulators must share the relevant information with each other and with ESMA and the ESRB in accordance with the supervisory cooperation procedures set out in Article 50 of the AIFMD. Information must also be shared where an AIF or AIFM becomes an important source of potential counterparty risk to a credit institution or other systemically relevant institutions in another Member State.601

B. Action by national regulators

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1.493  If the national regulator deems it necessary to preserve the stability and integrity of the financial system, it may impose leverage limits or other restrictions on an AIFM in relation to one or more of its AIFs with a view to limiting the build-up of systemic risk in the financial system or mitigating the risks of disorderly markets. (p. 106) 1.494  The national regulator must notify ESMA, the ESRB, and the national regulator of any affected AIF before imposing leverage limits and inform the same about any actions taken, all in accordance with the cooperation procedures of Article 50 AIFMD.602 The notification is subject to a notice period of 10 business days. In exceptional circumstances, the national regulator may decide to ignore the notice period.603 1.495  ESMA is responsible for facilitating and coordinating the national regulators’ actions, and in particular to ensure that a consistent approach is taken across the EU. Upon receipt of a notification, ESMA must advise the national regulator on the proposed action. The advice may, in particular, address whether the conditions for taking action appear to be met, whether the actions are appropriate, and what the effective time period should be.604

C. Action by ESMA 1.496  ESMA may also intervene if it determines that the leverage employed by an AIFM, or by a group of AIFMs, poses a substantial risk to the stability and integrity of the financial system. In such circumstances, ESMA may advise national regulators to take action, including to limit leverage levels. Before doing so, it must first take advice from the ESRB. ESMA must immediately inform the national regulators concerned, the ESRB, and the Commission if it intends to intervene.605 1.497  If a national regulator chooses not to follow ESMA’s advice it must inform ESMA, giving reasons. ESMA may make the fact that a national regulator intends not to follow its advice public. This may include the given reasons. ESMA must give advance notice before publication.606

2. AIFMs managing AIFs which acquire a (non-)controlling participation in (non-)listed companies (Articles 26–30) A. General 1.498  By Articles 27 and 28 of the AIFMD, special notification and disclosure requirements apply to AIFMs managing AIFs which acquire a (non-)controlling participation in (non-)listed companies. In addition, specific provisions regarding the annual report of AIFs apply in such cases (Article 29), as well as provisions on ‘asset stripping’ (Article 30).607 1.499  The logic for including these rules in the AIFMD is questionable, as they concern the conduct of anyone, not just investment funds, who acquires a (non-)controlling stake in a (non-)listed company. Recital (55) of the AIFMD confirms this: ‘[t]he Commission is invited to examine the need and the possibilities to amend the information and disclosure requirements applicable in cases of control over non-listed companies and issuers set out in [the (p. 107) AIFMD] on a general level, regardless of the type of investor’. Apparently, this invitation does not extend to the provisions on ‘asset stripping’.

B. Scope 1.500  Articles 26–30 of the AIFMD apply to (a) AIFMs managing one or more AIFs which either individually or jointly, acting in concert, acquire control over a non-listed company, and (b) AIFMs cooperating with one or more other AIFMs on the basis of an agreement pursuant to which the AIFs, managed by those AIFMs jointly, acquire control over a nonlisted company.608

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1.501  However, Articles 26–30 do not apply if the non-listed companies are (a) small and medium-sized enterprises within the meaning of Article 2(1) of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises,609 or (b) special purpose vehicles with the purpose of purchasing, holding, or administrating real estate.610 1.502  Article 27(1) (notification of major holding and control of non-listed companies) also applies to AIFMs managing AIFs that acquire a non-controlling participation in a non-listed company.611 1.503  Article 28(1)–(3) (disclosure in case of acquisition of control) and Article 30 (asset stripping) also apply to AIFMs managing AIFs that acquire control over listed companies (‘issuers’612). For the purposes of those provisions, Article 26(1) and (2) (see paragraphs 1.500 and 1.501) apply mutatis mutandis.613 1.504  ‘Control’ entails acquisition of more than 50% of the voting rights.614 When calculating the percentage, the voting rights held by the following persons must be added to the voting rights that are held directly by the AIF: (a) an undertaking controlled by the AIF; and (b) a natural or legal person acting in its own name but on behalf of the AIF or on behalf of an undertaking controlled by the AIF.615 The calculation must include all shares to which voting rights attach, even if exercise of the rights is suspended.616 1.505  The percentage of voting rights that confers ‘control’ of listed companies (‘issuers’617) for the purposes of Article 28(1)–(3) (disclosure in case of acquisition of control) and Article 30 (p. 108) (asset stripping) of the AIFMD, as well as the method of calculation, is determined by the rules of the Member State in which the listed company has its registered office.618 1.506  Articles 26–30 AIFMD apply subject to the conditions and restrictions set out in Article 6 (confidential information) of Directive 2002/14/EC on a general framework for informing and consulting employees in the European Community.619620 According to recital (58) of the AIFMD: [t]his means that Member States should provide that within the limits and conditions laid down by national law the employees’ representatives, and anyone assisting them, are not authorised to reveal to employees and to third parties any information affecting the legitimate interests of the company that has expressly been provided to them in confidence. Member States should, however, be able to authorise the employees’ representatives and anyone assisting them to pass on confidential information to employees and to third parties bound by an obligation of confidentiality. Member States should provide that the relevant AIFMs do not request the communication of information by the board of directors to the employees’ representatives or, where there are none, the employees themselves, when the nature of that information is such that, according to objective criteria, it would seriously harm the functioning of the company concerned or would be prejudicial to it. 1.507  Articles 26–30 provide for minimum harmonization. This means that Member States may adopt stricter rules regarding the acquisition of holdings in listed companies (‘issuers’621) and non-listed companies in their territories.622

C. Notification of the acquisition of major holdings and control of non-listed companies

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1.508  When an AIF acquires, disposes of, or holds shares of a non-listed company, the AIFM managing such an AIF must notify its national regulator of the proportion of voting rights of the non-listed company held by the AIF any time when that proportion reaches, exceeds, or falls below the thresholds of 10%, 20%, 30%, 50%, and 75%.623 1.509  When an AIF acquires, individually or jointly, control over a non-listed company, the AIFM must notify the acquisition of control by its AIF to: (a)  the non-listed company; (b)  the shareholders of which the identities and addresses are available to the AIFM or can be made available by the non-listed company or through a register to which the AIFM has or can obtain access; and (c)  its national regulator.

624

(p. 109) 1.510  The notifications referred to in paragraph 1.509 must include the following additional information: (a)  the resulting situation in terms of voting rights; (b)  the conditions subject to which control was acquired, including information about the identity of the different shareholders involved, any natural person or legal entity entitled to exercise voting rights on their behalf, and, if applicable, the chain of undertakings through which voting rights are effectively held; (c)  the date on which control was acquired.

625

1.511  The notification to the non-listed company must include a request to the board of directors of the company to inform the employees’ representatives or, where there are none, the employees themselves, without undue delay, of the acquisition of control by the AIF managed by the AIFM and of the information referred to in paragraph 1.510. The AIFM must use its best efforts to ensure that the employees’ representatives or, where there are none, the employees themselves, are duly informed by the board of directors.626 1.512  The notifications referred to in paragraphs 1.508 and 1.509 must be made as soon as possible, but no later than 10 working days after the date on which the AIF has reached, exceeded, or fallen below the relevant threshold or has acquired control over the non-listed company.627

D. Disclosure in case of acquisition of control 1.513  When an AIF acquires, individually or jointly, control of a non-listed company or a listed company (an ‘issuer’628), the AIFM managing such AIF must make the information referred to in paragraph 1.515, available to: (a)  the company concerned; (b)  the shareholders of the company of which the identities and addresses are available to the AIFM or can be made available by the company or through a register to which the AIFM has or can obtain access; and (c)  its national regulator.

629

1.514  Member States may require that the information referred to in paragraph 1.515 is also made available to the national regulator of the non-listed company which the Member States may designate to that effect.630

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1.515  The AIFM must make the following information available: (a)  the identity of the AIFMs which either individually or in agreement with other AIFMs manage the AIFs that have acquired control; (b)  the policy for preventing and managing conflicts of interest, in particular between the AIFM, the AIF, and the company, including information about the specific safeguards (p. 110) established to ensure that any agreement between the AIFM and/ or the AIF and the company is concluded at arm’s length; and (c)  the policy for external and internal communication relating to the company, in particular as regards employees. 631 1.516  In its notification to the company referred to in paragraph 1.513(a), the AIFM must request the board of directors of the company to inform the employees’ representatives or, where there are none, the employees themselves, without undue delay, of the information referred to in paragraph 1.515. The AIFM must use its best efforts to ensure that the employees’ representatives or, where there are none, the employees themselves, are duly informed by the board of directors.632 1.517  In addition, when an AIF acquires, individually or jointly, control of a non-listed company, the AIFM managing such AIF must ensure that the AIF, or the AIFM acting on behalf of the AIF, discloses its intentions with regard to the future business of the non-listed company and the likely repercussions on employment, including any material change in the conditions of employment, to: (a)  the non-listed company; and (b)  the shareholders of the non-listed company of which the identities and addresses are available to the AIFM or can be made available by the non-listed company or through a register to which the AIFM has or can obtain access. 633 1.518  Furthermore, the AIFM managing the relevant AIF must request and use its best efforts to ensure that the board of directors of the non-listed company makes available the information referred to in paragraph 1.517 to the employees’ representatives or, where there are none, the employees themselves, of the non-listed company.634 1.519  Finally, when an AIF acquires control of a non-listed company, the AIFM managing such an AIF must provide its national regulator and the AIF’s investors with information on the financing of the acquisition.635 Although this is not clear from the text of the AIFMD itself, recital (56) states that the obligation to provide information on financing should also apply when an AIFM manages AIFs which acquire control over listed companies (an ‘issuer’636).

E. Specific provisions regarding the annual report of AIFs exercising control of non-listed companies 1.520  When an AIF acquires, individually or jointly, control of a non-listed company, the AIFM managing such an AIF must either: (a)  request and use its best efforts to ensure that the annual report of the non-listed company drawn up in accordance with paragraph 1.521 is made available by the board of (p. 111) directors of the company to the employees’ representatives or, where there are none, to the employees themselves within the period such annual report has to be drawn up in accordance with national applicable law; or

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(b)  for each such AIF include in the annual report provided for in Article 22 (see paragraphs 1.467 to 1.475 ) the information referred to in paragraph 1.521 relating to the relevant non-listed company. 637 1.521  The additional information to be included in the annual report of the company or the AIF must include at least a fair review of the development of the company’s business representing the situation at the end of the period covered by the annual report. The report must also give an indication of: (a)  any important events that have occurred since the end of the financial year; (b)  the company’s likely future development; and (c)  the information concerning acquisitions of own shares set out in Article 22(2) of Council Directive 77/91/EEC. 638 1.522  The AIFM managing the relevant AIF must either: (a)  request and use its best efforts to ensure that the board of directors of the nonlisted company makes available the information referred to in paragraph 1.520(b) relating to the company concerned to the employees’ representatives of the company concerned or, where there are none, to the employees themselves within the period referred to in Article 22(1) (see paragraph 1.469 ); or (b)  make available the information referred to in paragraph 1.520(a) to the investors of the AIF, in so far as already available, within the period referred to in Article 22(1) (see paragraph 1.469 ) and, in any event, no later than the date on which the annual report of the non-listed company is drawn up in accordance with the national applicable law. 639

F. Asset stripping 1.523  When an AIF, individually or jointly, acquires control of a non-listed company or a listed company (an ‘issuer’640), the AIFM managing such an AIF must, for a period of 24 months following the acquisition of control of the company by the AIF: (a)  not facilitate, support, or instruct any distribution, capital reduction, share redemption, and/or acquisition of own shares by the company as described in paragraph 1.524 ; (p. 112) (b)  in so far as the AIFM is authorized to vote on behalf of the AIF at the meetings of the governing bodies of the company, not vote in favour of a distribution, capital reduction, share redemption, and/or acquisition of own shares by the company as described in paragraph 1.524 ; and (c)  in any event use its best efforts to prevent distributions, capital reductions, share redemptions, and/or the acquisition of own shares by the company as described in paragraph 1.524 . 641 1.524  The obligations imposed on AIFMs set out in paragraph 1.523 relate to the following: (a)  any distribution (including, in particular, the payment of dividends and of interest relating to shares 642 ) to shareholders made when on the closing date of the last financial year the net assets as set out in the company’s annual accounts are, or following such a distribution would become, lower than the amount of the subscribed capital plus those reserves which may not be distributed under the law or the statutes, on the understanding that where the uncalled part of the subscribed capital From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

is not included in the assets shown in the balance sheet, this amount will be deducted from the amount of subscribed capital; (b)  any distribution (including, in particular, the payment of dividends and of interest relating to shares 643 ) to shareholders the amount of which would exceed the amount of the profits at the end of the last financial year plus any profits brought forward and sums drawn from reserves available for this purpose, less any losses brought forward and sums placed to reserve in accordance with the law or the statutes; (c)  to the extent that acquisitions of own shares are permitted, the acquisitions by the company, including shares previously acquired by the company and held by it, and shares acquired by a person acting in his own name but on the company’s behalf, that would have the effect of reducing the net assets below the amount mentioned in point (a). 644 1.525  It remains to be seen how effective the ‘asset stripping’ rules will be in practice. As such, and always without prejudice to applicable rules of national corporate law, they do not seem to prevent or restrict, inter alia: (i) the sale of the target company’s assets, (ii) its assets being used as collateral for loans, and (iii) interest payments on loans provided to the target company.

(p. 113) IX. Marketing AIFs in the EU 1. Marketing of EU AIFs in the home Member State or the Member State of reference (Articles 31 and 39(2)) A. Scope of the marketing authority 1.526  Article 31(1) of the AIFMD provides that an authorized EU AIFM may market units or shares of any EU AIF that it manages to professional investors in its home Member State as soon as certain conditions are met.645 It follows that an authorized EU AIFM is not entitled, at least not as a matter of its AIFMD authorization to manage one or more AIFs, to market units or shares of EU AIFs managed by third parties. 1.527  If the AIFM intends to market a feeder AIF pursuant to Article 31, the master AIF must be an EU AIF which is managed by an authorized EU AIFM.646 1.528  Without prejudice to the right of a Member State to opt to allow AIFMs to market to retail investors in their territory under Article 43,647 Member States must require that AIFs managed and marketed by AIFMs be marketed only to professional investors.648

B. Notification procedure 1.529  The AIFM must notify its national regulator regarding its intentions.649 Pursuant to Annex III of the AIFMD (documentation to be provided in case of intended marketing in the home Member State of the AIFM),650 the notification must comprise the following documentation and information: (a)  a notification letter, 651 including a programme of operations identifying the AIFs which the AIFM intends to market and information on where the AIFs are established; (b)  the AIF rules or instruments of incorporation; (c)  identification of the depositary of the AIF; (d)  a description of, or any information on, the AIF available to investors; (e)  information on where the master AIF is established if the AIF is a feeder AIF;

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(f)  any additional information referred to in Article 23(1) (disclosure to investors: see paragraph 1.478 ) for each AIF the AIFM intends to market; (g)  where relevant, information on the arrangements established to prevent units or shares of the AIF from being marketed to retail investors, including in the case where the (p. 114) AIFM relies on activities of independent entities to provide investment services in respect of the AIF. 1.530  Within 20 working days following receipt of a complete notification file, the competent authorities of the AIFM’s home Member State must inform the AIFM whether it may start marketing the AIFs identified in the notification.652 1.531  The competent authorities of the AIFM’s home Member State may prevent the marketing of the AIF only if the AIFM’s management of the AIF does not or will not comply with the AIFMD or the AIFM otherwise does not or will not comply with the AIFMD.653 1.532  In the case of a positive decision, the AIFM may start marketing the AIF in its home Member State from the date of the notification by the competent authorities to that effect.654 1.533  In so far as they are different, the competent authorities of the home Member State of the AIFM must also inform the competent authorities of the AIF that the AIFM may start marketing units or shares of the AIF.655

C. Material change 1.534  In the event of a material change to any of the particulars in the notification file, the AIFM must give written notice656 of that change to the competent authorities of its home Member State at least one month before implementing the change, or immediately after an unplanned change has occurred.657 1.535  If, pursuant to a planned change, the AIFM’s management of the AIF would no longer comply with the AIFMD or the AIFM would otherwise no longer comply with the Directive, the relevant competent authorities must inform the AIFM without undue delay that it is not to implement the change.658 1.536  If a planned change is implemented notwithstanding the above or if an unplanned change has taken place pursuant to which the AIFM’s management of the AIF no longer complies with the AIFMD or the AIFM otherwise no longer complies with the Directive, the competent authorities of the AIFM’s home Member State must take all due measures in accordance with Article 46 (powers of competent authorities), including, if necessary, the express prohibition of marketing of the AIF.659

D. Marketing of EU AIFs in its Member State of reference by a non-EU AIFM (Article 39(2)) 1.537  Article 39(1) and (2) of the AIFMD gives a non-EU AIFM rights to market EU AIFs that it manages in its Member State of reference. The conditions and notification procedure set (p. 115) out in Article 39(2) and (3) (marketing in the AIFM’s Member State of reference) and the obligations of the AIFM in relation to material changes set out in Article 39(9) are replicas of the procedures and requirements of Article 31. 1.538  Article 39 will not come into force before 22 July 2015.660 Until that time, non-EU AIFMs must rely on Article 42 to market AIFs in the EU.661

2. Marketing of EU AIFs in Member States other than the home Member State or Member State of reference (Articles 32 and 39(4))

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A. Passporting rights for EU and non-EU AIFMs 1.539  Article 32(1) of the AIFMD provides that authorized EU AIFMs may market units or shares of an EU AIF that it manages to professional investors in a Member State other than the home Member State of the AIFM as soon as certain conditions are met.662 Similar to marketing rights under Article 31, it follows that an authorized EU AIFM is not entitled to market units or shares of EU AIFs that it does not itself manage. 1.540  If the EU AIF is a feeder AIF the right to market is subject to the condition that the master AIF is also an EU AIF and is managed by an authorized EU AIFM.663 1.541  Article 39(4) gives a non-EU AIFM rights to market EU AIFs that it manages in Member States other than its Member State of reference. With the exception of the feeder condition of Article 32(2), the conditions and notification procedure set out in Article 39(4)– (8) (marketing in Member States other than the AIFM’s Member State of reference) and the obligations of the non-EU AIFM in relation to material changes set out in Article 39(9) are replicas of the procedures and requirements of Article 32. 1.542  Article 39 will not come into force before 22 July 2015.664 Until that time, the nonEU AIFMs must rely on Article 42 to market AIFs in the EU.665 1.543  Without prejudice to the right of a Member State to opt to allow AIFMs to market to retail investors in their territory under Article 43, Member States must require that the AIFs managed and marketed by the AIFM be marketed only to professional investors.666

B. Notification procedure 1.544  An EU AIFM must notify its national regulator of its intentions ‘in a language customary in the sphere of international finance’.667 Pursuant to Annex IV to the AIFMD (documentation and (p. 116) information to be provided in the case of intended marketing in Member States other than the home Member State of the AIFM)668 the notification must include, in addition to the documentation and information required under Article 31 notifications,669 a notification letter,670 a list of the Member State(s) in which it intends to market, and information about arrangements671 made for the marketing of AIFs.672 1.545  The national regulator of the AIFM must, no later than 20 working days after the date of receipt of the complete notification file, transmit673 the complete notification file to the competent authorities of the host Member States, but only if the AIFM complies with and will continue to comply with the AIFMD.674 1.546  The national regulator must enclose a statement to the effect that the AIFM concerned is authorized to manage AIFs with a particular investment strategy. The statement675 is provided in a language customary in the sphere of international finance.676 1.547  Upon transmission of the notification file, the national regulator of the AIFM must, without delay, notify the AIFM about the transmission. The AIFM may start marketing the AIF in the AIFM’s host Member State as of the date of that notification.677 1.548  Member States must ensure that electronic transmission and filing of the relevant documents are accepted by their competent authorities.678 1.549  In so far as they are different, the national regulator of the AIFM must also inform the national regulator of the AIF that the AIFM may start marketing the units or shares of the AIF in the AIFM’s host Member State.679

(p. 117) C. Material change 1.550  The same material change provisions that apply in the case of marketing of units or shares of EU AIFs in the AIFM’s home Member State apply in the case of marketing such units or shares in Member States other than in the home Member State, including the

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AIFM’s duty to give written notice680 of the material change to the competent authorities of its home Member State.681 1.551  If the changes are acceptable because they do not affect the compliance of the AIFM’s management of the AIF with the AIFMD, or the compliance by the AIFM with the AIFMD otherwise, the competent authorities of the AIFM’s home Member State must, without delay, inform the competent authorities of the host Member State of those changes.682

3. Marketing of non-EU AIFs in the EU (Articles 35 and 40) A. Passporting rights for EU and non-EU AIFMs 1.552  Articles 35(1) and 40 of the AIFMD permit EU and non-EU AIFMs, respectively, to market non-EU AIFs, including feeder AIFs that invest in non-EU master AIFs, to professional investors in the EU when the conditions of Articles 35 and 40 are met. 1.553  Articles 35 and 40 will not come into force before 22 July 2015.683 Until these provisions come into force, authorized EU AIFMs must rely on Article 36 to market non-EU AIFs in the EU. Non-EU AIFMs must rely on Article 42.684 1.554  Under Articles 35(2) and 40(2), the AIFM must comply with all the requirements of the Directive. In addition, the following conditions must be met: (a)  appropriate cooperation arrangements must be in place between the AIFM’s national regulator (or, in case of non-EU AIFM, its Member State of reference) and the supervisory authorities of the non-EU AIF to ensure at least an efficient exchange of information, taking into account Article 50(4), so that the AIFM’s regulator may carry out its duties under the Directive; (b)  the non-EU AIF’s country is not listed as a Non-Cooperative Country and Territory by the Financial Action Task Force (FATF); and (c)  the non-EU AIF’s country has signed an agreement with the AIFM’s home Member State (or, in case of a non-EU AIFM, its Member State of reference) and with each other Member State in which the units or shares of the non-EU AIF are intended to be marketed, which fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and Capital and ensures an effective exchange of information in tax matters, including any multilateral tax agreements. (p. 118) 1.555  Articles 35(2) and 40(2), final paragraph give the competent authority of another Member State the right to petition to ESMA if it disagrees with the assessment made by the AIFM’s national regulator (or, in case of a non-EU AIFM, its Member State of reference) regarding the matters listed under (a) and (b) in paragraph 1.554. Article 19 of the ESMA Regulation provides for an arbitration procedure. Where the national regulators cannot reach agreement, ESMA may make a binding decision.685

B. Notification procedure and material change 1.556  The notification procedures set out in Articles 35(3) and (4) and 40(3) and (4) of the AIFMD (marketing in the AIFM’s home Member State or, in the case of a non-EU AIFM, its Member State of reference) and Articles 35(5)–(9) and 40(5)–(9) (marketing in Member States other than the home Member State or, in the case of a non-EU AIFM, its Member State of reference), and the obligations of the AIFM in relation to material changes set out in Articles 35(10) and 40(10) are replicas of the procedures and requirements of Article 31 and 32.

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4. Marketing of non-EU AIFs in the EU subject to national regimes by EU and non-EU AIFMs (Articles 36 and 42) A. Marketing of non-EU AIFs pursuant to national regimes by an authorized EU AIFM (Article 36) 1.557  Article 36(1) of the AIFMD permits Member States, without prejudice to Article 35, to allow an authorized EU AIFM to market to professional investors—in their territory only —units or shares of non-EU AIFs it manages and of EU feeder AIFs that do not invest in EU master AIFs subject to the conditions of Article 36. These are minimum requirements. Article 36(2) permits Member States to impose stricter rules on the AIFM. Indeed, some Member States may not permit marketing under Article 36 at all. 1.558  Under Article 36(1)(a), a non-EU AIFM must comply with the AIFMD with the exception of Article 21 (depositary requirements), provided that an independent party is appointed to perform the functions set out in Article 21(7) (monitoring of cash flows), 21(8) (assets entrusted to a depositary), and 21(9) (transfer agency function). The AIFM must inform its regulator about the identity of the third party. 1.559  In addition, appropriate cooperation arrangements for the purpose of systemic risk oversight and in line with international standards must be in place between the AIFM’s national regulator and the supervisory authorities of the non-EU AIF in order to ensure an efficient exchange of information that allows the AIFM’s national regulator to carry out its duties under the AIFMD. The country of the non-EU AIF may not be listed as a NonCooperative Country and Territory by the FATF.686

(p. 119) B. Marketing by a non-EU AIFM of non-EU AIFs pursuant to national regimes (Article 42) 1.560  Article 42 of the AIFMD permits Member States, without prejudice to Articles 37, 39, and 40, when in force, to allow (unauthorized) non-EU AIFMs to market to professional investors—in their territory only—units or shares of EU and non-EU AIFs they manage subject to the conditions of Article 42. Like the Article 36 conditions, under Article 42(2) Member States may impose stricter rules on the AIFM to the point where it is not permitted to market under Article 42 at all. 1.561  The conditions of Article 42 are similar to the conditions of Article 36 (ie cooperation agreements must be in place and the AIFs’ countries must be FATF compliant), provided that the (unauthorized) non-EU AIFM, unlike the authorized EU AIFM under Article 36, is not expected to comply with the AIFMD except for Articles 22–24 (transparency requirements) and Articles 26–30 if the AIF marketed by it pursuant to Article 42 falls within the scope of Article 26(1).687 This, therefore, is a mirror image of Article 36(1)(a), except that Article 42 does not impose any of the duties in Article 21(7), (8), or (9) on the non-EU AIFM. 1.562  Further, Article 42(1), final paragraph provides that if a competent authority of an EU AIF does not enter into the required cooperation arrangements ‘within a reasonable period of time’, the competent authorities of the Member State where the AIF is intended to be marketed may refer the matter to ESMA, which may act in accordance with the powers conferred on it under Article 19 of the ESMA Regulation. Article 36 of the AIFM does not provide for such a procedure in relation to EU AIFMs. 1.563  It would appear, therefore, that the playing field for EU AIFMs and non-EU AIFMs in relation to the marketing of non-EU AIFs is not entirely level.

C. Repeal of the national marketing regimes

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1.564  Article 66(4) of the AIFMD provides for termination of Articles 36 and 42 by a Commission delegated act made pursuant to Article 68(6). The delegated act must be adopted three months after ESMA has given positive advice pursuant to Article 68(1) on terminating the national regimes, if any, made under Articles 36 and 42. 1.565  ESMA’s advice must follow three years after the 22 July 2015 advice relating to extending passporting rights for the marketing of non-EU AIFs by EU AIFMs within the meaning of Article 35 and Articles 37–41. In other words, ESMA must give termination advice by 22 July 2018.

5. Marketing to retail investors (Article 43) 1.566  Without prejudice to other instruments of EU law, Member States may allow AIFMs to market to retail investors in their territory units or shares of AIFs that they manage in accordance with the AIFMD, irrespective of whether such AIFs are marketed on a domestic or cross-border basis or whether they are EU or non-EU AIFs.688 (p. 120) 1.567  If a Member State allows AIFMs to market units or shares of AIFs they manage in accordance with the AIFMD in their territory, stricter requirements may be imposed on the AIFM or the AIF than the requirements applicable to the AIFs marketed to professional investors in their territory in accordance with the Directive.689 1.568  However, Member States must not impose stricter or additional requirements on EU AIFs established in another Member State and marketed on a cross-border basis than on AIFs marketed domestically.690 1.569  Member States that permit the marketing of AIFs to retail investors in their territory must, by 22 July 2014, inform the Commission and ESMA about the types of AIF AIFMs may market to retail investors in their territory and any additional requirements the Member State imposes for the marketing of AIFs to retail investors.691 1.570  Member States must also inform the Commission and ESMA of any subsequent changes with regard to the information referred to in paragraph 1.569.692

X. Competent Authorities and Supervisory Powers 1. General 1.571  Chapter IX (competent authorities) of the AIFMD contains two sections: Section 1 (designation, powers, and redress procedures)693 and section 2 (Cooperation between different competent authorities).694

2. Designation, powers, and redress procedures A. General 1.572  Section 1 of Chapter IX of the AIFMD contains provisions regarding the designation, responsibilities, and powers of competent authorities in the Member States, as well as the powers and competences of ESMA.695

B. Powers of the competent authorities in the Member States 1.573  The competent authorities in the Member States have the power to: (a)  have access to any document in any form and to receive a copy of it; (b)  require information from any person related to the activities of the AIFM or the AIF and if necessary to summon and question a person with a view to obtaining information; (c)  carry out onsite inspections with or without prior announcements;

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(d)  require existing telephone and existing data traffic records; (p. 121) (e)  require the cessation of any practice contrary to the provisions adopted in the implementation of the AIFMD; (f)  request the freezing or the sequestration of assets; (g)  request the temporary prohibition of professional activity; (h)  require authorized AIFMs, depositaries, or auditors to provide information; (i)  adopt any type of measure to ensure that AIFMs or depositaries continue to comply with the requirements of the AIFMD applicable to them; (j)  require the suspension of the issue, repurchase, or redemption of units in the interest of the unit-holders or of the public; (k)  withdraw the authorization granted to an AIFM or a depositary; (l)  refer matters for criminal prosecution; (m)  request that auditors or experts carry out verifications or investigations.

696

C. Powers of ESMA 1.574  ESMA may request the competent authority or competent authorities to take any of the following measures, as appropriate: (a)  prohibit the marketing in the EU of units or shares of AIFs managed by non-EU AIFMs or of non-EU AIFs managed by EU AIFMs (i) without authorization (Article 37 of the AIFMD), 697 (ii) without notification (Articles 35, 39, and 40), 698 or (iii) without being allowed to do so by the relevant Member States (Article 42); 699 (b)  impose restrictions on non-EU AIFMs relating to the management of an AIF in case of excessive concentration of risk in a specific market on a cross-border basis; (c)  impose restrictions on non-EU AIFMs relating to the management of an AIF where its activities potentially constitute an important source of counterparty risk to a credit institution or other systemically relevant institutions. 700 1.575  ESMA may only take these measures if: (i) a substantial threat exists, originating or aggravated by the activities of AIFMs, to the orderly functioning and integrity of the financial markets or to the stability of the financial system in the EU with cross-border implications; (ii) the relevant competent authorities have not taken (adequate) measures to address the risk.701

3. Cooperation between different competent authorities 1.576  Section 2 of Chapter IX of the AIFMD contains provisions on (i) the obligation of the competent authorities to cooperate with each other and with ESMA and the ESRB, (ii) the transfer and retention of personal data, (iii) disclosure of information to third countries, (iv) exchange of information relating to the potential systemic consequences of AIFM activity, and (v) cooperation in supervisory activities.702 Section 2 concludes with a provision on dispute settlement.703 (p. 122) 1.577  In case of disagreement between competent authorities of Member States on an assessment, action, or omission of one competent authority in areas where the AIFMD requires cooperation or coordination between competent authorities from more than one Member State, competent authorities may refer the matter to ESMA which may

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act in accordance with the powers conferred on it under Article 19 of the ESMA Regulation (settlement of disagreements between competent authorities in cross-border situations).704

XI. Transitional and Final Provisions 1.578  Chapter X of the AIFMD contains several transitional and final provisions, inter alia on the exercise of the Commission’s powers to adopt delegated acts, revocation of the power to adopt delegated acts by the European Parliament or the Council, objections to delegated acts by the European Parliament and the Council, assistance of ESMA to the Commission in developing delegated acts, transitional provisions, amendments to other directives, transposition of the AIFMD into national law (by 22 July 2013705), and review and entry into force of the AIFMD (21 July 2011706).707

Footnotes: 1 

See Art 57(1) of Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (OJ 1985 L375/3) (the original UCITS Directive). 2

  See Arts 1 and 3(b) of Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (OJ 2009 L302/32) (‘UCITS Directive’) (recasting Arts 1 and 2 of Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities). 3

  See UCITS Directive, Arts 1(6), 5(1), 91.

4 

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/ EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ 2011 L174/1). 5

  AIFMD, Art 4(a).

6 

See AIFMD, recital (6).

7

  The term ‘alternative investment fund’ is commonly understood to refer to funds that aim to invest in ‘alternative’ asset classes, ie asset classes such as commodities, currencies, real estate, and private equity which have return properties that are not highly correlated to the return properties of traditional asset classes such as equities and fixed income. The definition of ‘AIF’ is not limited to collective investment arrangements that invest in ‘alternative asset classes’. 8

  See para 1.1 of the Explanatory Memorandum to the final Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and amending Directives 2004/39/EC and 2009, COM(2009) 207 final. 9 

AIFMD, recital (10) notes specifically that the AIFMD does not seek to regulate AIFs per se. 10 

See AIFMD, recital (4).

11

  See AIFMD, recital (10).

12

  See AIFMD, recital (10).

13

  Emphases added.

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14

  See, on the principle of effectiveness in European Union law, inter alia: T. Tridimas, The General Principles of EU Law (2nd edn, Oxford University Press, 2006), 418–76; W. van Gerven, ‘Of Rights, Remedies and Procedures’ (2000) 37 CMLR 501. Cf. on the principle of effectiveness in relation to breach of duties under Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (OJ 2004 L145/1) (‘MiFID’): ECJ 30 May 2013, C-604/11, Ars Aequi (2013) 663 with annotation by D. Busch (Genil 48 SL and others/Bankinter SA and others), para 57, read in conjunction with ECJ 19 July 2012, C-591/10 (Littlewoods Retail, C-591/10), para 27. 15

  See Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers (n 8). 16

  Report of the European Parliament with recommendations to the Commission on hedge funds and private equity (A6-0338/2008) (‘Rasmussen report’) and on the transparency of institutional investors (A6-0296-2008) (‘Lehne report’). 17

  Report of the High-Level Group on Financial Supervision in the EU, 25 February 2009 (‘De Larosière report’) 25. 18

  Regulation (EU) No 236/2012 of the European Parliament and the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (OJ 2012 L86/1). 19

  De Larosière report (n 17) 25.

20

  Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers (n 8), Explanatory Memorandum. 21

  Charles McGreevy, then European Commissioner for Internal Market and Services and a former Irish Minister for Finance, noted in an EC hosted conference on alternative investment funds in February 2009 on the topic of regulating hedge funds and private equity funds: ‘Hedge funds and private equity were the poster-boys of the new finance. They surfed the wave of abundant liquidity and cheap credit. Now, as the financial system crumbles, they are easy scapegoats for more deep-rooted problems’, quoted by D.A. Zetzsche, ‘Introduction’, in D Zetzsche (ed.), The Alternative Investment Fund Managers Directive (Kluwer Law International, 2012) 4. See also at p 9 in reference to the muddled political debate. 22

  A reference to the four-level regulatory approach recommended by the ‘Committee of Wise Men on the Regulation of European Securities Markets’, chaired by Baron Alexandre Lamfalussy, whose proposals were adopted by the Council of Economics and Finance Ministers, 22 March 2001. 23

  See eg AIFMD, recital (86) and Art 58.

24

  Established by Commission Decision 2004/5/EC and revised by Commission Decision 2009/78/EC. 25

  Established by Commission Decision 2004/6/EC and revised by Commission Decision 2009/79/EC. 26

  Established by Commission Decision 2001/527/EC and revised by Commission Decision 2009/77/EC. 27

  Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ 2010 L331/12).

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28

  Established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (OJ 2010 L331/48). 29

  Established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (‘ESMA Regulation’). 30

  See (the identical) recital (8) of each of Regulations (EU) Nos 1093/2010, 1094/2010, and 1095/2010, establishing EBA, EIOPA and ESMA, respectively (the recitals further note that: ‘The Union cannot remain in a situation where there is no mechanism to ensure that national supervisors arrive at the best possible supervisory decisions for cross-border financial market participants; where there is insufficient cooperation and information exchange between national supervisors; where joint action by national authorities requires complicated arrangements to take account of the patchwork of regulatory and supervisory requirements; where national solutions are most often the only feasible option in responding to problems at the level of the Union; and where different interpretations of the same legal text exist’). 31

  Established by Regulation (EU) No 1092/2010 European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (OJ 2010 L331/1). 32

  Per Arts 54–57 of Regulations (EU) Nos 1093/2010, 1094/2010, and 1095/2010.

33

  Per Art 1(2) of Regulations (EU) Nos 1093/2010, 1094/2010, and 1095/2010.

34

  See recitals (78) et seq.; Art 56 AIFMD.

35

  Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (OJ 2013 L83/1) (‘Implementing Regulation’). The remaining chapters of this book will refer to this Regulation simply as the ‘Implementing Regulation’. 36

  Per AIFMD, Art 3(4). This delegated act is dealt with in Commission Implementing Regulation (EU) No 447/2013 of 15 May 2013 establishing the procedure for AIFMs which choose to opt in under Directive 2011/61/EU of the European Parliament and of the Council (OJ 2013 L132/1) (‘Opt-In Implementing Regulation (EU) No 447/2013’). 37

  AIFMD, Art 37(14). This delegated act is dealt with in the Opt-In Implementing Regulation (EU) No 447/2013. 38

  In addition to the AIFMD giving the Commission the power to make delegated acts, similar provisions may be found, inter alia, in MiFID (n 14) and the UCITS Directive (n 2): see ESMA Regulation (n 29), Art 1(2). 39

  ESMA Regulation (n 29), Art 10(1).

40

  ESMA Regulation (n 29), Art 10(1).

41

  ESMA Regulation (n 29), Art 16.

42

  ESMA Regulation (n 29), Art 16.

43

  AIFMD, recital (10) notes specifically that the AIFMD does not seek to regulate AIFs per se. 44

  AIFMD, recital (20).

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45

  AIFMD, recital (11).

46

  AIFMD, Art 4(1)(a).

47

  ESMA, Guidelines on key concepts of the AIFMD, ESMA/2013/611, 13 August 2013.

48

  See ESMA, Final Report—Guidelines on key concepts of the AIFMD, ESMA/2013/600, 24 May 2013, para 4. 49

  ESMA, Guidelines on key concepts of the AIFMD (n 48), Guideline 17.

50

  ESMA, Guidelines on key concepts of the AIFMD (n 48), Guideline 18.

51

  Indeed, ESMA has no difficulty excluding ‘undertakings’ that have a ‘general commercial or industrial purpose’ from the definition of AIF: see ESMA, Guidelines on key concepts of the AIFMD (n 48), Guideline 12. 52

  AIFMD, Art 2(3)(a).

53

  AIFMD, Art 2(3)(b), (e).

54

  AIFMD, Art 2(3)(c)–(f).

55

  Emphasis added.

56

  AIFMD, Art 2(3)(g).

57

  Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (OJ 2006 L177/1). 58

  Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance (OJ 2002 L345/1). 59

  See also Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products, COM(2012) 352 final, 3 July 2012 (also known as the ‘Packaged Retail Investment Products Regulation’ or ‘PRIPs’). According to PRIPs, ‘investment products’ must be accompanied by a key information document (KID) when sold to ‘retail investors’. ‘Investment product’ is broadly defined and captures all investments where, regardless of the legal form of the investment, the amount repayable to the investor is exposed to fluctuations in reference values or in the performance of one or more assets which are not directly purchased by the investor (Art 4(a)). According to the Explanatory Memorandum (p 7), ‘[s]uch a definition would include products with capital guarantees, and those where, in addition to capital, a proportion of the return is also guaranteed; investment funds, whether closed-ended or open-ended including UCITS; all structured products, whatever their form (e.g. packaged as insurance policies, funds, securities or banking products), insurance products whose surrender values are determined indirectly by returns on the insurance companies own investments or even the profitability of the insurance company itself as well as derivative instruments. Some of these products may be used as individual retail pension products, i.e. accumulation vehicles for the purposes of retirement planning’. Although not explicitly mentioned, AIFs offered to retail investors appear to be within the scope of PRIPs as well. 60

  See also recital (21), which (definitively) proclaims that an AIFM ‘should never be authorised to provide portfolio management without also providing risk management or vice versa’. 61

  See UCITS Directive (n 2), Art 6(2), (3) and Annex II.

62

  AIFMD, Annex I, paras 2(a), (b) are exact copies of the second and third bullets of Annex I of the UCITS Directive (n 2). 63

  See paras 1.140–1.142.

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64

  See also E. Wymeersch, ‘The European Alternative Investment Fund Management Directive’, in E. Wymeersch (ed.), Alternative Investment Fund Regulation (Kluwer Law International, 2012) 437. 65

  AIFMD, Art 6(8). See also recital (9).

66

  Which is an investment service within the meaning of MiFID (n 14), Annex I, Section A(5). 67

  Which is an investment service within the meaning of MiFID (n 14), Annex I, Section A(2). 68

  AIFMD, Art 3(1). See also recital (16).

69

  AIFMD, Art 3(2)(a). See also recital (17).

70

  AIFMD, Art 3(1). See also recital (17).

71

  Per AIFMD, Art 3(6).

72

  Implementing Regulation, Art 2(1), (2), (4)–(6).

73

  Implementing Regulation, Art 2(1)(b).

74

  Implementing Regulation, Art 2(3). Under Art 10, the conversion methodology is set out in Annex II of the Implementing Regulation. 75

  AIFMD, Art 3(3) and the implementing rules in the Implementing Regulation, Arts 3–5. See also the Implementing Regulation, recitals (6)–(9). 76

  Implementing Regulation, Art 4(3).

77

  Implementing Regulation, Art 4(4).

78

  See AIFMD, recital (20).

79

  AIFMD, Art 5(2).

80

  See AIFMD, Art 5(3) and recital (11).

81

  See also recital (20).

82

  See ESMA, Final report Draft regulatory technical standards on types of AIFMs, ESMA/ 2013/413, 2 April 2013, submitted to the Commission for endorsement of the draft RTS pursuant to Art 10(1) of the ESMA Regulation (n 29). 83

  See ESMA, Opinion—Draft regulatory technical standards on types of AIFMs under Art 4(4) of Directive 2011/61/EU, 2013/ESMA/1119, 13 August 2013, paras 10ff. 84

  ESMA, Opinion (n 83), para 34.

85

  At the time of writing, the Commission had not yet issued final RTS in relation to types of AIFM. 86

  Annex I of the Implementing Regulation lists methods that may be used to increase the exposure of an AIF. 87

  Implementing Regulation, Art 6(3).

88

  Implementing Regulation, Art 6(4). Revolving credit facilities should not be considered since they are temporary in nature: see Implementing Regulation, recital (14). 89

  Implementing Regulation, Art 6(2).

90

  Implementing Regulation, Art 7.

91

  Implementing Regulation, Art 7(a), (c).

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92

  AIFMD, Art 19(1).

93

  Implementing Regulation, Arts 7(b), 10.

94

  Implementing Regulation, Art 7(d).

95

  Implementing Regulation, Art 7(e).

96

  Implementing Regulation, Art 8(1).

97

  Implementing Regulation, Art 8(1).

98

  Implementing Regulation, Arts 8(2)(a), 10.

99

  Implementing Regulation, Art 8(4).

100

  Implementing Regulation, Art 8(5).

101

  Implementing Regulation, Art 8(7).

102

  Implementing Regulation, Art 8(2)(c), Annex 1, paras 1, 2.

103

  Implementing Regulation, Art 8(2)(d).

104

  Implementing Regulation, Art 8(2)(b), (8), which list the conditions for netting.

105

  Implementing Regulation, Art 8(2)(b), (6), which list the qualifying criteria, which are, in essence, that there must be identifiable and verifiable reduction of market exposure. 106

  Implementing Regulation, recital (11).

107

  Implementing Regulation, recital (12).

108

  Implementing Regulation, Art 111 and recital (132).

109

  AIFMD, Art 66(3) delays implementation of Arts 35 and 37–41 until activated by a Commission delegated act made pursuant to Art 67(6). The delegated act must be adopted three months after ESMA has given positive advice pursuant to Art 67(1) on extending passporting rights for the marketing of non-EU AIFs by EU AIFMs within the meaning of Arts 35 and 37–41. ESMA must give advice by 22 July 2015. 110

  AIFMD, Annex I, para 2(a).

111

  Which, in case of pension schemes, is permitted under Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (OJ 2003 L235/10), Art 19(1). 112

  AIFMD, recital (9).

113

  The reverse is also true: external AIFMs wishing to manage UCITSs require separate authorization pursuant to the UCITS Directive (n 2). See AIFMD, Art 6(2) in fine and recital (21). 114

  AIFMD, Art 7(4).

115

  AIFMD, Art 6(4)(a). See, for a similar provision with respect to UCITS management companies, UCITS Directive (n 2), Art 6(3)(a). 116

  See, for a similar provision with respect to UCITS management companies, UCITS Directive (n 2), Art 6(3)(b)(i). 117

  See, for a similar provision with respect to UCITS management companies, UCITS Directive (n 2), Art 6(3)(b)(ii). Note that under the European Commission’s proposal for MiFID II of 20 October 2011 (COM (2011) 656 final), safe-keeping and administration qualifies as an investment service and no longer as an ancillary service. See MiFID II, Annex I, section A, sub (9). However, note that under the Council’s MiFID II compromise text of 18 June 2013 (2011/0298 (COD), No 11006/13), safe-keeping and administration still

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qualifies as an ancillary service and not as an investment service. See MiFID II, Annex I, section B, sub (7). 118

  See AIFMD, Art 6(4)(b). Note that Art 6(4)(a) and (b) derogate from Art 6(2), which provides that ‘Member States shall require that no external AIFM engage in activities other than those referred to in Annex I to [the AIFMD] and the additional management of UCITS subject to authorisation under [the UCITS Directive, n 2]’. 119

  See AIFMD, Art 6(6) in conjunction with MiFID (n 14), Arts 12 (initial capital requirements), 13 (organizational requirements), and 19 (conduct of business rules). See also AIFMD, Art 6(6) in conjunction with MiFID (n 14), Art 2(2), which provides that ‘[t]he rights conferred by [MiFID, n 14] shall not extend to the provision of services as counterparty in transactions carried out by public bodies dealing with public debt or by members of the European System of Central Banks performing their tasks as provided for by the Treaty and the Statute of the European System of Central Banks and of the European Central Bank or performing equivalent functions under national provisions’. 120

  Cf. Wymeersch, ‘The European Alternative Investment Fund Management Directive’ (n 64) 447, n 68. 121

  AIFMD, Art 6(5)(a) and recital (21). See, for a similar provision with respect to UCITS management companies, UCITS Directive (n 2), Art 6(3), last paragraph. 122

  AIFMD, Art 6(5)(b) and recital (21). See, for a similar provision with respect to UCITS management companies, UCITS Directive (n 2), Art 6(3), last paragraph. 123

  AIFMD, Art 6(5)(c) and recital (21).

124

  AIFMD, Art 6(5)(d) and recital (21).

125

  See AIFMD, Art 20 on delegation. See also Wymeersch, ‘The European Alternative Investment Fund Management Directive’ (n 64) 444. 126

  AIFMD, Art 4(1)(q).

127

  AIFMD, Art 34(1)(b). Implementing Regulation, Arts 113–115 contain rules designed to provide a common EU framework to facilitate the establishment of those cooperation arrangements with third countries. 128

  AIFMD, Art 33(1). See, for a similar provision, but formulated from the perspective of the UCITS rather than the UCITS management company, UCITS Directive (n 2), Art 16(3). 129

  AIFMD, Art 33(2)(a). See, for similar provisions, UCITS Directive (n 2), Arts 17(2)(a) (branch) and 18(1)(a) (cross-border). 130

  AIFMD, Art 33(2)(b). See, for similar provisions, UCITS Directive (n 2), Arts 17(2)(b) (branch) and 18(1)(b) (cross-border). In order to ensure consistent harmonization, ESMA may develop draft regulatory technical standards to specify the information to be notified (AIFMD, Art 33(7), first paragraph). Power is delegated to the Commission to adopt these regulatory technical standards in accordance with ESMA Regulation (n 29), Arts 10–14 (AIFMD, Art 33(7), second paragraph). Furthermore, in order to ensure uniform conditions of application, ESMA may develop draft implementing technical standards to establish standard forms, templates, and procedures for the transmission of information (AIFMD, Art 33(8), first paragraph). Power is conferred on the Commission to adopt these implementing technical standards in accordance with ESMA Regulation (n 29), Art 15 (AIFMD, Art 33(8), second paragraph). 131

  AIFMD, Art 33(3)(a).

132

  AIFMD, Art 33(3)(b). See, for a similar provision, UCITS Directive (n 2), Art 17(2)(c).

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133

  AIFMD, Art 33(3)(c) AIFMD. See, for a similar provision with respect to the establishment of a branch, UCITS Directive (n 2), Art 17(2)(d). 134

  In order to ensure consistent harmonization, ESMA may develop draft regulatory technical standards to specify the information to be notified (AIFMD, Art 33(7), first paragraph). Power is delegated to the Commission to adopt these regulatory technical standards in accordance with ESMA Regulation (n 29), Arts 10–14 (AIFMD, Art 33(7), second paragraph). Furthermore, in order to ensure uniform conditions of application, ESMA may develop draft implementing technical standards to establish standard forms, templates, and procedures for the transmission of information (AIFMD, Art 33(8), first paragraph). Power is conferred on the Commission to adopt these implementing technical standards in accordance with ESMA Regulation (n 29), Art 15 (AIFMD, Art 33(8), second paragraph). 135

  AIFMD, Art 33(4), first paragraph. See, for similar provisions, UCITS Directive (n 2), Art 17(3), first paragraph (branch) and Art 18(2), first paragraph (cross-border). 136

  AIFMD, Art 33(4), second paragraph.

137

  AIFMD, Art 33(4), third paragraph.

138

  AIFMD, Art 33(4), fourth paragraph. See, for similar provisions, UCITS Directive (n 2), Arts 17(7) (branch) and Art18(2), last paragraph. 139

  AIFMD, Art 33(5).

140

  AIFMD, Art 33(6), first paragraph.

141

  AIFMD, Art 33(6), second paragraph.

142

  AIFMD, Art 33(6), third paragraph.

143

  AIFMD, Art 33(6), fourth paragraph. See, for somewhat different provisions with respect to changes, UCITS Directive (n 2), Arts 17(8) and (9) (branch) and Art18(4) (crossborder). 144

  As discussed in para 1.136, Arts 37 and 41 do not come into force before 22 July 2015.

145

  AIFMD, Art 37(4)(a) and (b).

146

  AIFMD, Art 37(4)(c), (e), (g).

147

  AIFMD, Art 37(4)(d), (f).

148

  AIFMD, Art 37(4)(h).

149

  AIFMD, Art 37(4), final paragraph.

150

  AIFMD, Art 37(9), final paragraph.

151

  ESMA Regulation (n 29), Art 19(3).

152

  AIFMD, Art 37(11).

153

  AIFMD, Art 37(12).

154

  AIFMD, Art 37(12).

155

  AIFMD, Art 37(12).

156

  AIFMD, Arts 7(2)(a) and 37(8).

157

  AIFMD, Art 7(2)(b). ‘Qualifying holding’ means a direct or indirect holding in an AIFM which represents 10% or more of the capital or of the voting rights, in accordance with Arts 9 and 10 of Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (OJ 2004 L390/38) (‘Transparency Directive’), taking into account the conditions regarding

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aggregation of the holding laid down in Art 12(4) and (5) thereof, or which makes it possible to exercise a significant influence over the management of the AIFM in which that holding subsists (AIFMD, Art 4(1)(ah)). See, for similar provisions applying to UCITS management companies (but without any reference to the aggregation rules), UCITS Directive (n 2), Art 8(1), first paragraph and Art 2(1)(j). Compare also MiFID (n 14), Art 10(1), first paragraph. 158

  See, for similar requirements with respect to UCITS management companies and UCITS investment companies, UCITS Directive (n 2), Arts 7(1)(c) and 29(1)(a), respectively. Cf. also MiFID (n 14), Art 7(2) with respect to investment firms. 159

  AIFMD, Art 7(2)(c). It concerns: Chs II (authorization of AIFMs), III (operating conditions for AIFMs), IV (transparency requirements), and, where applicable, V (AIFMs managing specific types of AIF), VI (rights of EU AIFMs to market and manage EU AIFs in the Union), VII (specific rules in relation to third countries), and VIII (marketing to retail investors). 160

  AIFMD, Art 7(2).

161

  By Art 37(8)(b), if the application is made by a non-EU AIFM, the information referred to in Art 7(3) may be limited to the EU AIFs the AIFM intends to manage and to those nonEU AIFs managed by the AIFM that it intends to market in the EU. 162

  AIFMD, Art 7(3)(a).

163

  AIFMD, Art 7(3)(b). ‘Feeder AIF’ means an AIF which (i) invests at least 85% of its assets in units or shares of another AIF (the ‘master AIF’); (ii) invests at least 85% of its assets in more than one master AIF where those master AIFs have identical investment strategies; or (iii) has otherwise an exposure of at least 85% of its assets to such a master AIF (Art 4(1)(m)). ‘Master AIF’ means an AIF in which another AIF invests or has an exposure in accordance with Art 4(1)(m) (Art 4(1)(y)). 164

  AIFMD, Art 7(3)(c).

165

  AIFMD, Art 7(3)(d).

166

  AIFMD, Art 7(3)(e).

167

  AIFMD, Art 8(5), second paragraph. A non-EU AIFM must also submit the information specified in Art 37(8)(a): see Art 37(8)(e). 168

  AIFMD, Art 37(8).

169

  See the definition of ‘home member state’ in AIFMD, Art 4(1)(q). Article 37(8)(c)–(e) provides for a few other logical variations of Art 8 as it applies to non-EU AIFMs, eg that the head office of the non-EU AIFM does not have to be in the EU. 170

  AIFMD, Art 37(8)(a).

171

  See paras 1.168–1.175.

172

  AIFMD, Art 7(5).

173

  AIFMD, Art 37(2), (7)(b), (c).

174

  AIFMD, Art 7(4). In order to ensure consistent harmonization of the application for authorization, ESMA may develop draft regulatory technical standards to specify the information to be provided to the competent authorities in the AIFM’s application for the authorization, including the programme of activity (Art 7(6), first paragraph). Power is delegated to the Commission to adopt these regulatory technical standards in accordance with Arts 10–14 of the ESMA Regulation (n 29) (Art 7(6), second paragraph). Also, in order to ensure uniform conditions of application of authorization, ESMA may develop draft implementing technical standards to determine standard forms, templates, and procedures for the provision of information to the competent authorities in the AIFM’s application for the authorization (Art 7(7), first paragraph). Power is conferred on the Commission to adopt From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

these implementing technical standards in accordance with Art 15 of the ESMA Regulation (n 29) (Art 7(7), second paragraph). 175

  AIFMD, Art 8(1)(a). See, for a similar provision with respect to investment firms, MiFID (n 14), Art 7(1). Art 37(8)(c) of the AIFMD states that, in the case of an application by a nonEU AIFM, Art 8(1)(a) is without prejudice to Art 37(2), which provides for substitute compliance with the non-EU AIFM’s law. 176

  AIFMD, Art 6(1), second paragraph.

177

  AIFMD, Art 8(1)(c). Similar requirements apply to UCITS management companies, UCITS investment companies, and investment firms: see UCITS Directive (n 2), Arts 7(1)(b), 29(1)(b) and MiFID (n 14), Art 9, respectively. 178

  AIFMD, Art 8(1)(d). ‘Qualifying holding’ means a direct or indirect holding in an AIFM which represents 10 % or more of the capital or of the voting rights, in accordance with Arts 9 and 10 of the Transparency Directive (n 157), taking into account the conditions regarding aggregation of the holding laid down in Art 12(4) and (5) thereof, or which makes it possible to exercise a significant influence over the management of the AIFM in which that holding subsists (AIFMD, Art 4(1)(ah)). See, for similar provisions applying to UCITS management companies (but without any reference to the aggregation rules), UCITS Directive (n 2), Art 8(1), second paragraph and Art 2(1)(j). Compare also MiFID (n 14), Art 10(1), second paragraph and Art 4(1), point 27. In order to ensure consistent harmonization of the conditions for granting authorization, ESMA may develop draft regulatory technical standards to specify the requirements applicable to shareholders and members with qualifying holdings (AIFMD, Art 8(6)(b)). Power is delegated to the Commission to adopt these regulatory technical standards in accordance with ESMA Regulation (n 29), Arts 10– 14 (AIFMD, Art 8(6), second paragraph). 179

  AIFMD, Art 8(1)(e). Similar requirements apply to UCITS management companies and UCITS investment companies: see UCITS Directive (n 2), Arts 7(1)(d) and 27, third paragraph, respectively. By AIFMD, Art 37(8)(e), Art 8(1)(e) does not apply to applications made by non-EU AIFMs pursuant to Art 37(5). 180

  AIFMD, Art 9(1). The same amount applies to UCITS investment companies: see UCITS Directive (n 2), Art 29(1). 181

  AIFMD, Art 9(2). The same amount applies to UCITS management companies: see UCITS Directive (n 2), Art 7(1)(a). 182

  AIFMD, Art 9(3). The same rules apply to UCITS management companies: see UCITS Directive (n 2), Art 7(1)(a)(i). 183

  (1) Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ 2013 L176/338) and (2) Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/201 (OJ 2013 L176/1). 184

  AIFMD, Art 9(5). The same rule applies with respect to UCITS management companies: see UCITS Directive (n 2), Art 7(1)(a)(iii). In the AIFMD (and also in the UCITS Directive (n 2) and MiFID (n 14)), reference is made to Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) (OJ 2006 L177/201) (or, in the case of MiFID (n 14), even to Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions (OJ 1993 L141/1)), but according to recital (98) of CRD IV (para 1.192) these references should be construed as references to the provisions governing own

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funds requirements in CRD IV and CRR (in the case of MiFID (n 14) this should be read in conjunction with Directive 2006/49/EC, Art 5). 185

  AIFMD, Art 9(8).

186

  See AIFMD, Art 20 (delegation). Note that the restrictions set out in Art 20 only apply to delegation of portfolio and risk management functions, not to any additional functions an AIFM may perform in the course of the collective management of an AIF. See recital (31). 187

  AIFMD, Art 9(4). The same rule applies to UCITS management companies: see UCITS Directive (n 2), Art 7(1)(a)(ii). 188

  AIFMD, Art 9(6). The same rule applies to UCITS management companies: see UCITS Directive (n 2), Art 7(1), in fine. 189

  For the purpose of professional liability, ‘relevant person’ means any of the following: (a) a director, partner or equivalent, or manager of the AIFM; (b) an employee of the AIFM, or any other natural person whose services are placed at the disposal and under the control of the AIFM and who is involved in the provision of collective portfolio management services by the AIFM; (c) a natural or legal person who is directly involved in the provision of services to the AIFM under a delegation arrangement to third parties for the purpose of the provision of collective portfolio management by the AIFM (Implementing Regulation, Art 1(2)). 190

  Implementing Regulation, Art 12(1), made by the Commission pursuant to AIFMD, Art 9(9)(a). See, for a further specification of professional liability risks, Implementing Regulation, Art 12(2), (3). 191

  AIFMD, Art 9(7), first sentence, and (a). See Implementing Regulation, Arts 13, 14, made by the Commission pursuant to AIFMD, Art 9(9)(b), (c), for a further specification of this requirement. 192

  AIFMD, Art 9(7), opening words, and (b). See Implementing Regulation, Arts 13, 15 (based on AIFMD, Art 9(9)(b), (c)) for a further specification of this requirement. See also G. Walker, ‘The Liability Insurance of the AIFM’, in Zetzsche, The Alternative Investment Fund Managers Directive (Kluwer Law International, 2012) (n 21) 199 et seq. 193

  AIFMD, Art 9(10).

194

  AIFMD, Art 8(2). See, for a similar provision with respect to UCITS management companies, UCITS Directive (n 2), Art 8(3). 195

  AIFMD, Art 8(5), first paragraph. In the case of authorization pursuant to the UCITS Directive (n 2), the terms for granting authorization are different: the UCITS management company or, where applicable, the UCITS investment company, must be informed within two months (without any possibility of prolongation) of the submission of a complete application, whether or not authorization of the UCITS has been granted (UCITS Directive (n 2), Art 5(4), second paragraph). However, where a UCITS investment company has not designated a UCITS management company, the investment company must be informed, within six months of the submission of a complete application, whether or not authorization has been granted (UCITS Directive (n 2), Art 29(2)). In the case of authorization of investment firms, an applicant must be informed within six months of the submission of a complete application, whether or not authorization has been granted (MiFID (n 14), Art 7(3)). 196

  AIFMD, Art 8(3)(a). Similar provisions apply to UCITS management companies, UCITS investment companies, and investment firms: see UCITS Directive (n 2), Art 7(2), first

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paragraph, Art 29(1)(c), first paragraph, and MiFID (n 14), Art 10(1), third paragraph, respectively. 197

  AIFMD, Art 8(3)(b). Similar provisions apply to UCITS management companies, UCITS investment companies, and investment firms: see UCITS Directive (n 2), Art 7(2), second paragraph, Art 29(1)(c), second paragraph, and MiFID (n 14), Art 10(2), first part, respectively. 198

  AIFMD, Art 8(3)(c). Similar provisions apply to UCITS management companies, UCITS investment companies, and investment firms: see UCITS Directive (n 2), Art 7(2), second paragraph, Art 29(1)(c), second paragraph, and MiFID (n 14), Art 10(2), second part, respectively. In order to ensure consistent harmonization of the conditions for granting authorization, ESMA may develop draft regulatory technical standards to specify the grounds for refusal (AIFMD, Art 8(6)(a)). Art 8(6)(c) seems merely to repeat Art 8(6)(a), but the status of Art 8(6)(c) is not entirely clear. Power is delegated to the Commission to adopt these regulatory technical standards in accordance with ESMA Regulation (n 29), Arts 10– 14: AIFMD, Art 8(6), second paragraph. 199

  AIFMD, Art 8(4).

200

  AIFMD, Art 37(8), final paragraph.

201

  ESMA Regulation (n 29), Art 19(3).

202

  AIFMD, Art 8(5), third paragraph.

203

  AIFMD, Art 10(1).

204

  AIFMD, Art 10(2).

205

  AIFMD, Art 11(a). See, in a similar vein with respect to UCITS management companies, UCITS investment companies, and investment firms, UCITS Directive (n 2), Arts 7(5)(a), 29(4)(a), and MiFID (n 14), Art 8(a), respectively. 206

  AIFMD, Art 11(b). Compare, in relation to UCITS management companies, UCITS investment companies, and investment firms, UCITS Directive (n 2), Arts 7(5)(b), 29(4)(b), and MiFID (n 14), Art 8(b), respectively. 207

  AIFMD, Art 11(c). Compare, in relation to UCITS management companies, UCITS investment companies, and investment firms, UCITS Directive (n 2), Arts 7(5)(c), 29(4)(c), and MiFID (n 14), Art 8(c), respectively. 208

  AIFMD, Art 11(d). Compare, in relation to UCITS management companies and investment firms, UCITS Directive (n 2), Art 7(5)(d) and MiFID (n 14), Art 8(c), in fine. See nn 183 and 184. 209

  AIFMD, Art 11(e). Compare, in relation to UCITS management companies, UCITS investment companies, and investment firms, UCITS Directive (n 2), Arts 7(5)(e), 29(4)(d), and MiFID (n 14), Art 8(d), respectively. 210

  AIFMD, Art 11(f). Compare, in relation to UCITS management companies, UCITS investment companies, and investment firms, UCITS Directive (n 2), Arts 7(5)(f), 29(4)(e), and MiFID (n 14), Art 8(e), respectively. 211

  AIFMD, Art 7(5), first paragraph.

212

  AIFMD, Art 7(5), second paragraph. See Art 37(10) in relation to non-EU AIFMs. Compare MiFID (n 14), Art 5(3) which provides that the Member States, not ESMA, must establish a register of all investment firms.

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213

  ESMA’s technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive (November 2011) (ESMA Advice (November 2011)) 39–40; FSA, Discussion Paper DP 12/1, ‘Implementation of the Alternative Investment Fund Managers Directive’ (January 2012) (DP 12/1 (January 2012)) 28, paras 4.1, 4.2. 214

  Cf. FSA, DP 12/1 (n 213) 29, para 4.5.

215

  The best interests of the investors refers to the investors’ interests in their specific capacity as investors of the AIF, and not their individual interests. See AIFMD, recital (12). 216

  AIFMD, Art 12(1)(a), (b). See, for comparable provisions with respect to UCITS management companies and investment firms, UCITS Directive (n 2), Art 14(1)(a), (b) and MiFID (n 14), Arts 19(1) and 25(1), respectively. 217

  AIFMD, Art 12(1)(c). See, for a similar provision, UCITS Directive (n 2), Art 14(1)(c).

218

  AIFMD, Art 12(1)(d). The conflicts of interest duties are further elaborated in AIFMD, Art 14 and Implementing Regulation, Arts 30–37. See, for a treatment of these rules, paras 1.268–1.281. See, for a similar but less detailed provision, UCITS Directive (n 2) Art 14(1) (d). See also MiFID (n 14), Art 13(3). 219

  AIFMD, Art 12(1)(e). See, for a similar provision, UCITS Directive (n 2), Art 14(1)(e).

220

  AIFMD, Art 12(1)(f). See, for a similar provision, Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (OJ 2010 L176/42) (‘UCITS Implementing Directive’), Art 22(1), first paragraph. However, fair treatment duty for UCITS management companies is much stricter than for AIFMs; see further n 234. 221

  Implementing Regulation, Art 16. See, for the legal basis of the implementation rules set out in Implementing Regulation, Ch III, section 1s, AIFMD, Art 12(3), providing that the Commission must adopt, by means of delegated acts in accordance with Art 56 and subject to the conditions of Arts 57 and 58, measures specifying the criteria to be used by the relevant competent authorities to assess whether AIFMs comply with their obligations set out in Art 12(1). 222

  Implementing Regulation, Art 17(1) and recital (39). See, for a similar provision with respect to UCITS management companies, UCITS Implementing Directive (n 220), Art 22(2), which is, however, restricted to preventing malpractices that might reasonably be expected to affect the stability and integrity of the market. 223

  Implementing Regulation, Art 17(2). See for a similar provision UCITS Implementing Directive (n 220), Art 22(4). 224

  Implementing Regulation, Art 18(1). See, for a similar provision, UCITS Implementing Directive (n 220), Art 23(1). 225

  Implementing Regulation, Art 18(2). See, for a similar provision, UCITS Implementing Directive (n 220), Art 23(2). 226

  Implementing Regulation, Art 18(3), (4). See, for a similar provision, UCITS Implementing Directive (n 220), Art 23(3), but without any explicit obligation to regularly review and update the written due diligence policies and procedures.

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227

  Implementing Regulation, Art 19. Similar provisions do not apply to UCITS management companies. This is explained by the fact that UCITS investment companies are as a general rule obliged to invest in liquid assets: see UCITS Directive (n 2), Ch VII. 228

  COM(2010) 284. See Implementing Regulation, recital (42).

229

  Implementing Regulation, Art 21.

230

  Note that Art 9 (management body) of the European Commission’s MiFID II proposal (n 117) provides similar conditions. In addition, it seems likely that in the future similar conditions will apply to UCITS management companies. There seems to be no good reason in principle why similar provisions should not apply to UCITS management companies. 231

  Implementing Regulation, Art 22.

232

  AIFMD, Art 12(1)(f). See, for a similar provision, UCITS Implementing Directive (n 220), Art 22(1), first paragraph. 233

  Implementing Regulation, Art 23(1).

234

  AIFMD, Art 12(1), last sentence and Implementing Regulation, Art 23(2). The UCITS Implementing Directive (n 220) takes a much stricter stance: UCITS management companies must refrain from placing the interests of any group of unit-holders above the interests of any other group of unit-holders: UCITS Implementing Directive (n 220), Art 22(1), second paragraph. This different approach may be explained by the fact that UCITSs are designed as retail products and AIFs as wholesale products. 235

  ESMA Advice (n 213) 51; FSA, DP 12/1 (n 213) 30, paras 4.12, 4.13.

236

  Implementing Regulation, Art 24(1).

237

  These rules are currently the same for UCITS management companies and investment companies: see UCITS Implementing Directive (n 220), Art 29 and Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (OJ 2006 L241/26) (‘MiFID Implementing Directive’), Art 26, respectively. However, Art 24(5) and (6) of the European Commission’s MiFID II proposal (n 117) provides for a further tightening of the inducement rules for investment firms. The proposal intends to ban third party inducements completely in relation to investment firms providing investment advice on an independent basis and those providing individual portfolio management (note that this aspect of the MiFID II proposal is a moving target). 238

  Implementing Regulation, Art 27(1). See, for a similar provision, UCITS Implementing Directive (n 220), Art 25(1). Whenever there is no choice of different execution venues, AIFMs are only subject to Implementing Regulation, Art 27(1), not Art 27(2)–(5). However, AIFMs must be able to demonstrate that there is no choice of different execution venues. See Implementing Regulation, Art 27(7). 239

  Implementing Regulation, Art 27(2). See, for similar provisions with respect to UCITS management companies and investment firms, UCITS Implementing Directive (n 220), Art 25(2) and MiFID (n 14), Art 21(1), respectively. The relative importance of such factors must be determined by reference to the following criteria: (i) the objectives, investment policy, and risks specific to the AIF, as indicated in its rules or articles of association, prospectus, or offering documents; (ii) the characteristics of the order; (iii) the characteristics of the financial instruments or other assets that are the subject of that order; and (iv) the characteristics of the execution venues to which that order can be directed (Implementing Regulation, Art 27(2)(a)–(d); see, for similar provisions, UCITS

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Implementing Directive (n 220), Art 25(2)(a)–(d) and MiFID Implementing Directive (n 237), Art 44(1)). 240

  Implementing Regulation, Art 27(3). See, for similar provisions, UCITS Implementing Directive (n 220), Art 25(3) and MiFID (n 14), Art 21(2). 241

  Implementing Regulation, Art 27(6). See, for similar provisions, UCITS Implementing Directive (n 220), Art 25(5) and MiFID (n 14), Art 21(5). Furthermore, AIFMs must: (i) monitor on a regular basis the effectiveness of their arrangements and policy for the execution of orders with a view to identifying and, where appropriate, correcting any deficiencies; and (ii) review the execution policy on an annual basis, but this should also be carried out whenever a material change occurs that affects the AIFM’s ability to continue to obtain the best possible result for the managed AIFs (Implementing Regulation, Art 27(4), (5); see, for similar provisions, UCITS Implementing Directive (n 220), Art 25(4) and MiFID (n 14), Art 21(4)). 242

  Implementing Regulation, Art 28(1). See, for similar provisions, UCITS Implementing Directive (n 220), Art 26(1) and Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards recordkeeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive (OJ 2006 L 241/1) (‘MiFID Implementation Regulation’), Art 45(1), (2). Whenever there is no choice of different execution venues, AIFMs are only subject to Art 28(1), not Art 28(2)–(4). However, in such a case AIFMs must be able to demonstrate that there is no choice of different execution venues. See Implementing Regulation, Art 28(5). 243

  Implementing Regulation, Art 28(2), first paragraph. See, for similar provisions, UCITS Implementing Directive (n 220), Art 26(2), first paragraph and MiFID Implementing Directive (n 237), Art 45(4), first paragraph. 244

  Implementing Regulation, Art 28(2), second paragraph. See, for similar provisions, UCITS Implementing Directive (n 220), Art 26(2), second paragraph and MiFID Implementing Directive (n 237), Art 45(5). 245

  Implementing Regulation, Art 28(4). See, for a similar provision, UCITS Implementing Directive (n 220), Art 26(4). Furthermore, AIFMs must: (i) monitor on a regular basis the effectiveness of the order-placing policy and, in particular, the quality of the execution by the entities identified in that order-placing policy and, where appropriate, correct any deficiencies; (ii) review the order-placing policy on an annual basis, but this should also be carried out whenever a material change occurs that affects the AIFM’s ability to continue to obtain best execution for the managed AIFs (Implementing Regulation, Art 28(3); see, for similar provisions, UCITS Implementing Directive (n 220), Art 26(2) and MiFID (n 14), Art 45(6)). 246

  Implementing Regulation, Art 25(1). See, for similar provisions with respect to UCITS management companies and investment firms, UCITS Implementing Directive (n 220), Art 27(1), first paragraph and MiFID (n 14), Art 22(1), first paragraph. 247

  Implementing Regulation, Art 25(2)(a). See, for similar provisions with respect to UCITS management companies and investment firms, UCITS Implementing Directive (n 220), Art 27(1)(a), second paragraph and MiFID (n 14), Art 22(1), first paragraph, respectively. 248

  Implementing Regulation, Art 25(2)(b). See, for similar provisions with respect to UCITS management companies and investment firms, UCITS Implementing Directive (n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

220), Art 27(1)(b), second paragraph and MiFID (n 14), Art 22(1), second paragraph, read in conjunction with MiFID Implementing Directive (n 237), Art 47(1)(b), respectively. 249

  Implementing Regulation, Art 25(3). See, for similar provisions with respect to UCITS management companies and investment firms, UCITS Implementing Directive (n 220), Art 27(1), third paragraph and MiFID Implementing Directive (n 237), Art 47(1)(a), read in conjunction with Art 47(2), respectively. 250

  ‘Relevant person’ means any of the following: (a) a director, partner, or equivalent, or manager of the AIFM; (b) an employee of the AIFM, or any other natural person whose services are placed at the disposal and under the control of the AIFM and who is involved in the provision of collective portfolio management services by the AIFM; (c) a natural or legal person who is directly involved in the provision of services to the AIFM under a delegation arrangement to third parties for the purpose of the provision of collective portfolio management by the AIFM (Implementing Regulation, Art 1(2)). 251

  Implementing Regulation, Art 25(4). See, for similar provisions with respect to UCITS management companies and investment firms, UCITS Implementing Directive (n 220), Art 27(2) and MiFID Implementing Directive (n 237), Art 47(3). 252

  Implementing Regulation, recital (46).

253

  Implementing Regulation, Art 29(a). See, for similar provisions, UCITS Implementation Directive, Art 28(1)(a) and MiFID Implementing Directive (n 237), Art 48(1)(a). 254

  Implementing Regulation, Art 29(b). See, for similar provisions, UCITS Implementation Directive (n 220), Art 28(1)(b) and MiFID Implementing Directive (n 237), Art 48(1)(c). 255

  Implementing Regulation, Art 29(2). See, for similar provisions, UCITS Implementing Directive (n 220), Art 30(2) and MiFID Implementing Directive (n 237), Art 48(2). 256

  Implementing Regulation, Art 29(3). See, for similar provisions, UCITS Implementing Directive (n 220), Art 28(3) and MiFID Implementing Directive (n 237), Art 49(1). 257

  Implementing Regulation, Art 29(4), first paragraph. See, for similar provisions, UCITS Implementing Directive (n 220), Art 30(2) and MiFID Implementing Directive (n 237), Art 48(2). 258

  Implementing Regulation, Art 29(4), second paragraph. See, for similar provisions, UCITS Implementing Directive (n 220), Art 28(4), first paragraph, and MiFID Implementing Directive (n 237), Art 49(2), first paragraph. 259

  The essential information must at least include the following information: (i) the identification of the AIFM; (ii) the identification of the investor; (iii) the date and time of receipt of the order; (iv) the date of execution; (v) the identification of the AIF; (vi) the gross value of the order including charges for subscription or the net amount after charges for redemptions (Implementing Regulation, Art 26(3)). See, for a similar provision, UCITS Implementing Directive (n 220), Art 24(2). 260

  Implementing Regulation, Art 26(1). See, for a more or less similar provision, UCITS Implementing Directive (n 220), Art 24(1), first paragraph, read in conjunction with Art 24(3). This obligation does not apply where a third person is obliged to provide the investor with a confirmation concerning the execution of the order and where the confirmation contains the essential information. However, AIFMs must ensure that the third person complies with its obligations (Implementing Regulation, Art 26(2)). See, for a similar provision, UCITS Implementing Directive (n 220), Art 24(1), second paragraph, but without a duty that the UCITS management company must ensure that the other person complies with its obligations.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

261

  Implementing Regulation, Art 26(4). See, for a similar provision, UCITS Implementing Directive (n 220), Art 24(4) . 262

  ‘Prime broker’ means a credit institution, regulated investment firm, or other entity subject to prudential regulation and ongoing supervision, offering services to professional investors primarily to finance or execute transactions in financial instruments as counterparty and which may also provide other services such as clearing and settlement of trades, custodial services, securities lending, customized technology, and operational support facilities (AIFMD, Art 4(1)(af)). See further on prime brokers: M. Berman (ed.), Hedge Funds and Prime Brokers (Risk Books, 2009); D.A. Zetzsche, ‘(Prime) Brokerage’, in Zetzsche, The Alternative Investment Fund Managers Directive (Kluwer Law International, 2012) (n 21) 489 et seq. 263

  Implementing Regulation, Art 20(1).

264

  Implementing Regulation, Art 20(2), opening words, and subparagraph (a).

265

  Implementing Regulation, Art 20(2)(b).

266

  Implementing Regulation, Art 20(2)(c).

267

  Implementing Regulation, Art 20(3).

268

  Implementing Regulation, Art 20(4).

269

  OJ 1997 L84/22.

270

  AIFMD, Art 12(2).

271

  J.K. Galbraith, A short history of financial Euphoria (Penguin, 1993) 2–3. See also pp 18–19 on the perception of ‘something new and exceptional’ as the necessary ingredient for speculative euphoria to arise. 272

  Galbraith, A short history of financial Euphoria (n 271) 5, quoting Friedrich von Schiller. 273

  Galbraith, A short history of financial Euphoria (n 271) 106–7.

274

  Not surprisingly, given the intrusive nature of the remuneration principles, recital (28) states that the ‘provisions on remuneration should be without prejudice to the full exercise of fundamental rights guaranteed by the Treaties, in particular Article 153(5) TFEU, general principles of national contract and labour law, applicable legislation regarding shareholders’ rights and involvement and the general responsibilities of the administrative and supervisory bodies of the institution concerned, as well as the right, where applicable, of social partners to conclude and enforce collective agreements, in accordance with national laws and traditions’. 275

  AIFMD, Annex II, para 2.

276

  AIFMD, Annex II, para 1(a).

277

  AIFMD, Annex II, para 1(b).

278

  AIFMD, Annex II, para 1(c), (d).

279

  AIFMD, Annex II, para 1(e), (f).

280

  AIFMD, Annex II, para 3.

281

  AIFMD, Annex II, para 1(g), (h).

282

  AIFMD, Annex II, para 1(i).

283

  AIFMD, Annex II, para 1(j).

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284

  AIFMD, Annex II, para 1(k).

285

  AIFMD, Annex II, para 1(l)–(o).

286

  AIFMD, Annex II, para 1(p).

287

  AIFMD, Annex II, para 1(q), (r).

288

  AIFMD, recital (25) states that the ‘principles governing remuneration policies should recognise that AIFMs are able to apply those policies in different ways according to their size and the size of the AIFs they manage, their internal organisation and the nature, the scope and the complexity of their activities’. 289

  ESMA/2013/232, 3 July 2013.

290

  AIFMD, Art 14(1), second paragraph. See, for similar provisions, UCITS Directive (n 2), Art 12(1)(b) and MiFID (n 14), Art 13(3). 291

  AIFMD, Art 14(1), first paragraph (see also Art 12(1)(d), on which see para 1.212). For a similar (but less detailed) provision, see UCITS Directive (n 2), Art 12(1)(b) and MiFID (n 14), Art 18(1). 292

  ‘Relevant person’ means any of the following: (a) a director, partner, or equivalent, or manager of the AIFM; (b) an employee of the AIFM, or any other natural person whose services are placed at the disposal and under the control of the AIFM and who is involved in the provision of collective portfolio management services by the AIFM; (c) a natural or legal person who is directly involved in the provision of services to the AIFM under a delegation arrangement to third parties for the purpose of the provision of collective portfolio management by the AIFM (Implementing Regulation, Art 1(2)). 293

  Implementing Regulation, Art 30. See, for similar provisions, UCITS Implementing Directive (n 220), Art 17(1) and MiFID Implementing Directive (n 237), Art 21. However, the important difference is that in the case of UCITS and MiFID Implementing Directives these are merely minimum criteria (UCITS Implementing Directive (n 220) Art 27(1), opening words, MiFID Implementing Directive (n 237), Art 21, opening words). Implementing Regulation, Art 30 is based on AIFMD, Art 14(4)(a), providing that the Commission must adopt, by means of delegated acts in accordance with Art 56 and subject to the conditions of Arts 57 and 58, measures specifying the types of conflicts of interest. 294

  AIFMD, Art 14(1), last paragraph.

295

  Implementing Regulation, Art 31(1), first paragraph. See, for similar provisions, UCITS Implementing Directive (n 220) Art 18(1), first paragraph and MiFID Implementing Directive (n 237), Art 22(1), first paragraph. 296

  Implementing Regulation, Art 31(1), second paragraph, based on AIFMD, Art 14(4)(b). See, for similar provisions, UCITS Implementing Directive (n 220), Art 18(1), second paragraph and MiFID Implementing Directive (n 237) Art 22(1), second paragraph. 297

  Implementing Regulation, Art 31(2)(a), based on AIFMD, Art 14(4)(b). See, for similar provisions, UCITS Implementing Directive (n 220), Art 18(2)(a) and MiFID Implementing Directive (n 237), Art 22(2)(a), but both without any reference to activities carried out by (sub-) delegates, external valuers, and counterparties. 298

  Implementing Regulation, Art 32(2)(b), based on AIFMD, Art 14(4)(b). See, for similar provisions, UCITS Implementing Directive (n 220), Art 18(2)(b) and MiFID Implementing Directive (n 237), Art 22(2)(b). 299

  ‘Relevant person’ means any of the following: (a) a director, partner, or equivalent, or manager of the AIFM; (b) an employee of the AIFM, or any other natural person whose services are placed at the disposal and under the control of the AIFM and who is involved in the provision of collective portfolio management services by the AIFM; (c) a natural or legal person who is directly involved in the provision of services to the AIFM under a delegation From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

arrangement to third parties for the purpose of the provision of collective portfolio management by the AIFM (Implementing Regulation, Art 1(2)). 300

  Implementing Regulation, Art 33(1). See, for similar provisions, UCITS Implementing Directive (n 220), Art 19(1) and MiFID Implementing Directive (n 237), Art 22(3), first paragraph. Implementing Regulation, Art 34(2) provides a list of procedures and measures to be adopted that must be included where necessary and appropriate for the AIFM to ensure the requisite degree of independence: (a) effective procedures to prevent or control the exchange of information between relevant persons engaged in collective portfolio management activities or other activities pursuant to AIFMD, Art 6(2), (4) involving a risk of conflicts of interests where the exchange of information may harm the interest of one or more AIFs or its investors; (b) the separate supervision of relevant persons whose principal functions involve carrying out collective portfolio management activities on behalf of, or providing services to, clients or investors, whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the AIFM; (c) the removal of any direct link between the remuneration of relevant persons principally engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where conflicts of interests may arise in relation to those activities; (d) measures to prevent or restrain any person from exercising inappropriate influence over the way in which a relevant person carries out collective portfolio management activities; (e) measures to prevent or control the simultaneous or sequential involvement of a relevant person in separate collective portfolio management activities or other activities pursuant to AIFMD, Art 6(2), (4) where such involvement may impair the proper management of conflicts of interest. However, where the adoption or application of one or more of those measures and procedures does not ensure the requisite degree of independence, the AIFM must adopt such alternative or additional measures and procedures as are necessary and appropriate for those purposes (Implementing Regulation, Art 34(2), in fine). See, for similar provisions, UCITS Implementing Directive (n 220), Art 19(2) and MiFID Implementing Directive (n 237), Art 22(3), second paragraph. ‘Relevant person’ means any of the following: (a) a director, partner or equivalent, or manager of the AIFM; (b) an employee of the AIFM, or any other natural person whose services are placed at the disposal and under the control of the AIFM and who is involved in the provision of collective portfolio management services by the AIFM; (c) a natural or legal person who is directly involved in the provision of services to the AIFM under a delegation arrangement to third parties for the purpose of the provision of collective portfolio management by the AIFM (Implementing Regulation, Art 1(2)). 301

  Implementing Regulation, Art 34. See, for a similar provision, UCITS Implementing Directive (n 220), Art 20(2). However, unlike an AIFM, a UCITS management company must report these situations to investors by any appropriate durable medium and give reasons for its decision (UCITS Implementing Directive (n 220), Art 20(3)). 302

  Implementing Regulation, Art 35. See, for a similar provision, UCITS Implementing Directive (n 220), Art 20(1). However, unlike Implementing Regulation, Art 35(2), Art 20(1) of the UCITS Implementing Directive (n 220) does not prescribe that senior management must receive on a frequent basis, and at least annually, written reports on the relevant activities. 303

  Implementing Regulation, Art 14(2). See, for a similar provision, MiFID (n 14), Art 18(2). The information to be disclosed to investors must be provided in a durable medium or by means of a website (Implementing Regulation, Art 36(1)). Where the information is provided by means of a website and is not addressed personally to the investor, the following conditions must be satisfied: (a) the investor has been notified of the address of the website and the place on the website where the information may be accessed, and has consented to the provision of the information by such means; (b) the information must be up to date; and (c) the information must be accessible continuously by means of that website From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

for such period of time as the investor may reasonably need to inspect it (Implementing Regulation, Art 36(2)). In the case of MiFID (n 14), the disclosure can only be made on a durable medium: see MiFID Implementing Directive (n 237), Art 22(4). 304

  Implementing Regulation, Art 32, based on AIFMD, Art 14(4)(b). Note that the redemption policy must be in accordance with AIFMD, Art 14(1); on which, see paras 1.268–1.269. 305

  ‘Prime broker’ means a credit institution, a regulated investment firm, or another entity subject to prudential regulation and ongoing supervision, offering services to professional investors primarily to finance or execute transactions in financial instruments as counterparty and which may also provide other services such as clearing and settlement of trades, custodial services, securities lending, customized technology, and operational support facilities (AIFMD, Art 4(1)(af)). See, further on prime brokers: Mark Berman (ed.), Hedge Funds and Prime Brokers (2nd edn, Risk Books, 2009). 306

  Implementing Regulation, Art 14(3), first paragraph.

307

  Implementing Regulation, Art 14(3), second paragraph.

308

  Implementing Regulation, Art 37(1). See, for a similar provision, UCITS Implementing Directive (n 220), Art 21(1). 309

  Implementing Regulation, Art 37(2). See, for a similar provision, UCITS Implementing Directive (n 220), Art 21(2). 310

  Implementing Regulation, Art 37(3). See, for a similar provision, UCITS Implementing Directive (n 220), Art 21(3). However, unlike AIFMs, UCITS management companies must make a summary description of the strategies available to investors even without a request. 311

  See AIFMD, recitals (2), (3), (92).

312

  AIFMD, Art 15(1) and Implementing Regulation, Art 39.

313

  AIFMD, Art 15(1) and Implementing Regulation, Arts 42, 43, which provide minimum independence and conflict management requirements. 314

  See UCITS Implementing Directive (n 220), Art 12.

315

  AIFMD, Art 15(2) and Implementing Regulation, Art 38.

316

  AIFMD, Art 15(2) and Implementing Regulation, Art 45(1).

317

  Implementing Regulation, Art 40(3)(a).

318

  Implementing Regulation, Art 41, which contains a number of common sense requirements that most operators of AIFs should already have adhered to in practice before the AIFMD came into force. 319

  AIFMD, Art 15(3).

320

  Implementing Regulation, Art 44. These matters must be addressed in the risk management policy: Implementing Regulation, Art 40(2). 321

  AIFMD, Art 25(3).

322

  AIFMD, Art 15(4). This must be set out in the risk management policy: Implementing Regulation, Art 40(3)(d). 323

  Implementing Regulation, Art 47 (monitoring and managing liquidity risk) sets standards for the liquidity management system and procedures. Importantly, Art 47(1)(c) requires an AIFM that invests in another fund to monitor the liquidity policies of the other fund’s manager.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

324

  AIFMD, Art 16(1). Article 48 (liquidity management limits and stress tests) sets standards for the stress tests. 325

  Implementing Regulation, Art 46.

326

  AIFMD, Art 16(2).

327

  Implementing Regulation, Art 49(2).

328

  Implementing Regulation, Art 47(1)(e).

329

  Banking Directive, Art 4(1)(36). Article 4(1) (39) defines ‘tranche’ as a ‘contractually established segment of the credit risk associated with an exposure or number of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in each other such segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments’. 330

  Regulation (EC) No 24/2009 of the European Central Bank of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions (ECB/2008/30). 331

  See Lodewijk Van Setten, The Law of Institutional Investment Management (Oxford University Press, 2009) paras 4.70–4.75. In a basic programme, the receivables held by the SSPE and the payments due under the notes issued against those assets match, so that the funding of the payments due under the issued debt securities is covered. These securities are called ‘collateralized loan obligations’ (CLOs), ‘collateralized mortgage obligations’ (CMOs), or ‘collateralized bond obligations’ or (CBOs), in each case depending on the type of asset that is securitized through the programme. If the scheme securitizes liquid assets, such as tradable corporate loans in a CLO, the scheme may include the appointment of an investment manager who is charged with managing the securitized portfolio of loans in accordance with an investment objective. 332

  The reference to tranching being achieved through the derivatives is not necessarily accurate. The tranching is achieved through the terms of the note programme, as these apply between the SSPE and the note holders. The definition is correct to note that the ‘synthetic’ aspect is the fact that the reference portfolio is not actually transferred to the SSPE, but remains with the originator. Rather, economic exposure is transferred through swap transactions between the originator and the SSPE. 333

  Implementing Regulation, Art 50. The definition of ‘securitisation’ as used in the Banking Directive is discussed in para 1.300. Article 4(1)(40), (1)(41), and (1)(43) of the Banking Directive, respectively, define: ‘securitisation position’ as ‘an exposure to a securitisation’; ‘originator’ as ‘either of the following: (a) an entity which, either itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposure being securitised; or (b) an entity which purchases a third party’s exposures onto its balance sheet and then securitises them’; and ‘sponsor’ as a ‘credit institution other than an originator credit institution that establishes and manages an asset backed commercial paper programme or other securitisation scheme that purchases exposures from third party entities’. 334

  Implementing Regulation, Art 51(1).

335

  Institutions listed in the first subparagraph of Art 122a(3) of the Banking Directive: see Implementing Regulation, Art 51(2).

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336

  The monitoring must include, to the extent relevant, the exposure type, the percentage of loans more than 30, 60, and 90 days past due, default rates, prepayment rates, loans in foreclosure, collateral type and occupancy, frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, and frequency distribution of loan to value ratios with bandwidths that facilitate adequate sensitivity analysis: see Implementing Regulation, Art 53(2), second paragraph. 337

  Implementing Regulation, Art 59.

338

  Implementing Regulation, Art 58.

339

  Implementing Regulation, Art 57.

340

  Implementing Regulation, Art 63.

341

  Implementing Regulation, Arts 64, 66.

342

  Implementing Regulation, Arts 65, 66.

343

  Art 60.

344

  Implementing Regulation, Arts 61, 62.

345

  See para 1.104.

346

  AIFMD, Art 19(1), (2). Implementing Regulation, Arts 67–74 set out technical standards to which the valuation procedures must adhere, including regarding the use of models, consistency of application, periodic reviews, and frequency of valuation. 347

  AIFMD, Art 19(3).

348

  AIFMD, Art 19(4).

349

  AIFMD, Art 19(5).

350

  AIFMD, Art 19(6).

351

  AIFMD, Art 19(7).

352

  AIFMD, Art 19(9).

353

  See paras 1.13–1.22.

354

  FSA, DP 12/1 (n 213) 37, paras 4.42–4.43.

355

  AIFMD, recital (30).

356

  AIFMD, recital (31).

357

  Cf. FSA, DP 12/1 (n 213) 37–8, para 4.45. See also, on delegation, T. Partsch and J. Mullmaier, ‘Delegation’, in Zetzsche, The Alternative Investment Fund Managers Directive (Kluwer Law International, 2012) (n 21) 217 et seq. 358

  AIFMD, Art 20(1), first sentence. Cf. UCITS Directive (n 2), Art 13(1)(a).

359

  AIFMD, Art 20(1)(a).

360

  Implementing Regulation, Art 76(1).

361

  Implementing Regulation, Art 76(2).

362

  Implementing Regulation, Art 75(d).

363

  Implementing Regulation, Art 78(h).

364

  AIFMD, Art 20(1)(b). See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(a). In order to fulfil these requirements, the following criteria must be met: (a) a delegate must have sufficient resources and must employ sufficient personnel with the skills, knowledge, and expertise necessary for the proper discharge of the tasks delegated to it and have an appropriate organizational structure supporting the performance of the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

delegated tasks (Implementing Regulation, Art 77(1)); (b) persons who effectively conduct the activities delegated by the AIFM must have sufficient experience, appropriate theoretical knowledge and appropriate practical experience in the relevant functions. Their professional training and the nature of the functions they performed in the past must be appropriate for the conduct of the business (Implementing Regulation, Art 77(2)); (c) persons who effectively conduct the business of the delegate are not deemed of sufficiently good repute if they have any negative records relevant both for the assessment of good repute and for the proper performance of the delegated tasks or if there is other relevant information which affects their good reputation. Such negative records include but are not limited to criminal offences, judicial proceedings, or administrative sanctions relevant for the performance of the delegated tasks. Special attention must be given to any offences relating to financial activities, including but not limited to obligations relating to the prevention of money laundering, dishonesty, fraud or financial crime, bankruptcy, or insolvency. Other relevant information includes information such as that indicating that the person is not trustworthy or honest (Implementing Regulation, Art 77(3), first paragraph). Where the delegate is regulated in respect of its professional services within the Union, factors referred to in Art 77(3), first paragraph are deemed to be satisfied when the relevant supervisory authority has reviewed the criterion of ‘good repute’ within the authorization procedure unless there is evidence to the contrary (Implementing Regulation, Art 77(3), second paragraph). 365

  AIFMD, Art 29(1)(c). In a similar vein, Art 13(1)(c) of the UCITS Directive (n 2) provides that in the case of delegation of investment management, the mandate must be given only to undertakings which are authorized or registered for the purpose of asset management and subject to prudential supervision. Unlike the UCITS regime, the AIFMD regime specifies that the following entities are deemed as being authorized or registered for the purpose of asset management and subject to supervision: (a) UCITS management companies authorized under the UCITS Directive (n 2); (b) investment firms authorized under MiFID (n 14) to perform portfolio management; (c) credit institutions authorized under Directive 2006/48/EC having the authorization to perform portfolio management under MiFID (n 14); and (d) external AIFMs authorized under the AIFMD. See Implementing Regulation, Art 78(2). 366

  AIFMD, Art 29(1)(d). Similarly UCITS Directive (n 2), Art 13(1)(d) and MiFID Implementing Directive (n 237), Art 15(1). Unlike the UCITS and MiFID regimes, the AIFMD regime specifies that the following conditions must be fulfilled: (i) a written arrangement must exist between the competent authorities of the home Member State of the AIFM and the supervisory authorities of the undertaking to which delegation is conferred; (ii) with respect to the undertaking to which delegation is conferred, the arrangement referred to in (i) allows the competent authorities to: (a) obtain on request the relevant information necessary to carry out their supervisory tasks as provided for in AIFMD; (b) obtain access to the documents relevant for the performance of their supervisory duties maintained in the third country; (c) carry out on-site inspections on the premises of the undertaking to which functions were delegated. The practical procedures for on-site inspections must be detailed in the written arrangement; (d) receive as soon as possible information from the supervisory authority in the third country for the purpose of investigating apparent breaches of the requirements of the AIFMD and its implementing measures; and (e) cooperate in enforcement in accordance with the national and international law applicable to the supervisory authority of the third country and the EU competent authorities in cases of breach of the requirements of AIFMD and its implementing measures and relevant national law. See Implementing Regulation, Art 78(3).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

367

  Implementing Regulation, Art 75(i).

368

  AIFMD, Art 20(1)(e). See, for a similar provision, UCITS Directive (n 2), Art 13(1)(b). However, unlike the UCITS regime, the AIFMD regime specifies that a delegation prevents the effectiveness of supervision of the AIFM where: (a) the AIFM, its auditors, and the competent authorities do not have effective access to data related to the delegated functions and to the business premises of the delegate, or the competent authorities are not able to exercise those rights of access; (b) the delegate does not cooperate with the competent authorities of the AIFM in connection with the delegated functions; and (c) the AIFM does not make available on request to the competent authorities all information necessary to enable authorities to supervise the compliance of the performance of the delegated functions with the requirements of the AIFMD and its implementing measures. See Implementing Regulation, Art 78. 369

  Implementing Regulation, Art 75(c). See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(1)(c), (d). 370

  See, for a similar provision, UCITS Directive (n 2), Art 13(1)(h).

371

  See, for a similar provision, UCITS Directive (n 2), Art 13(1)(f).

372

  See, for a similar provision, UCITS Directive (n 2), Art 13(1)(g).

373

  See, for a similar provision, UCITS Directive (n 2), Art 13(1)(g), second part. See also MiFID Implementing Directive (n 237), Art 14(2)(g). 374

  AIFMD, Art 20(1)(f), first paragraph. See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2), first paragraph. 375

  AIFMD, Art 20(1)(f), second paragraph.

376

  Implementing Regulation, Art 75(e), first sentence. See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(b). 377

  Implementing Regulation, Art 75(j). See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(f). 378

  Implementing Regulation, Art 75(e), second sentence. See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(d). 379

  Implementing Regulation, Art 75(f), first sentence. See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(c). 380

  Implementing Regulation, Art 75(f), second sentence. See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(e). 381

  Implementing Regulation, Art 75(f), third sentence onwards.

382

  Implementing Regulation, Art 75(g).

383

  Implementing Regulation, Art 75(k). See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(j). 384

  Implementing Regulation, Art 75(l). See, for a similar provision, MiFID Implementing Directive (n 237), Art 14(2)(k). 385

  AIFMD, Art 20(2). Similarly, UCITS Directive (n 2), Art 13(1)(e), but without the escape provided by AIFMD, Art 20(2)(b) (‘unless. . .’). In a similar vein, see Art 25(2), second paragraph of the European Commission’s proposal for UCITS V, 3 July 2012 (COM(2012) 350 final). 386

  See Implementing Regulation, Art 80(1). Such specification is absent in the UCITS regime.

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387

  See Implementing Regulation, Art 80(2). Such specification is absent in the UCITS regime, because under that regime the UCITS management company is simply not entitled to delegate investment management to undertakings whose interests may conflict with those of the UCITS management company or the unit-holders, even if such entity has functionally and hierarchically separated the performance of its investment management from other potentially conflicting tasks. See UCITS Directive (n 2), Art 13(1)(e). 388

  Implementing Regulation, Art 80(3). A similar provision is absent in the UCITS regime.

389

  AIFMD, Art 20(3), first part. For a similar provision, see UCITS Directive (n 2), Art 13(2), first sentence, but without any explicit reference to sub-delegation. 390

  Implementing Regulation, Art 75(a).

391

  Implementing Regulation, Art 75(b). Article 14(1)(b) of the MiFID Implementing Directive (n 237) similarly provides that the relationship and obligations of the investment firm towards its clients under MiFID must not be altered. 392

  See paras 1.13–1.22.

393

  AIFMD, Art 20(3), second part. See, for a similar provision, UCITS Directive (n 2), Art 13(2), second sentence. 394

  Implementing Regulation, Art 82(1)(a)–(d). A similar further specification is not provided in the UCITS regime. 395

  Implementing Regulation, Art 82(d), second sentence onwards. A similar further specification is not provided in the UCITS regime. The Commission must monitor, in the light of market developments, the application of Implementing Regulation, Art 82. The Commission must review the situation after two years and, if necessary, take appropriate measures to further specify the conditions under which the AIFM is deemed to have delegated its functions to the extent that it becomes a letter-box entity and can no longer be considered to be manager of the AIF (Implementing Regulation, Art 82(2)). ESMA may issue guidelines to ensure a consistent assessment of delegation structures across the Union (Implementing Regulation, Art 82(3)). 396

  AIFMD, Art 20(4)(a). A sub-delegation becomes effective where the AIFM demonstrates its consent to it in writing. A general consent given in advance by the AIFM is not deemed consent under AIFMD, Art 20(4)(a). See AIFMD, Art 81(1). 397

  AIFMD, Art 20(4)(b). The notification must contain (i) details of the delegate, (ii) the name of the competent authority where the sub-delegate is authorized or registered, (iii) the delegated functions, (iv) the AIFs affected by the sub-delegation, (v) a copy of the written consent by the AIFM, and (vi) the intended effective date of the sub-delegation. See Implementing Regulation, Art 81(2). 398

  AIFMD, Art 20(4)(c).

399

  AIFMD, Art 20(6).

400

  AIFMD, Art 20(5), first paragraph.

401

  AIFMD, Art 20(5), second paragraph.

402

  On the Madoff point, see also ‘The Depositary’, in Zetzsche, The Alternative Investment Fund Managers Directive (n 21) 409 ff. 403

  AIFMD, recital (33).

404

  AIFMD, Art 21(7).

405

  AIFMD, Art 21(8).

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406

  AIFMD, Art 21(9).

407

  AIFMD, Art 21(1). In a similar vein, Art 22(1) of the European Commission’s proposal for UCITS V (n 385). 408

  AIFMD, recital (11).

409

  Implementing Regulation, Art 83, opening words.

410

  AIFMD, Art 21(2), first sentence and Implementing Regulation, Art 83(3). In a similar vein Art 22(2), first sentence of the European Commission’s proposal for UCITS V (n 385). 411

  Implementing Regulation, Art 83(5). See, for a similar provision, UCITS Implementing Directive (n 220), Art 36. 412

  Implementing Regulation, Art 83(2), (3). See, for similar provisions, UCITS Directive (n 2), Arts 23(5) and 33(5). 413

  Implementing Regulation, Art 83(1)(a).

414

  Implementing Regulation, Art 83(1)(b). Cf. UCITS Implementing Directive (n 220), Art 30(a). 415

  Implementing Regulation, Art 83(c). Cf. UCITS Implementing Directive (n 220), Art 32(c). 416

  Implementing Regulation, Art 83(d). Cf. UCITS Implementing Directive (n 220), Art 33.

417

  Implementing Regulation, Art 83(e). See, similarly, UCITS Implementing Directive (n 220), Art 31(1)(b) and (2). 418

  AIFMD, Art 21(2), second sentence. In a similar vein, see Art 22(2), second sentence of the European Commission’s proposal for UCITS V (n 385). 419

  Implementing Regulation, Art 83(4). See, for a similar provision, UCITS Implementing Directive (n 220), Art 35. 420

  Implementing Regulation, Art 83(f). See, for a similar provision, UCITS Implementing Directive (n 220), Art 30(c). 421

  Implementing Regulation, Art 83(g). Cf. UCITS Implementing Directive (n 220), Art 30(d). 422

  Implementing Regulation, Art 83(h).

423

  Implementing Regulation, Art 83(i). See, for a similar provision, UCITS Implementing Directive (n 220), Art 30(b). 424

  Implementing Regulation, Art 83(j). See, for a similar provision, UCITS Implementing Directive (n 220), Art 31(1)(a). 425

  Implementing Regulation, Art 83(k).

426

  Implementing Regulation, Art 83(l).

427

  Implementing Regulation, Art 83(m). See, for a similar provision, UCITS Implementing Directive (n 220), Art 31(c). 428

  Implementing Regulation, Art 83(n).

429

  Implementing Regulation, Art 83(o).

430

  Implementing Regulation, Art 83(p).

431

  AImplementing Regulation, Art 83(q). See, for a similar provision, UCITS Implementing Directive (n 220), Art 39(e).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

432

  Implementing Regulation, Art 83(r). See, for a similar provision, UCITS Implementing Directive (n 220), Art 30(f). 433

  Implementing Regulation, Art 83(6). Article 34 of the UCITS Implementing Directive (n 220) provides that the agreement should specify that the law of the UCITS home Member State applies to the agreement. 434

  AIFMD, Art 21(3), first paragraph, AIFMD. See also AIFMD, recital (34). The UCITS Directive (n 2) contains similar provisions: see Art 33(2) and (3). See, in a similar vein, Art 23(2) of the European Commission’s proposal for UCITS V (n 385). 435

  AIFMD, Art 21(3), second paragraph. See, further, AIFMD, Art 21(6). See also AIFMD, recital (34), in fine. The appointment of a depositary established in a third country must, at all times, be subject to the following conditions. (i) the competent authorities of the Member States in which the units or shares of the non-EU AIF are intended to be marketed, and, in so far as different, of the home Member State of the AIFM, have signed cooperation and exchange of information arrangements with the competent authorities of the depositary. (ii) The depositary is subject to effective prudential regulation, including minimum capital requirements and supervision, which have the same effect as Union law and are effectively enforced. (iii) The third country where the depositary is established is not listed as a Non-Cooperative Country and Territory by the Financial Action Task Force (FATF). (4) The Member States in which the units or shares of the non-EU AIF are intended to be marketed, and, in so far as different, the home Member State of the AIFM, have signed an agreement with the third country where the depositary is established which fully complies with the standards laid down in Art 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters including any multilateral tax agreements. (iv) The depositary must by contract be liable to the AIF or to the investors of the AIF, consistently with AIFMD, Art 21(12) and (13) (see paras 1.445–1.461), and must expressly agree to comply with Art 21(11) (see paras 1.429– 1.442). See AIFMD, Art 21(6), first paragraph and recital (35). AIFMD, Art 21(6)(b) (effectiveness of prudential regulation and supervision applicable to a depositary in a third country, whether it has the same effect as that provided for under Union law and its effective enforcement) is specified in more detail in the Implementing Regulation, Art 84. Where a competent authority of another Member State disagrees with the assessment made on the application of the points set out under (1), (3) or (5) by the competent authorities of the home Member State of the AIFM, the competent authorities concerned may refer the matter to ESMA, which may act in accordance with the powers conferred on it under ESMA Regulation (n 29), Art 19: AIFMD, Art 21(6), second paragraph. See also recital (35). 436

  AIFMD, Art 21(3), last paragraph. See also AIFMD, recital (34). The depositary functions should be part of professional or business activities in respect of which the appointed entity is subject to mandatory professional registration recognized by law or to legal or regulatory provisions or rules of professional conduct and can provide sufficient financial and professional guarantees to enable it to perform the relevant depositary functions and meet the commitments inherent in those functions effectively. This takes account of current practice for certain types of closed-ended funds: Art 21(3), last paragraph. See also recital (34). 437

  AIFMD, Art 21(4)(a).

438

  AIFMD, Art 21(4)(b). See also recital (43).

439

  See Implementing Regulation, Art 91.

440

  AIFMD, Art 21(5)(a). See also recital (35).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

441

  AIFMD, Art 21(5)(b). See also recital (35).

442

  AIFMD, Art 21(7), first paragraph. In a similar vein, see Art 22(4), opening words of the European Commission’s proposal for UCITS V (n 385). 443

  AIFMD, Art 21(7), first paragraph. See also Implementing Regulation, Art 87. In a similar vein, see Art 22(4), opening words of the European Commission’s proposal for UCITS V (n 385). 444

  Where the cash accounts are opened in the name of the depositary acting on behalf of the AIF, no cash of the entity referred to under points (1)–(4), and none of the depositary’s own cash may be booked on such accounts: AIFMD, Art 21(7), second paragraph. In a similar vein, see Art 22(4), last paragraph of the European Commission’s proposal for UCITS V (n 385). 445

  Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions (OJ 2000 L126/1). 446

  Provided that such entity is subject to effective prudential regulation and supervision which have the same effect as Union law and are effectively enforced in accordance with the principles set out in Art 16 of the MiFID Implementing Directive (n 237) (safeguarding of client financial instruments and funds). See AIFMD, Art 21(7), first paragraph. See also AIFMD, recital (37) and Implementing Regulation, Art 86(a). See, for similar provisions, Art 22(4)(a)–(c), of the European Commission’s proposal for UCITS V (n 385). 447

  Implementing Regulation, Art 86(b).

448

  Implementing Regulation, Art 86(c).

449

  Implementing Regulation, Art 86(d).

450

  Implementing Regulation, Art 86(e).

451

  Implementing Regulation, Art 86(f).

452

  Implementing Regulation, Art 85(1).

453

  Implementing Regulation, Art 85(2), opening words. To that end, and to have a clear overview of all the AIF’s cash flows, at least the following conditions must be fulfilled: (a) the depositary must be informed, upon its appointment, of all existing cash accounts opened in the name of the AIF, or in the name of the AIFM acting on behalf of the AIF; (b) the depositary must be informed at the opening of any new cash account by the AIF or the AIFM acting on behalf of the AIF; and (c) the depositary must be provided with all information related to the cash accounts opened at a third party entity, directly by those third parties. See Implementing Regulation, Art 85, opening words, and under (a)–(c). 454

  AIFMD, Art 21(8)(a)(i), first part. Similarly, see Art 22(5)(a)(i), first part of the European Commission’s proposal for UCITS V (n 385). Financial instruments belonging to the AIF or the AIFM acting on behalf of the AIF which are not able to be physically delivered to the depositary must be included in the scope of the depositary’s custody duties if they fulfil all of the following criteria: (a) they are transferable securities including those which embed derivatives as referred to in Art 51(3), final sub-paragraph of the UCITS Directive (n 2) and Art 10 of Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions (OJ 2007 L79/11), money market instruments, or units of collective investment undertakings; (b) they are capable of being registered or held in an account directly or indirectly in the name of the depositary. See Implementing Regulation, Art 88(1). Financial instruments which, in accordance with applicable national law, are only directly registered in the name of the AIF

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with the issuer itself or its agent, such as a registrar or a transfer agent, will not be held in custody. See Implementing Regulation, Art 88(2). 455

  AIFMD, Art 21(8)(a)(i), second part. In a similar vein, see Art 22(5)(a)(i), second part of the European Commission’s proposal for UCITS V (n 385). Financial instruments belonging to the AIF or the AIFM acting on behalf of the AIF which are able to be physically delivered to the depositary must always be included in the scope of custody duties of the depositary. See Implementing Regulation, Art 88(3). 456

  AIFMD, Art 21(8)(a)(ii). See also Implementing Regulation, Art 89(1)(a). In a similar vein, see Art 22(5)(a)(ii) of the European Commission’s proposal for UCITS V (n 385). 457

  Implementing Regulation, Art 89(1)(b).

458

  Implementing Regulation, Art 89(1)(c).

459

  Implementing Regulation, Art 89(1)(d).

460

  Implementing Regulation, Art 89(1)(e).

461

  Implementing Regulation, Art 89(1)(f).

462

  Implementing Regulation, Art 89(1)(g).

463

  Implementing Regulation, Art 89(3).

464

  AIFMD, Art 21(8)(b). In a similar vein, see Art 22(5)(b) of the European Commission’s proposal for UCITS V (n 385). 465

  Implementing Regulation, Art 90(1).

466

  Implementing Regulation, Art 90(2)(a).

467

  Implementing Regulation, Art 90(2)(b).

468

  Implementing Regulation, Art 90(2)(c)(i), (ii). For the purpose of Art 90(2)(c)(ii), the depositary must: (i) ensure that there are procedures in place to prevent registered assets being assigned, transferred, exchanged, or delivered without the depositary or its delegate having been informed of such transactions; or (ii) have access without undue delay to documentary evidence of each transaction and positions from the relevant third party. The AIFM must ensure that the relevant third party provides the depositary without undue delay with certificates or other documentary evidence every time there is a sale or acquisition of assets or a corporate action resulting in the issue of financial instruments, and at least once a year. See the Implementing Regulation, Art 90(2)(c), last paragraph. 469

  Implementing Regulation, Art 90(3).

470

  Implementing Regulation, Art 90(4).

471

  Implementing Regulation, Art 90(5).

472

  AIFMD, Art 21(9)(a). See, for a similar provision, Art 32(3)(a) of the UCITS Directive (n 2); see also Art 22(3)(a) of the European Commission’s proposal for UCITS V (n 385). See Implementing Regulation, Art 93 for a further specification of AIFMD, Art 21(9)(a). 473

  AIFMD, Art 21(9)(b). See, for further specifications, Implementing Regulation, Art 94. In a similar vein, see Art 22(3)(b) of the European Commission’s proposal for UCITS V (n 385). 474

  AIFMD, Art 21(9)(c). See, for further specifications, Implementing Regulation, Art 95. In a similar vein, see Art 22(3)(c) of the European Commission’s proposal for UCITS V (n 385).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

475

  AIFMD, Art 21(9)(d). See, for a similar provision, UCITS Directive (n 2), Art 32(3)(b)(f). See Implementing Regulation, Art 96 for a further specification of AIFMD, Art 21(9)(d). In a similar vein, see Art 22(3)(d) of the European Commission’s proposal for UCITS V (n 385). 476

  AIFMD, Art 21(9)(e). See, for a similar provision, Art 32(3)(c) of the UCITS Directive (n 2); see also Art 22(3)(e) of the European Commission’s proposal for UCITS V (n 385). See Implementing Regulation, Art 97 for a further specification of AIFMD, Art 21(9)(e). Note that the duties set out in Art 21(9) are in general terms further specified in Implementing Regulation, Art 92. In summary, this provision provides that: (i) the depositary must make a risk assessment of the AIF’s strategy and the AIF’s organization with a view to defining oversight procedures; (ii) the depositary must perform ex-post controls and verifications of relevant processes and procedures; (iii) the depositary establishes clear and comprehensive escalation procedures; and (iv) the AIFM provides the depositary with all relevant information. 477

  AIFMD, Art 21(10), first paragraph. See also AIFMD, recital (38).

478

  AIFMD, Art 21(10), second paragraph.

479

  AIFMD, Art 21(10), third paragraph.

480

  AIFMD, Art 21(11), first paragraph (delegation safe-keeping); AIFMD, Art 21(11), fourth paragraph (sub-delegation safe-keeping). In a similar vein, see Art 22(7) of the European Commission’s proposal for UCITS V (n 385). 481

  See also Wymeersch, ‘The European Alternative Investment Fund Management Directive’ (n 64) 464. 482

  AIFMD, recital (39).

483

  AIFMD, recital (40).

484

  OJ 1998 L166/45.

485

  AIFMD, Art 21(11), fifth paragraph and recital (41). In a similar vein, see Art 22(7), sixth paragraph of the European Commission’s proposal for UCITS V (n 385). 486

  AIFMD, recital (42).

487

  AIFMD, Art 21(11)(a). In a similar vein, see Art 22(7), second paragraph, (a) of the European Commission’s proposal for UCITS V (n 385). 488

  AIFMD, Art 21(11)(b). In a similar vein, see Art 22(7), second paragraph, (b) of the European Commission’s proposal for UCITS V (n 385). 489

  AIFMD, Art 21(11)(c). This due diligence duty is specified in detail in Implementing Regulation, Art 98. In a similar vein, see Art 22(7), second paragraph, (c) of the European Commission’s proposal for UCITS V (n 385). 490

  AIFMD, Art 21(11)(d)(i). In a similar vein, see Art 22(7), third paragraph, (a) of the European Commission’s proposal for UCITS V (n 385). 491

  AIFMD, Art 21(11)(d)(ii). In a similar vein, see Art 22(7), third paragraph, (b), (c) of the European Commission’s proposal for UCITS V (n 385). 492

  AIFMD, Art 21(11)(d)(iii). See, for a further specification of the segregation obligation, Implementing Regulation, Art 99, applying mutatis mutandis when the third party further delegates safe-keeping functions (Implementing Regulation, Art 99(3)). In a similar vein, see Art 22(7), third paragraph, (d) of the European Commission’s proposal for UCITS V (n 385). 493

  AIFMD, Art 21(11)(d)(iv).

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494

  AIFMD, Art 21(11)(d)(v). In a similar vein, see Art 22(7), third paragraph, (f) of the European Commission’s proposal for UCITS V (n 385). 495

  AIFMD, Art 21(11)(d)(ii). See also para 1.440.

496

  This is true for certain emerging markets. See also Wymeersch, ‘The European Alternative Investment Fund Management Directive’ (n 64) 464. 497

  AIFMD, Art 21(11), third paragraph, (a), (b). In a similar vein, see Art 22(7), fourth paragraph, (a), (b) of the European Commission’s proposal for UCITS V (n 385). 498

  AIFMD, Art 21(11), fourth paragraph. In a similar vein, see Art 22(7), fifth paragraph, (a) of the European Commission’s proposal for UCITS V (n 385). 499

  See UCITS Directive (n 2), Art 24, first paragraph for the liability regime applying to UCITS depositaries: ‘A depositary shall, in accordance with the national law of the UCITS home Member State, be liable to the management company and the unit-holders for any loss suffered by them as a result of its unjustifiable failure to perform its obligations or its improper performance of them’. Cf. UCITS Directive (n 2), Art 34. See also Art 24 of the European Commission’s proposal for UCITS V (n 385). 500

  See paras 1.13–1.22.

501

  AIFMD, Art 21(12), first paragraph. In a similar vein, see Art 24(1), first paragraph of the European Commission’s proposal for UCITS V (n 385). 502

  AIFMD, Art 21(12), second paragraph. In a similar vein, see Art 24(1), second paragraph of the European Commission’s proposal for UCITS V (n 385). 503

  Implementing Regulation, Art 100(1), opening words, read in conjunction with Art 100(5). 504

  Implementing Regulation, Art 100(1)(a).

505

  Implementing Regulation, Art 100(1)(b). There is no loss of a financial instrument held in custody where an AIF is definitively deprived of its right of ownership in respect of a particular instrument, but this instrument is substituted by or converted into another financial instrument or instruments. See Art 100(3). 506

  Implementing Regulation, Art 100(1)(c).

507

  Implementing Regulation, Art 100(4).

508

  Implementing Regulation, Art 100(2).

509

  AIFMD, Art 21(12), second paragraph. In a similar vein, see also Art 24(1), second paragraph, second sentence of the European Commission’s proposal for UCITS V (n 385). 510

  AIFMD, recital (44).

511

  Implementing Regulation, Art 101(1)(a).

512

  Implementing Regulation, Art 101(1)(b).

513

  Implementing Regulation, Art 101(1)(c). This condition may be deemed to be fulfilled when the depositary has ensured that the depositary and the third party to whom the custody of financial instruments held in custody has been delegated have taken all of the following actions: (i) establishing, implementing, applying, and maintaining structures and procedures and insuring expertise adequate and proportionate to the nature and complexity of the assets of the AIF in order to identify in a timely manner and monitor on an ongoing basis external events which may result in a loss of a financial instrument held in custody; (ii) assessing on an ongoing basis whether any of the events identified under (i) presents a significant risk of loss of a financial instrument held in custody; and (iii) informing the AIFM of the significant risks identified and taking appropriate actions, if any, to prevent or mitigate the loss of financial instruments held in custody, where actual or potential external

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events have been identified which are believed to present a significant risk of loss of a financial instrument held in custody. See Implementing Regulation, Art 101(1)(c)(i)–(iii). 514

  Implementing Regulation, Art 101(2).

515

  Implementing Regulation, Art 103(1)(e).

516

  AIFMD, Art 21(12), third paragraph. In a similar vein, see Art 24(1), third paragraph of the European Commission’s proposal for UCITS V (n 385). 517

  AIFMD, Art 21(13), first paragraph. See, similarly, UCITS Directive (n 2), Art 32(2). However, such discharge of liability is not available under the UCITS Directive (n 2). In a similar vein, see also Art 24(2) of the European Commission’s proposal for UCITS V (n 385), again with no possibility of discharge of liability. In the European Commission’s proposal for UCITS V (n 385) this is explained as follows: ‘This strengthening of the liability in case of delegation of custody appears justified in light of the very large investors base and the retail nature of UCITS holders. Introducing a regime with the same contractual possibility for the depositary to be discharged of its liability as it is allowed under AIFM Directive, is not considered to be entirely appropriate. To a similar extent, envisaging that the liability of the depositary could be discharged where assets are transferred to a sub-custodian that does not comply with delegation criteria would also not be appropriate’ (pp 8–9). 518

  AIFMD, Art 21(13)(a).

519

  AIFMD, Art 21(13)(b).

520

  AIFMD, recital (45). In many jurisdictions the express consent of the creditor is required for a transfer of liability. Cf. Wymeersch, ‘The European Alternative Investment Fund Management Directive’ (n 64) 467. It is not clear whether such consent requirement is still permitted in this context. In any event, for investors a discharge would mean an additional burden in that they may have to sue in several jurisdictions, under different legal regimes. See Wymeersch, ‘The European Alternative Investment Fund Management Directive’ (n 64) 467. 521

  AIFMD, Art 21(13)(c).

522

  Implementing Regulation, Art 102(1).

523

  Implementing Regulation, Art 102(2).

524

  Implementing Regulation, Art 102(3).

525

  AIFMD, Art 21(14) and recital (46).

526

  AIFMD, Art 21(15). In a similar vein, see Art 24(5) of the European Commission’s proposal for UCITS V (n 385). 527

  AIFMD, Art 21(16), first sentence. Similarly, see UCITS Directive (n 2), Art 33(4). See also Art 26(a) of the European Commission’s proposal for UCITS V (n 385). 528

  AIFMD, Art 21(16), second sentence.

529

  ESMA Advice (n 213) 217. Cf. FSA, DP 12/1 (n 213) 55, paras 6.1, 6.2. See also on the transparency requirements, D.A. Zetzsche, ‘Investor Information, Disclosure and Transparency’ in Zetzsche, The Alternative Investment Fund Managers Directive (n 21) 333 et seq. 530

  FSA DP 12/1 (n 213) 59, para 6.29.

531

  Implementing Regulation, Art 103.

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532

  AIFMD, Art 22(1), first paragraph, first sentence. In the case of UCITS investment companies the term is four months following the end of the financial year (UCITS Directive (n 2), Art 68(2)(a)). 533

  AIFMD, recital (48).

534

  In the case of a UCITS the annual report must also be provided to investors on request, but always free of charge (UCITS Directive (n 2), Art 75(1)). 535

  AIFMD, Art 22(1), first paragraph, second and third sentences.

536

  AIFMD, Art 22(1), second paragraph.

537

  AIFMD, Art 22(2)(a), further specified in Implementing Regulation, Art 104(1), (3), (4), (5), (6). See, for a similar provision, UCITS Directive (n 2), Art 69(3), further specified (but in less detail as in the AIFMD regime) in Annex I, Sch B, point 1 (statement of assets and liabilities). 538

  AIFMD, Art 22(2)(b), further specified in Implementing Regulation, Art 104(2), (7), and Annex IV. See, for a similar provision, UCITS Directive (n 2), Art 69(3) (but, unlike the AIFMD regime, without any further specification). 539

  AIFMD, Art 22(2)(c). See, for a similar provision, UCITS Directive (n 2), Art 69(3). Article 22(2)(c) is further specified in Implementing Regulation, Art 105. 540

  AIFMD, Art 22(2)(d). This requirement is further specified in Implementing Regulation, Art 106. Article 106(1) defines ‘material changes’ as follows: ‘Any changes in information. . .if there is a substantial likelihood that a reasonable investor, becoming aware of such information, would reconsider its investment in the AIF, including because such information could impact an investor’s ability to exercise its rights in relation to its investment, or otherwise prejudice the interests of one or more investors of the AIF’. 541

  AIFMD, Art 22(2)(e). This requirement is further specified in Implementing Regulation, Art 107. 542

  AIFMD, Art 22(2)(f).

543

  AIFMD, Art 22(3), first paragraph.

544

  OJ 2006 L157/87.

545

  AIFMD, Art 22(3), second paragraph.

546

  AIFMD, Art 22(3).

547

  See UCITS Directive (n 2), Arts 68(1)(a), 69(1), 70–75,UCITS Directive (n 2), Annex I, Sch A; and Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website (OJ 2010 L176/1) (‘UCITS Regulation’), Art 38. See also Wymeersch, ‘The European Alternative Investment Fund Management Directive’ (n 64) 468. 548

  UCITS Directive (n 2), Arts 78–82, specified in detail in the UCITS Regulation (n 547).

549

  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (OJ 2003 L345/64), as amended by Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and 2004/109/EC on the harmonisation of

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transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (OJ 2010 L327/1) (‘Prospectus Directive’). 550

  FSA DP 12/1 (n 213) 55, paras 6.3–6.4.

551

  In the case of UCITS the prospectus must always be provided to investors on request and free of charge (UCITS Directive (n 2), Art 75(1)). 552

  Implementing Regulation, Art 106(1) defines ‘material changes’ as follows: ‘Any changes in information. . .if there is a substantial likelihood that a reasonable investor, becoming aware of such information, would reconsider its investment in the AIF, including because such information could impact an investor’s ability to exercise its rights in relation to its investment, or otherwise prejudice the interests of one or more investors of the AIF’. 553

  AIFMD, Art 23(1), opening words.

554

  AIFMD, Art 23(1)(a).

555

  AIFMD, Art 23(1)(b).

556

  AIFMD, Art 23(1)(c).

557

  AIFMD, Art 23(1)(d).

558

  AIFMD, Art 23(1)(e).

559

  AIFMD, Art 23(1)(f).

560

  AIFMD, Art 23(1)(g).

561

  AIFMD, Art 23(1)(h).

562

  AIFMD, Art 23(1)(i).

563

  AIFMD, Art 23(1)(j). The FSA considers this most likely to be relevant where an AIFM has agreed or proposes to issue units or shares under different terms. This is sometimes facilitated through the use of ‘side letters’ in the case of hedge funds. Side letters generally offer some investors preferential treatment in return for their investment and can include benefits such as reduced fees and waived lock-up or redemption periods. Other forms of preferential treatment might concern more favourable performance or management fees. See FSA DP 12/1 (n 213) 57, para 6.13. 564

  AIFMD, Art 23(1)(k).

565

  AIFMD, Art 23(1)(l).

566

  AIFMD, Art 23(1)(m).

567

  AIFMD, Art 23(1)(n).

568

  AIFMD, Art 23(i)(o).

569

  AIFMD, Art 23(1)(p).

570

  AIFMD, Art 23(2).

571

  AIFMD, Art 23(3).

572

  AIFMD, Art 23(4)(a). This requirement is further specified in Implementing Regulation, Art 108(1), (2). 573

  AIFMD, Art 23(4)(b). This requirement is further specified in Implementing Regulation, Art 108(1), (3). 574

  AIFMD, Art 23(4)(c). These requirements are further specified in Implementing Regulation, Art 108(4), (5).

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575

  AIFMD, Art 23(5)(a). These requirements are further specified in Implementing Regulation, Art 109(1), (2). 576

  AIFMD, Art 23(5)(b). This requirement is further specified in Implementing Regulation, Art 109(1), (3). 577

  See, eg Commission Staff Document SWD (2012) 386 final, ‘Impact Assessment’, 12 (accompanying the draft Implementing Regulation). 578

  ESMA Advice (n 213) 217; FSA DP 12/1 (n 213) 61, para 6.37.

579

  In accordance with AIFMD, Art 42(1)(a), for non-EU AIFMs any references to the competent authorities of the home Member States means the competent authority of the Member State of reference, ie where the AIF is marketed (Implementing Regulation, Art 110(7)). 580

  AIFMD, Art 24(1), first paragraph. The paragraph also refers to markets ‘of which it is a member’ but it seems highly unlikely that the manager/operator of a collective investment scheme will also conduct, or be permitted to conduct, brokerage activities, ie the investment service within the meaning of MiFID (n 14). 581

  See, for the terms within which this information referred to in AIFMD, Art 24(1), second subparagraph must be provided, Implementing Regulation, Art 110(1), in fine, (3), (4). The information must be provided in accordance with the pro-forma reporting template as set out in the Annex (Implementing Regulation, Art 110(6)). 582

  AIFMD, Art 24(1), second paragraph, further specified in Implementing Regulation, Art 110(1)(a). 583

  AIFMD, Art 24(1), second paragraph and Implementing Regulation, Art 110(1)(b).

584

  AIFMD, Art 24(1), second paragraph. Note that Implementing Regulation, Art 112(1)(c) provides a broader formulation of this requirement by referring to ‘the diversification of the AIF’s portfolio including, but not limited to, its principal exposures and most important concentrations’. 585

  For the terms within which this information referred to in AIFMD, Art 24(2) AIFMD must be provided, see Implementing Regulation, Art 110(3), (4). The information must be provided in accordance with the pro-forma reporting template as set out in the Annex (Implementing Regulation, Art 110(6)). 586

  AIFMD, Art 24(2)(a) and Implementing Regulation, Art 110(2)(a).

587

  AIFMD, Art 24(2)(b) and Implementing Regulation, Art 110(2)(b).

588

  AIFMD, Art 24(2)(c), first part, further specified in Implementing Regulation, Art 110(2)(d). 589

  AIFMD, Art 24(2)(c), second part and Implementing Regulation, Art 110(2)(c).

590

  AIFMD, Art 24(2)(d), further specified in Implementing Regulation, Art 110(2)(e).

591

  AIFMD, Art 24(2)(e) and Implementing Regulation, Art 110(2)(f). See paras 1.469– 1.471. 592

  AIFMD, Art 24(3)(a). See paras 1.469–1.471.

593

  AIFMD, Art 24(3)(b).

594

  Leverage is considered to be employed on a substantial basis when the exposure of an AIF as calculated according to the commitment method under Implementing Regulation, Art 8 exceeds three times its net asset value (Implementing Regulation, Art 111(1)).

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595

  AIFMD, Art 24(4), first paragraph and Implementing Regulation, Art 111(2).

596

  AIFMD, Art 24(4), second paragraph and Implementing Regulation, Art 111(2).

597

  AIFMD, Art 24(4), third paragraph and Implementing Regulation, Art 111(2).

598

  AIFMD, Art 24(5), first paragraph.

599

  AIFMD, Art 24(5), second paragraph.

600

  AIFMD, Art 25(1) and Implementing Regulation, Art 112 which sets out certain matters regulators must take into account when assessing systemic risk. 601

  AIFMD, Art 25(2).

602

  AIFMD, Art 25(3).

603

  AIFMD, Art 25(4).

604

  AIFMD, Art 25(5), (6).

605

  Art 25(7).

606

  AIFMD, Art 25(8).

607

  In case of control over listed companies, the rules of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (OJ 2004 L142/12) and the Transparency Directive (n 157) also apply. Cf. AIFMD, recital (53). 608

  AIFMD, Art 26(1).

609

  AIFMD, Art 26(2)(a). According to Art 2(1) of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003, ‘[t]he category of micro, small and mediumsized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million’. 610

  AIFMD, Art 26(2)(b).

611

  AIFMD, Art 26(3).

612

  See the definition of ‘issuer’ in AIFMD, Art 4(1)(t): ‘an issuer within the meaning of point (d) of Article 2(1) of Directive 2004/109/EC where that issuer has its registered office in the Union, and where its shares are admitted to trading on a regulated market within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC’. 613

  AIFMD, Art 26(4).

614

  AIFMD, Art 26(5), first paragraph.

615

  AIFMD, Art 26(5), second paragraph.

616

  AIFMD, Art 26(5), third paragraph.

617

  See the definition of ‘issuer’ in AIFMD, Art 4(1)(t): ‘an issuer within the meaning of point (d) of Article 2(1) of Directive 2004/109/EC where that issuer has its registered office in the Union, and where its shares are admitted to trading on a regulated market within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC’. 618

  AIFMD, Art 26(5), fourth paragraph, read in conjunction with Art 5(3) of the Takeover Directive. 619

  Directive 2002/14/EC of the European Parliament and of the Council of 11 March 2002 establishing a general framework for informing and consulting employees in the European Community (OJ 2002 L80/29).

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620

  AIFMD, Art 26(6).

621

  See the definition of ‘issuer’ in AIFMD, Art 4(1)(t): ‘an issuer within the meaning of point (d) of Article 2(1) of Directive 2004/109/EC where that issuer has its registered office in the Union, and where its shares are admitted to trading on a regulated market within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC’. 622

  AIFMD, Art 26(7). See also recital (58).

623

  AIFMD, Art 27(1).

624

  AIFMD, Art 27(2).

625

  AIFMD, Art 27(3).

626

  AIFMD, Art 27(4).

627

  AIFMD, Art 27(5).

628

  See the definition of ‘issuer’ in AIFMD, Art 4(1)(t): ‘an issuer within the meaning of point (d) of Article 2(1) of Directive 2004/109/EC where that issuer has its registered office in the Union, and where its shares are admitted to trading on a regulated market within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC’. 629

  AIFMD, Art 28(1), first paragraph.

630

  AIFMD, Art 28(1), second paragraph.

631

  AIFMD, Art 28(2).

632

  AIFMD, Art 28(3).

633

  AIFMD, Art 28(4), first paragraph.

634

  AIFMD, Art 28(4), second paragraph.

635

  AIFMD, Art 28(5).

636

  See definition of ‘issuer’ set out in AIFMD, Art 4(1)(t): ‘an issuer within the meaning of point (d) of Article 2(1) of Directive 2004/109/EC where that issuer has its registered office in the Union, and where its shares are admitted to trading on a regulated market within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC’. 637

  AIFMD, Art 29(1).

638

  AIFMD, Art 29(2). Article 22(2) of Council Directive 77/91/EEC (OJ 1977 L26/1) provides the following: ‘Where the laws of a Member State permit a company to acquire its own shares, either itself or through a person acting in his own name but on the company’s behalf, they shall require the annual report to state at least: (a) the reasons for acquisitions made during the financial year; (b) the number and nominal value or, in the absence of a nominal value, the accountable par of the shares acquired and disposed of during the financial year and the proportion of the subscribed capital which they represent; (c) in the case of acquisition or disposal for a value, the consideration for the shares; (d) the number and nominal value or, in the absence of a nominal value, the accountable par of all the shares acquired and held by the company and the proportion of the subscribed capital which they represent’. 639

  AIFMD, Art 29(3).

640

  See definition of ‘issuer’ set out in AIFMD, Art 4(1)(t): ‘an issuer within the meaning of point (d) of Article 2(1) of Directive 2004/109/EC where that issuer has its registered office in the Union, and where its shares are admitted to trading on a regulated market within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC’.

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641

  AIFMD, Art 30(1).

642

  AIFMD, Art 30(3)(a).

643

  AIFMD, Art 30(3)(a).

644

  AIFMD, Art 30(2). The restriction of Art 30(2)(c) is subject to points (b)–(h) of Art 20(1) of Directive 77/91/EEC: see AIFMD, Art 30(3)(c). Furthermore, according to AIFMD, Art 30(3)(b), the provisions on capital reductions do not apply to reduction in the subscribed capital, the purpose of which is to offset losses incurred or to include sums of money in a non-distributable reserve provided that, following that operation, the amount of such reserve is not more than 10% of the reduced subscribed capital. 645

  AIFMD, Art 31(1), first paragraph.

646

  AIFMD, Art 31(1), second paragraph. ‘Feeder AIF’ means an AIF which: (i) invests at least 85% of its assets in units or shares of another AIF (the ‘master AIF’); (ii) invests at least 85% of its assets in more than one master AIF where those master AIFs have identical investment strategies; or (iii) otherwise has an exposure of at least 85% of its assets to such a master AIF (AIFMD, Art 4(1)(m)). ‘Master AIF’ means an AIF in which another AIF invests or has an exposure in accordance with Art 4(1)(m) (AIFMD, Art 4(1)(y)). 647

  See paras 1.566–1.570.

648

  AIFMD, Art 31(6) in conjunction with Art 34(1).

649

  AIFMD, Art 31(2), first paragraph.

650

  See AIFMD, Art 31(2), second paragraph.

651

  In order to ensure uniform conditions of application of this Article, ESMA may develop draft implementing technical standards to determine the form and content of a model for the notification letter (AIFMD, Art 31(5)(a)). Power is conferred on the Commission to adopt these implementing technical standards in accordance with ESMA Regulation (n 29), Art 15: AIFMD, Art 31(5), second paragraph. 652

  AIFMD, Art 31(3), first paragraph, first sentence.

653

  AIFMD, Art 31(3), first paragraph, second sentence.

654

  AIFMD, Art 31(3), first paragraph, third sentence.

655

  AIFMD, Art 31(3), second paragraph.

656

  In order to ensure uniform conditions of application of this Article, ESMA may develop draft implementing technical standards to determine the form of the written notice (AIFMD, Art 31(5)(b)). Power is conferred on the Commission to adopt these implementing technical standards in accordance with ESMA Regulation (n 29), Art 15: AIFMD, Art 31(5), second paragraph. 657

  AIFMD, Art 31(4), first paragraph.

658

  AIFMD, Art 31(4), second paragraph.

659

  AIFMD, Art 31(4), third paragraph.

660

  See para 1.10.

661

  See para 1.10.

662

  AIFMD, Art 32(1), first paragraph.

663

  AIFMD, Art 32(1), second paragraph. ‘Feeder AIF’ means an AIF which (i) invests at least 85% of its assets in units or shares of another AIF (the ‘maser AIF’); (ii) invests at least 85% of its assets in more than one master AIF where those master AIFs have identical investment strategies; or (iii) otherwise has an exposure of at least 85% of its assets to such

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a master AIF (AIFMD, Art 4(1)(m)). ‘Master AIF’ means an AIF in which another AIF invests or has an exposure in accordance with Art 4(1)(m) (AIFMD, Art 4(1)(y)). 664

  See para 1.10.

665

  See para 1.10.

666

  AIFMD, Arts 32(9), 39(11).

667

  AIFMD, Arts 32(6), 39(8). It is submitted that in any event the English language qualifies as such. See for a similar provision, UCITS Directive (n 2), Art 93(4), which, however, provides that the UCITS home and host Member States may agree that the notification is provided in an official language of both Member States. 668

  AIFMD, Art 31(2), second paragraph.

669

  See paras 1.529–1.533.

670

  In order to ensure uniform conditions of application of this Article, ESMA may develop draft implementing technical standards to determine the form and content of a model for the notification letter: see AIFMD, Arts 32(8)(a), 39(10)(a). Power is conferred on the Commission to adopt the implementing technical standards in accordance with ESMA Regulation (n 29), Art 15: AIFMD, Arts 32(8), 39(10), second subparagraph. 671

  It follows from AIFMD, Arts 32(5) and 39(7) that these arrangements are to be subject to the laws and supervision of the AIFM’s host Member State. 672

  See, for the somewhat different information to be provided where UCITSs are marketed in a Member State other than the home Member State, UCITS Directive (n 2), Art 93(1), second paragraph and (2) and UCITS Regulation (n 547), Arts 1–5. 673

  In order to ensure uniform conditions of application of this Article, ESMA may develop draft implementing technical standards to determine the form of the transmission (AIFMD, Art 32(8)(c)). Power is conferred on the Commission to adopt the implementing technical standards in accordance with ESMA Regulation (n 29), Art 15: AIFMD, Arts 32(8), 39(10), second subparagraph. 674

  AIFMD, Arts 32(3), 39(5). See, for a similar provision, UCITS Directive (n 2), Art 93(3), second and third paragraphs. However, the term for transmission of the notification file is 10 working days (instead of 20 working days) after the date of receipt: see UCITS Directive (n 2), Art 93(3), second paragraph. 675

  In order to ensure uniform conditions of application of this Article, ESMA may develop draft implementing technical standards to determine the form and content of a model for the statement (AIFMD, Art 32(8)(b)). Power is conferred on the Commission to adopt the implementing technical standards in accordance with ESMA Regulation (n 29), Art 15: AIFMD, Arts 32(8), 39(10). 676

  AIFMD, Arts 32(3), 39(5), second subparagraph, read in conjunction with Arts 32(6), 39(8), first paragraph. It is submitted that in any event the English language qualifies as such. 677

  AIFMD, Arts 32(4), 39(6), first paragraph. See, for a similar provision, UCITS Directive (n 2), Art 93(3), third paragraph. 678

  AIFMD, Arts 32(6), 39(8), second paragraph. See, for a similar provision, UCITS Directive (n 2), Art 93(5). 679

  AIFMD, Arts 32(4), 39(6), second paragraph.

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680

  In order to ensure uniform conditions of application of this Article, ESMA may develop draft implementing technical standards to determine the form of the written notice (AIFMD, Art 32(8)(d)). Power is conferred on the Commission to adopt the implementing technical standards in accordance with ESMA Regulation (n 29), Art 15: AIFMD: Art 32(8), second subparagraph. 681

  AIFMD, Art 32(7), first to third paragraphs.

682

  AIFMD, Art 32(7), fourth paragraph. See, for a somewhat different provision with respect to changes, UCITS Directive (n 2), Art 93(7) and (8). 683

  See para 1.10.

684

  See para 1.10.

685

  ESMA Regulation (n 29), Art 19(3).

686

  AIFMD, Art 36(1)(b), (c).

687

  AIFMD, Art 42(1)(a). Competent authorities and AIF investors referred to in the Articles specified in Art 42(1)(a) are deemed to be those of the Member States where the AIFs are marketed. 688

  AIFMD, Art 43(1), first paragraph.

689

  AIFMD, Art 43(1), second paragraph, first sentence.

690

  AIFMD, Art 43(1), second paragraph, second sentence.

691

  AIFMD, Art 43(2), first paragraph.

692

  AIFMD, Art 43(2), second paragraph.

693

  AIFMD, Arts 44–49.

694

  AIFMD, Arts 50–55.

695

  AIFMD, Arts 44–47.

696

  AIFMD, Art 46(2).

697

  See paras 1.161–1.175.

698

  See paras 1.10, 1.537–1.538, 1.550–1.551, 1.556.

699

  See paras 1.560–1.563.

700

  AIFMD, Art 47(4).

701

  AIFMD, Art 47(5).

702

  AIFMD, Arts 50–54.

703

  AIFMD, Art 55.

704

  AIFMD, Art 55.

705

  AIFMD, Art 66.

706

  AIFMD, Art 70.

707

  AIFMD, Arts 56–71.

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2 United Kingdom David Rouch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Advertising and marketing and funds — Hedge fund — Collective investment scheme — Alternative investment fund — Alternative Investment Fund Managers Directive (AIFMD)

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(p. 123) 2  United Kingdom1 I. Pre-AIFMD Regulatory Framework 2.01 1. Regulation of AIFMs and national AIFs prior to the AIFMD 2.01 2. Regulation of national marketing of AIFs prior to the AIFMD 2.08 II. Regulation of National AIFs after the AIFMD 2.14 III. General Provisions of the AIFMD and the Implementing Regulation 2.19 1. Articles 2 and 3—scope and exemptions 2.19 2. Article 5—determination of the AIFM 2.29 IV. Authorization of AIFMs 2.42 1. Articles 6 to 8—conditions and application for authorization 2.42 2. Article 9—initial capital and own funds 2.46 3. Articles 10 and 11—changes in the scope of the authorization and withdrawal 2.56 4. Consequences of violation of authorization provisions 2.58 V. Operating Conditions for AIFMs 2.63 1. Section 1 (Articles 12 to 17)—general requirements 2.63 2. Section 2 (Articles 18 and 19)—organizational requirements 2.81 3. Section 3 (Article 20)—delegation of AIFM functions 2.86 4. Section 4 (Article 21)—depositary 2.87 5. Consequences of violation of operating conditions 2.107 VI. Transparency Requirements 2.127 1. Article 22—financial reporting 2.127 2. Article 23—disclosure to investors 2.130 3. Article 24—regulatory reporting 2.132 4. Consequences of violation of transparency requirements 2.135 VII. AIFM Managing Specific Types of AIF 2.137 1. Section 1 (Article 25)—AIFM managing leveraged AIF 2.137 2. Section 2 (Articles 26 to 30)—obligations for AIFMs managing AIFs which acquire control of non-listed companies and issuers 2.139 3. Consequences of violation of provisions relating to AIFMs managing specific types of AIF 2.141 VIII. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 2.143 1. Introduction 2.143

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2. Article 31—marketing of shares or units of EU AIFs in the home Member State of the AIFM 2.146 3. Article 32—marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 2.150 4. Article 33—conditions for managing AIFs established in other Member States 2.156 5. Consequences of violation of conditions for EU AIFMs to market and manage EU AIFs in the EU 2.162 IX. Specific Rules in Relation to Third Countries 2.169 1. Article 34—conditions for EU AIFMs that manage non-EU AIFs not marketed in the EU 2.169 (p. 124) 2. Articles 35 and 36—conditions for marketing in the EU with and without a passport of non-EU AIFs managed by an EU AIFM 2.170 3. Articles 37 to 41—authorization of non-EU AIFMs and managing and marketing AIFs in the EU 2.174 4. Article 42—conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 2.175 5. Consequences of violation of specific rules in relation to third countries 2.177 X. Marketing to Retail Investors 2.179 1. Article 43—marketing of AIFs by an AIFM to retail investors 2.179 2. Consequences of violation of national rules with respect to marketing of AIFs by AIFMs to retail investors 2.184 XI. Competent Authorities and Supervisory Powers 2.186 1. Designation, responsibility, and powers of competent authorities 2.186 XII. Concluding Remarks 2.187

I. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD 2.01  The pre-AIFMD UK regulatory regime already applied to a range of investment vehicles and their sponsors, operators, depositaries, and managers. Many of these also now fall within the ambit of the AIFMD implementing rules. The scope of the pre-AIFMD regime was not identical to the AIFMD; in some respects it was narrower and in others broader. 2.02  In implementing the AIFMD, the UK government has left the pre-AIFMD regime largely untouched, so that the AIFMD implementing rules have been fitted into the existing regime and apply in parallel to existing rules. By way of summary, the UK regulatory regime therefore continues to apply as it did before to the following types of investment vehicle: (a)  collective investment schemes (regulated under the Financial Services and Markets Act 2000 (FSMA) and rules made by the UK regulator, the Financial Conduct Authority (FCA) 2 in its Collective Investment Schemes Handbook (‘COLL’));

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(b)  investment vehicles established as closed-ended bodies corporate issuing shares or debt instruments.

A. Collective investment schemes 2.03  The concept of ‘collective investment scheme’ is very broadly defined, covering all forms of arrangement with respect to property of any description, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding, management, or disposal of the property or sums paid out of such profits or income. The arrangements must be such that the persons who are to participate do not have day-to-day control over the management of the property. The arrangements must have at least one of the following characteristics: (a) contributions of the participants and the profits or income out of which payments are to be made to them are (p. 125) pooled; (b) the property is managed as a whole by or on behalf of the operator of the scheme.3 The scope of this definition is reduced by a number of exclusions, including arrangements involving the issue of debt instruments satisfying certain criteria, deposits, individual investment management arrangements and bodies corporate that are not open-ended investment companies.4 2.04  Except in the case of closed-ended bodies corporate, the legal form of an arrangement is not relevant to whether it is a collective investment scheme. It is simply necessary to establish that the various elements in the definition are satisfied. Consequently, collective investment schemes can exist in a range of different forms including trusts, partnerships, limited partnerships, limited liability partnerships, openended investment companies, and contractual arrangements. 2.05  Activities involving the establishment, operation, and winding up of collective investment schemes are regulated in the UK, as are the activities of (a) managing or providing custody of their assets and (b) advising on and transacting in interests in collective investment schemes. Firms conducting these activities must be UK authorized and must operate to certain minimum standards. Individuals holding significant or customer-facing positions must be approved by the FCA. In addition, firms responsible for the operation of collective investment schemes that are authorized by the FCA for distribution to the public must ensure that the vehicles concerned comply with detailed operating and investment conditions set out in COLL. 2.06  As well as requiring that firms carrying on certain fund-related activities are authorized, the UK regime provides that some types of fund must themselves be authorized. UK authorized collective investment schemes must take the form of either a unit trust or an investment company with variable capital—ie an open-ended investment company. The main categories of UK authorized collective investment scheme are as follows: (a)  undertaking for collective investment in transferable securities (UCITS) schemes (retail funds that comply with Directive 2009/65/EC of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (‘the UCITS Directive’) 5 and which can therefore be distributed within the EEA); (b)  non-UCITS retail schemes (NURSs) (retail funds that are not UCITS schemes, but which nonetheless comply with the requirements of the FCA for distribution to retail investors in the UK); and (c)  qualified investor schemes (QISs) (schemes subject to lighter regulation by the FCA, but which may only be distributed in the UK to a narrower group of investors—

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broadly, professional clients and certain sophisticated investors, including some retail investors).

(p. 126) B. Investment vehicles established as closed-ended bodies corporate 2.07  It is possible for closed-ended bodies corporate to operate arrangements which would be collective investment schemes but for the exclusions from the definition noted at paragraph 2.03. Shares in closed-ended bodies corporate are excluded from being investments in a collective investment scheme, as are debt instruments issued by a closedended body corporate satisfying certain detailed criteria. However, the UK regulatory regime still potentially applies to those managing and providing custody in relation to their assets and to those who advise on and transact in interests in these closed-ended excluded vehicles. Examples of arrangements falling within this category are investment trust companies and venture capital trusts.

2. Regulation of national marketing of AIFs prior to the AIFMD 2.08  Generally, a financial promotion (that is an invitation or an inducement to engage in investment activity, for example to acquire an interest in an alternative investment fund (AIF)) may only be communicated to persons in the UK by someone who is authorized to conduct regulated activities there.6 However, those who are not so authorized may communicate a financial promotion if (in the case of a non-real time, interactive communication) it has been approved by an authorized person or it can be communicated in reliance upon an exemption.7 Where a promotion is communicated or approved by an authorized person, it must generally satisfy various contents requirements under the FCA rules.8 2.09  In addition, some UK marketing rules are specific to particular investment types concerning the circumstances in which that type of investment may be offered to investors and, in some cases, stipulating the form and content of the offering documentation that must be used. The rules vary depending upon whether the investment vehicle is a collective investment scheme or a closed-ended body corporate.

A. Collective investment schemes 2.10  An authorized person may not promote any collective investment scheme in the UK9 unless: (a)  it is a UK authorized unit trust or open-ended investment company 10 (as indicated at paragraph 2.06 , these may be a UCITS, NURS, or QIS, but the last can only be marketed to a more limited range of professional and sophisticated investors); (b)  it is a UK recognized scheme (which include non-UK UCITS funds being marketed in the UK under the UCITS Directive, 11 collective investment schemes set up in certain (p. 127) UK-designated territories that comply with various operating requirements under a number of statutory instruments, and individually recognized funds 12 ); or (c)  an exemption applies.

13

B. Investment vehicles established as closed-ended bodies corporate 2.11  As long as shares or debt instruments issued by a closed-ended body corporate are not offered to the public, there are no marketing requirements other than those described in paragraph 2.08. Where they are offered to the public, a prospectus must be prepared in accordance with the UK rules implementing the Directive 2003/71/EC of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to

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trading (‘Prospectus Directive’) and approved by the FCA (unless an exemption applies, for example for offers to ‘qualified investors’).14 2.12  Additional rules apply where a body corporate wishes to be classified as an investment trust company or a venture capital trust company (so qualifying for special UK tax treatment). Among other things, it must apply for listing on the London Stock Exchange to the UK Listing Authority (UKLA) (or any other EEA regulated market). In order to obtain and maintain its listing, it must comply with various requirements under the applicable listing rules, which may involve restrictions on its investment policy, but generally do not.15

C. Non-mainstream pooled investment products 2.13  There is a further restriction on firms that are subject to the FCA’s Conduct of Business Sourcebook (COBS). As from January 2014, such firms are prohibited from communicating an invitation or inducement to participate in a ‘non-mainstream pooled investment’ where that invitation is addressed to or disseminated in a way that it is likely to be received by a retail client, unless an exemption applies. Non-mainstream pooled investments include units in unregulated collective investment schemes, units in QISs, securities issued by special purpose vehicles (SPVs) (other than various ‘excluded securities’), traded life policy investments, and rights to or interests in these categories of investment. Exemptions from this restriction are set out in COBS 4.12 and, in the case of unregulated collective investment schemes, the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) Order 2001.16

(p. 128) II. Regulation of National AIFs after the AIFMD 2.14  The UK has generally adopted a ‘copy out’ approach in implementing the AIFMD but has fitted the new rules into the FSMA structure. As indicated at paragraph 2.02, it has also left the pre-AIFMD regime largely untouched. As a result, the AIFMD implementing rules apply in parallel to the pre-existing regime. Consequently, in considering the regulatory characterization of any arrangement or activity, it is now necessary to conduct the same assessment as would have been needed before AIFMD implementation and then to check the position under the AIFMD implementing rules. It follows that an AIF will not be directly regulated in its own right (unless it is a NURS or QIS—see paragraph 2.06) because of the UK’s implementation approach. 2.15  The AIFMD is implemented into UK law by The Alternative Investment Fund Managers Regulations 201317 (‘the UK AIFM Regulations’), The Alternative Investment Fund Managers (Amendment) Regulations 2013,18 and the FCA’s Handbook of Rules and Guidance, in particular a new sourcebook known as the Investment Funds Sourcebook (‘FUND’) and amendments to other parts of the FCA Handbook. The UK AIFM Regulations also amend the pre-existing UK regulatory regime set out in FSMA and various statutory instruments made under it, including the Financial Services and Markets Act (Regulated Activities) Order 200119 (‘RAO’). The FCA’s rules implement, broadly, those parts of the AIFMD that concern the operation and conduct of AIFMs. The UK allows reliance on the private placement regime contemplated under the AIFMD. Since that regime requires, among other things, non-EU AIFMs to comply with certain minimum requirements and since non-EU AIFMs are not regulated by the FCA, those parts of the AIFMD are implemented through the UK AIFM Regulations. 2.16  Many of the UK implementing rules can therefore be found in the UK AIFM Regulations and FUND. However, the effect of the UK’s approach to implementation is that each section of the pre-existing regime to which the AIFMD is relevant has been adjusted to accommodate it and there is no single place in which the implementing rules can be found. Further, the FCA rules provide that any FCA rules which conflict with a rule that transposes

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the AIFMD or with a provision in the Implementing Regulation are to be modified to the extent necessary to be compatible with European law.20 2.17  While this is an intellectually rigorous approach, it has added another layer of complexity to a regime that was already highly technical in places. Consequently, this chapter does not include derivation tables in the main body of the chapter, since the number of cross-references involved would be very long. Instead, those wishing to understand in more detail where particular provisions of the AIFMD have been implemented into the UK regulatory regime should consult the transposition table for the UK implementation of the AIFMD (p. 129) prepared by HM Treasury and annexed to its explanatory memorandum on the UK AIFM Regulations.21 2.18  The Implementing Regulation is directly applicable. Most of its requirements have therefore not been copied into the UK implementing legislation. However, cross-references have been included in places in the FCA Handbook in order to facilitate compliance with the Level 1 provisions.

III. General Provisions of the AIFMD and the Implementing Regulation 1. Articles 2 and 3—scope and exemptions 2.19  The UK has adopted a copy out approach, which means that the scope of the UK’s AIFMD regime is broadly the same as that in the AIFMD. This includes defined expressions. In particular, the UK AIFM Regulations provide that, unless otherwise defined, any expression used in the UK AIFM Regulations which is used in the AIFMD has the same meaning as in the AIFMD.22 Consequently, even where some of these expressions have an English law meaning when used in other contexts, this must be disregarded in favour of the meaning given to these expressions in the AIFMD under European law.23 2.20  Uncertainty remains as to precisely when an arrangement will be an AIF and the circumstances in which a firm will be treated as an AIFM. In spite of that, the UK implementing rules adhere closely to Article 2 of the AIFMD, which concerns its basic scope. Nonetheless, the UK has taken the opportunity of clarifying that certain of the exclusions from the scope of the AIFMD (for holding companies, occupational pension schemes, employee participation and savings schemes, and securitization special purpose vehicles) exclude these arrangements both from being AIFs and AIFMs, whereas the rest are just exclusions from being AIFMs.24

A. Holding companies 2.21  The concept of a ‘holding company’25 has attracted attention in the UK. The FCA has stated that, as a minimum, the term covers a company that (a) carries out a commercial business strategy through its participations by contributing to their long-term value and (b) does not generate its returns for its investors by means of divestment of its participations. However, there is a question as to whether a broader set of arrangements also falls within the notion of a holding company. The FCA has provided guidance on its approach.26 2.22  In commenting on the general requirement that the holding company must be carrying out a business strategy through its subsidiaries, the FCA has stated its view that this means that the holding company must be responsible (with the subsidiaries) for the overall strategy of the subsidiaries so that, if its subsidiaries are manufacturers, the holding company must be (p. 130) responsible with the subsidiaries themselves for the manufacturing strategy of the subsidiaries.27 A holding company has shareholder control of its subsidiaries, but it is less certain what the FCA may have in mind in referring to a holding company owing a ‘responsibility’ with the subsidiaries for pursuing a particular strategy. To the extent that a responsibility is owed, it is presumably to the shareholders in the potential holding company. On that basis, the distinction being drawn by the FCA seems From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

to boil down to whether shareholders in the potential holding company are seeking to profit from the conduct of a commercial activity by the companies in the relevant group or to earn an investment return. The position of passive intermediate holding companies in group structures is not addressed. However, in most cases it is likely to be appropriate to apply a ‘look through’ approach, so that where the ultimate holding company falls within the exemption, the intermediate holding companies are also exempt. 2.23  The FCA repeats the European Commission guidance that private equity vehicles should not be regarded as falling within the holding companies exclusion.28 2.24  The FCA has also commented on the European Commission guidance on the need for a listed holding company to be ‘operating on its own account’. The guidance states that the company should not be conducting business ‘on behalf of a third party’, drawing a distinction between this and companies like Siemens and Shell as examples of companies carrying on business on their own account. In theory, there is no distinction between a company whose returns are ‘for itself’ and one whose returns are for investors, since the returns of any company are ultimately for its shareholders. The FCA therefore considers that the distinction being drawn is between companies admitted to trading that carry on ordinary commercial activities and those with the characteristics of a fund. It has also suggested that the reference to shares admitted to trading on a regulated market in the European Union should be understood as a reference to shares in an internally managed undertaking. 2.25  In the FCA’s view, the holding company exemption only applies to the extent that the company concerned is acting as a holding company; activities that are not ancillary to the holding company function (including services to other group companies such as treasury functions and human resources) would not qualify for the holding company exemption. In other words, it would be possible for a company to be exempt in relation to its activities as a holding company, but nonetheless to be carrying on some other activity falling within the definition of ‘AIF’ or resulting in the company managing an AIF. Consistent with this, the FCA states that the holding company exclusion only applies in so far as the company acts as a holding company so that if it also carried on the activity of, for example, managing a unit trust, the holding company exclusion would not cover that activity.29 2.26  Finally, the FCA takes a purposive approach to the concept of a ‘company’ for the purposes of the holding company exclusion. Based on its view that ‘the basic distinction in the AIFMD is between investment activities and commercial/investment activities’, the FCA has stated that the concept of a ‘company’ should be broadly construed so as to cover any undertaking, such as a limited liability partnership.30

(p. 131) B. Sub-threshold AIFMs 2.27  Article 3 of the AIFMD allows Member States to introduce a ‘light touch’ registration regime for AIFMs managing AIFs with assets under management of less than EUR 500 million and no redemption rights for five years (or, if leveraged, with assets under management of less than EUR 100 million). Broadly, the UK has opted to apply the minimum requirements under the AIFMD to all AIFMs that qualify, to the extent that they were not already subject to a higher level of regulation under the pre-existing regime. It rejected an earlier proposal to avoid an unlevel playing field between large and small authorized funds by applying enhanced requirements to AIFMs of sub-threshold, UK authorized AIFs in order to align them more closely with the main investor protection requirements of the AIFMD. 2.28  The effect of this is that sub-threshold AIFMs must continue to comply with the rules that applied to them prior to the implementation of the AIFMD. In most cases, that means that they will continue to need FCA authorization. However, no additional rules will be imposed by virtue of the AIFMD save to the extent necessary to enable relevant AIFMs to qualify for the sub-threshold regime. The main categories of operating entity that will now From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

be subject to the registration requirement and were not previously required to be authorized are internally managed investment companies and AIFMs managing the assets of funds that do not include investments—the principal example being certain real estate portfolios. In both cases, the FCA has been given the additional power to refuse registration if any of the individuals responsible for the operation of the AIF is subject to a prohibition order or could be subject to a company director’s disqualification order, or has been convicted of an offence involving fraud or dishonesty or an indictable offence.31

2. Article 5—determination of the AIFM A. The UK regulated activity of managing an AIF 2.29  The activity of establishing, operating, or winding up collective investment schemes was already regulated in the UK before the implementation of the AIFMD. However, because the scope of the definition of ‘collective investment scheme’ is not the same as that of an AIF, it was necessary to introduce a new UK regulated activity of ‘managing an AIF’.32 2.30  Because the concepts of ‘AIF’ and ‘collective investment scheme’ are not identical and the latter may be broader than the former, the regulated activity of establishing, operating, or winding up collective investment schemes has not been abolished. However, where a person has an FCA permission to manage AIFs, that activity is excluded from the scope of establishing, operating, or winding up collective investment schemes.33 2.31  The introduction of the new regulated activity of managing an AIF also has implications for other firms involved in providing already-regulated services to the same AIF. Firms in that position are no longer treated as establishing, operating, or winding up a collective investment scheme as long as the relevant AIF is already managed by a person with a UK permission to manage an AIF or a UK registered sub-threshold AIFM.34 (p. 132) 2.32  The implementing legislation provides that managing an AIF is a regulated activity and that a person will be managing an AIF when the person performs at least risk management or portfolio management for the AIF. Although these are the core activities of managing an AIF, the UK has also incorporated the additional activities listed in paragraph 2 of Annex 1 to the AIFMD (and any other activities in which the AIFM engages in connection with the management of the relevant AIF) into the UK regulated activity. This is to enable the FCA to make rules with respect to the full range of these activities (in particular in pursuing the FCA’s statutory objective of promoting competition in the interests of users of the financial markets)35 and to clarify the operation of the UK Financial Services Compensation Scheme and Financial Ombudsman Service. In some cases, this means that the activities will be regulated when conducted by an AIFM, whereas if they were conducted by a separately appointed service provider they would not. 2.33  The description of the UK regulated activity of managing AIFs states that a person will not be regarded as managing an AIF if the functions the person performs for the AIF have been delegated to it by another person, provided the other person is not an AIFM that has delegated its functions to the extent that it is no more than a letter-box entity.36 An AIFM is permitted to delegate, and this includes the provision of portfolio management and risk management services.37 Where a third party is appointed to provide services other than portfolio management and risk management, this will not result in the third party managing an AIF. It is also possible for an AIFM to sub-delegate portfolio and risk management. The FCA Handbook reproduces Article 82 of the Implementing Regulation, which addresses when a delegation of this sort will result in an AIFM being regarded as having become a letter-box entity.38 However, the FCA has provided additional guidance on the

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circumstances in which, in its view, a firm will become a letter-box entity and the implications of that. 2.34  The FCA’s position is that, even where a UK regulated AIFM delegates to the extent that it becomes a letter-box entity, it will not cease to be carrying on the UK regulated activity of managing an AIF, albeit that it may no longer be the AIFM of the relevant AIF as provided under the AIFMD. The FCA’s position appears to be driven by a concern that a firm may fall outside the scope of UK regulation entirely were this not the case; if it is correct that a letter-box firm would still be carrying on a UK regulated activity even if it was no longer the AIFM of the relevant AIF, the FCA would retain regulatory oversight over the firm.39 2.35  The FCA also takes the view that where a delegation results in an AIFM becoming a letter-box entity, even if the delegating AIFM continues to carry on the UK regulated activity of managing an AIF, the delegation can result in the delegate becoming the AIFM of the relevant AIF. However, it does not consider that will always be the case; each situation is to be judged on its own facts. Where all of the functions have been delegated to the same firm, it is likely that the firm concerned will be managing the AIF, but where they have been delegated to multiple service providers, it may be that none of them will be carrying on the UK regulated activity of managing an AIF.40 Against this, it might be argued that the description (p. 133) of the regulated activity requires the relevant firm to be performing the relevant activities ‘for the AIF’, whereas a sub-delegate would be performing them for the AIFM. However, since (as discussed previously) the description of managing an AIF specifically contemplates a sub-delegate doing so, it seems appropriate to construe this as a reference to the ultimate recipient of the service. 2.36  The significance of the FCA’s position extends beyond delegation by UK AIFMs. In particular, it means that where a UK firm receives a delegation from a non-UK AIFM (regardless of whether that AIFM is regulated under the AIFMD) the UK firm may be engaging in the UK regulated activity of managing an AIF even if it is not the AIFM of that AIF. In assessing whether a delegate is managing an AIF for UK regulatory purposes, the FCA has indicated that its approach will depend upon whether the delegating AIFM is governed by Article 20 of the AIFMD and Article 82 of the Implementing Regulation (which concerns when an AIFM is to be regarded as a letter-box entity and no longer the manager of the relevant AIF for the purposes of the AIFMD). Where those Articles do apply to the delegating AIFM, whether the delegate is managing an AIF for UK regulatory purposes will be determined in accordance with Article 82 of the Implementing Regulation. Where that is not the case, the FCA will consider whether the delegation is so extensive that the manager can no longer be considered as carrying out the activities of portfolio and risk management. While the FCA will take account of the criteria in Article 82, it will not restrict itself to that because the description of the UK regulated activity of managing an AIF does not specifically cross-reference Article 20 of the AIFMD or Article 82 of the Implementing Regulation. The FCA accepts that if a delegating manager falling outside Article 82 has not become a letter-box entity under the Article 82 tests, the delegation will not result in its delegate performing the UK regulated activity of managing an AIF. Conversely, it has also indicated that it will not necessarily regard a delegate as managing an AIF for UK regulatory purposes simply because the delegating AIFM might be a letter-box entity if the Article 82 tests were applied. A key consideration for the FCA will be the importance of the tasks that continue to be conducted by the manager, especially the right and ability of the manager to exercise oversight and control and the degree to which those rights are exercised in practice.41

B. Internal management

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2.37  The FCA’s starting point is that an AIF is ‘internally managed’ if it is managed by the body responsible for governing it within the legislation under which the AIF is formed. This is particularly the case where there is no governing body that appoints and supervises the manager and the manager is a member of the AIF. 2.38  This could create an anomaly in the case of English partnerships and limited partnerships since an AIFM must be a legal person, and English partnerships and limited partnerships are not legal persons. There are similar questions in the case of trusts and contractually based arrangements falling within the definition of an AIF. 2.39  The FCA takes the view, in the case of the general partner of an English limited partnership,42 that the roles of the limited and general partners are sufficiently distinct for the limited partnership not to be regarded as self-managing, but as being managed by the general partner as (p. 134) a separate AIFM. The FCA places some reliance on the legislation governing English limited partnerships, which provides for a clear separation of roles between the general partner and the limited partners, with the latter being prevented from engaging in the management of the partnership if they are to retain their limited liability status.43 2.40  Likewise, it would not be possible for an AIF in the form of a general partnership, trust, or contractually based arrangement to be internally managed since none of these arrangements are ‘legal persons’ and are not therefore capable of being an AIFM.44 However, the way in which the UK regulated activity of managing an AIF is drafted appears to have the effect that it would be necessary in such circumstances for an AIFM to be appointed to manage the AIF. If it is not, there is a risk that the persons concerned would be carrying out unauthorized activities. As a result, they would be in breach of the UK prohibition on unauthorized persons carrying on regulated activities in the UK.45

C. Failure of external AIFM to comply 2.41  Where an external AIFM cannot ensure compliance with the requirements of the AIFMD, Article 5(2) provides that it must immediately inform its home state regulator and, where relevant, that of the AIF, and the home state regulator must require the AIFM to take remedial action. These provisions have been implemented on a largely copy out basis in the UK, albeit that the UK rules clarify that the Article concerns the AIFM’s procurement of compliance by an AIF it manages.46 The UK implementing rules go on to provide that the FCA may use its powers under sections 55J and 55L of FSMA in requiring the remedial action provided for in Article 5 of the AIFMD. These provisions allow the FCA to vary or cancel a firm’s permission and to impose requirements as to the conduct of the firm’s business. However, this does not limit the ability of the FCA to exercise any of its other powers under FSMA.

IV. Authorization of AIFMs 1. Articles 6 to 8—conditions and application for authorization 2.42  Consistent with Article 6(5) of the AIFMD, a UK AIFM can only be authorized to provide risk management and portfolio management. FCA guidance states that a firm will not cease to be an AIFM simply because it only carries on one of these activities, as long as its permission extends to both (as will automatically be the case if it is authorized as an AIFM).47 2.43  The FCA has stated that authorization as an AIFM permits the AIFM to conduct AIFM management functions for a collective investment undertaking that is neither an AIF nor a UCITS.48 Since it is now possible for a UCITS management company also to act as an AIFM, and vice versa, it seems likely that, over time, these activities will become concentrated in a

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single operating company, with the additional possibility that the company would also extend its regulatory permission to provide segregated portfolio management services. (p. 135) 2.44  The UK has exercised its derogation right under Article 6(4) to allow AIFMs to provide segregated portfolio management services and non-core services comprising investment advice, safekeeping, and administration in relation to interests in collective investment schemes, and reception and transmission of orders in relation to financial instruments. 2.45  The FCA authorization process for a new AIFM follows the existing process for UCITS management companies and MiFID investment firms.49 In all these cases, the firm must apply for a ‘Part 4A permission’ under Part 4A of FSMA.50 If granted, the Part 4A permission sets out which regulated activities the firm may carry out. The basic elements of the authorization process and timetable are broadly similar for all of these categories of firm albeit that there are detailed variations to reflect differences in the EU legislation. Likewise, where an existing UCITS management company wishes to extend its Part 4A permission to enable it to engage in managing AIFs, there is a standard procedure to vary an existing permission. Since the FCA already regulates the activity of establishing, operating, and winding up collective investment schemes, it is assumed that the introduction of the AIFMD will not result in a material change to the way the FCA approaches the exercise of its discretion in the authorization process, albeit there will inevitably be adjustments to reflect the detailed requirements of the AIFMD.

2. Article 9—initial capital and own funds 2.46  Before implementation of the AIFMD, the application of the UK regulatory capital regime varied depending upon whether the firm was, broadly: (a) an operator of UCITS and other forms of collective investment scheme as a UK authorized UCITS management company; (b) a firm that provided investment services under MiFID (and which was therefore subject to the capital regime established under the Capital Adequacy Directive51); or (c) a firm that only operated collective investment schemes outside the scope of the UCITS Directive. 2.47  Since the capital regime under the AIFMD and the UCITS Directive are broadly similar (both being based on funds under management and the expenditure of the relevant firm), the UK implementing rules are drafted so as to apply both to UCITS management companies and AIFMs to the extent possible. Both categories of firm are referred to in the FCA implementing rules52 as ‘collective portfolio management firms’ (‘CPM firms’), or where they also conduct segregated portfolio management and other activities permitted by the relevant underlying directive, as collective portfolio management investment firms (‘CPMI firms’). 2.48  The AIFMD requires internally managed AIFs and AIFMs to hold initial capital of at least EUR 300,000 and EUR 125,000 respectively, but it is unclear whether this minimum capital requirement only applies upon authorization or on an ongoing basis thereafter. Consistent (p. 136) with the position for UCITS firms, the UK implementing rules take the approach that these minimum requirements should be met out of initial capital, at inception, and of own funds on an ongoing basis thereafter.

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2.49  Consequently, the ongoing capital requirement for a CPM firm is comprised of the minimum requirement, a percentage of funds under management, an amount calculated by reference to the firm’s expenditure, and, where applicable, a capital requirement in relation to professional negligence. The effect of this is that a CPM firm must maintain own funds of at least the higher of: (a)  EUR 125,000 plus an amount equal to 0.02% of the value of the portfolios of the UCITS and AIFs under its management over EUR 250 million (the ‘AUM requirement’); (b)  one-quarter of the firm’s relevant fixed expenditure; and (c)  where the CPM firm is an AIFM, and where it does not hold relevant professional indemnity insurance, an additional amount of own funds to cover risks arising from professional negligence. 2.50  In the light of the EU Commission’s view that Article 9(3)–(6) applies equally to internally managed AIFs as to AIFMs, the UK has applied broadly the same regime to internally managed AIFs, except that the initial capital requirement is EUR 300,000. 2.51  The UK has not so far opted to exercise the derogation right in Article 9(6) to allow AIFMs to provide up to 50% of the AUM requirement (referred to at paragraph 2.49) by way of a guarantee of the same amount given by a credit institution or an insurance undertaking, subject to specified conditions. The main reason for this was that, following consultation, there was little evidence that firms operating in the UK market would make use of it. 2.52  Where the firm is a CPMI firm, the UK regulatory capital rules apply to those activities as if it were an MiFID investment firm conducting the same activities. This ensures that there is a level playing field between CPMI firms and MiFID investment firms conducting the same activities. The effect of this is that a CPMI firm must maintain own funds equal to the higher of: (a)  the amount described above in relation to its non-MiFID activities; and (b)  the regulatory capital requirement that applies in relation to its MiFID activities. 2.53  Article 9(7) of the AIFMD requires the firm to carry additional capital or insurance in respect of ‘professional liability risks’. In order to comply with this, it is necessary to understand the extent of the professional liability risks that result from the activities of an AIFM under the AIFMD. The Implementing Regulation defines these as ‘the risks of loss or damage caused by a relevant person through the negligent performance of activities for which the AIFM has legal responsibility’,53 and goes on to list the categories of potential loss on a non-exhaustive basis. ‘Relevant person’ is defined to include directors, partners, employees, and sub-contractors and their staff. Since the Implementing Regulation is directly applicable in the UK, Article 12 must be applied. The interplay between EU and English law is not straightforward since the non-exhaustive list of types of professional liability included in Article 12 of the Implementing Regulation refers, for example, to the breach of ‘legal and regulatory obligations’, a ‘duty of skill and care towards the AIF and its investors’, ‘fiduciary duties’, and (p. 137) ‘obligations of confidentiality’, all of which could arise under national law. Consequently, it seems likely that the liability risks in respect of which the AIFM is required to make provision are a mixture of risks arising under the AIFMD and Implementing Regulation, some of which might not otherwise have existed, and others arising under national law. Nonetheless, it seems reasonable to suppose that the scope of pre-existing legal duties, such as English common law duties of skill and care, may have been affected by the implementation of the AIFMD since standards of conduct under

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the Directive are likely to be relevant to what a reasonable person might expect of an AIFM in carrying out its functions.54 2.54  The FCA rules implementing Article 9(7) provide that where a firm relies on professional indemnity insurance to satisfy the requirements identified at paragraph 2.53, it must hold sufficient own funds to cover (a) the amount of any excess and (b) any exclusions from the policy. The rules allow a firm to satisfy its professional indemnity insurance requirements with a policy that also provides cover to one or more entities other than the firm, provided the policy otherwise satisfies the requirements of the Implementing Regulation exclusive of the cover provided to the other firms under the policy.55 2.55  In implementing the requirement in Article 9(8) to invest own funds in liquid assets, the FCA has provided that liquid assets are assets that are readily convertible into cash within one month and which have not been invested in speculative positions.56 Accompanying guidance provides the following by way of example: cash, debtors, and readily realizable investments that are not held for short term resale (a category which includes, broadly, certain government or public securities and other securities admitted to listing on or regularly traded under the rules of an exchange in an EEA State).

3. Articles 10 and 11—changes in the scope of the authorization and withdrawal 2.56  All UK regulated firms have a general duty of disclosure to the FCA of anything of which the FCA would reasonably expect notice under Principle 11 of the FCA Principles for Business. However, the requirements of Article 10 of the AIFMD have been implemented in a way that applies additional specific reporting obligations to AIFMs and addresses the reporting obligations of sub-threshold AIFMs. Consistent with the AIFMD, AIFMs are required to notify the FCA of material changes to the conditions under which they were granted permission to manage an AIF. The FCA has provided guidance on the changes of which it would expect notice, including the AIFM being appointed to manage another AIF, the appointment of a new depositary of an AIF managed by the AIFM, and the appointment of new senior personnel of the AIFM (where their appointment does not require them to become an FCA approved individual in any event). The regulatory process that applies where an AIFM makes a notification of this sort (giving the home state regulator one month within which to accept, reject, or impose conditions to the change) arise under the Implementing Regulation and are therefore directly applicable and specific to AIFMs. 2.57  Although the circumstances in which the competent authorities may withdraw the authorization of an AIFM are broadly similar to those of an investment firm under MiFID, the (p. 138) UK has implemented Article 11 by including a specific new power in the FSMA.57 In addition to the general power to cancel authorization where no use has been made of it within 12 months,58 the new rules allow for the FCA to cancel an AIFM’s authorization where the AIFM has failed during a period of at least six months to carry on the regulated activity of managing an AIF.59

4. Consequences of violation of authorization provisions60 A. Persons who are not authorized to conduct regulated activities in the UK 2.58  It is a criminal offence (punishable by fine or imprisonment, or both) for a person to carry on the activity of managing an AIF by way of business in the UK without being authorized to carry on regulated activities there.61 In addition, any agreement entered into in the course of the activity giving rise to the breach is unenforceable against the other party. The other party is entitled to recover money or property paid by him under the agreement and compensation for any loss sustained by him as a result of it.62

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2.59  It is also a criminal offence for a person who is not so authorized, in the course of business, to communicate a financial promotion unless the content of the promotion has been approved by an authorized person or unless the communication is exempt.63 The offence is punishable by fine, imprisonment, or both. Breach of the prohibition can also render resulting agreements unenforceable against a person entering the agreement as a customer, entitling him to recover money paid or property transferred by him and compensation for any loss.64 This prohibition pre-dates the AIFMD and should be distinguished from the prohibition on ‘marketing’ AIFs under the UK rules implementing the AIFMD and considered at section VIII.

B. Persons who are authorized to conduct regulated activities in the UK but do not have permission to manage AIFs 2.60  Where a person is authorized to carry on other forms of regulated activity in the UK, but his authorization does not extend to the activity of managing an AIF, that person will be treated as having contravened a requirement imposed on him by the FCA under the FSMA if he nonetheless engages in the activity of managing an AIF. Thus, the FCA may take action against that person in the same way as it could if he had breached an FCA rule. However, this will not amount to a criminal offence or result in transactions being void. It may, however, give rise to a right of action for breach of statutory duty.65

(p. 139) C. Breaches of FCA rules by persons who have permission to manage AIFs 2.61  Where a firm has permission to manage AIFs, but breaches any applicable FCA rules, the FCA has a broad range of enforcement powers. These include, ultimately, varying or withdrawing the firm’s permission or imposing requirements on the firm.66 2.62  Where the person obtained his Part 4A permission to carry on the regulated activity of managing an AIF by making a false statement or by any other irregular means, the FCA has the power to cancel his permission.67 In addition, where the AIFM is a CPMI its permission can be withdrawn if the firm ceases to comply with the capital requirements considered at paragraphs 2.46 et seq.68 However, because these rules are financial resources rules, the FSMA provides that no action for breach of statutory duty arises in respect of losses suffered by a person as a result of breach.69

V. Operating Conditions for AIFMs 1. Section 1 (Articles 12 to 17)—general requirements A. Article 12—general principles 2.63  The FCA implementing rules adopt a copy out approach to Article 12. Any differences between these and the equivalent standards in the UCITS Directive and MiFID therefore reflect divergences in the underlying legislation. However, firms that have been used to operating under either of these regimes will be broadly familiar with the equivalent in Article 12. Since some of the provisions in Article 12 are relevant to other parts of the AIFMD, rather than implement Article 12 in one place, a number of the Article 12 provisions have been transposed into other parts of the FCA Handbook that deal with this issue. 2.64  Since they implement provisions of the AIFMD, these rules must be construed in accordance with European law. The associated provisions of the Implementing Regulation are directly applicable and must also therefore be construed in accordance with EU law. However, the principle that firms should ‘treat customers fairly’ has long been a foundation of the UK regulatory regime for all authorized firms. It has therefore been the subject of

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considerable regulatory guidance and comment, and has provided a basis for numerous enforcement actions. 2.65  One of the most important examples of FCA guidance in this area is known as ‘The Responsibilities of Providers and Distributors for the Fair Treatment of Customers’.70 The guidance concerns, among other things, steps that product providers should take in order to treat customers (understood as meaning underlying investors) fairly. It has been supplemented more recently by guidance for the producers of retail structured products (such as structured notes and certificates and complex UCITSs), much of the content of which is not obviously specific to retail structured products and which is therefore likely to be relevant (p. 140) to other sorts of products, as noted in the guidance.71 The FCA’s work in this area is also now being informed by competition regulation, which means that it is increasingly likely to explore the commercial characteristics of a product in order to determine whether they could involve unfairness to investors or undermine a competitive market, for example as a result of opaque fee structures or cross-subsidization between different groups of investor. 2.66  While the UK concept of ‘treating customers fairly’ and the guidance accompanying it has not been developed specifically with European law in mind, it is likely that the FCA’s supervisory approach to Article 12 would nonetheless be fundamentally influenced by its ‘treating customers fairly’ initiative to date. Indeed, a key strand in its developing approach to the concept of ‘treating customers fairly’ concerns the responsibilities of ‘product providers’ to underlying investors in designing and operating investment products even though they have no direct commercial relationship with them. 2.67  The UK regulators have sometimes struggled with the fact that much of the legislation under which they operate does not expressly contemplate direct regulatory duties being owed by a product provider to end investors. However, the requirements of Article 12 requiring Member States to ensure that AIFMs act ‘in the best interests of AIFs or the investors of the AIFs they manage’ and to ‘treat all AIF investors fairly’ establish that link as a regulatory matter in the context of AIFs. This is consistent with the way the UK regulatory regime has now developed; on its launch in April 2013, the FCA was granted extensive powers to regulate the process of product creation and governance in the interests of market users. It is anticipated that this will be a prime area of regulatory focus in the short to medium term. The FCA has warned against assuming that this more interventionist approach will be restricted to the retail market, noting that wholesale conduct may undermine market integrity and affect retail investors. While it appears to recognize a need for proportionality in its approach to AIFMs dealing principally with professional investors, it has made clear that it will expect AIFMs to set high standards in dealing with all categories of investor. 2.68  It is reasonable to suppose that the introduction of regulatory duties of this sort might also be taken into account by a court in considering, for example, the nature and extent of tortious duties requiring AIFMs to act with reasonable skill and care in discharging their functions.

B. Article 13—remuneration 2.69  There is a potential overlap between the pre-existing provisions of the FCA Remuneration Code and the remuneration regime contemplated under the AIFMD where an AIFM is a subsidiary of a credit institution and a CPMI. In implementing the AIFMD, the FCA has addressed this by providing that, where an AIFM is subject to both remuneration regimes, as long as it complies with the remuneration regime under the AIFMD that will also satisfy the requirements of the FCA Remuneration Code. The FCA has noted that it

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may need to revisit its policy for some firms in due course in the light of the introduction of caps on variable remuneration under CRD IV. 2.70  The European Securities and Markets Authority (ESMA) has issued guidelines on the contents of sound remuneration policies as required under Article 13 of the AIFMD. They are intended as a statement of good practice for promoting sound and effective risk management (p. 141) in accordance with the objectives of the AIFMD. The FCA has confirmed to ESMA that it will apply these guidelines to UK AIFMs. The FCA has expressed its view that in complying with the guidelines, AIFMs may be able to rely upon the principle of proportionality under the guidelines and that this may allow some AIFMs to disapply certain elements of the guidelines. However, it has also stated that it will expect the firms concerned to be able to justify why full application may be disproportionate. At the time of writing, the FCA is consulting on draft FCA guidance on its view as to how some aspects of the guidelines apply in the UK. The guidance would cover various issues in greater depth than the ESMA guidelines and the main areas would be the application of the principle of proportionality to the remuneration payment process and payments to partners or members of an AIFM established as a limited liability partnership.72

C. Article 14—conflicts of interest 2.71  The UK has adopted a copy out approach to the provisions of the AIFMD on conflicts of interest so that there are separate conflicts rules for AIFMs.73 Differences between the UK rules implementing the AIFMD conflict provisions and those implementing the equivalent provisions in the UCITS Directive and MiFID can therefore be largely explained by divergences in the underlying legislation. However, the conflicts requirements under the three regimes are broadly similar, except that the AIFMD introduces new requirements concerning the use of prime brokers. 2.72  As a regulatory matter, UK authorized firms have always been subject to a general principle that requires them to manage conflicts of interest fairly between themselves and their customers and between one customer and another client.74 Where an AIFM has hitherto been authorized as an MiFID investment firm (in order to conduct discretionary portfolio management in respect of the assets of an AIF) it will also have been subject to the conflicts of interests rules in MiFID. However, those operate by reference to the firm’s ‘client’ whereas the rules in the AIFMD require the AIFM not only to avoid or manage conflicts involving the AIF but also those involving investors in the AIF. This change is consistent with the development in UK regulatory policy on product development and governance, outlined at paragraphs 2.64 to 2.67, which places increasing expectations on product providers to treat end investors ‘fairly’ even where they have no direct contractual relationship with them. 2.73  It is questionable to what extent the manager of an AIF owes duties at common law to underlying investors to avoid or manage conflicts of interest. English law would ordinarily recognize a fiduciary relationship between an investment manager and its client and it is therefore highly likely that an AIFM would owe fiduciary duties to an AIF. However, depending upon the precise nature of the relationship and the fund vehicle concerned, it is less clear that it would owe any fiduciary duties to investors (save where, for example, those investors are also advisory or discretionary management clients of the AIFM in relation to their investment in the AIF). It is therefore likely that, in many cases, the effect of the rules implementing Article 14 is to extend the protection received by investors in an AIF, at least as a regulatory matter.

(p. 142) D. Article 15—risk management

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2.74  The UK rules implementing Article 15 adopt a copy out approach.75 Any differences between these and the UK rules implementing the equivalent framework in the UCITS Directive therefore result principally from the underlying legislation rather than a UK specific approach. 2.75  The risk management standards specified in Article 15 are materially more prescriptive than those that applied previously to UK authorized firms, although it is likely that some will have been applied in any event as a matter of good practice. 2.76  Concerns have been expressed that the structural and functional splits required by the new rules would have a disproportionate impact on private equity, venture capital and real estate firms, and smaller AIFMs. The FCA has made clear that it cannot apply different treatment to different sectors of the market. However, it has nonetheless noted that it is required to have regard to the principle of proportionality when reviewing AIFM compliance with Article 15 and that it will take account of each firm’s structure and safeguards in the course of its supervisory relationship.76 2.77  Article 44 of the Implementing Regulation requires AIFMs to establish quantitative or qualitative risk limits, or both, for each AIF they manage. Where only a qualitative risk limit is set, the AIFM is required to justify this to the relevant competent authority. The FCA has indicated that this justification might include the reasons why it would be difficult to set a meaningful quantitative risk limit or why using quantitative risk limits might not be in the best interests of the AIF’s investors. It has stated that the intention of an AIFM in setting only qualitative risk limits should not be simply to seek additional flexibility to take on more risk with the aim of increasing potential investment returns.77

E. Article 16—liquidity management 2.78  The UK rules implementing Article 16 adopt a copy out approach without introducing further formal guidance.78 The standards specified in Article 16 of the Implementing Regulation are new for UK authorized firms. While some firms may previously have adopted some practices consistent with the new standards as a matter of good practice, the new rules go well beyond existing regulatory requirements and are likely to involve a significant change for many firms. 2.79  Article 47 of the Implementing Regulation provides that a firm’s liquidity management systems and procedures shall, among other things, ensure that the AIFM considers and puts into effect ‘tools and arrangements, including special arrangements, necessary to manage the liquidity risk of each AIF under its management’, including, in exceptional circumstances, taking account of the need for fair treatment of AIF investors. These may only be used if appropriate disclosures have been made as contemplated in Article 108 of the Implementing Regulation. FCA commentary on these provisions identifies exceptional liquidity measures as including gates, side pockets, lock-ups, notice periods, redemption penalties, and suspensions.79 It seems likely that the level of prescription, forward-planning, and heightened (p. 143) transparency required in the use of arrangements of this sort will, in due course, result in changes in industry and investor practice.

F. Article 17—investment in securitization positions 2.80  Since the requirements of the AIFMD in relation to investment in securitization positions are contained in the Implementing Regulation, they do not require implementation in the UK. It is too early to say how they will affect market practice.

2. Section 2 (Articles 18 and 19)—organizational requirements

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A. Article 18—general principles 2.81  The general principles on organizational requirements80 are similar to those in the UCITS Directive. They have some similarities with those that apply to MiFID firms, but there is a greater contrast—for example in the areas of accounting, electronic data processing, record keeping, and governance. The greatest change is for those firms that previously had permission to establish, operate, or wind up unregulated collective investment schemes but fell outside these Directives and are now covered by the definition of AIFM. 2.82  Article 18 requires AIFMs to maintain adequate and appropriate human and technical resources that are necessary for the proper management of AIFs. The FCA has indicated that, in considering what is adequate for a given AIFM, it will expect the AIFM to take into account the nature, scale, and complexity of its business and the types of AIFs under its management in a way that is proportionate, and that it will expect firms to be able to justify the approach they have taken.81 2.83  The FCA rules for AIFMs go beyond those in the AIFMD in a number of respects where the AIFMD is silent, but the FCA has nonetheless taken the view that additional requirements are justified in the interests of investor protection or the wider public interest.82 Examples include certain of the FCA’s rules concerning the maintenance of arrangements for the detection and prevention of financial crime and the management of conflicts of interest.

B. Article 19—valuation 2.84  Article 19 requires that the rules for the valuation of assets of an AIF and the net asset value of interests in it shall be laid down in the law of the country where the AIF is established and/or in the AIF rules or instruments of incorporation.83 The requirement will extend to AIFs established in third countries as it does AIFs established in Member States. It should presumably not be seen as requiring Member States to ensure that the authorities in the location of an AIF’s establishment introduce rules on AIF valuation, but rather as a requirement for AIFs to be valued in accordance with such local rules as there are. However, if a regulator has concerns as to the local standards that might be applied, that could be addressed in the instrument of incorporation in the relevant AIF. The FCA has not introduced any additional rules on asset valuation for AIFs. Nonetheless, the pre-existing rules and guidance on the valuation of assets of authorized funds (found in COLL) will continue to apply, catching (p. 144) those AIFs that are authorized funds, but not UCITS. These include a requirement to reimburse the relevant authorized fund and investors (or former investors) affected by incorrect pricing, in most circumstances. 2.85  The duty to value the assets of the AIF is placed on the AIFM. Previously, the UK operator of an AIF would commonly have been responsible for the valuation of the assets of the AIF. That did not equate in all cases to the entity that will now be the AIFM.

3. Section 3 (Article 20)—delegation of AIFM functions 2.86  The UK has adopted a largely copy out approach to this provision.84

4. Section 4 (Article 21)—depositary A. The method of implementation 2.87  The depositary provisions of the AIFMD have been implemented in the UK through a mixture of legislative and rulebook changes. The UK AIFM Regulations make the legislative changes, which include amendments to existing legislation (for example amendments to the RAO to create a new regulated activity of acting as a depositary of an AIF) as well as freestanding regulations (such as Articles 29–32, which deal with depositary liability). Section 3.11 of FUND contains all the AIFMD-derived FCA rules and guidance, and amendments have been made to Chapter 6 of the Client Assets sourcebook to cover any other FCA From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

requirements for safe-keeping and delegation in a way that is consistent with the AIFMD. On top of all this, the Implementing Regulation is directly applicable to depositaries and FUND 3.11 copies out or signposts the relevant provisions.

B. The main changes brought about by the AIFMD 2.88  The most significant change brought about by the AIFMD for depositaries is simply that it is now mandatory for an AIF to have a depositary. The only non-UCITS funds for which the pre-AIFMD UK regime required there to be a depositary were NURSs and QISs. There was no such requirement for unauthorized collective investment schemes, such as unauthorized unit trusts and unauthorized open-ended investment companies. In the case of unit trusts, there was by definition a trustee, but although the trustee held title to the fund’s assets and had certain duties under the fund’s trust deed and the general law (and, if FSMA-authorized, under FCA rules), the scope of its functions typically fell below those of an AIFMD depositary. Similarly, a depositary was not required for fund structures that were not collective investment schemes at all, such as investment trust companies and other closed-ended bodies corporate (albeit that they might appoint a custodian to hold their assets). The appointment of a depositary where there was none before will clearly have a significant impact on the way in which AIFs are managed and it will be necessary to adapt the day-to-day operations of these funds to enable these new ‘quasi-supervisors’ to carry out their functions. 2.89  The AIFMD has also significantly broadened the scope of the depositary’s potential legal liability. Pre-AIFMD, the depositary’s liability (where there was a depositary) was governed (p. 145) largely by the contract under which it was appointed. Invariably this would include a provision limiting the depositary’s liability to a significant extent, typically confining it to, broadly, cases of negligence, wilful default, or fraud. It was common to seek to exclude liability for the default of a delegated custodian or sub-custodian unless the delegate was a company in the same group as the depositary or the depositary had been negligent in appointing or continuing to use the custodian or sub-custodian. Post-AIFMD the position is now very different where there has been ‘loss’ of financial instruments held in custody by the depositary (or its delegate); the liability of the depositary is closer to strict liability unless it has transferred liability to its delegate.85 2.90  A third important area of change relates to the depositary’s obligation to operate segregated accounts for AIF assets held in custody. The issue is not simply that segregation is required (as this is generally necessary under general principles of English law), but the degree of segregation required at different levels of the chain of intermediation between the AIF and the issuer of the relevant securities. In particular, an important issue still not fully resolved at the time of writing is whether an indirect delegate of a depositary (ie a person appointed to act as a custodian by a direct delegate of the depositary) must maintain accounts in its books sufficient to show which assets belong to clients of the depositary.86

C. Who may be a depositary? 2.91  The AIFMD provides that three categories of entity are eligible to be depositaries of all types of AIF: authorized EU credit institutions; authorized EU MiFID investment firms that provide the MiFID ancillary service of safekeeping and administration of financial instruments and are subject to the EUR 730,000 own funds requirement; and other firms, prudentially regulated and subject to ongoing supervision, which, on 21 July 2011, were within the categories of firm determined by the Member State to be eligible to be a depositary of a UCITS under the UCITS Directive. The FCA has taken the view that, in order to fall within the third category, a firm must have been authorized as a depositary on 21 July 2011, with the result that no new firms can qualify.87 There is a question as to whether the AIFMD does in fact prohibit this or whether it would be sufficient if the firm is of a kind that

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was eligible to be a UCITS depositary on 21 July 2011 even if it was not in fact a UCITS depositary on that date. 2.92  The UK has exercised its derogation rights under Article 21(3) of the AIFMD in relation to the depositary requirements for AIFs which have a five-year lock-up period and which either (1) do not generally invest in the type of assets that require to be held in custody, or (2) generally invest only in order potentially to acquire control. The UK government’s stated intention in doing so was to support a competitive market for AIFMs engaged in private equity activities.88 The derogation is not specific to private equity funds, however; there are some private equity funds that do not meet the criteria and some other funds (for example, real estate funds) that do. Depositaries for qualifying funds (referred to as ‘PE AIFs’) do not need to come within any of the three categories mentioned in paragraph 2.91. (p. 146) 2.93  The FCA considers that a fund will ‘generally. . . . not invest in the type of assets that must be held in custody’ if it invests in assets of that sort on a temporary basis or if assets of that sort do not constitute a significant proportion of the fund’s overall assets or if it is in the process of divesting its investment in an issuer which it controls or previously controlled.89 2.94  The AIFMD prohibits an AIFM from acting as a depositary and requires that the AIFM and the depositary shall act independently in their respective roles.90 The UK takes the view that this does not prohibit some other entity in the AIFM’s group from acting as a depositary provided there is proper management (including sufficient organizational separation) and disclosure of potential conflicts of interest.91 The FCA has decided not to impose any specific additional requirements where depositary functions are performed within the same group, but it is keeping the issue under review.92 However, the UK’s preAIFMD regime for NURSs and QISs required the depositary to be independent from the fund manager’s group and the UK has retained this requirement for these types of fund. 2.95  Although a depositary for a UK AIF must generally have its registered office or a branch in the UK, the UK has made use of the flexibility provided for in the AIFMD to allow a credit institution authorized in another EEA state to act as a depositary of a UK unauthorized AIF for a transitional period ending in July 2017. However, the UK does not permit this for the depositary of an NURS or QIS. It justifies this on the grounds that these funds already had a depositary at the time of implementation of the AIFMD and that these depositaries are subject to a UK-specific regime that will be unfamiliar to non-UK depositaries.93 2.96  The AIFMD does not require that AIF depositaries should be subject to an authorization regime. Nevertheless, the way it has been implemented in the UK means that a UK firm acting as an AIF depositary will need to be authorized under the FSMA unless an exemption applies. A specific authorized activity of acting as a depositary of an AIF has been created for this purpose by an amendment to the RAO.94 Depositaries of NURSs and QISs would normally have needed authorization under the pre-AIFMD regime as they would generally have been carrying on the regulated activity of ‘safeguarding and administering investments’ (ie providing custody). Under the new regime, a firm with a Part 4A permission to act as an AIF depositary does not also need to have a separate permission of safeguarding and administering assets in relation to the AIFs for which it acts. 2.97  The Part 4A permission relating to a PE AIF will be limited to acting as a depositary of a qualifying fund, but will not necessarily contain a limitation preventing the depositary from holding assets in custody.95 The same rules apply to PE AIF depositaries as to depositaries of other unauthorized UK AIFs except as regards capital requirements.

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2.98  The AIFMD does not require a firm to have any particular amount of capital in order to be an AIF depositary, although EU credit institutions and MiFID investment firms (the two (p. 147) largest categories of firm eligible to be depositaries) are already subject to capital requirements under the other directives applicable to them.96 However, the preAIFMD UK regime for NURSs and QISs required depositaries to hold capital of at least £4 million.97 This requirement has been retained for depositaries of NURSs and QISs98 (although the FCA intends to reconsider the matter when there is certainty on any future changes to the requirements for UCITS depositaries99). PE AIF depositaries and depositaries of non-EEA AIFs are subject to a capital requirement of EUR 125,000.100 Subject to this, no capital requirements apply to depositaries of AIFs other than NURSs and QISs merely by virtue of them acting as depositaries.

D. The duties of a depositary 2.99  Generally, as with many of the other provisions of the AIFMD, the UK’s approach to implementing the Directive’s requirements in relation to the duties of depositaries of AIFs above the threshold has been to apply them without any ‘gold-plating’ (reflecting the fact that the AIFMD is generally maximum harmonizing). Nevertheless, some additional requirements have been retained from the pre-implementation regime on the basis that they are either outside the scope of, or are consistent with, the AIFMD.101 For sub-threshold AIFs, depositaries will be subject to the pre-implementation custody regime. (The UK government was initially minded to apply the AIFMD depositary requirements to depositaries of sub-threshold authorized AIFs, but was persuaded in the course of consultation that this was unnecessary.102) 2.100  The two main areas in which questions have arisen in the UK as regards the duties of depositaries concern: (a)  their ability to delegate their functions; and (b)  the AIFMD requirements on segregation of AIF assets. 2.101  The AIFMD allows a depositary (subject to certain conditions103) to delegate to a third party its safe-keeping obligations both as regards assets that can be held in custody and assets for which the depositary is obliged to verify ownership.104 This has been incorporated into the UK regime,105 which also goes beyond the express requirements of the AIFMD in stating that the AIFM cannot act as such a delegate.106 2.102  One of the conditions that must be satisfied for a delegation by a depositary is that the depositary ‘can demonstrate an objective reason for the delegation’.107 This does not seem to have been much of an issue for UK AIFs. It is being interpreted so as to permit, for example, (p. 148) delegation to: prime brokers;108 local sub-custodians in jurisdictions in which the depositary does not itself have a presence; and tri-party repo agents (which need to hold securities belonging to the AIF in order to perform their collateral management function). 2.103  There has, however, been some discussion as to whether, notwithstanding its right to delegate, the depositary is nevertheless obliged to remain part of the chain of title to the AIF’s assets. In other words, when the depositary appoints a delegate in respect of some or all of the AIF’s assets, can it allow the delegate to record those assets in the delegate’s books as being held directly for the account of the AIF (or the AIFM acting on behalf of the AIF), or must the delegate’s books show them as being held for the account of the depositary (with or without further designation to indicate the ultimate ownership of the AIF)? The question is particularly important in connection with the use of prime brokers. A prime broker will want to take a security interest over AIF assets that it holds, and this is much easier to achieve if the account holder is the AIF itself rather than the depositary on behalf of the AIF. Prior to implementation of the AIFMD, Irish funds would typically be

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direct holders of the prime brokerage account for this reason, and this practice seems to be continuing for both Irish and UK depositaries since implementation of the AIFMD. 2.104  The other area of debate has concerned the segregation of assets. General principles of English law, as well as FCA rules, will usually require a custodian to segregate its clients’ assets from its own. Clearly, the custodian records in its own books which of the assets it holds belong to which of its clients, but the segregation obligation refers rather to the need for this to be supported by separation of the assets themselves into those belonging to clients and those belonging to the custodian itself. Where (as is usually the case) these assets are represented by entitlements recorded in accounts held by the custodian with third parties (eg sub-custodians or central securities depositaries) this requirement for separation takes the form of a requirement for the custodian to hold separate accounts at that level for client assets and for its own assets. The same segregation obligation applies at the level of a sub-custodian, ie the sub-custodian must keep its clients’ assets separate from its own and must therefore maintain separate accounts for these two categories at the next level down in the chain. This system already applied in the UK before implementation of the AIFMD. It is important to note that it requires only that a person holding assets belonging to a client keep those assets separate from any assets of its own—it does not require separation of the assets of one client from those of another (ie separate accounts for each client). Of course, neither the general law nor FCA rules prohibit this additional form of segregation, but it would involve a significant increase in the number of accounts, and consequently the administrative burden, and is more costly as a result. Segregation of this sort is therefore usually provided only when the client expressly requests it and pays for it. 2.105  An important question is what degree of segregation is required under the UK’s implementation of the AIFMD. The position concerning segregation by the depositary itself is governed by Article 21(8)(a)(ii). Although the wording is not ideal, the reference to segregation being ‘in accordance with Article 16 of Directive 2006/73/EC’ does make it reasonably clear that the depositary must open separate accounts on the books of the third party for its own assets (p. 149) and those of the AIF. It follows from the above that this alone has not required any change to previous UK practice. 2.106  The more difficult question concerns the degree of segregation required by delegates and sub-delegates of the depositary. In particular, it is not entirely clear whether the relevant provisions109 require the delegate to open a separate account with the subdelegate to hold assets of the delegate held for the depositary’s AIF clients, so that the subdelegate is able to identify in its records assets of the delegate held for the depositary’s AIF clients and assets of the delegate held for its other clients. The FCA has taken the view that the delegate may open an omnibus account that can include the assets of AIFs and other clients of the delegate, as long as these assets are segregated from the delegate’s own assets.110

5. Consequences of violation of operating conditions A. Regulatory law consequences 2.107  The FCA has a number of powers in relation to an AIFM which fails to comply with any of the operating conditions summarized above: (a)  The FCA may, on its own initiative, cancel that person’s Part 4A permission to manage an AIF where the relevant AIFM has seriously or systematically infringed any of the UK AIFM Regulations, the implementing FCA rules, or the Implementing Regulation. 111

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(b)  Where an AIFM has breached a relevant provision of the UK AIFM Regulations, FCA rule, or provision of the Implementing Regulation, the FCA may censure the AIFM publicly, impose a financial penalty on it, and/or suspend any permission it holds to carry on regulated activities or make that permission subject to limitations or requirements (in each case for up to 12 months). 112 (c)  Where it appears to the FCA that, as a result of a contravention of one of these provisions, profits have accrued to the AIFM or a person has suffered loss or been adversely affected, the FCA may order the AIFM to disgorge those profits or pay compensation in respect of such a loss or adverse effect. 113 2.108  Generally an AIF depositary will be an authorized person. It will therefore also be subject to potential regulatory law consequences under the FSMA, including removal or variation of relevant permissions and the consequences referred to in paragraph 2.107(b) and (c). 2.109  The FCA can also take disciplinary action against an FCA-approved individual who has knowingly been concerned in a breach by the AIFM of a requirement imposed on it by the FSMA, the rules, the UK AIFM Regulations, or the Implementing Regulation.114

(p. 150) B. Criminal law consequences 2.110  There are no specific criminal offences attached to breaching the relevant provisions of the UK AIFM Regulations.115 However, depending on the precise circumstances, it is possible to envisage cases of breach which might amount, for example, to fraud or theft and would potentially therefore be subject to prosecution by the relevant authorities.

C. Private law consequences 2.111  Almost all of the requirements of the operating conditions applying to an AIFM and many applying to a depositary have been implemented as rules made by the FCA. Generally, section 138D of FSMA gives any private person116 a right to recover any loss he suffers as a result of a breach of an FCA rule.117 So, for example, FCA rule FUND 3.9.2R provides that ‘An AIFM is responsible for the proper valuation of AIF assets, the calculation of the net asset value and the publication of that net asset value’ and FUND 3.9.3R provides that ‘an AIFM must ensure that any valuation of an AIF’s assets is performed impartially and with all due skill, care and diligence’. Any loss suffered by a private person and flowing from a breach of these rules is potentially recoverable under section 138D of FSMA.118 2.112  This right of action is expressly excluded in relation to the rules (in SYSC 4) implementing Article 18 (organizational requirements).119 2.113  For the purposes of section 138D of FSMA, the requirements established by the Implementing Regulation are not, themselves, ‘rules’. However, it seems likely that a UK court would take them into account in determining whether an FCA rule to which they relate has been complied with.120 2.114  Given the existence of the FCA’s right to order restitution referred to in paragraph 2.107(c) and the right of a private person to seek damages under section 138D of FSMA, it seems unlikely that a UK court would conclude that these rules and the Implementing Regulation establish some other private right of action against the AIFM for an AIF or investor.

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2.115  A few provisions of the operating conditions have been implemented in the UK AIFM Regulations: (a)  Regulation 24(4) provides (emphasis added): ‘Any liability of [an]. . .AIFM to an AIF managed by it, or to an investor of such an AIF. . .is not affected by the appointment by the AIFM of an external valuer in respect of that AIF’; and (p. 151) (b)  Regulation 28(1) provides (emphasis added): ‘irrespective of any contractual arrangements that provide otherwise, any liability of [an] AIFM to an AIF it manages, or to an investor of such an AIF, is not affected by. . .delegation. . .subdelegation. . .or. . .any further sub-delegation. . . .’. Each appears to be intended to preserve other rights of action, and prevent an AIF from contracting out of them, rather than to found a new one. 121 2.116  The position is very different for a depositary, however. The AIFMD expressly provides for the depositary to be liable in two cases: (a)  for loss of financial instruments held in custody (referred to below as ‘liability for loss’); and (b)  for negligent or intentional failure properly to fulfil its obligations under the AIFMD (referred to below as ‘liability for negligence’). 2.117  The regulations that implement these provisions on depositary liability appear to create additional, self-standing grounds of liability that are distinct and independent of any other sources of liability that may arise. 2.118  Article 21(12) of the AIFMD provides as follows concerning liability for loss: The depositary shall be liable to the AIF or to the investors of the AIF, for the loss by the depositary or a third party to whom the custody of financial instruments held in custody in accordance with [Article 21(8)(a)] has been delegated. In the case of such a loss of a financial instrument held in custody, the depositary shall return a financial instrument of identical type or the corresponding amount to the AIF or the AIFM acting on behalf of the AIF without undue delay. The depositary shall not be liable if it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary.122 2.119  The first sentence of Article 21(12) is unclear. It refers to ‘the loss’ by the depositary or its delegate but does not make clear what loss is being referred to—the loss of what? The second sentence seems to imply that the first is referring only to a loss of financial instruments held in custody and provides a remedy, namely that the depositary shall return a financial instrument of identical type or corresponding amount. On the face of it, it is not clear whether this is intended to exclude the possibility of other remedies, either under the AIFMD or under some other cause of action available under national law. 2.120  Article 21(13) contains a general statement that the depositary’s liability is unaffected by any delegation of its functions, subject to certain exceptions set out in that Article and Article 21(14). One of the exceptions is where the depositary has transferred liability to a delegate, but it may only transfer liability if (among other things) there is ‘an objective reason’ for doing so.123 What amounts to an ‘objective reason’ for this purpose is unclear. In practice many depositaries are including in their contracts with delegates an express and extensive obligation for the delegate to indemnify them for losses caused to the

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depositary by the (p. 152) delegate, as a ‘back-up’ in case it should ultimately be held that there was no ‘objective reason’ for a transfer of liability. 2.121  Regulation 30 of the UK AIFM Regulations is the main UK implementing provision as regards liability for loss. It does not simply repeat the relevant parts of Article 21(12). Instead, it provides that: where a financial instrument held in custody in accordance with Article 21.8(a) of the directive by the depositary or a third party to whom the custody has been delegated or sub-delegated is deemed to have been lost under Article 100 of the [Implementing Regulation]. . .the depositary must return a financial instrument of the identical type or the corresponding amount. . . 2.122  The UK seems therefore to have taken the view that liability for loss under Article 21(12) applies only in relation to financial instruments held in custody in accordance with Article 21(8)(a)—ie it assumes that ‘the loss’ referred to in the first sentence of Article 21(12) is the same as the loss referred to in the second sentence. Similarly, it assumes that when the first sentence says that ‘The depositary shall be liable. . .’, it simply means that it is obliged to return a financial instrument of the identical type or corresponding amount. Any indirect loss arising, for example, from late settlement of a transaction because the relevant instrument or proceeds were not available does not appear to be recoverable under this provision. 2.123  Liability for negligence is provided for in the second paragraph of Article 21(12), which states: The depositary shall also be liable to the AIF, or to the investors of the AIF, for all other losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations pursuant to this Directive. In accordance with Article 21(13), this liability is not affected by any delegation of the depositary’s functions; unlike liability for loss, there are no exceptions to this rule. 2.124  Regulation 31 of the UK AIFM Regulations implements the AIFMD’s provisions on liability for negligence. Regulation 31(2) provides that, ‘irrespective of any contractual provisions that provide otherwise’, the depositary’s liability is unaffected by any delegation of its functions. This statement, which does not appear in the AIFMD itself, seems intended to distinguish this liability from the depositary’s liability for loss, which the AIFMD and the UK AIFM Regulations expressly state may be transferred in certain circumstances to a person to whom the depositary has delegated custody. 2.125  There are interesting questions about the nature of the liability under regulations 30 and 31, which become apparent when these regulations are compared with section 138D of FSMA (summarized at paragraph 2.111). The relevant liability is similar to liability for negligence under regulation 31. Both create a form of statutory liability for breach of other obligations. However, there are differences: (a)  Section 138D attaches to the breach of non-statutory obligations arising under FCA rules, the most relevant rules in this case being those in the FUND sourcebook. On the other hand, regulation 31 concerns obligations that may arise from the UK AIFM Regulations, the Implementing Regulation, any other directly applicable EU regulation made under the AIFMD, or by or under the FSMA if the provision implements the AIFMD. 124

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(b)  Liability under regulation 31 arises only if the depositary’s failure is negligent or intentional. In this respect it is potentially narrower than liability under section 138D for which negligence or intent does not have to be shown. (p. 153) (c)  Liability under section 138D is ‘subject to the defences and other incidents applying to actions for breach of statutory duty’. It is not clear whether these defences and other incidents apply to liability under regulations 30 and 31 as this is not liability for breach of statutory duty in the ordinary sense. The reasons for this uncertainty are that the liability itself (not merely the obligations whose breach results in liability) is a creation of statute and, more importantly, that these regulations implement European legislation and must therefore be interpreted in accordance with European law. 2.126  The operating condition provisions of the UK AIFM Regulations, FCA rules, and Implementing Regulation may also impact existing private law rights in another way. The statutory remedies provided by section 138D of FSMA and regulations 30 and 31 of the UK AIFM Regulations do not preclude other kinds of private law action.125 Where, as an established matter of law, the AIFM or depositary owes a duty to take reasonable care (generally or in relation to what it says, for example in marketing material) or a contractual or fiduciary duty to the AIF or investor, a court is very likely to take into account relevant requirements in determining the scope of the duty in question.126 It is prudent to assume that a court will not necessarily cut back an existing duty to match the implementing measures. So, for example, disclosure of conflicting interests or duties without more may not be treated as the informed consent required by law to modify fiduciary duties.

VI. Transparency Requirements 1. Article 22—financial reporting 2.127  The requirements of the AIFMD for the production of annual reports have been implemented using a copy out approach.127 The rules for UK authorized AIFMs are incorporated in the FCA Handbook. Since a non-EU AIFM must also comply with these provisions in order to market into the UK in reliance on the private placement regime, the requirements for these are included in the UK AIFM Regulations (which do so by crossreference to the AIFMD). 2.128  The annual report must be provided for each financial year of the relevant AIF and made available no later than six months following the end of the financial year. Recital (48) of the AIFMD contemplates Member States imposing a shorter period for this. The FCA rules impose a period of four months on AIFMs of non-UCITS authorized schemes (ie NURSs and QISs) in order to continue with the pre-existing requirement.128 2.129  Article 22 requires the accounting information in the annual report to be audited by an auditor subject to the Audit Directive.129 However, Member States are permitted to allow an AIFM marketing a non-EU AIF to subject the report of that AIF to an audit meeting international (p. 154) auditing standards in force where the AIF has its registered office. The UK has implemented rules allowing for this. Although the drafting of this provision in the AIFMD is potentially ambiguous, the FCA rule implementing it provides that, in the case of a non-EU AIF, the audit can be undertaken by a person empowered by law to audit accounts under international auditing standards in force in the country where the non-EU AIF is established.130

2. Article 23—disclosure to investors

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2.130  The approach taken in implementing these provisions is similar to that for the annual reporting requirements, considered at paragraphs 2.127 to 2.129.131 2.131  Since the AIFMD allows a Member State to apply higher standards where it permits AIFs to be marketed to retail investors, the UK has continued with its pre-existing, pre-sale disclosure regime in relation to NURSs and QISs. These requirements therefore continue to apply, in addition to the rules implementing the AIFMD pre-sale disclosure requirements. The FCA has indicated its intention to revisit these requirements in the context of EU work on a key investor information document for packaged retail investment products, or ‘PRIPs’.

3. Article 24—regulatory reporting 2.132  The approach taken in implementing these provisions is similar to that for the annual reporting requirements, considered at paragraphs 2.127 to 2.129.132 2.133  The FCA’s previous practice was to collect information provided voluntarily by hedge funds and their counterparties to help it assess the potential systemic risk posed by hedge funds. In the light of the new reporting requirements, arrangements for voluntary submission of information by hedge funds have been discontinued. However, the FCA still receives information from hedge fund counterparties. 2.134  As with the annual reporting and disclosure requirements, a non-EU AIFM that markets an AIF in the UK must comply with the reporting obligations under Article 24. Since the FCA requires reporting by a UK AIFM on the basis of templates developed by ESMA, which also cover reporting by a non-EU AIFM, reporting by a non-EU AIFM can be on the same basis as for a UK authorized AIFM.

4. Consequences of violation of transparency requirements 2.135  The potential regulatory law consequences of any breach of the transparency requirements are broadly the same as those set out in paragraph 2.107. However, depending on the facts, criminal offences under section 89 of the Financial Services Act 2012 (misleading statements in connection with investment activities) and section 398 of FSMA (misleading statements to the FCA) may also be relevant. As regards potential rights of action under section 138D of FSMA, all the rules implementing these articles potentially carry a right to damages for a private person, in respect of any loss suffered as a result of breach. However, if a private person seeks to recover loss suffered as a result of a breach of the AIFM’s duty under COBS 4.2.1R to ensure that a communication is fair, clear, and not misleading, that person’s statutory right (p. 155) to damages is excluded to the extent that the AIFM can demonstrate that it has taken reasonable steps to comply with the rule.133 2.136  The statutory action for damages is without prejudice to any separate tortious liability in respect of negligent misstatement and liability under any other regimes which may apply in the particular circumstances, such as prospectus liability.

VII. AIFM Managing Specific Types of AIF 1. Section 1 (Article 25)—AIFM managing leveraged AIF 2.137  To the extent that this provision requires implementation, the UK has adopted a largely copy out approach.134 The implementing rules do not address in detail what the FCA will expect an AIFM to do in order to ‘demonstrate’ that the leverage limits set for each AIF it manages are reasonable and that they have been complied with.135 However, they do indicate that to comply with the relevant implementing rule, an AIFM should ‘report to the FCA any changes to the leverage limits it sets’.136 This does not address the position of leverage limits for new AIFs set up after the AIFM is authorized. However, in practice it seems likely that the FCA would treat these as changes to the leverage limits previously set in relation to that AIFM. It also does not cover the requirement to demonstrate compliance

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with leverage limits, but in practice it is likely that firms will, in any event, need to comply with them in a similar way to any other investment restrictions. 2.138  As noted previously,137 the FCA has adopted an increasingly interventionist approach in supervising the basis upon which firms design and operate financial products and their related product governance arrangements. It has also shown itself ready to challenge firms’ judgments in this respect. However, the FCA has been clear that its role is not to approve products, and it is anticipated that it would be reluctant to be put in a position in which it could be deemed to have given any assurance as to the reasonableness of the leverage limits within individual AIFs. Nonetheless, the fact that an AIFM is required to demonstrate that relevant leverage limits are reasonable would seem to imply that it is necessary for someone to take a view as to whether the AIFM has successfully done so.

2. Section 2 (Articles 26 to 30)—obligations for AIFMs managing AIFs which acquire control of non-listed companies and issuers 2.139  Articles 27–29 impose obligations on an AIFM to provide certain information to the competent authority of the AIFM where an AIF acquires control of a non-listed company or issuer. These are implemented in the UK AIFM Regulation138 itself. The competent authority for these purposes, and for enforcing the anti-‘asset stripping’ provisions in Article 30, is the FCA.139 2.140  The UK government has decided not to apply these provisions to sub-threshold AIFMs.

(p. 156) 3. Consequences of violation of provisions relating to AIFMs managing specific types of AIF 2.141  The potential regulatory, criminal, and civil law consequences of any breach by the AIFM of the rules implementing the leverage requirements are broadly the same as set out in paragraphs 2.107 et seq. However, the FCA is also given power, by regulation 68(2) of the UK AIFM Regulations, to impose limits on the leverage an AIFM may employ and other restrictions on the management of an AIF (subject to compliance with certain notification requirements). 2.142  Regulation 44 of the UK AIFM Regulations provides that an AIFM that contravenes the non-listed company etc. provisions is to be treated as having contravened a rule made by the FCA. It is therefore clear that such a breach is intended to engage the FCA’s regulatory law powers. The better view appears to be that the regulation is not intended to extend the statutory right of action under section 138D of FSMA to private persons who have suffered loss as a result of such a breach.

VIII. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Introduction 2.143  The AIFMD restriction on marketing AIFs, as implemented in the UK in the UK AIFM Regulations, will operate in parallel to, and on the whole overlap with, the financial promotion and scheme promotion restrictions.140 The definition of ‘marketing’ in the AIFMD has been reflected in Part 6 of the UK AIFM Regulations, which also limits the application of the AIF marketing restrictions to direct and indirect marketing in the UK by AIFMs and investment firms.141 This reflects an apparent anomaly in Article 6(8) of the AIFMD. The effect is that the marketing restrictions in the UK AIFM Regulations will not apply directly to activities undertaken by other categories of regulated firm that are permitted under the terms of their current authorization to market investments that may fall within the definition of ‘AIF’. This distinguishes the AIFM marketing regime from the financial promotion restrictions which affect a wider range of persons than those under the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

UK AIFM Regulations. An AIFM or investment firm will need to consider both regimes before carrying out any promotional activity in relation to an AIF in the UK. Other firms should consider whether their activities involve indirect marketing on behalf of the AIFM. 2.144  Investment firms: The FCA has confirmed that an investment firm is only subject to the marketing restrictions in the UK AIFM Regulations where it is marketing an AIF at the initiative of, or on behalf of, the AIFM.142 If an investment firm is marketing an AIF in this manner it may only market an AIF if the AIFM has complied with the relevant conditions in Part 6 of the UK AIFM Regulations. An investment firm itself will be unable to satisfy (p. 157) the conditions for marketing an AIF in the UK, but if it markets an AIF for or on behalf of the AIFM, both it and the AIFM would potentially breach the the UK AIFM Regulations, unless the AIFM has first complied with the relevant conditions. 2.145  Marketing: The UK has adopted a copy out approach to the definition of ‘marketing’,143 but the FCA has provided guidance on interpretation. While this guidance is helpful in addressing some of the ambiguity, uncertainty remains as to some aspects of the definition and there is a risk of divergence between the views of the FCA and those of other regulators. Some of the key elements of the guidance are as follows: (a)  Marketing at the initiative of the investor: The UK has exempted marketing that takes place at the initiative of the investor. 144 In an earlier consultation draft of its PERG, the FCA provided detailed guidance as to when marketing can be regarded as being at the initiative of the investor. However, in the final published version, the FCA suggests that a simple confirmation from the investor that the marketing was made at the investor’s own initiative should normally suffice, provided this is not solicited to avoid the marketing restriction. 145 (b)  Offering or placement: The FCA’s guidance is that an offering or placement takes place for the purposes of the UK AIFM Regulations when a person seeks to raise capital by making a unit or share of an AIF available for purchase by a potential investor. It has also provided examples, which include a contractual offer to make an investment that can be accepted by a potential investor and an invitation to an investor to make an offer to subscribe for an investment. Read in conjunction with the FCA’s guidance on draft documentation (see below), this suggests that the FCA views the scope of AIFMD ‘marketing’ as being less extensive than ‘promotion’ for the purposes of the FSMA financial promotion restrictions. This means that there is potentially some flexibility to promote a potential new AIF in the UK without first complying with the marketing restrictions. The FCA has also confirmed that offering or placement does not usually extend to secondary trading of units or shares in an AIF as this does not relate to the raising of capital in an AIF, the raising of capital being a key condition for any offer or placement to be caught by the definition of marketing. 146 However, secondary trading could nonetheless be caught if it involved the indirect offering or placement of units or shares in an AIF. (c)  Draft documentation: The FCA has taken the view that sending out draft promotional documentation in relation to an AIF (such as a pathfinder version of a private placement memorandum) should not be considered marketing under the UK AIFM Regulations (although it may still involve a financial promotion) unless the draft documentation is in materially final form and the relevant materials can be used by an investor to make an investment in the AIF. The FCA has noted that other EEA states may take a different view. 147 (d)  Investor: The expression ‘investor’ is not defined in the AIFMD or UK AIFM Regulations. However, the FCA has expressed the view that an investor is the person who makes the (p. 158) decision to invest in the AIF rather than the person whose property is being invested. 148 Based on this approach, the FCA has taken the view that where an AIF is marketed to a discretionary investment manager, it is the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investment manager that can be regarded as the ‘investor’ so that it is not necessary to look through to the underlying client of that manager. However, the position might be otherwise if the investment manager were itself engaging in offering or placement on behalf of an AIFM. (e)  Territoriality: The marketing restrictions in the UK AIFM Regulations only apply where an AIFM or investment firm markets an AIF ‘in the United Kingdom’. 149 It therefore appears that, for the purposes of the UK AIFM Regulations at least, an AIFM (or investment firm) will not be breaching the marketing restrictions if the marketing to an investor takes place outside the UK (even if that investor is domiciled or has their registered office there).

2. Article 31—marketing of shares or units of EU AIFs in the home Member State of the AIFM 2.146  Before marketing a UK AIF or an EU AIF,150 a UK AIFM must obtain the approval of the FCA.151 By contrast, the scheme promotion restrictions do not require pre-approval from the FCA. 2.147  While certain promotional activity, for example circulating an early draft prospectus,152 may not require the AIFM to have obtained prior approval, in practice it is likely that an AIFM will want to be sure of avoiding a breach of the marketing restrictions by obtaining FCA approval before any substantive promotional activity is undertaken. 2.148  A UK AIFM can apply for FCA marketing approval for an AIF either as part of the AIFM’s authorization application or, if already authorized, by a separate marketing application.153 The application to the FCA must be made using the form ‘Notification of intention to market an AIF in the United Kingdom’, available from the FCA’s website. If the AIF is to be marketed to retail as well as professional investors in the UK, the FCA requires the UK AIFM to indicate how the marketing will be effected in accordance with the UK AIFM Regulations.154 2.149  The FCA generally has 20 working days after receipt of a complete application to make a determination in respect of the relevant UK or EU AIF.155 If there is a material change in the information provided in the FCA approval application, the UK AIFM will be required to give the FCA at least one month’s prior notice before implementing the change or, if the change is unplanned, to notify the FCA as soon as reasonably practicable and, at the latest, immediately after the change has occurred.156

(p. 159) 3. Article 32—marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM A. Marketing into the UK by AIFMs from other Member States 2.150  An EU AIFM will only be able to market a UK or EU AIF157 to professional investors in the UK using the AIFMD marketing passport under Article 32 of the AIFMD. The EU AIFM must apply to its home Member State competent authority for permission to market in the UK and will only be able to commence marketing when the FCA receives that competent authority’s passporting notice in relation to such marketing.158 The EU AIFM will be informed of the transmission of this notice to the FCA by the AIFM’s home Member State competent authority.159 2.151  The EU AIFM must notify its home Member State competent authority of any material change to the information provided in the passporting notification at least one month prior to implementing the planned change. Unless the change affects the AIFM’s

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compliance with the AIFMD, the home Member State competent authority will simply inform the FCA of the changes.160 2.152  Under Article 32(5) of the AIFMD, an EU AIFM marketing an AIF into the UK under a marketing passport is subject to the laws and supervision of the UK as the host state. Accordingly, the EU AIFM must comply with the scheme promotion restrictions and relevant FCA rules when carrying out promotional activity in the UK in relation to the relevant AIF.161

B. UK AIFM marketing into other EU Member States 2.153  A UK AIFM can only market a UK or EU AIF162 to professional investors in an EU Member State other than the UK in reliance on a marketing passport under Article 32 of the AIFMD. The UK AIFM must submit a passporting notification to the FCA.163 The UK AIFM must also consider relevant national law and regulations before commencing any marketing activity in the relevant EU Member State.164

C. Comparison with the UCITS marketing regime 2.154  The AIFM marketing passport operates in a similar way to the UCITS product passport under the UCITS Directive. The key substantive difference in the process is that the home Member State has 20 working days under Article 32(3) of the AIFMD to transmit the completed application to the FCA (whereas, under Article 93(3) of the UCITS Directive, a (p. 160) competent authority has 10 working days). Unlike the UCITS Directive, there is no requirement in the AIFMD for the AIFM or AIF to have a facilities agent in the UK. 2.155  If the AIF is being marketed to retail investors in the UK (either as well as or instead of professional investors), the EU AIFM must obtain an AIFM marketing passport and comply with additional UK requirements applicable to the marketing of an AIF to retail investors.165

4. Article 33—conditions for managing AIFs established in other Member States 2.156  Before the implementation of the AIFMD, it was already possible for firms passporting under the Capital Requirements Directive IV,166 MiFID, and the UCITS Directive to provide investment management services to all categories of UK AIF in reliance on an appropriate passport. 2.157  The position in relation to AIF management activities generally was more complex as a result of the fact that the activity of establishing, operating, or winding up a collective investment scheme is a UK-regulated activity, but is not regulated under any of the single market directives. This meant that there was a difference in regulatory treatment between AIFs that fell within the definition of ‘collective investment scheme’ and those that did not. Given the broad range of arrangements falling within the definition of AIF, it is not easy to generalize but, broadly, the activity of establishing, operating, or winding up a collective investment scheme was subject to more intensive regulation: (a)  Incoming UCITS management companies were permitted to act as the manager of UCITS funds in reliance on a passport under the UCITS Directive. (b)  It was also possible for any firm (whether located in the EU or otherwise) to conduct the activity of establishing, operating, or winding up an unregulated collective investment scheme on a cross-border basis from a place of business outside the UK without needing to be UK-authorized.

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(c)  However, where an EU firm passporting into the UK under one of the single market directives wished to establish, operate, or wind up collective investment schemes (other than UCITSs) from a location in the UK, it was necessary for it to obtain a ‘top up permission’ from the FCA (since the activity is UK-regulated rather than being capable of being conducted under an EU passport). (d)  Where an incoming firm was not operating under an EU passport and was not already UK-authorized, but wished to conduct the activity of establishing, operating, or winding up a collective investment scheme from a place of business in the UK, it was necessary to apply to the FCA to become authorized. This will remain the case for a non-EU AIFM until the third country AIFM passporting provisions of the AIFMD take effect. 2.158  Following implementation of the AIFMD, where an authorized EU AIFM provides management services to a UK AIF in reliance on a passport under the AIFMD, and that AIF is also within the UK definition of ‘collective investment scheme’, the AIFM no longer requires a ‘top up’ in order to conduct the UK regulated activity of establishing, operating, or winding up collective investment schemes. Instead, it can rely upon its passport. (p. 161) 2.159  The UK implementing rules address the application of the UK Financial Services Compensation Scheme (FSCS) to an EU AIFM that provides its services to an AIF located in the UK either cross-border or through a branch. The FSCS provides compensation (subject to certain limits) to investors who suffer a loss at the hands of firms conducting regulated activities where those firms are in default and are unable to satisfy claims against them. The position of a non-EU AIFM under the FSCS has been deferred pending the implementation of the third country AIFMs regime under the AIFMD. 2.160  Various firms conducting activities into the UK in reliance on EU passports are required to participate in the FSCS, while others are given the option to ‘purchase’ cover under the scheme to ‘top up’ any difference between the compensation provided under the investor compensation scheme in their home Member State and that available under the FSCS. For EU AIFMs, the UK has restricted the application of the FSCS so that it only applies on a compulsory basis to an EU AIFM of a UK authorized AIF. The rules allow other EU AIFMs to participate in the FSCS should they elect to do so. The compulsory element is being retained because the UK is not satisfied that UK investors would otherwise obtain the same level of protection under the compensation schemes of other Member States. This approach mirrors that taken in relation to an EU manager of a UCITS fund. Consequently, an incoming EU AIFM wishing to assume management of a UK authorized AIF is required to pay a levy to the FSCS. The cost of this is calculated in the same way as for a UK manager. 2.161  A similar approach has been taken to the jurisdiction of the UK Financial Ombudsman Service (FOS). The purpose of the FOS is to provide a swift, relatively informal means of resolving disputes between investors or clients and regulated firms. The FOS normally covers activities conducted from a permanent establishment in the UK, including UK branches of EEA firms. This approach has been maintained for most cross-border business under the AIFMD. However, FOS coverage has been extended to an EEA AIFM managing an FCA-authorized fund from an establishment outside the UK.

5. Consequences of violation of conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences

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2.162  The consequences of ‘unlawful marketing’ (ie marketing in contravention of the restrictions under the UK AIFM Regulations) depend on whether the AIFM (or investment firm) is an authorized person (eg a UK AIFM or EU AIFM marketing into the UK under an EU passport) or an unauthorized person (eg an EU AIFM marketing into the UK without an EU passport). 2.163  Authorized persons: Where the FCA considers that there are circumstances suggesting unlawful marketing by an authorized person,167 the FCA may exercise its right under section 168 of FSMA168 to appoint a competent person to investigate the suspected breach of the (p. 162) UK AIFM Regulations. This is the same power the FCA has in respect of suspected breaches of the scheme promotion restrictions. 2.164  Following any investigation ordered by the FCA under section 168 of FSMA (or separate to the FCA exercising its power), the FCA has a range of disciplinary powers it can use against an authorized firm for FCA rule breaches, including systems and control failures that may have contributed to the unlawful marketing (see paragraph 2.107). 2.165  Unauthorized persons: Where the FCA considers that there are circumstances suggesting unlawful marketing by an unauthorized person, the FCA may exercise its right under section 168 of FSMA169 to appoint a competent person to investigate the suspected breach of the UK AIFM Regulations. This is the same power the FCA has in respect of suspected breach of the financial promotion restrictions.

B. Criminal law consequences 2.166  Criminal sanctions are only available in respect of unlawful marketing where the AIFM (or investment firm) is not an authorized person, because this is treated as a breach of the financial promotion restrictions. However, depending on the facts, criminal offences under section 89 of the Financial Services Act 2012 (misleading statements in connection with investment activities) or fraud may also be relevant.

C. Private law consequences 2.167  Authorized persons: Any unlawful marketing carried on by an AIFM or investment firm that is an authorized person is actionable at the suit of a private person who suffers loss as a result of such marketing (subject to the defences and other incidents applying to actions for breach of statutory duty).170 2.168  Unauthorized persons: As is the case where there is a breach of the financial promotion restrictions, any controlled agreement (eg a subscription document) entered into by a person (as a customer) due to unlawful marketing by an unauthorized person is unenforceable against that person. In addition, any rights exercised by that person in relation to his investment in the AIF (referred to in the UK AIFM Regulations as controlled investment171) will also be unenforceable. The person in question is entitled to recover any money or property transferred by him, as well as compensation for any loss sustained.172

(p. 163) IX. Specific Rules in Relation to Third Countries 1. Article 34—conditions for EU AIFMs that manage non-EU AIFs not marketed in the EU 2.169  Until implementation of the AIFMD, it was legitimate for a UK authorized person with an appropriate permission to manage the assets of (broadly) whomever it pleased, and from wherever the owner originated. It is not now permissible for a UK authorized AIFM to manage the assets of a third country AIF, even if that AIF is not marketed in the EU, unless there is an appropriate cooperation arrangement in place between the FCA and the relevant authorities of the territory where the AIF is established.173 As of August 2013, through negotiations carried out by ESMA, the necessary cooperation arrangements are in place with 42 territories. Under the AIFMD, the AIFM is not required to ensure that an AIF

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of this kind appoints a depositary or to make available an annual report.174 In all other respects, the AIFM is subject to the provisions implementing the AIFMD and, therefore, the same potential regulatory, criminal, and private law consequences follow from a breach. Clearly, the marketing requirements of the AIFMD are not relevant in relation to an AIF not marketed in the EU.

2. Articles 35 and 36—conditions for marketing in the EU with and without a passport of non-EU AIFs managed by an EU AIFM A. Article 35 2.170  The UK has not so far brought into force rules implementing Article 35 of the AIFMD (establishment of a passporting regime for non-EU AIFs in the EU), pending the review to be carried out by ESMA and the Commission during 2015 under Article 67 of the AIFMD as to the introduction of the third country provisions of the Directive. HM Treasury and the FCA have put in place minimum implementation measures because they believe that they are obliged to do so at this time, but the FCA will consult on implementing rules in advance of bringing into force the Article 35 passporting regime following that review.175

B. Article 36 2.171  Article 36 permits Member States to impose additional requirements for private placement in their jurisdiction of non-EU AIFs managed by EU AIFMs. The UK has chosen not to impose any additional requirements beyond the minimum stated in the AIFMD. This approach is intended to ensure continued investor access to third country AIFs by UK investors, subject to the existing UK private placement regime. Consequently, an EU AIFM seeking to market a non-EU AIF in the UK must both (a) comply with the minimum private (p. 164) placement standards under the AIFMD;176 and (b) comply with the UK regime that existed prior to implementation of the Directive.177 2.172  The AIFMD minimum requirements include what is colloquially referred to as the ‘depositary lite’ regime. The UK does not require the three basic depositary functions of cash monitoring, safe-keeping, and operational oversight to be carried out by a single depositary (the other depositary provisions, for example dealing with independence, segregation, and liability, do not apply). These three basic functions may be performed by one or more depositaries but they may not be performed by the AIFM itself.178 A UK firm performing any of these functions does, however, still need a Part 4A permission to act as an AIF depositary. 2.173  An EU AIFM wishing to market a non-EU AIF in the UK need only notify the FCA of its intention to do so.179 It does not need to wait for FCA approval before engaging in marketing activities. It must, however, comply with the financial promotion or the scheme promotion restrictions and relevant FCA rules, as applicable.

3. Articles 37 to 41—authorization of non-EU AIFMs and managing and marketing AIFs in the EU 2.174  The position in relation to these Articles is as described in paragraph 2.170.180

4. Article 42—conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 2.175  The position for a non-EU AIFM marketing a non-EU AIF to professional investors in the UK is broadly the same as for an EU AIFM marketing a non-EU AIF (see paragraph 2.171) except that, for a non-EU AIFM, the minimum requirements under the AIFMD are less stringent.181 A non-EU AIFM need only notify the FCA of its intention to market the relevant AIF in the UK to professional investors before engaging in marketing activities.182 Cooperation arrangements of the kind discussed in paragraph 2.169 must be in place and, so far as relevant, the AIFM must comply with the transparency requirements described in

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section VI and the anti-asset stripping provisions implemented in Part 5 of the UK AIFM Regulations. 2.176  Unlike many other EU jurisdictions, the UK has also introduced a separate subthreshold non-EU AIFM marketing regime. A non-EU AIFM falling under the thresholds set out in regulation 9 of the UK AIFM Regulations and intending to market in the UK must still (p. 165) notify the FCA but will not need to comply with the private placement criteria under Article 42 of the AIFMD. Instead, the FCA only requires the sub-threshold AIFM to provide it with basic information, including information relating to the main instruments in which the AIFM trades and the principal exposures and most important concentrations of the AIF it manages, to enable the FCA to monitor systemic risk effectively.183

5. Consequences of violation of specific rules in relation to third countries 2.177  The FCA has power to suspend or revoke the marketing entitlement of an AIFM relying on the provisions implementing Article 36 or 42 if, broadly, it is not complying with applicable requirements or has misled the FCA. The UK AIFM Regulations do not provide for any criminal or private law consequences in the event of non-compliance with these requirements. 2.178  Once the marketing entitlement is revoked, if marketing continues the position is as described in section VIII.5.

X. Marketing to Retail Investors 1. Article 43—marketing of AIFs by an AIFM to retail investors 2.179  As discussed at section I.2, the categories of non-UCITS funds available to retail investors in the UK prior to the implementation of the AIFMD were: (a)  FCA authorized NURSs; (b)  QISs (which were generally restricted to professional investors, but could also be held by a restricted category of retail investors); (c)  closed-ended bodies corporate (such as investment trust and venture capital trust companies); (d)  non-UK collective investment schemes recognized under sections 270 and 272 of FSMA, recognition being conditional on investors being provided with a level of protection equivalent to investment in a non-UCITS retail scheme; (e)  certain unregulated collective investment schemes where these could be sold to retail clients in reliance on an exemption from the general prohibition on retail sales (in particular, where the investors satisfied requirements as to their sophistication in investment matters or level of income or assets available for investment). 2.180  As noted at paragraph 2.13, the circumstances in which it is possible to promote unregulated collective investment schemes and certain other ‘non-mainstream pooled investment products’ to retail clients are due to be tightened from January 2014.184 2.181  In implementing the AIFMD, the UK has restricted neither the range of AIFs available for retail investment nor the extent to which unregulated funds or qualified investor schemes can be sold to retail investors. Nonetheless, in practice, the tendency has been for the UK regulator to demand ever higher standards in the distribution of

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unregulated collective (p. 166) investment schemes to retail investors, and the new restrictions discussed in paragraph 2.13 are consistent with this. 2.182  Since the UK is required to give EU AIFs managed by EU AIFMs access to the retail market on a non-discriminatory basis, a revised recognition process for non-UK funds designed for investment by retail investors has been provided to allow for this. This involved merging and expanding two pre-existing regimes—the first allowing for recognition for retail distribution of certain funds from ‘designated territories’ and the second for individual recognition of funds from elsewhere. Under the new recognition regime, for an AIF to be recognized: (a)  it is necessary to ensure that it provides adequate protection to investors, broadly by applying standards equivalent to those for UK authorized funds; and (b)  an application for recognition must be made to the FCA accompanied by a gap analysis comparing the investor protection standards in the AIF’s home state against those in the UK. 185 The FCA will only declare the scheme to be recognized if it is satisfied as to the level of equivalence.186 2.183  Once a year, following recognition and any material change to the AIF, the AIFM must confirm to the FCA that the scheme is still compliant with requirements that are comparable to the then-current requirements for UK retail funds. This enables the FCA to establish whether there are any divergences and to require compliance with UK standards.187 Pre-existing recognized schemes are not required to reapply, but must file a statement of compliance before 22 July 2014 if they wish to remain authorized.

2. Consequences of violation of national rules with respect to marketing of AIFs by AIFMs to retail investors 2.184  Marketing to retail investors of a scheme not permitted to be marketed to them will, depending on the identity of the person doing the marketing, potentially breach the financial or scheme promotion restrictions and the marketing restrictions referred to in sections VIII and IX, with the consequences described in those sections. 2.185  The FCA may also revoke or suspend recognition of a scheme in certain circumstances, including where the AIFM or depositary has contravened relevant requirements or misled the FCA, or where it is undesirable in the interests of participants or potential participants that the scheme should continue to be recognized.188 Once recognition is revoked, continued marketing will have the consequences described in section VIII.5.

(p. 167) XI. Competent Authorities and Supervisory Powers 1. Designation, responsibility, and powers of competent authorities 2.186  The competent authority for the purposes of the AIFMD is the UK FCA. Since the majority of UK business that falls to be regulated under the AIFMD was already regulated in the UK before 22 July 2013, most of the competent authority powers contemplated under these provisions were already available to the UK regulator in relation to the businesses concerned, albeit that the drafting of the relevant provisions has been adjusted to cover AIFMs that did not previously require authorization. The scope of existing regulatory powers has also been revised to cover situations where the AIFMD contemplates the competent authority imposing requirements on AIFMs that are not UK regulated, broadly by extending regulatory powers already exercisable in relation to UK authorized firms. The powers of enforcement in relation to unlawful marketing of AIFs in the UK, considered at

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paragraphs 2.162 to 2.168, are entirely new, but build on the pre-existing financial and scheme promotion restrictions, with which they overlap significantly.

XII. Concluding Remarks 2.187  Before implementation of the AIFMD, the UK had a comprehensive system of regulation covering the establishment, operation, and winding up of a collective investment scheme, the management and custody of an investment portfolio (including one belonging to any kind of collective fund), and the promotion of a collective investment scheme. The UK government has not taken the opportunity offered by the need to implement the AIFMD to review and revise the existing regime. Instead, the Treasury and the FCA have, in broad terms, chosen the route of bolting the new requirements (which it has, in the main, ‘copied out’) on top of the existing regime and making only such changes to the existing regimes as are necessary to satisfy themselves that implementation has been achieved. The result is a highly complex set of rules and legislation, which those affected are unlikely to find easy to understand and, as a result, may well experience uncertainty as to whether they have properly complied.(p. 168)

Footnotes: 1

  The author is grateful for the comments and assistance of Jonathan Baird, Jordan Cooper, Andrew Marsh, and Annabel Sykes, all of Freshfields Bruckhaus Deringer LLP, in preparing this chapter. 2

  The FCA is the competent authority for the purposes of the AIFMD. Further detail is given in para 2.186. 3

  FSMA, s 235.

4

  The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062). 5

  OJ 2009 L302/32.

6 

FSMA, s 21. In this chapter, s 21 and related exemptions are referred to as ‘the financial promotion restrictions’. 7 

The exemptions are set out in the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (SI 2005/1529). 8 

FCA Handbook of Rules and Guidance, COBS 4. The basic requirement is for the communication to be clear, fair, and not misleading. However, this is supplemented by more detailed rules, especially where the communication is being made to a retail client. 9

  FSMA, s 238. In this chapter, s 238 and related exemptions are referred to as the ‘scheme promotion restrictions’. 10

  Authorized and regulated by the FCA under FSMA, Pt XVII, Chs III and IV (respectively), the Open Ended Investment Companies Regulations 2001 (SI 2001/1228), and COLL. 11

  FSMA, s 264.

12 

FSMA, s 272: the categories of recognized fund have been simplified in connection with the implementation of the AIFMD. 13 

The exemptions are set out in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060) and allow for promotion, for example to investment professionals and sophisticated investors where certain conditions are satisfied. Further exemptions are set out in COBS 4.12 of the FCA Code of Business Sourcebook. Firms that are not authorized to conduct investment business in the UK must simply comply with the financial promotion restrictions. The overall effect is

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to impose a general prohibition on the promotion of any collective investment scheme, outside the exemptions discussed in this paragraph. 14

  OJ 2003 L345/64; FSMA, Pt VI; United Kingdom Listing Authority (UKLA) Prospectus Rules. 15

  UKLA Listing Rules, LR 15.

16

  SI 2001/1060.

17

  SI 2013/1773.

18

  SI 2013/1797. These Regulations implement elements of the AIFMD relating to the authorization of non-EU AIFMs which have the UK as their ‘Member State of reference’ (as defined in the AIFMD), the management and marketing of AIFs by such AIFMs, and the marketing of non-EU AIFs by UK AIFMs, which will not apply until dates that will be specified in delegated acts to be made under the AIFMD by the European Commission. 19

  SI 2001/544.

20

  FUND 1.1.2R.

21

  Explanatory Memorandum to the UK AIFM Regulations, Annex A.

22

  UK AIFM Regulations, reg 2(2)(a).

23

  RAO, Sch 8, para 1.

24

  AIFMD, Art 2(3) and UK AIFM Regulations, regs 3, 4.

25

  The AIFMD definition is incorporated into the UK AIFM Regulations verbatim by reg 2(2). 26

  In the FCA’s Perimeter Guidance Sourcebook (PERG), PERG 16.6, Questions 6.2–6.5.

27

  PERG 16.6.4, Question 6.4.

28

  European Commission, Questions on Single Market Legislation, AIFMD section, Question ID 1146; available at . 29

  PERG 16.6, Questions 6.3, 6.4.

30

  PERG 16.6, Question 6.5.

31

  UK AIFM Regulations, reg 10(2).

32

  RAO, Art 51ZC.

33

  RAO, Art 51ZG.

34

  RAO, Art 51ZG. The exemption also applies where no more than 30 days have passed since the AIF was last managed by such a person. See paras 2.27 and 2.28 for an explanation of what is a sub-threshold AIFM. 35

  FSMA, s 1E.

36

  RAO, Art 51ZC(3).

37

  UK AIFM Regulations, reg 26(1) and FUND 3.10.

38

  FUND 3.10.9EU. The FCA uses ‘EU’ in its Handbook to denote material reproduced which originates either in a directive or a directly applicable EU regulation. 39

  PERG 16.3, Question 3.9.

40

  PERG 16.3, Questions 3.9, 3.10.

41

  PERG 16.3, Questions 3.12, 3.13.

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42

  A partnership established under the Limited Partnerships Act 1907.

43

  PERG 16.3, Question 3.16.

44

  UK AIFM Regulations, reg 4(1).

45

  PERG 16.3, Question 3.15.

46

  UK AIFM Regulations, reg 6.

47

  FUND 1.4.4G(4) and PERG 16.3, Question 3.2.

48

  FUND 1.4.6G.

49

  ie a firm that is an ‘investment firm’ for the purposes of the Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (OJ 2004 L145/1) (generally known as ‘MiFID’). 50

  See FSMA, ss 55A et seq.

51

  Now Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 (OJ 2013 L176/338), and Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (OJ 2013 L176/1). 52

  These relevant rules are found in the GENPRU, BIPRU, UPRU, and IPRU (INV) sections of the FCA Handbook. Starting points are GENPRU 2.8, BI PRU 1.1 and 8.5, UPRU 1.1, and IPRU (INV) 11, and all have related transitional provisions. 53

  Implementing Regulation, Art 12.

54

  See further para 2.126.

55

  GENPRU 2.1.72R.

56

  GRNPRU 2.1.73R.

57

  FSMA, s 55J.

58

  FSMA, s 55J(1)(b).

59

  FSMA, s 55J6A(a).

60

  The regulatory, criminal, and private law consequences under the FSMA and related legislation are discussed in detail in Freshfields Bruckhaus Deringer, Financial Services: Investigations and Enforcement, 3rd edn (Bloomsbury Professional, 2014). 61

  FSMA, s 23.

62

  FSMA, s 25.

63

  FSMA, s 21; and see para 2.08.

64

  FSMA, s 30.

65

  FSMA, s 20. Under s 20(3), there are certain cases in which an action similar to that available under s 138D of FSMA (see para 2.111) is available, broadly, to a ‘private person’. A breach may be actionable by individuals or other persons not acting in the course of business that suffer a loss as a result of the breach, subject to the defences and other incidents applying to breach of statutory duty. 66

  FSMA, ss 55J, 55L.

67

  FSMA, s 55J(6A)(b). An offence may also have been committed under FSMA, s 398.

68

  FSMA, s 55J(6A)(c).

69

  FSMA, s 138D(5), GENPRU 1.4.1R, and BIPRU 1.4.1R. Compare the situation as regards operating conditions—see para 2.111.

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70

  Included in the ‘Regulatory Guides’ section of the FCA Handbook.

71

  Retail Product Development and Governance—Structured Product Review, Finalised Guidance, FSA, March 2012 (FG 12/9). 72

  FCA, Quarterly Consultation Paper No 2, September 2013, CP13/9, Ch 14.

73

  See primarily FCA Principle for Business 8 (PRIN2.1.1R) and COBS 2.1.4R.

74

  FCA Principle for Business 8 (PRIN2.1.1R).

75

  FUND 3.7.

76

  FSA Consultation Paper CP12/32, ‘Implementation of the Alternative Investment Fund Managers Directive Part 1’, November 2012, paras 7.39, 7.42. 77

  FSA Consultation Paper CP12/32 (n 76), para 7.47.

78

  FUND 3.6.

79

  FSA Consultation Paper CP12/32 (n 76), para 8.14.

80

  FCA SYSC 4.1.

81

  FSA Consultation Paper CP12/32 (n 76), para 7.28.

82

  See SYSC 1 Annex 1, 2.6B.

83

  AIFMD, Art 19(2). UK implementation of Art 19 is primarily in FUND 3.9.

84

  In FUND 3.10. See paras 2.33 et seq. in relation to the question of delegation and ‘letter-box’ entities under Art 20(3). 85

  This is discussed in more detail at paras 2.118 et seq.

86

  These questions are discussed in more detail at para 2.106.

87

  FSA Discussion Paper DP 12/1, ‘Implementation of the Alternative Fund Managers Directive’, January 2012, paras 7.3 and 7.4; and FSA Consultation Paper CP12/32 (n 76), para 9.12. 88

  HM Treasury Consultation Paper, ‘Transposition of the Alternative Investment Fund Managers Directive’, January 2013, para 4.4. 89

  FUND 3.11.13G.

90

  AIFMD, Art 21(4)(a) and (10).

91

  FUND 3.11.6G. However, under the FSMA the position is different for an authorized AIF (see later in this paragraph). 92

  FCA Policy Statement PS13/5, ‘Implementation of the Alternative Investment Fund Managers Directive’, June 2013, para 6.13. 93

  FSA Consultation Paper CP12/32 (n 76), para 9.46.

94

  RAO, Art 51ZD(1)(a).

95

  FCA Policy Statement PS13/5 (n 92), para 6.7.

96

  Capital Requirements Directive IV and Regulation (EU) No 575/2013.

97

  This includes MiFID investment firms performing this role (see FUND 3.11.16R), even if their capital requirement might otherwise have been lower. 98

  IPRU-INV 5.2.3(3)R(a).

99

  FCA Policy Statement PS13/5 (n 92), para 6.3.

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100

  FUND 3.11.14R and IPRU-INV 5.2.3(3)R(a)(ia).

101

  For example, FSA Consultation Paper, ‘Implementation of the Alternative Investment Fund Managers Directive Part 2’, March 2013, CP13/9, para 6.8. 102

  HM Treasury Consultation Paper, ‘Transposition of the Alternative Investment Fund Managers Directive’, January 2013, para 2.13, and the related ‘Response to Consultation’, May 2013, para 2.5. 103

  Set out in AIFMD, Art 21(11)(a)–(d).

104

  AIFMD, Art 21(11).

105

  FUND 3.11.28R.

106

  FUND 3.11.7R(1).

107

  AIFMD, Art 21(11)(b) and FUND 3.11.28R(2).

108

  This is expressly permitted (subject to certain conditions) by recital (43) of the AIFMD and FUND 3.11.8G. 109

  AIFMD, recital (40), Art 21(8)(a)(ii) and (11)(d)(iii); Implementing Regulation, Art 99(1) (a) and (3). 110

  FCA Policy Statement PS13/5 (n 92), para 6.23; FUND 3.11.31G.

111

  FSMA, s 55J(6A). The FCA also has an own-initiative power to impose requirements on an AIFM under FSMA, s 55L. 112

  FSMA, ss 204A–206A.

113

  FSMA, s 384. There is an alternative restitutionary remedy in FSMA, s 382 not limited to authorized persons, under which the FCA can make a court application and the payments are made through the FCA, rather than directly to those affected. The FCA can also apply to court for an injunction under s 380 to restrain breaches and require a remedy beyond restitution. 114

  FSMA, s 66.

115

  FSMA, s 138E(1) makes clear that breach of a rule made by the FCA is not, in and of itself, an offence. 116

  This expression is defined in the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256) and very broadly means any individual not carrying on a financial services business and anyone else not acting in the course of a business (excluding a governmental or international organization). This remedy will be of limited relevance in the context of any AIF not marketed to retail investors. Note that an attempt in Grant Estates Limited (in liquidation) v The Royal Bank of Scotland plc [2012] CSOH 133 to argue that MiFID required a wider class of person to have these rights failed. 117

  This is subject to the defences and other incidents applying to actions for breach of statutory duty. The requirements that the claimant must be able to show that the breach caused the loss and has not contributed to his own loss through his own negligence are probably the most relevant. 118

  In practice, rather than litigate, a consumer may take his complaint to the Financial Ombudsman Service—discussed in para 2.161—rather than to court. 119

  SYSC 1 Ann 1.2.19R.

120

  This seems an appropriate approach, as the Implementing Regulation was clearly not drafted with a right to statutory damages in mind.

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121

  The protection offered by reg 24(4) of the UK AIFM Regulations appears to be bolstered, to some extent, by COBS 2.1.2R, which provides that, ‘[An AIFM] must not, in any communication relating to designated investment business seek to: (1) exclude or restrict; or (2) rely on any exclusion or restriction of; any duty or liability it may have to a client under the regulatory system’. Any breach of this rule gives rise to damages under FSMA, s 138D (this right is not restricted to private persons). 122

  AIFMD, Art 21(12), first and second paragraphs.

123

  AIFMD, Art 21(13)(c).

124

  UK AIFM Regulations, reg 31(1) and the definition of ‘implementing provision’ in reg 2(1). 125

  This is particularly relevant to anyone who is not a ‘private person’—see para 2.111.

126

  The requirements must be relevant to the existing legal duty, however. In Green & Rowley v Royal Bank of Scotland plc [2013] EWCA Civ 1197, the Court of Appeal took into account conduct of business rules which were within the scope of the existing legal duty, but did not extend that duty to match the more extensive requirements of the rules. Specifically, duties under the rules to provide information and to ensure that the customer had understood were not relevant to the existing legal duty to take reasonable care when making statements on which the maker knew the customer would rely. 127

  FUND 3.3.

128

  FCA Handbook, COLL 4.5.14R.

129

  Directive 2006/43/EC of 17 May 2006 on statutory audits of annual accounts and consolidated accounts (OJ 2006 L157/87). 130

  FUND 3.3.6R.

131

  FUND 3.2.

132

  Primarily FUND 3.4.

133

  COBS 4.2.6R.

134

  FUND 3.7.7R et seq. and UK AIFM Regulations, reg 68.

135

  Article 112 of the Implementing Regulation sets out several factors the FCA must take into account in making its assessment, but is not exhaustive. 136

  FUND 3.7.9G.

137

  See para 2.67.

138

  Part 5.

139

  UK AIFM Regulations, regs 35 et seq.

140

  See section I.2.

141

  ‘Investment firm’ has the same meaning as in MiFID by virtue of the UK AIFM Regulations, reg 2(2)(c) and includes a person who would be an MiFID investment firm if it had its head office in the EEA (FSMA, s 424A). 142

  PERG 8.37.3G and PERG 8.37.4G(1)(b).

143

  UK AIFM Regulations, reg 45.

144

  UK AIFM Regulations, reg 47.

145

  PERG 8.37.11G.

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146

  PERG 8.37.5G.

147

  PERG 8.37.6G.

148

  PERG 8.37.9G.

149

  UK AIFM Regulations, regs 49, 50.

150

  Except a UK or EU feeder AIF, the master AIF of which is managed by a non-EU AIFM or is a non-EU AIF. These may only be marketed in the UK in accordance with the provisions transposing Art 36 of the AIFMD (see paras 2.171 et seq). 151

  UK AIFM Regulations, reg 54.

152

  See PERG 8.37.6G.

153

  UK AIFM Regulations, reg 54(2).

154

  See section X.

155

  UK AIFM Regulations, reg 54(3), (4).

156

  UK AIFM Regulations, reg 55.

157

  Except a UK or EU feeder AIF, the master AIF of which is managed by a non-EU AIFM or is a non-EU AIF. These may only be marketed in the UK in accordance with the provisions transposing Art 36 of the AIFMD (see paras 2.171 et seq.). 158

  UK AIFM Regulations, reg 49.

159

  AIFMD, Art 32(4).

160

  AIFMD, Art 32(7).

161

  PERG 8.37.6 G (3).

162

  Except a UK or EU feeder AIF, the master AIF of which is managed by a non-EU AIFM or is a non-EU AIF. These may only be marketed in the UK in accordance with the provisions transposing AIFMD, Art 36 (see para 2.171). 163

  FUND 10.3.3G and SUP13 provide guidance.

164

  AIFMD, Art 32(5) and PERG 8.37.6G(3).

165

  See section X.

166

  OJ 2013 L176/338.

167

  UK AIFM Regulations, reg 53. The applicable definition of ‘authorized person’ is that in the FSMA, by virtue of the UK AIFM Regulations, reg 2(2)(c). Thus, it includes those branching or providing services in the UK under an EU passport, as well as those directly authorized under the FSMA. 168

  As extended by the UK AIFM Regulations, reg 53(3).

169

  As extended by UK AIFM Regulations, reg 53(3).

170

  UK AIFM Regulations, reg 53. This is similar to the position where there is a breach of the scheme promotion restrictions which (by virtue of FSMA, s 241) is actionable under FSMA, s 138D in the same way as an FCA rule breach. 171

  Which include units in collective investment schemes, shares, and instruments creating or acknowledging indebtedness (see Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529), Pt II, Sch I). 172

  FSMA, s 30 (as modified by UK AIFM Regulations, reg 52).

173

  UK AIFM Regulations, reg 33.

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174

  See para 2.127.

175

  See Annex A of the HM Treasury Explanatory Memorandum to the UK AIFM Regulations 2013 and paras 9.10–9.15 of FCA Policy Statement PS13/5 (n 92), ‘Implementation of the Alternative Investment Fund Managers Directive’. The implementation measures are the Alternative Investment Fund Managers (Amendment) Regulations 2013 (SI 2013/1797) and the Alternative Investment Fund Managers (No 2) Instrument 2013 (FCA 2013/54). 176

  These include a requirement that cooperation arrangements of the kind discussed in para 2.169 are in place. Subject to the relaxations in relation to a depositary described in para 2.172, the AIFM is otherwise required to comply with the AIFMD’s requirements in relation to the relevant AIF. 177

  See section I.2.

178

  FUND 3.11.33R.

179

  UK AIFM Regulations, reg 57. The notification includes various confirmations.

180

  See Annex A of the HM Treasury Explanatory Memorandum to the UK AIFM Regulations 2013 and paras 9.10–9.15 of FCA Policy Statement PS13/5 (n 92). 181

  UK AIFM Regulations, reg 59.

182

  UK AIFM Regulations, reg 59(1). The required notification includes various confirmations relevant to its obligations. 183

  UK AIFM Regulations, reg 58.

184

  The new restriction will appear in COBS 4.12.

185

  FSMA, s 272.

186

  Recognition under FSMA, s 272 does not have the effect of making the operator, trustee, or depositary of the relevant scheme an authorized person (in contrast with the recognition of a UCITS scheme under FSMA, s 264). 187

  FSMA, s 277A.

188

  FSMA, s 279.

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3 France Stéphane Puel From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Advertising and marketing and funds — Hedge fund

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(p. 169) 3  France I. Introduction 3.01 1. Nature of the non-retail investment industry in France: facts and figures 3.01 2. Legal structures used to form national AIFs 3.06 II. Pre-AIFMD Regulatory Framework 3.15 1. Regulation of AIFMs and national AIFs prior to the AIFMD 3.15 2. Regulation of national marketing of AIFs prior to the AIFMD 3.20 III. Regulation of National AIFs after the AIFMD 3.26 IV. General Provisions of the AIFMD and the Implementing Regulation 3.32 1. Implementation table 3.32 2. Articles 2 and 3—Scope and exemptions 3.32 3. Article 5—Determination of the AIFM 3.36 V. Authorization of AIFMs 3.40 1. Implementation table 3.40 2. Articles 6 to 8—Conditions and application for authorization 3.40 3. Article 9—Initial capital and own funds 3.41 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 3.43 5. Consequences of violating authorization provisions 3.44 VI. Operating Conditions for AIFMs 3.50 1. Implementation table 3.50 2. Section 1 (Articles 12 to 17)—General requirements 3.50 3. Section 2 (Articles 18 and 19)—Organizational requirements 3.62 4. Section 3 (Article 20)—Delegation of AIFM functions 3.68 5. Section 4 (Article 21)—Depositary 3.70 6. Consequences of violating operating conditions 3.74 VII. Transparency Requirements 3.86 1. Implementation table 3.86 2. Article 22—Financial reporting 3.86 3. Article 23—Disclosure to investors 3.88 4. Article 24—Regulatory reporting 3.90 5. Consequences of violating transparency requirements 3.93

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VIII. AIFM Managing Specific Types of AIF 3.96 1. Implementation table 3.96 2. Section 1 (Article 25)—AIFM managing leveraged AIF 3.96 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 3.100 4. Consequences of violating provisions relating to AIFMs managing specific types of AIF 3.101 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 3.105 1. Implementation table 3.105 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 3.105 (p. 170) 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 3.106 4. Article 33—Conditions for managing AIFs established in other Member States 3.109 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU 3.110 X. Specific Rules in Relation to Third Countries 3.114 1. Implementation table 3.114 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 3.114 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by EU AIFMs 3.116 4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 3.123 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs 3.124 6. Consequences of violating specific rules in relation to third countries 3.126 XI. Marketing to Retail Investors 3.130 1. Implementation table 3.130 2. Article 43—Marketing of AIFs by AIFMs to retail investors 3.130 3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 3.134 XII. Competent Authorities and Supervisory Powers 3.135 1. Implementation table 3.135 2. Designation, responsibility, and powers of competent authorities 3.135 3. Other issues 3.138

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XIII. Concluding Remarks 3.142

I. Introduction 1. Nature of the non-retail investment industry in France: facts and figures 3.01  The key economic features of the alternative investment fund industry in France are best viewed in the wider context of asset management in France generally. The French asset management industry is one of the largest in the world, with assets under management over EUR 2,900 billion at the end of December 2012. This figure is comprised of over EUR 1,500 billion managed in French funds and over EUR 1,400 billion managed in discretionary mandates and funds domiciled abroad. 3.02  France ranks first in Europe and second worldwide (after the United States) for fund management (with EUR 1,700 billion under management in funds). France also ranks second in Europe (with 17% of the market) and worldwide as a fund domiciliation centre. There are currently some 12,000 French investment funds (including 3,000 undertaking for collective investment in transferable securities (UCITS) funds and 9,000 alternative investment funds (AIFs)). Just over 25% of French funds are money market funds, with other main categories being employee saving schemes, bond funds, equity funds, balanced funds, structured funds, private equity funds, funds of hedge funds, real estate investment vehicles, and securitization funds. The broad term for French collective investment funds (including both UCITS and non-UCITS) is organismes de placement collectif en valeurs mobilières (OPCVM). (p. 171) 3.03  There are currently more than 600 investment fund managers, referred to as sociétés de gestion de portefeuille (SGPs), licensed by the French financial markets and securities regulator, the Autorité des marchés financiers (AMF). More than 200 new SGPs have been created over the last five years. SGPs fall into two main categories: (i) subsidiaries of banking, insurance, or other financial groups; and (ii) independent companies, which make up more than half the SGPs but manage only 5% of total assets under management (AUM). Subsidiaries of financial groups, on the other hand, make up one-third of SGPs but manage almost two-thirds of total AUM. The French investment fund industry also has various smaller boutique managers, notably of hedge funds, multimanager funds, and private equity funds. 3.04  French SGPs include both generalist and specialized management strategy firms. Key investment fund management strategies in France are quantitative, absolute return, structured, hedge, indexed, credit, private equity, and real estate. Approximately 83,000 people are employed in the asset management industry in France, including 15,000 in SGPs.1 3.05  The pre-AIFMD non-retail alternative investment management vehicles were introduced into French law in 2003. The French alternative investment fund market is therefore still relatively new. The French Parliament and regulators are becoming increasingly flexible on the rules relating to the setting-up of hedge funds and the strategies they employ. For example, following an order passed in 2008, contractual funds have been permitted to invest in any assets, not necessarily financial instruments, provided they comply with certain requirements. These contractual funds are the most flexible and, as such, have come to represent a real alternative to Luxembourg or Irish investment funds.

2. Legal structures used to form national AIFs

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3.06  The main legal vehicles used in France by both alternative funds and retail funds are the société d’investissement à capital variable (SICAV), fonds commun de placement (FCP), and société d’investissement à capital fixe (SICAF). 3.07  SICAVs are open-ended investment companies governed by the rules applicable to sociétés anonymes, being French limited liability companies. Their capital is divided into shares, referred to as actions, which are issued and redeemed at their net asset value (NAV) on shareholders’ request. An SICAV is usually managed by an SGP under an investment management agreement, but may be self-managed by its board of directors or executive board. (p. 172) 3.08  FCPs are unit trusts with no legal personality of their own. Interests in an FCP are referred to as parts, meaning units. An FCP needs to be established by an SGP, which manages its assets and represents it in relation to third parties, and a depository. 3.09  Apart from certain funds dedicated to professional investors, SICAVs or FCPs are usually open-ended funds. As such, investors are free to subscribe and redeem at the NAV on each NAV calculation day.2 However, French regulations allow SICAVs and FCPs to suspend or cease issuing units in certain circumstances so long as these have been set out in its prospectus.3 3.10  As for funds dedicated to professional investors, the French code monétaire et financier (MFC) provides that a lock-up period may be inserted in the legal documentation. For specialized professional funds (the French equivalent of the Luxembourg specialized investment fund (SIF) or the Irish alternative investment fund (AIF)), this period is not limited and may be contractually agreed with the investors. 3.11  Shares or units of OPCVMs can be sold to other unit-holders or shareholders or to third parties. In the case of the latter, the third party must pay at least the minimum subscription amount, as stated in the prospectus. However, no active secondary market exists in relation to shares or units of funds, except in the case of index-tracking funds. 3.12  The only legal form that a truly closed-ended fund may take in France is that of a SICAF. The legal regime for SICAFs, which had not been subject to any major amendments since 1945, was significantly updated in 2009. SICAFs are now listed in the MFC, as undertakings for collective investment. However, this reform was implemented in France during the global financial crisis and SICAFs are still currently almost non-existent in France as compared to some other countries. This is expected to change over the next few years.4 3.13  In practice FCPs are the most common form of funds found in the French market. As FCPs are unit trusts with no legal personality, all management decisions are made by the SGP. SICAVs are usually managed by SGPs but may be internally managed by their board of directors or executive board. Running an SICAV is more expensive because of its corporate (p. 173) structure, and the SICAV’s board’s involvement in investment policy may conflict with the role of the management company. Where a closed-ended structure is required, the only legal form available in practice is that of an SICAF. 3.14  There is no registration tax, corporation tax, or ‘taxe d’abonnement’ on French funds. As such, tax is less likely to be a primary structuring consideration than in some other jurisdictions.

II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD

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3.15  In terms of the pre-AIFMD regulatory framework for AIFs, the main provisions both pre- and post-AIFMD are contained in the following sources (although general French civil and commercial laws also apply): (a)  French monetary and financial code (code monétaire et financier) (MFC); (b)  the General Regulations of the AMF (règlement général de l’AMF) (‘General Regulations’); (c)  published policy (which is being updated to reflect the implementation of the AIFMD) of the AMF; and (d)  conduct of business rules issued by the Association française de gestion financière (AFG), the French asset management association, which represents investment funds and investment management companies. 3.16  Published policy of the AMF is primarily in the form of instructions, positions, and recommendations. Instructions are interpretations of the General Regulations, stating how it is implemented and enforced. Positions are interpretations of legal and regulatory provisions that come within the AMF’s jurisdiction and explain how the AMF applies those provisions to individual cases. Recommendations are proposals to adopt a behaviour or comply with a provision that, in the AMF’s view, would make it easier to achieve the aims of the standards or general principles under its jurisdiction, without denying that other behaviours or provisions may also be consistent with these standards or principles. 3.17  French AIFs and French AIFMs are, and continue to be post-AIFMD, regulated by the AMF. The AMF is an independent public authority with its own financial resources and employees.5 3.18  The AMF also authorizes French investment funds other than those dedicated to professional investors. Before granting authorization, it checks that the fund complies with all legal and regulatory requirements and examines the key information set out in the fund’s documentation. The AMF also subsequently monitors each fund on an ongoing basis, paying particular attention to information disclosed to investors (such as marketing materials). 3.19  In addition, the AMF is entitled to take extraordinary measures in the event of exceptional circumstances which threaten the stability of financial markets. These measures are of particular relevance to hedge funds as they may include, for example, the prohibition of short-selling of certain securities.6

(p. 174) 2. Regulation of national marketing of AIFs prior to the AIFMD 3.20  The definition of marketing given by the AMF is broad, namely ‘the presentation of a financial instrument through various means (advertising, direct marketing, placement, advice, etc.) by an investment services provider, a financial investment adviser, or a direct marketer of banking or financial services with a view to encourage a client to buy that instrument’.7 3.21  Under French laws and regulations, solicitation and marketing of the public with respect to shares and units of national or foreign AIFs are subject to a number of rules, as follows. 3.22  Prohibition on marketing unauthorized AIFs in France: Except in the case of those French AIFs dedicated to professional investors (which only need to be notified), it has only been possible to market AIFs in France with the prior authorization of the AMF.8

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3.23  Financial solicitation activities: The marketing of French or foreign AIFs may be subject to French rules on financial solicitation if such marketing activities fall within the definition of financial solicitation (démarchage) provided by the MFC unless they can benefit from any exception to the rules (for example, potentially, if marketing only to professional investors). 3.24  Distributors (relationship and applicable regulations): Following France’s implementation of MiFID, distribution of French or foreign AIF funds may fall within the scope of rules in the MFC and the General Regulations applying to the provision of reception and transmission of orders and investment advice services as follows: •  First, as shares or units of AIF funds are financial instruments, if the entity responsible for the marketing of the AIF processes the clients’ subscription and redemption orders, such entity will be deemed to be providing the investment service of reception and transmission of orders; and •  Second, if the marketing of the AIF by an entity involves personalized recommendations addressed to potential investors, the rules on the provision of the financial service of investment advice will apply to such entity. Accordingly, if a French or foreign AIF or its management company or sponsor uses the service of a distributor in France to market its units, it will need to verify that the distributor is properly authorized or benefits from one or more exemptions to the authorization requirement. 3.25  Marketing documents: Under the pre-AIFMD regime, the AMF has been entitled to request all marketing materials intended to be used to market a French or foreign AIF in France and may also require that the presentation or the content of such marketing materials be amended in order to comply with French regulations.9

(p. 175) III. Regulation of National AIFs after the AIFMD 3.26  National non-UCITS funds were already within the scope of French regulation preAIFMD. Nevertheless, with the implementation of the Directive, a complete recasting of the nomenclature of funds has been made under French law, which now distinguishes two categories of French AIFs. 3.27  The French regime now distinguishes between French AIFs which are AIFs ‘by nature’ (that is, investment funds already within the scope of MFC regulation pre-AIFMD) and those which are AIFs ‘by object’ (that is, other investment funds that meet the AIFMD definition of AIFs but which were not within the scope of MFC regulation pre-AIFMD). 3.28  This new category of AIFs ‘by object’ is designed to encompass all the investment vehicles which were not regulated pre-AIFMD but meet the conditions of Article 4(1)(a) of the AIFMD. AIFs ‘by nature’ are listed in article L.214-24 II of the MFC and are, in summary, employee savings funds, certain securitization vehicles, and AIFs open to retail and professional investors. 3.29  France has implemented the AIFMD through amendments to the MFC and the General Regulations.10 3.30  French investment fund managers are referred to as sociétés de gestion de portefeuille (SGPs) and are licensed by the AMF. The General Regulations have been amended to take into account the geographical spectrum of AIFMs under the AIFMD. Thus, Book III, article 316-1 of the General Regulations provides that: 1°  the term ‘société de gestion de portefeuille’ designates a French SGP;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

2°  the term ‘société de gestion’ designates a management company established in another Member State of the European Union; 3°  the term ‘gestionnaire’ designates a management company established in a third country. 3.31  For the purposes of this chapter, the terms ‘société de gestion de portefeuille’, ‘société de gestion’, and ‘gestionnaire’ are translated as ‘SGP’, ‘non-national EU AIFM’, and ‘manager’ respectively. SGPs include not only managers of AIFs but also managers of other investment funds, notably UCITSs.11

(p. 176) IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

There is no French implementing text

Art 2 (scope)

MFC, art L.532-9

Art 3 (exemptions)

MFC, arts L.532-9, R.532-12-1

Art 4 (definitions)

MFC, arts L.214-24, L.214-24-20 VI

Art 5 (determination of AIFMs)

France has taken the view that requirements corresponding to those of Art 5 already exist in French law in MFC, arts L.621-13, L.621-13-1, and L.621-14

Implementing Regulation

National implementation

Arts 3–7 (re Art 3(2) AIFMD: calculation of AUM)

There is no French implementing text

Arts 8–13 (re Art 4(3) AIFMD: calculation of leverage)

There is no French implementing text

2. Articles 2 and 3—Scope and exemptions 3.32  The AIFMD raised a significant question of how the definition of ‘AIF’ and exemptions thereto should be transposed into French law and what effect this would potentially have on the definitions of non-UCITS investment funds generally accepted pre-AIFMD. 3.33  France’s implementation of the AIFMD generally reflects the scope and exemptions envisaged. While national non-UCITS funds were already within the scope of French regulation pre-AIFMD, the implementation of the AIFMD has brought into the scope of regulation a number of funds that meet the AIFMD definition of AIFs but which were not within the scope of French regulation pre-AIFMD. The SGP authorization regime was already in place pre-AIFMD but, given the extension of the definition of an SGP to management of AIFs, post-AIFMD regulation now also applies to applications for authorization by AIFMs.

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3.34  The AIFMD gives Member States the option to create a de minimis, or registration, regime for those SGPs managing portfolios of AIFs whose assets are below certain AUM thresholds (small AIFMs). The relevant value of AUM is dependent on whether the AIFs under management make use of leverage and offer certain redemption rights to investors. 3.35  Small AIFMs are not entitled to rights under the AIFMD, including management or marketing passports, unless they opt in to the Directive’s full requirements. Article 3(2) provides that the de minimis regime for small AIFMs is without prejudice to any stricter rules adopted by Member States. Following the implementation of the AIFMD, France requires a small AIFM either to opt in to the AIFMD or to operate under France’s preAIFMD regime. In the latter case, the applicable marketing regime depends on whether the relevant AIF is open-ended or closed-ended. Thus, post-AIFMD, France imposes requirements on small AIFMs over and above the de minimis registration regime option permitted by the AIFMD.

(p. 177) 3. Article 5—Determination of the AIFM 3.36  Article 5 of the AIFMD recognizes that responsibility for managing AIFs can rest with either the AIF itself or an external party. An internally managed AIF will itself be the AIFM and, as such, subject to the AIFMD. Article L.532-9(1) of the MFC has been amended to extend the definition of an SGP to include reference to management of AIFs, so that external AIFMs fall within the definition of SGPs. 3.37  France has taken the view that requirements corresponding to those of Article 5 already exist in French law in articles L.621-13, L. 621-13-1, and L.621-14 of the MFC. Internal management is permitted in the case of SICAVs, which may either be externally managed by SGPs under an investment management agreement or internally managed by a board of directors or executive board. Where internal management is chosen, article L. 214-24 of the MFC provides that the AIF should itself fulfil all the requirements applicable to AIFMs. An FCP, on the other hand, is not a legal entity and is entirely dependent on external management by its SGP, which manages its assets and represents it in relation to third parties. SICAFs can also only be externally managed by SGPs. 3.38  France has implemented Article 20(1)(f) of the AIFMD in article 318-58 of the General Regulations. Article 318-58 VII requires that ‘The AIFM shall comply with articles 75 to 82 of the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012’. Beyond this, French law does not prescribe any specific means for demonstration of compliance. As a practical matter, however, AIFMs will generally carry out appropriate due diligence on delegates and will often have the ability to monitor delegated activity reflected in contractual terms with delegates. 3.39  Where an AIFM fails to ensure that the AIF complies with the requirements of the AIFMD, the MFC provides for procedures for the withdrawal of authorization and emergency measures, such as a temporary prohibition of professional activity and suspension of marketing.

V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as an AIFM)

MFC, art L.532-9 I has been amended to include reference to management of AIFs, so that AIFMs may fall within the definition of SGPs

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 7 (application for authorization)

Art 8 (conditions for granting authorization) Art 9 (initial capital and own funds)

MFC, art L.532-9 General Regulations, arts 316-3, 316-7

General Regulations, art 316-4

General Regulations, arts 317-2, 317-3

Art 10 (changes in scope of authorization)

MFC, art R.532-13 General Regulations, art 316-5

Art 11 (withdrawal of authorization)

Similar provisions to art 11 were already contained in MFC, arts L. 532-10 to L.532-13 pre-AIFMDGeneral Regulations, arts 316-6 et seq

Implementing Regulation

National implementation

Arts 14–17 (re Art 9(7) AIFMD: own funds and insurance)

There is no French implementing text

(p. 178) 2. Articles 6 to 8—Conditions and application for authorization 3.40  France already permitted both internally and externally managed funds pre-AIFMD. However, irrespective of whether they are internally or externally managed, fund management activity requires an authorization by the AMF, whose conditions are detailed in article 532-9 of the MFC and in articles 316-3 and seq of the General Regulations. Under these articles, any management company intending to manage AIFs in France has to submit an application to the AMF, providing information regarding as an example the persons in charge of the management, the services the management company intends to provide, or the AIFs it intends to manage.

3. Article 9—Initial capital and own funds 3.41  The AIFMD sets out the calculation of a core set of capital requirements together with the requirement to have additional own funds or to hold professional indemnity insurance to cover liability arising from the crystallization of specified risks in connection with professional negligence. 3.42  The section of the General Regulations relating to SGPs has been revamped following the implementation of the AIFMD in French law, and Article 9 of the AIFMD has been fully transposed by article 317-2 of the General Regulations. The option in Article 9(6) of the AIFMD has also been integrated into the French regulations. Implementation of Article 9 should not have a significant impact on private law liability for AIFMs, since conditions for liability of AIFMs and SGPs generally existed in French law pre-AIFMD, with French SGPs already being required to have professional indemnity insurance.

4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 3.43  French regulations which existed pre-AIFMD and related to ‘change in scope’ and ‘withdrawal’ provisions have not been changed following the implementation of the AIFMD. Articles L.532-9-1 and L532-10, which deal with these matters, are drafted in a way which is very similar to the provisions of Articles 10 and 11 of the AIFMD.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5. Consequences of violating authorization provisions A. Regulatory law consequences 3.44  Article L.621-9 II of the MFC provides for the statutory powers of the AMF. Article L. 621-9 II (as amended following the transposition of the AIFMD) expressly states that the AMF must monitor compliance of, inter alia, AIFs and AIFMs with French regulations. Should a French AIFM breach French regulations, the AMF may carry out inspections and investigations and may impose administrative sanctions (for example reprimands, censures, or temporary or permanent prohibition to manage AIFs) as well as fines of up to EUR 100 million.

(p. 179) B. Criminal law consequences 3.45  With regard to the managing of an AIF without authorization, the implementing texts provide for several sanctions (including, in particular, up to three years’ imprisonment, a fine of EUR 375,000, and publication of the decision).

C. Private law consequences 3.46  While French laws clearly provide for regulatory and criminal law consequences for the violation of provisions pursuant to Chapter II of the AIFMD (authorization of AIFMs), for example including but not limited to managing or marketing an AIF without authorization, there are no French private law consequences specified in the French implementation of the AIFMD. 3.47  Nevertheless, it may be argued that French case law that operates in the context of banking and finance services, ie the provision of banking or investment services in France without authorization, will apply by analogy to the violation of the authorization requirements applicable to AIFMs. 3.48  It is worth noting that the French High Court ruled that unauthorized provision of banking and finance services does not render the banking agreements made with clients void or voidable by way of rescission.12 Accordingly, it may be argued, by analogy, that the unauthorized carrying-on of AIF management activities without authorization does not render the resulting transactions, for example the subscription agreements between the investors and the AIF or the AIFM, as the case may be, void or voidable. 3.49  In addition, French case law allows clients to file a civil claim in any criminal proceedings concerning unauthorized banking or finance services and to seek compensation. A successful claim is subject to the claimant’s ability to demonstrate a personal and direct loss resulting from the lack of authorization of the unauthorized provider, and the court’s discretion to set the amount of the compensation.13 This case law is also, arguably, applicable to AIFMs by analogy. In this respect, and as a general point, it may not be easy in practice for an investor to prove damage arising from a lack of authorization as such, as opposed to, for example, negligent management.

(p. 180) VI. Operating Conditions for AIFMs 1. Implementation table AIFMD

National implementation

Art 12 (general principles)

General Regulations, art 319-3

Art 13 (remuneration)

General Regulations, art 319-10

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

AIFMD

National implementation

Art 14 (conflicts of interest)

General Regulations, art 318-13

Art 15 (risk management)

MFC, art L.533-10-1 General Regulations, arts 318-1 et seq

Art 16 (liquidity management)

General Regulations, arts 318-44, 318-45

Art 17 (investment in securitization positions)

At this stage, France has implemented Art 17 only by reference to compliance with the Implementing Regulation. See the entry in this table at ‘Arts 51–56 (re Art 17, investment in securitization positions)’

Art 18 (general principles)

General Regulations, art 318-1

Art 19 (valuation)

MFC, arts L.214-24-13 to L.214-24-18

Art 20 (delegation)

General Regulations, art 318-58

Art 21 (depositary)

MFC, arts L.214-24-3 to L.214-24-12 General Regulations, arts 323-23, 323-25, 323-32, 323-35

Implementing Regulation

National implementation

Arts 18–30 (re Art 12(1) AIFMD: general principles)

General Regulations, arts 319-7° to 319-9.

Arts 31–38 (re Art 14 AIFMD: conflicts of interest)

General Regulations, arts 318-15, 319-21

Arts 39–46 (re Art 15 AIFMD: risk management)

General Regulations, art 318-43

Arts 47–50 (re Art 16 AIFMD: liquidity management)

General Regulations, art 318-46

Arts 51–56 (re Art 17 AIFMD: investment in securitization positions)

General Regulations, Art 320-24(4)

Arts 57–67 (re Art 18 AIFMD: organizational requirements—general principles)

General Regulations, arts 318-3, 318-4, 318-6, 318-11, 318-36, 318-48

Arts 68–75 (re Art 19 AIFMD: valuation)

There is no French implementing text at this stage

Arts 76–83 (re Art 20 AIFMD: delegation of AIFM functions)

General Regulations, art 318-58 VII

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

AIFMD

National implementation

Arts 84–103 (re Art 21 AIFMD: depositary)

General Regulations, arts 323-23, 323-25, 323-30, 323-32 to 323-34

(p. 181) 2. Section 1 (Articles 12 to 17)—General requirements A. Article 12—General principles 3.50  France has implemented Article 12(1) of the AIFMD in article 319-3 of the General Regulations. The General Regulations (at articles 319-3 7°, 319-8, 319-9) require that the AIFM must comply with Articles 17–29 of the Implementing Regulation.14 French implementation thus provides for the standards to operate in a manner similar to the sister provisions in the UCITS Directive and MiFID. 3.51  The requirement under Article 12(1)(f) of the AIFMD that no AIF investor may obtain preferential treatment unless disclosed in the AIF’s rules or instruments of incorporation may lead to some changes in French AIFs’ documentation. 3.52  As regards the relationship between Article 12(1)(c)–(e) and Article 12(1)(a), (b), and (f), and given that France has implemented these provisions by way of direct copy out, there is no specific guidance to suggest that they should be interpreted other than at face value.

B. Article 13—Remuneration 3.53  France has implemented Article 13 of the AIFMD by way of direct copy out of Annex II (remuneration policy) in article 319-10 of the General Regulations. The AMF has published a position (2013-11) ‘Politiques de rémunération applicable aux gestionnaire de fonds d’investissement alternatifs’ (‘Remuneration policy applicable to alternative investment fund managers’) by way of adoption in their entirety of ESMA’s Guidelines on sound remuneration policies under the AIFMD.15 This is accompanied by a Guide Rémunération (‘Remuneration Guide’) published by the AMF in August 2013 with the aim of assisting SGPs on the subject. 3.54  As such, in France there is a separate remuneration code applicable to firms authorized under the AIFMD. The very specific nature of ESMA’s Guidelines on sound remuneration policies under the AIFMD provides a valid rationale for differentiation between firms authorized under the AIFMD and those authorized under the UCITS Directive or MiFID.

C. Article 14—Conflicts of interest 3.55  Article 14 of the AIFMD has been implemented by article 318-13 of the General Regulations. Articles 318-15 and 319-21 of the General Regulations require AIFMs to comply with Articles 30–37 of the Implementing Regulation. French implementation thus provides for the standards to operate in a manner similar to the sister provisions in the UCITS Directive.

D. Article 15—Risk management 3.56  The Guidelines issued by the French authorities in connection with the implementation of the AIFMD clearly stated that the transposition of Article 15 of the AIFMD would be in the General Regulations since the risk management framework applicable to UCITS was lodged in the General Regulations and the two systems are very similar.

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(p. 182) 3.57  In this respect the AMF has implemented Article 15 in articles 318-38 to 318-43 of the General Regulations in a manner which is very similar to the framework applicable to UCITS SGPs. 3.58  The implemented risk management framework may not significantly affect the way French SGPs are organized in terms of risk management. Nevertheless, it may affect the way sponsors will launch new AIFs in the future as compared to pre-AIFMD French nonUCITS funds. Unlike French pre-AIFMD funds, AIFs are not subject to limits in terms of leverage. This change may affect the way French funds will be managed in the future and the way their offering documentation is drafted in this respect.

E. Article 16—Liquidity management 3.59  French law already imposed requirements relating to liquidity management preAIFMD. Moreover, a number of the principles in the AIFMD are broadly similar to those under MiFID, the UCITS Directive, and CRD 3.16 3.60  France has implemented the provisions of Article 16 in articles 318-44 to 318-46 of the General Regulations without providing for further guidance at this stage. Thus, any specific French expectations and requirements in connection with liquidity management are not certain. It is not, however, expected that the transposition of the AIFMD will have a significant effect on the manner in which sponsors operate AIFs. Liquidity management issues were already, pre-AIFMD, subject to scrutiny by the AMF, which required sponsors to carry out specific liquidity stress tests in connection with specific types of funds, such as real estate and hedge funds.

F. Article 17—Investment in securitization positions 3.61  France has implemented Article 17 of the AIFMD only by reference to compliance with Articles 51–56 of the Implementing Regulation. Beyond this, Article 17 has not yet been implemented into national law.

3. Section 2 (Articles 18 and 19)—Organizational requirements A. Article 18—General principles 3.62  The French authorities have decided to implement the provisions of Article 18 of the AIFMD by inserting into articles 318-3, 318-4 and 318-11 of the General Regulations direct references to Articles 57–59 and 61–63 of the Implementing Regulation. The French authorities have therefore decided not to align the standards defined in the AIFMD with their sister provisions in the UCITS Directive completely, although it is expected that the requirements of the French regulator in this respect will in practice be very similar to those applicable to SGPs pre-AIFMD and to UCITS SGPs post-AIFMD.

(p. 183) B. Article 19—Valuation 3.63  The valuation requirements arising from the AIFMD are very similar to those already existing in France and imposed by the AMF on most types of SGPs. Hence, during its review of an SGP’s licence, the AMF must ascertain that the SGP has the necessary technical means to value AUM. The frequency with which NAV is calculated and published depends on the type of fund. 3.64  The valuation principles contained in Article 19 of the AIFMD have been transposed in articles L.214-24-13 to L.214-24-17 of the MFC in respect of French AIFMs. These articles provide that an AIFM has an obligation to ensure proper and independent valuation and that this obligation applies even if the valuation function is performed by an external valuer.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.65  French regulations now clearly provide that the AIFM’s liability to the AIF is not affected by the fact that an external valuer has been appointed. The AIFM is liable to the AIF for any losses suffered by the AIF as a result of the external valuer’s negligence or intentional failure to perform its tasks. This liability is irrespective of any contractual arrangements providing otherwise. However, the French regulations also refer to the potential responsibility of an AIF, not just an AIFM, so that the ‘AIF or its AIFM is responsible for the proper valuation of the assets of the AIF. . .’. See section VI.6.C. 3.66  This liability rule should not, in principle, significantly affect the legal relationship between the AIFM and the valuation agent of an AIF. French regulations already provided pre-AIFMD that the SGP was liable to investors in case of error in the valuation of the assets. 3.67  Nevertheless, French regulations did not contain a general liability regime for external valuation which provided for a specific contractual liability. The fact that under the new AIFMD regime the valuation agent is liable to the AIF or its AIFM for mere negligence (as opposed to gross negligence) may entail some changes in the contractual relationship between French AIFMs and valuation agents. This is because a significant percentage of agreements between those parties currently provide that the external valuer is only liable for gross negligence.

4. Section 3 (Article 20)—Delegation of AIFM functions 3.68  Article 20 of the AIFMD has been transposed in article 318-58 of the General Regulations. Although article 318-58 applies only to AIFs, and is drafted in accordance with the provisions of the AIFMD, French authorities indicated at the time of transposition that small wording amendments had been made in order to make the provisions compliant, and as closely aligned as possible, with the sister provisions of the UCITS Directive, which are reflected in article 313-77 of the General Regulations. 3.69  Furthermore, the AMF applies to those AIFs that are not dedicated to professional investors, specific status requirements relating to the entity receiving the delegation, which correspond to those laid down by the UCITS Directive.

5. Section 4 (Article 21)—Depositary 3.70  The French regime for depositaries of AIFs is distinct from that for depositaries of UCITSs. The MFC and the General Regulations make specific provisions (p. 184) for depositaries of AIFs with references to compliance with Articles 83–102 of the Implementing Regulation. 3.71  The key difference in French laws and regulations between, on the one hand, the regime for depositaries pursuant to Article 21 of the AIFMD and, on the other hand, the current regime for UCITS is that the depositary of an AIF is required to ensure that the fund’s cash flows are properly monitored, rather than only the overseeing and safe-keeping of the fund’s assets. 3.72  In addition, the obligation of an AIF’s depositary to return assets, and the very limited circumstances in which it may avoid liability, are strictly defined by the MFC and the General Regulations. However, it is intended to amend the current French regime for UCITS depositaries in order to bring it into line with the AIFMD. However, this also needs to be seen within the wider context of the changes to the UCITS depositary regime to be introduced by UCITS V.17 3.73  Pursuant to AIFMD implementation, a French AIFM is required to ensure that a single depositary is appointed for each French AIF it manages. In addition, the French AIF’s depositary must be established in France. Many stakeholders consider that the AIFMD took the French regulatory framework as a source of inspiration and the change to adapting to the new environment for French depositaries is less than in many other Member States. From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

French depositaries tend to be large banking groups with worldwide networks, a key consideration in the context of AIFs.

6. Consequences of violating operating conditions A. Regulatory law consequences 3.74  Article L.621-9 II of the MFC provides for the statutory powers of the AMF. Article L. 621-9 II (as amended following the transposition of the AIFMD) expressly states that the AMF monitors compliance of, inter alia, AIFs and AIFMs with French regulations. Should a French AIFM breach French regulations, the AMF may carry out inspections and investigations and may impose administrative sanctions (for example reprimand, censure, temporary, or permanent prohibition to manage AIFs) as well as fines of up to EUR 100 million.

B. Criminal law consequences 3.75  As the French texts currently stand, there is no criminal law consequence attached to the violation of the national implementation provisions with respect to operating conditions of AIFMs. Indeed, the only provisions in the current national criminal law concerning the violation of the French provisions resulting from the implementation of the AIFMD are those which relate to the managing of an AIF without authorization.

C. Private law consequences 3.76  As regards liability in the context of valuation, Article 19(10) of the AIFMD states that valuation is the responsibility of the AIFM and its liability towards the AIF and its investors is not affected by the fact that the AIFM has appointed an external valuer. However, French (p. 185) implementation in article L.214-24-13 of the MFC refers also to the potential responsibility of an AIF, so that the ‘AIF or its AIFM is responsible for the proper valuation of the assets of the AIF as well as the calculation and publication of its net asset value. The appointment of an external valuer by the AIF or the AIFM does not relieve them of their responsibilities’. 3.77  As regards liability in the context of delegation, Article 20(3) of the AIFMD has been implemented in French law under the General Regulations of the AMF.18 As such, under French law the AIFM’s liability to the AIF and its investors is not affected by the fact that the AIFM has delegated functions to a third party, or by any further sub-delegation. 3.78  The provisions referred to in 3.76 and 3.77 may clearly be read as regulatory requirements on AIFs, AIFMs, and depositories, as the case may be, not to seek to avoid responsibility. However, it is not specified as part of the French law implementing the AIFMD that a breach of such regulatory requirements, in itself, would necessarily also invalidate or breach contractual arrangements. 3.79  However, French law more clearly envisages private rights in the context of other provisions. Thus, the external valuer ‘is liable to the AIF or its AIFM for any loss suffered by them as a result of its negligence or intentional failure to perform its tasks’ and ‘any contractual arrangement providing otherwise is deemed null and void’.19 As regards liability in the context of the depositary, Article 21(12) and (13) of the AIFMD has been implemented in French law by means of direct copy out.20 3.80  Accordingly, under French law, the depositary ‘shall be liable’ to the AIF or to the unit-holders and shareholders of the AIF for the loss of financial instruments held by the depositary or a sub-custodian in the circumstances set out in the AIFMD and ‘shall be liable’ for all other losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.81  Also reflecting the AIFMD, under French law liability to the unit-holders or shareholders of the AIF may be invoked directly or indirectly through the AIFM, depending on the legal nature of the relationship between the depositary, the AIFM, and the unitholders or shareholders. 3.82  However, the nature of such private rights of action has not been further specified in French implementation and remains subject to judicial interpretation. 3.83  As a general point, it should be noted that under French law, no clear distinction is made between public and private law in this area. Therefore, a breach of its professional obligations by an investment services provider (understood in a broad sense and including AIFMs) may directly be invoked before a civil court on the basis of the general requirements to always act honestly, fairly, and professionally in the best interest of the clients.21 3.84  Indeed, French case law draws from these general requirements the conclusion that investment services providers are required to comply with all regulations applicable to the operation of their activities (as set out in the MFC and the General Regulations) in order to promote the interests of their clients and market integrity. As a consequence, they will be (p. 186) held liable for any damageable consequences of the breach of any of the aforementioned regulations, including when the execution of an activity is outsourced to a third party.22 3.85  As a consequence, an investor in an AIF may be entitled to bring a civil action against an AIFM on the basis of a breach of any of its professional obligations (either organizational rules or conduct of business rules) and seek compensation in this respect. Compensation, however, is subject to the investor’s ability to demonstrate a personal and direct loss, and to the French court’s discretion regarding the amount of the compensation, which is often limited due to the absence of punitive damages under French law.

VII. Transparency Requirements 1. Implementation table AIFMD Art 22 (annual report)

National implementation MFC, art D.214-32-5 MFC, art L.214-24-19

Art 23 (disclosure to investors) Art 24 (reporting obligations to competent authorities)

MFC, art L.214-24-20

Implementing Regulation

National implementation

Arts 104–112 (re Arts 22(2)A–E, 23(4), 24(1): disclosure to investors and regulatory reporting)

General Regulations, art 319-11

2. Article 22—Financial reporting 3.86  Article 22 of the AIFMD requires that the investors be provided with the annual report of the AIF at the latest six months following the end of the financial year. In order to implement this requirement in France, the MFC has been amended to extend the time permitted for the provision of the annual reporting to six months. 3.87  In order to align with the AIFMD, the MFC has been amended to include a new article D.214-32-5, which requires a financial report to be published at the latest six months following the end of the financial year. Nevertheless, when the AIF issues bonds or equities whose nominal value is below EUR 1,000, which are not money market instruments and with maturity of less than one year, the report may be published at the latest four months From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

following the end of the financial year. However, as the French texts currently stand, there is no provision stipulating that content should be audited by external auditors.

3. Article 23—Disclosure to investors 3.88  Pursuant to French law post-AIFMD, information that has to be made available to investors prior to investing in an AIF, in accordance with Article 23 of the AIFMD, should be included in the AIF’s prospectus (which contains as annexes the AIF’s regulation or the statutes, or, in other words, its constitutional documents) and in its key investor information document (KIDD). The specific content of the KIDD and prospectus will be prescribed later in Book IV (p. 187) of the General Regulations and in an instruction of the AMF. Broadly speaking, however, the implementation of these requirements will bring an AIF’s practice in respect of disclosure documents closer to that already existing under the UCITS regime. 3.89  The liability regime applicable in the event of operators’ and sponsors’ errors in the disclosure materials will be designed and published later in Book IV of the General Regulations. At this stage, the likely scope of such a regime is not yet known.

4. Article 24—Regulatory reporting 3.90  The AIFMD imposes various transparency obligations on AIFMs under its provisions on reporting to competent authorities, with a key policy objective being to increase the transparency required of AIFMs in relation to competent authorities considerably. 3.91  Outside the context of the AIFMD, however, the law and operating environment in France already imposes a number of transparency related obligations. For example, as regards reporting to regulators in relation to an OPCVM, SGPs must file an annual information questionnaire relating to the composition of their turnover. In addition, an SGP compliance officer (responsable de la conformité et du contrôle interne) may be required to provide a thematic report to the AMF on a specific issue. NAV must be reported to the AMF on the same day as it is determined. 3.92  The principle of the regulatory reporting obligation under Article 24 of the AIFMD has been implemented only through article L.214-24-20 of the MFC. The AMF has stated that it will provide practical guidance in the form of detailed implementing rules with respect to regulatory reporting. At this stage, however, it is not yet known what the content of these rules will be nor whether, in practice, the rules exceed regulatory reporting requirements under the current French regime.

5. Consequences of violating transparency requirements A. Regulatory law consequences 3.93  Article L.621-9 II of the MFC provides for the statutory powers of the AMF. Article L. 621-9 II (as amended following the transposition of the AIFMD) expressly states that the AMF must monitor compliance of, inter alia, AIFs and AIFMs with French regulations. Should a French AIFM breach French regulations, the AMF may carry out inspections and investigations and may impose administrative sanctions (for example reprimand, censure, or temporary or permanent prohibition to manage AIFs) as well as fines of up to EUR 100 million.

B. Criminal law consequences 3.94  As French law currently stands, there are no criminal law consequences for the violation of the national implementation provisions with respect to transparency requirements. Indeed, the only provisions in the current criminal law concerning the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

violation of the French provisions resulting from the implementation of the AIFMD are those which are related to the managing of an AIF without authorization.

C. Private law consequences 3.95  At present, French national private law does not provide for any consequences where there is a violation of the national implementation provisions with respect to transparency (p. 188) requirements. However, a potential risk exists that the authorized AIFM would be liable in tort to the investors of the AIF.

VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD Art 25 (use of information, supervisory cooperation, and limits to leverage)

National implementation Certain provisions of Art 25 were already reflected in MFC, arts L.621-1, L.632-1, L.632-6-1 MFC, arts L.533-10-1, L.621-18-8, L.631-2-1, L. 631-2-2, L.632-8

Art 26 (scope)

MFC, art L.214-24-21 -I

Art 27 (notification of the acquisition of major holdings and control of non-listed companies)

MFC, arts L.214-24-22, D.214-32-6, D.214-32-7, D. 214-32-7-1

Art 28 (disclosure in case of acquisition of control)

MFC, arts L.214-24-23, D.214-32-7-1, D.214-32-7-6 to D. 214-32-7-9

Art 29 (annual report of AIFs exercising control of non-listed companies)

MFC, arts D.214-32-7-10 to D.214-32-7-12

Art 30 (asset stripping)

MFC, arts D.214-32-8, D.214-32-7-13 to D.214-32-7-15

Implementing Regulation

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

There is no French implementing text

2. Section 1 (Article 25)—AIFM managing leveraged AIF 3.96  The AIFMD contains a number of requirements relating to leverage which are beyond those imposed by French laws and regulations pre-AIFMD. The implementation of the Directive introduces a new dimension to French regulation in relation to the supervision of the use of leverage by AIFMs. In particular, the requirements to set maximum leverage levels and to disclose leverage levels to investors and to the French competent authorities require the levels of each AIF to be calculated in accordance with methods set out in the AIFMD. 3.97  The application of the method of calculation of leverage set out in Articles 8–13 of the Implementing Regulation may therefore involve some practical changes for operators and sponsors of national AIFs. In particular, they will need to ensure that they have in place documented procedures to calculate the exposure of AIFs. 3.98  With regard to the requirement of the first sentence of Article 25(3) of the AIFMD, the French implementing texts provide for the possibility of the French regulator to limit the leverage which an AIF management company can use for reasons of financial stability.

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3.99  How AIFMs will, in practice, be regarded as having demonstrated that the leverage limits they impose are reasonable remains to be seen since arguably this requires an element of subjective judgment and will depend on individual cases. However, having documented rationale should assist in this respect.

(p. 189) 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 3.100  AIFMD implementation has involved changes to the French regime for corporate acquisitions of non-listed companies. In particular, the notification requirements introduce a new dimension.

4. Consequences of violating provisions relating to AIFMs managing specific types of AIF A. Regulatory law consequences 3.101  Article L.621-9 II of the MFC provides for the statutory powers of the AMF. Article L. 621-9 II (as amended following the transposition of the AIFMD) expressly states that the AMF must monitor compliance of, inter alia, AIFs and AIFMs with French regulations. If a French AIFM breaches French regulations, the AMF may carry out inspections and investigations and may impose administrative sanctions (for example reprimand, censure, temporary, or permanent prohibition to manage AIFs) as well as fines of up to EUR 100 million.

B. Criminal law consequences 3.102  As the French texts currently stand, the only national criminal law provisions concerning the violation of the French provisions resulting from the implementation of the AIFMD are those which relate to the managing of an AIF without authorization. 3.103  With regard to managing an AIF in breach of national provisions, the national law provides for several sanctions (including, in particular, up to three years’ imprisonment, a fine of EUR 375,000, and the publication of the decision).

C. Private law consequences 3.104  At present, French national private law does not provide for any consequence in case of violation of the national implementation provisions with respect to AIFMs managing specific types of AIF. However, a potential risk exists that an authorized AIFM would be liable in tort to the investors of the AIF.

IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIFs in the home Member State of the AIFM)

MFC, art L.214-24-1 I

Art 32 (marketing of shares or units of EU AIFs in Member States other than in the home Member State of the AIFM)

MFC, arts L.214-24-2 I, L.214-24-2 II, L. 214-24-2 IV, L.214-24-2 V General Regulations, art 421-14

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AIFMD

National implementation

Art 33 (conditions for managing AIFs established in other Member States)

MFC, arts L.532-21-3 I, L.532-25-1 I, R. 532-25-1, R.532-30

Implementing Regulation

National implementation

n/a

-

(p. 190) 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 3.105  AIFMD implementation in France does not, in practice, mean significant changes to the regime for marketing of French AIFs by a French AIFM in France.

3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 3.106  The French regime for marketing of non-national EU AIFs in France provides for a notification procedure as set out in article L.214-24-2 I of the MFC. The details of this notification procedure are provided in article 421-14 of the General Regulations. As an example, it must contain among others (i) a notification letter including a business plan identifying the AIFs that the AIFM intends to market as well as information regarding the place where each AIF is established, (ii) each AIF’s rules and instruments of incorporation, (iii) the identity of the depositary, and (iv) description of the AIF and of any information relating to it and made available to the investors. The AMF shall notify its decision no later than 20 business days after receipt of the complete notification. 3.107  Under the French laws implementing the AIFMD, French AIFMs with French AIFs can market only using the AIFMD passport from the date of the AIFM’s authorization under the Directive (at the latest, for an AIFM managing above-threshold AIFs, by 22 July 2014). AIFMs managing sub-threshold AIFs and not opting into the AIFMD will not benefit from the passport. 3.108  After the expiry of the one-year transitional period, French AIFMs will all be required to be AIFMD-compliant and will therefore benefit from the marketing provisions of the Directive. At this stage it is too early to come to conclusions as to how the AIF passporting regime is working or how it compares in practice to the passporting regime for UCITS. It is hoped that the AIF passporting regime will ultimately provide similar benefits to those currently enjoyed by UCITS.

4. Article 33—Conditions for managing AIFs established in other Member States 3.109  Article 33 of the AIFMD provides that a non-national AIFM may manage a national AIF in another Member State. France has implemented Article 33 and, although specific provisions in the context of AIFs are new, cross-border management is already a familiar concept in France.

(p. 191) 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 3.110  Article L.621-9 II of the MFC provides for the statutory powers of the AMF. Article L. 621-9 II (as amended following the transposition of the AIFMD) expressly states that the AMF must monitor compliance of, inter alia, AIFs and AIFMs with French regulations. If a French AIFM breaches French regulations, the AMF may carry out inspections and investigations and may impose administrative sanctions (for example reprimand, censure, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

temporary or permanent prohibition to manage AIFs) as well as fines of up to EUR 100 million.

B. Criminal law consequences 3.111  As the French texts currently stand, there is no criminal law consequence attached to the violation of the national implementation provisions with respect to rights of EU AIFMs to market EU AIFs in the EU. Indeed, the only provisions in the current national criminal law concerning the violation of the French provisions resulting from the implementation of the AIFMD are those which relate to the managing of an AIF without authorization. 3.112  With regard to the managing of an AIF in breach of national provisions, the national law provides for several sanctions (including, in particular, up to three years’ imprisonment, a fine of EUR 375,000, and the publication of the decision).

C. Private law consequences 3.113  At present, French national private law does not provide for any consequence in case of violation of the national implementation provisions with respect to breaches of the conditions for EU AIFMs to market and manage EU AIFs in the EU. However, a potential risk exists that an authorized AIFM would be liable in tort to the investors of the AIF.

X. Specific Rules in Relation to Third Countries 1. Implementation table AIFMD

National implementation

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

MFC, art L.532-29

Art 35 (conditions for marketing in EU with passport of non-EU AIFs managed by EU AIFMs)

MFC, arts L.214-24-2 II§2, D.214-32-2, D. 214-32-3General Regulations, arts 421-15 et seq

Art 36 (conditions for the marketing in Member States without a passport of non-EU AIFs managed by an EU AIFM)

MFC, arts L.214-24-1 II, §2, D.214-32-2 General Regulations, art 421-13-1

Art 37 (authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Art 38 (EU AIFs) or 39 (non-EU AIFs))

MFC, arts L.532-30 to L.532.42, R.532-32 to R.532-35General Regulations, arts 316-11 et seq and arts 421-7 et seq

Art 38 (peer review of authorization and supervision of non-EU AIFMs)

Provisions of Art 38 are already contained in Regulation 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority. Therefore, this article has not been transposed.

Art 39 (conditions for the marketing in the Union with a passport of EU AIFs managed by non-EU AIFMs)

MFC, arts L.214-24-1 I§1, L.214-24-2 IGeneral Regulations, arts 421-18 et seq

Art 40 (conditions for the marketing in the EU with a passport of non-EU AIFs managed by non-EU AIFMs)

MFC, arts L.214-24-1 I§1, L.214-24-2 I, D.214-32-1, D. 214-32-4General Regulations, arts 421-21, 421-22, 421-23

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AIFMD

National implementation

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by non-EU AIFMs)

MFC, art L.532-42-1

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs)

MFC, arts L.214-24-1 I§2General Regulations, arts 421-13-1

Implementing Regulation

National implementation

Art 114–116 (re Arts 34(1), 35(2), 36(1), 37(7) (D), 39(2)(A), 40(2)(a), 42(1) AIFMD)

There is no French implementing text

(p. 192) 2. Article 34—Conditions for EU AIFMs which manage nonEU AIFs not marketed in EU 3.114  France has implemented Article 34 of the AIFMD through article L.532-29 of the MFC, which states that an AIFM can manage AIFs of third countries which are not marketed in the EU provided that the AIFM complies with all the requirements established in the French laws and regulations applicable to AIFMs and that appropriate cooperation arrangements are in place between the AMF and the supervisory authorities of the third country where the AIF is established, in order to ensure at least an efficient exchange of information that allows the AMF to carry out its duties. This implementation of the AIFMD introduces specific new requirements which were not present pre-AIFMD. 3.115  The content of the agreements that have to be signed with the supervisory authorities of third countries in order to allow EU AIFMs to manage non-EU AIFs which are not marketed in the EU has been detailed by ESMA in its Guidelines on the model Memorandum of Understanding (MoU) concerning consultation, cooperation and the exchange of information related to the supervision of AIFMD entities, published on 18 July 2013.

3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by EU AIFMs 3.116  The ability to market in the EU with a passport non-EU AIFs managed by an EU AIFM will introduce a completely new regime and associated framework into France. As such, it will undoubtedly change the current environment both within France and beyond. 3.117  The extension of the marketing passport to non-EU AIFs will not happen until 2015 at the earliest and it is too soon to say what the impact will be. It is anticipated that the passport will be of most use in respect of non-EU AIFs which are suitable for marketing on a more (p. 193) pan-European basis; until now, many non-EU AIFs aimed at professional investors have been designed to target relatively specific EU markets. 3.118  In order to access professional investors in France without a passport, it is necessary to comply with specific conditions, which shall be laid down by a decree. Such decree has not yet been adopted. 3.119  Moreover, please note that non-EU AIFs managed by EU AIFMs may no longer be marketed on a private placement basis (within the meaning of the Prospectus Directive) in France. Nevertheless, please note that non-EU AIFs managed by EU AIFMs may still be offered by way of the so-called ‘reverse solicitation’ (‘commercialisation passive’ in French), which implies that the units or shares of an investment fund are sold upon the genuine request of the prospective investors. Reverse solicitation has been defined restrictively as being based on an express request from the investor for a specifically determined fund and

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without any solicitation of any kind from the fund or the management company, so that it does not constitute marketing. 3.120  The ‘reverse solicitation’ is therefore to be distinguished from marketing, which has been defined with respect to shares or units of funds and to financial instruments. 3.121  In this regard marketing is considered to be their presentation through different means (advertising, direct marketing, advice etc) with a view to encouraging a client to buy them. 3.122  Such presentation is performed by an investment services provider, a financial investment adviser or a direct marketer of banking or financial services. The AMF highlighted the difference between marketing and passive marketing, as it specified that marketing does not concern the sale of financial instruments in response to a client’s unsolicited request to purchase a specifically designated financial instrument.

4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 3.123  The French implementing texts provide that where non-EU AIFMs intend to manage EU AIFs and/or market AIFs managed by them in the EU they must acquire prior authorization from the AMF. Thus, the conditions of article D.214-32 of the MFC must be met by non-EU AIFMs. The conditions to access professional investors in France without a passport, are, in summary, the same as those in relation to Article 36 of the AIFMD.

5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs 3.124  Further to the implementation of AIFMD in French law, it is not possible to market AIFs on a private placement basis (in the meaning of the Prospectus Directive) under French law. However, under article L. 214-24-1, I° of the MFC, it is possible to market AIFs following a procedure without passport. The conditions of such procedure are specified in article 421-13-1 of the General Regulations. The management company has then to submit to the AMF an application folder, whose content has still to be determined in an instruction of the AMF. 3.125  It is worth noting that prior to the implementation of the AIFMD, marketing and distribution of foreign investment funds in France was permitted but in practice depended on whether the fund was open-ended or closed-ended, with a separate set of applicable conditions in each case. A foreign open-ended fund could only be marketed in France by professional investors if it had been authorized by the AMF. In practice very few foreign open-ended (p. 194) funds succeeded in becoming authorized. The private placement regime for closed-ended funds, however, permitted the private placement of foreign closedended funds to French professional investors subject only to a requirement for a disclaimer at the beginning of the private placement memorandum and on other documents provided to prospective investors.

6. Consequences of violating specific rules in relation to third countries A. Regulatory law consequences 3.126  Article L.621-9 II of the MFC provides for the statutory powers of the AMF. Article L. 621-9 II (as amended following the transposition of the AIFMD) expressly states that the AMF monitors compliance of, inter alia, AIFs and AIFMs with French regulations. If a French AIFM breaches French regulations, the AMF may carry out inspections and investigations and may impose administrative sanctions (for example, reprimand, censure,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

temporary or permanent prohibition to manage AIFs) as well as fines of up to EUR 100 million.

B. Criminal law consequences 3.127  With regard to the marketing and managing of AIFs in breach of national provisions, the implementing texts provide for several sanctions (mainly three years’ imprisonment, a fine of EUR 375,000, and the publication of the decision).

C. Private law consequences 3.128  At present, French national private law does not provide for any consequence in case of violation of the national implementation provisions with respect to breaches of specific rules in relation to third countries. However, a potential risk exists that the authorized AIFM would be liable in tort to the investors of the AIF. 3.129  In the context of Article 37 of the AIFMD, French law makes it clear that any disputes arising between the AMF and a manager established in a third country for which France is the Member State of reference shall be settled by French courts. However, disputes arising between a manager established in a third country for which France is the Member State of reference and EU unit-holders or shareholders of the AIF concerned will be settled by the courts of ‘a Member State’.23 It is not further specified how this provision is intended to work in the context of French civil procedure rules, in particular as to what law of which Member State applies.

XI. Marketing to Retail Investors 1. Implementation table AIFMD

National implementation

Art 43 (marketing of AIFs to retail investors)

MFC, art L.214-24-1 IIIGeneral Regulations, art 421-13

Implementing Regulation

National implementation

n/a

-

(p. 195) 2. Article 43—Marketing of AIFs by AIFMs to retail investors 3.130  Pre-AIFMD there existed an AMF-authorized investment fund regime for sale to retail investors which operated alongside the UCITS regime. 3.131  The AIFMD is predominantly aimed at AIFs that are marketed solely to professional investors. Investment funds which require authorization under the UCITS Directive fall outside the scope of the AIFMD. 3.132  The AIFMD permits the French competent authorities to allow AIFMs to market AIFs to French retail investors and to impose stricter requirements than those applicable to AIFs marketed to professional investors. 3.133  For the purpose of Article 43(1) implementation, a literal transposition has been proposed by the French legislator, which provides for an authorization for AIFMs to market AIFs to French retail investors under certain conditions. Details of these conditions are provided under article 421-13 of the General Regulations. It is necessary to obtain an authorization of the AMF prior to marketing any AIF to retail investors. The criteria analysed by the AMF will depend on whether the AIF and the AIFM are French or not.

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3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 3.134  Details of these consequences will not be available until publication of the outstanding French implementing texts.

XII. Competent Authorities and Supervisory Powers 1. Implementation table AIFMD

National implementation

Art 44 (designation of competent authorities)

Provisions of Art 44 are already contained in MFC, arts L.532-9(1), L.621-7, L. 621-9, L.631-2-1. MFC, art L.621-9 has been amended to adjust to the AIFMD

Art 45 (responsibility of competent authorities in Member States)

MFC, art L.532-21-3

Art 46 (powers of competent authorities)

Several provisions of Art 46 are already contained in MFC, arts L.621-9 I, R.621-31 I, L.612-47, L.631-2-1, L.621-9-2, R.621-31 I, L.621-14 II, L. 621-15-I, L.214-12, L.621-14, L.621-15 III, L.621-13, L.621-13-2, L.214-7-4, L.214-8-7, L.214-126, L.214-136, L.532-10, L.532-6, L.621-20-1, L.621-9-2, General Regulations, art 143-1 and art L.325-1 of the French insurance code. MFC, arts L.621-13, L.621-25 have been modified in order to widen their scope to include AIFs MFC, arts L.621-8-4, L.621-10, L.621-12, L.621-13-2

Art 48 (administrative penalties)

Provisions of Art 48 were already contained in MFC, arts R.621-15 III, L. 532-12 first subparagraph, L.621-15 V, L.621-14 I and General Regulations, art 311-5 MFC, art R.621-42 has been modified to comply with Art 48

Art 50 (obligation to cooperate)

Most provisions of Art 50 were contained prior to the adoption of the AIFMD in MFC, arts L.632-1, L.632-6-1, L.632-1(1), (2), L.632-8 MFC, art L.632-6 has been modified to include in its scope the obligation of the AMF to cooperate with ESMA regarding AIFMs MFC, art L.532-46

Art 51

Most provisions of Art 51 are contained in art 6 point 5° of the French Data Protection and Freedom of Information Law of 6 January 1978 MFC, art L.632-8

Art 52

Several provisions of Art 52 were already contained in MFC, art L.632-16 MFC, art L.632-7 IV

Art 53

MFC, art L.632-6-2

Art 54

Provisions of Art 54 already existed under French Law as set out in MFC, arts L. 632-2(1)–(3), L.632-16(1), L.632-5

Art 55

Provisions of Art 55 are already contained in Art 15 of Regulation 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a

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AIFMD

National implementation European Supervisory Authority and are directly applicable in France. Therefore, Art 55 has not been transposed.

(p. 196) 2. Designation, responsibility, and powers of competent authorities 3.135  These sections deal with the powers of competent authorities, including their designation and responsibilities. They also require competent authorities to lay down rules relating to administrative penalties for infringements. 3.136  A feature of the AIFMD is that, for the first time, it requires competent authorities to monitor the potential build-up of systemic risk in the financial system, which may arise from the use of leverage by AIFMs in relation to AIFs under management. This introduces an EU financial stability dimension to fund management regulation: Member States must ensure that their competent authorities possess the necessary powers to supervise the use of leverage and impose supervisory restrictions on AIFMs where necessary to limit the extent to which use of leverage by AIFMs contributes to the build-up of systemic risk in the financial system. This process is coordinated with ESMA, the European Systemic Risk Board (ESRB), and other EU regulators where relevant. 3.137  The French legislator considers that provisions corresponding to those in Articles 44–46 and 48 of the AIFMD already exist in national law. Therefore, with regard to the designation, responsibility, and powers of competent authorities and administrative penalties under French law, see section II.

3. Other issues 3.138  The French legislator considers that Articles 49, 50, and 51 of the AIFMD are already reflected in French law. (p. 197) 3.139  Several provisions of Article 52 were already reflected in French law. Articles 52 and 53 have been transposed in France on a copy out basis. 3.140  The French legislator considers that Article 54 is already reflected in French law. 3.141  The provisions of Article 55 are already reflected in Article 15 of Regulation 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority.24 As such, no further implementation has been considered necessary.

XIII. Concluding Remarks 3.142  The AIFMD raises certain questions of material change for French businesses operating in the alternative fund management arena, impacting not only fund managers but also investors, regulators, depositaries, valuers, administrators, distributors, and other service providers. 3.143  Transposition of the Directive has made it necessary for France to adjust regulation in the non-UCITS investment fund management arena and develop and implement new policies. As the AIFMD is principally maximum harmonizing, there are certain limitations on what additional regulatory requirements the French competent authorities may impose on AIFMs; nevertheless, France, along with many other Member States, has exercised its discretion to do so in a number of areas. France has also taken advantage of the AIFMD implementation opportunity to reorganize the MFC and to restructure the range of funds.(p. 198)

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Footnotes: 1

  The source of all these figures is the Association Française de la Gestion Financière, the French asset management association, stated as at May 2013. 2

  See French code monétaire et financier (MFC), arts L.214-7 and L.214-8, respectively.

3

  Examples of such circumstances include where a maximum number of shares or units has been issued, a maximum amount of assets has been reached, or the term of a defined subscription period has come to an end: see MFC, art L.214-7-4 and L214-8-7 and art 411-20 of the General Regulations of the AMF. SICAVs and FCPs can temporarily suspend redemption of shares or units in accordance with their constitutional documents if there are exceptional circumstances; and it is in the unit-holders’ or shareholders’ best interests: see MFC, arts L.214-7-4, L.214-8-7 and art 411-20 of the General Regulations of the AMF. The redemption of units must also be suspended when the assets of an FCP or SICAV fall below EUR 300,000. The SGP must notify the AMF of the reasons and procedures for suspending redemptions: see art 411-20 of the General Regulations of the AMF. 4

  An SICAF cannot issue any new shares after the initial subscription period unless there is an increase of the share capital. After the initial subscription period, an investor can nevertheless acquire the SICAF’s shares on the secondary market. An SICAF’s shares cannot be redeemed at the request of the investors, except in certain exceptional cases provided for in the SICAF’s articles of incorporation: see MFC, art L.214-147. Subject to these limited exceptions, an investor can only sell shares on the secondary market. Listed SICAFs can redeem up to 10% of their capital per year and up to 25% if the price of the shares is 10% less than the NAV of the shares: see MFC, art L.214-158. The redemption of more than 25% of the shares must be authorized by a general meeting of the SICAF’s shareholders. Non-listed SICAFs may impose restrictions on transfers (for example, approval clauses or pre-emption rights). Listed SICAFs cannot impose restrictions. Transfers of shares or units of a hedge fund are subject only to the transferor being an eligible investor for that fund. Additionally, transfers to third parties may be subject to the SGP’s prior approval, if the prospectus so provides. 5

  Having been established by the Financial Security Act (Law No 2003-706 of 1 August 2003). 6

  As set out in MFC, art L.421-16-II.

7

  AMF Position No 2010-05, 15 October 2010, Marketing of complex financial instruments.

8

  MFC, art L.214-24.

9

  Pursuant to General Regulations, arts 411-126, 314-30.

10

  Requirements relating to French AIFs are contained in Book II of the MFC, which has been amended to implement the provisions of the AIFMD relating to AIFs (for example, marketing, depositaries, valuation, transparency, and control of non-listed companies and issuers). While Book II of the MFC contains rules relating to collective investment products (including AIFs), Book V relates to service providers. Meanwhile, Book III concerns service providers whereas Book IV relates to products. 11

  See MFC, art L.532-9 I.

12

  Cass. Ass. Plé., 4 March 2005, No 03-11.725.

13

  Cass. Crim., 5 March 1998, No 96-85.122; Cass. Crim., 16 June 1999, No 98-83.734; Cass. Crim., 19 November 2003; Cass. Crim., 20 June 2007.

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14

  Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012, supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (OJ 2013 L83/1). 15

  ESMA, Guidelines on key concepts of the AIFMD, ESMA/2013/611, 13 August 2013.

16

  Directive 2010/76/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies (OJ 2010 L329/3). 17

  The Proposed Directive for amending Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, (OJ 2009 L302/32). 18

  General Regulations, art 318-58.

19

  MFC, art L.214-24-13.

20

  MFC, arts L.214-24-10 and L.214-24-11.

21

  MFC, art L.533-11, together with art 1147 of the French Civil Code regarding general contractual liability. 22

  Cass. Com., 26 February 2008, No 07-10761.

23

  See MFC, art L.532-41.

24

  OJ 2010 L331/84.

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4 Germany Christian Schmies From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Collective investment scheme — Hedge fund — Advertising and marketing and funds

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(p. 199) 4  Germany I. Introduction 4.01 1. Nature of the national non-retail investment industry 4.01 2. Legal structures used to form national AIFs 4.11 II. Pre-AIFMD Regulatory Framework 4.15 1. Regulation of AIFMs and national AIFs prior to the AIFMD 4.15 2. Regulation of national marketing of AIFs prior to the AIFMD 4.18 III. Regulation of National AIFs after the AIFMD 4.23 IV. General Provisions of the AIFMD and the Implementing Regulation 4.25 1. Implementation table 4.25 2. Articles 2 and 3—Scope and exemptions 4.25 3  Article 5—Determination of the AIFM 4.29 V. Authorization of AIFMs 4.36 1. Implementation table 4.36 2. Articles 6 to 8—Conditions and application for authorization 4.36 3. Article 9—Initial capital and own funds 4.40 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 4.42 5. Consequences of violation of authorization provisions 4.43 VI. Operating Conditions for AIFMs 4.46 1. Implementation table 4.46 2. Section 1 (Articles 12 to 17)—General requirements 4.46 3. Section 2 (Articles 18 and 19)—Organizational requirements 4.59 4. Section 3 (Article 20)—Delegation of AIFM functions 4.61 5  Section 4 (Article 21)—Depositary 4.65 6. Consequences of violating operating conditions 4.69 VII. Transparency Requirements 4.74 1. Implementation table 4.74 2. Article 22—Financial reporting 4.74 3. Article 23—Disclosure to investors 4.78 4. Article 24—Regulatory reporting 4.80 5. Consequences of violation of transparency requirements 4.81

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VIII. AIFM Managing Specific Types of AIF 4.84 1. Implementation table 4.84 2. Section 1 (Article 25)—AIFM managing leveraged AIF 4.84 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 4.85 4. Consequences of violation of provisions relating to AIFMs managing specific types of AIF 4.88 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 4.92 1. Implementation table 4.92 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 4.92 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 4.95 4. Article 33—Conditions for managing AIFs established in other Member States 4.100 (p. 200) 5. Consequences of violation of conditions for EU AIFMs to market and manage EU AIFs in the EU 4.102 X. Specific Rules in Relation to Third Countries 4.105 1. Implementation table 4.105 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 4.105 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 4.106 4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 4.109 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 4.112 6. Consequences of violation of specific rules in relation to third countries 4.113 XI. Marketing to Retail Investors 4.116 1. Implementation table 4.116 2. Article 43—Marketing of AIFs by AIFMs to retail investors 4.116 3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 4.121 XII. Competent Authorities and Supervisory Powers 4.122 1. Implementation table 4.122 2. Designation, responsibility, and powers of competent authorities 4.122 3. Other issues 4.124

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XIII. Concluding Remarks 4.125

I. Introduction 1. Nature of the national non-retail investment industry 4.01  Before the implementation of the AIFMD, the German fund industry could be neatly distinguished in a regulated and a non-regulated fund industry. The regulated German fund industry was subject to comprehensive regulation under the German Investment Act (Investmentgesetz—‘InvG’) which was repealed as of 22 July 2013 and substituted by the new German Capital Investment Code (Kapitalanlagengesetzbuch—‘KAGB’) which implements AIFMD into German law. 4.02  The scope of the former InvG, however, was not comprehensive. It left open the possibility to establish collective investment schemes not covered by the InvG. For many decades, a largely unregulated fund industry thus coexisted alongside the regulated fund industry in Germany. 4.03  German investment funds regulated under the InvG included both retail funds and institutional funds. The latter are known as ‘special funds’ (Spezialfonds). Spezialfonds are an important vehicle for investments by German institutional investors, first and foremost German insurance companies. 4.04  The most important type of regulated retail funds under the InvG were undertakings for collective investment in transferable securities (UCITSs), but the InvG also provided for other types of retail fund which, being non-UCITS, are alternative investment funds (AIFs) within the meaning of the AIFMD. The most prominent type of non-UCITS fund regulated under the InvG are real estate funds. While regulated German real estate funds attracted a lot of interest among German retail investors, other regulated fund types more recently introduced, such as hedge funds, funds of hedge funds, and infrastructure funds, did not gain a lot of interest from the retail public. (p. 201) 4.05  One feature of all funds regulated under the InvG was their open-ended nature. All investment funds under the InvG had to grant investors a right of redemption, even though with different frequencies of redemption dates. German UCITSs, for example, must generally grant investors a daily right of redemption. In the case of special funds, it was sufficient under the InvG to allow investors to redeem their units at least once every two years. 4.06  Other characteristic features of all investment funds under the InvG were their limitation to a catalogue of permissible assets and the existence of statutory investment restrictions. Whereas the regime was liberal for special funds, the investment restrictions for retail funds were strict: each retail fund had to comply with the specific set of rules applicable to one of the permissible retail fund types under the InvG (for example, UCITS, real estate fund, etc). A combination of fund types was not permissible for retail funds. 4.07  In the past, unregulated German investment funds were simply established as companies under general German corporate law. Often, their structure was determined or significantly influenced by tax considerations. For lack of comprehensive supervision, these funds were often referred to as being part of the ‘grey capital market’ (grauer Kapitalmarkt). The lack of regulation and public supervision of this segment of the fund business was to some extent compensated by the German courts, which had to deal with numerous cases of investor lawsuits over the decades.

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4.08  Only in 2004 did the German legislator decide to shed more regulatory light on the grey capital market by imposing regulatory disclosure requirements, in particular a prospectus requirement. Apart from disclosure requirements, however, neither prudential regulation of the managers of these types of funds nor product regulation of the funds as such was introduced. 4.09  Unregulated German investment funds were typically closed-ended because German corporate forms do not easily lend themselves to an open-ended fund type with frequent fund issuances and redemptions. 4.10  One important asset class for these funds is real estate, where unregulated closedended real estate funds thus coexisted alongside regulated open-ended funds. Since unregulated funds were not limited to any catalogue of permissible assets as provided for in the InvG, any other asset class was also accessible to them. Other asset classes in this part of the fund industry include, among others, ships, aircraft, containers, wind, and solar parks, life insurance contracts, and private equity.

2. Legal structures used to form national AIFs 4.11  Before the AIFMD was introduced, Germany already regulated AIFs under the InvG. The InvG only provided for two legal forms: a contractual type fund (Sondervermögen) managed by a German asset management company (Kapitalanlagegesellschaft, or ‘KAG’) or (p. 202) the investment company with variable capital (Investmentaktiengesellschaft mit veränderlichem Kapital, or ‘ICVC’), ie a corporate-type vehicle. In comparison to the importance of the Luxembourg société d’investissement à capital variable (SICAV), the investment company with variable capital in Luxembourg, the German version of the ICVC has never gained much importance as a legal form for regulated German investment funds under the InvG. 4.12  The vast majority of regulated German investment funds are established in contractual form, ie as a segregated pool of assets managed by an asset management company (KAG) pursuant to a contractual agreement with investors. The assets of the fund are either held by the KAG on trust for the investors or by the investors as co-owners. In either case, the fund assets do not form part of the insolvency estate of the management company. The issue and redemption of shares is handled by the custodian bank whose involvement has been a mandatory feature for regulated German funds even before the AIFMD. 4.13  Those German funds which were previously unregulated could generally avail themselves of any legal form for the establishment of companies in Germany. In order to achieve tax transparency for investors, but also due to the flexibility of applicable provisions, unregulated funds were established as a partnership rather than as a corporation in most cases. 4.14  The KAGB now limits the choice for all German investment funds to three basic legal forms: the contractual fund (Sondervermögen), the investment company (Investmentaktiengesellschaft), and the investment limited partnership (Investmentkommanditgesellschaft). Other legal forms are not permissible for German AIFs unless they are not captured by the AIFMD implementing legislation, for example due to their limited size.

II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD

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4.15  The German pre-alternative investment fund manager (AIFM) regulatory framework was characterized by a dichotomy of regulated and unregulated investment funds. Investment funds regulated under the InvG include UCITSs but also other regulated funds which now qualify as AIFs. 4.16  Even before the implementation of the AIFMD, KAGs managing such regulated funds were subject to comprehensive regulation similar to the regulation now provided for in the Directive. The same applies to the few regulated German investment funds established in the form of investment companies. In the case of a self-managed investment company, the company itself was subject to essentially the same level of regulation as KAGs for contractual funds. For investment companies that were not self-managed, the InvG required the management to be delegated to a KAG regulated under the InvG. 4.17  The more significant regulatory changes are brought about by the AIFMD for those German investment funds which have so far largely escaped regulation, ie mostly closedended investment funds. While subject to prospectus and ongoing transparency requirements, the activity of managing such funds was essentially unregulated. It is mainly the managers of these investment funds which will be affected by a completely new regulatory framework after the implementation of the AIFMD into German law.

(p. 203) 2. Regulation of national marketing of AIFs prior to the AIFMD 4.18  Before the transposition of the AIFMD, various regimes applied to the marketing of AIFs in Germany depending on the legal nature of the AIFs. Generally, the regulation of the service of conducting marketing must be distinguished from the regulation of the marketed product. 4.19  Distribution of financial instruments typically qualifies as investment brokerage or investment advice under German law. Both activities are regulated under the German Banking Act (Gesetz über das Kreditwesen) if relating to financial instruments. 4.20  Units in regulated German funds generally qualify as financial instruments. However, intermediaries exclusively distributing units in German investment funds and foreign investment funds which had been notified for public distribution in Germany benefited from an exemption under which they did not need a licence under the German Banking Act but a mere ‘trade licence’ (Gewerbeerlaubnis) issued by the local authorities. For the distribution of foreign collective investment schemes, this privilege could only be invoked by distributors if the scheme qualified as a ‘foreign investment fund’ within the technical sense of the InvG. This, among other criteria, was only the case if the scheme was open-ended or was subject to investment supervision in its home state. 4.21  Apart from the regulation of those conducting the marketing activity, an additional layer of regulation applied to the marketed product as such. German public mutual funds regulated under the InvG were eligible per se for distribution to the retail public. Foreign collective investment schemes qualifying as ‘foreign investment fund’ within the technical sense of the InvG could only be successfully notified for public distribution in Germany if they were comparable to one of the fund types for retail funds under the InvG. UCITSs benefitted from the European passport but for foreign non-UCITS investment funds the regime was so restrictive that ultimately only a handful of foreign non-UCITS investment funds were still notified for public distribution in Germany. 4.22  The InvG did not apply to foreign collective investment schemes that did not qualify as ‘foreign investment funds’ within the technical sense of the InvG, for example closedended, unregulated investment funds. Depending on their legal nature, distribution of units in foreign collective investment schemes could be governed by the legislation implementing

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the European Prospectus Directive1—the German Securities Prospectus Act (Wertpapierprospektgesetz) or by autonomous German legislation.

III. Regulation of National AIFs after the AIFMD 4.23  Before the implementation of the AIFMD, the InvG already provided for manager and product regulation of various types of open-ended, non-UCITS investment funds accessible to the retail public. Apart from the regulation of the management companies, which had to be adapted to the AIFMD, the German legislator did not significantly change the product (p. 204) regulation applicable to the previously already regulated, open-ended retail AIF. However, with the transition from the InvG to the KAGB, some AIF fund types that existed previously were abandoned, essentially for lack of investor interest. 4.24  In relation to closed-ended AIFs, essentially no product regulation existed before the implementation of the AIFMD. Unlike the UCITS Directive, the AIFMD itself, with its focus on manager regulation, does not provide for product regulation of AIFs. The German legislator, however, has taken the opportunity to implement the AIFMD into national law as an opportunity to introduce product regulation for closed-ended funds, in particular closedended funds accessible to retail investors.2 The new product regulation of closed-ended retail AIFs under the KAGB includes, among others: (i) a catalogue of eligible assets;3 (ii) restrictions on foreign currency exposures;4 (iii) risk diversification requirements;5 and (iv) limitations on leverage.6

IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

KAGB, § 1

Art 2 (scope)

KAGB, § 1, 2

Art 3 (exemptions)

KAGB, § 2

Art 4 (definitions)

passim

Art 5 (determination of AIFMs)

KAGB, § 17

Implementing Regulation

National implementation

Arts 3–7 (re Art 3(2) AIFMD: calculation of AUM)

No additional national implementation

Arts 8–13 (re Art 4(3) AIFMD: calculation of leverage)

No additional national implementation

2. Articles 2 and 3—Scope and exemptions 4.25  The starting point for determining the scope of the KAGB is § 1(1), with its definition of investment fund (Investmentvermögen). Pursuant to this definition, an investment fund is any scheme for collective investment raising capital from a number of investors in order to invest it according to a specific investment policy for the benefit of its investors and which is not an operative company outside the financial sector. Subject to exemptions provided for

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in the KAGB, its scope of application is determined by this broad definition of investment fund. (p. 205) 4.26  Current discussions on the scope of the KAGB focus at least as much on the criteria forming part of this broad definition as on the various express exemptions provided for in the KAGB. In June 2013, the German Federal Financial Services Supervisory Authority (BaFin) released a circular providing some regulatory guidance on the interpretation of the concept of investment fund under the KAGB.7 In its circular, BaFin has tried to provide both general guidance relating to the various components of the definition of an investment fund as well as specific guidance with regard to the treatment of particular structures, such as real estate investment trusts (REITs). The draft circular shows that even the regulator struggles with the broad definition of investment fund, which threatens to capture not only typical collective investment schemes but also structures presumably not intended to be captured by investment regulation. Some of the defining features of AIFs, for example the requirement of a specific investment policy in contrast to a mere ‘corporate strategy’, are still unclear in their boundaries even after the release of the BaFin circular. 4.27  The exemptions provided for in Articles 2(3) and 3 of the AIFMD are reflected in § 2 of the KAGB. While the KAGB regulates AIFs limited to professional investors and semiprofessional investors as well as AIFs open to retail investors, only AIFMs managing exclusively AIFs limited to professional and semi-professional investors (Spezial-AIF) can benefit from the implementing provisions for ‘small AIFMs’. In accordance with the provisions of the AIFMD, the exemption for small AIFMs can be invoked by AIFMs managing AIFs whose assets under management, including any assets acquired through leverage, do not exceed a threshold of EUR 100 million, or, provided that the portfolios of the AIF are unleveraged and have no redemption rights exercisable during a period of five years following the date of the initial investment, do not exceed a threshold of EUR 500 million. 4.28  In addition to the exemption for small AIFMs provided for in the AIFMD and implemented by the German legislator for AIFMs managing only Spezial-AIF, the KAGB provides for an exemption for AIFMs managing small retail AIFs. This exemption is only available if the managed AIF is closed-ended, has assets not exceeding EUR 5 million, and has no more than five investors.

3. Article 5—Determination of the AIFM 4.29  In accordance with the AIFMD, § 17 of the KAGB provides that the AIFM, or, in the terminology of the KAGB, the Kapitalverwaltungsgesellschaft (‘KVG’), is either an external AIFM or an internal AIFM. The term ‘KVG’ now captures both asset management companies (Kapitalanlagegesellschaften) within the meaning of the former InvG managing contractual funds as well as self-managed investment stock corporations and investment limited partnerships. Among the three permissible legal forms for AIFs under German law, ie contractual funds, investment companies, and investment limited partnerships, contractual funds can only be managed by an external AIFM/KVG. The contractual fund itself has no legal personality and therefore must be managed by a third party. (p. 206) 4.30  Both the investment company and the investment limited partnership can be established with an internal AIFM, ie as a self-managed legal entity or with an external AIFM. German investment funds regulated under the InvG before implementation of the AIFMD were typically established in the form of contractual funds and it can be expected that the contractual fund remains the favourite legal form for open-ended investment funds.

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4.31  In case of contractual funds, the AIFM is generally the KVG that has established the AIF. Many KAG/KVGs delegate the portfolio management of their funds to external asset managers. In fact, it is the business model of various KVGs to serve as ‘master-KAG’, ie as KVG establishing investment funds and serving as the administrative backbone for external portfolio managers to whom the master-KVG delegates the portfolio management of funds. In such a case, the master-KVG remains the AIFM, whereas the portfolio manager acts as delegate in accordance with the German implementation of Article 20 of the AIFMD. 4.32  Regulated German KVGs are subject to stringent regulatory requirements applicable in the case of an outsourcing of material functions, in particular an outsourcing of the portfolio management. The InvG provides that portfolio management can only be outsourced to a delegate who is licensed for portfolio management and subject to effective public supervision. 4.33  If domiciled in the EU, external portfolio managers to whom German KVGs managing investment funds invested in financial instruments delegate portfolio management are typically MiFID investment firms that have passported their authorization to provide MiFID portfolio management services to Germany. External portfolio managers are typically screened prior to any delegation on the basis of industry-standard questionnaires. The outsourcing of portfolio management is typically based on an industry standard template developed by the German industry association Bundesverband Investment und Asset Management e.v., which grants KVGs comprehensive instruction, audit, and inspection rights. While from time to time cases occur where external asset managers do cause damage due to violation of investment restrictions, the multitude of outsourcing arrangements in the German fund industry has so far not created any significant problems. 4.34  In the past, only a few investment companies have been established under German law, some of them self-managed, some externally managed. Externally managed investment companies are attractive where, for tax or other reasons, a corporate vehicle is preferred and the infrastructure of an external AIFM is already in place. 4.35  Investment limited partnerships have so far not been eligible legal forms for regulated German investment funds. Limited partnerships were a common legal form for unregulated, closed-ended German investment funds prior to the implementation of the AIFMD and may well remain the favourite legal form for closed-ended German investment funds in the future. Given the workload involved in the establishment of an AIF, it would seem to be advantageous to set up one external AIFM for those fund sponsors intending to establish a variety of AIFs.

(p. 207) V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as an AIFM)

KAGB, § 20

Art 7 (application for authorization)

KAGB, § 22

Art 8 (conditions for granting the authorization)

KAGB, § 23

Art 9 (initial capital and own funds)

KAGB, § 25

Art 10 (changes in the scope of the authorization)

KAGB, § 22

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AIFMD

National implementation

Art 11 (withdrawal of the authorization)

KAGB, § 39

Implementing Regulation

National implementation

Arts 14–17 (re Art 9(7) AIFMD: own funds and insurance)

No additional national implementation

2. Articles 6 to 8—Conditions and application for authorization 4.36  The KAGB deals with the authorization of UCITS management companies and AIFMs in parallel provisions. Apart from differences due to the different nature of funds managed, the procedural framework for the authorization of an AIFM resembles the procedure applicable for the authorization of a UCITS management company. BaFin has recently released a circular providing regulatory guidance on the authorization procedure for AIFMs.8 4.37  The KAGB provides legal forms compatible with internal as well as external AIFM authorization. Fund sponsors that have already established German regulated investment funds will typically have to apply for authorization as external AIFMs because their German investment funds are generally established in the legal form of contractual funds which only allow for external AIFMs. Closed-ended investment funds are now regulated for the first time and, as such, the model of an internal AIFM may gain more relevance. 4.38  Fund managers who managed German regulated investment funds in the past were, unless focused on the management of regulated real estate funds, typically licensed to manage both UCITS funds and other regulated investment funds in securities which now qualify as AIFs. These KAGs will in the future typically combine the activities of a UCITS management company and an AIFM. Given the broad similarity of requirements applicable to UCITS management companies and AIFMs, there is no obvious reason why a fund manager who intends to manage both should split their functions into two different legal entities and thereby duplicate the number of licensing procedures and licensed entities. However, the directors of a management company must have expertise in the particular type of funds to be managed by the company. By limiting its licence to particular fund types, a management company may thus also limit the range of expertise required from its own management. (p. 208) 4.39  KAGs managing UCITSs or other regulated funds in Germany are often at the same time licensed to provide discretionary asset management services for individual accounts and other ancillary services. It may therefore be expected that the option to obtain a licence for discretionary asset management services and other ancillary services will continue to have significant practical relevance in Germany.

3. Article 9—Initial capital and own funds 4.40  In accordance with the provisions of the AIFMD, § 25(1) of the KAGB requires an initial capital of at least EUR 300,000 for internal AIFMs and at least EUR 125,000 for external AIFMs. Additional own funds must be retained if the assets under management exceed EUR 250 million, namely 0.02% of the excess amount. Germany has made use of the option to allow AIFMs to provide up to 50% of the additionally required capital in the form of a guarantee by a credit institution or insurance undertaking eligible pursuant to Article 9(6) of the AIFMD.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

4.41  German KAGs have so far not been under particular regulatory capital requirements relating to professional liability risks. With the implementation of the AIFMD, German AIFMs must either have appropriate additional own funds or professional indemnity insurance to cover potential professional liability risks. The capital requirements relating to professional liability risks apply exclusively to AIFMs and have not been extended to UCITS management companies. The statutory provisions under which liability of an AIFM towards investors may arise have not been changed by the national implementation of the AIFMD.

4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 4.42  The requirements under which an authorization can be withdrawn are described in § 39 of the KAGB in one coherent provision for UCITS management companies and for AIFMs. The requirements closely resemble those which already applied before the AIFMD. The implementation of the Directive therefore does not change the legal framework significantly, except that the scope of companies requiring a licence in the first place increases significantly in Germany with the implementation of the Directive.

5. Consequences of violation of authorization provisions A. Regulatory law consequences 4.43  The KAGB confers various powers upon BaFin to combat the management of investment funds without the required licence or, in the case of small AIFMs, registration.9 In particular, BaFin may order the immediate cessation of business activities, give instructions regarding the termination of existing business, and appoint appropriate persons to unwind the illegal business activity.

(p. 209) B. Criminal law consequences 4.44  The violation of financial regulatory requirements is only rarely sanctioned as a criminal offence in Germany. The prominent exception to this rule are licensing requirements in the financial sector: conducting the business of a UCITS management company or an AIFM without the required licence or, in the case of small AIFMs, the required registration, is a criminal offence under German law which can be sanctioned by up to three years’ imprisonment or a monetary fine in the case of wilful intent, and up to one year imprisonment or a monetary fine in the case of negligence.10

C. Private law consequences 4.45  The German AIFMD implementing legislation does not include any provisions governing the private law consequences of a violation of the German implementation provisions regarding the authorization of AIFMs. Therefore, general principles of German law apply. With regard to licensing requirements for banks and investment firms, it is generally accepted that the statutory provisions on the licensing requirements are provisions protecting the interest of third parties. This implies that clients contracting with an entity lacking the required licence can claim damages based on the violation of the licensing requirement. Such a damages claim may also be directed at the unwinding of the relevant client contract. It is debated whether the lack of a requisite licence even implies that the relevant client agreements are void. However, given that clients can often request agreements to be unwound based on their damages claim, the practical impact of this debate is limited. It is fair to assume that the same principles would also apply in the area of fund management companies operating without the requisite licence.

VI. Operating Conditions for AIFMs

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1. Implementation table AIFMD

National implementation

Art 12 (general principles)

KAGB, § 26

Art 13 (remuneration)

KAGB, § 37

Art 14 (conflicts of interest)

KAGB, § 27

Art 15 (risk management)

KAGB, § 29

Art 16 (liquidity management)

KAGB, § 30

Art 17 (investment in securitization positions)

No national implementation; only direct application of Implementing Regulation

Art 18 (general principles)

KAGB, § 28

Art 19 (valuation)

KAGB, §§ 169, 170, 216, 279

Art 20 (delegation)

KAGB, § 36

Art 21 (depositary)

KAGB, §§ 80–90

Implementing Regulation

National implementation

Arts 18–30 (re Art 12(1) AIFMD: general principles)

No additional national implementation

Arts 31–38 (re Art 14: conflicts of interest)

No additional national implementation

Arts 39–46 (re Art 15 AIFMD: risk management)

No additional national implementation

Arts 47–50 (re Art 16 AIFMD: liquidity management)

No additional national implementation

Arts 51–56 (re Art 17 AIFMD: investment in securitization positions)

No additional national implementation

Arts 57–67 (re Art 18 AIFMD: organizational requirements—general principles)

No additional national implementation

Arts 68–75 (re Art 19 AIFMD: valuation)

No additional national implementation

Arts 76–83 (re Art 20 AIFMD: delegation of AIFM functions)

No additional national implementation

Arts 84–103 (re Art 21 AIFMD: depositary)

No additional national implementation

(p. 210) 2. Section 1 (Articles 12 to 17)—General requirements A. Article 12—General principles

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4.46  The general requirements governing the operating conditions have been implemented by the German regulator in one provision for both AIFMs and UCITS management companies. This reflects the general approach taken by the German legislator for the implementation of Articles 12–17 of the AIFMD: The German implementing provisions have generally been drafted to apply to both AIFMD and UCITS management companies. 4.47  With regard to AIFMs, the KAGB makes additional reference to the provisions of the Implementing Regulation. While the provisions of the Implementing Regulation thus do not apply to UCITS management companies, this distinction is of little practical relevance because most management companies managing UCITSs at the same time also manage AIFs. 4.48  For UCITS management companies and AIFMs managing AIFs accessible to the retail public, the German legislator has created an additional, German implementing regulation containing further requirements for these management companies: the Capital Investment Conduct and Organization Regulation (Kapitalanlage-Verhaltens- und Organisationsverordnung). An AIFM managing AIFs accessible to the retail public is thus subject to the statutory provisions of the KAGB, the European Implementing Regulation, and the German implementing regulation. 4.49  The catalogue of general requirements in § 26 (2) of the KAGB closely follows Article 12 of the AIFMD. While many requirements of Article 12 are interrelated, they have been implemented by the German legislator as separate requirements. For those AIFMs that were already regulated under the InvG before the implementation of the AIFMD, the requirements following from these general provisions are not new. It is essentially fund managers regulated for the first time with the implementation of AIFMD that will have to revise and adapt their policies and organization to comply with the new regulatory requirements. 4.50  The principle of fair treatment in Article 12(1)(f) has been implemented verbatim by the German legislator. The principle of equal treatment has always been an accepted principle (p. 211) applicable to German regulated investment funds. Although this principle has not figured very prominently in the letter of the law so far, in substance the requirements of Article 12(1)(f) should not go beyond what was required from regulated German KAGs in the past.

B. Article 13—Remuneration 4.51  The German fund industry has in the past largely escaped statutory regulation of its remuneration principles. The requirements applicable to remuneration belong to the general operating requirements where the German legislator deviated from its general principle to implement the requirements of the AIFMD consistently for AIFMs and UCITS management companies. The German provisions implementing Article 13 of the AIFMD only apply to AIFMs but not to UCITS management companies. Management companies exclusively managing UCITS are, however, a rare phenomenon in Germany so that most management companies managing UCITS will be affected by the new rules on remuneration because they manage AIFs at the same time.

C. Article 14—Conflicts of interest 4.52  The AIFMD provisions governing conflicts of interest have also been implemented by the German legislator so that they apply in principle to both UCITS management companies and AIFMs,11 it being understood that the provisions of the Implementing Regulation only apply to AIFMs. As mandated by the AIFMD and in accordance with the principles of MiFID and the UCITS Directive, the German implementing provisions follow the principle that conflicts of interests should, where possible, be prevented by appropriate organizational

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requirements. Where the organizational requirements are not sufficient to ensure that risks of damage to investors’ interests will be prevented, disclosure is required.

D. Article 15—Risk management 4.53  In accordance with the general approach adopted by the German regulator for the implementation of Articles 12 to 17 of the AIFMD, Article 15 has been implemented in one coherent provision for both AIFMs and UCITS management companies.12 The requirements applicable to risk management and the risk management function are largely known to those German KVGs already regulated under the InvG. It therefore seems reasonable to expect that these KVGs will not have to make significant changes to the manner in which they have operated so far. Like many other AIFMD requirements, the requirements applicable to risk management are, however, a novelty for the so-far unregulated sector of the German fund industry. 4.54  The AIFMD requirements applicable to the use of leverage are a novelty at least with respect to their degree of detail. Again, the German legislator has taken the decision to implement these requirements consistently for both AIFMs and UCITS management companies.13 The leverage requirements should, however, play a much more significant role for AIFMs than for UCITS management companies because of the limitations to an increase of market risk applicable to UCITSs under the UCITS Directive.

(p. 212) E. Article 16—Liquidity management 4.55  Article 16 of the AIFMD has also been implemented by the German legislator so that the implementing provision applies to both UCITS management companies and AIFMs.14 Regulated German KAGs were already subject to regulatory requirements regarding their liquidity management under the InvG. It is reasonable also to expect with respect to liquidity management requirements that these KAG/KVGs will not have to make significant changes to the manner in which they operate. 4.56  In accordance with Article 16, the liquidity management requirements do not apply to the extent that the AIFM manages unleveraged closed-ended AIFs.15 The rationale for this exemption seems to be the expectation that an AIF that faces neither redemption requests nor claims for the repayment of loans will typically not be exposed to significant liquidity problems. Nevertheless, liquidity problems may also arise in unleveraged closed-ended funds. For example, real estate funds may have to pay for refurbishments or public levies. Even though the regulatory requirements for liquidity management do not apply, an AIFM will also have to engage in some elementary liquidity management for unleveraged closedended funds. 4.57  Both the former InvG and the new KAGB permit AIFMs to suspend redemptions of open-ended funds in extraordinary circumstances. Beyond the suspension of redemptions and the limited permission for AIFs to borrow monies to finance redemptions, neither the InvG nor the KAGB elaborates what arrangements may be used to deal with liquidity problems in open-ended funds. In particular, the KAGB does not provide a legal framework for the establishment of ‘side pockets’ which would allow AIFMs to isolate temporarily illiquid instruments from the remaining pool of assets.

F. Article 17—Investment in securitization positions 4.58  The KAGB does not include any particular provision implementing Article 17 of the AIFMD. The requirements applicable to investments by AIFMs in securitization positions are governed in Germany exclusively by the provisions of the Implementing Regulation. In contrast to the general approach taken by the German legislator for the implementation of Articles 12 to 17 of the AIFMD, the requirements for investments in securitization positions have thus not been extended to German UCITS management companies even though some German KAGs have in the past also invested in asset-backed securities for UCITSs.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Generally, investments in asset-backed securities are, however, of limited practical relevance in the German fund industry.

3. Section 2 (Articles 18 and 19)—Organizational requirements A. Article 18—General principles 4.59  The general principles governing the organizational requirements of managers have been implemented by the German legislator in the same provision for both AIFMs and UCITS (p. 213) management companies.16 The legislation acknowledges that the organizational requirements of Article 18 of the AIFMD and Article 12 of the UCITS Directive, the European Directive harmonizing retail funds invested in financial instruments,17 are largely identical. Based on the UCITS Directive, these general principles were already applicable under the InvG to German UCITS management companies as well as management companies managing regulated funds other than UCITSs.18 It is thus reasonable to expect that for these KAGs no significant changes to the organizational structure will result from the general principles of Article 18 of the AIFMD.

B. Article 19—Valuation 4.60  The German legislator has implemented the requirements of Article 19 of the AIFMD in identical terms for both AIFMD and UCITS management companies. The legislator has deliberately taken this decision, arguing that for reasons of investor protection the more detailed requirements of the AIFMD should also apply to UCITS management companies.

4. Section 3 (Article 20)—Delegation of AIFM functions 4.61  The ability to delegate functions, including portfolio management, plays an important role in the German asset management industry. It is the business model of some German KAG/KVGs (‘master KVGs’) to serve primarily as management companies for investment funds managed by specialized portfolio managers under outsourcing agreements rather than by the management company itself. 4.62  The requirements for a delegation of AIFM functions under § 36 of the KAGB, including a delegation of portfolio management, do not go significantly beyond the requirements before the introduction of the AIFMD. Even before the implementation of the Directive, a German KAG was only allowed to delegate the portfolio management for financial instruments to an entity licensed for the business of discretionary asset management. Under the KAGB, KAGs are now required to notify a delegation to BaFin before it enters into force. Previously, KAGs were only obliged to notify BaFin on an annual basis of all outsourcing arrangements in place. 4.63  Even before the implementation of the AIFMD by the KAGB, the former InvG provided that the liability of the asset management company managing a regulated investment fund is not affected by a delegation of functions. The same rules apply under the KAGB pursuant to the implementation of Article 20(3) of the AIFMD. KAGB, § 36(4) provides that an AIFM delegating functions is responsible for any fault of its delegate as if it were its own fault. From a German civil law perspective, this provision probably means that any deviating contractual arrangement between the asset management company and the investors is void. 4.64  It may be questionable whether § 36(4) also affects the relationship between the AIFM and the delegate, ie whether a provision limiting the liability of the delegate vis-à-vis the AIFM (p. 214) would also be void. In practice, regulated German asset management companies do not accept any limitation of liability in favour of their delegates that would

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expose them to a risk of liability vis-à-vis their investors which they could not pass on to their delegates.

5. Section 4 (Article 21)—Depositary 4.65  Under the KAGB, AIFMs are generally obliged to appoint a depositary, irrespective of whether or not investment in the AIF is limited to professional investors. For the managers of closed-ended funds, this is a novelty. Nevertheless, KAGs managing open-ended German investment funds have in the past been obliged to appoint a depositary bank. This requirement also applied to open-ended investment funds not invested in securities, such as open-ended real estate funds. 4.66  The requirements of the UCITS Directive and the AIFMD regarding the appointment of a depositary are not identical, which is why the German legislator implemented the requirements in a different set of rules for UCITSs and AIFs. However, the German legislator has opted to apply some of the stricter requirements of the AIFMD also in the area of UCITS depositaries, such as the provisions on liability and sub-custody. 4.67  Traditionally, depositary banks acting as custodian for regulated German investment funds limited their responsibility for foreign sub-custodians to proper selection and monitoring, excluding any further liability. This liability regime is also reflected in the general terms and conditions of the German banking industry, which are commonly incorporated by reference into custody agreements for regulated German investment funds. 4.68  KAGB, § 88 (AIF depositaries) and § 77 (UCITS depositaries) implement the liability regime of Article 21 of the AIFMD. The wording of §§ 77 and 88 of the KAGB suggests that these provisions constitute civil law rules that apply by operation of law without any need for implementation in a custody agreement. From a practical perspective, custody agreements will typically contain specific provisions on depositary liability, and new templates developed by the relevant German industry associations already reflect the new liability regime under the KAGB.

6. Consequences of violating operating conditions A. Regulatory law consequences 4.69  The KAGB confers upon BaFin the power to take all suitable and necessary measures to enforce compliance with the provisions of the KAGB.19 Every violation of regulatory requirements under the KAGB can thus be sanctioned by BaFin by administrative order. Such administrative orders can be enforced by coercive measures. Non-compliance with an enforceable BaFin order can furthermore be sanctioned by administrative fines.

B. Criminal law consequences 4.70  In accordance with the general rule that violations of financial regulatory requirements are not sanctioned as a criminal offence in Germany, violation of the German provisions implementing Chapter III of the AIFMD (operating conditions of AIFMs) is not a criminal (p. 215) offence under German law. Therefore, no criminal sanctions can be applied for mere violation of these provisions.

C. Private law consequences 4.71  The KAGB contains no express provisions dealing with the private law consequences of a violation of German provisions implementing Chapter III of the AIFMD. Where funds are established as a contractual fund, ie the prevailing legal form for regulated German investment funds, a violation of these regulatory requirements may at the same time constitute a violation of the contractual relationship between the investor and the KVG.

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4.72  In the context of MiFID conduct of business rules, the prevailing view is that the MiFID rules of conduct, even though regulatory provisions, typically also influence the content of the contractual obligations of the service provider towards the client so that a violation of such rules of conduct will typically also give rise to liability under private law. 4.73  MiFID organizational requirements, on the other hand, are widely regarded as being regulatory requirements only. Nevertheless, failure to comply with organizational requirements may also have an impact on private law liability, for example when it comes to determining whether a service provider has acted with proper care or negligently. For such purposes, the organizational requirements will typically be held up as the standard against which the organization of a service provider is measured when determining whether it meets industry standards.

VII. Transparency Requirements 1. Implementation table AIFMD

National implementation

Art 22 (annual report)

KAGB, § 308

Art 23 (disclosure to investors)

KAGB, § 307

Art 24 (reporting obligations to competent authorities)

KAGB, § 35

Implementing Regulation

National implementation

Arts 104–112 (re Arts 22(2)A–E, 23(4), 24(1) AIFMD: disclosure to investors and regulatory reporting)

No additional national implementing legislation

2. Article 22—Financial reporting 4.74  German investment funds regulated under the InvG were required to prepare periodic accounts even before the transposition of the AIFMD into German law. The regime for special funds in this respect was considerably more flexible than for public mutual funds. In particular, no semi-annual reports were required for German special funds. 4.75  German closed-ended funds were not subject to regulation under the InvG but, if they were not already required to publish an annual report due to the corporate and commercial law provisions applicable to the fund vehicle, they were obliged to prepare such a report under the German Asset Investment Act (Vermögensanlagengesetz). (p. 216) 4.76  The KAGB distinguishes between general requirements applicable to annual reports for all investment funds, additional requirements for public mutual funds, and additional requirements for AIFs.20 With regard to the requirements applicable to AIFs, the KAGB furthermore refers to Articles 103 to 107 of the Implementing Regulation. 4.77  Since German investment funds, including AIFs not previously subject to comprehensive regulation, were already subject to a requirement to publish periodic reports whose minimum content was regulated in detail, the implementation of the AIFMD requirements on financial reporting should not pose significant challenges for most German AIFMs.

3. Article 23—Disclosure to investors

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4.78  The implementation of the AIFMD into German law implies some changes for the preinvestment disclosure of information. For German public mutual funds regulated under the German Investment Act, some of which now qualify as AIFs, a prospectus was already required before the implementation of the AIFMD. Closed-ended funds generally became subject to a prospectus requirement in 2004, but subject to exemptions for certain offerings, including offerings with a minimum price per offered share of EUR 200,000 or more and offerings exclusively directed to investors acquiring and selling financial instruments and other assets as part of their profession. 4.79  For regulated German special funds, in contrast, for example, to Luxembourg specialised investment funds (SIFs), German law did not require a pre-investment disclosure document. Following the introduction of Article 23 of the AIFMD, the KAGB now also requires such documents for German special funds.21 The process for setting up German special funds has thus become more cumbersome under the KAGB, even though the regime still remains very flexible.

4. Article 24—Regulatory reporting 4.80  The implementation of the regulatory reporting requirements under Article 24 of the AIFMD into German law introduces new elements of regulatory reporting into German investment law. KAGs for regulated funds were already subject to BaFin reporting requirements and a comprehensive right of BaFin to inquire and audit such companies. The InvG, however, did not provide for comprehensive ongoing reporting on the items now covered by Article 24.

5. Consequences of violation of transparency requirements A. Regulatory law consequences 4.81  The KAGB confers upon BaFin the power to take all suitable and necessary measures to enforce compliance with the provisions of the KAGB.22 Every violation of regulatory requirements under the KAGB can thus be sanctioned by BaFin by administrative order. Such administrative orders can be enforced by coercive measures and non-compliance (p. 217) with an enforceable BaFin order can furthermore be sanctioned by administrative fines.

B. Criminal law consequences 4.82  In accordance with the general rule that violations of financial regulatory requirements are not sanctioned as a criminal offence in Germany, violation of the German provisions implementing Chapter V of the AIFMD (AIFMs managing specific types of AIF) is not a criminal offence under German law. Therefore, no criminal sanctions can be applied for mere violation of these regulatory provisions. Criminal sanctions may apply in cases of fraudulent behaviour, ie if the violation of reporting requirements is an element in actions aiming at defrauding investors.

C. Private law consequences 4.83  The KAGB includes provisions on prospectus liability which also apply mutatis mutandis to the information to be provided under the German provisions implementing Article 23 of the AIFMD into German law.23 This information also includes the latest annual report so that wrongful information included in the annual report as part of the information provided to the investor in implementation of Article 23 can also give rise to prospectus liability claims. Having assumed responsibility for or sponsoring the prospectus, third parties, as well as distributors, may be exposed to prospectus liability claims, in addition to the management companies.

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VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD

National implementation

Art 25 (use of information, supervisory cooperation, and limits to leverage)

KAGB, §§ 9, 12, 35, 215, 263, 274

Art 26 (scope)

KAGB, §§ 287, 288

Art 27 (notification of the acquisition of major holdings and control of non-listed companies)

KAGB, § 289

Art 28 (disclosure in case of acquisition of control)

KAGB, § 290

Art 29 (annual report of AIFs exercising control of non-listed companies)

KAGB, § 291

Art 30 (asset stripping)

KAGB, § 292

Implementing Regulation

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

No additional national implementation

(p. 218) 2. Section 1 (Article 25)—AIFM managing leveraged AIF 4.84  In accordance with Article 25 of the AIFMD, § 29(4) of the KAGB requires that every KVG determines a maximum amount of leverage for each of the investment funds managed by it as part of its risk management requirements.24 Apart from the organizational requirements relating to leverage, the use of leverage is furthermore subject to disclosure requirements. Each KVG is obliged to include information on leverage and leverage limits in the information document provided to professional and semi-professional investors,25 as well as in the sales prospectus provided to retail investors, before an investment in the relevant fund.26 At least in the case of funds marketed to retail investors, the fund rules, articles of association, or partnership agreement must also include provisions on leverage and its limits.27

3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 4.85  In contrast to other provisions of the AIFMD, the German legislator followed the wording of the Directive very closely in implementing Articles 26 to 30. These provisions were therefore also transposed in one coherent set of rules—§§ 287 to 290 of the KAGB. 4.86  Even before the introduction of the AIFMD, under German corporate law, an undertaking holding 25% or more of a German stock corporation (Aktiengesellschaft) was obliged to inform the company accordingly which, in turn, must publish this information in the company’s statutory publication media.28 The notification requirements introduced with the implementation of AIFMD are entirely new for unlisted companies; they are, however, reminiscent of the notification requirements to BaFin and to the issuers of listed shares under European Directive 2004/109/EC (‘Transparency Directive’),29 with the notable exception that under the German transposition of that Directive notification must also be made if the thresholds of 3%, 5%, 15%, or 25% are affected.

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4.87  Article 30 of the AIFMD, ie the asset stripping rules, have been implemented into German law by § 292 of the KAGB. Twenty-four months after acquisition of control over a target, § 292 prohibits AIFMs from facilitating, supporting, or instructing certain measures relating to the target, including distributions, capital reductions, share redemptions, and acquisition of own shares to the extent that they exceed certain limitations set out in § 292.

(p. 219) 4. Consequences of violation of provisions relating to AIFMs managing specific types of AIF A. Regulatory law consequences 4.88  The KAGB confers upon BaFin the power to take all suitable and necessary measures to enforce compliance with the provisions of the KAGB.30 Every violation of regulatory requirements under the KAGB can thus be sanctioned by BaFin by administrative order. Such administrative orders can be enforced by coercive measures, and non-compliance with an enforceable BaFin order can furthermore be sanctioned by administrative fines.

B. Criminal law consequences 4.89  In accordance with the general rule that violations of financial regulatory requirements are not sanctioned as a criminal offence in Germany, violation of the German provisions implementing Chapter V of the AIFMD (AIFMs managing specific types of AIF) is not a criminal offence under German law. Therefore, no criminal sanctions can be applied for mere violation of these provisions.

C. Private law consequences 4.90  It is disputed to what extent non-compliance with regulatory requirements can lead to civil liability of regulated financial institutions under German law. The prevailing view is that rules of conduct typically influence the content of contractual obligations among parties so that the violation of regulatory rules of conduct typically also gives rise to private law liability under contractual law. Organizational requirements, on the other hand, are widely regarded as mere obligations under public law whose violation as such does not yet give rise to liability under private law. 4.91  Breach of leverage limits will typically give rise to liability under private law because the relevant leverage limitations must be reflected in information documents and sales prospectuses made available to investors before an investment.

IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIFs in the home Member State of the AIFM)

KAGB, §§ 316, 321

Art 32 (marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM)

KAGB, §§ 323, 324 (inbound to Germany) KAGB, § 331 (outbound by German AIFM)

Art 33 (conditions for managing AIFs established in other Member States)

KAGB, § 53 (outbound from Germany)

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AIFMD

National implementation KAGB § 54 (inbound into Germany)

Implementing Regulation

National implementation

n/a

(p. 220) 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 4.92  The implementation of the AIFMD into German law affects the marketing of EU AIFs managed by German AIFMs in several ways. Generally, under the new KAGB every marketing activity requires a prior notification procedure. This is a novelty for German AIFs managed by German AIFMs. Under the former InvG, once established in accordance with the applicable provisions, a regulated German investment fund could be marketed without any additional regulatory procedure. Under Article 31 of the AIFMD, the marketing of German AIFs to investors in Germany now requires a prior notification to BaFin.31 4.93  For non-German EU AIFs managed by German AIFMs, the main impact of the Directive is to create a legal framework for the management of AIFs domiciled outside Germany by German AIFMs. The marketing of such non-German EU AIFs managed by German AIFMs to professional investors in Germany is equally subject to a notification requirement.32 4.94  Notification pursuant to the German implementing provision of Article 31 of the AIFMD also allows for the distribution of the EU AIFs to semi-professional investors. The category of semi-professional investors is an autonomous creation by the German legislator. Semi-professional investors include, among others, (i) investors with a committed investment amount of at least EUR 200,000 and in respect of which the AIFM or the distributor has confirmed the suitability of the investment and (ii) investors with a committed investment amount of at least EUR 10 million in the AIF. Under the AIFMD, semi-professional investors are non-professional investors. Nevertheless, it is permissible to allow for the distribution of EU AIFs to such investors on the basis of Article 43.

3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 4.95  The implementation of the AIFMD into German law significantly changes the legal framework for the cross-border distribution of AIFs, both into and from Germany. 4.96  German AIFMs managing EU AIFs now benefit from the AIFMD European passport for the distribution of their EU AIFs to professional investors in other EU/EEA Member States.33 The electronic passporting procedure for notifying EU AIFs for distribution in other Member States is similar to the passporting procedure for UCITSs. Unlike UCITSs, amendment notifications are handled on an authority-to-authority basis. BaFin has recently published regulatory guidance regarding details of the electronic notification procedure for outbound AIF notifications by German AIFMs.34 4.97  For the distribution of non-German EU AIFs in Germany, the KAGB also introduces significant changes. First, the German legislator abolished existing private placement (p. 221) exemptions for the distribution of foreign AIFs in Germany, subject to the ‘grandfathering’ for one year of private placements already commenced before the KAGB entered into force. In the past, foreign investment funds were often distributed to German institutional investors by way of a private placement without any involvement of the German regulator. Subject to the grandfathering provisions, this is no longer possible under

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the KAGB, which states that every active marketing, including marketing limited to German institutional investors, requires prior completion of a notification procedure. 4.98  EU AIFs managed by non-German EU AIFMs licensed in their home state can be distributed in Germany on the basis of the European passport. If European AIFMs licensed in their EU/EEA home state intend to distribute EU AIFs to professional or semiprofessional investors on German territory, they have to notify their intention to the competent authority in their home Member State according to rules implementing the European passport under Article 32 of the AIFMD into the relevant national law. The details of the notification procedure are governed by the laws of the relevant home Member State. 4.99  Small EU AIFMs, ie EU AIFMs not licensed in their home Member State because they fall below the thresholds of Article 3(2) of the AIFMD but registered in their home state under the provisions implementing Article 3 into national law, may distribute their EU AIFs in Germany to professional and semi-professional investors if the home Member State of the AIFM also allows the distribution of AIFs managed by small German AIFMs under requirements not stricter than those imposed by German law on small EU AIFMs.35 Small EU AIFMs intending to distribute their EU AIFs to professional and semi-professional investors must complete a notification procedure governed exclusively by German law.36 The European passport under the AIFMD is not available to small EU AIFMs unless they decide to opt into full applicability of the Directive in their home Member State.

4. Article 33—Conditions for managing AIFs established in other Member States 4.100  The implementation of the AIFMD into German law allows German AIFMs to manage EU AIFs established in other EU/EEA Member States on the basis of the European passport.37 The passporting procedure must be initiated by German AIFMs with BaFin. Details of the notification procedure depend on whether the AIFM intends to manage EU AIFs on a cross-border basis or by making use of a branch in the host Member State. The passporting procedure required in order to manage EU AIFs established in other Member States is similar to the procedure for UCITS management companies. 4.101  EU AIFMs domiciled in other EU/EEA Member States may also manage German AIFs limited to professional and semi-professional investors on the basis of the European passport.38

(p. 222) 5. Consequences of violation of conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 4.102  The KAGB confers various powers upon BaFin in order to combat a distribution of AIFs in violation of applicable notification requirements. In this respect, § 314 of the KAGB authorizes BaFin to take all suitable and required measures, including a prohibition on further marketing.

B. Criminal law consequences 4.103  Violations of regulatory requirements are only rarely sanctioned as a criminal offence in Germany. In accordance with this general principle, the mere violation of distribution rules does not constitute a criminal offence. If, however, the violation includes the provision of banking or investment services (eg investment advice, transmission of orders, etc) in connection with the distribution of AIFs without the requisite licence for such activities, such provision without the requisite licence would constitute a criminal offence.

C. Private law consequences

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4.104  There is little legal literature as to the private law consequences of a breach of the conditions for the marketing of AIFs under German law. However, to the extent that the provision aims at investor protection, it is fair to assume that these provisions qualify as provisions protecting the interests of third parties for purposes of German tort law so that their violation can give rise to damage claims, including the claim to unwind the relevant contract, to the extent that German law applies to the relevant contractual relationship.

X. Specific Rules in Relation to Third Countries 1. Implementation table AIFMD

National implementation

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

KAGB, § 34

Art 35 (conditions for marketing in EU with passport of non-EU AIFs managed by an EU AIFM)

KAGB, §§ 322 (for German AIFMs) 324 (for non-German EU AIFMs)

Art 36 (conditions for the marketing in EU without a passport of non-EU AIFs managed by an EU AIFM)

KAGB, § 330

Art 37 (authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Art 38 (EU AIFs) or 39 (non-EU AIFs))

KAGB, § 56

Art 38 (peer review of authorization and supervision of non-EU AIFMs)

KAGB, § 64

Art 39 (conditions for the marketing in the EU with a passport of EU AIFs managed by a non-EU AIFM)

KAGB, §§ 325, 327

Art 40 (conditions for the marketing in the EU with a passport of non-EU AIFs managed by a non-EU AIFM)

KAGB, §§ 326, 328

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by a non-EU AIFM)

KAGB, § 65

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM)

KAGB, § 330

Implementing Regulation

National implementation

Arts 114–116 (re Arts 34(1), 35(2), 36(1), 37(7)(D), 39(2)(A), 40(2)(a), and 42(1) AIFMD)

No additional implementing legislation, only crossreferences in KAGB to Arts 114–116

(p. 223) 2. Article 34—Conditions for EU AIFMs which manage nonEU AIFs not marketed in EU 4.105  Article 34 of the AIFMD has been implemented by § 55 of the KAGB. According to this provision, the management of non-EU AIFs not marketed in the EU by a German AIFM is permitted, if (i) the AIFM complies with all requirements of the AIFMD in respect of such non-EU AIFs, except for the requirements applicable to the depositary (Article 21) and the annual report (Article 22) and (ii) appropriate cooperation agreements are in place between BaFin and the supervisory authorities of the third country where the non-EU AIFs are

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established in order to ensure at least an efficient exchange of information that allows BaFin to carry out its duties under the KAGB.

3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 4.106  Once a passport for non-EU AIFs managed by an EU AIFM is introduced, German AIFMs may market non-EU AIFs managed by them to German professional and semiprofessional investors pursuant to § 322 of the KAGB provided that they meet all requirements of the AIFMD, including those relating to the depositary and the annual report, and the additional requirements of Article 35(2), which have also been implemented by § 322 KAGB, are met. The same requirements apply mutatis mutandis for non-German EU AIFMs and the marketing of their non-EU AIFs in Germany after the introduction of the third-country passport. 4.107  Until the introduction of the passport for non-EU AIFs managed by EU AIFMs, such non-EU AIFs managed by non-German EU AIFMs can be marketed to German professional investors on the basis of § 330 of the KAGB which, based on Article 36 of the AIFMD, does not require full compliance with the Directive. Germany has thus chosen to make use of the option of Article 36 to allow the marketing of non-EU AIFs managed by non-German EU AIFMs to professional investors in Germany, provided that the minimum requirements of Article 36(1) regarding depositary, cooperation arrangements, and anti-money laundering are met. 4.108  Irrespective of the introduction of the third-country passport, the implementation of the AIFMD into German law changes the regime for marketing non-EU AIFs managed by (p. 224) German AIFMs in the sense that a private placement of such non-EU AIFs without a regulatory notification procedure is no longer possible, subject to grandfathering provisions for non-EU AIFs already privately placed before 22 July 2013.

4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 4.109  The concept of a reference Member State is a novelty in the regulation of KVGs in Germany. So far, only entities whose seat is in Germany can be licensed by BaFin to provide regulated asset management services. The concept of the reference Member State introduces the possibility for non-resident entities to obtain an authorization of AIFMs not resident in Germany. The authorization as non-EU AIFM with Germany as reference Member State opens up the possibility to (i) manage German AIFs limited to professional and semi-professional investors, (ii) manage non-German EU AIFs on a cross-border basis or by establishing a branch in a different EU/EEA Member State, and (iii) market EU AIFs and non-EU AIFs managed by such non-EU AIFMs on the basis of the European passport. 4.110  The passporting procedure for non-EU AIFMs having Germany as their Member State is very similar to the passporting procedure for German AIFMs or German UCITS management companies providing their services in other EU/EEA Member States.39 The requirements applicable to the passporting notification depend, in particular, on whether services are provided on a cross-border basis only or via the establishment of a branch. 4.111  The marketing of German AIFs, non-German EU AIFs, and non-German AIFs managed by a non-German AIFM having Germany as its Member State of reference requires a prior notification to BaFin.40 Marketing of non-German AIFs is only permissible if the non-German AIFM having Germany as its Member State of reference manages the nonGerman AIFs in full compliance with the requirements of the AIFMD. AIFs managed by nonEU AIFMs having a member state of reference other than Germany can be distributed in

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Germany to professional and semi-professional investors on the basis of the European passport, once introduced.41

5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 4.112  Germany has made use of the option granted to Member States by Article 42 of the AIFMD and allows the marketing of AIFs managed by a non-EU AIFM in Germany to professional investors. The relevant implementing provision, § 330(1) of the KAGB, however, only applies until the introduction of the third-country passport.

6. Consequences of violation of specific rules in relation to third countries A. Regulatory law consequences 4.113  The KAGB confers various powers upon BaFin to combat a distribution of AIFs in violation of applicable notification requirements. In this respect, § 314 of the KAGB authorizes BaFin (p. 225) to take all suitable and required measures, including a prohibition of further marketing. Equally, to the extent that management services are provided in Germany by a non-EU AIFM without having obtained authorization in Germany as Member State of reference or without having passported its authorization obtained in a different Member State of reference, BaFin is authorized to prohibit such management services.42

B. Criminal law consequences 4.114  Violations of regulatory requirements are only rarely sanctioned as a criminal offence in Germany. In accordance with this general principle, the mere violation of distribution rules does not constitute a criminal offence. If, however, the violation includes the provision of banking or investment services (for example investment advice, transmission of orders, etc) in connection with the distribution of AIFs without the requisite licence for such activities, such provision of banking or investment services without the requisite licence would constitute a criminal offence.

C. Private law consequences 4.115  The KAGB does not expressly regulate the consequences of a violation of the implementing provisions for Chapter VII of the AIFMD (specific rules in relation to third countries) under German private law. A breach of the requirements for the marketing of AIFs, ie marketing of AIFs to German investors under circumstances where such marketing is not allowed, could give rise to damage claims because the regulatory requirements applicable to marketing may be regarded under German tort law as statutory provisions protecting the interests of third parties, namely potential investors. Resulting damage claims may also entitle investors to unwind the investment. It is conceivable that such violations may also lead German courts to regard agreements entered into in violation of the relevant marketing rules as void, but such result does not appear convincing.

XI. Marketing to Retail Investors 1. Implementation table AIFMD Art 43 (marketing of AIFs to retail investors)

National implementation KAGB, § 316 KAGB (German AIFs) KAGB, §§ 317–320 (non-German AIFs)

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AIFMD

National implementation

Implementing Regulation

National implementation

n/a

n/a

2. Article 43—Marketing of AIFs by AIFMs to retail investors 4.116  The starting point for the implementation of Article 43 of the AIFMD into German law was that the InvG already provided for several types of AIF which had been distributed to German retail investors in the past, namely open-ended non-UCITS funds regulated under the InvG, and closed-ended funds, which were only subject to prospectus and financial reporting requirements. (p. 226) 4.117  The German legislator took the decision not to use the AIFMD as an occasion to fundamentally change or restrict the marketing of AIFs to retail investors. In the area of open-ended non-UCITS funds, the legislator abolished some of the previously existing fund types, mainly because of lack of investor interest. Open-ended real estate funds, however, have survived the transition from the InvG to the KAGB despite the fact that in recent years a number of open-ended real estate funds faced severe liquidity problems, had to suspend redemptions, and are now in the process of liquidation. 4.118  The more significant changes occurred in the area of closed-ended funds where the legislator used the implementation of the AIFMD as an opportunity to introduce some elements of product regulation. On the basis of these new requirements, closed-ended funds remain accessible to the retail public. 4.119  The marketing of non-German AIFs to the retail public follows the principle known under the former InvG that non-German AIFs do not have to be fully compliant with the requirements of the AIFMD in order to be marketed. However, they have to be comparable to German AIFs accessible to the public. This means, for example, that foreign, closedended AIFs can only be marketed to German retail investors if they are compliant with the new product regulation introduced for German closed-ended AIFs. 4.120  In addition, non-German AIFs have to comply with certain additional requirements due to their nature as non-German vehicles. In particular, a representative in Germany must be appointed to represent the AIF in Germany.43

3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 4.121  The consequences of a violation of national rules with respect to the marketing of AIFs by AIFMs to retail investors correspond to the consequences of such violation in relation to distribution to professional investors, as set out at paragraph 4.115.

XII. Competent Authorities and Supervisory Powers 1. Implementation table AIFMD

National implementation

Art 44

KAGB, § 5

Art 45

KAGB, §§ 5, 11

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AIFMD

National implementation

Art 46

KAGB, § 14

Art 48

KAGB, § 340

Art 50

KAGB, § 9

Art 51

KAGB, § 9

Art 52

KAGB, § 9

Art 53

KAGB, § 9

Art 54

KAGB, § 10

Art 55

KAGB, § 10 (4)

(p. 227) 2. Designation, responsibility, and powers of competent authorities 4.122  The German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht—BaFin) is the competent authority for the supervision of the investment fund industry in Germany. BaFin was already the competent authority for the supervision of regulated investment funds before the implementation of the AIFMD into German law and was also the competent authority for the review of prospectuses of otherwise unregulated funds. 4.123  The KAGB contains a comprehensive catalogue of the actions and omissions in violation of the KAGB which qualify as administrative offences and as such can be sanctioned.

3. Other issues 4.124  The KAGB does not contain any particular provisions implementing Article 49 of the AIFMD, ie the right of appeal. The requirements of Article 49 are already covered by general principles of German administrative law so that no particular implementing legislation was required in this respect.

XIII. Concluding Remarks 4.125  The implementation of the AIFMD into German law has resulted in a fundamental transformation of German investment law. The traditional dichotomy of regulated and nonregulated investment funds no longer applies. 4.126  For KAGs which already managed regulated, open-ended investment funds other than UCITSs pre-AIFMD, the implementation of the Directive does not bring about fundamental changes. For German asset managers who, pre-AIFMD, operated in a largely unregulated environment, the implementation of the Directive, however, marks the beginning of a new era which may also lead some firms to exit the market due to the new set of requirements.(p. 228)

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Footnotes: 1

  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (OJ 2003, L345/64), as amended. 2

  KAGB, §§ 261–272.

3

  KAGB, § 261(1)–(3).

4

  KAGB, § 261(4).

5

  KAGB, § 262.

6

  KAGB, § 263.

7

  BaFin, Auslegungsschreiben zum Anwendungsbereich des KAGB und zum Begriff des ‘Investmentvermögens’, 14 June 2013, available at . 8

  Available at. 9

  KAGB, § 15.

10

  KAGB, § 339.

11

  KAGB, § 27.

12

  KAGB, § 29.

13

  KAGB, § 29(4).

14

  KAGB, § 30.

15

  KAGB, § 30(1).

16

  KAGB, § 28.

17

  Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ 2009 L302/32). 18

  InvG,§ 9a.

19

  KAGB, § 5(6).

20

  KAGB, § 101.

21

  KAGB, § 307.

22

  KAGB, § 5 (6) KAGB.

23

  KAGB, §§ 306, 307(3).

24

  KAGB, § 29(4).

25

  § 307 (1) no. 5 KAGB.

26

  § 165 (2) no. 6 KAGB, § 269 (1) KAGB.

27

  § 162 (2) no. 1 KAGB, § 266 KAGB.

28

  § 20 German Stock Corporation Act.

29

  Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonization of transparency requirements in relation to information about

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issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (OJ 2004 L390/38). 30

  KAGB, § 5(6).

31

  KAGB, § 316(1)1 (for distribution to retail investors), § 321(1) for distribution to professional and semi-professional investors. 32

  KAGB, § 321(1)1.

33

  KAGB, § 331.

34

  Available at . 35

  This includes (i) AIFMs managing, directly or indirectly, AIFs whose assets under management, including any assets acquired through leverage, do not exceed EUR 100 million and (ii) AIFMs managing, directly or indirectly, AIFs whose assets under management do not exceed EUR 500 million if the portfolios of the AIFs are unleveraged and the AIFs do not grant redemption rights for a period of five years starting from the date of the first investment in the AIFs. 36

  KAGB, § 330a.

37

  KAGB, § 53.

38

  KAGB, § 54.

39

  KAGB, § 65.

40

  KAGB, § 325.

41

  KAGB, § 327 (for EU AIFs), § 328 (for non-EU AIFs).

42

  KAGB, § 15.

43

  KAGB, § 319(1).

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5 Ireland Michael Jackson, Dualta Counihan From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Collective investment scheme — Undertakings for Collective Investment (UCIs) — Hedge fund — Advertising and marketing and funds — Performance fee

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(p. 229) 5  Ireland I. Introduction 5.01 1. Nature of the national non-retail investment industry 5.01 2. Legal structures used to form national AIFs 5.08 II. Pre-AIFMD Regulatory Framework 5.33 1. Regulation of AIFMs and national AIFs prior to the AIFMD 5.33 2. Regulation of national marketing of AIFs prior to the AIFMD 5.61 III. Regulation of National AIFs after the AIFMD 5.64 1. The AIF Rulebook 5.65 2. The qualifying investor AIF 5.69 3. The RIAIF 5.75 4. Professional investor funds 5.78 5. Provisions applicable to all AIFs under the new regime 5.80 IV. General Provisions of the AIFMD and the Implementing Regulation 5.88 1. Implementation table 5.88 2. Articles 2 and 3—Scope and exemptions 5.88 3. Article 5—Determination of the AIFM 5.91 V. Authorization of AIFMs 5.94 1. Implementation table 5.94 2. Articles 6 to 8—Conditions and application for authorization 5.94 3. Article 9—Initial capital and own funds 5.101 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 5.104 5. Consequences of violating authorization provisions 5.106 VI. Operating Conditions for AIFMs 5.111 1. Implementation table 5.111 2. Section 1 (Articles 12 to 17)—General requirements 5.111 3. Section 2 (Articles 18 and 19)—Organizational requirements 5.123 4. Section 3 (Article 20)—Delegation of AIFM functions 5.130 5. Section 4 (Article 21)—Depositary 5.134 6. Consequences of violating operating conditions 5.137

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VII. Transparency Requirements 5.140 1. Implementation table 5.140 2. Article 22—Financial reporting 5.140 3. Article 23—Disclosure to investors 5.144 4. Article 24—Regulatory reporting 5.148 5. Consequences of violating transparency requirements 5.149 VIII. AIFM Managing Specific Types of AIF 5.152 1. Implementation table 5.152 2. Section 1 (Article 25)—AIFM managing leveraged AIF 5.152 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 5.155 4. Consequences of violating provisions relating to AIFMs managing specific types of AIF 5.156 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 5.159 (p. 230) 1. Implementation table 5.159 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 5.159 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 5.167 4. Article 33—Conditions for managing AIFs established in other Member States 5.174 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU 5.178 X. Specific Rules in Relation to Third Countries 5.181 1. Implementation table 5.181 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 5.181 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 5.182 4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 5.184 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 5.186 6. Consequences of violating specific rules in relation to third countries 5.187 XI. Marketing to Retail Investors 5.190 1. Implementation table 5.190 2. Article 43—Marketing of AIFs by AIFMs to retail investors 5.190

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3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 5.191 XII. Competent Authorities and Supervisory Powers 5.192 1. Implementation table 5.192 2. Designation, responsibility, and powers of competent authorities 5.192 3. Other issues 5.194 XIII. Concluding Remarks 5.197

I. Introduction 1. Nature of the national non-retail investment industry 5.01  Ireland is a leading international domicile for regulated alternative investment funds (AIFs) and fund of funds, with EUR 300 billion in assets under management as at November 2013. Ireland is also the largest hedge fund administration centre in the world, servicing alternative investment assets representing more than 40% of global and 63% of European hedge fund assets.1 5.02  Ireland was the first regulated jurisdiction to provide a regulatory framework specifically for the AIF industry. AIFs can avail of a variety of fund structures, with different levels of investment and borrowing restrictions, minimum subscription requirements, service provider requirements, and authorization time frames depending on the fund’s investor profile and portfolio composition. Irish AIFs pursue a broad range of strategies, including long/short, event-driven, arbitrage, global macro, distressed debt, and multistrategy, among others. It is relatively common for such AIFs to appoint a prime broker where necessary in order to pursue these investment strategies. The term ‘alternative investments funds’ in an Irish context includes hedge funds and the terms ‘alternative investment fund’ and ‘hedge fund’ are often used interchangeably. The nature of the investment policy followed by hedge funds means that, prior to AIFMD implementation, they were generally established as professional (p. 231) investor funds (PIFs) or, more commonly, qualifying investor funds (QIFs) (see further discussion at paragraphs 5.33 to 5.46). 5.03  In advance of the transposition of the AIFMD, the Irish regulatory system was already aligned with many of the requirements of the Directive. Irish regulated AIFs, for example, were required to have an independent depositary and were administered and valued by entities authorized and supervised by the Central Bank of Ireland (‘Central Bank’). The Irish regime provided further protection of investor interests by requiring the pre-approval of fund promoters and service providers to the fund and of fund directors, who had to comply with the Central Bank’s Fitness and Probity requirements.2 The Irish Funds Industry Association (IFIA), at the instigation of the Central Bank, introduced a Corporate Governance Code for the Funds Industry,3 which mirrors many of the governance requirements contemplated under the AIFMD. 5.04  The majority of promoters with Irish-domiciled funds (undertakings for collective investment in transferable securities (UCITSs) and AIFs) are based in the US, followed by the UK and continental Europe. A total of 440 fund promoters from over 50 different countries have chosen Ireland as the domicile for their investment funds, and Irish domiciled investment funds are distributed in over 70 countries.4

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5.05  Pre-AIFMD, the QIF structure proved to be the most popular structure when establishing non-UCITS funds in Ireland, representing 80% of all non-UCITS funds, with the balance represented by PIFs and retail non-UCITS funds. QIFs had minimum initial subscription requirements and could only be sold to qualifying investors. The QIF structure is discussed further at paragraphs 5.36 to 5.42 in the context of the regulation of alternative investment fund managers (AIFMs) and national AIFs prior to the AIFMD. In advance of the implementation of the AIFMD, Central Bank figures demonstrated that asset managers were increasingly turning to regulated products and the QIF in particular, with the number of QIFs reaching an all-time high of 1,731 and assets reaching a record level of EUR 226 billion—up 19% in 2011 and 10% year-to-date in May 2013.5 Cash/short-term assets, bonds, and equities were the largest asset classes in 2012, followed by alternative investment, exchange traded equities, and fund of funds.6 5.06  Private equity funds currently represent only a small proportion of regulated Irish domiciled funds; the 2012 Monterey Insights survey allocating US$4.9 billion of total Irishdomiciled fund assets to the private equity/venture capital category.7 In order to address the requirements of promoters of private equity structures, Ireland is currently updating its legislation in relation to limited partnership structures and is introducing a new corporate vehicle for (p. 232) fund structures. The Finance Act 2013 provided for the establishment of real estate investment trusts (REITs). The establishment of REITs is expected to result in increased international investment in Irish real estate. It is expected that REITs will be familiar to investors from the US, Europe, Asia, and Australia and attractive to institutional investors, and private equity and pension funds. In 2012, US$3.5 billion of total Irishdomiciled fund assets were allocated to property/real estate. 5.07  Irish-domiciled funds are typically directed at the international rather than the Irish domestic market.

2. Legal structures used to form national AIFs 5.08  An AIF may be established through any one of the following vehicles: •  an investment company; •  a unit trust; •  a common contractual fund; and •  an investment limited partnership. 5.09  The choice of an appropriate vehicle through which an investment fund will be constituted will depend on a number of factors including the investment strategy to be pursued, future product development plans, tax considerations, target markets, and proposed distribution networks.

A. Terms used in this section 5.10  This section sets out the legal vehicles and fund structures used in Ireland both prior to and after the implementation of the AIFMD and the related tax consequences. References to ‘manager’, ‘investment manager’, and ‘management company’ should not be understood in all cases as being equivalent to the AIFM as these entities may not perform the full range of management functions contemplated under the AIFMD. In the pre-AIFMD regime, ‘custodian’ was the term applied to the depositary as identified in the AIFMD; the Central Bank has adopted the term ‘depositary’ in place of ‘custodian’ in its implementation of the AIFMD.

B. Investment company

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5.11  An investment company is an entity with distinct legal personality which is managed and controlled by its board of directors and which can enter into contracts in its own name. The assets are the property of the company, and each investor holds shares in the company. A depositary is appointed to safe-keep the assets on behalf of the company. An investment fund established as a company may be self-managed or may appoint a management company. It must have as its aim the spread of investment risk. 5.12  The paid-up share capital of the company must at all times equal the net asset value (NAV) of the company, the shares of which have no par value. An investment company may be structured as a stand-alone fund or an umbrella fund. An open-ended investment company with variable capital may be regarded as similar to a société d’investissement à capital variable (SICAV) or an open-ended investment company (OEIC). 5.13  In terms of applicable Irish company law, AIFs which are established as investment companies are governed by Part XIII of the Companies Act 1990 and the Central Bank’s AIF (p. 233) Rulebook.8 The constitutional document of an investment company is the memorandum and articles of association. Liability of shareholders in an AIF established as an investment company is limited.

C. Unit trust 5.14  A unit trust is created by a trust deed entered into by the trustee and the manager of the fund and the use of a management company in this structure is a necessity. It is a contractual arrangement and is not a separate legal entity, with the result that a unit trust does not have power to enter into contracts in its own name. In general, the manager or trustee enters into contracts for the account of a unit trust. The trustee is registered as the legal owner of the assets on behalf of the investors, who receive units, each of which represents a beneficial interest in the assets of the unit trust. 5.15  As distinct from an AIF formed as a company, there is no requirement for an AIF unit trust to operate on the principle of risk spreading. An AIF unit trust is governed by the Unit Trusts Act 1990, and by the Central Bank’s AIF Rulebook.

D. Common contractual fund 5.16  A common contractual fund (CCF) is an unincorporated body established by a manager pursuant to which the investors, through contractual arrangements, participate and share in the property of the fund as co-owners of the assets of the fund. As a co-owner, each investor will hold an undivided co-ownership interest as a tenant in common with the other investors. 5.17  The CCF is constituted under contract law (and not company law or trust law) by way of deed of constitution executed under seal between the manager and the custodian and does not therefore have a distinct legal personality. Accordingly, the CCF cannot assume liabilities and, in the same way as for a unit trust, the manager and the custodian enter the various agreements for and on behalf of the CCF. The assets of the CCF are entrusted to a custodian for safe-keeping. A CCF may be structured as a stand-alone fund or an umbrella fund. There is no requirement for an AIF CCF to operate on the principle of risk spreading. 5.18  The main feature which differentiates CCFs from other investment funds is that a CCF is totally tax-transparent. This means that investors in a CCF are treated as if they directly own a proportionate share of the underlying investments of the CCF rather than shares or units in a entity which itself owns the underlying investments. A natural person cannot invest in a CCF without undermining its tax transparency. 5.19  AIFs established as CCFs are governed by the Investment Funds, Companies and Miscellaneous Provisions Act 2005 and by the Central Bank’s AIF Rulebook.

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E. Investment limited partnerships 5.20  An AIF can also be established as an investment limited partnership (ILP). ILPs can be established under the Investment Limited Partnership Act 1994 (‘ILP Act’) for investment in property or securities of any kind with the authorization of the Central Bank. An ILP is (p. 234) created by contract between the general partner(s) and one or more investors who participate as limited partner(s), and will be subject to the Central Bank’s AIF Rulebook. 5.21  The ILP is not incorporated and is not a separate legal entity. It does not therefore have power to enter contracts in its own name. The general partner usually enters into contracts for the account of the ILP. As with each of the structures referred to previously, a depositary is required to safe-keep the assets. 5.22  There is no requirement under the ILP Act for an ILP to operate on the principle of risk spreading. ILPs can be dedicated investment vehicles or offered on a private placement or public basis. There is no limit on the number of limited partners permitted for an ILP. 5.23  The general partners of an ILP are responsible for the management of its business and are liable for the debts and obligations of the ILP. In general, a limited partner’s liability will not exceed the amount of its capital contribution or commitment to the ILP. However, a limited partner who participates in the conduct of the business of an ILP in its dealings with third parties may be liable on the insolvency of the ILP for debts incurred by the ILP in the period during which it participated in the conduct of its business, as if such limited partner had been a general partner during this period.9 A limited partner’s liability in this regard is limited to a debt or obligation incurred by the ILP in favour of a third party who, at the time that debt or obligation was incurred, reasonably believed, based upon the conduct of the limited partner, that the limited partner was a general partner.10 The ILP Act specifies certain activities which will not be deemed to constitute participation by a limited partner in the business of an ILP.11 In practice, given the availability of establishing an AIF through an investment company, unit trust, or CCF, the use of an ILP as a fund vehicle has been limited. 5.24  Irish partnership law is currently under review following the implementation of the AIFMD. Amendments under consideration include statutory recognition of the tax transparency of the partnership vehicle and the issues arising from such recognition.

F. Fund structures and special features 5.25  Each of the structures referred to at paragraph 5.08 may be subject to further variations which best suit the investment policy or distribution intentions of a fund promoter or investment manager. For example, a fund may be structured as a separate, stand-alone fund or as an umbrella fund with multiple sub-funds. All funds can be structured to have different share classes to accommodate different currency denominations, distribution policies, charging structures, or uses of financial derivative instruments. Funds can also be established as feeder funds or hybrid asset-allocation vehicles. 5.26  A review of some of the various structures and special features or strategies which may be availed of are described at paragraphs 5.27 to 5.32.

a. Umbrella funds 5.27  It is possible to constitute an AIF as umbrella funds comprising a number of separate sub-funds with different investment policies. Each sub-fund of an umbrella fund must be (p. 235) approved by the Central Bank. The exchange of shares or units between sub-funds of an umbrella fund does not incur any Irish tax liability.

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5.28  Each sub-fund within an investment company is represented by a different series of shares. The fund vehicle may be structured so that one sub-fund of the umbrella can invest in another sub-fund of the same umbrella, which greatly facilitates fund promoters seeking to avail of economies of scale within their own investment fund complexes, and to rationalize fund offerings.

b. Segregated liability between sub-funds 5.29  The Investment Funds, Companies and Miscellaneous Provisions Act 2005 enables complete segregation of liability for the sub-fund of an umbrella fund which is structured as an investment company: the liabilities of the sub-fund are discharged solely from the assets of that sub-fund. For investment fund companies that avail of this provision, there will be implied into every contract, agreement, arrangement, or transaction entered into by an umbrella fund availing of segregated liability, a term that any parties contracting with the umbrella fund shall not seek to have recourse to any assets of any sub-fund in discharge of any liability which was not incurred on behalf of that sub-fund. The sub-fund of an umbrella fund will not be a separate legal person but the fund may sue and be sued in respect of a particular sub-fund, and may exercise the same rights of set-off between sub-funds as apply at law in respect of companies. 5.30  Unit trusts and CCFs are normally structured to provide for segregated liability between sub-funds and accordingly do not rely on the provisions of the Investment Funds, Companies and Miscellaneous Provisions Act 2005.

c. Multi-class funds 5.31  It is possible to establish an AIF in which there are multiple classes of shares or units. In the case of an umbrella fund, these multiple classes of shares and units can be established within each sub-fund of the umbrella fund. These share or unit classes may be differentiated on the basis of currency, distribution policies, or charging structures. They may also be used for the purpose of hedging currency or interest rate risk (including through the use of derivative instruments). The use of derivative instruments at share or unit class level is also permitted to provide a different level of capital protection or participation in the performance of an underlying portfolio or index.

d. Tax efficiency 5.32  Ireland offers a highly efficient, clear, and certain tax environment for investment funds which is intended to ensure that no tax charge is incurred by sponsors or investors in Irish trusts. Irish investment funds are exempt from Irish tax on their income and gains, irrespective of where their investors are resident. No withholding taxes apply on income distributions and redemption payments made by an Irish fund to non-Irish resident investors. Depending on the tax status of an investor in its home jurisdiction (for example, a tax-exempt pension fund) an Irish fund can also be structured as a tax transparent vehicle resulting in the retention of the tax benefits (for example reduced withholding taxes) enjoyed by investors through direct ownership. A QIF may also hold investments through special purpose vehicles (SPVs) to improve tax efficiencies. Furthermore, Ireland has an extensive and growing network of double taxation treaties with over 70 countries, providing access to favourable tax reclaim rates.

(p. 236) II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD A. Regulation of AIFMs and national AIFs

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5.33  The Central Bank is the competent authority responsible for the authorization and ongoing supervision of all regulated Irish fund structures. As discussed at paragraphs 5.08 to 5.24, the legislative basis for AIFs in Ireland is found in a number of enactments, including Part XIII of the Companies Act 1990, the Units Trusts Act 1990, the ILP Act, and the Investment Funds, Companies and Miscellaneous Provisions Act 2005. Pre-AIFMD, these statutory provisions were expanded upon and clarified by a series of notices and guidance notes issued by the Central Bank (the non-UCITS Notices or ‘NU Notices’ and ‘non-UCITS Guidance Notes’). Different levels of regulation were applied to QIFs, PIFs, and retail funds. 5.34  Prior to the implementation of the AIFMD, the authorization process for Irish funds had two main elements—the authorization process for the fund itself and the authorization process for its promoter and service providers, including the management company (if any), the directors, the investment manager, and the Irish administrator and custodian. 5.35  As mentioned at paragraph 5.05, AIFs domiciled in Ireland could be structured as QIFs, PIFs, or retail funds. The target investor profile dictated the type of non-UCITS fund to be used. The Central Bank introduced general investment diversification and borrowing restrictions for all non-UCITS funds. However, these general restrictions were modified, superseded, or disapplied by specific regulations for particular types of funds such as venture capital funds, property funds, futures and options funds, feeder funds, and funds of funds. These investment and borrowing restrictions could also be disapplied on a case-bycase basis for PIFs and they do not apply to QIFs.

B. Qualifying investor funds 5.36  With approximately EUR 226 billion in assets as at May 2013,12 the Irish QIF was a well-established, regulated investment fund vehicle that addressed the flexibility and speed to market requirements of sophisticated investors. The QIF has been renamed the ‘qualifying investor AIF’ or ‘QIAIF’ under the new regime, with the QIAIF having almost identical characteristics to the QIF.13 5.37  The QIF had the characteristics and flexibility of typical hedge fund products while authorized and regulated by the Central Bank and already meeting many of the requirements contained in the AIFMD. The main advantage of the QIF was the removal of the Central Bank’s general conditions relating to investment policies and borrowing, thereby enabling sophisticated investors to use this structure for a wide range of investment strategies. As such, the QIF offered excellent flexibility in terms of the range of eligible assets and was the preferred structure used in the regulated alternative investment sphere. (p. 237) 5.38  While the Central Bank did not impose investment concentration or leverage restrictions of any nature on QIFs, QIFs constituted as an investment company had to observe the general principle of risk spreading. This risk-spreading requirement derives from the Companies Act 1990, which in turn has incorporated this provision in accordance with a provision of EU law applicable to corporate structures,14 and so does not apply to fund vehicles other than investment companies, ie unit trusts, CCFs, or ILPs. 5.39  To qualify as a QIF (or a QIAIF), a fund must: •  have a minimum initial subscription requirement of EUR 100,000. The aggregate of an investor’s investments in the sub-funds of an umbrella fund can be taken into account for the purposes of meeting this requirement; •  sell its shares or units to qualifying investors. Qualifying investors are defined to include: (i) an investor who is a professional client under MiFID; or (ii) an investor who receives an appraisal from an EU credit institution, a MiFID firm, or a UCITS management company that the investor has the appropriate expertise, experience, and knowledge to adequately understand the investment in the scheme; or (iii) an From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investor who certifies that it is an informed investor by confirming (a) that it has such knowledge of and experience in financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or (b) that the investor’s business involves, whether for its own account or the account of others, the management, acquisition, or disposal of property of the same kind as the property of the QIF; and •  ensure that qualifying investors have certified that they meet the definition of qualifying investor set out at (i) to (iii) of the preceding paragraph and that they are aware of the risks involved in the proposed investment and of the fact that inherent in such investment is the potential to lose all of the sum invested. 5.40  Exemptions from the minimum subscription and qualifying investor criteria could be provided under certain conditions to the management company, the promoter, or an affiliate, the investment manager, a director of any of those entities, or, subject to certain further conditions, an employee of any of those entities. 5.41  The absence of Central Bank-imposed investment restrictions resulted in QIFs becoming attractive vehicles for the establishment of leveraged funds, funds pursuing investment policies which involved high concentrations of investments in individual issuers, private equity or venture capital funds, property funds, and emerging market funds. 5.42  A QIF could be authorized by the Central Bank within 24 hours of a single filing of documents. Authorization could be granted on the day following the date of filing of appropriate QIF documentation provided that: (i) the Central Bank received a completed application by 3 pm on the filing date; (ii) all relevant parties to the QIF (eg the promoter, directors, and service providers) had been approved in advance of the application; and (iii) the fund certified that it complied with certain agreed parameters codified in the Central Bank’s QIF application form. This fast-track procedure has operated since February 2007 and was a significant (p. 238) development in expediting the speed to market and attractiveness of QIFs. It will continue to operate in respect of QIAIFs.

C. Retail funds 5.43  Retail funds were available to the widest pool of investors. Funds which had no regulatory minimum subscription, or a minimum subscription of less than EUR 100,000 per investor, were considered to be retail funds. In practice, because of the similarities between the investment limitations imposed on non-UCITS retail funds and UCITSs, the majority of fund sponsors seeking to establish open-ended retail funds in Ireland elected for UCITS status in order to benefit from the cross-border marketing advantages of a UCITS.

D. Professional investor funds 5.44  The Central Bank could, on request, disapply the general non-UCITS fund investment and borrowing restrictions which applied to retail funds in the case of non-UCITS funds qualifying as PIFs. As a general rule, the Central Bank was usually willing to double each of the retail investment restrictions for a PIF. The Central Bank would also generally allow a PIF to engage in leverage and the limit for same could be agreed with the Central Bank on a case-by-case basis. 5.45  To qualify as a PIF, a fund had to have a minimum initial subscription requirement of EUR 100,000. In the case of an umbrella fund, this minimum initial subscription requirement could be satisfied where the aggregate of the investments of an investor in any of the sub-funds of the umbrella fund was equal to, or exceeded EUR 100,000. Institutions

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which had discretionary mandates over individual accounts could group amounts of less than EUR 100,000 on behalf of their clients to satisfy this requirement. 5.46  In practice, the Central Bank could impose certain concentration and leverage limits on PIFs, but the ability to seek derogations from some of the concentration requirements made PIFs suitable vehicles for funds wishing to adopt more sophisticated investment strategies than those permissible for retail funds.

E. Private equity and real estate funds 5.47  Private equity and real estate funds domiciled in Ireland can utilize any of the legal structures discussed at paragraphs 5.11 to 5.24, including unit trusts, variable capital investment companies, CCFs, and ILPs. The fund structure can be open-ended, limited liquidity, or, more frequently, closed-ended. Pre-AIFMD, private equity and real estate funds were typically established as QIFs. Unregulated structures may be established as limited liability partnerships under the Limited Partnership Act 1907, and the limited partnership is usually the vehicle of choice for private equity and real estate funds. Limited partnerships have the added advantage of being able to ‘check the box’ for US taxable investors. The 1907 Act and the ILP Act are currently under review and a new, revised Irish partnership law is expected to be published shortly. 5.48  While the public marketing of closed-ended non-UCITS is possible under Directive 2003/71/EC (the ‘Prospectus Directive’),15 most promoters of private equity funds in Ireland do not (p. 239) consider the Prospectus Directive regime to offer marketing advantage particularly for the sophisticated or institutional investor. The QIF proved a popular structure for promoters of private equity funds which were able to place widely without using the Prospectus Directive regime on the basis of national private placement rules.

F. Approval of fund promoter and investment manager 5.49  Pre-AIFMD, promoters of Irish domiciled funds had to seek approval from the Central Bank. The Central Bank had to be satisfied that the promoter and investment manager(s) responsible for investing the assets of the fund had appropriate experience, expertise, reputation, and resources. If the promoter and investment manager were the same entity, the Central Bank could concurrently approve the promoter to also act as the investment manager. If the promoter did not propose to act as the fund’s investment manager, then the investment manager had to seek separate approval. The promoter approval regime was removed upon the transposition of the AIFMD as the Central Bank believed that the obligations imposed on the AIFM by the Directive would be duplicative; the investor protections in the Directive are sufficient; and the Central Bank will place reliance on the directors of the fund instead of the promoter in the case of funds in distressed circumstances. 5.50  In determining the suitability for approval, the Central Bank relied on a detailed application form, which had to be completed and filed prior to the filing of any fund documentation. Where the investment manager was the promoter of the fund, only one application form needed to be completed. This application form required an applicant to provide the Central Bank with the following information: •  type of investment fund the applicant intended to establish, promote, or manage; •  applicant’s ownership structure and regulatory status, as well as the regulatory status of any other group companies; •  applicant’s activities, countries of operation, relevant experience, and value of assets which the applicant had under discretionary management; •  curriculum vitae for the directors or relevant senior managers of the applicant;

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•  identity of the proposed administrator and custodian of the investment fund; and •  details of the distribution plans for the investment fund. 5.51  In addition to filing a signed application form, an applicant was required to provide the Central Bank with the following documentation: •  a chart detailing the applicant’s group structure; •  latest audited accounts of the applicant and its parent company (the Central Bank would generally expect an investment manager to have capital of EUR 635,000); and •  two references for the applicant. 5.52  It was possible for the applicant to avail of a fast-track, one-week approval process where it held an authorization under legislation implementing MiFID in a Member State of the European Economic Area or was a credit institution regulated within the European Economic Area and could provide the necessary information as required by the Central Bank’s fast-track checklist, together with an up-to-date confirmation of regulatory status. In other cases, the approval process generally took approximately three to five weeks (the timing depending significantly on the speed with which responses to the Central Bank’s queries were provided). (p. 240) 5.53  In light of the implementation of the AIFMD in Ireland, the Central Bank has decided to discontinue the promoter regime on the basis that the obligations on the AIFM set out in the AIFMD would be duplicative and the investor protections in the Directive are sufficient. In light of the promoter regime being discontinued, the Central Bank has elaborated on considerations relevant to the fitness and probity requirements applicable to Irish fund directors and the current legal requirements, to identify specific standards of behaviour which must be met and to clarify what is expected of directors of AIFs in difficulties.

G. The management company 5.54  A unit trust and a CCF must have a management company. As mentioned at paragraph 5.10, a management company should not be understood to be the equivalent of the AIFM; the requirement for a management company is driven by the legal structure of the fund and the management company may not perform all of the management functions contemplated under the AIFMD. An investment company may appoint a management company or operate on a self-managed basis. The Central Bank has to be satisfied as to suitability of a non-UCITS management company, its directors, shareholders, and share capital. A non-UCITS or AIF management company must have a minimum capitalization of EUR 125,000, or one-quarter of its previous year’s total expenditure (as set out in its most recent audited accounts), whichever is the greater.

H. Approval of directors 5.55  Both before and after the implementation of the AIFMD, the board of directors of Irish domiciled funds established as investment companies must include at least two Irish resident directors. The same requirement applies to management companies of Irish domiciled funds and general partners of ILPs. 5.56  All directors of Irish domiciled investment companies, and directors of any company acting as a ‘manager’ of an Irish fund or as a general partner of an ILP, must be preapproved by the Central Bank as part of its ‘Fitness and Probity’ regime. Sufficient information in respect of all directors must be submitted to the Central Bank by the directors themselves via the Central Bank’s online filing system. The directors are required to demonstrate, via an application form and the submission of supporting documents, that

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they are competent and capable; honest, ethical, and able to act with integrity; and financially sound. 5.57  In addition to the Central Bank’s requirements relating to directors, a corporate governance code (the ‘Code’) applies to Irish investment funds and management companies.16 The Code is voluntary but operates on a ‘comply or explain’ basis so that, where the board of any company decides not to comply with any provision of the Code, the reasons for non-compliance should be set out in its directors’ report or on its website. The Code provides that: •  the board of directors must have a minimum of three directors; a majority of nonexecutive directors; at least one independent director (who may not be an employee of any service provider firm receiving professional fees from the fund); and at least one director who is an employee of the promoter or investment manager; (p. 241) •  each director must have sufficient time to devote to the role of director and associated responsibilities; •  there should be an informal annual review of the board membership and a formal review every three years; •  a non-executive chairman should be appointed to the board; •  board meetings should take place at least quarterly depending on the nature, scale, and complexity of the fund or management company. (For non-UCITS funds, the Code provides that the board could meet less frequently if it believes this is justified, but this must be disclosed in the ‘comply or explain’ statement in the annual report.); and •  conflicts of interest should be taken into account in making appointments to the board and there should be documented procedures for dealing with conflicts, with an annual review of compliance with these procedures.

I. Selection of custodian and administrator 5.58  Pre-AIFMD and post-implementation, Irish domiciled funds were/are required to appoint a Central Bank-approved custodian/depositary for the safe-keeping of their assets and a Central Bank-approved administrator responsible for maintaining the books and records of the fund, calculating the NAV of the fund and maintaining the shareholder or unit-holder register. All of the world’s leading depositaries and administrators are Central Bank-approved and have a presence in Ireland. 5.59  No single company may act as both management company, administrator, or general partner, on the one hand, and depositary, on the other, although affiliated companies of the same group may and regularly do perform these functions independently. 5.60  Pre-AIFMD, the depositary of a non-UCITS fund was obliged to exercise due care and diligence in the discharge of its duties and was liable to the fund and the investors for any loss arising from negligence, fraud, bad faith, wilful default, or recklessness in the performance of its duties. The liability of the depositary was not affected by the fact that it may have entrusted to a third party sub-custodian some or all of the assets in its safekeeping. In order to discharge its responsibility the depositary had to exercise care and diligence in choosing and appointing a third party as safe-keeping agent and to ensure that the third party had and maintained the expertise, competence, and standing appropriate to discharge the responsibilities concerned. The depositary had to maintain an appropriate level of supervision over the safe-keeping agent and make appropriate enquiries from time

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to time to confirm that the obligations of the agent continued to be completely discharged.17

2. Regulation of national marketing of AIFs prior to the AIFMD 5.61  Pre-AIFMD, upon authorization, an Irish AIF could be marketed within Ireland without further regulatory approvals. A QIF or QIAIF may only be offered to qualifying investors, with similar restrictions in relation to a PIF and professional investors. (p. 242) 5.62  The requirements applying to the inward marketing of AIFs established in another jurisdiction were set out in the NU Notices.18 These requirements provided that non-UCITS funds which proposed to market their units in Ireland had to be authorized by a supervisory authority set up in order to ensure the protection of unit-holders and which, in the opinion of the Central Bank, provided a similar level of protection to that provided under Irish law and regulations. Alternatively, the Central Bank had to be satisfied that the management and depositary arrangements, constitution, and investment objectives of any scheme which was proposed to be marketed in Ireland provided a similar level of investor protection to that provided by funds authorized under Irish law and regulations. 5.63  A foreign non-UCITS was required to apply in writing to the Central Bank providing specified information and documentation including the name and address of a facilities agent established in Ireland, where facilities would be maintained and where: (i) unitholders could be advised how dividend payments would be made, how a redemption request could be made to the scheme, and how redemption proceeds would be paid to investors; (ii) the instrument(s) constituting the scheme, the prospectus, the annual and half-yearly reports could be examined, free of charge, and copies obtained if required; and (iii) complaints could be made for forwarding to the head office of the operator. Funds established and authorized in Guernsey, Jersey, and the Isle of Man could avail of a fasttrack process and receive approval to market their funds in Ireland on completion of the information and documentation requirements. Annual and semi-annual reports were required to be submitted to the Central Bank as soon as they were available.19 Funds marketing in Ireland had to comply with the provisions of the Code for Advertising, Promotional and Direct Marketing in Ireland.

III. Regulation of National AIFs after the AIFMD 5.64  As discussed in more detail at paragraph 5.03, prior to the implementation of the AIFM, Ireland had the advantage of being ‘AIFMD-ready’ in respect of having an already well-established regulatory framework in place for AIFs. A prime example of Ireland’s preAIFMD regulatory regime already going a long way towards satisfying a key AIFMD regulatory provision was the Central Bank’s requirement that each authorized AIF had to have a depositary appointed to hold the assets of the fund. The question in this case, then, is to what degree this framework was changed and adapted following the introduction of the AIFMD.

1. The AIF Rulebook 5.65  Following a detailed consultation process initiated by the Central Bank with relevant stakeholders, the Central Bank published the AIF Rulebook.20 The Central Bank took the opportunity presented by the implementation of the AIFMD to revise and recast the NU Notices and Non-UCITS Guidance Notes which had grown incrementally and been adjusted over a number of years in response to industry developments. The AIF Rulebook consolidates and, where appropriate, amends existing rules in relation to available fund structures, (p. 243) while guidance previously contained in the NU Notices and non-UCITS

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Guidance Notes is published separately on the ‘Markets Update’ section of the Central Bank website. 5.66  While the AIF Rulebook deals extensively with regulation at the level of the AIF, it also has dedicated chapters in relation to the regulation of AIFMs, AIF management companies (where the management company is not itself the authorized AIFM), fund administrators, and depositaries. Later sections address the provisions of the AIF Rulebook in relation to the regulation of AIFMs and other service providers. 5.67  This section outlines the changes in regulation of AIFs post-implementation of the AIFMD, with a particular focus on the relevant provisions of the AIF Rulebook. 5.68  The two options for establishing a new AIF under the post-AIFMD regime are the QIAIF or the Retail Investor Alternative Investor Fund (RIAIF). These replaced the qualifying and retail investor funds under the previous Central Bank regulatory framework. The Central Bank decided to discontinue the PIF regime as it considers that the QIAIF and RIAIF regimes will adequately cover the scope of non-UCITS investment funds.

2. The qualifying investor AIF 5.69  The QIAIF is essentially the Central Bank’s post-AIFMD version of the already wellestablished QIF structure, subject to certain enhancements and any necessary amendments which arise as a result of the implementation of the AIFMD. 5.70  The AIF Rulebook sets out the rules relating to QIAIFs under the following headings: •  QIAIF restrictions; •  supervisory requirements; •  prospectus requirements; •  general operational requirements; •  annual reports and half-yearly reports; •  specific fund-type requirements; •  additional provisions applicable to QIAIFs which have a registered AIFM.

A. Definition of ‘qualifying investor’ 5.71  The definition of ‘qualifying investor’ remains unaltered under the new regime. The AIF Rulebook clarifies that, within the EU, QIAIFs may only be marketed to professional investors as defined in the AIFMD, unless the Member State in question permits, under its national law, AIFs to be sold to other categories of investors and this permission includes investors set out in the second two categories of ‘qualifying investor’.21

B. Investment in unregulated funds 5.72  The Central Bank has always imposed a restriction on a QIF’s ability to invest in other unregulated funds. This restriction means that no fund may invest more than 50% of its net assets in a single unregulated investment fund. The rationale for this prohibition is to prevent the requirements of the Central Bank being circumvented through the use of a ‘regulated wrapper’, where an Irish fund benefits from having its regulated status but essentially invests all its assets in an unregulated fund. (p. 244) 5.73  This restriction will continue to apply to QIAIFs. However, the restriction will be disapplied provided there is a minimum subscription amount of EUR 500,000 and appropriate and full disclosure is made in the prospectus. This disclosure must outline, in detail, the regulatory requirements and standards which apply to the QIAIF and its AIFM,

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on the one hand, but which do not apply to the underlying unregulated investment fund and its manager, on the other.

C. Extension of the initial offer period of property and private equity funds 5.74  The AIF Rulebook provides that the initial offer period of a QIAIF must be no longer than six months.22 However, where a QIAIF is established as a private equity or real estate QIAIF, the permissible maximum initial offer period is increased up to a potential two years and six months. This is subject to appropriate disclosure being made and a mechanism being put in place to compensate earlier investors, recognizing the cost of initial monies and any potential increase in the value of the fund while shares are still being offered at a fixed price.

3. The RIAIF 5.75  While the new RIAIF regime reflects many of the requirements for retail non-UCITS set out in the NU Notices and non-UCITS Guidance Notes, the Central Bank introduced enhancements to the retail non-UCITS regime by providing fund promoters who wish to target retail investors with a product that offers greater flexibility, while offering minimum protections for retail investors. As such, the new RIAIF regime will impose less investment and eligible asset restrictions than the UCITS regime, but will be more restrictive than the QIAIF regime. To ensure that a RIAIF has a different risk profile to a UCITS, key maximum limits on certain categories of investment have been raised. For example, the limit for investment in securities which are not traded on a regulated market has been raised from 10% to 20% and the limit for investment in securities issued by the same institution has been raised from 10% to 20%. 5.76  The AIF Rulebook sets out the rules relating to RIAIFs under the following headings: •  RIAIF restrictions; •  supervisory requirements; •  prospectus requirements; •  general operational requirements; •  annual and half-yearly reports; •  specific fund-type requirements; •  marketing of AIFs to retail investors. 5.77  UCITSs are permitted to invest in financial derivative instruments (FDIs) subject to detailed requirements, whereas under the pre-AIFMD regime non-UCITS retail funds could not make such investments. This resulted in a decline in the appeal of non-UCITS retail funds, which were in fact more restrictive than their strictly regulated UCITS counterparts, which enjoy the added benefit of a European-wide passporting regime. The new regime permits RIAIFs to invest in FDIs. Further, the AIF Rulebook contains no prohibition on the use of short sales by RIAIFs. This is a significant change in the regulation of retail nonUCITS (p. 245) funds and is likely to make this structure a more practical option, which may be more readily used as an alternative to UCITSs.

4. Professional investor funds 5.78  As noted at paragraph 5.68, the third option under the pre-AIFMD regime, the PIF, has been discontinued. PIFs were initially intended to serve as a mid-way option between a retail fund and a qualifying investor fund, allowing a degree of increased flexibility in terms of the permitted investment strategy, but also having a greater degree of regulation¸ leading to the perception that a PIF was a ‘safer’ fund than a QIF. The minimum

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subscription limits for both QIFs and PIFs were aligned to EUR 100,000 prior to the implementation of the AIFMD. This arguably reduced the need for the PIF. 5.79  The Central Bank further considered that the new QIAIF and RIAIF structures cover the entirety of investors’ needs in terms of the availability of appropriate investment vehicles. As such, while PIFs existing as at 22 July 2013 may continue to operate as PIFs (there is no mandatory requirement that existing PIFs be converted to an RIAIF or a QIAIF; however, such a conversion is expressly encouraged), no new PIFs may now be established and no new sub-funds or share classes may be launched by existing PIFs. All existing PIFs must have an AIFM, either authorized under the AIFMD or registered as a sub-threshold AIFM. Depositaries of PIFs with a registered AIFM must comply with the depositary requirements set out in the AIF Rulebook, with the exclusion of the AIFMD depositary liability rules. The old PIF depositary liability rules will apply instead.23

5. Provisions applicable to all AIFs under the new regime A. Requirement for AIFs to have a promoter 5.80  The Central Bank has discontinued the requirement that each AIF should have a promoter authorized by the Central Bank. The rationale behind the promoter regime was that the various stipulations accompanying the authorization of a promoter meant that there would be a sizeable entity with adequate resources in place, able to step in and assist should any of its AIFs encounter difficulties. This rationale was reflected in certain capital requirements that were imposed on proposed promoters. 5.81  The implementation of the AIFMD and the imposition of obligations on AIFMs have to a great extent alleviated any such concerns, and the Central Bank is of the view that the investor protections in the AIFMD are sufficient. The AIF Rulebook elaborates on the duties of directors of AIFs to meet specific standards of behaviour and clarifies what is expected of directors of AIFs in distressed or failing circumstances.

B. Fair treatment of investors 5.82  The AIF Rulebook provides for the fair, as opposed to equal, treatment of investors under the post-AIFMD regime, reflecting the references to ‘fair treatment’ in the AIFMD. The Central Bank accepts that investors in AIFs are able to fully understand the implications of investing in a share class with a different dealing frequency, liquidity terms, or availability of investor information, and has allowed for variation to be applied across different share (p. 246) classes, provided appropriate and adequate disclosure is made to investors at the outset as to the difference in treatment as between share classes.

C. Side-pockets 5.83  Under the new regime, AIFs are permitted to place assets in a ‘side-pocket’ distinct from the rest of the assets held by the fund. This amendment to the previous regime allows for such assets to be purchased and immediately separated and ‘side-pocketed’. A sidepocket is essentially a section of an AIF’s portfolio (normally consisting of ‘distressed assets’) that may have an entirely different liquidity standard from the AIF in question. Investors that hold shares in a side-pocket are essentially deprived of their redemption rights in respect of those shares representing the assets held in the side-pocket. Such a mechanism is useful in the case of preventing a run of redemptions on an illiquid portion of a portfolio. The Central Bank has placed no limit on the amount of assets capable of being side-pocketed. 5.84  The point to note in relation to this policy change is that the distinction between open-ended, limited-liquidity, and closed-ended is no longer as clear cut. For example, an AIF may be open-ended and required to have at least a monthly dealing frequency. If that AIF is operating side-pockets, the investors who are invested in the class of shares

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representing those side-pockets are not afforded the usual minimum standard of dealing frequency. 5.85  The key requirements in implementing a side-pocket are that the AIF must make the appropriate disclosure in its prospectus, and, further, that where assets are immediately side-pocketed, only those investors invested in the AIF at the time of side-pocketing are able to participate in that class of shares.

D. Verification of the calculation of performance fees 5.86  The pre-AIFMD regulatory regime required that the calculation of performance fees of AIFs be verified by the depositary. The AIF Rulebook allows for a third party (not necessarily the depositary) to verify this calculation, as long as this party is independent from any party involved in or benefitting from the operations of the AIF.

E. Valuation details to be included in AIF’s constitutional document 5.87  The AIF Rulebook stipulates that in the case of both RIAIFs and QIAIFs, assets are to be valued in accordance with the rules set down in the constitutional document of the AIF, which must clearly define an expected method of valuation and set out a framework for variation from this method. These rules are required to be clear and unambiguous. Further, the assets of the AIF may only be purchased and sold at prices which are in conformity with the rules in the constitutional document. Pre-AIFMD, the Central Bank had issued a guidance note on ‘Valuation of Assets of Collective Investment Schemes’.24 However, no equivalent rules have been included in the AIF Rulebook and therefore, post-AIFMD, there will be no provision of national law setting out valuation rules so that such rules will have to be set out in the AIF’s constitutional document. In practical terms, this requirement will mean some adjustment (p. 247) to AIFs’ constitutional documents and will necessitate further consideration of the wording used to lay down the valuation methodologies.

IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

European Union (Alternative Investment Fund Managers) Regulations 2013 (SI 257 of 2013) (‘Irish AIFMD Regulations’), reg 2

Art 2 (scope)

Irish AIFMD Regulations, reg 3

Art 3 (exemptions)

Irish AIFMD Regulations, reg 4

Art 4 (definitions)

Irish AIFMD Regulations, reg 5

Art 5 (determination of AIFM)

Irish AIFMD Regulations, reg 6

Implementing Regulation

National implementation

Arts 3–7 (re Art 3(2) AIFMD: calculation of AUM)

No implementing legislation

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AIFMD

National implementation

Arts 8–13 (re Art 4(3) AIFMD: calculation of leverage)

No implementing legislation

2. Articles 2 and 3—Scope and exemptions 5.88  Article 2(2) of the AIFMD provides that whether an AIF is open-ended or closedended, whether it is constituted under the law of contract, trust law, or statute, and irrespective of its legal form or structure, it comes within the scope of the AIFMD. 5.89  It is possible, arising from the broad definition of AIF in the AIFMD, that entities which previously were not regulated (for example managers of exempt unit trusts and investment companies such as forestry funds) may be captured by that definition. Since such entities have not to date been considered to be AIFs, it is likely to prove difficult for such entities to fit within that requirements of the AIFMD. In light of the uncertainty in this area, the Central Bank consulted on types of AIF under the AIFMD in July 2013.25 5.90  Article 3 of the AIFMD allows Member States to apply stricter rules to AIFMs falling below the threshold than the registration and reporting requirements contained in the Directive. The AIF Rulebook provides that managers of QIAIFs authorized after 22 July 2013 and managed by an AIFM which is below the threshold will have two years from the date of launch to apply for authorization. During this two-year period, QIAIFs will effectively be subject to the pre-existing Irish QIF regime and the AIFMD registration regime, but will not be required to have an approved promoter. The intention behind the two-year period is to give start-up AIFMs time to grow their business before becoming subject to the full AIFMD regime. QIFs authorized before 22 July 2013, which are managed by below-threshold AIFMs, will be permitted to operate under the current QIF regime indefinitely, provided they comply with the AIFMD depositary requirements. All RIAIFs, (p. 248) whether managed by an AIFM which is above or below the thresholds, are required to have an authorized AIFM.

3. Article 5—Determination of the AIFM 5.91  Article 5 of the AIFMD provides that the AIFM shall be either (a) an external manager or (b) where the legal form of the AIF permits an internal manager and the AIF’s governing body chooses not to appoint an external AIFM, the AIF itself. Article 5 was transposed directly in the European Union (Alternative Investment Fund Managers) Regulations 201326 (the ‘Irish AIFMD Regulations’), and no further rules have been provided to assist in determining which entity performs the AIFM function. As mentioned at paragraph 5.11, an investment fund established as a company may be self-managed or it may appoint a management company. The self-managed investment company, which delegates many of the investment management functions to professional investment managers in other EU Member States and regulated jurisdictions, is firmly embedded within the Irish regulatory framework and is widely used in the UCITS context, which has many similar oversight and monitoring requirements to the AIFMD. Under the new regime, a self-managed QIAIF may itself apply for authorization as the AIFM, and may then choose to delegate certain functions including portfolio management and/or risk management functions. The European Securities and Markets Authority (ESMA) acknowledges that limited partnerships may also possibly be self-managed AIFs.27 5.92  In relation to the delegation of investment management functions by a self-managed AIFM, the AIF Rulebook imposes the requirement that where the AIFM delegates activities, the programme of activity must identify the board member or other individual (‘designated

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persons’) who will, on a day-to-day basis, monitor and control each of the 16 managerial functions set out in the AIF Rulebook for which the board of the AIFM is responsible. 5.93  The Irish AIFMD Regulations and the AIF Rulebook do not elaborate further upon the discretion afforded under Article 5(2) and (3) of the AIFMD in the case of failure of an AIFM to ensure that the AIF complies with the requirements of the Directive. The necessary steps required of an AIFM to remedy the situation will vary on a case-by-case basis and will depend on what AIFMD requirements are not being complied with.

V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as an AIFM)

Irish AIFMD Regulations, reg 7

Art 7 (application for authorization)

Irish AIFMD Regulations, reg 8

Art 8 (conditions for granting the authorization)

Irish AIFMD Regulations, reg 9

Art 9 (initial capital and own funds)

Irish AIFMD Regulations, reg 10

Art 10 (changes in the scope of the authorization)

Irish AIFMD Regulations, reg 11

Art 11 (withdrawal of the authorization)

Irish AIFMD Regulations, reg 12

Implementing Regulation

National implementation

Arts 14–17 (re Art 9(7) AIFMD: own funds and insurance)

No implementing legislation

(p. 249) 2. Articles 6 to 8—Conditions and application for authorization 5.94  The requirements for authorization of an AIFM in Ireland reflect the AIFMD provisions generally. The Central Bank was the first European regulator to accept applications for authorization under the AIFMD and issued application forms for AIFMs as well as RIAIFs and QIAIFs in May 2013.28 5.95  The Central Bank requires that the shareholders, directors, and managers of the AIFM must satisfy the requirements of SI 437 of 201129 (the ‘Fitness and Probity requirements’). The requirements in this regard in relation to shareholders are not applicable to self-managed AIFMs. The Fitness and Probity requirements were introduced to give statutory footing to the requirements that the persons to which they apply should be (i) competent and capable, (ii) act honestly, ethically, and with integrity, and (iii) be financially sound. 5.96  Guidance published by the Central Bank provides that an application for authorization as an AIFM must be made by submitting the following documents or information: (a)  a completed application form signed by two directors of the applicant AIFM; (b)  completed individual questionnaires (IQs) in respect of: •  each director and senior manager;

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•  each individual who has a direct or indirect holding of shares or other interest in the proposed AIFM, which represents 10% or more of the capital or voting rights in the AIFM; •  any other individual who is in a position to exercise significant influence over the management of the AIFM; (c)  a programme of activity setting out the organizational structure of the AIFM, including information on how it intends to comply with its obligations under the provisions of the Irish AIFMD Regulations which implement Chapters II, III, IV (and, where applicable) V, VI, VII, and VIII of the AIFMD; (d)  information on the remuneration policies and practices pursuant to regulation 14 of the Irish AIFMD Regulations; (e)  information on arrangements made for the delegation and sub-delegation to third parties of functions as referred to in regulation 21 of the Irish AIFMD Regulations; (f)  information on the AIFs it intends to manage as specified in regulation 8 of the Irish AIFMD Regulations; (g)  the statement of responsibility referenced in section iii, paragraph 4 of the AIFM chapter of the AIF Rulebook, if applicable. (p. 250) 5.97  The AIF Rulebook also focuses on strong corporate governance principles being in place and requires AIFMs to establish and maintain written procedures for the purposes of reporting and for allocating certain functions and responsibilities. The board of the AIFM is responsible for certain managerial functions, similar to the current regime for managers of UCITSs and self-managed UCITSs. This includes decision-making, monitoring of compliance, investment policies, investment strategies and performance, risk and liquidity management, and supervision of delegates. The board of the AIFM must put in place certain policies and procedures in order to ensure that matters such as complaints handling, conflicts of interest, remuneration, AIFMD reporting processes, etc, are managed appropriately on an ongoing basis. In a slight deviation from the AIFMD, the AIF Rulebook requires that a record of each transaction entered into is maintained in readily accessible form by the AIFM for six years, while the AIFMD states a period of five years. 5.98  A fund manager with a UCITS range which also has an AIF range or intends to create an AIF will be able to leverage to some extent off existing models in place as the Central Bank requires a number of similar policies and procedures for self-managed UCITSs and UCITS management companies. It is therefore likely that some fund managers will seek dual authorization for UCITS management companies as external AIFMs, but this will be a matter for consideration on a case-by-case basis. Fund managers will also need to consider whether to avail of the derogation in the Irish AIFMD Regulations whereby an external AIFM may provide certain services including management of portfolios of investments, and certain non-core services such as the provision of investment advice, safe-keeping and administration in units of collective investment undertakings, and reception and transmission of orders relating to financial instruments: this will largely depend on the structure and available resources of the entity which is intended to act as AIFM. 5.99  With regard to the composition of the board of the AIFM, at least two directors must be Irish resident and all director and alternate director appointments require pre-approval by the Central Bank. Where a director is resigning, the board of the AIFM or its chairman must consider the impact of such a resignation on the financial state of the AIFM and the AIFs it manages and, where it is believed that this could give rise to concerns, must notify the Central Bank. The AIF Rulebook also provides that the AIFM must appoint a permanent

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chairman and be structured in such a way that no one person can decide on the direction of the AIFM without another’s consideration. 5.100  It is also worth noting that the Central Bank requires AIFMs to be open and cooperative in dealings with the Central Bank and other relevant supervisory entities. The AIF Rulebook requires an AIFM to notify the Central Bank of: any breaches of the AIFMD or Central Bank requirements or breaches of any other Irish legislation which may impact on its reputation of good standing or which may be of concern to the Central Bank; the institution of any legal proceedings to which the AIFM is party; and any situations which may impact the AIFM in a significant manner. The Central Bank may also conduct inspections of the AIFM’s operations and request certain documentation from the AIFM including internal auditor’s reports and documentation on the operating procedures that the AIFM has in place.

3. Article 9—Initial capital and own funds 5.101  It is likely that the initial capital requirements will be a consideration for some fund managers in determining which entity will act as AIFM and influence internal structuring decisions. (p. 251) The AIF Rulebook includes a template minimum capital requirements report, which must be submitted to the Central Bank by the AIF depositary, together with additional notes on the compilation of the report itself. 5.102  Where the fund itself will act as AIFM, it will need to consider whether it can satisfy the AIFMD capital and additional own funds requirements and update its various service provider contracts to ensure that they adequately capture the new AIFMD requirements. In the context of a self-managed AIF, the requirement as to additional own funds may be met using shareholder funds. AIFs may also satisfy the requirements of Article 9 of the AIFMD by obtaining appropriate professional indemnity insurance. 5.103  Pursuant to the discretion afforded to Member States under Article 9(6) of the AIFMD, the Irish AIFMD Regulations provide that the Central Bank may authorize 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 Central Bank as equivalent to those laid down in EU law.30

4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 5.104  The AIF Rulebook provides that, in addition to the AIFMD requirement that the AIFM must notify the Central Bank in advance of any material changes to the information provided in its application for authorization, the AIFM must also notify the Central Bank prior to engaging in significant new activities or establishing new branches, offices, or subsidiaries. In addition, the AIFM must obtain prior Central Bank approval before changing its name and must promptly notify the Central Bank of any change to the AIFM’s address, telephone number, or fax number. Central Bank approval is also required in advance of any proposed change of ownership or qualifying holdings of the AIFM, whether direct or indirect. 5.105  See paragraph 5.106 for details in respect of the Central Bank’s power to withdraw authorization of an AIFM.

5. Consequences of violating authorization provisions A. Regulatory law consequences

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5.106  The regulatory law consequences of a violation of any provision of the AIFMD are provided for in the Irish AIFMD Regulations. While the Regulations do not expressly deal with a scenario whereby an entity has managed an AIF without authorization, they mirror the provisions in Article 46 of the AIFMD and provide that the Central Bank has the power to require the cessation of any practice which is contrary to the Regulations, which includes the ability to request the freezing or sequestration of assets, request the temporary prohibition of professional activity, require the suspension of dealing in the interests of investors, or refer matters for criminal prosecution. The Central Bank may also withdraw authorization of an AIFM in certain circumstances, including where the AIFM has seriously or systematically (p. 252) infringed the provisions of the Irish AIFMD Regulations or obtained its authorization by making false statements or other irregular means.31 5.107  A violation of the Irish AIFMD Regulations is a prescribed contravention under the Central Bank Act 1942 and therefore subject to the Central Bank’s administrative sanctions regime, including cautions and reprimands, fines, and disqualification orders.

B. Criminal law consequences 5.108  The Irish AIFMD Regulations do not provide for criminal law consequences for breaches of the Regulations.

C. Private law consequences 5.109  The AIFMD does not specify a duty of care owed by the AIFM to investors in the AIF. Notwithstanding this, the AIFMD refers to the ‘liability of an AIFM towards the AIF and its investors’ not being affected by delegation, sub-delegation, or by the fact that the AIFM has appointed an external valuer. It is arguable that failure by an AIFM to comply with the requirements of the AIFMD could be held by an Irish court to be negligent (ie a failure to take reasonable care), so that an investor in an AIF managed by the AIFM which could show that it has suffered a loss as a result of the breach and that it was sufficiently proximate to the AIFM might be able to recover its loss. However, the Irish courts have not yet made any final determinations on this question. In addition, an investor in a selfmanaged AIF may have an action for any breach of the requirements of the AIFMD arising out of the contract between the investor and the AIF comprising the application form and the prospectus. As Irish law does not recognize third party contract rights, this same right of action will not arise between investors in AIFs with external AIFMs. 5.110  The Central Bank (Supervision and Enforcement) Act 2013 provides ‘customers’ with a statutory right to sue directly for breaches of financial services legislation, including the Irish AIFMD Regulations. ‘Customer’ is defined broadly in the legislation to include any person to whom the regulated financial service provider provides or offers financial services, or any person who requests the provision of financial services from the regulated financial service provider, and includes a potential customer and a former customer. This broad definition is likely to include AIF investors.

VI. Operating Conditions for AIFMs 1. Implementation table AIFMD

National implementation

Art 12 (general principles)

Irish AIFMD Regulations, reg 13

Art 13 (remuneration)

Irish AIFMD Regulations, reg 14

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AIFMD

National implementation

Art 14 (conflicts of interest)

Irish AIFMD Regulations, reg 15

Art 15 (risk management)

Irish AIFMD Regulations, reg 16

Art 16 (liquidity management)

Irish AIFMD Regulations, reg 17

Art 17 (investment in securitization positions)

Irish AIFMD Regulations, reg 18

Art 18 (general principles)

Irish AIFMD Regulations, reg 19

Art 19 (valuation)

Irish AIFMD Regulations, reg 20

Art 20 (delegation)

Irish AIFMD Regulations, reg 21

Art 21 (depositary)

Irish AIFMD Regulations, reg 22

Implementing Regulation

National implementation

Arts 18–30 (re Art 12(1) AIFMD: general principles)

No implementing legislation

Arts 31–38 (re Art 14 AIFMD: conflicts of interest)

No implementing legislation

Arts 39–46 (re Art 15 AIFMD: risk management)

No implementing legislation

Arts 47–50 (re Art 16 AIFMD: liquidity management)

No implementing legislation

Arts 51–56 (re Art 17 AIFMD: investment in securitization positions)

No implementing legislation

Arts 57–67 (re Art 18 AIFMD: organizational requirements—general principles)

No implementing legislation

Arts 68–75 (re Art 19 AIFMD: valuation)

No implementing legislation

Arts 76–83 (re Art 20 AIFMD: delegation of AIFM functions)

No implementing legislation

Arts 84–103 (re Art 21 AIFMD: depositary)

No implementing legislation

(p. 253) 2. Section 1 (Articles 12 to 17)—General requirements A. Article 12—General principles 5.111  The Irish AIFMD Regulations adopt the provisions of Article 12 of the AIFMD, without imposing any additional Irish requirements. The implementation of the UCITS Directive operates in a similar manner. 5.112  While no definitive guidance has been set out (or is likely to be set out) by the Central Bank, it is understood that the provisions of Article 12(1)(c)–(e), on the one hand, and Article 12(1)(a), (b) and (f), on the other, are independent requirements and that the former is not simply an expression of the latter. Article 12(1)(a), (b) and (f) specify the requirements for AIFMs to act honestly, with due skill, care, diligence, and fairly and to act in the best interests of the AIFs or the investors of the AIFs they manage and to treat all investors fairly. Article 12(1)(c)–(e) specify the requirements to have adequate resources and procedures for the proper performance of business activities, to avoid conflicts of

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interest, and to comply with the regulatory requirements applicable to the conduct of business activities. 5.113  As referred to at paragraph 5.82, prior to the implementation of the AIFMD, Irish AIFs were required to treat investors equally. This did not prevent features such as different fee levels or hedging arrangements. However, it operated as a barrier to several potential fund features, including offering investors in the same fund different liquidity terms or differing access to information. The implementation of Article 12, which requires fair treatment as opposed to equal treatment, will allow AIFMs to offer investors in the same fund several features that were previously unavailable. This fairness standard will rely on appropriate disclosure being made to investors at the outset as to the difference in treatment they should expect. It is likely that different liquidity terms or differing access to information may be available and (p. 254) it is possible that other features may be approved as the Central Bank develops its guidance in this area.

B. Article 13—Remuneration 5.114  Ireland does not have a single remuneration code applicable to all authorized firms and it is anticipated that, as part of their application for authorization, AIFMs will be required to adopt their own remuneration policy (consistent with Annex II of the AIFMD and ESMA’s Guidelines on Sound Remuneration Policies under the AIFMD (the ‘Remuneration Guidelines’)).32 5.115  The majority of Irish AIFMs will operate on an agency/delegation model basis and therefore will not have their own employees or staff. However, the Remuneration Guidelines provide that the entities to which portfolio management or risk management activities have been delegated should be subject to regulatory requirements on remuneration that are equally as effective as those applicable under the AIFMD, or that appropriate contractual arrangements should be put in place to ensure that there is no circumvention of the remuneration rules. The majority of Irish AIFMs will delegate portfolio management or risk management activities and it will be for the AIFM to assess the applicable regulatory requirements on remuneration or the appropriateness of contractual arrangements. This assessment may be subject to review by the Central Bank.

C. Article 14—Conflicts of interest 5.116  The Central Bank will require AIFMs to adopt their own conflicts of interest policies, similar to the way in which it requires UCITS Management Companies to do so.

D. Article 15—Risk management 5.117  The risk management frameworks of AIFMs are expected to operate in a similar manner to the way in which UCITS management company risk management frameworks operate. UCITSs typically have a separate risk management policy to deal with investments in FDIs (which policy is reviewed by the Central Bank’s derivatives unit) and include other risk management policies in the UCITS business plan. In the case of RIAIFs, the AIF Rulebook provides that RIAIFs must establish and maintain risk management processes which monitor FDI transactions to ensure that they are adequately covered in accordance with the requirements in the AIF Rulebook. Before commencing any FDI activity, the RIAIF must notify the Central Bank in writing of any risk management processes it has established and how it is being maintained. The RIAIF must also submit a report to the Central Bank on its use of FDIs on an annual basis. These requirements in relation to risk management processes do not apply to QIAIFs. 5.118  This represents a change to the way in which AIFs previously operated, in that previously the Central Bank had no interaction with the risk management frameworks of non-UCITS funds and set out no specific requirements in relation to them. AIFMs must set out in their programme of activity that their risk management frameworks comply with the AIFMD requirements. The Central Bank will not review risk management frameworks in From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

detail as (p. 255) part of the authorization process but such detailed review could form part of a thematic inspection conducted by the Central Bank. Offering documents should disclose the AIF’s current risk profile and the risk management systems employed by the AIFM to manage those risks, or include details of where such information is disclosed to investors. 5.119  The AIF Rulebook also requires the board of the AIFM to put in place procedures designed to ensure that all applicable risks pertaining to the AIFM and to AIFs under its management can be identified, monitored, and managed at all times.

E. Article 16—Liquidity management 5.120  The liquidity management frameworks of AIFMs represent a change to the way in which Irish AIFs previously operated, in that the Central Bank had no interaction with the liquidity management frameworks of non-UCITS funds and set out no specific requirements in relation to them. AIFMs must set out in their programme of activity that their frameworks comply with the relevant requirements. Offering documents should include a description of the relevant liquidity management systems employed, including matching of portfolios to anticipate redemptions, stress testing, redemption gates, side-pockets, and temporary suspension of dealings. 5.121  Where an AIF has the ability to adopt special liquidity arrangements, including sidepockets, it must disclose this to investors. In particular, the prospectus must contain a clear description of the proposed arrangements and information on the actions which will be taken in the event that the relevant assets do not increase in value and/or liquidity as anticipated.

F. Article 17—Investment in securitization positions 5.122  It is not yet clear how the provisions of Article 17 of the AIFMD and the corresponding Articles of the Implementing Regulation will operate in practice. It is likely that AIFMs will be required to assess compliance on a self-certification basis. It is very unlikely that the Central Bank will review or approve any given or particular securitizations, but it is possible that it may provide guidance as to how particular elements or types of securitization should be viewed in the context of Articles 50 to 56 of the Implementing Regulation.

3. Section 2 (Articles 18 and 19)—Organizational requirements A. Article 18—General principles 5.123  The general principles of Article 18 of the AIFMD, as implemented in Ireland, operate in a similar manner to the UCITS equivalent. In particular, the Central Bank requires each AIFM to establish, implement, and maintain decision-making procedures and an organizational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities. In practice, this means drafting a document, called a ‘business plan’ in the UCITS context, or ‘programme of activity’ in the AIFM context, setting out the organizational structure of the AIFM, including information on how it intends to comply with its obligations under the provisions of the Irish AIFMD Regulations. 5.124  In particular, the programme of activity describes how the AIFM meets its responsibilities with respect to the following functions: decision-making; monitoring of investment policy, investment strategies, and performance; monitoring compliance; risk (p. 256) management; liquidity management; operational risks; conflicts of interest; supervision of delegates; financial control; monitoring of capital; internal audit; complaints

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handling; accounting policies and procedures; record keeping; and remuneration and reporting processes. 5.125  The document also details how the AIFM justifies its delegation structure.

B. Article 19—Valuation 5.126  Pre-AIFMD, the valuation of assets was the regulatory responsibility of the board of directors of the fund, which delegated the task to the fund’s administrator, although a competent person (which would typically be the investment manager) valued certain difficult-to-price assets. The AIFMD provides that the AIFM is responsible for the proper valuation of AIF assets, and this change will impact on the various legal and regulatory relationships. If the board of directors of an AIF elects to act as AIFM under the AIFMD, the board will continue to retain the primary responsibility. However, if the investment manager or another entity undertakes the role of the AIFM, the investment manager or that other entity will assume responsibility for this function, which will represent a change from previous practice. In either event, contractual arrangements need to reflect this change. 5.127  The AIFMD and the Irish AIFMD Regulations distinguish between the valuation of assets and the calculation of the NAV. Pre-AIFMD, the administrator carried out the calculation of the NAV and it can continue to perform this function, with or without taking on the valuation function, although it is possible that some administrators may be willing to consider taking on that role. As the valuation of assets and the calculation of the NAV are distinctly separate, with (in the case of valuation) the AIFMD prescribed liability provisions, administration agreements need to reflect this differentiation. 5.128  The valuation provisions of the AIFMD do not impact on the offering documents of Irish AIFs. The AIFMD requires that an AIF’s prospectus must contain a description of the valuation procedure and pricing methodology, as well as methods used in valuing hard-tovalue assets; pre-AIFMD Irish AIF prospectuses should already contain sufficient disclosure in this regard. 5.129  The Irish AIFMD Regulations provide that assets will be valued in accordance with the rules set down in the AIF’s constitutional document, which must clearly define an expected method of valuation and set out a framework for any variation from this method. The majority of Irish AIFs would not have this type of information in their constitutional documents as it had been sufficient under previous rules to cross-refer to the provisions of the offering document. However, given the requirements of the AIFMD, it will be necessary to make amendments to the AIF’s constitutional documents to reflect those requirements.

4. Section 3 (Article 20)—Delegation of AIFM functions 5.130  An AIFM may delegate functions subject to the provisions of the Irish AIFMD Regulations, which mirror the AIFMD provisions and operate in a similar manner to the UCITS equivalent. (p. 257) 5.131  The Central Bank’s primary requirement in this regard is that where an AIFM delegates activities, its programme of activity (as described in paragraph 5.120) must identify the board member or other individual (‘designated persons’) who, on a day-to-day basis, will monitor and control each of the individual delegated activities.

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5.132  The programme of activity must contain certain details regarding this monitoring and control, including in relation to the reports to be received by the designated person and the required action, in the context of each function delegated. In particular, the programme of activity must detail: (a)  a list of reports which the designated person will receive from parties who have involvement, by delegation or otherwise, in the performance of the function and the identity of those third parties; (b)  procedures for immediate reporting to the designated person of all material issues which arise; (c)  circumstances in which action by a designated person is required and procedures to be followed by the designated person in this event, including escalation to the board; and (d)  thresholds/trigger events for exceptional reports and the procedures which must be adopted on receipt of exceptional reports. 5.133  These requirements are likely to require changes to most delegate contracts or, at the least, the issue of proper instructions under those contracts to the delegates to require them to provide appropriate reporting.

5. Section 4 (Article 21)—Depositary 5.134  The implementation of the AIFMD requires existing depositary agreements and trust deeds to be updated. On the most basic level, this may involve adding the AIFM as a party to the contract/deed so that it can ensure the appointment of the depositary in accordance with the requirements. (This does not represent a change where the AIF has opted to become a self-managed AIFM.) The liability standards and the potential discharge of liability in the circumstances envisaged in Article 20(13) of the AIFMD also need to be reflected, as well as the particular requirements of Article 83 of the Implementing Regulation. 5.135  In addition, the AIFM needs to ensure that pre-existing prime brokerage agreements are updated to provide that the prime broker is obliged to make available to the depositary the various types of information detailed in the Implementing Regulation. 5.136  The AIF’s prospectus must contain a description of any safe-keeping function delegated by the depositary, the identity of the delegate, and any conflicts of interest that may arise; each of these is a new type of disclosure for Irish AIFs. In addition, where the depositary has contractually discharged some of its liability, the AIFM must inform investors of this before they invest in the AIF.

6. Consequences of violating operating conditions A. Regulatory law consequences 5.137  As stated at paragraph 5.107, a violation of the Irish AIFMD Regulations is a prescribed contravention under the Central Bank Act 1942 and therefore subject to the Central Bank’s (p. 258) administrative sanctions regime, including cautions and reprimands, fines, and disqualification orders.

B. Criminal law consequences 5.138  As stated at paragraph 5.108, the Irish AIFMD Regulations do not specify any criminal law consequences for a breach of any of the requirements set out in the Regulations.

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C. Private law consequences 5.139  See paragraph 5.109, which discusses possible private law consequences of a breach of any of the provisions of the Irish AIFMD Regulations.

VII. Transparency Requirements 1. Implementation table AIFMD

National implementation

Art 22 (annual report)

Irish AIFMD Regulations, reg 23

Art 23 (disclosure to investors)

Irish AIFMD Regulations, reg 24

Art 24 (reporting obligations to competent authorities)

Irish AIFMD Regulations, reg 25

Implementing Regulation

National implementation

Arts 104–112 (re Arts 22(2)A–E, 23(4), 24(1) AIFMD: disclosure to investors and regulatory reporting)

No implementing legislation

2. Article 22—Financial reporting 5.140  Pre-AIFMD, Irish non-UCITSs were required to publish an audited annual report within four months of the end of the relevant period and, with the exception of QIFs established as variable capital investment companies, an unaudited half-yearly report within two months of the end of the relevant period. The annual and, where relevant, half-yearly report had to be sent to the Central Bank and made available to investors free of charge on request. As a result, Irish non-UCITS were already in compliance with the primary requirement of Article 22 of the AIFMD and the principal impact of the Irish implementation is to give Irish AIFs an additional two months (ie six months in total) to file their annual accounts. In a related development, as a consequence of the implementation of the AIFMD in Ireland, it is expected that changes will be introduced to the relevant primary legislation to remove the requirements for QIFs established as unit trusts or CCFs to prepare semi-annual reports, thereby ensuring that the requirement is disapplied for all QIAIFs, irrespective of their legal structure, although this requirement is likely to be retained for RIAIFs. 5.141  The Central Bank’s NU Notices set out what information was required to be contained in the annual and half-yearly report. These requirements were similar to those contained in Article 22 and, as such, Irish AIFs do not have to implement material changes in terms of their annual reporting requirements following the implementation of the AIFMD. (p. 259) 5.142  The implementation of the AIFMD in Ireland does not materially affect the legal relationship between an AIF and its auditors, which is governed by the primary legislation in respect of each fund type. 5.143  It is noteworthy that the AIF Rulebook requires the AIFM itself to submit half-yearly financial and annual audited accounts to the Central Bank, which is not a requirement of the AIFMD. The AIF Rulebook clarifies that internally managed QIAIF investment companies are not required to produce half-yearly financial accounts.

3. Article 23—Disclosure to investors

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5.144  Pre-AIFMD Irish non-UCITSs were required to publish an up-to-date prospectus. The prospectus was required to be offered to investors free of charge before the conclusion of the contract. The Central Bank’s NU Notices33 set out the requirements in relation to the content of the prospectus. The pre-AIFMD requirements did not differ significantly to those set out in Article 23 of the AIFMD, save that the AIFMD requires additional information relating to the requirements of the AIFMD, such as a description of how the AIFM is complying with the additional own funds requirement, information about the percentage of illiquid assets an AIF may hold, and information on any arrangement made by the depositary to contractually discharge itself of liability. 5.145  Clearly, the nature of some of the disclosure requirements and the obligation to make additional periodic disclosure in certain circumstances will not lend itself to disclosure in a prospectus document, and Irish AIFMs may provide a supplementary information document to investors together with the prospectus and most recent annual report in advance of any subscription in an AIF, and then periodically thereafter. The Central Bank has not mandated any specific form in which such information should be disclosed, so the manner in which these requirements are complied with are for the AIFM to determine. 5.146  As a result, it is unlikely that Irish AIFMs will adopt a similar document to the UCITS key investor information document (KIID) but will continue to use the prospectuses issued in respect of the AIFs they manage as their primary disclosure document, together with a less formal supplementary document containing the additional disclosure requirements. 5.147  In relation to liability for mistakes or errors in the disclosure materials, private law consequences (see general discussion at paragraph 5.109) may arise whereby a mistake or error in a prospectus document may leave an AIFM open to a claim in negligence or contract, depending on the structure of the relevant AIF, or an investor may exercise its statutory right to sue for breach of financial services legislation under the Central Bank (Supervision and Enforcement) Act 2013.

4. Article 24—Regulatory reporting 5.148  The reporting obligations contained in Article 24 of the AIFMD are more onerous than those which applied to Irish non-UCITSs pre-AIFMD. Irish non-UCITSs were previously required to provide certain information in monthly returns to the Statistics (p. 260) Department of the Central Bank, as specified in the NU Notices, which are the same as the obligations on Irish UCITSs.34 Such information included the total gross and NAV of the scheme at the month-end, the number of units in circulation, the NAV per unit, and the payments received and made during the month. While these requirements have been retained for the present by the Central Bank as part of the AIF Rulebook (for reasons of continuity in statistical reporting), Article 24 of the AIFMD requires more detailed reporting (under a number of different headings) to competent authorities than was previously required, albeit potentially on a less frequent basis, depending on the size of the AIF.

5. Consequences of violating transparency requirements A. Regulatory law consequences 5.149  As stated at paragraph 5.107, a violation of the Irish AIFMD Regulations is a prescribed contravention under the Central Bank Act 1942 and therefore subject to the Central Bank’s administrative sanctions regime, including cautions and reprimands, fines, and disqualification orders.

B. Criminal law consequences

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5.150  As stated at paragraph 5.108, the Irish AIFMD Regulations do not specify any criminal law consequences of a breach of any of the provisions of the Regulations.

C. Private law consequences 5.151  See paragraph 5.109, which discusses possible private law consequences of a breach of any of the provisions of the Irish AIFMD Regulations.

VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD

National implementation

Art 25 (use of information, supervisory cooperation, and limits to leverage)

Irish AIFMD Regulations, reg 26

Art 26 (scope)

Irish AIFMD Regulations, reg 27

Art 27 (notification of the acquisition of major holdings and control of nonlisted companies)

Irish AIFMD Regulations, reg 28

Art 28 (disclosure in case of acquisition of control)

Irish AIFMD Regulations, reg 29

Art 29 (annual report of AIF exercising control of non-listed companies)

Irish AIFMD Regulations, reg 30

Art 30 (asset stripping)

Irish AIFMD Regulations, reg 31

Implementing Regulation

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

No implementing legislation

(p. 261) 2. Section 1 (Article 25)—AIFM managing leveraged AIF 5.152  While there are no Ireland-specific issues with the methods of calculation of leverage provided for under the AIFMD, Irish AIFMs share the general industry concerns regarding the calculation methods selected and have made, through the IFIA, representations to the Central Bank and ESMA about the inflated exposure results which some hedging transactions, including interest rate hedging, can generate. Irish AIFMs frequently have a lot of experience in applying the leverage rules from the management of their UCITS. 5.153  Pursuant to the AIFMD, the Irish AIFMD Regulations require that the AIFM must demonstrate the reasonableness of the leverage levels exhibited by the AIFs it proposes to manage. Demonstration of such reasonableness will therefore form part of the authorization process for an AIFM or the process for authorizing a new AIF following the AIFM’s authorization. The AIFM must set out in its programme of activity how it determines that the leverage limits are reasonable (ie what factors it considers in setting/reviewing the limits). 5.154  It is expected that the Central Bank will regard compliance with stated leverage limits in the same way as any other investment restriction and so will expect AIFMs to comply with them as they would any other obligation. In the case of leverage, the Central

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Bank has additional assistance in monitoring compliance with the leverage levels in the form of the regular reporting required by Article 24(4) of the AIFMD.

3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 5.155  The implementation of the AIFMD should not materially change the Irish private equity fund regime, although, as a commercial matter, AIFMs must consider the restrictions on the use of ‘asset-stripping’ techniques that might prejudice the long-term wealth of the companies acquired and the additional disclosure requirements in respect of those companies. It is also necessary for funds that use corporate entities as subsidiaries or holding companies for investment to consider the application of notification requirements under this provision.

4. Consequences of violating provisions relating to AIFMs managing specific types of AIF A. Regulatory law consequences 5.156  As stated at paragraph 5.107, a violation of the Irish AIFMD Regulations is a prescribed contravention under the Central Bank Act 1942 and therefore subject to the Central Bank’s administrative sanctions regime, including cautions and reprimands, fines, and disqualification orders.

B. Criminal law consequences 5.157  As stated at paragraph 5.108, the Irish AIFMD Regulations do not specify any criminal law consequences for a breach of the Regulations.

C. Private law consequences 5.158  See paragraph 5.109, which discusses possible private law consequences of a breach of any of the provisions of the Irish AIFMD Regulations.

(p. 262) IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIFs in the home Member State of the AIFM)

Irish AIFMD Regulations, reg 32

Art 32 (marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM)

Irish AIFMD Regulations, reg 33

Art 33 (conditions for managing AIFs established in other Member States)

Irish AIFMD Regulations, reg 34

Implementing Regulation

National implementation

n/a

n/a

2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM

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5.159  The Irish AIFMD Regulations adopt the provisions of the AIFMD in respect of marketing to professional investors, without imposing any additional requirements. Similarly, the AIF Rulebook has not addressed the marketing provisions of AIFs to professional investors and it is noteworthy that the provisions of former NU Notice 19 in relation to the inward marketing of schemes established in other jurisdictions, to such investors, has not been incorporated into the AIF Rulebook or Central Bank guidance. A section of the AIF Rulebook and Central Bank guidance sets out similar rules to those contained in NU Notice 19 in relation to the inward marketing of AIFs to retail investors. 5.160  Accordingly, the marketing of AIFs to professional investors in Ireland is governed by the provisions of Article 31 of the AIFMD (transposed by regulation 32 of the Irish AIFMD Regulations) and many of the requirements under the pre-AIFMD regime, as described in paragraph 5.61, will no longer apply. The Central Bank has confirmed, however, that it will keep its requirements under review at all times and welcomes ongoing discussion on how best to protect investors, while facilitating management of the costs arising. It is therefore possible that further guidance will be issued in due course in relation to marketing provisions. 5.161  In the case of an Irish AIFM providing management services to an EU AIF, the provisions of Article 31(1) of the AIFMD apply. The process requires that the AIFM submits a notification to the Central Bank in respect of each EU AIF it is intended to market. The notification is required to set out the information listed in Annex III of the AIFMD (including a notification letter, the AIF rules or instruments of incorporation, identification of the depositary of the AIFM, a description of the AIF, information on where the master AIF is located if the AIF is a feeder, information required under Article 23 of the AIFMD on disclosure to investors, and, where relevant, information on the procedures to prevent shares being marketed to retail investors). The Central Bank must inform the AIFM within 20 working days whether it can commence marketing and may only prohibit such marketing if the AIFM’s management of the AIF does not or will not comply with AIFMD. (p. 263) 5.162  Article 31 does not set out any particular requirements in relation to a selfmanaged AIF and, accordingly, the procedures outlined at paragraphs 5.160 and 5.161 apply equally in relation to an application by an Irish self-managed AIF to market its shares in Ireland. However, it is likely that the review process will in practice be streamlined and that authorization will be granted well within the maximum period of 20 working days, given that the Central Bank will have reviewed and approved all information in respect of the AIF as part of its authorization process. 5.163  Article 31(4) applies provisions in respect of proposed material changes by an AIFM to information previously notified to the Central Bank. In particular, the AIFM must provide the Central Bank with one month’s notice in relation to any planned amendment (and immediate notification in the event that a change was unplanned). The Central Bank must determine whether the changes may impact on compliance with the AIFMD and, in the event that it has no objection, must inform host Member States of the proposed change. If the Central Bank believes that the change would impact on compliance with the AIFMD, it may instruct the AIFM not to proceed with the amendment and, in the event that the AIFM proceeds, it may exercise any of the supervisory powers granted under the Directive, including, if necessary, a prohibition on marketing the AIF. 5.164  Article 31(5) contemplates that ESMA may develop implementing technical standards to determine the form and content of a model notification letter and the form and content of notices to be provided by the AIFM to the Central Bank, advising it of material changes to any notification previously made to the Central Bank.

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5.165  In relation to transitional measures, the Central Bank has confirmed that an EU AIFM marketing an EU AIF to professional investors in Ireland as at 22 July 2013 may continue to market the AIF and other EU or non-EU AIFs notwithstanding that the AIFM has not yet been authorized in its home Member State. Once the AIFM has received its authorization, it should comply with the AIFMD passporting notification process.35 5.166  Paragraphs 5.159 to 5.165 set out the position in relation to marketing to professional investors. The Central Bank has also provided guidance in relation to the marketing of AIFs to retail investors, which are discussed further at paragraph 5.190.

3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 5.167  The provisions in relation to marketing into Ireland36 reflect those of the AIFMD, and Ireland has introduced no marketing requirements in addition to those which apply in Article 32. 5.168  Accordingly, where it is proposed that an AIFM located in a Member State other than Ireland markets EU AIFs into Ireland, the AIFM must comply with the domestic requirements of its home Member State in relation to the process for notifying the regulator in the home Member State. The home Member State regulator must satisfy itself that the AIFM’s management of the (p. 264) relevant AIF is in accordance with the AIFMD and transmit the relevant notification file to the Central Bank. The notification must contain confirmation that the AIFMD is authorized to manage AIFs with the relevant investment strategies. The home Member State regulator must also inform the competent authorities of the individual Member States in which the AIFs are domiciled of the completion of the registration process. The home Member State regulator must notify the relevant AIFM without delay of the transmission of the relevant notification file, and the AIFM may start marketing as of the date of such notification. 5.169  The AIFM must also comply with the provisions in respect of proposed changes by an AIFM to particulars previously notified to the home Member State regulator, as described in paragraph 5.163. 5.170  Once the home Member State regulator notifies the Central Bank of the proposed marketing and transmits the completed notification file to the Central Bank, nothing further is required from the Central Bank, and the only local provisions it may apply are in relation to any matters set out in point (h) of Annex IV of the AIFMD (which govern information on arrangements made for the marketing of AIFs and, where relevant, information on the arrangements to prevent units or shares of the AIF from being marketed to retail investors). However, the Central Bank has not proposed any such additional requirements. In particular, former NU Notice 19 in relation to the inward marketing of schemes established in other jurisdictions has not been incorporated into the AIF Rulebook and the regime will be significantly different to that which previously applied in respect of inward marketing. 5.171  Where an Irish AIFM proposes to market its shares or units in an EU AIF (whether domiciled in Ireland or another Member State), in another Member State, the process outlined at paragraphs 5.168–5.170 will apply in reverse, so that the Irish AIFM will be required to submit a notification to the Central Bank, which will then transmit the notification file to the competent authorities of the Member State where it is intended the AIF will be marketed. 5.172  It should be noted that, while the passporting regime under the AIFMD shares many features with the UCITS structure (including notification to the relevant home state regulator, use of electronic submissions, and regulator-to-regulator communications), there are differences in terms of their operation. One significant difference is that the Central Bank does not propose that inward marketing to professional investors under the AIFMD be subject to the appointment of a local agent to ensure that facilities are available for making From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

payments to investors repurchasing and redeeming shares and for making available certain information to unit-holders. Furthermore, the provisions of Article 31(7) of the AIFMD requiring one month’s prior notice from the AIFM to the home competent authority of any proposed change, with the home competent authority then considering the change and notifying all host state competent authorities, is different to the current UCITS regime where any post-notification changes are notified directly to the host state regulators. However, this is currently under review in the UCITS context and may be amended in proposals to amend the UCITS Directive pursuant to the European Commission’s consultation document on UCITS dated 26 July 2012. 5.173  The provisions in relation to marketing to retail investors in Ireland, as described in paragraph 5.190, will apply equally in relation to marketing under Article 32 of the AIFMD.

(p. 265) 4. Article 33—Conditions for managing AIFs established in other Member States 5.174  The provisions of Article 33 of the AIFMD introduce into Irish law for the first time the ability of a non-Irish entity to manage an Irish AIF (although it is important to note that ‘manage’ in this context means the full range of management functions contemplated under the AIFMD, rather than simply the investment management function which, under the previous regime, was often delegated to professional investment managers in other EU Member States and other regulated jurisdictions). As with the other provisions described in this section, Ireland has not introduced any provisions in its implementing legislation and guidance in addition to those set out in the AIFMD. Accordingly, the provisions of Article 33 will apply in relation to (i) management of an Irish AIF by an AIFM established in another Member State and (ii) management by an Irish AIFM of AIFs established in another Member State. 5.175  Where a non-Irish EU AIFM proposes to manage an Irish AIF, it must provide details to its home Member State regulator, including setting out in its programme of activity the services it proposes to provide. The home Member State regulator then has one month (in the case of direct provision of services) or two months (in the case of establishment of a branch) to satisfy itself that the AIFM is able to comply with the provisions of the AIFMD in respect of such services. The home Member State regulator must then transmit the complete documentation to the Central Bank and confirm that the AIFM is authorized by it. As with the procedures for marketing of shares, there is a process for prior notification to the home Member State regulator of any changes to the information previously provided to it, which it will then consider and, if satisfied, notify the Central Bank. It should be noted that Article 33(5) of the AIFMD provides that the host Member State of an AIFM must not impose any additional requirements on the AIFM concerned in respect of the matters covered by the Directive. 5.176  Where an Irish AIFM proposes to manage AIFs established in another Member State, the process outlined at paragraph 5.175 will operate in reverse. As with the passporting regime for UCITS management companies, it is likely that the Central Bank will closely review the programme of activity for any Irish AIFM planning to manage AIFs in other Member States. In particular, it will seek to ensure that robust procedures are in place in relation to the transfer of information between the AIFM and the service providers appointed by the AIFs and/or the AIFM in such Member States. It may also seek to ensure that there is sufficient expertise within the AIFM to assess, monitor, and manage the risk arising from the fact that the AIFM and the AIF are located in different domiciles with different legal and regulatory regimes.

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5.177  The AIFMD contemplates that ESMA will issue technical standards to harmonize the forms of notification contemplated at paragraphs 5.175 and 5.176, both between the AIFM and the Central Bank, and between the Central Bank and other competent authorities.

5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 5.178  As stated at paragraph 5.107, a violation of the Irish AIFMD Regulations is a prescribed contravention under the Central Bank Act 1942 and therefore subject to the Central Bank’s administrative sanctions regime, including cautions and reprimands, fines, and disqualification orders.

(p. 266) B. Criminal law consequences 5.179  As stated at paragraph 5.108, the Irish AIFMD Regulations do not specify any criminal law consequences of a breach of any of those Regulations.

C. Private law consequences 5.180  See paragraph 5.109, which discusses possible private law consequences of a breach of any of the provisions of the Irish AIFMD Regulations.

X. Specific Rules in Relation to Third Countries 1. Implementation table AIFMD

National implementation

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

Irish AIFMD Regulations, reg 35

Art 35 (conditions for marketing in EU with a passport of non-EU AIFs managed by an EU AIFM)

Irish AIFMD Regulations, reg 36

Art 36 (conditions for marketing in EU without a passport of non-EU AIFs managed by an EU AIFM)

Irish AIFMD Regulations, reg 37

Art 37 (authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Arts 38 (EU AIFs) or 39 (non-EU AIFs))

Irish AIFMD Regulations, reg 38

Art 38 (peer review of authorization and supervision of non-EU AIFMs)

Irish AIFMD Regulations, reg 39

Art 39 (conditions for the marketing in the EU with a passport of EU AIFs managed by a non-EU AIFM)

Irish AIFMD Regulations, reg 40

Art 40 (conditions for the marketing in the EU with a passport of non-EU AIFs managed by a non-EU AIFM)

Irish AIFMD Regulations, reg 41

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by non-EU AIFM)

Irish AIFMD Regulations, reg 42

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM)

Irish AIFMD Regulations, reg 43

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AIFMD

National implementation

Implementing Regulation

National implementation

Arts 114–116 (re Arts 34(1), 35(2), 36(1), 37(7)(D), 39(2)(A), 40(2)(a), and 42(1) AIFMD)

No implementing legislation

2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 5.181  An AIFM authorized by the Central Bank must comply with the requirements set out in Chapter 3 of the AIF Rulebook—‘Alternative Investment Fund Manager Requirements’ and the Irish AIFMD Regulations. These requirements adopt the provisions in the AIFMD relating to application requirements, operating conditions, organizational requirements, etc. As provided in the AIFMD, the depositary requirements and annual report requirements set out in Articles 21 and 22 respectively will not apply to an Irish AIFM managing non-EU AIFs not marketed in Ireland.

(p. 267) 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 5.182  Once Article 35 of the AIFMD comes into effect,37 the marketing of non-EU AIFs managed by an EU AIFM will be governed by regulation 36 of the Irish AIFMD Regulations. As discussed at paragraph 5.62, the inward marketing of foreign funds was previously regulated by the provisions of NU Notice 19, which were not included in the AIF Rulebook or Central Bank guidance in relation to marketing to professional investors. 5.183  In relation to the marketing into Ireland of non-EU AIFs by an EU AIFM on a private placement basis, as the AIF Rulebook does not set out any requirements regarding the inward marketing of AIFs to professional investors in Ireland, the marketing of non-EU AIFs by an EU AIFM on a private placement basis will be governed solely by Regulation 37 of the Irish AIFMD Regulations transposing Article 36 of the AIFMD (including requirements regarding cooperation arrangements). Ireland has therefore not availed of the discretion afforded by Article 36(2) to impose stricter rules on the AIFM in this regard.

4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 5.184  The Central Bank has confirmed that it will authorize a QIAIF post-22 July 2013 which designates a non-EU AIFM. The Central Bank will allow a transition benefit to nonEU AIFMs so that any QIAIF authorized prior to 22 July 2013 and which designates a nonEU AIFM will only be obliged to ensure that it has an AIFM capable of carrying out all of the tasks of an authorized AIFM by 22 July 2015. Any QIAIF authorized on or after 22 July 2013 on the basis of designating a non-EU AIFM must only ensure that the non-EU AIFM is capable of carrying out all the tasks of an authorized AIFM within two years of the QIAIF’s date of launch ie the date when the initial offer period closes, or, where there are multiple closings, the date of first closing.38 During the transitional period, QIAIFs authorized before 22 July 2013 must comply with the NU Notices, while QIAIFs authorized after 22 July 2013 must comply with the provisions of the AIF Rulebook that apply in the case of QIAIFs with registered AIFMs.39

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5.185  The AIF Rulebook does not specify rules that will apply where a non-EU AIFM seeks authorization under the AIFMD using Ireland as its Member State of reference. The Central Bank has stated that it will consider what rules will apply closer to the start date for this regime, likely to be 2015.40 Regulations 38 and 40 of the Irish AIFMD Regulations track the provisions in Articles 37 and 39 of the AIFMD closely.

(p. 268) 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 5.186  As the Central Bank has not set out in the AIF Rulebook or guidance specific requirements on the inward marketing of AIFs to professional investors, the marketing of AIFs managed by non-EU AIFMs in Ireland will be governed solely by the requirements in regulation 43 of the Irish AIFMD Regulations transposing Article 42 of the AIFMD, including that the non-EU AIFM provides written notification to the Central Bank of its intention to market, that it complies with the reporting and disclosure obligations in the AIFMD, and that there are appropriate cooperation arrangements in place. Ireland has not availed of the discretion afforded by Article 42(2) to impose stricter rules on the AIFM in respect of the marketing of AIFs in Ireland by non-EU AIFMs on a private placement basis. Non-EU AIFMs marketing AIFs in Ireland as at 22 July 2013 must make the notification required under regulation 43 by 22 July 2014. Pending the making of such notification, nonEU AIFMs may continue to market AIFs in Ireland under the pre-AIFMD rules.

6. Consequences of violating specific rules in relation to third countries A. Regulatory law consequences 5.187  As stated at paragraph 5.107, a violation of the Irish AIFMD Regulations is a prescribed contravention under the Central Bank Act 1942 and therefore subject to the Central Bank’s administrative sanctions regime, including cautions and reprimands, fines, and disqualification orders.

B. Criminal law consequences 5.188  As stated at paragraph 5.108, the Irish AIFMD Regulations do not specify any criminal law consequences for a breach of any of the provisions of those Regulations.

C. Private law consequences 5.189  See paragraph 5.109, which discusses possible private law consequences of a breach of any of the provisions of the Irish AIFMD Regulations.

XI. Marketing to Retail Investors 1. Implementation table AIFMD

National implementation

Art 43 (marketing of AIF to retail investors)

Irish AIFMD Regulations, reg 44

Implementing Regulation

National implementation

n/a

n/a

2. Article 43—Marketing of AIFs by AIFMs to retail investors

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5.190  The Central Bank has determined that it is appropriate to set out rules in relation to the marketing of AIFs to retail investors and has therefore exercised the discretion afforded (p. 269) under Article 43 of the AIFMD. These rules are similar in many respects to the existing provisions of NU Notice 19, summarized in paragraphs 5.62 and 5.63. The relevant AIF will need to be authorized by a supervisory authority set up to ensure protection of unitholders and which, in the opinion of the Central Bank, provides an equivalent level of investor protection to that provided under Irish laws, regulations, and conditions governing an Irish RIAIF. It will be necessary to appoint a local facilities agent to provide information to Irish retail investors on redemption and dividend provisions and to provide documentation to investors on an ongoing basis. The application to the Central Bank for permission to market to Irish retail investors will need to outline any material differences between the requirements applicable to the relevant AIF and those applicable to an RIAIF. The marketing of the AIF will be subject to ongoing requirements, including the submission of annual and half-yearly reports, if any, to the Central Bank and compliance with laws, regulations, and administrative provisions in force in Ireland, including the Consumer Protection Code.

3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 5.191  The fact that AIFs may be marketed to retail investors will not alter the analysis of the regulatory, criminal, and private law consequences of a breach of the Irish AIFMD Regulations set out at paragraphs 5.106 to 5.108.

XII. Competent Authorities and Supervisory Powers 1. Implementation table AIFMD

National implementation

Art 44

Irish AIFMD Regulations, reg 45

Art 45

Irish AIFMD Regulations, regs 46 and 47

Art 46

Irish AIFMD Regulations, reg 48

Art 48

Not transposed

Art 50

Irish AIFMD Regulations, reg 54

Art 51

Irish AIFMD Regulations, reg 55

Art 52

Irish AIFMD Regulations, reg 56

Art 53

Irish AIFMD Regulations, reg 57

Art 54

Irish AIFMD Regulations, reg 58

Art 55

Not transposed

2. Designation, responsibility, and powers of competent authorities 5.192  The Irish AIFMD Regulations track Articles 44 to 55 of the AIFMD, with minimum changes. The Central Bank is the designated competent authority. Regulation 48 of the Irish AIFMD Regulations elaborates upon and provides further detail in relation to the power referred to in Article 46(1)(b) to require information from any person related to the activities of the AIFM or AIF. The Central Bank may give written notice requiring (p. 270) a

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person to appear before it to give such information or provide such records as it may reasonably require. Regulation 49 provides for the Central Bank’s power to issue directions in a number of circumstances, including where the AIFM, AIF, depositary, or related undertaking: (a)  has become or is likely to become unable to meet its obligations to its creditors or professional or retail investors; (b)  is not maintaining or is unlikely to be in a position to maintain adequate capital or other financial resources having regard to the volume and nature of its business; (c)  has failed to comply with any condition or requirement imposed by the Irish AIFMD Regulations or any other enactment; (d)  is conducting business in such a manner as to jeopardize or prejudice: (i) monies or property held or controlled by it on behalf of a professional or retail investor; (ii) the rights and interests of a professional or retail investor; or (iii) in a market for a financial instrument, the orderly functioning of that market. 5.193  The Central Bank may also issue directions where there are grounds for revoking the authorization or approval of an AIFM, AIF or depositary. The directions may require the person to take a broad range of actions, including to suspend for such period not exceeding 12 months the provision of financial services, the making of payments or the acquisition or disposal of any assets or liabilities. Directions may be published by the Central Bank. The person receiving the direction may apply to the Irish High Court to set the direction aside, while the Central Bank may apply to the High Court for an order compelling a person to comply with a direction.

3. Other issues 5.194  The Central Bank has extended its administrative sanctions regime to cover breaches of the Irish AIFMD Regulations. 5.195  The administrative sanctions regime provides that where the Central Bank suspects on reasonable grounds that a regulated financial service provider (for example an AIFM) has breached the Irish AIFMD Regulations or any condition or requirement imposed under them (for example the AIF Rulebook), it will engage in a preliminary examination of the suspected breach. If, at the close of the examination stage, the Central Bank concludes that its suspicions are reasonably held, it may decide to proceed to an inquiry in order to determine whether the breach has been committed and whether sanctions should be imposed. 5.196  In the course of the inquiry, the Central Bank must observe the rules of procedural fairness, but is not bound by the rules of evidence. If the Central Bank holds an inquiry and finds that an AIFM has committed a breach, it must publish such finding and details of any sanction imposed. The available sanctions range from a caution or reprimand to a fine of up to EUR 10 million or 10% of the turnover for the last complete financial year before the finding is made.41

(p. 271) XIII. Concluding Remarks 5.197  While the implementation of the AIFMD introduced significant changes to the panEuropean regulation of non-UCITS funds, Ireland was well-placed in the lead-up to implementation, having been the first regulated jurisdiction to provide a regulatory framework specifically for AIFs. The fact that the pre-AIFM regime already required that Irish regulated AIFs have an independent depositary and were administered and valued by entities authorized and supervised by the Central Bank lessened the impact at a practical level of many of the AIFMD requirements. However, existing fund documentation must be

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carefully reviewed to ensure that all of the requirements of the AIFMD are met and appropriately reflected. The enhancements to the RIAIF regime and the QIAIF regime, effected to coincide with the implementation of the AIFMD, are welcome developments which will ensure that Ireland remains a leading international domicile and fund administration centre for AIFs.*(p. 272)

Footnotes: 1

  Analysis of HFMWeek Survey April 2011 and HFR Survey 2010. See Irish Funds Industry Association’s ‘Why Ireland’ brochure; available at . 2

  Central Bank Fitness and Probity Standards (Code issued under s 50 of the Central Bank Reform Act 2010); available at . 3

  IFIA Corporate Governance Code for Collective Investment Schemes and Management Companies; Available at. 4

  Monterey Insight Ireland Fund Survey 2013 and the Irish Funds Industry Association, ‘Why Ireland?’, brochure available at . 5

  Irish Funds Industry Association May 2013.

6

  Monterey Insights Ireland Fund Survey 2012.

7

  Monterey Insights Ireland Fund Survey 2012.

8

  Central Bank AIF Rulebook July 2013; available at . 9

  ILP Act, s 6(2).

10

  ILP Act, s 6(3).

11

  ILP Act, s 6(4).

12

  Central Bank of Ireland/Irish Funds Industry Association May 2013.

13

  The Central Bank used the opportunity presented by the implementation of the AIFMD to introduce enhancements to the QIF regime, such as amendments in relation to the use of side pockets and fair treatment of investors. See further at paras 5.80–5.87. 14

  Both the Second Council Directive (77/91/EEC) and the Fourth Council Directive (78/660/EEC) define investment companies as companies the exclusive objective of which is to invest funds in various assets with the sole aim of spreading investment risks. 15

  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (OJ 2003 L345/64). 16

  IFIA Corporate Governance Code for Collective Investment Schemes and Management Companies; Available at. 17

  Following implementation of the AIFMD, QIAIFs launched post-22 July 2013 must appoint an authorized AIFM within 12 months. During the transitional period, depositaries of QIAIFs must comply with the AIFMD depositary regime except in relation to depositary liability. The standard of liability under the previous regime will apply during the transitional period. The former standard of liability will also apply to QIAIFs launched after

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22 July 2013 with a registered AIFM (until they appoint an authorized AIFM within two years of launch as required by the Central Bank’s AIF Rulebook) and to PIFs with a registered AIFM. 18

  See NU Notice 19 in particular.

19

  See former NU Notice 19.

20

  Central Bank of Ireland AIF Rulebook, 2nd issue, July 2013; available at . 21

  See para 5.39.

22

  An identical provision applied to QIFs.

23

  The PIF depositary will be liable for any loss arising from negligence, fraud, bad faith, wilful default, or recklessness in the performance of its duties. 24

  Guidance Note 1/00.

25

  The consultation closed in October 2013.

26

  SI 257 of 2013.

27

  ESMA discussion paper on key aspects of the AIFMD and types of AIFM, 23 February 2012. 28

  The Central Bank announced on 15 May 2013 that it would accept applications.

29

  The Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011.

30

  Irish AIFMD Regulations, reg 10(6).

31

  Irish AIFMD Regulations, reg 12(b).

32

  ESMA Guidelines on Sound Remuneration Policies under the AIFMD, 3 July 2013.

33

  NU Notice 9.

34

  NU Notice 10, UCITS 7.3.

35

  Central Bank AIFMD Q&A, 3rd edition, 19 July 2013; available at . 36

  Irish AIFMD Regulations, reg 33.

37

  This will depend on the advice of ESMA, as provided for under AIFMD, Art 64(1)(b).

38

  Central Bank AIFMD Q&A (n 35).

39

  These requirements are set out in Ch 2, Pt III of the AIF Rulebook and include the requirement to appoint a depositary in accordance with reg 22 of the Irish AIFMD Regulations. 40

  Central Bank Feedback Statement on CP60, ‘Consultation on the Implementation of the Alternative Investment Fund Managers Directive’, 1 February 2013. 41

  Section 33AQ of the Central Bank Act 1942 as amended by the Central Bank (Supervision and Enforcement) Act 2013. *  Please note that the content of this chapter is provided for general informational purposes only, and it does not constitute or comprise legal advice. While every effort has been made to ensure the accuracy of the content as at the time of writing, no representation or warranty is given in respect thereof. Please also note that you should not act or refrain from acting on the basis of the material herein without seeking appropriate

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legal or other professional advice, and that there is no acceptance of liability to any person arising directly or indirectly through reliance on this material.

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6 Italy Francesco Paolo Crocenzi From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Hedge fund — Advertising and marketing and funds

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(p. 273) 6  Italy I. Introduction 6.01 1. Nature of the national non-retail investment industry 6.01 2. Legal structures used to form national AIFs 6.03 II. Pre-Aifmd Regulatory Framework 6.11 1. Regulation of AIFMs and national AIFs prior to the AIFMD 6.11 2. Regulation of national marketing of AIFs prior to the AIFMD 6.35 III. Regulation of National Aifs after the Aifmd 6.39 1. Status of implementation of the AIFMD in Italy 6.39 2. Regulation of AIFs after implementation of the AIFMD 6.42 IV. General Provisions of the Aifmd and the Implementing Regulation 6.44 1. Implementation table 6.44 2. Articles 2 and 3—Scope and exemptions 6.45 3  Article 5—Determination of the AIFM 6.48 V. Authorization of Aifms 6.52 1. Implementation table 6.52 2. Articles 6 to 8—Conditions and application for authorization 6.52 3. Article 9—Initial capital and own funds 6.59 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 6.62 5. Consequences of violating authorization provisions 6.63 VI. Operating Conditions for Aifms 6.73 1. Implementation table 6.73 2. Section 1 (Articles 12 to 17)—General requirements 6.73 3. Section 2 (Articles 18 and 19)—Organizational requirements 6.84 4. Section 3 (Article 20)—Delegation of AIFM functions 6.91 5. Section 4 (Article 21)—Depositary 6.98 6. Consequences of violating operating conditions 6.103 VII. Transparency Requirements 6.127 1. Implementation table 6.127 2. Article 22—Financial reporting 6.127 3. Article 23—Disclosure to investors 6.128

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4. Article 24—Regulatory reporting 6.134 5. Consequences of violating transparency requirements 6.135 VIII. Aifm Managing Specific Types of Aif 6.139 1. Implementation table 6.139 2. Section 1 (Article 25)—AIFM managing leveraged AIF 6.139 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 6.140 4. Consequences of violating provisions relating to AIFMs managing specific types of AIF 6.145 IX. Rights of Eu Aifms to Market and Manage Eu Aifs in the Eu 6.147 1. Implementation table 6.147 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 6.147 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than in the home Member State of the AIFM 6.149 (p. 274) 4. Article 33—Conditions for managing AIFs established in other Member States 6.153 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU 6.155 X. Specific Rules in Relation to Third Countries 6.161 1. Implementation table 6.161 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 6.161 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by EU AIFMs 6.162 4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 6.164 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 6.166 6. Consequences of violating specific rules in relation to third countries 6.167 XI. Marketing to Retail Investors 6.170 1. Implementation table 6.170 2. Article 43—Marketing of AIFs by AIFMs to retail investors 6.170 3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 6.177 XII. Competent Authorities and Supervisory Powers 6.181 1. Implementation table 6.181

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2. Designation, responsibility, and powers of competent authorities 6.181 3. Other issues 6.184 XIII. Concluding Remarks 6.193

I. Introduction 1. Nature of the national non-retail investment industry 6.01  Most of the Italian non-UCITS funds—alternative investment funds (AIFs)—are funds of funds. A significant part of the investments in non-Italian AIFs will come from Italian AIFs. In addition, there are also investments from other classes of Italian investors like ‘foundations’ and high net worth/affluent individuals, to the extent that they qualify as eligible investors for the relevant AIF. 6.02  AIFs are not permitted investments for Italian pension funds. However, the Italian Minister of Economy and Finance is expected to issue new rules on the permitted investments in mid 2014. These must include rules on AIFs in light of the AIFMD passports. Alternative investment fund managers (AIFM) should be able to offer AIFs to professional investors, a category that includes pension funds.

2. Legal structures used to form national AIFs 6.03  The largely predominant structure for Italian AIFs is the Fondo Comune di Investimento (FCI) (common investment fund). The FCI is equivalent, for example, to the Luxembourg Fonds Commun de Placement. 6.04  An FCI is an unincorporated structure, not a legal person, and, as we will see, its lack of legal status affects the ownership of the fund’s assets (see paragraphs 6.09 and 6.10). FCIs are also (p. 275) defined as collective investment schemes of the ‘contractual type’, as opposed to the Società di Investimento a Capitale Variabile (SICAV), ie an investment company with variable capital, which are referred to as collective investment schemes of a ‘corporate type’. 6.05  The reason for the prevalence of the FCI structure over the investment company is historical: in particular, the first Italian statute that governed collective investment schemes —Law No 77 of 23 March 1983—was titled ‘establishment and discipline of the common funds in transferable securities’ and did not consider SICAVs. 6.06  The introduction of SICAVs in Italian legislation was made at a later stage in connection with the implementation of the UCITS I Directive. The initial omission of SICAVs from the Italian legal system can be found in the main piece of Italian legislation on securities law—the Consolidated Law on Finance Intermediation,1 Legislative Decree No 58 of 24 February 1998 (in Italian, Testo unico delle disposizioni in materia di intermediazione finanziaria (‘TUF’)). 6.07  Interestingly, the pre-AIFMD text of the TUF only addressed FCIs and not SICAVs, which are governed by specific rules. During the consultation leading up to the introduction of the TUF, stakeholders noted that the Italian legislator ‘forgot’ SICAVs, and therefore a paragraph was inserted in order to state that the provisions of the TUF on FCIs also apply to SICAVs (TUF, article 50). 6.08  Article 36.6 of the TUF states that each sub-fund is a separate pool of assets, segregated from those of the managing company, and no legal actions of the creditors of the managing company can be taken against the fund’s assets.2 The application of article 36.6

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has been confirmed and further clarified by the Italian Supreme Court (Corte di Cassazione (CdC)). 6.09  The CdC confirmed that the FCI ‘is not an autonomous legal person’ capable of having a legal relationship directly in its own name with third parties, thus needing the intervention of the managing company,3 but that, notwithstanding, the FCI’s assets are segregated from those of the managing company as a result of the ‘lawmakers’ concerns to ensure a strong protection of the interests of the investors who hold units of the fund by avoiding the risk that the fund’s assets are adversely affected by attacks from the creditors of the managing company’. This ensured the ‘exclusive destination [of the FCI’s assets] to the purpose of financial investment for the purpose of which it has been organized’.4 (p. 276) 6.10  The CdC’s clarifications involve two further considerations. First, that since the FCI has no autonomous legal personality, its assets will need to be registered in the name of an entity having legal status, ie the managing company. Second, that registration in the name of the managing company will be only ‘nominal’,5 while the beneficial owners will be the fund and its unit-holders. With regard to this issue, and in particular to the title on the real estate owned by an Italian real estate FCI, a recent decision of the Milan court (Tribunale di Milano) dated 29 March 20126 stated that the title on the real estate of an FCI must necessarily be registered in the name of its managing company, but this SGR (Società di Gestione del Risparmio) will hold the real estate only as ‘trustee’ of the unit-holders.

II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD A. The pre-AIFMD regulation of non-UCITS management companies 6.11  The TUF may either directly regulate matters or delegate other entities, such as the Minister of Economy and Finance, the Bank of Italy, or the National Commission for the Companies and the Stock Exchange (‘CONSOB’) to issue second level rules for the implementation of the general principles contained in the TUF. Some articles of the TUF have been renumbered upon implementation of the AIFMD (see paragraph 6.41) and referred to here as articles of the ‘TUFR’. The TUFR entered into force on 9 April 2014. 6.12  Part II, Title III of the TUF governs ‘collective portfolio management’, which was defined by the article 1.1(n), (1) and (2) of the TUF as ‘the service that is performed through: (1) the promotion, establishment and organization of mutual funds and the administration of participants’ accounts; and (2) the management of the assets of own or third-party collective investment undertakings by means of investment in financial instruments, claims and other movable or immovable assets’. 6.13  The new definition of ‘collective portfolio management’ contained in article 1.1(n) of the TUFR only contemplates the ‘core’ activity of managing collective investment schemes, which includes the ‘administration’ of the scheme. 6.14  The pre-AIFMD text of article 33 of the TUF provided that the collective portfolio management might be carried out by either Italian ‘asset management companies’7 and SICAVs, or ‘harmonized asset management companies’. Harmonized asset management companies are non-Italian EU management companies that benefit from the freedom to provide services/freedom of establishment granted by Articles 16 to 21 of the UCITS Directive. 6.15  Given the regulatory context of the definition and until the full implementation of the AIFMD in Italy, ‘harmonized asset management companies’ will not be deemed authorized to carry out collective portfolio management in relation to the promotion or establishment (p. 277) of AIFs in Italy as their activity should be limited to UCITS funds, while the same companies, if authorized in their home Member State to manage investment portfolios on a

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segregated basis, may be appointed for the management of a specific part of the assets of an existing Italian AIF pursuant to passporting rights under MiFID. 6.16  In the Italian post-AIFM legal system, EU AIFMs and non-EU AIFMs have been added to the list of the entities authorized to carry out collective portfolio management, while the term ‘harmonized asset management company’ has been replaced by ‘EU management company’ (TUFR, article 1.1 o-bis). In this context, an EU management company will be authorized to manage either UCITSs and/or AIFs in Italy according to the authorizations it has in its home Member State.

B. The pre-AIFMD regulation of non-UCITS funds (AIFs) 6.17  Article 37 of the TUF authorized the Minister of Economy and Finance to make TUF implementation rules by Ministerial Decree, or ‘DM’. Accordingly, DM No 228 of 1999 (as amended) provides general requirements for the establishment of collective investment schemes with regard, inter alia, to the ‘object of the investment’,8 the ‘categories of investor targeted’,9 and ‘the manner of participating in open-/closed-ended funds’10 in connection with the subscription and redemption of units/shares and the frequency thereof, as well as with the minimum subscription amount. 6.18  Only collective investment schemes falling in one of the categories enumerated in DM 228 are permitted. The ‘catalogue’ in DM 228 can be extended to include new types of collective investment schemes, provided that they comply with the fundamental features of collective management in the TUF. DM 228 will be amended to complete the implementation of the AIFMD in Italy but, as of the date of this chapter, such modifications have not yet been enacted. 6.19  Therefore, the description of the articles of DM 228 in the following paragraphs refers to the pre-AIFMD text and any reference to ‘current’ or ‘currently’ in these paragraphs refers to the law as it stands before the changes are made in connection with the implementation of the AIFMD. Conversely, ‘DM 228R’ refers to DM 228 after the implementation of the AIFMD, as taken from the latest available draft. 6.20  DM 228 provides for the following types of Italian collective investment schemes: (i) harmonized open-ended funds; (ii) non-harmonized open-ended funds; (iii) closed-ended funds; (iv) reserved funds; (v) guaranteed funds; and (vi) speculative funds. 6.21  Harmonized open-ended funds (article 8 of DM 228) are UCITS funds organized under Italian law. 6.22  Non-harmonized open-ended funds (article 9 of DM 228) are best described as Italian domestic non-UCITS retail schemes (NURSs). Their investment policies and restrictions must comply with requirements of the Bank of Italy. The requirements are set out in the Bank of Italy Regulation on Collective Savings Management of 8 May 2012 (‘BOI Regulation 2012’). In essence, the rules for Italian NURSs are similar to the rules for UCITS funds, subject to certain exemptions. (p. 278) 6.23  Non-harmonized open-ended funds may invest up to 20% of their assets in Italian ‘speculative funds’ or foreign funds, similar to the Italian ‘speculative funds’ that would qualify for authorization in Italy. The speculative or foreign fund must: (a)  have its net asset value (NAV) calculated at least monthly; (b)  have procedures that allow unit-holders to know the assets in which the fund is invested; (c)  have a sufficient diversification of the investments;

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(d)  invest in assets with a sufficient degree of liquidity (according to criteria set out in the BOI Regulation 2012); (e)  in case of foreign vehicles, ensure that the administrator and custodian are subject to adequate supervision of an EU or G10 country. Furthermore: (f)  the rules of the target fund must specify the maximum leverage that can be used; (g)  the investments in units or shares of the same closed-ended or hedge fund cannot exceed 5% of the assets of the non-harmonized fund, but, where non-harmonized funds invest exclusively in other collective investment schemes, such threshold is raised to 20%. 6.24  Closed-ended funds (article 12 of DM 228), which category includes real-estate funds (article 12 bis of DM 228), must be used if more than 10% of the fund’s assets are invested in certain financial instruments specified in DM 228, such as, inter alia, real estate, equity interests in real estate companies, claims, and securities representing claims. 6.25  Reserved funds (article 15 of DM 228) can be open-ended or closed-ended. These funds are only available to those categories of investors as specified in the relevant fund’s rules, and not investors generally. DM 228 provides that reserved funds can establish investment limits different from those established by the ‘prudential rules for limiting and spreading risk issued by the Bank of Italy’ (article 15.3 of DM 228). 6.26  Guaranteed funds (article 15bis of DM 228) can be open-ended or closed-ended funds and may be available to retail and/or professional investors. They must comply with the BoI Regulation’s requirements regarding risk limitation and diversification. Guaranteed funds, as implied in the definition, ‘guarantee the return of the capital invested or payment of a minimum return’ through agreements, which can include swap agreements with banks, insurance companies, or other authorized intermediaries. 6.27  Speculative funds (article 16 of DM 228)11 are funds which have less than 200 unitholders/shareholders, irrespective of whether these investors are retail or professional investors, who each invest at least EUR 500,000 and the units/shares of the fund have not been publicly offered. Speculative funds, pre-AIFMD, are not subject to regulatory restrictions on their investment powers. In particular, article 16 of DM 228 provides that speculative funds may invest ‘by way of derogation from the prudential rules for limiting and spreading risk issued by the Bank of Italy’. Accordingly, the fund’s powers are limited only as set out in its constitutive and offering documents. (p. 279) 6.28  The Bank of Italy initially determined that an SGR may not promote and manage both speculative funds and UCITS funds, but this restriction was lifted in 2007. 6.29  The possibility of marketing AIFs to retail investors has not been affected in the postAIFMD Italian regulatory system, given that article 44 of the TUFR expressly contemplates such marketing. 6.30  The latest draft of DM 228R, which implements the AIFMD, will amalgamate the categories ‘reserved funds’ and ‘speculative funds’ and replace them with the category ‘alternative funds’. This suggests that the other categories are not AIFs. That appears to be incorrect in view of the definition in Article 4(1)(a) of the AIFMD, which clearly includes all other categories under DM 228, except UCITS funds.

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6.31  Unfortunately, the TUFR12 is not very helpful either, because the definitions of ‘alternative collective investment schemes’ contained in article 1.1 m-ter, m-quinquies, and m-sexies of the TUFR (concerning, respectively, Italian, EU, and non-EU AIFs) only mention, with an evident tautology, that the alternative collective investment schemes are those covered by the AIFMD, but the AIFMD does not regulate AIFs as such, only managers of AIFs.

C. The regulatory bodies 6.32  The Minister of Economy and Finance, the Bank of Italy, and CONSOB have, within their respective responsibilities, the power to issue regulations for the implementation of the TUF. 6.33  The responsibilities of the Bank of Italy and CONSOB are described by the TUF. As a general rule, the Bank of Italy is responsible for those aspects concerning the reduction of investment risks and the asset stability of the entities providing investment services; CONSOB is responsible for ensuring the correctness and transparency of the actions of such entities. 6.34  The TUF, as revised following the transposition of MiFID in Italy, provides the following supervisory objectives: to promote confidence in the financial system; to protect investors; to ensure stability and the satisfactory operations of the Italian financial system; to promote competitiveness of the financial system; and to ensure compliance with the rules governing financial matters.

2. Regulation of national marketing of AIFs prior to the AIFMD 6.35  DM 228 provides that units or shares in ‘speculative funds’ ‘cannot be the object of solicitation’. This means ‘any offering, invitation to offer or promotional message, addressed to the public in any manner whatsoever, having as its purpose the sale or the subscription of financial instruments’. 6.36  Although the term ‘solicitation’ is replaced in the TUF with the term ‘public offering’, the word ‘solicitation’ keeps its original meaning in DM 228, and the consequence is that Italian speculative funds cannot be advertised or offered to a retail audience. Therefore, no (p. 280) advertisements of Italian speculative funds may appear in the Italian media. It should be noted that the prohibition only covers (as indicated in the definition of ‘solicitation’) the promotion of financial instruments, and therefore the Italian AIFM is entitled to advertise its name and, if sought, its investment strategies so far as the object of the advertisement is a service and not an instrument. 6.37  The same restrictions apply to foreign AIFs, which, in addition, had to be previously authorized for being offered in Italy. In particular, pursuant to article 42.5 of the TUF (repealed by the TUFR), the offering of units of non-UCITS funds in Italy, including hedge funds, was subject to the authorization of the Bank of Italy after having consulted CONSOB. 6.38  In relation to foreign non-UCITSs with the same features as Italian speculative funds, no public advertisements are allowed for reasons of consistency with the restriction applicable to the Italian speculative funds.

III. Regulation of National AIFs after the AIFMD 1. Status of implementation of the AIFMD in Italy 6.39  As of 22 July 2013 (ie the deadline for the implementation of the AIFMD), Italy had not formally implemented the AIFMD. The Bank of Italy and CONSOB did issue interim rules regarding the freedom of EU AIFMs to market AIFs to Italian professional investors

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and manage AIFs in Italy, thus providing the minimum level of protection to EU players and avoiding sanctions from the EU.13 6.40  On 31 July 2013, the Italian Parliament approved an Act empowering the government to amend the TUF in order to implement the AIFMD. Level 2 rules will be issued by the Bank of Italy and CONSOB. The draft Bank of Italy and CONSOB regulations for the implementation of the rules of the revised TUF (TUFR) on AIFMs are currently not publicly available, although the draft TUFR have been elaborated by the Italian government in consultation with these regulators. 6.41  A public consultation procedure concerning a draft revised TUF to implement the AIFMD was completed on 26 July 2013; on 2 December 2013, the Italian government approved the (p. 281) revised TUF, and, finally, the Government approved the Legislative Decree of 4 March 2014 (‘Decree 44’) that amends the TUF in order to implement the AIFMD. Therefore, references to ‘TUFR’ are references to the TUF as amended by Decree 44. Several provisions of the TUFR will not enter into force until the issue of the second level rules of the BoI and CONSOB for the implementation of the TUFR (not yet issued as of the date of this chapter), hence the necessity of mentioning also the TUF before the changes introduced by the Decree 44. Public consultation for changes to DM 228 was completed in April 2011, but DM 228R has not been issued yet.

2. Regulation of AIFs after implementation of the AIFMD 6.42  The TUFR contains general principles applicable to any collective investment scheme, ie a wider definition that includes FCIs, SICAVs, but also the new category of SICAFs, or Società di Investimento a Capitale Fisso, ie investment companies with fixed capital. Specific sections apply to collective investment schemes of the ‘corporate type’. 6.43  The AIFMD does not seek to include AIFs as such in its regulatory scope. Accordingly, the transposition in Italy of the AIFMD will not have a material effect on existing Italian statutory provisions, which do not govern AIFs per se. The TUF regulates ‘collective portfolio management’, which may be carried out by SGRs, SICAVs, and harmonized managing companies (as described in paragraphs 6.14 and 6.15). Article 32 quater of the TUFR will replace article 33.1 of the TUF and will contain an updated list of the entities permitted to manage collective investment schemes. These will include, in addition to the SGRs, SICAVs, and harmonized asset management companies (to be named ‘EU management companies’ in the TUFR—see paragraph 6.16), Italian SICAFs (or fixed capital investment companies), as well as EU and non-EU AIFMs.

IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

TUF, arts 33, 34, 40, 41, 43; TUFR, arts 32 quater, 34

Art 2 (scope)

TUF, arts 33, 34, 40, 41, 42.5, 43; TUFR, art 32 quater

Art 3 (exemptions)

TUF, art 37; TUFR, arts 32 quater, 35 undecies; DM 228; DM 228R

Art 4 (definitions)

TUFR, art 1

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AIFMD

National implementation

Art 5 (determination of AIFM)

TUF, arts 33, 37, 38; TUFR, art 32 quater  ; BOI/CONSOB Regulation, arts 21, 33 (delegation of management)

Implementing Regulation

National implementation

Arts 3–7 (re Art 3(2) AIFMD: calculation of AUM)

BOI Regulation 2012, Title V, Ch IV

Arts 8–13 (re Art 4(3) AIFMD: calculation of leverage)

DM 228; BOI Regulation 2012

(p. 282) 6.44  The following terms used in the tables have the following meaning: •  TUF: Consolidated Law on Finance—Legislative Decree No 58 of 24 February 1998 before the changes in connection with the implementation of the AIFMD or the provisions not affected by the implementation of the AIFMD, as the case may be; •  TUFR: the TUF as amended in connection with the implementation of the AIFMD by the Legislative Decree No 44 of 4 March 2014 (‘Decree 44’); •  DM 228: Ministerial Decree (Treasury, now Economy and Finance) No 228 of 24 May 1999; •  DM 228R: the draft revised DM 228 for the implementation of the AIFMD; •  BOI/CONSOB Regulation: the joint regulation of the Bank of Italy/CONSOB of 29 October 2007; •  BOI Regulation 2012: the Bank of Italy Ruling of 8 May 2012.

2. Articles 2 and 3—Scope and exemptions 6.45  Article 2(2) of the AIFMD provides that the structure of the AIF is of ‘no significance’ for the purpose of the enforcement of the Directive. The present Italian rules that govern funds generally already apply without distinction to any type of collective investment scheme. 6.46  The exemptions set out in Article 3 of the AIFMD introduce new principles into the Italian regulatory environment. Currently, no exemptions are available if the unit-holder of the fund is the relevant SGR and/or its affiliates, subject to the requirements of ‘plurality’ of unit-holders. In addition, there are currently no minimum asset under management (AUM) thresholds that trigger the rules on funds. The TUFR empowers the Bank of Italy and CONSOB to implement the AIFMD exemptions. 6.47  Under the pre-AIFMD Italian law, there is no exemption if the unit-holder is the promoter or the manager SGR and/or its affiliate(s). The fund rules apply except that there is no ‘plurality’ of investors. ‘Plurality’ denotes that a vehicle is a collective investment scheme. In this context, the definition of collective investment scheme in article 1.1(k) of the TUFR (thus, in a post-AIFM scenario) provides that a collective investment scheme is a ‘scheme organised for the collective management of the savings of which the assets are raised from a plurality of investors’, thus in a manner substantially consistent with Article 4(1)(a)(i) of the AIFMD, which provides that AIFs ‘raise capital from a number of investors’.

3. Article 5—Determination of the AIFM

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6.48  Italian law is clear that an AIFM is deemed to carry out the activity defined as ‘collective management’ by article 1.1(n) of the TUF. Only SGRs and self-managed SICAVs (in addition to EU management companies as defined in paragraph 6.16) are qualified to render the service of ‘collective management’, as defined in paragraph 6.13 (article 33.1 of the TUF, as replaced by article 32 quater of the TUFR. Article 32 quater of the TUFR also added the SICAFs (see paragraph 6.42) and the AIFMs, either Italian, EU, or non-EU that manage Italian AIFs. 6.49  As already pointed out (see paragraph 6.03), the entirety of existing Italian AIFs are established in the form of an FCI. Therefore, the internally managed structures as per Article 5(1) (a) of AIFMD do not have any practical relevance in the Italian market as long as they are intended as applicable to investment companies. 6.50  Another feature of Italian AIFs is that they are mostly funds of funds (as of 31 December 2013, 50 out of 69 Italian AIFs are funds of funds (plus 2 ‘mixed’ funds of funds— source MondoHedge)). (p. 283) The underlying collective investment schemes of such Italian funds of funds are foreign vehicles. This means that Italian FCIs do not need external managers formally appointed as delegates of Italian AIFMs because FCIs are already de facto managed by external managers, ie the managers of the underlying funds. Italian AIFMs are, in practice, selectors of funds. With a few exceptions, the capability of Italian AIFMs focuses on fund selection rather than on direct management. 6.51  Article 5(2) and (3) of the AIFMD provides for a series of steps to be taken by the competent regulator should the external AIFM prove unable to ensure compliance with the requirements of the AIFMD. In this case, the Italian regulators will directly exercise their powers where the external AIFM is an Italian entity or the Italian branch of a foreign managing company, while in the case of management services rendered to the AIF through the freedom to provide services, the Italian regulators will liaise with the home country regulator by following the procedures set out in the TUFR and AIFMD.

V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as AIFM)

TUFR, art 32 quater, 34, 35; BOI Regulation 2012

Art 7 (application for authorization)

TUFR, arts 34, 35, 35 bis (for SICAVs and SICAFs); BOI Regulation 2012, Title II, Ch I

Art 8 (conditions for granting the authorization)

TUFR, arts 13(*), 14(+), 34, 35 bis (for SICAVs and SICAFs); BOI Regulation 2012, Title II, Ch I

Art 9 (initial capital and own funds)

TUFR, art 35 bis.1(c) (for SICAVs and SICAFs); BOI Regulation 2012, Title II, Ch I, section II

Art 10 (changes in the scope of the authorization)

TUFR, arts 13(*), 14(*); BOI Regulation 2012, Title II, Ch I, section VI.4, Title IV, Ch IV, section II, Title III, Ch III (for SICAVs)

Art 11 (withdrawal of the authorization)

TUFR, arts 51–53, 56, 57, 60 bis; BOI Regulation 2012, Title II, Ch I, sections VI.5 and VI.6

Implementing Regulation

National implementation

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Arts 14–17 (re Art 9(7) AIFMD: own funds and insurance)

BOI Regulation 2012, Title II, Ch V (insurance not included)

(*)  Rule applicable to the repute requirements of the persons conducting the business of the AIFMD per Art 8(1)(c), then implemented through Ministerial Decree No 468 of 11 November 1998. (+)  Rule applicable to the requirements for the shareholders of the AIFMD per Art 8(1)(d), then implemented through Ministerial Decree No 469 of 11 November 1998.

2. Articles 6 to 8—Conditions and application for authorization 6.52  Until a few years ago (see paragraph 6.28), Italian law did not allow the same company to manage both UCITSs and ‘speculative funds’ (as described in paragraph 6.27). Therefore, although this restriction has been eliminated, in the Italian market there is still a distinction (p. 284) between companies that only manage UCITSs and companies that only manage other funds, even within the same group. Article 34 of the TUFR provides that the authorization to operate as an SGR granted by the Bank of Italy covers both UCITSs and AIFs, thus giving rise in the Italian legal system to identical requirements for UCITS management companies and AIFMs. 6.53  The procedures to be established by the competent regulator and the exercise of regulatory discretions under Articles 7 (application) and 8 (granting authorization) of the AIFMD are expected to compare generally to the procedures established and the exercise of regulatory discretions under the sister provisions in Articles 7 and 8 of the UCITS Directive. 6.54  SGRs are authorized by the Bank of Italy. In examining a request of authorization for a new SGR, the Bank of Italy will carry out both a verification of the formal requirements provided for by the TUFR (article 34) for granting an authorization, and an analysis of the position of the applicant within its group of companies—if any—in order to ensure that the structure of such group does not adversely affect the actual exercise of the Bank of Italy supervision over the SGR (article 34.1(f) of the TUFR). The application for authorization will be rejected if, in the opinion of the Bank of Italy, and after examination of the documents and information submitted by the applicant, sound and prudential management cannot be ensured. 6.55  From a practical standpoint, this means that whenever there is an application for authorization filed by a company belonging to a group which does not have other companies authorized and regulated by the Bank of Italy, it is a common practice that, together with the filing of the documents and information, the applicant will ask for a meeting with the Bank of Italy, with the participation of the applicant’s affiliates and/or mother company, in order to introduce the group and its plans for Italy (in addition to the business plan filed with the request for authorization). 6.56  Another practical aspect is that the Bank of Italy grants the authorization to carry out the collective management only to companies that are already incorporated. Therefore, before filing the application for such authorization, the process of establishing an SGR in the form of a joint stock company (Società per Azioni or ‘SpA’), including the full payment of at least the minimum capital of the company, must be completed. 6.57  Market practice in Italy shows that SGRs also manage portfolios on an individual basis. Since 1998, the TUF has provided that an SGR may carry out both collective and individual management, ie before the amendment to the UCITS I Directive introduced by Directives 2001/107/EC and 2001/108/EC of the European Parliament and of the Council of 21 January 200214 (known as ‘UCITS III’) permitted this in 2001 for managers of UCITS funds. In this context, and in relation to Article 6(4) of the AIFMD, Italy will allow domestic AIFMs to carry out all of the additional services provided for in said rule, including the

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reception and transmission of orders (the only service not permitted to SGRs in the preAIFMD system), but only to SGRs managing AIFs, not UCITS. (p. 285) 6.58  In particular, article 33.2 of the TUFR15 allows the same SGR to manage both on a segregated and pooled basis (ie with collective investment schemes), without making any distinction between types of funds (for example UCITS or ‘speculative funds’). The same provision also allows SGRs to advise on investments (which is defined in the AIFMD as a non-core service, rather than an investment service, as made by MiFID and the TUF), to set up and manage pension funds, to place units or shares of collective investment schemes either of the same SGR or of third parties, to carry out the non-core services provided by the TUF16 but only with respect to the assets of the funds of the relevant SGR, and to perform related and instrumental activities established by the Bank of Italy in consultation with CONSOB.17 As anticipated, article 33.2, as revised by Decree 44, will also include the reception and transmission of orders in relation to financial instruments, but only for SGRs managing AIFs.

3. Article 9—Initial capital and own funds 6.59  The implementation of the AIFMD will not have a significant impact on existing Italian rules governing certain aspects of AIFs such as initial capital and own funds, provided the pre-AIFMD domestic rules applicable to Italian SGRs are stricter than the EC rules. For example, with regard to minimum capital, the threshold required by the Bank of Italy for the establishment of SGRs is currently EUR 1 million fully paid-in (BOI Regulation 2012, title II, Chapter I, section II), which is an amount materially higher than that required by the AIFMD, plus a variable amount depending upon the value of the assets under management. 6.60  Article 9(7) of the AIFMD, and as detailed in Article 12 of the Implementing Regulation, will require specific implementation rules. BOI Regulation 2012 (not yet amended in connection with the implementation of the AIFMD) does not provide for the possibility of a guarantee from a third party in connection with the coverage of 50% of own funds as referred to in Article 9(3), nor is it possible to foresee whether Italy will select the option set out in Article 9(6) of the AIFMD due, on the one hand, to a conservative attitude of Italian law makers as to capitalization requirements, and, on the other hand, by the likely pressure from industry and the attempt to create more independent asset management companies that would be helped by the exercise of such options. 6.61  It is expected that the provisions of Article 9 in general and Article 9(7) in particular will not change the Italian general rules on private law liability of AIFMs, provided these rules do not affect the basic principles of such liability, but only the protection of AIFMs from the consequences of such liability.

(p. 286) 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 6.62  Given that the Italian rules on authorization for managing companies apply to SGRs in general, irrespective of the fact that they manage UCITSs or other non-UCITS funds, the ‘change in scope’ and ‘withdrawal’ provisions of the AIFMD will not materially affect the current Italian legal system, which is consistent with the corresponding provisions of the UCITS Directive, which, in turn, are very similar to those in the AIFMD.

5. Consequences of violating authorization provisions A. Regulatory law consequences

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6.63  For the purpose of the following discussion, the phrase ‘regulatory law consequences’ means sanctions consisting of fines—enforced by regulators and not by judges—which do not arise from crimes but from ‘administrative irregularities’, ie those behaviours which, under the law, are considered less serious than a crime.18 6.64  As a consequence, the procedure for administrative sanctions will be administered directly by the competent regulatory authorities, ie the Bank of Italy or CONSOB, according to their respective competence. The procedure for the enforcement of administrative sanctions is governed by the TUF. 6.65  It should be noted that if the person who committed an administrative irregularity is an employee, officer, director, etc, of a company, the company should be jointly and severally liable with the relevant individual for the payment of the administrative sanction, with a right of recourse against that individual. 6.66  With regard to the actual administrative irregularities, the TUF sanctions the ‘abusive denomination’, ie the use near the company’s name of phrases like ‘SGR’, ‘SIM’ (ie investment firm), ‘SICAV’, or similar—even if not in Italian—by entities that are not authorized to use such qualifications. This is because the TUF provides that the acronyms ‘SGR’ and ‘SIM’19 may be used only by companies that have been authorized to act respectively as fund management companies and investment firms, and thus any use of those acronyms by non-authorized entities will be considered an abuse capable of deceiving the public on the regulatory status of the relevant company. 6.67  Therefore, if the companies ‘Alpha Milano Asset Management’ SIM or ‘Beta Roma SGR’ are not authorized by the Bank of Italy or CONSOB to act as fund/asset management companies, the respective insertion of ‘SIM’ and ‘SGR’ will be liable to the administrative sanction for abusive denomination, the amount of which ranges from EUR 516 to EUR 10,329.20 (p. 287) 6.68  These figures may seem relatively low, and therefore, in addition to civil damages, the most efficacious deterrent seems to be the threat of criminal sanctions, which is also accompanied by the extension of the consequences of the liability to the company that obtained a profit from the crime committed by its officers, directors, agents, etc (see paragraphs 6.103 to 6.106).

B. Criminal law consequences 6.69  Under article 166 of the TUF, any entity that carries out investment services or activities, or collective portfolio management without being authorized under the TUF will be punished with imprisonment of between six months and four years and a criminal fine of between EUR 2,066 and EUR 10,329. 6.70  The CdC had the occasion of further defining the crime of unauthorized exercise of asset management in order to state that such crime can be perpetrated jointly by misrepresentation and thus give rise to two distinct charges. This is because, according to the court, the unauthorized exercise of asset management is a so-called ‘crime of danger’ (ie a crime that does not produce actual damages but the risk of damaging interests protected by the law), in which the object of the protection granted by the law is the correct operation of the markets in financial instruments for the benefit of investors, which result is obtained by permitting only regulated and authorized entities to operate on such markets, while the swindle is a ‘crime of damage’ in which there is an actual decrease of the assets of the person who suffered the fraud.21

C. Private law consequences

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6.71  The consequences of managing an AIF without authorization are those provided by the Italian civil code (‘CC’) for damages not arising from a contract, defined as ‘extracontractual liability’. Other rules of the CC also deal with liability for breach of contract, ie ‘contractual liability’. 6.72  Provided damages caused to a third party by an AIF acting without authorization do not arise from breach of an agreement between the damaged party and the unauthorized entity but from something else, ie the behaviour of a person who acts against the law irrespective of the existence of an agreement, the private law consequences will be classified as ‘extra-contractual liability’. Article 2043 of the CC provides that ‘Any fact, either deriving from wilful misconduct or from negligence, which causes an unjust damage on another, obliges the person who committed the fact to pay damages’. Calculation of the amount of damage is assessed according to the general criteria of the CC, which also apply to liability for breach of contract. Under these criteria, it is necessary to take into consideration both the actual loss suffered by the creditor—or, in case of extra-contractual liability, by the person who suffered the damage, and the missed gain that that person experienced, to the extent that such loss and missed gain are the immediate and direct consequence of the injurious fact. If the injurious fact has been committed by more than one person, there will be joint and several liability of such persons.

(p. 288) VI. Operating Conditions for AIFMs 1. Implementation table AIFMD

National implementation

Art 12 (general principles)

TUFR, art 35 decies

Art 13 (remuneration)

BOI/CONSOB Regulation, art 8(1)(f)

Art 14 (conflicts of interest)

TUFR, art 35 decies. 1(b); BOI/CONSOB Regulation, arts 37–40

Art 15 (risk management)

BOI/CONSOB Regulation, arts 12, 13

Art 16 (liquidity management)

BOI Regulation 2012, Title V, Ch III

Art 17 (investment in securitization positions)

BOI Regulation 2012, Title V, Ch III

Art 18 (general principles)

TUFR, art 35 decies; BOI/CONSOB Regulation, Pt II, Title I

Art 19 (valuation)

TUFR, art 48.3(b)(*); BOI Regulation 2012, Title V, Ch IV

Art 20 (delegation)

TUFR, art 33.4; BOI/CONSOB Regulation, arts 21, 33, 34

Art 21 (depositary)

TUFR, arts 47–49; BOI/CONSOB Regulation, art 21; BOI Regulation 2012, Title IV, Ch III, Title V, Ch VIII

Implementing Regulation

National implementation

Arts 18–30 (re Art 12(1) AIFMD: general principles)

TUFR, art 35 decies; BOI/CONSOB Regulation, arts 4–18, 35–39, 44

Arts 31–38 (re Art 14 AIFMD: conflicts of interest)

BOI/CONSOB Regulation, arts 37–40

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AIFMD

National implementation

Arts 39–46 (re Art 15 AIFMD: risk management)

BOI/CONSOB Regulation, arts 12, 13

Arts 47–50 (re Art 16 AIFMD: liquidity management)

BOI Regulation 2012, Title V, Ch III

Arts 51–56 (re Art 17 AIFMD: investment in securitization positions)

BOI Regulation 2012, Title V, Ch III

Arts 57–67 (re Art 18 AIFMD: organizational requirements—general principles)

BOI/CONSOB Regulation, Arts 4–18

Arts 68–75 (re Art 19 AIFMD: valuation)

BOI Regulation 2012, Title V, Ch IV

Arts 76–83 (re Art 20 AIFMD: delegation of AIFM functions)

BOI/CONSOB Regulation, arts 21, 33, 34

Arts 84–103 (re Art 21 AIFMD: depositary)

BOI/CONSOB Regulation, art 21; BOI Regulation 2012, Title IV, Ch III, Title V, Ch VIII

(*)  Governing the role of the custodian in the valuation process.

(p. 289) 2. Section 1 (Articles 12 to 17)—General requirements A. Article 12—General principles 6.73  Italian general conduct principles apply to all SGRs. Therefore, the relevant principles of the AIFMD will not involve changes to the current Italian system and in particular to the standard of care under article 40 of the TUF (replaced by article 35 decies of the TUFR), according to which SGRs (ie Italian AIFMs) must, without limitation, operate diligently, correctly, and transparently in the interests of the unit-holders and the integrity of the market. 6.74  The fact that the AIFMD shows ‘appropriate level of consistency with UCITS and MiFID’, as requested in ESMA’s technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive of 16 November 2011 (‘ESMA Advice’), is very helpful in terms of national transposition of the AIFMD. 6.75  Article 35 decies of the TUFR (which replaces article 40 of the TUF) expressly contemplates an additional conduct of business rule, ie equal treatment between unit/ shareholders. Furthermore, the TUFR also include an additional requirement that an SGR must act not just in the interests of unit-holders and the integrity of the market, but also in the interests of the collective investment schemes managed by it.

B. Article 13—Remuneration 6.76  In the absence of rules providing for a complete remuneration code as outlined in Article 13 and Annex II of the AIFMD, it is expected that Italy will need to implement new provisions in this field. For the time being, there are provisions in the BOI/CONSOB Regulation (Article 8(1)(f)) providing that the Board of Directors of an intermediary— including an SGR—must ensure that remuneration and inducements policies do not increase risks for the company and are consistent with its long-term strategies.

C. Article 14—Conflicts of interest

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6.77  The AIFMD will not involve material changes to the present Italian rules on conflicts of interest, which apply to all SGRs and conform to the corresponding provisions of the UCITS Directive and MiFID.

D. Article 15—Risk management 6.78  With the exception of requirements on leverage, provisions on the organization requirements applicable to the risk management function within an AIFM will not involve material changes to Italian law, since the BOI/CONSOB Regulation already provides for ‘permanent risk management function’ (Article 39(1) of the Implementing Regulation), as well as a separation, even in the hierarchical organization of the AIFM, of the risk management function and other requirements to protect its independence and ensure its segregation from other departments. 6.79  Article 6.1(c)(2) of the TUFR grants to the Bank of Italy the (new) power of determining maximum levels of leverage for certain Italian AIFs. The definition of ‘leverage’ that will probably appear in the new text of DM 228 is ‘any method that uses indebtedness, financial derivative instruments or other procedures by means of which the SGR increases the exposure of a collective investment scheme’. (p. 290) 6.80  The draft revised text of DM 228 provides that the rules of the AIF must provide for a maximum level of leverage and, in compliance with the rules of the TUFR, that the Bank of Italy has the power to determine maximum thresholds with respect to funds that invest in certain assets or use particular investment methods. These restrictions will be determined by the Bank of Italy on a case-by-case basis or for predetermined categories of vehicles. 6.81  Therefore, there are, for the time being, no further details as to the method for calculating the leverage as set out in Articles 6 to 11 of the Implementing Regulation and it is possible that DM 228 will establish further requirements as to such method (keeping in mind the review of the method of calculation to be made by the Commission under Article 6(2), second paragraph of the Implementing Regulation) and information on leverage/ indebtedness that a fund must provide under Article 15(4) of the AIFMD.

E. Article 16—Liquidity management 6.82  With regard to the provisions on liquidity management set out in the AIFMD and Implementing Regulation, it is expected that current Italian rules will be updated. This is because ‘liquidity’ is presently contemplated only for reporting purposes by the BOI Reporting Manual (as defined in the Table at section VII), while the only provision with actual rules on liquidity management is a Bank of Italy ruling of December 2008 that introduced in the Italian legal system the possibility of establishing ‘side-pockets’ for Italian speculative funds.

F. Article 17—Investment in securitization positions 6.83  Currently, the issue of securitization is governed by two main groups of rules: (i) the rules on investment restrictions applicable to Italian collective investment schemes, as provided for in DM 228 in general and in BOI Regulation 2012 in particular; and (ii) the rules on securitization transactions provided for by Law No 130 of 30 April 1999. None of these rules govern all the matters contemplated by the AIFMD and Implementing Regulation, and therefore it is expected that changes will be introduced in the Italian rules.

3. Section 2 (Articles 18 and 19)—Organizational requirements A. Article 18—General principles

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6.84  The organization of Italian AIFMs is currently governed by the high level rules of the TUF/TUFR (for example article 35 decies of the TUFR), as well as by the second level rules, issued either solely by the Bank of Italy, ie the BOI Regulation 2012 on collective management, or jointly in the form of the BOI/CONSOB Regulation, which, although issued within the context of the implementation of the rules of MiFID on investment firms, is also applicable to other intermediaries, including SGRs. 6.85  In particular, while the BOI/CONSOB Regulation governs the internal organization and main functions of all intermediaries carrying out investment services, including SGRs (for example, prevention of conflicts of interests, compliance, delegation of activities, etc), the BOI Regulation 2012 is only applicable to SGRs. In this context, the BOI Regulation 2012 specifically lists the requirements for being authorized as an SGR, the requirements for its directors and top management, as well as its shareholders. The BOI Regulation 2012 is very detailed, and its contents are in line with the requirements set out by the AIFMD and the Implementing Regulation for the subject matter. (p. 291) 6.86  Accordingly, the implementation of the provisions of the AIFMD and of the Implementing Regulation on the internal organization of AIFM involved few changes to the TUF and a revision of a limited number of provisions of both the BOI/CONSOB Regulation and BOI Regulation 2012.

B. Article 19—Valuation 6.87  Although current Italian rules provide that the valuation of the assets of hedge funds should take place at least twice yearly, market practice shows that calculation of NAV occurs more frequently (weekly, monthly, or quarterly). The fund may choose its own method of disclosing this financial information, which may include publication in a newspaper or dissemination via the internet. It is expected that the requirements of Article 19 will not affect the structuring of an AIF post-AIFMD. 6.88  The formalities for securing independence of the function of SGRs in valuing assets are those currently provided by the BOI/CONSOB Regulation rules on the independence of the functions of compliance, internal control, and internal audit (‘control functions’). In this context, under article 12.1 of the BOI/CONSOB Regulation, persons undertaking control functions: (i) must have the authority, resources, and expertise necessary for performing their duties; (ii) must not be hierarchically subordinate to the persons responsible for the controlled activities, nor can such activities be carried out by the same persons in charge of the control functions. The control functions must be separate and the system of remuneration of the persons in charge of the control functions must not be such as to affect their objectiveness. 6.89  Valuation can be carried out either by the SGR or by the depository. If the valuation is entrusted to the depository, BOI Regulation 2012 provides that the depositary must have, at each calculation period, the information necessary for the valuation, and must implement procedures in order to verify the information received from the SGR for the purpose of the valuation. 6.90  The Italian rules on breach of the duty of care in connection with the valuation are not only consistent with the principles in Article 19(10) of the AIFMD, but appear to be even more protective for investors. In particular, Article 19(10) provides that in the event of such breach, investors may only seek a remedy from the AIFM and not the external valuer appointed to carry out the valuation: this is because the first part of Article 19(10) expressly provides for liability of the AIFM towards the investors for any such breach, while the second part of Article 19(10) provides that in the same circumstance the external valuer is responsible towards the AIFM, without mentioning any direct liability of the external valuer towards the investors. In contrast, article 49.1 of the TUFR provides for a direct liability of the depository towards the SGR and the investors in relation to the duties delegated by the SGR (including the valuation of the assets). Furthermore, consistently with the second part From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

of Article 19 (10) of the AIFMD, a ‘contractual’ liability may arise in the relationship between the AIFM and the external entity in charge of the valuation.

4. Section 3 (Article 20)—Delegation of AIFM functions 6.91  Article 33.4 of the TUFR permits the delegation of ‘specific functions’. Until the transposition of the AIFMD, complete delegation was permitted only to another SGR or to a (p. 292) foreign EU UCITS managing company, then defined as a ‘harmonized managing company’ by article 1.1(o)bis of the TUF. After implementation of the AIFMD the TUFR also includes foreign AIFMs. Article 38 of the TUFR specifically regulates the management by a third party manager of the entire assets of SICAVs and SICAFs, and provides rules that are applicable to both the delegating entity (ie the SICAV or SICAF) and the delegate. 6.92  In relation to delegation of a portion of the fund’s assets, the TUF (article 33.3) provided that: Asset management companies [ie SGRs] may delegate specific functions inherent in the provision of the services referred to in subsections 1 and 2 [ie fund management, portfolio management, advice on investments, placing] to third parties in ways that avoid turning the company into an empty shell, without prejudice to its responsibility vis-à-vis participants in the fund for the actions of agents. 6.93  This provision remains the same in article 33.4 of the TUFR with a few changes in relation to the new terminology and the express reference to compliance with the rules on the delegation of core services (see paragraph 6.95). 6.94  For the purpose of this rule, the ‘third parties’ are either SGRs/‘harmonised managing companies’ (and foreign duly passported AIFMs, after the complete implementation of the AIFMD) or, with the exclusion of the management of the entire fund, investment firms governed by MiFID and authorized to manage investment portfolios on an individual basis. The possibility that MiFID investment firms may proceed to the partial management of an AIF is also contemplated by Article 6(8) of the AIFMD. It is interesting that the Italian rules anticipated the requirements to prevent the delegating entity becoming a letter-box entity as set out in Article 82 of the Implementing Regulation. 6.95  The second level rules issued for the implementation of MiFID regulate the delegation of ‘essential operational functions’—including the management of the investment portfolio (article 19 of the BOI/CONSOB Regulation)—being the functions that, if discontinued or adversely affected, could jeopardize the intermediary’s ability to act in compliance with the terms of its authorization or to comply with the rules that govern the investment services. 6.96  Article 21 of the BOI/CONSOB Regulation provides for a series of conditions for such delegation, including most of those listed in Article 20(1) of the AIFMD. Article 33 of the BOI/CONSOB Regulation provides for a list of requirements for the delegation of the management. These appear to be consistent with those set out in Article 75 of the Implementing Regulation and therefore the current Italian rules on the delegation of management will not be materially affected by the implementation of the AIFMD. 6.97  The obligation to notify the delegation to the regulators of the home Member State will not involve material change in the Italian system since such duty is already provided for SGRs in CONSOB Regulation No 17297 of 2010. In addition, under the BOI/CONSOB Regulation (article 21.5) intermediaries must transmit or disclose to the regulators the information necessary to verify that the delegated activities are being carried out in compliance with the applicable rules.

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5. Section 4 (Article 21)—Depositary 6.98  In general, the implementation of the AIFMD will involve a loosening of the current rules on depositories, which are presently stricter than those of the AIFMD. For example, with regard to the eligible parties, Italian law provides that only an Italian bank, or the Italian (p. 293) branch of an EU bank, may be appointed as depository, while for the time being the entities mentioned in Article 21(3)(b) and (c) of the AIFMD are not contemplated unless (with some restrictions) for the purpose of the sub-deposit. Therefore, article 47 of the TUFR provides that, in addition to Italian banks and Italian branches of EU banks, Italian Società di Intermediazione Mobiliare (SIMs, ie Italian investment firms) and Italian branches of investment firms will also be eligible to be appointed as depositories. 6.99  In addition, the Bank of Italy requires that the depository has minimum assets for supervision purposes (EUR 100 million) and adequate experience. The bank appointed as depository must have a division dedicated to the function of depository, have in place adequate information systems to enable exchange of information with the SGR on a continuous basis, ensure the segregation and protection of information received in performing its duties, and verify its procedures on a periodic basis. It is also worth mentioning that the BOI Regulation 2012 stipulates that the bank cannot be appointed as custodian if the managing director, the chairman of the board of directors, the general manager, or the head of the management function of the SGR is also the managing director, chairman of the BOD, general manager, or head of the depository division of that bank, because such appointments will give rise to conflicts of interest. 6.100  The BOI Regulation 2012 also provides that the depository can sub-deposit the fund’s assets to Italian or foreign entities authorized to deal with the centralized administration of financial instruments subject to adequate supervision, to Italian or foreign banks, to SIMs (ie Italian investment firms as described in paragraph 6.98) and (non-Italian EC) investment firms that can hold the cash and financial instruments of their clients, as well as to the residual category of entities other than those already mentioned, subject to the same supervision as the banks and SIMs or investment firms, provided that the correct performance of their duties is guaranteed by a bank of the same group. 6.101  With regard to the functions in addition to the main task of safe-keeping the fund’s assets, the list in article 38.1 of the TUF was consistent with that provided in Article 21(9) of the AIFMD. Article 38.1 provided that the depository: 1. verifies the compliance with the law of the operations of issue and redemption of units and the destination of the fund income; 2. verifies the correctness of the calculation of the value of the fund’s units, if made by the SGR, or, if appointed to do so by the SGR, makes such calculation; 3. verifies that in the transactions involving fund’s assets any consideration is paid to the fund within the usual time limits; 4. carries out the instructions of the SGR unless they conflict with the law, the fund rules or the prescriptions of the supervisory authorities. 6.102  Article 48 of the TUFR, which replaces article 38 of the TUF, replicates the list in paragraph 6.101, but adds a fifth duty of the depository to monitor the liquidity of the collective investment scheme, when such liquidity is not entrusted to the depository itself.

6. Consequences of violating operating conditions

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A. Regulatory law consequences a. Legislative Decree No 231 of 8 June 2001 6.103  From a regulatory standpoint, Legislative Decree No 231 of 8 June 2001 (‘D Lgs 231’) provides for the ‘administrative liability’ of a company where crimes are committed by its (p. 294) officers, managers, directors, agents, internal auditors, or individuals for whom they are responsible (‘agents’), if two conditions occur: (i) the company took a benefit from such crimes; and (ii) the company cannot provide evidence that it has an organization providing for a series of controls in order to avoid the perpetration of said crimes and that there was an adequate supervision of the activity of the person who committed the crime. An amendment to D Lgs 231, introduced by Law No 190 of 6 November 2012 (‘Law 190’), has added to the crimes from which a company may take an advantage the crime of ‘corruption between private parties’. In other words, D Lgs 231, as integrated by Law 190, now provides that a company may be subject to administrative liability if its agents corrupted those of another company (the ‘target company’) in order to carry out actions contrary to their fiduciary/diligence duties towards the target company, thus giving rise to damage to the target company (accompanied, as stated earlier, by a benefit to the company on behalf of which the agents are acting). 6.104  For the purpose of D Lgs 231, ‘administrative liability’ consists of being subject to a series of ‘administrative sanctions’—other than imprisonment22—which are usually imposed in conjunction with committing a crime. In this context, the ultimate rationale of D Lgs 231 is to secure the payment of fines, which are the most important administrative sanctions, taking into account not only the estate of the individual who actually committed the crime, but also the company on behalf of which the crime was perpetrated. 6.105  The administrative liability of the company under D Lgs 231 arises when the company did not implement what is defined in D Lgs 231 as an ‘organizational and management model’ to ensure the avoidance of the perpetration of crimes. In practice, a regulated company, such as an AIFM, subject to organizational requirements established by the law, appears to be in a safer position with respect to the generality of companies given that full compliance with such requirements will probably, per se, be evidence that the company has in place ‘organizational and management models’ required by D Lgs 231 to exclude the administrative liability of the company in conjunction with the criminal liability of its agents (as defined in paragraph 6.103). On the other hand, the crime of ‘corruption between private parties’ introduced by Law 190 will impose an extra duty of care on the AIFM to ensure that its agents do not perpetrate such a crime in connection, for example, with the payment of inducements to a target company (as defined in paragraph 6.103) in exchange for the target company—for example, a discretionary portfolio manager— breaching its duty of best serving its clients’ interests. It should also be noted that article 60 bis of the TUFR coordinates the enforcement of certain ‘administrative sanctions’ under D Lgs 231, such as the suspension of the company’s licence, and the prohibition on carrying out the activity or contracting with the public administration, with certain measures set out by the TUF/TUFR having similar scope or a more serious purpose, such as appointment of directors by the state or compulsory liquidation. 6.106  The relevance of D Lgs 231 should not be underestimated, because it requires, inter alia, that Italian companies issue a ‘Code of Ethics’ containing the general principles of honesty, fairness, diligence, customer care, non-discrimination, social responsibility, etc, which must be followed when conducting business. Such a Code of Ethics will also ensure that companies (p. 295) cannot enter in agreements with other companies (irrespective of their nationality) which do not comply with the Code of Ethics. This may lead to deadlocks in negotiations of agreements between Italian and foreign parties if the latter are not

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willing to comply with a Code of Ethics of another company, belonging to a different jurisdiction and written in another language.

b. The TUF 6.107  Under the TUF, the violation of article 40.1(b) (article 35 decies.1 b) of the TUFR), which states that SGRs must ‘organize themselves in such a way as to minimize the risk of conflicts of interest, including conflicts between the pools of assets under management and, where a conflict of interest exists, act in such a way as to ensure the fair treatment of the collective investment undertakings’, will give rise to the administrative sanction in article 190.1 of the TUFR of a fine ranging from EUR 2,500 to EUR 250,000, payable by the company’s directors, officers, or employees. 6.108  The administrative sanctions set out in article 190 also apply to breaches of the second level regulations issued by the Bank of Italy for the implementation of the TUF/ TUFR rules. These concern, inter alia, rules relating to capital adequacy, the limitation of risk, permissible shareholdings, depositories and client money, and various rules relating to the operation of collective investment undertakings. 6.109  In addition, these sanctions will also apply to breaches of the rules governing the limits to the leverage that can be used by Italian AIFs and the delegation of the NAV calculation, issued by the Bank of Italy in exercising the additional powers granted by article 6 of the TUFR. 6.110  The administrative sanctions set out in article 190.1 of the TUFR (see paragraph 6.107) apply to the breach of duties arising from second level regulation issued by the Bank of Italy and/or CONSOB for the implementation of the TUF and governing the general aspects of the organization of SGRs: prevention of discontinuation of the operations, administration and accounts, internal control, compliance, risk management, internal audit, liability of top management, processing of the complaints, personal transactions, outsourcing, including the delegation of management, procedures for managing the conflicts of interest, the keeping of records, and inducements.

B. Criminal law consequences 6.111  With regard to breach of organizational requirements and in particular those for the prevention of conflicts of interests, article 167 of the TUF provides for the crime of ‘unfaithful management’, which is perpetrated by those who, within an SGR (or an investment firm), in breach of the rules on the conflicts of interests, carry out transactions for the purpose of obtaining an unjust profit for the AIFM itself or third parties and causing damage to investors. 6.112  The crime is punishable by imprisonment for between six months and three years and a fine of between EUR 5,164 to EUR 103,291. ‘Unfaithful management’ may also give rise to the crime of breach of fiduciary duties set out in article 2634 of the CC, which is punishable by imprisonment for between six months and three years for directors, general managers, and liquidators with conflicting interests with those of the company who, for the purpose of obtaining an unjust profit, dispose of the company’s assets and wilfully cause a loss to the (p. 296) company. Article 2634 of the CC also applies when such a disposal if made of assets owned or administered on behalf of third parties. 6.113  Finally, breach of the rules on conflicts of interests may involve a breach of article 2635 of the CC, which contemplates ‘corruption between private parties’, discussed in paragraph 6.103. 6.114  A breach of the organizational requirements may also amount to the crime of ‘confusion of assets’, punishable under article 168 of the TUF. Such crime is perpetrated by those who, within an SGR (or investment firm), breach the rules on the segregation of the assets of the SGR from funds managed by it for the purpose of procuring an unjust profit to

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the detriment of the investors. The same criminal sanctions apply as to unfaithful management, discussed in the previous paragraphs. 6.115  The sanctions set out in articles 167 and 168 of the TUF are applicable as long as such behaviour does not amount to a more serious crime. For example, if the crime of unfaithful management is carried out by a company without licence to act as an SGR, or if such behaviour involves the crime of ‘false statements in the prospectus’ (see paragraph 6.116), the more severe sanctions set out in article 166 of the TUF (see paragraph 6.69) will apply. The same is true if the ‘confusion of assets’ is actually an appropriation of the fund’s assets by, for example, a director of the SGR. 6.116  Finally, there is the crime of ‘false statements in the prospectus’ set out in article 173 bis of the TUF. Anyone who, for the purpose of obtaining an unjust profit, inserts in the prospectus false information or conceals data or news in a manner liable to deceive prospective investors may be punished with imprisonment from one to five years. In this context, a breach of the organizational requirements may also amount to ‘false statements in the prospectus’ if statements become false and are liable to procure an unjust profit for the issuer of the prospectus.

C. Private law consequences 6.117  On a preliminary basis, it should be noted that the Italian rules of private law and liability of AIFMs apply to breaches of the rules on risk management, securitization positions, and liquidity management. 6.118  From a private law perspective, failure to comply with the organizational requirements set out, inter alia, in Articles 12(1)(c), (e), 14, and 18 of the AIFMD or in the corresponding national provisions may give rise to either an ‘extra-contractual liability’ (sanctioned by article 2043 of the CC—see paragraph 6.72) or a ‘contractual liability’ of the AIFM, to the extent that there is a direct relationship between the violation of the organizational requirements and the damage suffered by a party (typically, an investor or a client). For example, a breach of the organizational duties concerning the function of risk management of an SGR may amount to an extra-contractual liability towards persons who have suffered damage as a consequence of such breach but who are not a party to a contract with the SGR, or to a contractual liability if there is an agreement (for example a portfolio management agreement) between the party who suffered the damage and the SGR. 6.119  It is expected that the rules of the AIFMD on the standard of care that must accompany the operations of SGRs, as well as those of other intermediaries, including the concept of ‘professional diligence’ requiring insurance against ‘professional negligence’ set out by Article 9(7) of the AIFMD, will not materially affect the existing Italian rules and guidance of the courts relating to the liability of intermediaries. (p. 297) 6.120  As with private liability for breach of the authorization requirements, either the rules on extra-contractual liability in article 2043 of the CC, or those of contractual liability in the CC, apply. The difference between these two types of liabilities is based on the existence or not of a contract between the investor/unit-holder, on the one hand, and the AIFM and the investment company, on the other. In particular, extra-contractual liability will be grounded on ‘unjust damage’ suffered by the non-breaching party. The fact that damage is a consequence of the breach of the duty of care appears sufficient to qualify it as ‘unjust’ for the purpose of the enforcement of the liability provisions in article 2043 of the CC. In addition, the general rules of the CC on the diligence of ‘bonus pater familias’ and of the enhanced standard of diligence applicable to specific types of professional services are applicable (article 1176, paragraphs 1 and 2 of the CC).

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6.121  The TUF/TUFR provides for a reversal of the burden of proof in relation to disputes concerning investment services. In particular, article 23.6 provides that in this type of dispute, the investment firm must give evidence that it acted with the ‘due diligence required’. Therefore, as stated by the Corte di Cassazione23 in a case concerning investment services, the investor/plaintiff, under the ordinary rules of the CC, will have to give evidence of the damage suffered and of the fact that such damage is a direct consequence of the behaviour of the investment firm, while the latter will need to give evidence that it acted in accordance with the rules of diligence provided by the law. 6.122  Although article 23.6 of the TUF expressly applies to investment services, and thus not to collective portfolio management, it is likely that its criteria, consisting of rigid scrutiny of the diligence used by the relevant intermediary, will also be applied to judgments against managing companies, in order to avoid unjustified differences of treatment being given to clients who have entrusted a segregated portfolio and those who have their assets managed on a pooled basis by a fund management company such as an AIFM. 6.123  Indeed, maintaining such a distinction as to the burden of proof could lead to the paradoxical consequence that, in a legal action brought by a client on behalf of which an Italian SGR managed a segregated portfolio (ie an investment service), the SGR would have to prove that it acted with due diligence, but would not be subject to such burden of proof in a case concerning fund (ie collective) management. 6.124  The Corte di Cassazione, in its judgment 16605 of 201024 (mentioned in paragraph 6.09), fixed criteria for the determination of the liability of the SGR. In particular, where there has been a breach of the statements made or misrepresentation in a prospectus, the SGR that issued the prospectus will have an extra-contractual liability towards the investor under article 2043 of the CC, with the consequent necessity for the plaintiff to give evidence of a direct relationship between the breach/misrepresentation in the prospectus and the damage suffered by the plaintiff/investor. 6.125  The Italian rules state that in no case will an entity that has delegated its management functions to a third party be exempted from its duties (see paragraph 6.92 and in particular the last sentence of article 33.3 of the TUF quoted there). The rules are fully in line with Article 20(3) of the AIFMD, which provides that an AIFM’s liability shall not be affected ‘by the fact that the AIFM has delegated functions to a third party’. Accordingly, since the AIFM remains responsible for management functions even where it has delegated these functions to another party, the provisions on liability for breach of the organizational (p. 298) requirements or of the duty of care apply. In particular, there will be a breach of the organizational requirements by the delegating entity where the delegate is not qualified, or where the delegate—duly appointed and vested with the appropriate requirements—does not perform its duties with the diligence necessary for this type of professional task. 6.126  The rules on the liability of the depository provided for in Article 21(6)(e), (12), (13), (14)(e), and (15) of the AIFMD will involve some changes to Italian legislation with respect to the limitation of a depository’s liability in cases of force majeure and contractual arrangements. In particular, the pre-AIFMD Italian rules (article 38.2 of the TUF) provided that the depository was liable towards the SGR and the unit-holders of the fund for any loss suffered as a consequence of a breach of its duties (see also paragraph 6.90). Article 49 of the TUFR, which replaces article 38 of the TUF, reproduces article 38.2 and further provides for reimbursement of any loss suffered, as provided for in Article 21(12) of the AIFMD. However, in compliance with the AIFMD, article 49 of the TUFR expressly provides that the depositary is exempted from liability if such loss was due to force majeure. Article 49.3 of the TUFR extends the liability of the depository to damages arising from actions of

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the sub-depository appointed by the depository, unless such liability was contractually excluded (Article 21(13)(b) of the AIFMD).

VII. Transparency Requirements 1. Implementation table AIFMD

National implementation

Art 22 (annual report)

TUFR, art 39.2(b); DM 228, art 3; BOI Regulation 2012, Title IV, Ch VI

Art 23 (disclosure to investors)

TUFR, arts 37), 94(*), 98 ter(°); BOI Regulation 2012, Title V, Ch I; CONSOB Regulation 11971/1999,25 Annex I

Art 24 (reporting obligations to competent authorities)

TUFR, art 8; BOI Regulation 2012, Title IV, Ch IV

Implementing Regulation

National implementation

Arts 104–112 (re Art 22(2)A–E, 23(4), 24(1) AIFMD: disclosure to investors and regulatory reporting)

Disclosure to investors: BOI Regulation 2012, Title V, Ch I; CONSOB Regulation 11971/1999, Annex I Reports to regulators: BOI Regulation 2012, Title IV, Ch IV; Bank of Italy Manual for Statistical and Regulatory Reports of Collective Investment Schemes(+)

(*)  Prospectus requirements for all financial instruments excluding open-ended funds, and thus including closed-ended funds. (°)  Prospectuses requirements for open-ended funds, SICAVs, and SICAFs. (+)  In Italian, ‘Manuale delle segnalazioni statistiche e di vigilanza per gli OICR’, hereinafter, ‘BOI Reporting Manual’.

(p. 299) 2. Article 22—Financial reporting 6.127  Article 22 of the AIFMD will not materially change the law and operating environment for AIFs/AIFMs in Italy given that the local rules already provide for the same type of duties, including the audit to be made by external auditors under the supervision of CONSOB.

3. Article 23—Disclosure to investors 6.128  To correctly address the issue of disclosure to investors, it is necessary to determine what, in the Italian legal system, is considered to be a ‘disclosure document’ as contemplated by the AIFMD. This is because, in the Italian system collective investment schemes—organized as FCIs—have two disclosure documents: the fund’s rules (Regolamento) and the fund’s prospectus, the first to be drafted in accordance with Bank of Italy regulations and the second in accordance with templates of CONSOB. 6.129  While the rules address in general the organization and operation of the fund and its relationship with the investors, the prospectus focuses on the merits of the investments, ie the investment policies and techniques. However, the two documents often overlap, with the effect that the prospectus also describes the functioning of the fund and the rules also contain the investment policies. The fact that the rules also address matters contained in the prospectus is for a precise reason: in the Italian legal system, no prospectus is issued/ delivered if the offering of a financial instrument is exclusively addressed to institutional investors, or, as defined by the TUF, ‘qualified investors’, a category that corresponds to ‘professional clients’ as defined in the CONSOB rules that implement MiFID. Accordingly, in From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

this case, the only document that will be required are the rules, which will therefore also contain information on matters covered by the prospectus, such as the investment objective and policies. 6.130  The consequence is that the rules, to be issued in any case, are the ‘disclosure document’ set out by the AIFMD, while the prospectus will be issued only ‘in accordance with the national law’, as also contemplated by Article 23(3) of the AIFMD. 6.131  Article 98 ter. 1 and 98 quater. 1(a) of the TUFR grant to CONSOB the power to establish rules governing the issue and public dissemination of the key investor information document (KIID) for all types of Italian collective investment schemes offered to retail investors, including domestic AIFs. CONSOB may use this to authorize a shorter format for an AIF’s disclosure document similar to the KIID for UCITS funds. 6.132  Article 37.5 of the TUFR grants to the Bank of Italy the power to issue general authorizations applicable to the rules of collective investment schemes having standard characteristics in terms of eligible investors and fund procedures, but this article will not necessarily apply to AIFs. The BOI Regulation 2012 contemplates ‘simplified Rules’ for certain classes of collective investment schemes, which for the time being do not include alternative funds. 6.133  With regard to liability for errors in the disclosure document, see paragraph 6.124.

4. Article 24—Regulatory reporting 6.134  It is expected that the BOI Reporting Manual will need to be amended for AIFs since not all the items contemplated in the AIFMD and Implementing Regulation are currently covered, especially those on arrangements concerning illiquid investments.

(p. 300) 5. Consequences of violating transparency requirements A. Regulatory law consequences 6.135  A breach of the Italian rules on transparency that implement Articles 22 to 24 of the AIFMD will involve the enforcement of the ‘administrative sanctions’ set out in article 190 of the TUFR: see paragraph 6.107.

B. Criminal law consequences 6.136  Breach of the transparency requirements may be ‘false statements in the prospectus’, as described at paragraph 6.116. The same breach may also amount to ‘unfaithful management’, as described at paragraph 6.111. 6.137  Article 2638 of the CC introduces the crime of ‘hindrance to the activity of the supervisory authorities’. In particular, this article punishes with imprisonment from one to four years directors, managers, persons in charge of preparing the accounts, internal auditors and liquidators who insert false information on the economic or financial situation of their company—or omit to mention circumstances that should have been disclosed—in the reports to be provided to the supervisory authorities. With respect to the funds, it is important to mention that article 2638 of the CC is also applicable when such false statements or omissions concern assets owned or administered on behalf of third parties.

C. Private law consequences 6.138  Breach of the transparency requirements set out in the national rules implementing Articles 22 to 24 of the AIFMD will involve ‘extra-contractual’ liability of the SGR/SICAV under article 2043 of the CC (see paragraph 6.72), if, as required for the enforcement of this article 2043, there is a direct relationship between the breach of such transparency requirements and the ‘unjust’ damage suffered by the investor.

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VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD

National implementation

Art 25 (use of information, supervisory cooperation, and limits to leverage)

TUFR, arts 4 quater, quinquies(*), 6.1(c)(2)(°); new second level provisions to be inserted in DM 228, BOI Regulation 2012, and BOI Reporting Manual

Art 26 (scope)

TUFR, arts 45, 46; new second level provisions to be inserted possibly in CONSOB Regulation 11971/1999

Art 27 (notification of the acquisition of major holdings and control of non-listed companies)

TUFR, arts 45, 46; new second level provisions to be inserted possibly in CONSOB Regulation 11971/1999 and BOI Reporting Manual

Art 28 (disclosure in case of acquisition of control)

TUFR, arts 45, 46; new second level provisions to be inserted possibly in CONSOB Regulation 11971/1999 and BOI Reporting Manual

Art 29 (annual report of AIFs exercising control of non-listed companies)

TUFR, art 45.5(c); new provisions to be inserted possibly in CONSOB Regulation 11971/1999 and BOI Reporting Manual

Art 30 (asset stripping)

TUFR, art 45.5(d); new second level provisions to be issued by CONSOB

Implementing Regulation

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

New provisions to be inserted possibly in DM 228, BOI Regulation 2012, and BOI Reporting Manual

(*)  Cooperation for OTC derivatives, central clearing houses, Regulation (EU) No 345/2013 on EuVECA,26 Regulation (EU) No 346/2013 on EuSEF.27 (°)  Limits to leverage.

(p. 301) 2. Section 1 (Article 25)—AIFM managing leveraged AIF 6.139  The rules on the AIFMD on leverage involved changes to the Italian legislation given that no Italian rules expressly dealt with leverage before the implementation of the AIFMD. The regulatory changes with regard to the use of leverage by AIFs are outlined in paragraphs 6.79 and 6.80, while the relationship with non-Italian regulators and ESMA in connection with the leverage described in Article 25 of the AIFMD will be governed by brand new rules: as already mentioned, article 6.1(c)(2) of the TUFR grants to the Bank of Italy the power of fixing limits on leverage for certain Italian AIFs.

3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 6.140  The implementation of Articles 26 to 30 of the AIFMD on holdings in ‘non-listed companies’ involved amendments to the Italian regulations. Before the implementation of the AIFMD there were few restrictions on holdings in non-listed companies. They concerned holdings in regulated companies such as SGRs, investment firms, banks, insurance companies, etc, which are unlisted.28

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6.141  Article 45.1 of the TUFR requires an SGR to notify CONSOB of any variation in its participation in a non-listed company held by an Italian, EU, or non-EU AIF managed by the SGR where such participation equals, exceeds, or is reduced below the following thresholds: 10%, 20%, 30%, 50%, and 75% of the voting rights of the non-listed company. 6.142  Notification is also required where there is an acquisition of a relevant holding in a non-listed company made jointly by two or more AIFs (Italian and/or foreign), managed by either the same SGR or by different SGRs, or by an SGR and a foreign AIFM. For selfmanaged SICAV/SICAFs, notification will have to be made directly by these entities. (p. 302) 6.143  Article 45.4 of the TUFR defines ‘non-listed companies’ as companies with a registered office in the EU not having shares admitted to listing on a regulated market, and expressly excludes from the scope of the definition (in compliance with the AIFMD) ‘micro, small and medium-sized enterprises’ as defined in the Annex to Commission Recommendation 2003/61/EC,29 as well as special purpose vehicles (SPVs) whose purpose is the purchasing, holding, or administrating of real estate. 6.144  Article 45.5(d) of the TUFR grants to CONSOB the power to issue regulations in order to protect the capital of a non-listed company and prevent the spin-off of its assets for a period of 24 months from the acquisition by the relevant AIF.

4. Consequences of violating provisions relating to AIFMs managing specific types of AIF 6.145  For the private, regulatory, and criminal law consequences for violation of the requirements for leveraged AIFs, the same consequences as those described in paragraphs 6.111 to 6.126 in connection with the violation of organizational requirements shall apply. 6.146  Given that this matter is relatively new for the Italian legal system, it is difficult to comment at this time on the consequences of a breach of the requirements concerning the participation in non-listed companies by AIFs. For the time being, the administrative sanctions set out in article 190 of the TUFR30 are applicable in case of breach of the notification duties set out in articles 45 and 46 of the TUFR (see paragraphs 6.141 and 6.142).

IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIFs in the home Member State of the AIFM)

TUFR, arts 43 (marketing to professional investors), 44 (marketing to retail investors); BOI Regulation 2012, Title V, Ch II

Art 32 (marketing of shares or units of EU AIFs in Member States other than in the home Member State of the AIFM)

TUFR, arts 43 (marketing to professional investors), 44 (marketing to retail investors); BOI Regulation 2012, title VI(*), Ch III, Title VI, Ch V

Art 33 (conditions for managing AIFs established in other Member States)

TUFR, art 41 ter; BOI Regulation 2012, Title VI, Ch II

Implementing Regulation

National implementation

n/a

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(*)  Marketing of Italian AIFs outside Italy.

(p. 303) 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 6.147  Article 43.2 and 43.3 of the TUFR implement Article 31 of the AIFMD. This new procedure is applicable without distinction to Italian, EU, and non-EU AIFs managed by Italian AIFMs (ie SGRs) or by non-EU AIFMs authorized in Italy, and for this reason it has materially changed the previous system of authorization, which provided for different procedures for Italian or foreign AIFs, irrespective of the nationality of the management company. 6.148  Article 43.2 and 43.4 of the TUFR also provide that CONSOB will promptly forward to the Bank of Italy a copy of the notification set out by Article 31 of the AIFMD and of the attachments thereto, and will reply to the applicant AIFM within 20 business days from receipt of the notification. The AIFM will also have to seek CONSOB approval in case of modifications to the information transmitted with the notification. The actual procedures for the notification will be specified in a regulation to be issued by CONSOB.

3. Article 32—Marketing of shares or units of EU AIFs in Member States other than in the home Member State of the AIFM 6.149  Article 43.8 of the TUFR fully implements the notification procedure of Article 32 of the AIFMD with regard to the marketing in Italy to professional investors and to specific categories of non-professional investors, as they shall be defined in a Decree of the Minister of Economy and Finance, of AIFs managed by AIFMs of other EU Member States or by nonEU AIFMs authorized in another EU Member State. The notification must be transmitted by the home Member State regulator to CONSOB, which will forward to the Bank of Italy a copy of the documentation received. It should be noted that the definition of ‘professional investor’ in the TUFR corresponds to the one of ‘professional clients’ as given in the CONSOB rules that implement MiFID (see also paragraph 6.129). 6.150  With regard to the marketing to professional investors in other EU Member States of AIFs managed by Italian SGRs (ie Italian AIFMs), the same procedure described in paragraphs 6.147 and 6.148 for the marketing in Italy of AIFs of SGRs are applicable. 6.151  Another issue that may arise in connection with the implementation of the AIFMD is the possibility of listing non-UCITSs on the Italian Stock Exchange (Borsa Italiana), which for the time being only allows the listing of UCITSs. 6.152  Finally, it is worth mentioning that the pre-AIFMD procedure for the authorization of foreign non-UCITSs will not be applicable any longer to foreign non-UCITSs, if any, which are not covered by the AIFMD.31.

4. Article 33—Conditions for managing AIFs established in other Member States 6.153  Article 41 ter of the TUFR implements Article 33 of the AIFMD. In particular, the establishment of an AIF in another Member State must be notified to the Bank of Italy (which will promptly forward to CONSOB such notification) by the home Member State regulator. (p. 304) 6.154  Article 41 of the TUFR provides that SGRs can render their services abroad. The terms and conditions for the relevant applications and authorizations will be detailed in second level rules to be issued by the Bank of Italy. With regard to the operations of SGRs in

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non-EU countries, article 41 expressly requires the existence of a cooperation agreement between Italy and the competent regulator of the relevant non-EU host country.

5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 6.155  Where there is a breach by an Italian AIFM of the Italian rules—implementing the AIFMD—which govern the marketing and/or management of AIFs in the EU (outside Italy), the same rules as described with respect to the breach of the provisions on marketing and management of AIFs on the domestic market will be applicable. In particular, a breach of the Italian rules on the operations abroad of Italian SGRs will involve the enforcement of the ‘administrative sanctions’ set out in article 190 of the TUFR (see paragraph 6.107). Furthermore, the correspondent rules of the home Member State may be applicable, especially where services are carried out directly from such home Member State and not through a branch in the relevant host Member State. 6.156  Article 54 of the TUFR provides that if the Bank of Italy or CONSOB suspects that foreign collective investment schemes (either UCITSs or non-UCITSs, and thus also non-EU AIFs) are in breach of the Italian provisions applicable, inter alia, to marketing in Italy of their units/shares, the Bank of Italy or CONSOB, according to their respective competence, may suspend the offerings of such collective investment schemes for a period not exceeding 60 days. If such violations are ascertained following a formal investigation, the offerings may be suspended without time limit or definitively prohibited.

B. Criminal law consequences 6.157  With regard to the marketing of foreign AIFs in Italy without authorization, the general rules on the unauthorized offering in Italy of collective investment schemes will apply. In this context, article 166.1(b) of the TUF provides that the offering of units or shares of collective investment schemes in Italy without authorization is punishable with imprisonment from between six months and four years and with a fine ranging from EUR 2,065 to EUR 10,329. 6.158  With regard to breaches by foreign AIFMs that operate through a branch in Italy, the same rules as those applicable to Italian SGRs managing AIFs apply.

C. Private law consequences 6.159  From a private law perspective, a breach of the rules on the marketing of AIFs in the home Member State or of foreign AIFs in Italy will give rise to extra-contractual liability under article 2043 of the CC (see paragraph 6.72) if the relevant damage is duly evidenced. 6.160  Where there is a breach of the rules on the management of Italian AIFs by foreign AIFMs, the rules on contractual liability (described in paragraph 6.120) will apply provided the carrying-out of such management services is reflected in an agreement between the foreign AIFM and the Italian AIF (or its promoter AIFM) since third parties who have suffered damage as a result of such breach by the foreign AIFM may claim damages arising from extra-contractual liability.

(p. 305) X. Specific Rules in Relation to Third Countries

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1. Implementation table AIFMD

National implementation

Art 34 (conditions for EU AIFMs which manage nonEU AIFs not marketed in EU)

TUFR, art 41(*); BOI Regulation 2012, Title VI, Ch II(*)

Art 35 (conditions for marketing in EU with passport of non-EU AIFs managed by EU AIFMs)

TUFR, arts 43 (marketing to professional investors) and 44 (marketing to retail investors); BOI Regulation 2012,Title VI, Ch V

Art 36 (conditions for the marketing in EU without a passport of non-EU AIFs managed by EU AIFMs)

n/a

Art 37 (authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Art 38 (EU AIF) or 39 (non-EU AIF))

Art 38 (peer review of authorization and supervision of non-EU AIFMs)

TUFR, arts 41 quater (management of AIF by non-EU AIFM), 43 (marketing to professional investors), 44 (marketing to retail investors) Second level rules in DM 228 and BOI Regulation 2012, Title VI

TUF, arts 2, 4(°)

Art 39 (conditions for the marketing in the EU with a passport of EU AIFs managed by non-EU AIFMs)

TUFR, arts 43 (marketing to professional investors), 44 (marketing to retail investors) Second level rules in DM 228 and BOI Regulation 2012, Title VI

Art 40 (conditions for the marketing in the EU with a passport of non-EU AIFs managed by non-EU AIFMs)

TUFR, arts 43 (marketing to professional investors), 44 (marketing to retail investors) Second level rules in DM 228 and BOI Regulation 2012, Title VI

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by non-EU AIFMs)

TUFR, art 41 quater Second level rules in DM 228 and BOI Regulation 2012, Title VI

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs)

n/a

Implementing Regulation

National implementation

Arts 114–116 (re Arts 34(1), 35(2), 36(1), 37(7)(D), 39(2)(A), 40(2)(a), 42(1) AIFMD)

Same as for the AIFMD in the respective matters

(*)  Applicable to the foreign operations of Italian AIFM. (°)  General provisions concerning the relationship between the Italian regulators and the EU institutions.

2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU

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6.161  With regard to the implementation of Article 34 of the AIFMD, article 41 of the TUFR as described in paragraph 6.154 is applicable to Italian AIFMs managing non-EU AIFs not marketed in the EU.

(p. 306) 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by EU AIFMs 6.162  With regard to marketing to professional investors in the EU with a passport a nonEU AIF managed by an EU AIFM, the same provisions as those applicable to the marketing to professional investors in Italy of AIFs managed by AIFMs of other EU Member States are applicable (see paragraph 6.147). 6.163  The Italian legal system does not contemplate marketing in Italy without a passport a non-EU AIF managed by an EU AIF. In particular, Italy never had a so-called ‘private placement exception’, meaning that an offering of certain financial instruments to professional investors only would have been exempted from registration/authorization requirements. Accordingly, in the pre-AIFMD Italian system, any ‘offering’ of non-UCITSs (as well as of UCITSs, etc) requires prior authorization even if such offer is exclusively addressed to professional investors. As used here, the term ‘offer’ means ‘taking the initiative’ of approaching an Italian prospect for the purpose of an investment. Based on such qualification, the present Italian rules allow the purchase of non-UCITSs not authorized for ‘offering’ in Italy if the Italian investor has taken the initiative of contacting the fund (and this can be adequately evidenced).

4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 6.164  Article 41 quater.1 of the TUFR provides that non-EU AIFMs must be authorized by the Bank of Italy in order to manage Italian AIFs (or EU AIFs, or AIFs for which Italy is the Member State of reference). The Bank of Italy will issue second level rules in order to enforce the authorization procedure. The Italian branches of non-EU AIFMs will have to comply with the Italian rules on conduct in relation to branches of EU AIFMs. Finally, article 41 quater.2 of the TUFR provides that a non-EU AIFM already authorized in another EU Member State can manage Italian AIFs through a branch or provide services under the same rules as those governing EU AIFMs, ie the regulator of the EU Member State that authorized the non-EU AIFM send a notification to the Bank of Italy (see paragraph 6.153). 6.165  The marketing to professional investors in Italy of Italian, EU, or non-EU AIF managed by a non-EU AIFM is subject to the same notification procedure as described in paragraph 6.147 in relation to the marketing to professional investors of Italian, EU, or nonEU AIF managed by an Italian SGR.

5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 6.166  With regard to the possibility of marketing without a passport in Italy of AIFs managed by non-EU AIFMs, see paragraph 6.163, and in particular the discussion on the absence of a ‘private placement’ exception in the Italian legal system.

6. Consequences of violating specific rules in relation to third countries A. Regulatory law consequences

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6.167  For the regulatory law consequences of violation of the Italian laws on the marketing/offering/managing of AIFs by non-EU AIFMs, see the discussion on the corresponding topics in relation to EU AIFMs in paragraphs 6.155 and 6.156.

(p. 307) B. Criminal law consequences 6.168  For the criminal law consequences of violation of the Italian laws on the marketing/ offering/managing of AIFs by non-EU AIFMs, see the discussion on the corresponding topics in relation to EU AIFMs in paragraphs 1.157 and 1.158.

C. Private law consequences 6.169  For the private law consequences of violation of the Italian laws on the marketing/ offering/managing of AIFs by non-EU AIFMs, see the discussion on the corresponding topics in relation to EU AIFMs in paragraphs 6.159 and 6.160.

XI. Marketing to Retail Investors 1. Implementation table AIFMD

National implementation

Art 43 (marketing of AIFs to retail investors)

TUFR, arts 44, 94(*), 98 ter(°); BOI Regulation 2012; CONSOB Regulation 11971/1999

Implementing Regulation

National implementation

n/a

(*)  Prospectus requirements for all financial instruments excluding open-ended funds, and thus including closed-ended funds. (°)  Prospectus requirements for open-ended funds and SICAVs.

2. Article 43—Marketing of AIFs by AIFMs to retail investors 6.170  As discussed in paragraph 6.29, Italy will continue to allow retail investors to purchase units or shares of AIFs, if relatively high minimum investment thresholds (EUR 250,000 in the last draft of revision of DM 228) are complied with. 6.171  Under article 44.1 of the TUF, the marketing to retail investors in Italy of Italian AIFs must be preceded by a notification to CONSOB by the manager SGR. The following documents must be included in the notification: the prospectus, the rules (or memorandum and articles) of the AIF to be marketed to retail investors, and the document containing the additional information to be provided before the investment, which is to be determined in second level rules by CONSOB (but which article 98 ter of the TUFR expressly refers to as a KIID). 6.172  Provided the information contained in the documents mentioned in paragraph 6.171 is complete, consistent, and understandable, CONSOB will authorize the marketing to retail investors within 10 business days from receipt of the notification from the SGR. Second level rules to be issued by CONSOB will govern in detail the notification procedure.

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6.173  Managers of foreign EU and non-EU AIFs that offer in their home state the units/ shares of those AIFs can be authorized to market the AIFs to Italian retail investors, according to the terms and conditions in article 44.5 of the TUFR. Authorization is granted by CONSOB (with the participation of the Bank of Italy for the matters described in (b)) if the following conditions are satisfied: (a)  the managers of the relevant AIF have completed the procedures set out in article 43 of the TUFR (marketing to professional investors); (p. 308) (b)  the operating procedures and arrangements for the limitation and diversification of risk implemented by the foreign AIF are consistent with those provided for Italian AIFs; (c)  the duties of the depository of the foreign AIF are consistent with those provided for the depository of Italian AIFs; (d)  the rules (or memorandum and articles) of the AIF do not allow preferential treatments towards one or more investors; (e)  the organization of the foreign AIF allows the exercise of rights of the investors, in compliance with the second level rules issued by CONSOB with the participation of the Bank of Italy; (f)  the pre-investment information provided to the retail investors is complete, consistent, and understandable 6.174  The rules for the authorization to market foreign AIFs to Italian retail investors will be issued by CONSOB. In this context, it is likely that such rules will be contained in a revision to CONSOB Regulation 11971, which implements the rules of the TUF on the offering of financial instruments to the public. 6.175  The rules set out in paragraph 6.174 provide in general that any offering to retail investors (or addressed to retail investors too, ie not addressed exclusively to professional investors) requires the publication32 of a prospectus and its delivery to the prospective investor before the subscription. 6.176  Notwithstanding the general requirement described in paragraph 6.175, and even if the offering is also addressed to retail investors too, article 100 of the TUF and article 34 ter of the CONSOB Regulation 11971 provide for a series of exemptions from the prospectus requirements. These exemptions include (without limitation): (i) where the offering is to less than 100 retail investors (in addition to an unlimited number of professional investors); (ii) where the offerings are open-ended collective investment schemes (CISs) for which the minimum subscription amount is EUR 250,000; (iii) where the offerings are financial instruments, other than open-ended CISs (and securities issued by insurance companies), for which the minimum par value per security is EUR 50,000. Therefore, as long as Italy allows the offering of AIFs also to retail investors and unless the rules on the prospectus requirements of the TUF and CONSOB Regulation 11971 are amended, the publication/delivery of a prospectus should not be required because, as indicated at (ii), the minimum threshold for the offering of AIFs to retail investors is EUR 250,000, which is also one of the cases in which there is a prospectus exemption for openended CISs.

3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors

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6.177  If publication of a prospectus is required and this requirement is not met, both the administrative sanction set out by article 191.1 of the TUF and the suspension/prohibition of the marketing of the relevant AIF set out by article 54 of the TUFR will apply (see paragraph 6.156). (p. 309) 6.178  More generally, if the breach of the rules on retail offering involves a breach of the general duties of care set out in article 40 of the TUF, the administrative sanction in article 190 of the TUFR will also apply (see paragraph 6.107). 6.179  With regard to the criminal law, a breach of the duties on offering CISs in Italy may give rise to the sanctions in article 166.1(b) of the TUF (see paragraph 6.157). 6.180  With regard to private law consequences, a breach of the rules on the marketing of AIFs to retail investors may give rise to an extra-contractual liability under article 2043 of the CC (see paragraph 6.72), if, as is required by article 2043, there is a direct relationship between the breach of such transparency requirements and the ‘unjust’ damage suffered by the investor.

XII. Competent Authorities and Supervisory Powers 1. Implementation table AIFMD

National implementation

Art 44

TUFR, arts 2, 4

Art 45

TUFR, arts 5–8, 10

Art 46

TUFR, arts 2, 4–8, 10

Art 48

TUF, arts 187 quinquiesdecies, 188–191, 195

Art 50

TUFR, arts 2, 4

Art 51

Legislative Decree No 196 of 2003 (‘D Lgs 196’)

Art 52

D Lgs 196

Art 53

TUFR, arts 2, 4

Art 54

TUFR, arts 2, 4

Art 55

TUF, art 2

2. Designation, responsibility, and powers of competent authorities 6.181  The rules of the AIFMD on competent authorities and supervisory powers, ie Articles 44 to 46 and 48 to 55, are implemented through changes to the TUF. However, it should be noted that the TUF already had a complete definition of the competence and powers of the Italian regulators: see paragraphs 6.32 to 6.34. 6.182  In particular, the Bank of Italy is the regulator of the funds industry. In addition to the powers to authorize SGRs, the Bank of Italy has extended supervisory powers, the general purpose of which has been described in paragraph 6.33.

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6.183  The first part of the TUF describes how these supervisory powers are actually articulated. In particular, they consist of the power of the Bank of Italy: •  to issue second level regulations for the implementation of the rules of the TUF (and possibly in other statutes), and an example of this power is the BOI Regulation 2012 (article 6 of the TUFR); •  to convene boards of companies subject to supervision —such as SGRs—if these boards are not called in due course pursuant to the law, and the power to request clarifications from members of boards of companies subject to supervision (article 7 of the TUF); (p. 310) •  to request information and documents from the companies subject to supervision (article 8 of the TUFR); and •  to make inspections and carry out investigations within the premises of companies subject to supervision and requesting exhibit documents (article 10 of the TUFR).

3. Other issues 6.184  The implementation of Article 49 of the AIFM on the right of appeal will not involve changes in the Italian legislation because the acts of public administrations, such as CONSOB and the Bank of Italy, can be challenged before regional administrative courts (Tribunali Amministrativi Regionali) made up of magistrates. The judgments of these courts can be appealed before the Council of State (Consiglio di Stato). 6.185  Article 4 of the TUF/TUFR provides that Italian regulators, including the Bank of Italy and CONSOB, must cooperate with regulators of the EU, including ESMA, and that such cooperation must be performed, inter alia, through exchange of information. In addition, cooperation agreements providing for a reciprocal delegation of supervisory powers can be entered into between CONSOB and/or the Bank of Italy and ESMA or regulators of other Member States. The Italian regulator competent to receive requests for information from other EU regulators is CONSOB, which will consult the Bank of Italy if the matter is within the competence of the latter, such as in the field of collective management. In general, article 2 of the TUF provides that the Ministry of Economy and Finance, the Bank of Italy, and CONSOB must exercise their powers in a manner consistent with the EU rules and that the Bank of Italy and CONSOB are parties of ESMA and the European Banking Authority. Where there is tension in the market, article 2 of the TUF provides that the Bank of Italy and CONSOB must consider the effects of any decision on the stability of the financial systems of other Member States. 6.186  It should be noted that, save as explained at paragraph 6.187, Italian regulators, when processing personal data, must comply with D Lgs 196, which implemented Directive 95/46/EC.33 6.187  However, under article 187 octies of the TUF, CONSOB is entitled to obtain from third parties, information providers, and other public administrations, etc, also in derogation to the privacy rules provided for by D Lgs 196, information collected by such entities and relating to persons that CONSOB is investigating in connection with insider trading. 6.188  In all other cases, data can be transferred by the Italian regulator to a third party only with the consent of the party providing the data and the TUF expressly states that information received by the Bank of Italy or CONSOB cannot be forwarded to other regulatory authorities without the prior consent of the regulator which sent that information. Finally, Italian regulators and their employees, officers, and agents, are bound

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by professional secrecy; derogations are expressly provided for by the law in connection with criminal investigations. (p. 311) 6.189  Article 4.5 bis of the TUF provides that the exchange of information between the Italian regulators and the correspondent authorities of third countries is possible only if such third countries have comparable rules on professional secrecy to Italy. 6.190  With regard to the exchange of information relating to the potential systemic consequences of AIFM activity, the matter has been addressed by article 4 quater of the TUF. 6.191  Article 4 of the TUF provides that the Bank of Italy and CONSOB may execute cooperation agreements with regulators of other Member States providing for the reciprocal delegation of supervisory activities (for example the power to carry out onsite investigations). 6.192  A new paragraph 2 bis added to article 4 of the TUF provides that the Bank of Italy and CONSOB ‘may’ (thus reflecting the wording of Article 55 of the AIFMD) submit to ESMA a dispute between the regulators and a foreign regulator, but only with regard to ‘cross-border’ matters.

XIII. Concluding Remarks 6.193  The implementation of the AIFMD in Italy will materially affect the local market for ‘speculative funds’ so long as the barriers to the entry of foreign AIFs are lifted. An assessment on whether or not this will be a success can be based on a consideration of the various standpoints. It will be a success for foreign AIFMs, which will gain full access to the Italian market through direct sales to local investors (including, as we have seen, retail investors—see paragraph 6.170) instead of the indirect presence they had through wrapping their foreign products in Italian funds of funds. 6.194  It is likely that the increase in the ‘import’ of foreign AIFs in Italy will not be balanced by a correspondent increase in ‘export’ Italian AIFs due to the fact that Italian AIFs are generally funds of funds (see paragraph 6.50). There is no significant Italian expertise in the direct management of AIFs. Accordingly, from an industry standpoint, the AIFMD seems to be more advantageous to foreign than Italian AIFMs. 6.195  In addition, as long as the AIFMD grants to national regulators an option to adopt more flexible requirements in relation to the organization of AIFMs or service providers— such as the option to act as depositary for certain private equity funds set out in Article 21 (3) of the AIFMD—it is expected that AIFMs of countries with stricter rules will establish their AIFs (if not the AIFM itself) in countries with less strict requirements. Undoubtedly, Italy will belong to the group of countries with strict requirements and will suffer an ‘emigration’ of its AIFs and possibly AIFMs. Such emigration may also be aided by more favourable fiscal treatments in certain jurisdictions. 6.196  From investors’ standpoint, the transposition of the AIFMD into Italian law may bring some advantages in terms of protection and information to subscribers of AIFs. This is because until now the restrictions on the ‘marketing’ (in the meaning specified in Article 4(1)(x) of the AIFMD) of foreign AIFs in Italy did not prevent subscriptions by Italian investors through the ‘reverse inquiry’ process, consisting of a subscription originated by an unsolicited ‘initiative’ of the Italian prospect. In particular, the Italian law does not apply to subscriptions originated by a ‘reverse inquiry’; the fact that a sale took place without the enforcement of any Italian rule (for example rules on the prospectus, information to investors under MiFID, (p. 312) etc) meant that an Italian party was completely unprotected so long as the investment was considered to be outside of Italy.

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6.197  If one considers that, following the implementation of the AIFMD, ‘marketing’ (in the meaning described at paragraph 6.196) will be possible, Italian investors will continue to do the same things they did before (ie subscribing foreign AIFs), but with a higher level of protection because they will purchase products from companies complying with the requirements of the Directive and will receive pre-investment information required by the rules on the placing of all other types of financial instruments (under the UCITS and Prospectus Directives). 6.198  Of course, products not covered by the AIFMD will continue to be liable to subscriptions through the reverse enquiry process, but the opportunity of taking benefit from the ‘linear’ process of the AIFMD will probably induce most AIFMs to use the passport rather than the other, ‘byzantine’, procedure.

Footnotes: 1

  Unless otherwise specified, the English translations of Italian financial regulations quoted in this chapter are from the English section of the website of CONSOB at . 2

  TUF, art 36.3 states: Each investment fund and each sub-fund shall constitute an independent pool of assets, separate to all intents and purposes from the assets of the Italian management company and from those of each unitholder, as well as from any other assets managed by the same company; commitments relating to bonds subscribed on its own account shall be met solely from the investment fund’s own equity. Such assets may not be admitted in legal actions brought by creditors of the Italian management company or in its interest or in actions brought by creditors of the depositary or the sub-depositary or in their interest. Actions brought by the creditors of individual investors shall be admitted only with respect to the latter’s units. In no case may the Italian management company use the assets belonging to the funds it manages in its own interest or in the interest of third parties.

3

  Corte di Cassazione, I Civil Section, judgment No 16605 of 15 July 2010, published in Pluris/Cedam-UTET database (hereinafter ‘Pluris’). 4

  Corte di Cassazione (n 3).

5

  Corte di Cassazione (n 3).

6

  Available at .

7

  Under the TUF, the term ‘asset management companies’ means ‘management companies’ as defined in Art 2(1)(b) of Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ 1985 L375/3), which has been superseded by the UCITS Directive. For the avoidance of doubt, ‘asset management companies’ under TUF, art 33 are SGRs. 8

  TUF, art 37.1(a).

9

  TUF, art 37.1(b).

10

  TUF, art 37.1(c).

11

  The regulatory definition contained in the Italian version of DM 228, ie ‘fondi speculativi’ (‘speculative funds’), has been criticized because of the implied negativity of the phrase, and will probably be changed to ‘alternative investment funds’, as defined in the

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TUFR, or ‘alternative funds’, as defined in the forthcoming redrafting of DM 228 with the implementation of the AIFMD. 12

  See para 6.43.

13

  In particular, on 26 July 2013 the Bank of Italy and CONSOB issued a joint Notice concerning the access of AIFMs to the Italian market (the ‘AIFMD Notice’). The AIFMD Notice covers Italian AIFMs, non-Italian EU AIFMs, and non-EU AIFMs. With regard to Italian AIFMs, the AIFMD Notice provides that until the full implementation of the Directive in Italy, SGRs covered by its scope (ie those active in the alternative management business) must manage and market their AIFs in accordance with the current Italian laws and regulations (ie those preceding the transposition of the AIFMD in Italy (the ‘pre-AIFMD Rules’); therefore, the delay in transposing the AIFMD is actually a disadvantage to SGRs, which are not able to apply for a passport to market their AIFs to professional investors or offer their alternative management services outside Italy. With regard to the marketing of AIFs to Italian professional investors by EU AIFMs of a Member State that has already implemented the AIFMD, such AIFMs will be entitled to market their AIFs to professional investors in Italy through the AIFMD passport. The relevant notification will be sent by the regulator of the AIFM home Member State to CONSOB and to the Bank of Italy. Should the AIFM of a Member State that has not implemented the AIFMD intend to market AIFs to Italian retail investors, the pre-AIFMD Rules on the authorization of non-UCITS funds (art 42.5 of TUF) apply. The same notification system is applicable to EU AIFMs of a Member State that has already implemented the AIFMD and is willing to manage Italian AIFs, but the notification will have to be sent to the Bank of Italy and CONSOB. EU AIFMs of a Member State that has not yet implemented the AIFMD, as well as non-EU AIFMs, will be subject to the pre-AIFMD Rules. 14

  OJ L41/20 and OJ L41/35, respectively.

15

  It should be noted that in the case of SGRs managing AIF, the service of management of segregated portfolios can be rendered exclusively to institutional investors. 16

  Being the ‘safekeeping and administration of financial instruments and related services’ (art 1.6(a) of the TUF). 17

  As provided for in BOI Regulation 2012 and including study and analysis in financial and economic matters, the elaboration and transmission of economic data and information, the setting-up of data processing services, and accounting services. 18

  It should be noted that the phrase ‘administrative sanctions’ will have a different meaning when used in connection with Legislative Decree 231/2001, described in paras 6.103 to 6.106. 19

  Or their complete forms ‘Società di Gestione del Risparmio’ and ‘Società di Intermediazione Mobiliare’. 20

  The relatively unusual amounts of the fines are the result of the conversion in EUR of amounts originally denominated in Italian liras. 21

  Corte di Cassazione, V Criminal Section, judgments No 22419 of 2 April 2003 and No 43026 of 24 September 2009, published in Pluris. 22

  The ‘administrative sanctions’ mentioned in D Lgs 231 are not the same as those contemplated by the TUF. 23

  Corte di Cassazione, I Section, judgment No 3773 of 17 February 2009, published in Pluris.

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24

  Corte di Cassazione, I Civil Section, judgment No 16605 of 15 July 2010, mentioned at para 6.09. 25

  Regulation for the implementation of Legislative Decree No 58 of 24 February 1998 in relation to the discipline of the Issuers of financial instruments, approved through CONSOB Resolution No 11971 of 14 May 1999, published on the Ordinary Supplement No 100 to the Official Gazette of the Italian Republic No 123 of 25 May 1999, as amended. 26

  Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds (OJ 2013 L115/1). 27

  Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds (OJ 2013 L115/18). 28

  For completeness, it should be pointed out that the TUF and the second level rules of CONSOB provide for a complete system of notification of ‘relevant’ (ie exceeding 2%) holdings in listed companies. 29

  Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ 2003 L124/36). 30

  Fines ranging from EUR 2,500 to EUR 250,000.

31

  According to verbal guidance from the Italian regulators.

32

  ‘Publication’ of a prospectus means filing with CONSOB a specimen of the prospectus for retail investors. 33

  Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (OJ 1995 L281/31).

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7 Luxembourg Gilles Dusemon, Victorien Hémery, Myriam Moulla From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Undertakings for Collective Investment (UCIs) — Hedge fund — Advertising and marketing and funds — Performance fee — Classification of UCIs

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(p. 313) 7  Luxembourg I. Introduction 7.01 1. Nature of the national non-retail investment industry 7.01 2. Legal structures used to form national AIFs 7.18 3. Unregulated AIFs 7.20 4. Regulated AIFs 7.24 II. Pre-AIFMD Regulatory Framework 7.59 1. Regulation of AIFMs and national AIFs prior to the AIFMD 7.59 2. Regulation of national marketing of AIFs prior to the entry into force of the AIFMD 7.62 III. Regulation of National AIFs after the AIFMD 7.70 IV. General Provisions of the AIFMD and the Implementing Regulation 7.75 1. Implementation table 7.75 2. Articles 2 and 3—Scope and exemptions 7.75 3. Article 5—Determination of the AIFM 7.85 V. Authorization of AIFMs 7.92 1. Implementation table 7.92 2. Articles 6 to 8—Conditions and application for authorization 7.92 3. Article 9—Initial capital and own funds 7.102 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 7.110 5. Consequences of violating authorization provisions 7.120 VI. Operating Conditions for AIFMs 7.141 1. Implementation table 7.141 2. Section 1 (Articles 12 to 17)—General requirements 7.141 3. Articles 18 and 19—Organizational requirements 7.175 4. Consequences of violating operating conditions 7.223 VII. Transparency Requirements 7.234 1. Implementation table 7.234 2. Article 22—Financial reporting 7.234 3. Article 23—Disclosure to investors 7.237 4. Article 24—Regulatory reporting 7.251 5. Consequences of violating transparency requirements 7.253

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VIII. AIFM Managing Specific Types of AIF 7.261 1. Implementation table 7.261 2. Section 1 (Article 25)—AIFMs managing leveraged AIFs 7.261 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 7.263 4. Consequences of violating provisions relating to AIFMs managing specific types of AIF 7.264 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 7.267 1. Implementation table 7.267 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 7.267 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 7.274 4. Article 33—Conditions for managing AIFs established in other Member States 7.283 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU 7.288 (p. 314) X. Specific Rules in Relation to Third Countries 7.292 1. Implementation table 7.292 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 7.292 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by EU AIFMs 7.295 4. Articles 37 to 41—Authorization of non-EU AIFMs managing and marketing AIFs in the EU 7.301 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs 7.311 6. Consequences of violating specific rules in relation to third countries 7.312 XI. Marketing to Retail Investors 7.315 1. Implementation table 7.315 2. Article 43—Marketing of AIFs by AIFMs to retail investors 7.315 3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 7.317 XII. Competent Authorities and Supervisory Powers 7.318 1. Implementation table 7.318 2. Designation, responsibility, and powers of competent authorities 7.318 3. Other issues 7.319

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XIII. Concluding Remarks 7.325

I. Introduction 1. Nature of the national non-retail investment industry 7.01  Luxembourg has gradually emerged as the EU’s main investment funds domicile, starting off as a retail fund centre as of 1988. The main investment fund legislation was introduced in 1988 when Directive 85/611/EC1 (the ‘UCITS I Directive’) was transposed into Luxembourg law.2 Luxembourg was the first European Member State to implement the UCITS I Directive into domestic law. 7.02  The transposition followed a particular pattern, which has since been replicated in other parts of the Luxembourg investment funds legislation. The Luxembourg implementing law of the UCITS I Directive was organized in two parts. Part I introduced and transposed the UCITS I Directive, thus creating the first European harmonized investment funds regime at the time, while Part II introduced a framework for non-harmonized3 collective investment schemes, the so-called ‘Part II UCIs’. Undertakings for collective investment (UCIs) governed by Part II of the 1988 UCI Law afforded their promoters additional structuring flexibility for the adoption of alternative asset management strategies. (p. 315) 7.03  In 1991, the Luxembourg legislator provided the industry with a legal framework for another type of UCI. The law of 11 November 1991 on collective investment undertakings the shares or units of which may not be placed with the public (the ‘1991 UCI Law’) introduced a legal framework introducing a special category of UCIs, the units and shares of which were reserved for institutional investors (ie these funds became known as ‘institutional funds’). 7.04  The 1991 UCI Law set the scene for a new type of investment funds regime.4 These institutional funds were reserved for qualifying investors only and offered their promoters more structuring flexibility and a lower tax burden. The purpose of the 1991 UCI Law was to introduce a more suitable legal, regulatory, and tax framework allowing certain alternative investment strategies and asset classes (ie hedge funds, property funds, and private equity funds, but also money market funds, etc) to be pursued by Luxembourg UCIs. The increased structuring flexibility opened up the possibility for the implementation of alternative investment strategies using Luxembourg domiciled investment funds. The 1991 UCI Law clearly signalled that the Luxembourg fund sector was ready for alternative asset classes. 7.05  The success of the 1991 UCI Law and the gradual transformation of Luxembourg into a global investment funds hub were some of the drivers for a radical overhaul and modernization of the 1991 UCI Law in 2007. Instead of amending the 1991 UCI Law, the legislator opted for a fully restated, stand-alone investment fund regime specifically targeting the alternative asset classes. 7.06  The law of 13 February 2007 on specialized investment funds (fonds d’investissement spécialisé— SIFs), as amended (the ‘2007 SIF Law’), created a legal, regulatory, and fiscal regime tailored to the requirements of the alternative asset management industry. In exchange for a more liberal legal and regulatory framework, funds set up under the 2007 SIF Law were only available to prospective investors qualifying as ‘well-informed’ investors pursuant to the 2007 SIF Law. 7.07  While the 2007 SIF Law substituted the 1991 UCI Law, it did so following the tracks of another major legislative innovation in 2004. Luxembourg was one of the first Member States to implement a dedicated risk capital investment company regime in 2004.5 The 2004 SICAR Law was the first domestic attempt to provide for a legal framework specifically addressing one of the alternative asset classes, ie risk capital or private equity including venture capital. It was thus the 2004 SICAR Law which introduced the ‘wellFrom: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

informed investor’ concept, hence restricting access to the riskier private equity asset class, when compared to the UCITS retail focus. (p. 316) 7.08  By and large, the three main Luxembourg investment fund laws6 follow the same pattern around the three pillars typically associated with Luxembourg investment fund products: (a)  legal and regulatory structuring flexibility in order to cater for all alternative asset classes; (b)  investor protection through prior authorization supervision; and

7

and ongoing prudential

(c)  fiscal neutrality—an essential feature for an investment vehicle—which is meant to put investors into a no worse situation as if they were to invest directly. 7.09  With the exception of the 2004 SICAR Law and the collective investment schemes set up under the UCITS brand, the Luxembourg legislative framework does not, in fact, distinguish between asset classes or strategies. The 2010 UCI Law (Part II) and the 2007 SIF Law may thus in principle be used as a launching pad for all alternative asset classes. 7.10  While no other distinction is made at the level of the legislative framework, the CSSF has created a regulatory framework inter alia based on circulars, press releases, and annual reports clarifying certain features among the various asset classes and strategies. Current regulation does not, however, go so far as to prescribe a detailed asset classification (other than for risk capital investments and certain hedge fund strategies). 7.11  Accordingly, regulatory oversight focuses increasingly on the general regulatory product framework but prescribes certain additional guidelines depending on the investment policy or strategy chosen. One of the earliest and most relevant examples to date can be found in Circular IML 91/75 (as amended by Circular CSSF 05/1778) of 21 January 1991.9 (p. 317) 7.12  The CSSF clarified on a number of occasions that the laws applicable to UCIs (other than UCITS and SICARs) do not comprise any provisions regarding asset class specific restrictions or asset class definitions. While additional regulatory guidance is set out in Circular IML 91/75, UCIs which adopt alternative investment strategies are not specifically covered by the provisions of the circular. Therefore, up to and until 5 December 2002 the investment restrictions applicable to UCIs pursuing so-called alternative investment strategies were dealt with by the CSSF on a case-by-case basis. 7.13  In response to an increase in applications from 2000 onward for authorization of Luxembourg UCIs that pursue investment strategies akin to those pursued by hedge funds or alternative investment funds, the CSSF issued Circular CSSF 02/8010 intending to clarify the legal and regulatory framework applicable to such UCIs. This circular seeks to clarify the specific rules applicable to Luxembourg UCIs, which pursue alternative investment strategies. 7.14  In this context and due to the high investment risks which the investment strategies pursued by such UCIs may entail, the CSSF clarified that it would pay increased attention to the reputation, experience, and financial standing of the promoters of such UCIs. Moreover, the CSSF considered that the professional qualifications and experience of the directors of the management bodies, and, if applicable, of the investment managers and investment advisers are particularly important in relation to such UCIs.

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7.15  While these circulars remain in effect today in respect of Part II UCIs governed by the 2010 UCI Law, collective investment schemes organized under the 2007 SIF Law may, in principle, deviate. 7.16  Given that all Luxembourg regulated UCIs are subject to authorization and ongoing prudential supervision, the CSSF may grant derogations from the provisions set out in its circulars on the basis of appropriate justification or impose additional investment restrictions. 7.17  The transposition of Directive 2011/61/EU11(the ‘AIFMD’) thus marks an important milestone in the evolution of Luxembourg as an international fund domicile. While the AIFMD primarily regulates managers of alternative investment funds (‘AIFs’), the AIFMD also contains a long list of product relevant rules. It is thus possible to state that Luxembourg-regulated investment funds have for some time been almost compliant with the product rules introduced by the law of 12 July 2013 on alternative investment fund managers (the ‘AIFM Law’), which entered into force on 15 July 2013. Hence, the productrelated adjustments in Luxembourg remain minimal compared to most other European domiciles, while the new manager regulations bring significant change.

(p. 318) 2. Legal structures used to form national AIFs 7.18  Based on the definition of AIFs in article 1(39) of the AIFM Law, UCIs organized under one of the three regulated ‘fund’ laws (ie 2010 UCI Law, 2007 SIF Law, or 2004 SICAR Law) will and/or may potentially qualify as AIFs. 7.19  In addition, Luxembourg law has always permitted the creation of certain types of ‘quasi-funds’ in the form of non-regulated ordinary commercial companies. Since the modernization of the Luxembourg common limited partnership (société en commandite simple— SCS) and the introduction of the special limited partnership (société en commandite spéciale— SCSp) with the AIFM Law, which came into force on 15 July 2013, the structuring toolbox of non-regulated legal structures has been substantially enhanced. It is thus appropriate to differentiate between unregulated and regulated AIFs in Luxembourg.

3. Unregulated AIFs 7.20  All Luxembourg commercial companies are governed by the law of 10 August 1915 on commercial companies, as amended (the ‘1915 Company Law’). From the seven available corporate forms, five are frequently used for the formation of non-regulated AIFs: (a)  corporate partnership limited by shares (société en commandite par actions— SCA); (b)  public limited liability company (société anonyme—SA); (c)  private limited liability company (société à responsabilité limitée—S.à r.l.), (d)  common limited partnership (société en commandite simple—SCS), and (e)  special limited partnership (société en commandite spéciale— SCSp). 7.21  When the corporate vehicles mentioned in paragraph 7.20 are used for the sole purpose of holding participations and other financial instruments in other companies or entities, these vehicles will then in financial jargon be referred to as SOPARFI.12 While this acronym has no legal bearing it is meant to indicate that the relevant entity has been set up to acquire, sell, and manage financial instruments in other entities to the exclusion of any commercial or industrial activities. A SOPARFI’s sole corporate purpose is thus to hold and manage financial participations in other undertakings. Apart from that, no investment restrictions or risk-spreading requirements apply. A SOPARFI is thus not subject to any

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restrictions on the eligibility of investors. SOPARFIs are not subject to prior authorization from the CSSF. 7.22  Currently, a SOPARFI does not have to appoint a depositary. SOPARFIs must appoint an independent auditor if certain quantitative thresholds (ie balance sheet total, turnover, and number of staff) are exceeded. 7.23  Hence, if a non-regulated entity were to qualify as an AIF, and provided the grandfathering rules do not apply and the entity is managed by a duly authorized AIFM, the unregulated entity is subject to the full impact of the indirect product rules contained in the AIFM Law, such as the need to appoint a depositary and the transparency obligations.

(p. 319) 4. Regulated AIFs A. Investment companies in risk capital (SICARs) 7.24  SICARs were introduced by the 2004 SICAR Law and are subject to the prior authorization and ongoing prudential supervision of the CSSF. SICARs may be organized using one of the corporate forms mentioned in paragraph 7.20: SA, S.à r.l., SCA, SCS, or SCSp. The 2004 SICAR Law provides for a specific legal, regulatory, and tax regime and applies to one of the corporate vehicles chosen among the corporate forms governed by the 1915 Company Law. 7.25  A SICAR must invest its funds in securities representing risk capital. Investment in risk capital is defined in Circular CSSF 06/24113 as the direct or indirect contribution of assets to entities in view of their launch, development, or listing on a stock exchange. Two conditions must be met: (i) the risk relating to the investments of the SICAR must be high; and (ii) the SICAR must aim at contributing to the development of the entities in which it invests. Absent the investment fund specific risk-spreading requirement, a SICAR may limit its investment in a single target entity or one specific sector or geography. 7.26  Investment in a SICAR may only be marketed to well-informed investors.14 While the well-informed investor concept includes the professional investor status as defined in Annex II of Directive 2004/39/EC,15 the scope of the Luxembourg ‘well-informed investor’is broader by including certain other investors based on a threshold or certification approach. 7.27  A SICAR is characterized by a certain operational flexibility stemming from the fact that it can elect to have a variable share capital or may be a multi-compartment/umbrella structure. 7.28  Distributions by way of annual dividends and interim dividends throughout the year in a SICAR are not subject to any restrictions other than those set out in the constitutional documents. 7.29  The assets of a SICAR must be valued on the basis of the fair value. SICARs must abide to certain transparency obligations towards investors and the supervisory authority similar to the requirements set out in the AIFM Law. (p. 320) 7.30  A SICAR must appoint a depositary located in Luxembourg and entrust it with the oversight of assets. A Luxembourg independent auditor must audit the accounting information contained in the annual report of the SICAR. 7.31  According to current regulatory practice, appropriate risk management systems must be implemented in order to detect, measure, manage, and monitor the risk of the investments and their contribution to the overall risk profile of the portfolio. 7.32  SICARs are thus mostly in line with the new organizational requirements imposed under the AIFM Law, when managed by a duly authorized AIFM.

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B. Specialized investment funds (SIFs) 7.33  SIFs were introduced by the 2007 SIF Law and are subject to the prior authorization and ongoing prudential supervision of the CSSF. The SIF, just like the SICAR, may be organized using one of the corporate forms mentioned in paragraph 7.20: SA, S.à r.l., SCA, SCS, or SCSp. 7.34  In addition, SIFs can adopt the form of a common fund (fonds commun de placement — FCP), ie an undivided co-ownership of assets managed by a Luxembourg management company itself subject to and governed by the 2010 UCI Law. Hence, the 2007 SIF Law provides for a specific legal, regulatory, and tax regime, which either applies to one of the corporate forms governed by the 1915 Company Law or the FCP governed by the 2007 SIF Law. 7.35  The 2007 SIF Law was enacted to replace and substitute the 1991 UCI Law and to provide Luxembourg with a true alternative investment funds regime. The 2007 SIF Law does not provide for any asset class limitation or other restrictions save for a mandatory direct (if organized as a master fund) or indirect (if organized as a feeder fund) risk diversification obligation. SIFs may thus in principle pursue all investment strategies in all asset classes. 7.36  Just like SICARs, investment into SIFs is restricted to well-informed investors. Given that the 2007 SIF Law was designed so as to permit the implementation of AIFs in accordance with international terms and conditions, the 2007 SIF Law provides for the requisite level of structuring flexibility. 7.37  SIFs are subject to transparency obligations comparable to those introduced by the AIFM Law if managed by an authorized AIFM. SIFs must also appoint a depositary and are subject to the same investor protection standards as SICARs. 7.38  In conclusion, SIFs are already mostly in line with the new organizational requirements imposed under the AIFM Law, if managed by a duly authorized AIFM.

C. Part II UCIs 7.39  UCIs governed by Part II of the 2010 UCI Law have been in existence since 1988. Part II UCIs have, since their inception, been the only regulated investment funds regime permitting the offering of private equity, hedge, and property funds to retail investors. 7.40  As potential retail products, Part II UCIs have always been subject to stricter regulatory oversight and certain additional investment restrictions. Some of these restrictions (ie strict risk diversification ratios) were meant to protect investors from excessive risk taking. Promoters of these funds were therefore often confined to limited structuring options. Consequently, the use of Part II UCIs for typical alternative asset classes has been limited over time. A large (p. 321) part of the existing Part II UCIs merely replicates a UCITS-compliant strategy or pursues a similar but not fully harmonized investment strategy. 7.41  Part II UCIs may be set up in corporate form as investment companies with variable or fixed capital, or as a FCP with a management company. 7.42  Since the 2010 UCI Law does not prescribe a defined list of eligible assets for Part II UCIs, its scope is very broad and includes potentially all asset classes and strategies, subject to the restrictions and limitations set out in Circular IML 91/75, as amended, as well as in Circular CSSF 02/80 in respect of UCIs using alternative investment strategies.

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7.43  In general, however, and outside the scope of the restrictions specifically set in the previously mentioned circulars, Part II UCIs investments are limited to: (a)  no more than 10% of their net assets in securities not listed on a stock exchange or dealt in on another regulated market which operates regularly and is recognized and open to the public; (b)  no more than 10% of the securities of the same kind issued by the same issuing body; and (c)  no more than 10% of the net assets in securities issued by the same issuing body. 7.44  The concentration limits in paragraph 7.43 do not apply to securities issued or guaranteed by a Member State of the Organization for Economic Cooperation and Development (OECD) or its local authorities or a public international body with an EU, regional, or worldwide scope. 7.45  While SIFs and SICARs are not subject to pre-set borrowing limitations, Part II UCIs may generally borrow up to 25% of their net assets (except leveraged UCIs, where the investment policy provides for a permanent borrowing for investment purposes of at least 25% of their net assets). 7.46  While derogations may apply on a case-by-case basis, more specific rules have been issued in respect of UCIs pursuing alternative strategies as per Circular CSSF 02/80. The CSSF addressed in particular: (a)  the risk-diversification rules regarding short sales; (b)  the restrictions applicable to target UCIs (ie applicable to funds of funds); (c)  the restrictions relating to financial derivative instruments; (d)  the provisions applicable to securities lending transactions; and (e)  the provisions applicable to repo transactions. 7.47  Part II UCIs may thus choose to apply either the provisions of Circular CSSF 02/80 or Circular CSSF 08/35616 as regards securities lending and repo transactions. In the latter case, Circular CSSF 08/356 clarifies the rules applicable to UCIs when employing certain techniques and instruments relating to transferable securities and money market instruments. 7.48  Securities lending transactions: (a)  UCIs may lend directly to a borrower or through a standardized lending system (organized by a recognized clearing institution or by a financial institution subject to equivalent prudential supervision rules); (p. 322) (b)  the counterparty must be subject to equivalent prudential supervision; (c)  the UCIs must receive a guarantee the value of which is at least equivalent to 90% of the global valuation of the securities lent; (d)  the volume of securities lending transactions must be kept at an appropriate level; and (e)  disclosure of the global valuation of the securities lent must be made in the financial reports.

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7.49  Repo transactions: The purchase or sale of securities with a repurchase option is allowed (i) if the counterparties are subject to equivalent prudential supervision, (ii) if disclosure of the total amount of the open transactions is made in the financial reports, and (iii) subject to the limits set out in Circular CSSF 08/356. 7.50  Reverse repo transactions are allowed (i) if the counterparties are subject to equivalent prudential supervision, (ii) if disclosure of the total amount of the open transactions is made in the financial reports, and (iii) subject to the limits set out in Circular CSSF 08/356. 7.51  Limitation of the counterparty risk associated with efficient portfolio management transactions: According to Circular CSSF 11/512,17 the net exposures (ie the exposures of the UCITS less the collateral received by the UCITS) to a counterparty arising from securities lending transactions or reverse repurchase/repurchase agreement transactions will be taken into account in the 20% limit provided for in article 43(2) of the 2010 UCI Law. Consequently, the previous specific limits of 5%/10%, as indicated in Circular CSSF 08/356, are no longer applicable. 7.52  The cash provided as a guarantee may be reinvested, under the conditions set out in Circular CSSF 08/356. 7.53  While Part II UCIs could have been repealed by the 2007 SIF Law, affording promoters the highest level of structuring flexibility, the retail public distribution potential allowed Part II UCIs to continue. 7.54  As a result of the implementation of the AIFM Law, all Part II UCIs will automatically be AIFs. While this default rule has not been retained for the 2004 SICAR Law and the 2007 SIF Law, all Part II UCIs are thus automatically within the scope of application of the AIFM Law. 7.55  Since AIFs may only be marketed to professional investors and subject to special authorization and/or additional local law requirements to retail investors, it may be expected that Part II UCIs and SIFs will continue to coexist. 7.56  Part II UCIs are subject to more stringent transparency requirements than SIFs and are required to appoint a depositary as well as an independent auditor. As such, Part II UCIs are largely compliant with the new organizational requirements that may be imposed under the AIFM Law, when managed by a duly authorized AIFM.(p. 323) (p. 324) (p. 325) (p. 326) 7.57  AIFMs choosing to set up a Luxembourg AIF will have to determine, on the one hand, whether to organize a regulated or a non-regulated (fund) structure, and, if they elect a regulated (fund) structure, they will have to choose among the three available legal, regulatory, and tax regimes, ie the 2004 SICAR Law, the 2007 SIF Law, or the 2010 UCI Law; and, on the other hand, the appropriate legal or corporate form to be adopted for the formation of the AIF (ie SA, S.à r.l., SCA, SCS, SCSp, or FCP, as the case may be) though not every corporate or legal form will be available under all three regimes. 7.58  The table on pages 323–5 is a summary overview of the key features pertaining to the various corporate or legal forms as prescribed under the 1915 Company Law. It should be noted that the overview merely reflects the standard legal provisions applicable to nonregulated corporate vehicles as per the 1915 Company Law. In respect of some of these standard rules, the 2004 SICAR Law, the 2007 SIF Law, and the 2010 UCI Law will deviate from the 1915 Company Law in order to provide for terms tailored to the needs of the investment management industry.

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SA Governance

SCA One tier SA: At least one director (if the SA has one shareholder) or at least three directors (if the SA has several shareholders) that do not need to be shareholders, may be entrusted with the management of the SA. In case of plurality of directors, they form a board of directors. Two-tier SA: Management board with at least two directors, supervised by a supervisory board with at least three directors, if several shareholders. The board of directors has the broadest powers to take any actions necessary or useful to fulfill the corporate object, excepting the actions reserved to the general meeting by the 1915 Company Law or by the constitutional document.

S.à r.l

One or several general partners (GPs) or one or several appointed external managers, may be entrusted with the management of the SCA. The GP and/ or the manager cannot be dismissed without its own consent, unless otherwise provided for in the constitutional documents. The GP is jointly and severally liable for any liabilities of the SCA which cannot be satisfied out of the SCA’s assets. If an external manager has been appointed, such manager will only be liable as agent. Limited partners may not participate in the (external) management of the SCA. Any limitations to their powers (even if published in the constitutional document) cannot be opposed

One or several managers, who do not need to be shareholders may be entrusted with the management of the S.à r.l. In case of plurality of managers, they may form a collective body. Each manager or the board of managers has the broadest powers to take any actions necessary or useful to fulfill the corporate object, excepting the actions reserved to the general meeting of shareholders by the 1915 Company Law or by the constitutional document. Any limitations to their powers (even if published in the constitutional document) cannot be opposed towards third parties. The term and revocability of each manager can

SCS One or several general partners (GPs) or one or several appointed external managers may be entrusted with the management of the SCS.

One or several general partners (GPs) or on or several appointed external managers may be entrusted with the manageme of the SCSp

Each manager has the broadest powers to perform all acts necessary or useful to conduct the business of the SCS in accordance with the limited partnership agreement (LPA).

Each manager ha the broades powers to perform all acts necessary o useful to conduct the business of the SCSp in accordance with the LPA.

The GP is jointly and severally liable for any liabilities of the SCS which cannot be satisfied out of the SCS’s assets. If an external manager has been appointed, such manager will only be liable as agent. Limited partners may not participate in the (external)

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SCSp

The GP is jointly and severally liable for any liabilities o the SCSpwhich cannot be satisfied ou of the SCSp’s assets.

If an external manager ha been appointed, such manager will only be liable as agent.

Limited partners may not participate in the (external) manageme of the SCSp

SA

SCA Any limitations to their powers, (even if published in the constitutional document), cannot be opposed towards third parties.

S.à r.l

towards third parties.

be freely determined.

The term and revocability of each manager can be freely determined.

management of the SCS. Any limitations on their powers as managers provided for in the LPA (even if published via extract) cannot be opposed towards third parties.

The directors may only be appointed for a renewable term of six years and can be dismissed by the general meeting at any time and without cause.

Shares/ interest issued

SCS

The term and revocability of each manager can be freely determined.

Issuance of ordinary and preferred shares in bearer and registered form with or without nominal value.

Issuance of ordinary and preferred shares in bearer and registered form with or without nominal value.

Shares may be issued in several classes having different rights associated thereto.

Shares may be issued in several classes having different rights associated thereto.

Register of registered shares required. Register is not public.

Register of registered shares required. Register is not public.

Public and/or private issuance of equity, bonds, and debt instruments possible.

Public and/or private issuance of equity, bond, and debt instruments possible.

Issuance of ordinary and preferred shares in registered form with or without nominal value. Shares may be issued in several classes having different rights associated thereto. Register of shareholders required. Register to be publicly disclosed (through filing with trade and companies register).

Any limitations to their powers as managers provided fo in the LPA (even if published via extract) cannot be opposed towards third parties.

The term and revocability of each manager can be free determined

Issuance of unitized or non-unitized limited partnership interests.

Issuance of unitized or non-unitize limited partnership interests.

Capital accounts can be maintained per partner. SCS has a legal personality.

Capital accounts can be maintained per partner SCSp does not have a legal personality.

Register of partners. Register is not public. Possibility to issue debt securities privately or publicly.

Only private issuance of equity, bonds and debt

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SCSp

Register of partners. Register is not public.

Possibility t issue debt securities privately or publicly.

SA

SCA

S.à r.l

SCS

SCSp

instruments possible.

Transfers/ listing of shares

No statutory restriction on transfers.

No statutory restriction on transfers.

Transfers can be restricted under certain conditions.

Transfers can be restricted under certain conditions.

Listing of securities possible.

Legal ownership of assets

Collective decisions

Yes.

Transfers (to third parties) subject to restrictions and consent.

Listing of securities possible.

Yes.

Yes.

Transfer rules freely determined in the LPA.

Transfer rules freely determined in the LPA.

Default rules: limited partnership (LP) interests may be transferred only with the GP consent while GP interest may be transferred following the rules for the amendments of the LPA.

Default rules: LP interests may be transferred only with the GP consent while GP interest ma be transferred following the rules fo the amendmen of the LPA.

Yes.

The general meeting is vested with the powers expressly reserved to it by the 1915 Company Law and by the constitutional document.

The general meeting is vested with the powers expressly reserved to it by the 1915 Company Law and by the constitutional document.

The general meeting is vested with the powers expressly reserved to it by the 1915 Company Law and by the constitutional document.

Mandatory annual meeting (at pre-set date) for the approval of the annual accounts.

Mandatory annual meeting (at pre-set date) for the approval of the annual accounts.

Annual meeting (or written consultation if less than 25 shareholders) for the approval of

Yes.

Collective decisions and procedures freely determined under the LPA. Default rules may apply.

Collective decisions and procedures freely determined under the LPA. Defau rules may apply.

Default rules: qualified majority for the removal of the GP or the amendments to the LPA, simple majority for

Default rules: qualified majority for the remova of the GP o the amendmen to the LPA, simple majority for

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SA

SCA

S.à r.l

Simple majority of the votes validly cast, regardless of the portion of capital represented for ordinary decisions.

Simple majority of the votes validly cast, regardless of the portion of capital represented for ordinary matters.

Stricter quorum and voting requirements for extraordinary decisions (ie changes to the articles of association).

Stricter quorum and voting requirements for extraordinary decisions (ie changes to the articles of association).

One share, one vote.

GP(s)may be granted veto right on specific matters.

Stricter quorum and voting requirements for extraordinary decisions (ie changes to the articles of association and share transfers to third parties).

One share, one vote.

One share, one vote.

SCS

SCSp

the annual accounts.

other decisions.

other decisions

Simple majority of the votes validly cast, regardless of the portion of capital represented for ordinary matters.

Annual general meeting or written consultation for the approval of the annual accounts.

No requiremen for approva of annual accounts.

Voting rights determined in LPA.

II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD 7.59  Pre-AIFMD alternative investment funds were either set up as unregulated (corporate) entities under the 1915 Company Law or as regulated (corporate or other arrangements) entities under either the 2004 SICAR Law, the 2007 SIF Law, or the 2010 UCI Law (the ‘Product Laws’). 7.60  All regulated AIFs continue to be subject to the prior authorization and ongoing prudential supervision of the CSSF.18Among the different Product Laws, the CSSF applies a sliding scale of scrutiny, with heavy scrutiny and verification of all Part II UCIs meant for retail distribution and lesser scrutiny for SIFs and SICARs meant for ‘well-informed investors’. 7.61  The CSSF reviews and approves the initiator, sponsors, or promoter19 of the Luxembourg funds. That does not amount to authorization of the sponsor, initiator, or promoter. Most AIFs will be organized as SIFs and SICARs that are structured as corporate or limited partnerships. The management of the partnership is typically entrusted to one managing general partner, which is typically a Luxembourg private or public limited liability company (SA or S.à r.l.). While the CSSF reviews and approves each individual to be appointed as a member of the management body, the CSSF does not regulate or authorize the general partner entity itself.

(p. 327) 2. Regulation of national marketing of AIFs prior to the entry into force of the AIFMD

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Voting righ determined in LPA.

A. General 7.62  Luxembourg is an important destination for the distribution and placement of shares and units of EU and third country AIFs. Given that most of the placement activity is directed towards professional and institutional investors (ie funds of funds), Luxembourg has taken a liberal approach towards the placement of AIF units and shares and merely regulates the public offering and distribution/placement of AIF shares or units. A placement which would not be a public offer would ipso facto qualify as a private placement or offering not subject to registration or regulation by the CSSF. 7.63  A distinction was made between the offering of shares or units of (a) closed-ended AIFs versus the offering of (b) open-ended AIFs. Generally, all offers must comply with the law of 8 April 2011 concerning the implementation of a Consumer Code, dealing in particular with door-to-door selling, itinerant sales, and solicitation of orders.

B. Offering of closed-ended AIFs 7.64  The offering of shares or units in closed-ended AIFs potentially falls within the scope of application of the Law of 10 July 2005 on prospectuses for securities, as amended (the ‘Prospectus Law’), as such law does not apply to open-ended AIFs. 7.65  The Prospectus Law set up a new framework for the drawing-up, approval, and distribution of prospectuses to be published when securities are offered to the public or admitted to trading on a regulated market. Indeed, the Luxembourg procedures regarding the approval of prospectuses for securities have been completely reshuffled with the transposition into Luxembourg law of Directive 2003/71/EC.20 7.66  The Prospectus Law thus provides for a number of exclusions such as: where the offer is addressed to qualified investors only; where the offer is to fewer than 150 natural or legal persons in Luxembourg other than qualified investors; where the offer is addressed to investors who acquire securities for a total consideration of at least EUR 100,000 per investor, for each separate offer.

C. Offering of open-ended AIFs 7.67  For open-ended AIFs, an offer of shares, units, or interests can be made without triggering any licensing or registration requirements, if there is no ‘public announcement, offer or sale’ of the shares/units/interests. 7.68  Since no statutory criteria have been set for private placement activities in Luxembourg, the following criteria have been defined over time: (a)  the number of offerees should be limited (note that it is the number of offerees and not the number of subscribers that matters). While there is no official number as to what a limited circle of potential investors means, various numbers can be encountered in practice ranging anywhere between 20 to 150 potential investors. In practice, a number of 50 offerees is often mentioned as a safe harbour rule of thumb. (p. 328) (b)  there is no public announcement or publicity (for example, marketing of the AIF in a national newspaper), no public distribution and no public solicitation in respect of the AIF; or (c)  there is an existing relationship between the offeror and the offeree. 7.69  The criteria in paragraph 7.68 will continue to apply post-22 July 2013 until 22 July 2014 and thereafter, subject to the additional AIFMD requirements as of such date until

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such time as the private placement rules are altogether repealed at EU level or in Luxembourg.

III. Regulation of National AIFs after the AIFMD 7.70  Based on its established tradition in the investment funds area, Luxembourg already benefitted from pre-AIFMD regulated investment vehicles. This aspect is confirmed mainly by the provisions of the 2007 SIF Law, 2004 SICAR Law, and 2010 UCI Law with respect to Part II UCIs. The transposition of the AIFMD into Luxembourg law was made by the verbatim implementation of the AIFMD into the AIFM Law. In addition, the AIFM Law introduced various amendments to the existing Product Laws. While these amendments did not overhaul the existing legal framework, they introduced important differentiations between: (a)  SIFs qualifying as AIFs and being managed by a duly authorized AIFM not benefitting from the grandfathering provisions in respect of such AIFs, and SIFs not qualifying as AIFs and therefore remaining subject to the original legal framework, as well as SIFs managed by a sub-threshold AIFM not having opted for authorization as an AIFM; (b)  SICARs qualifying as AIFs and being managed by a duly authorized AIFM not benefitting from the grandfathering provisions in respect of such AIFs, and SICARs not qualifying as AIFs and therefore remaining subject to the original legal framework, as well as SICARs managed by a sub-threshold AIFM not having opted for authorization as an AIFM; (c)  UCIs governed by Part II of the 2010 UCI Law, which ipso iure qualify as AIFs and being managed by a duly authorized AIFM not benefitting from the grandfathering provisions in respect of such AIFs, and UCIs managed by a sub-threshold AIFM not having opted for authorization as an AIFM. 7.71  As a result of the implementation of the AIFMD, the existing funds legislation has been reorganized to continue the pre-AIFMD legal framework for those collective investment schemes not requiring the appointment of a duly authorized AIFM and collective investment schemes not qualifying as AIFs, and to update the existing legal framework for collective investment schemes qualifying as AIFs and being managed by a duly authorized AIFM and not benefitting from the grandfathering provisions. 7.72  The Luxembourg pre-AIFMD legal framework will therefore be largely untouched by the product relevant implications of the AIFM Law. AIFs will, through the Product Laws, continue to be regulated in their own right. 7.73  While the impact on the regulated investment entities has been implemented in the relevant legal texts, the so-called unregulated corporate or legal entities qualifying as AIFs and being managed by a duly authorized AIFM not benefitting from the grandfathering provisions in respect of these AIFs have not changed and have not become subject to regulation as a result of the AIFM Law. 7.74  The consequences of these non-regulated AIFs falling within the full scope of application of the product relevant provisions of the AIFM Law will have to be complied with by the (p. 329) relevant AIFM, ie the AIFM will have to ensure that an AIFM Lawcompliant depositary is appointed and that the transparency obligations are complied with.

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IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

AIFM Law, art 2(1)

Art 2 (scope)

AIFM Law, art 2(1), (2)

Art 3 (exemptions)

AIFM Law, art 3

Art 4 (definitions)

AIFM Law, art 1er

Art 5 (determination of AIFM)

AIFM Law, art 4

Implementing Regulation Arts 2–5 (re Art 3(2) AIFMD: calculation of AUM)

n/a

Arts 6–11 (re Art 4(3) AIFMD: calculation of leverage)

n/a

2. Articles 2 and 3—Scope and exemptions 7.75  The AIFM Law covers the authorization, activities, and transparency requirements applicable to Luxembourg-based AIFMs managing and/or marketing AIFs in the EU. 7.76  The AIFM Law thus applies to any legal person established in Luxembourg whose regular business is managing one or more AIFs in accordance with the definition under article 1(46) of the AIFM Law. It should be noted that it is the responsibility of any legal person whose regular business is the management of one or more AIFs to self-assess if it is to be considered as an AIFM under the AIFM Law. 7.77  The AIFM Law applies to both external and internal AIFMs. As such, the AIFM Law replicates the relevant provisions of the AIFMD. 7.78  Following the implementation of the AIFM Law, the CSSF issued frequently asked questions (FAQs)21 aimed at highlighting some of the key aspects of the AIFM. These FAQs will be regularly updated and the CSSF reserves its right to alter its approach to any matter covered at any time. 7.79  The CSSF thus clarifies in its FAQs that the following entities may potentially be considered as AIFMs in Luxembourg: (a)  Chapter 15 management companies under the 2010 UCI Law; (b)  Chapter 16 management companies (articles 125-1 and 125-2) under the 2010 UCI Law; (c)  internally managed Part II UCIs under the 2010 UCI Law; (d)  internally managed SIFs under the 2007 SIF Law; (p. 330) (e)  internally managed SICARs under the 2004 SICAR Law; and (f)  any Luxembourg entity which will adopt the status of an AIFM regulated under the AIFM Law.

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7.80  The supervisory authority confirmed that (i) any Luxembourg entity providing management services to AIFs which are not regulated under any of the Product Laws and (ii) any internally managed Luxembourg entity qualifying as an AIF which is not regulated under any of the Product Laws, must be authorized as an AIFM. 7.81  Pre-AIFMD, only two types of management companies were subject to prudential authorization and oversight. Whereas Chapter 15 management companies governed by the 2010 UCI Law are UCITS-compliant management companies, which can also manage nonharmonized UCIs, Chapter 16 management companies governed by the 2010 UCI Law can merely be used to manage UCIs (and not UCITSs). 7.82  The supervisory authority in its FAQs clarifies the steps to be taken by Chapter 15 (see Figure 1) and Chapter 16 management companies (see Figure 2) in order to determine their status under the AIFM Law. Further guidance is also provided in this respect for Luxembourg investment products (see Figure 6) and detailed for Part II UCIs established in corporate form (see Figure 3), SIFs established in corporate form (see Figure 4), and nonregulated AIFs (see Figure 5). View full-sized figure

Figure 1  Chapter 15 management company (‘ManCo’) Adapted from CSSF AIFMD FAQ version #3 189 July 2013, www.cssf.lu

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View full-sized figure

Figure 2  Chapter 16 ManCo Adapted from CSSF AIFMD FAQ version #3 189 July 2013, www.cssf.lu View full-sized figure

Figure 3  Part II UCIs established in corporate form Adapted from CSSF AIFMD FAQ version #3 189 July 2013, www.cssf.lu

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View full-sized figure

Figure 4  SIFs established in corporate form or SICARs Adapted from CSSF AIFMD FAQ version #3 189 July 2013, www.cssf.lu View full-sized figure

Figure 5  AIFM Law impact on non-regulated AIFs Adapted from CSSF AIFMD FAQ version #3 189 July 2013, www.cssf.lu

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View full-sized figure

Figure 6  Product overview Adapted from CSSF AIFMD FAQ version #3 189 July 2013, www.cssf.lu (p. 331) 7.83  The Luxembourg implementation of Article 3 of the AIFMD does not currently give rise to any specific comment given the lack of any further domestic guidance thereon. 7.84  In order to determine the level of assets under management, neither the CSSF nor the parliamentary discussions in relation to the AIFM Law give any indications other than the communications made between the European Securities and Markets Authority (‘ESMA’), the Commission, certain trade bodies, and other representative groups such as the European Private Equity and Venture Capital Association (‘EVCA’) during the time leading up to the adoption of the AIFMD and the Implementing Regulation.22

(p. 332) 3. Article 5—Determination of the AIFM 7.85  The AIFM Law requires that every AIF must appoint or designate its AIFM. For all AIFs having a legal personality separate from that of their investors, various structuring options may thus be considered each time in accordance with the 1915 Company Law, or, insofar as the FCP is concerned, in accordance with the 2007 SIF Law and/or the 2010 UCI Law. The management body of each AIF may thus have the option to appoint or designate: (a)  an external AIFM, provided that (i) it is an external legal entity appointed by the AIF or on behalf of the AIF and (ii) its regular business is the management of one or more AIFs; (p. 333) (b)  itself as internally managed, provided that (i) its legal form permits internal management and (ii) the management functions are performed by its governing body or any other internal resource. 7.86  It is generally accepted that all corporate forms mentioned in section I.2 may be either internally managed (ie a SA may be internally managed by its board of directors and a S.à r.l. may be internally managed by its board of managers, in which case the SA or the S.à r.l. itself will be considered the AIFM) or externally managed (ie the SCA or SCS may be deemed internally or externally managed by its respective managing general partner). 7.87  While an external AIFM will be able to manage several other AIFs, this option will not be available to internally managed AIFs. FCPs and SCSps are always considered as externally (p. 334) managed due to the fact that they lack a legal personality different from that of their investors. 7.88  As mentioned previously, the SCA or SCS offers most of the structuring options.23

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(p. 335) 7.89  A SCA/SCS may consider itself as internally managed, whereby the managing general partner would be assimilated to the internal management body (in which case the general partner may not act as managing general partner of any other corporate partnership limited by shares or any common or special limited partnership). 7.90  Alternatively, the SCA/SCS may consider itself as externally managed, whereby the managing general partner elects to be an external AIFM (in which case the managing general partner may be appointed as AIFM of other AIFs). 7.91  Finally, the SCA/SCS may opt to appoint a third party as AIFM.24

(p. 336) V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as AIFM)

AIFM Law, art 5

Art 7 (application for authorization)

AIFM Law, art 6

Art 8 (conditions for granting the authorization)

AIFM Law, art 7

Art 9 (initial capital and own funds)

AIFM Law, art 8

Art 10 (changes in the scope of the authorization)

AIFM Law, art 9

Art 11 (withdrawal of the authorization)

AIFM Law, art 10

Implementing Regulation

National implementation

Arts 14–17 (re Art 9(7) AIFMD: own funds and insurance)

n/a

2. Articles 6 to 8—Conditions and application for authorization 7.92  Following Press Release 13/3225 issued by the CSSF, all Luxembourg-based internally managed AIFs and external AIFMs have been requested to perform a self-assessment as to the application of the AIFM Law. Only Luxembourg AIFs electing to be internally managed as well as external AIFMs established in Luxembourg were summoned to file a declaration with the CSSF on or around 16 August 2013. The purpose of the self-assessment was to permit the CSSF to determine the number of AIFMs it would need to register or authorize on or before 22 July 2014. 7.93  Sub-threshold AIFMs (including internally managed sub-threshold AIFs) are under a legal obligation to register pursuant to article 3(3) of the AIFM Law. 7.94  It is expected that a significant number of AIFs will elect to be treated as internally managed sub-threshold AIFs. This should generally be the case for AIFs having completed their fund-raising while still being in their investment phase. It is also generally expected that many smaller private equity and real estate AIFs will opt to remain outside the full scope of application of the AIFM Law. 7.95  The situation will be different for open-ended funds as well as closed-ended funds that are still in the early stages of raising funds. The ability to continue marketing via private placement will often determine whether or not an AIFM marketing passport will be needed. In light of the organizational requirements for a full AIFM authorization, it is expected that a number of smaller AIFs will elect to appoint a third party AIFM offering the full range of

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AIFM services and hence qualifying the relevant AIF shares/units/interests for distribution in all EU Member States. 7.96  It is expected that the activities of third party AIFMs and ‘super management companies’ combining both a UCITS authorization and an AIFM authorization will gain momentum. As of 27 December 2013, 11 entities have been authorized as external AIFMs in Luxembourg. (p. 337) 7.97  In addition, external AIFMs may, in accordance with article 5(4) of the AIFM Law, apply to be authorized to provide discretionary portfolio management services as well as certain non-core services comprising investment advice, safe-keeping, and administration in relation to shares or units of collective investment undertakings and reception and transmission of orders in relation to financial instruments, including with respect to portfolios owned by pension funds and institutions for occupational retirement provision set up under Directive 2003/41/EC.26 In order to be in a position to offer these additional services, the application for authorization must include the additional services. 7.98  A significant number of UCITS management companies are organized and operating in and from Luxembourg. These management companies typically manage and administer UCITSs. A significant number has also been managing either FCPs governed by Part II UCIs, which qualify as AIFs since 12 July 2013, or FCP-SIFs, which may qualify as AIFs if they meet the relevant conditions. As a consequence, these UCITS management companies will in most cases apply for dual registration under article 5(2) and 6(4) of the AIFM Law. This represents an opportunity for Luxembourg to become a European distribution hub for non-European managers wishing to benefit immediately from the passport instead of waiting, in principle, for 2015, by plugging into a UCITS management company acting as AIFM. 7.99  The AIFM Law ensures a more flexible authorization regime for Luxembourg management companies while recognizing their possibility to manage UCITSs subject to the authorization under the 2010 UCI Law in addition to the services offered under Annex I.27 In this context, when a UCITS management company authorized pursuant to Chapter 15 of the 2010 UCI Law, or a management company authorized as a Chapter 16 management company pursuant to the 2010 UCI Law, applies for authorization as an AIFM, it will not be required to provide information or documents, which it has already provided to the CSSF when applying for authorization under the 2010 UCI Law, provided that such information or documents remain up to date.28 7.100  Regarding the procedures to be established by the CSSF in relation to Article 7 of the AIFMD (application for authorization) and Article 8 (conditions for granting authorization), it is worth noting that the CSSF has reorganized its services in the wake of the implementation of the AIFM Law. A dedicated team has been created for the handling of AIFM applications as well as their supervision. 7.101  In terms of procedures for authorization, as mentioned at paragraph 7.99, duly authorized UCITS management companies electing to become AIFMs will already comply with a number of requirements, which they will not need to resubmit in the context of the AIFM authorization. AIFM applications may thus refer to the documents already submitted. The procedures will therefore not deviate from those in place for UCITS management companies, although some adaptations will depend on the various forms of AIFMs possible. Managers will have to apply for authorization as an AIFM by filling in an application available on the CSSF website together with a certain number of documents evidencing the information (p. 338) contained in the application. The application must contain all the requirements, which are listed in the provisions set forth in article 6 of the AIFM Law. However, different types of applications will be available on the CSSF website depending notably on whether or not the AIFM applicant is an existing UCITS management company, a

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Chapter 16 management company, an internally managed AIF, or another Luxembourg entity, in order to facilitate the instruction and approval process.

3. Article 9—Initial capital and own funds 7.102  Article 9 of the AIFMD (transposed verbatim by article 8 of the AIFM Law) specifies requirements in terms of initial capital and own funds, which are similar to the relevant provisions of the 2010 UCI Law for UCITS management companies and self-managed investment companies. Indeed, according to the 2010 UCI Law29 and the AIFM Law,30 UCITS management companies and external AIFMs (including UCITS management companies), respectively, are subject to the same capital requirement, ie they must have an initial capital of at least EUR 125,000. Just like self-managed UCITSs, internally managed AIFs must have an initial capital of at least EUR 300,000. 7.103  An additional amount of own funds may be necessary by taking into account the following factors. 7.104  When the value of the portfolios of AIFs managed by the AIFM exceeds EUR 250 million, the AIFM is required to 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, with a maximum of EUR 10 million. 7.105  Irrespective of the foregoing, the own funds of the AIFM must never be less than the equivalent of one-quarter of its preceding year’s fixed overheads. Fixed overheads are the personnel costs and costs of the implementing bodies, as well as the operating expenses. 7.106  Where the value of the portfolios of AIFs managed by the AIFM exceeds EUR 250 million, the AIFM may not provide up to 50% of the additional amount if it benefits from a guarantee of the same amount given by a credit institution or an insurance undertaking which has its registered office in a EU Member State or in a third country in which it is subject to prudential supervision considered equivalent to that of the EU. 7.107  The requirement to have an additional amount of own funds when the value of the portfolios managed exceeds a certain amount applies to UCITS management companies but not to self-managed investment companies. Article 9 of the AIFMD refers to the value of the portfolios of AIFs managed by the AIFM, ie to a plurality of AIFs. Therefore, the requirement under the AIFMD to provide additional own funds applies to external AIFMs only and not to internally managed AIFs, because an internally managed AIF may not engage in activities other than the internal management of that single AIF,31 not multiple AIFs. Such an interpretation is also in line with the UCITS rules. (p. 339) 7.108  Unlike UCITS management companies and self-managed investment companies, under the AIFM Law,32 in conjunction with the Implementing Regulation,33 in order to cover potential liability risks arising from professional negligence, an AIFM must further dispose of either (i) additional own funds of at least 0.01% of the value of the portfolios of the AIFs managed, or (ii) a professional indemnity insurance against liability arising from professional negligence which is appropriate to the risks covered. The own funds of the AIFM, including additional own funds, must be invested in liquid assets or in short-term liquid assets in accordance with the AIFM Law.34 The objective of the AIFMD and its Implementing Regulation is to protect investors by ensuring that potential professional liability risks resulting from the AIFM’s activities are appropriately covered by way of additional own funds or professional indemnity insurance. 7.109  While the additional own funds requirements will not be problematic for AIFMs sponsored by financial institutions or other institutional investors, they may be considered considerably more burdensome for smaller AIFMs wishing to opt-in or having to apply for authorization. It is expected that a market will develop for AIFM services to be provided to smaller AIFMs offering the necessary safeguards. It is generally expected that the operational model of private equity and real estate AIFs will more easily permit the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

appointment of a third party external AIFM subject to organizing the appropriate investment advisory relationship, including all the procedural safeguards to be ensured by the AIFM. It is also expected that sponsors of sub-threshold AIFs wishing to opt-in will seriously consider third party external AIFM services, including the portfolio and risk management functions in addition to the marketing passport.

4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 7.110  As a general comment, since the AIFMD has only recently been implemented into Luxembourg law, we cannot yet assess how the ‘change in scope’ and ‘withdrawal’ provisions are likely to operate under the AIFM Law. Notwithstanding, some differences between the AIFM Law, the 2010 UCI Law, and the law of 13 July 2007 on markets in financial instruments, as amended (the ‘MiFID Law’) may be mentioned. 7.111  First, with regard to the change in scope of the authorization, the AIFM Law35 and the 2010 UCI Law both impose an explicit obligation on the AIFM and the UCITS to notify the CSSF of any material changes regarding the information upon which the CSSF granted such authorization. 7.112  However, as opposed to the MiFID Law, which clearly identifies a material change as any change in the rules governing the regulated market, the definition of ‘material change’ under the AIFM Law and the UCITS Law is broader and includes any change in the information (p. 340) upon which the CSSF granted the authorization, but does not exclude any other material change from being notified. 7.113  Another difference concerns the process following the notification to the CSSF of a contemplated material change. The AIFM Law specifies that the AIFM must be informed within one month of receipt of the notification if such change is restricted or rejected. At the expiration of the deadline—which may be extended for up to one month under specific circumstances—if the CSSF does not oppose the contemplated change, it may be implemented. 7.114  Contrary to the AIFM Law, the 2010 UCI Law does not provide for any process or deadline during which the CSSF may approve, restrict, or reject the contemplated change. Furthermore, contrary to the MiFID Law, neither the AIFM Law nor the 2010 UCI Law provides for any rationales upon which the CSSF may decide to approve, restrict, or reject the change.36 Indeed, although no deadline is set in the MiFID Law, the CSSF should nevertheless reject the change if it has objective and demonstrable reasons to think that such change may affect the orderly functioning of the market. 7.115  Second, with regards to the ‘withdrawal’ provision, the 2010 UCI Law and the AIFM Law are similar save for one specific event upon which the CSSF may withdraw the authorization. Under the 2010 UCI Law, the authorization may be withdrawn from the UCITS if it falls within any reasons for withdrawal as provided by the 2010 UCI Law, whereas under the AIFM Law, it may be withdrawn if it falls within any of the reasons which Luxembourg law, in respect of matters outside the scope of the AIFM Law, provides for withdrawal. The scope of potential withdrawal events therefore appears to be wider under the AIFM Law than the 2010 UCI Law. Though a similar provision to the AIFM Law is set out under MiFID regarding a withdrawal event, such provision was not implemented in the MiFID Law. 7.116  Finally, both the 2010 UCI Law and the AIFM Law provide that the court will pronounce the dissolution and liquidation of the AIFM/UCITS established in Luxembourg

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whose registration on the relevant list has been refused or withdrawn. The MiFID Law, however, does not provide for automatic liquidation and dissolution. 7.117  With respect to withdrawal of an authorization or licence, the AIFM Law contains provisions that are similar to the 2010 UCI Law and the Law of 5 April 1993 on the Financial Sector, as amended from time to time (‘1993 Financial Sector Law’). 7.118  The main difference under the AIFM Law and the 1993 Financial Sector Law is with respect to the change of scope. In this context, the AIFM Law provides that an AIFM is under an obligation to notify the CSSF of any material changes, in particular to the information within the application upon which the CSSF granted the authorization. If the CSSF decides to impose restrictions on or reject changes to the authorization application, it must inform the AIFM accordingly. These provisions are stricter than under the 1993 Financial Sector Law as it gives the CSSF the power to implicitly withdraw an AIFM authorization where there has been a change in its scope. 7.119  Both the 2010 UCI Law and the AIFM Law provide that the competent court must order the dissolution and liquidation of the AIFM/UCITS established in Luxembourg, whose (p. 341) registration on the official list maintained by the CSSF has been refused or withdrawn. This differs from the corresponding provisions in the 1993 Financial Sector Law, which does not provide for judicial liquidation.

5. Consequences of violating authorization provisions A. Regulatory law consequences 7.120  The AIFM Law provides for administrative sanctions in the case of failures to comply with the AIFM Law. Legal persons (ie AIFMs) subject to the supervision of the CSSF and natural persons in charge of the administration or management of these legal persons, as well as natural persons subject to the same supervision, may be sanctioned37 by the CSSF where they fail to comply with the provisions of Chapter 238 of the AIFM Law. 7.121  The ambit of the AIFM Law provisions in this respect is general in that it refers to the failure to comply with the obligations set out under Chapter 2 (dealing mostly with the authorization of the AIFM) as well as where these persons (i) refuse to provide accounting documents or other requested information, (ii) have provided documents or other information that proves to be incomplete, inaccurate, or false; (iii) prevent the CSSF from exercising its powers of supervision, inspection, and investigation, (iv) fail to act in response to orders of the CSSF, or (v) risk jeopardizing the sound and prudent management of the institution concerned. 7.122  The CSSF may adopt the following sanctions: (a) a warning, (b) a reprimand, (c) a fine of between EUR 250 and EUR 250,000 and, in the cases referred to under (iii), (iv), or (v) in paragraph 7.121, one or several of the following: (a) a temporary or definitive prohibition on carrying out operations or activities, as well as any other restrictions on the activity of the person or entity; (b) a temporary or definitive prohibition on acting as directors, managers, or conducting persons, whether de jure or de facto, of persons or entities subject to the supervision of the CSSF. 7.123  The CSSF may further disclose to the public the penalties imposed in this respect, unless such disclosure would seriously jeopardize the financial markets or cause disproportionate damage to the parties involved. 7.124  In each case, when imposing a penalty, the CSSF will take into account the nature, duration, and severity of the infringement, the conduct and past record of the natural or

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legal person, the damage caused to third parties, and the potential benefits or gain effectively deriving from the infringement.

B. Criminal law consequences 7.125  The AIFM Law provides for fines of between EUR 5,000 and EUR 125,000 and a term of imprisonment from eight days to five years, or either of these penalties, for any person carrying out or attempting to carry out the activity of an AIFM, either as an external AIFM or as an internally managed AIF, or any person using a designation or description giving the impression that they relate to the activities subject to the AIFM Law, without being authorized by the CSSF in accordance with the AIFM Law.39

(p. 342) C. Private law consequences 7.126  As a preliminary remark, private law consequences may only be assessed for Luxembourg AIFMs which manage Luxembourg AIFs or non-Luxembourg AIFs. Moreover, no specific provisions are set out in the AIFM Law regarding private law consequences in case of violation of Chapter 2 of the AIFM Law. Any damage suffered by investors or by third parties as a result of a violation of any provision of the AIFM Law will thus have to be resolved in tort, save for certain specific actions which may be envisaged under the 1915 Company Law or on contractual grounds for internally managed AIFs. 7.127  A distinction thus needs to be drawn first between internally managed AIFs, where the AIF itself is the AIFM, and externally managed AIFs.

a. Internally managed AIF authorized as AIFM 7.128  An internally managed AIFM is generally represented by its management body (general partner, board of managers, or board of directors as the case may be). The management body may be in charge of or responsible for the actions taken by the AIF(M). In this context, it is worth mentioning that the management body may further delegate part of its functions to a third party delegate while remaining ultimately responsible for such delegated functions. 7.129  The private law consequences should be assessed at the level of the AIF itself, since it is the AIF that may be held liable towards investors who suffer damage as a result of a breach of the provisions of Chapter 2. 7.130  The liability regime may directly derive from the contractual relationship created between the AIF and its investors by virtue of the AIF documentation, including any subscription agreement.40 Remedies should thus be sought under the contractual liability regime. 7.131  Any legal action by investors will also have to be carefully assessed in the context of the 1915 Company Law, to the extent applicable to an AIF under a corporate form. Investors acting collectively via the general meeting may have different courses of action under the 1915 Company Law. 7.132  Liability for management errors:41In order to characterize an act or omission as a management error, the court will consider whether such act or omission would not have been made by a member of a management body of average and reasonable prudence and competence under the same or similar circumstances. Therefore, it would have to be established that non-compliance with the AIFM Law by any member of the management body individually constitutes a management error either for a breach of the duty of care that members owe to the AIF or because the decision being challenged was not made in the best interest of the AIF. In addition, this is a personal liability regime and, thus, a member of a management body is not liable for a wrongful act committed by another member. Such

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action may only be triggered in respect of decisions not yet having been discharged by the general meeting. 7.133  Liability for breach of the 1915 Company Law or the articles of association:42Action is taken on the basis of the articles of association rather than for a breach of the 1915 Company Law. In this sense, the articles of association must per se comply with the provisions of (i) the 2007 (p. 343) SIF Law in relation to a SIF, (ii) the 2004 SICAR Law in relation to a SICAR, (iii) the 2010 UCI Law in relation to a UCI, or (iv) the AIFM Law in relation to an unregulated corporate entity (ie a SOPARFI) qualifying as an AIF. Any action would have a collective impact on all the members of the management body, save where (a) member(s) has denounced the relevant wrongdoing. 7.134  A liability case against a member of a management body may also be brought by investors or third parties on the basis of tort (articles 1382 and 1383 of the Luxembourg Civil Code).43 Members of a management body must perform their obligations with the care of a ‘good family father’ (‘bon père de famille’). They must comply with applicable legal provisions and the provisions of the articles of association of the AIF, but also manage the AIF’s business with due and proper care.44 7.135  Articles 1382 and 1383 may apply in cases of management errors, if investors or third parties can prove that the wrongful act is a breach of an applicable legal provision, such as the AIFM Law, or results from the negligence of a director, managing director, or officer. The wrongful act must have caused personal damage to the plaintiff (which must be different from the damage suffered by the investors collectively). Such liability is a personal liability and a member of a management body may only be held liable for the wrongful act committed by him personally.

b. AIF managed by an external authorized AIFM 7.136  Where an external authorized AIFM has been appointed by the AIF, the AIF and AIFM are contractually bound by the management agreement setting the terms and conditions of the services to be provided by the AIFM. 7.137  In the event of a breach of the agreement between the parties (for example a violation of the AIFM Law), the AIF may bring an action against the AIFM for breach of contract and thus seek reparation for the damage or losses caused by the AIFM’s wrongful behaviour.45 7.138  The AIFM Law does not provide for any minimum standard of liability of the AIFM toward the AIF. In the absence of a clear standard, therefore, it appears that an AIFM may limit its liability to gross negligence. In this respect, the CSSF could intervene to impose a minimum standard of liability for AIFMs. 7.139  Furthermore, investors of the AIF may act on the basis of a tort action under the same general tort regime and applicable conditions, as set out previously. 7.140  Investors may also act against the AIFM directly via a derivative action (action oblique).46 Such action may only be brought where the AIF does not exercise its rights against the AIFM. Investors may then have a course of action against the representatives of the AIF for failing to act against the AIFM for its wrongful behaviour.

(p. 344) VI. Operating Conditions for AIFMs 1. Implementation table AIFMD

National implementation

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Art 12 (general principles)

AIFM Law, art 11

Art 13 (remuneration)

AIFM Law, art 12

Art 14 (conflicts of interest)

AIFM Law, art 13

Art 15 (risk management)

AIFM Law, art 14

Art 16 (liquidity management)

AIFM Law, art 15

Art 17 (investment in securitization positions)

n/a

Art 18 (general principles)

AIFM Law, art 16

Art 19 (valuation)

AIFM Law, art 17

Art 20 (delegation)

AIFM Law, art 18

Art 21 (depositary)

AIFM Law, art 19

Implementing Regulation

National implementation

Arts 18–30 (re Art 12(1) AIFMD: general principles)

n/a

Arts 31–38 (re Art 14 AIFMD: conflicts of interest)

n/a

Art 31

n/a

Art 32

n/a

Art 32

n/a

Art 33

n/a

Art 34

n/a

Art 35

n/a

Art 36

n/a

Art 37

n/a

Art 38

n/a

Arts 39–46 (re Art 15 AIFMD: risk management)

n/a

Art 39

n/a

Art 40

n/a

Art 40

n/a

Art 41

n/a

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Art 41

n/a

Art 42

n/a

Art 43

n/a

Art 44

n/a

Art 45

n/a

Art 45

n/a

Art 46

n/a

Arts 47–50 (re Art 16 AIFMD: liquidity management)

n/a

Art 47

n/a

Art 48

n/a

Art 49

n/a

Art 50

n/a

Arts 51–56 (re Art 17 AIFMD: investment in securitization positions)

n/a

Art 51

n/a

Art 52

n/a

Art 53

n/a

Art 54

n/a

Arts 55–56

n/a

Arts 57–67 (re Art 18 AIFMD: organizational requirements—general principles)

n/a

Arts 57–60

n/a

Art 61

n/a

Arts 62–65

n/a

Art 66(1), (2)

n/a

Art 66(3), (4)

n/a

Art 66(5), (6)

n/a

Art 67

n/a

Arts 67–74 (re Art 19 AIFMD: valuation)

n/a

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Arts 75–82 (re Art 20 AIFMD: delegation of AIFM functions)

n/a

Arts 83–102 (re Art 21 AIFMD: depositary)

n/a

(p. 345) 2. Section 1 (Articles 12 to 17)—General requirements A. Article 12—General principles a. Convergent approach 7.141  In line with the approach applied to UCITS investment companies and UCITS management companies,47 Luxembourg AIFMs will have to comply with principles-based conduct (p. 346) of business rules enshrined in Article 12 of the AIFMD and transposed verbatim into the AIFM Law. 7.142  The conduct of business rules have been further elaborated in the Implementing Regulation, as required by the AIFMD, through various specific obligations, which operate in a manner similar to the provisions of Directive 2009/65/EC48 and MiFID. Those principles must be assessed in light of the precise obligations in the Implementing Regulation. However, the general principles provided in the AIFMD are the main driver for the activities and operations of the AIFM.

b. Distinctive features 7.143  While the UCITS and MiFID regimes have served as a regulatory model for the standards applicable to AIFMs, account has been taken of the diversity of AIFs in light of the various types of assets in which AIFs may be invested. 7.144  For this reason, and unlike the UCITS and MiFID approach (for example, that the AIFM should comply with ‘best execution’49), it is not relevant when the AIFM invests in real estate or private equity investments and the investment is made after extensive negotiations on the terms of the agreement. Where there is no choice of different execution venues, the AIFM should be able to demonstrate this to the competent authorities.50 7.145  For reasons of consistency with the requirements of UCITS managers, rules on handling of orders and on aggregation and allocation of trading orders apply to AIFMs when providing collective portfolio management. However, as provided under the Implementing Regulation,51 such rules will not apply where the investment is made after extensive negotiations on the terms of the agreement, such as investments in real estate or private equity transactions, as in such cases no order is executed. 7.146  Another differentiating element vis-à-vis the current UCITS regime is the specific due diligence requirements that apply to AIFMs which invest in assets of limited liquidity. In such a case, where AIFMs invest in specific assets, such as real estate or partnership interests, due diligence requirements will apply to the negotiation phase.52 7.147  The Implementing Regulation also imposes due diligence requirements on AIFMs in the selection and appointment of counterparties and prime brokers, which are not directly required for Luxembourg UCITS management companies.53 (p. 347) 7.148  Article 12(1)(f) of the AIFMD prohibits preferential treatment, which is again different from the UCITS regime.54 The AIFM Law, however, allows preferential treatment subject to certain conditions. 7.149  Under the UCITS rules, management companies and investment companies must ensure that unit-holders of managed UCITS are treated fairly and equally. Under the AIFM Law, AIFMs must treat all AIF investors fairly and no investor in an AIF may obtain

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preferential treatment, unless such preferential treatment is disclosed in the relevant AIF’s rules or instruments of incorporation.

c. Impact on prevailing national structures 7.150  To the extent that many Luxembourg AIFMs are already authorized as UCITS management companies under the 2010 UCI Law, it is expected that, in relation to the management of AIFs, it will only be necessary to adapt their current business models, rather than make onerous changes. However, Luxembourg non-regulated alternative investment structures and regulated investment funds such as Part II UCIs, SIFs, and SICARs, will be more impacted in the way they are organized, although SIFs and SICARs are already subject to certain organizational obligations, for example to set up a conflicts of interests policy (for SIFs, this obligation derives directly from the 2007 SIF Law, whereas for SICARs, it comes from the CSSF’s administrative practice). Compliance efforts are expected to result in a further formalization of procedures, especially for internally managed AIFs. Should AIFs elect to be managed by a UCITS management company with an AIFM licence, or by another external AIFM, compliance efforts will be less cumbersome as the substance requirements, including the rules of conduct, will apply at the level of the AIFM and not directly at that of the AIF. 7.151  In the context of prevailing national alternative investment structures, preferential treatment does not exist as such, as the principle of equal treatment of shareholders (of the same type or category) strictly applies. In order to mitigate different rights across different categories of investors, especially in the private equity and real estate asset classes, different investor rights are frequently implemented either via negotiated side letter agreements or through the implementation of different share categories or classes, thus permitting different terms on a class-by-class basis. 7.152  Generally, however, the enforceability of side letters will depend on the scope or type of rights granted to investors. For instance, a side letter granting one investor a veto right over decisions, which should be adopted collectively by a general meeting, would not be acceptable. 7.153  A commonly used provision in side letters is the ‘most favoured nation’ (‘MFN’) clause—a provision by which any rights granted to an investor which are more favourable than those (p. 348) granted to the beneficiary of the MFN provision will automatically be extended either to the beneficiary or to all investors in the structure. An MFN provision is acceptable to the extent that all investors may benefit equally. As side letters may breach the principle of equal treatment of shareholders, the provision must be carefully assessed on the basis of the various legal and factual circumstances particular to each structure. 7.154  The question remains how the practice will develop in Luxembourg with regard to the possibility of preferential treatment introduced by the AIFMD. Since the general principle of equal treatment of shareholders continues to apply in respect of Luxembourg structures,55 the impact should be limited. Having said that, the possibility of granting preferential treatment under the AIFMD is already restricted by the fact that it may not, according to the Implementing Regulation, result in an overall material disadvantage to other investors, which considerably limits the possibility of granting a preferential treatment other than via the implementation of different investor categories (thus announcing and spelling out in detail the relevant preferential treatment).

B. Article 13—Remuneration 7.155  To date, Luxembourg has no single remuneration code applicable to all firms whether authorized under the AIFM Law, the 2010 UCI Law, or MiFID, as there is currently

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no single European set of remuneration guidelines for these various regimes. The rationale for differentiation is the absence of common rules currently set at the European level. 7.156  The Luxembourg authorities have been reviewing the possibility of regulating remuneration since 2009, driven by Commission Recommendation 2009/384/EC of 30 April 2009 on the remuneration policies in the financial sector. The CSSF adopted Circular CSSF 10/43756 on guidelines concerning the remuneration policies in the financial sector, which applies to all entities subject to the CSSF’s prudential supervision, ie credit institutions, MiFID firms, and collective investment schemes. While the rules changed in 2010 at the European level for credit institutions and MiFID firms, Circular CSSF 10/437 still applies to the investment funds sector. 7.157  This will change in the context of the full implementation of the AIFMD, and in the near future with UCITS V (see paragraph 7.158) and the various initiatives taken at European level should converge towards a consistent approach regarding remuneration in the various sectors of activities. 7.158  The UCITS industry is currently focused on the proposal for a directive amending the UCITS Directive (known as ‘UCITS V’), which aims at addressing discrepancies between Member States (and existing European rules such as the AIFMD) in respect of depositary (p. 349) duties, liability, and remuneration policy. In this context, ESMA will produce guidelines on remuneration policies, which should, where appropriate, be aligned as far as possible with those applicable to AIFMs.

C. Article 14—Conflicts of interest 7.159  Every AIFM must have a conflicts of interest policy and ensure the integrity of its management, and take every reasonable measure to prevent conflicts of interest arising. This requirement already applies to UCITS management companies and investment companies generally. The AIFMD should therefore operate in a manner similar to the relevant provisions in the UCITS Directive and MiFID. 7.160  However, the differences between the various types of assets in which AIFs are invested and the different types of AIFs should be taken into account in the way conflicts of interest are identified, managed, monitored, and disclosed. For this reason the Implementing Regulation specifies, for example under Article 32, that an AIFM that manages an open-ended AIF must identify, manage, and monitor conflicts of interest arising between those investors who wish to redeem their investments in the AIF, and those who wish to maintain their investments. In addition, the AIFM must identify, manage, and monitor any conflicts between the AIFM’s incentive to invest in illiquid assets and the AIF’s redemption policy in accordance with its obligations under Article 14(1) of the AIFMD relating to the identification of conflicts of interest. 7.161  The AIFMD, by introducing compulsory rules designed to identify, prevent, manage, and monitor conflicts of interest, will ensure a level playing field between all Luxembourg alternative investment structures. For the time being, unregulated investment structures are not subject to equivalent rules. Even among regulated investment vehicles, only SIFs are subject to a formal obligation to set up a conflicts of interest policy, whereas for SICARs there is no such formal obligation in the 2004 SICAR Law. Notwithstanding the different statutory provisions, the CSSF’s administrative practice regarding SICARs currently only requires the conflicts of interest policy to be disclosed in the prospectus.

D. Article 15—Risk management 7.162  The AIFMD risk management framework is similar to that of the UCITS Directive. As stressed by the Implementing Regulation,57 the tasks and responsibilities of the risk management function are similar in nature to those assigned to the risk management function in UCITS management companies and investment companies. For consistency

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reasons, the requirements relating to the identification, measuring, and monitoring of risks are also built on similar provisions of the UCITS Directive. 7.163  Like UCITS and their management companies, AIFMs must establish adequate risk management systems, placing a central role on a permanent risk management function, as well as policies and procedures to measure and manage risks in relation to each AIF. To that effect, an AIFM must establish and maintain a permanent risk management function and (p. 350) document an adequate management policy for the AIFs it manages. AIFMs must also make appropriate arrangements to implement the risk management policy and ensure regular reporting on risk management matters to their governing bodies. 7.164  It is worth noting that the European Commission, in its impact assessment dated 19 December 2012 accompanying the Implementing Regulation, stressed that: as AIFM may be subject to risk management requirements imposed by MiFID and/ or UCITS, coherence with these requirements is a key factor in the design of the implementing measures. The existence of a well-developed and proven regulatory framework for UCITS limits de facto the scope of the considerations for the development of implementing measures to the question whether there are valid reasons to deviate from those rules. As the types of AIFs differ even more than the types of UCITS, such implementing measures have to take a relatively general, principles-based approach which makes it difficult to develop clearly defined distinct options and to impact assess differences between them. 7.165  Considering the variety of legal and operational models available to AIFMs, there is therefore no one-size-fits-all approach to risk management and AIFMs will have to tailor their risk management systems to their own structure and the AIFs they manage. The AIFMD also stresses the principle of proportionality, taking into account the structure and complexity of the AIFM and its AIFs. Although the risk management framework under the AIFMD does not materially deviate from the UCITS risk management structure, the Luxembourg fund industry is likely to develop several approaches to risk management depending on alternative industries such as real estate, private equity, or hedge funds. 7.166  However, one of the major differences with UCITS risk management is that it is not a core function under the UCITS Directive (although risk management must be part of a UCITS organization), whereas under the AIFMD, risk management is a core function of the AIFM. The way in which the risk management function may be delegated thus differs when compared to the UCITS delegation framework and should remain within the ‘letter-box entity’ limits provided for by the AIFMD. For more details regarding the delegation of core functions, see section VI.4. 7.167  The implemented risk management framework should not oblige initiators of regulated investment structures, such as SIFs or UCITS management companies having an AIFM licence, to make meaningful changes to the manner in which they operate Luxembourg regulated AIFs, as they are already subject to similar risk management requirements, though in a less formalized way for SIFs. From a Luxembourg operational perspective the new risk management framework does not represent a revolution, but an evolution, merely requiring further formalization of the existing business models rather than onerous changes.58 7.168  For example, in relation to hedge funds, risk management, even in the form required by the AIFMD, is not a new topic as a hedge fund manager is and remains a risk manager. In the hedge funds market, risk management is an ongoing activity and forms an essential part of the day-to-day investment process. What is new, however, is the legal requirement to conform the already existing risk management to the framework set out by the AIFMD. In particular, an AIFMD-compliant risk management framework must ensure that the risk (p. 351) management function has enough competence and authority to challenge the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investment manager when necessary, while maintaining flexibility. This must be organized according to the relevant business model and investment strategy. 7.169  In the private equity and real estate market, risk management also typically forms an essential part of the investment process. Private equity and real estate managers invest in the real economy, meaning that they often need to demonstrate hands-on management skills and permanent involvement in the day-to-day operations of their portfolio assets. The risk management function should thus be involved in the investment process and ensure that this responsibility is clearly defined. It should be organized as an independent function. It should further be ensured that the investment manager is accountable for carrying out its primary role in relation to risk management. Thus, there is no unique approach to the organization of risk management for private equity and real estate funds. Each AIFM will have to analyze how the risk management function will best fit its internal governance structure while adhering to the defined regulatory requirements (for example, management of conflicts of interest). 7.170  Finally, the impact on the offering documentation for Luxembourg AIFs, and thus their sponsors and initiators, should remain limited. Additional disclosure to investors should cover, inter alia, (i) arrangements for managing the liquidity of the AIF, (ii) information on the risk profile of the AIF and adherence to risk limits, (iii) information on the risk management systems employed, (iv) changes to the maximum level of leverage, and (v) information on total amounts of leverage.

E. Article 16—Liquidity management 7.171  The AIFM Law does not detail an AIF’s liabilities in relation to liquidity management. However, these liabilities are explicitly detailed in the Implementing Regulation as comprising present obligations of the AIF arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. 7.172  Liabilities will be sub-classified according to the following items: (a)  ‘payables’, including, but not limited to, amounts payable in relation to the purchase of investments or redemption of units or shares in the AIF and amounts due to brokers and ‘accrued expenses’, including, but not limited to, liabilities for management fees, advisory fees, performance fees, interest, and other expenses incurred in the course of the AIF’s operations; (b)  ‘borrowings’, including, but not limited to, amounts payable to banks and other counterparties; (c)  ‘other liabilities’, including, but not limited to, amounts due to counterparties for collateral on return of securities loaned, deferred income, and dividends and distributions payable. 7.173  The AIFM Law does not deal with the issue of special arrangements or side-pockets. However, the Implementing Regulation asserts that liquidity management systems and procedures may allow AIFMs to apply the tools and arrangements necessary to deal with illiquid assets and related valuation matters in order to respond to redemption requests. Such tools and arrangements may include, where permitted under national law, gates, partial redemptions, temporary borrowings, notice periods, and pools of liquid assets. Sidepockets and other mechanisms where certain assets are subject to similar arrangements between the AIF (p. 352) and its investors should be regarded as ‘special arrangements’ as they impact the specific redemption rights of investors in the AIF. Suspension of an AIF should not be considered as a special arrangement as this applies to all the AIF’s assets and all its investors. The use of tools and special arrangements to manage liquidity should be

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made dependent on concrete circumstances and should vary according to the nature, scale, and investment strategy of the AIF.

F. Article 17—Investment in securitization positions 7.174  Article 17 of the AIFMD has not been transposed by the AIFM Law. While the Implementing Regulation provisions are directly applicable under Luxembourg law, there is currently insufficient guidance to assess their scope and impact.

3. Articles 18 and 19—Organizational requirements A. Article 18—General principles 7.175  Article 16 of the AIFM Law (transposing Article 18 of the AIFMD) provides that AIFMs must, at all times, use adequate and appropriate human and technical resources necessary for the proper management of AIFs. 7.176  In particular, the CSSF requires, having regard also to the nature of the AIFs managed by the AIFM, that the AIFM has sound administrative and accounting procedures, and control and safeguard arrangements for electronic data processing and adequate internal control mechanisms including, in particular, rules for personal transactions by its employees or for the holding or management of investments in order to invest on its own account and ensuring, at least, that each transaction involving its AIFs may be reconstructed according to its origin, the parties to it, its nature, and the time and place at which it was effected. In addition, the assets of the AIFs managed by the AIFM must be invested in accordance with the AIFs’ management regulations or instruments of incorporation and the legal provisions in force. 7.177  Articles 57 to 66 of the Implementing Regulation further elaborate on the procedures and arrangements that must be implemented by the AIFM. These should generally operate in a manner similar to the requirements imposed on UCITS management companies by the UCITS Directive and related 2010 UCI Law and implementing legislation. 7.178  Like UCITS management companies, AIFMs are required to establish a welldocumented organizational structure that clearly assigns responsibilities, define control mechanisms, and ensure a good flow of information between all parties involved. AIFMs must also establish systems to safeguard information and ensure business continuity. 7.179  In order to ensure that the relevant activities are performed properly, AIFMs should, in particular, use suitable electronic systems in order to fulfil the recording requirements with regard to portfolio transactions or subscription and redemption orders, and should establish, implement, and maintain accounting policies and procedures to ensure that the calculation of net asset value (NAV) is carried out as required in the AIFMD and Implementing Regulation. 7.180  Furthermore, in order to ensure consistency with the requirements imposed on UCITS managers, the governing body, senior management, or, where relevant, the supervisory function of the AIFM should be entrusted with similar tasks, to which adequate responsibilities (p. 353) should be allocated. A permanent and effective compliance function must also be established within the AIFM. 7.181  Such requirements must, however, be proportionate and adjusted to the nature, scale, and complexity of the AIFM’s business and the AIF’s structure and strategy. Some of these requirements may also need to be tailored to closed-ended AIF specificities. 7.182  The requirements mentioned previously regarding procedures and arrangements are applicable to all AIFMs irrespective of whether they are external AIFMs or internally managed AIFs.

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7.183  Under the 2010 UCI Law and related implementing regulation, however, a distinction is made between UCITS management companies and investment companies that have not designated a UCITS management company. Not all the procedures and arrangements applicable to UCITS management companies pursuant to CSSF Regulation 10-459 apply mutatis mutandis to self-managed investment companies. 7.184  For example, the general requirements on procedures and organization, administrative, and accounting procedures, internal control mechanisms, permanent compliance and audit functions, rules on personal transactions, or recording of portfolio transactions and subscription and redemption orders, do not apply as such to self-managed companies. Therefore, the organizational rules are to a certain extent stricter for internally managed AIFs than for UCITS self-managed investment companies. 7.185  Having said that, Circular CSSF 12/546, which applies in addition to CSSF Regulation 10-4, extends the application of some of the procedures and arrangements to be implemented by UCITS management companies to self-managed investment companies, such as, for example, the requirement to implement procedures for the prompt handling of complaints received from investors or the rules on adequate administrative and accounting procedures. Circular CSSF 12/546 was issued by the CSSF in order to provide further clarifications on certain conditions for authorization of UCITS management companies and investment companies, more particularly in the area of the use of own funds, administrative bodies, arrangements concerning the central administration, and rules of delegation.

B. Article 19—Valuation 7.186  Pre-AIFMD, the CSSF addressed the issue of valuation errors (leading to errors in the calculation of NAV) as of 15 March 2000, when Circular CSSF 2000/860 was issued. This Circular was repealed and substituted by Circular CSSF 02/7761 on 27 November 2002. 7.187  Circular CSSF 02/77 applies across the entire range of Luxembourg fund regimes. It introduced the materiality principle and certain thresholds and set the correction and compensation process and measures in favour of the UCI and its investors. 7.188  Compensation is awarded either contractually or in tort. The party who is liable for the valuation error must compensate the parties who have suffered loss or damage. In the case (p. 354) of default of such liable party, and in relation only to UCIs, the CSSF could have made the fund promoter liable to compensate the investors. 7.189  The new regime introduced in article 17 of the AIFM Law is expected to materially change the allocation of responsibilities of the parties involved in the valuation process. 7.190  While it is too early to predict the impact on the relationships between the parties, it is expected that most liability risks will remain with AIFMs.

C. Article 20—Delegation of AIFM functions 7.191  The requirements and limitations in Article 20 of the AIFMD, as transposed by article 18 of the AIFM Law, and Articles 75 to 82 of the Implementing Regulation, must be complied with when an AIFM intends to delegate some of its functions. The delegation requirements and limitations apply to the management functions in Annex I of the AIFMD. In contrast, supporting tasks, for example administrative or technical functions that assist the management tasks, such as logistical support in the form of cleaning, catering, and procurement of basic services or products, should not be deemed to be a delegation of AIFM functions. 7.192  Will these requirements and limitations operate in a manner similar to the UCITS provisions? The AIFMD rules are UCITS inspired in that AIFMs, like UCITS management companies and self-managed investment companies, remain at all times fully responsible for the proper performance of the delegated tasks and their compliance with the AIFMD and its implementing measures. In addition, and again like UCITS management companies and

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self-managed investment companies, AIFMs must ensure that the delegate performs and applies the quality standards that would be applied by the AIFM itself. The AIFM must be able to terminate the delegation. As such, the delegation arrangement should confer flexible termination rights on the AIFM. Furthermore, the possibility to delegate functions within both the AIFMD and the UCITS rules is limited by the fact that UCITS management companies/self-managed investment companies and AIFMs may not become ‘letter-box entities’. 7.193  Notwithstanding the similarities, there are also differences between the AIFMD and UCITS delegation regimes. Although CSSF Circular 12/546 has specified further conditions to permitting UCITS management companies and self-managed investment companies to delegate their functions, the AIFMD and AIFM Law provide a more explicit delegation framework than the UCITS framework. 7.194  Under the UCITS rules, delegation of functions by management companies is permitted generally so as to enable companies to conduct their business more efficiently, which delegation does not need to be justified.62 The AIFMD rule is stricter. The AIFM must be able to justify its entire delegation structure for ‘objective reasons’. It must provide the competent authorities, ie the CSSF, with a detailed description, explanation, and evidence of the objective reasons for delegation.63 (p. 355) 7.195  The core functions of UCITS management companies—portfolio management, administration, and distribution—may be delegated in full provided that the company remains fully responsible for the supervision of the activities delegated, and liable vis-à-vis the investors. Although the UCITS Directive and 2010 UCI Law provide that delegation cannot lead to the UCITS management company becoming a letter-box entity, the concept remains undefined under the UCITS Directive. In practice, functions may be delegated in full as long as the management company remains able to supervise the delegates. The supervision and monitoring functions may not be delegated under any circumstances. 7.196  Under the AIFMD, the situation is different as the European legislator has defined the concept of letter-box entity in restrictive terms.64 Further restrictions apply to the delegation of the core functions of the AIFM, ie portfolio management and risk management.65 Of course the supervision element remains as the AIFMD provides that the liability of the AIFM is not affected by the fact that it has delegated these functions to third parties. 7.197  As noted, Circular CSSF 12/546 has nuanced the differences, in particular in relation to the determination of functions that have to be retained by UCITS management companies against those which are delegated with a view to enhancing the substance requirements applicable thereon. The Circular has listed the conditions under which management companies activities may be delegated, by, for example, defining the minimum functions that a management company should retain.66 7.198  In addition, the FAQs on the AIFMD have specified that, in addition to the AIFM Law and the provisions of Article 82 of the Implementing Regulation, the principles laid down in the Circular CSSF 12/546 specifying the delegation rules with respect to Chapter 15 management companies and self-managed UCITS under the 2010 UCI Law will apply by analogy to Luxembourg AIFMs that delegate investment management functions. 7.199  This means that a Circular CSSF 12/546-compliant UCITS management company with an AIFM authorization should not be onerously affected in their delegation business model. As such, the AIFMD delegation rules should operate in a manner similar to the UCITS rules as far as UCITS management companies are concerned.

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(p. 356) 7.200  In conclusion, important differentiating elements have been eliminated through the action of the CSSF under Circular CSSF 12/546, which is consistent with a general trend towards convergence between the UCITS and AIFMD worlds. 7.201  While the 2010 UCI Law and the AIFM Law appear to feature similar rules on delegation, the 1993 Financial Sector Law includes a more general provision stating that an investment firm, when relying on a third party for the performance of operational functions critical for the provision of continuous and satisfactory service to clients and the performance of investment activities on a continuous and satisfactory basis, must ensure that it takes reasonable steps to avoid undue additional operational risk. Outsourcing of important operational functions may not be undertaken in such a way as to materially impair the quality of its internal control and the ability of the supervisor to monitor the firm’s compliance with all obligations.

D. Article 21—Depositary a. General 7.202  The implementation of the AIFMD in Luxembourg introduces new provisions across the three potential Luxembourg regulated AIF regimes67 regarding depositaries, thereby creating not just the regimes applicable to AIFs, including SIFs, SICARs, Part II UCIs, and UCITSs, but also contributing to a relative68 alignment of the regimes applicable to the depositaries of AIFs and UCITSs. 7.203  Under the AIFM Law a depositary has a twofold supervisory obligation: an obligation in relation to assets that can or are likely to be kept in custody and a supervisory obligation in relation to all other types of assets. From a Luxembourg legal perspective, this is no revolution but a mere evolution of the current market practice. 7.204  Nevertheless, the roles and responsibilities of the depositary are more detailed under the AIFM Law than under the 2010 UCI Law, the 2007 SIF Law, and the 2004 SICAR Law. The discussion in paragraphs 7.205 to 7.222 sets out the most noticeable differences between the Pre-AIFMD depositary regime (which will continue in respect of AIFs not appointing an authorized AIFM) for depositary banks and for depositaries under the AIFM Law.

b. Wider range of eligible service providers 7.205  One of the most remarkable innovations and therefore one of the most striking differentiating elements of the pre-AIFMD regime rests in the eligibility of additional categories of service providers to act as depositaries. Indeed, where the pre-AIFMD regime only allowed credit institutions to be appointed as depositary banks, the AIFM Law provides for the possibility to appoint either (i) an investment firm meeting certain requirements as set out in the AIFMD or (ii) for certain types of funds only,69 a newly created category (p. 357) of financial sector professional70—the ‘professional depositories of assets other than financial assets’.71

c. Intellectual safe-keeping under UCITS versus verification of ownership under AIFMD 7.206  Under the pre-AIFMD regime, the supervision of assets can be qualified as intellectual safe-keeping. This encompasses supervision of (i) the location of the assets of the UCITS, UCI, SIF, or SICAR (ie the depositary bank must know at all times in what manner the assets are invested and where and how these assets are available) and (ii) the quality and solvency of third parties involved in the safe-keeping of the assets of the UCITS, UCI, SIF, or SICAR. This duty is to be understood in the broadest terms and covers the entire portfolio of any such structure. The duty is mandatory and cannot be delegated by the depositary bank.

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7.207  Under the AIFMD and the AIFM Law, there is an obligation to ‘verify the ownership’ of the assets and maintain a record of those assets for which the depositary is satisfied that ownership is held by the AIF. This duty is limited to assets other than financial instruments that can or are likely to be held in custody. As a result, where the AIFM Law introduces duties that can be seen, on the one hand, as more burdensome on the depositary (as the verification of ownership may be a difficult exercise depending, for example, on the location of the assets and on the nature of the asset), they may (depending on the investment policy), on the other hand, also be less extensive as they relate to specific assets only (it being understood that, depending on its investment policy, the portfolio of an AIF may be comprised in majority of such assets).

d. Cash monitoring 7.208  The AIFM Law72 provides that the depositary of an AIF will be required to have a full overview of and proceed to the proper monitoring of all cash movements of the AIF.73 This duty is new compared to the pre-AIFMD regime. 7.209  Luxembourg real estate/private equity funds have already implemented an earlier version of cash monitoring, overview, and reconciliation standards. Many depositary bank agreements for real estate and/or private equity funds comprise provisions whereby the opening of bank accounts for subsidiaries of such funds are subject to prior approval of the depositary bank, which should be provided, on a regular basis, with information relating to cash movements and, to a certain extent, information on access and instruction rights. This market practice will need to be strengthened, clarified, and adapted to stricter provision under the AIFM Law. Luxembourg real estate/private equity service providers have for many years been familiar with the concept.

e. Custody of financial instruments—impact on sub-custody and strict liability to return 7.210  Another important difference concerns sub-custody arrangements. Under the preAIFMD regime a fund may directly appoint a sub-custodian (such as a prime broker), with the (p. 358) depositary bank acting merely as supervisor. However, under the AIFM Law, appointments of sub-custodians for the purposes of holding financial instruments in custody must be processed through and by the depositary only. As a result, direct appointments of sub-custodians by an AIF (having appointed an authorized AIFM) will no longer be possible. 7.211  An AIFMD-compliant depositary, however, and as opposed to a pre-AIFMD depositary bank, may now pass on liability to a sub-custodian, subject to the approval of the AIF. This may be particularly useful in circumstances where an AIF/AIFM requires the depositary to use a specific sub-custodian, for example outside the depositary’s network. 7.212  In addition, the depositary will be liable to the AIF or to the AIF’s investors for any loss by the depositary or by a third party to whom the custody of financial instruments has been delegated. Where a financial instrument held in custody is lost, the depositary must return an instrument of identical type, or the corresponding amount, without undue delay.

f. Force majeure 7.213  The AIFM Law has implemented the new European definition of ‘force majeure’, ie the depositary will not be liable if it can prove that the loss arose as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary. 7.214  This definition may be more restrictive than the current concept of force majeure under Luxembourg law, since the insolvency of a sub-custodian will not necessarily qualify as a force majeure event.

g. Delegation

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7.215  The pre-AIFMD regime does not provide for any rules in relation to the delegation by a depositary bank of part of its functions (except for requirements concerning the reputation, competence, and financial resources of the sub-custodian). The AIFM Law introduces specific requirements74 in this respect which may render the implementation of delegation arrangements more difficult, given that the depositary will be required to evidence the objective reasons for such delegation.

h. Alignment of UCITS and AIFM regimes 7.216  The legal regimes currently applicable to depositary banks of UCITSs, on the one hand, and UCIs, SIFs, and/or SICARs, on the other, are different insofar as the depositary bank of a UCITS is entrusted with certain additional duties, which is not the case for SIFs and SICARs, and only to a limited extent for UCIs.

i. Additional oversight duties of a depositary under AIFMD/UCITS 7.217  Following the implementation of the 2007 SIF Law and amendment of the 2004 SICAR Law in 2008,75 the legal obligation on a depositary bank to proceed to certain verifications, which were incumbent upon the depositary bank of a UCITS and to a lesser extent of a UCI or an institutional (p. 359) fund under the 1991 UCI Law76 was removed. The legal obligation on such institutions is now to undertake a safe-keeping duty (in the sense of intellectual and material safe-keeping). 7.218  These additional duties77 are now introduced by the AIFM Law (respectively ‘reintroduced’ in respect of a SICAR) and are incumbent upon depositaries of AIFs (having appointed an authorized AIFM) thus aligning to a certain extent the duties of depositaries of UCITSs, UCIs, SIFs, and SICARs in that respect, it being understood that, depending on the type of AIFs (whether contractual or corporate) and subject to the applicable regime (whether UCITSs, UCIs, SIFs, SICARs), the scope of these additional duties will vary. 7.219  It should be noted that the additional duties, which applied to the former institutional funds governed by the 1991 UCI Law (replaced by the 2007 SIF Law), were carried out by certain depositary banks in Luxembourg after the 1991 UCI Law was repealed on a contractual (but not legally required) basis as so called ‘value-added services’.

j. Impact on sponsor’s operation of AIF on offering documentation 7.220  Although the implementation of the AIFMD framework will result in significant changes for depositary banks subject to the rules governing depositaries, and require them to make certain adaptations to their practices and procedures, as briefly outlined in paragraphs 7.202 to 7.219 the impact on the offering documentation for AIFs and thus their sponsors should be minimal. Indeed, in addition to updating the description of a depositary’s duties, it will be necessary to insert disclosures in the offering documentation concerning, inter alia, (i) potential liability discharges agreed with the depositary, (ii) that the depositary is not subject to a strict liability to return in all cases, (iii) use of rehypothecation. 7.221  The service level agreement (or operating memorandum) to be entered into between an AIF/AIFM and service providers (including the depositary) will be crucial in ensuring compliance with the provisions of the AIFM Law and the Implementing Regulation. The focus of sponsors must be on such document going forward, as it will comprise important clarifications on the operational aspects (including depositary-related matters) relating to an AIF. In fact, it is already a requirement that service level agreements (or operating memoranda) should be agreed upon in most of the depositary agreements currently entered into and/or in force, but the matter is not necessarily given the attention it merits.

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(p. 360) 7.222  The impact of the new rules will depend on the asset class in which an AIF invests. For structures such as real estate/private equity funds, many requirements are to a large extent already being complied with by Luxembourg depositary banks, or are at least capable of being ‘upgraded’ swiftly.78

4. Consequences of violating operating conditions A. Regulatory law consequences 7.223  Article 51 of the AIFM Law provides a list of administrative sanctions. These sanctions apply mutatis mutandis to violations of duties in Chapter 2 and Chapter 3 of the AIFM Law. For a detailed summary, see the analysis in section V.5.A.

B. Criminal law consequences 7.224  The AIFM Law does not provide for criminal law sanctions in respect of violations relating to Chapter 3 provisions.

C. Private law consequences 7.225  The analysis in section V.5.C regarding the private law consequences of a violation of the provisions of Chapter 2 of the AIFM Law apply mutatis mutandis with respect to the provisions under Chapter 3. 7.226  Where an AIFM breaches investment guidelines, it may be liable for breach of contractual liability. The analysis in section V.5.C regarding the private law consequences of a violation of the provisions of Chapter 2 of the AIFM Law will apply mutatis mutandis. 7.227  Furthermore, the provisions on investments in securitization positions have not been directly transposed by the AIFM Law. While the provisions of the Implementing Regulation are directly applicable under Luxembourg law, there is not sufficient guidance at this stage to assess the liability regime under such provisions in relation to third party certification. 7.228  Articles 17(1) and 18(3) of the AIFM Law include provisions specifically providing for liability of AIFMs, while article 19(12) and (13) provide for the liability of depositaries. The provisions purport to clearly establish liability of AIFMs and the depositaries for nonperformance or improper performance of their functions where these have been delegated to a third party. 7.229  Indeed, article 17(10) of the AIFM Law provides that AIFMs are responsible for the proper valuation of the AIF assets as well as the calculation and publication of the NAV. The AIFM’s liability towards the AIF and its investors shall, therefore, not be affected by the fact that the AIFM has appointed an external valuer. Similarly, article 18(3) provides that the ‘AIFM’s liability towards the AIF and its investors shall not be affected by the fact that the AIFM has delegated functions to a third party, or by any further sub-delegation’. 7.230  These provisions clearly state that an AIFM remains ultimately liable in case of delegation as regards its valuation, portfolio management, or risk management functions. The provisions prevent AIFMs from seeking to avoid liability for delegated functions. Although Luxembourg law recognizes some form of limitation on the ability of a party to contractually (p. 361) exclude or limit its liability,79 it is likely that a contractual clause attempting to exclude or limit the AIFM’s liability, thus breaching a regulatory requirement, would be set aside. 7.231  However, even though such contractual exclusion or limitation may be deemed réputée non écrite, ie ‘non-existent’, the agreement between the AIFM and the delegate will not become null or void. Article 19(13) of the AIFM Law provides that ‘the depositary’s liability shall not be affected by any delegation’. Article 19(6)(e) specifies as one of the

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conditions for the appointment of the depository that it must ‘by contract be liable to the AIF or to the investors of the AIF, consistently with paragraphs 12 and 13’. 7.232  Notwithstanding the provisions set out at paragraphs 7.230 and 7.231, although the AIFM may not exclude or limit its liability in case of wrongdoing during the course of performance of its delegated functions, the AIFM is nevertheless not unreservedly liable for all wrongdoings of the delegate. The second paragraph of article 17(10) of the AIFM Law states that ‘notwithstanding the first subparagraph and irrespective of any contractual arrangements providing otherwise, the external valuer shall be liable to the AIFM for any losses suffered by the AIFM as a result of the external valuer’s negligence or intentional failure to perform its tasks’. 7.233  Although a depositary remains liable in case of negligence or intentional failure to properly fulfil its obligations, the second paragraph of article 19(12) of the AIFM Law provides that ‘the depositary shall not be liable if it is able to prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary’.

VII. Transparency Requirements 1. Implementation table AIFMD

National implementation

Art 22 (annual report)

AIFM Law, art 20

Art 23 (disclosure to investors)

AIFM Law, art 21

Art 24 (reporting obligations to competent authorities)

AIFM Law, art 22

Implementing Regulation

National implementation

Arts 103–111 (re Arts 22(2)A–E, 23(4), 24(1) AIFMD: disclosure to investors and regulatory reporting)

n/a

2. Article 22—Financial reporting 7.234  It is uncertain how the reporting obligations will impact Luxembourg AIFs. Under the pre-AIFMD reporting regimes, Part II UCIs, SICARs, and SIFs were already subject to detailed reporting obligations towards their supervisory authority and investors. While the scope, breadth, and depth of the reporting obligations have increased under the AIFM Law, it is expected that the existing reporting templates and channels will have to be updated accordingly in due course. The transitional period and phased-in reporting obligations afford (p. 362) services providers additional time to prepare their systems. It is nevertheless expected that certain information will not be readily available absent its collection preAIFMD. 7.235  All regulated Luxembourg AIFs are already obliged to have their annual reports audited by an independent auditor. 7.236  It remains to be seen how Article 106 of the Implementing Regulation will be construed for certain types of AIFs.

3. Article 23—Disclosure to investors

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7.237  Unlike unregulated AIFs, Luxembourg-regulated AIFs, including Part II UCIs, SIFs, and SICARs, should not be heavily impacted by the new disclosure provisions, in particular Article 23 of the AIFMD and related provisions of the Implementing Regulation, which address the minimum level of disclosure to investors. 7.238  Luxembourg-regulated AIFs must already conduct their activities in a transparent, clear, and understandable way, which is closely monitored by the CSSF. The prospectus (also called the ‘issuing document’ in the 2007 SIF Law) cannot be presented to investors or amended without first obtaining the approval of the CSSF. To that extent, the essential elements of the prospectus or issuing document must be kept up to date, although this obligation is applicable to SIFs and SICARs only when new securities are issued to new investors. 7.239  Neither the SIF Law nor the AIFM Law nor parliamentary history provide a definition or details regarding the scope of the ‘essential elements’ of the prospectus or issuing document. According to general Luxembourg administrative practice, it is likely that ‘essential elements’ generally cover the information described in Article 23 of the AIFMD. The AIFM Law refers to the ‘information’ that must be made available to AIF investors before they invest in the AIF, including the investment strategy and objectives of the AIF, investment restrictions, leverage, fees and expenses, the identity of the service providers and their delegates, etc. The provisions of Article 106 of the Implementing Regulation, which defines the concept of ‘material changes’, should therefore be applicable to the changes of any essential or material elements of the prospectus or issuing document of a Luxembourg-regulated AIF. 7.240  Article 106 of the Implementing Regulation considers any changes to be material ‘if there is a substantial likelihood that a reasonable investor, becoming aware of such information, would reconsider its investment in the AIF, including because such information could impact an investor’s ability to exercise its rights in relation to its investment, or otherwise prejudice the interests of one or more investors in the AIF’. It remains to be seen how Article 106 will be construed for certain types of AIF. 7.241  The rationale behind Article 106 is of a consent nature, well known in Luxembourg or other civil law countries under the principle of ‘vices du consentement’. As a consequence, any changes in information that may, if not brought to the attention of an investor prior to its subscription, cause the investor to reconsider its subscription, constitute a cause for terminating the subscription agreement and/or financial compensation if a prejudice has been suffered. The supervisory authority may also press administrative charges on the AIFM where it has not complied with the transparency obligations mentioned in paragraphs 7.234 to 7.240. Administrative sanctions under article 51 of the AIFM Law vary (p. 363) from a warning or disapproval to financial sanctions ranging between EUR 250 and EUR 250,000. 7.242  Attention should be drawn to certain differentiating elements between the AIFMD and the national regime applicable to regulated alternative investment structures, as follows. 7.243  The obligation to keep the essential elements of the prospectus/issuing document up to date lies with the management body of a corporate AIF, or its management company in case of a FCP rather than on its manager (unless the management company of the FCP becomes the AIFM). 7.244  Therefore, to the extent that similar obligations of transparency towards investors already exist at the level of the AIF (assuming that the AIF is not internally managed), the question remains as to how the provisions of the AIFMD, applicable at the level of the AIFM, and the Luxembourg laws or administrative practice applicable to the product, will interact. The AIFM Law provides that SIFs and SICARs falling within its scope must

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conform to the obligations in Article 23 of the AIFMD, therefore not distinguishing between AIFs and AIFMs. 7.245  This means that SIFs and SICARs will have to ensure that the information contained in Article 23 of the AIFMD is provided to investors. Most probably, the prospectus or issuing document will in practice contain warnings relating to the respective responsibilities of both the AIF and AIFM. 7.246  Furthermore, the AIFMD provides that the AIFM must provide investors with the information contained in Article 23 ‘in accordance with the AIF rules or instruments of incorporation’. Since the AIF rules or instruments of incorporation are the responsibility of the AIF, they will probably contain more precise information as to how the relevant information should be disclosed to investors and who is responsible for what.80 7.247  Article 106 of the Implementing Regulation provides for a formal definition of the concept of material changes. Furthermore, according to Luxembourg administrative practice, changes to the essential elements of the prospectus or issuing document are generally considered as material when they may potentially adversely affect investors (for example an increase of fees). In such a case, investors are usually allowed (at least in openended structures) to redeem their shares or units free of charge in the month before the changes may become effective. This practice may continue to apply to Luxembourg AIFs in addition to the obligations of disclosure to investors. 7.248  It should be noted that, at present, there is no fixed layout for disclosure to investors under the AIFMD regime, in contrast with the UCITS KIID regime. 7.249  Furthermore, UCITS KIIDs compel sponsors to comply with transparency requirements, including the obligation to describe complex strategies in plain language and in a specific format and order, so that investors can understand and compare the products between themselves before investing. Furthermore, they do not target the same persons (ie they are aimed at retail investors, in contrast to the AIFMD, which targets professional investors) and their content is strictly regulated. (p. 364) 7.250  Therefore, it is unlikely that the practice of the AIFMD disclosure requirements will be similar to that of the KIIDs under the UCITS Directive. That said, AIFMs may want to use a KIID-like document for pre-investment disclosures and regular periodical updates. However, no sanction should apply to the format used to disclose the relevant information as there is no regulated layout under the AIFMD.

4. Article 24—Regulatory reporting 7.251  Irrespective of whether the requirements under Article 24 of the AIFMD and related provisions of the Implementing Regulation will exceed regulatory reporting requirements under the UCITS Directive, regulatory reporting under the UCITS Directive does not pursue the same objectives as the AIFMD, which is to ensure effective monitoring of systemic risks. In contrast, the aim of the UCITS Directive is to ensure the proper functioning of UCITS on an ongoing basis. 7.252  Furthermore, it is premature to evaluate the impact of the reporting requirements on prevailing national alternative structures. One may, however, generally say that such obligations will have an important impact on non-regulated structures as compared to regulated structures which are already subject to reporting requirements and will thus merely have to adapt their reporting templates. The CSSF has given guidance on the reporting obligations in its latest FAQs, see above fn 21.

5. Consequences of violating transparency requirements

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A. Regulatory law consequences 7.253  Article 51 of the AIFM Law provides a list of administrative sanctions, which apply mutatis mutandis to violations of the duties set out in Chapters 2 to 4 of the AIFM Law. For a detailed summary, see section V.5.A.

B. Criminal law consequences 7.254  The AIFM Law does not provide for criminal sanctions in respect of violations relating to obligations contained in Chapter 4.

C. Private law consequences a. AIF/AIFM liability 7.255  The analysis set out in section V.5.C regarding the private law consequences of a violation of the provisions of Chapter 2 of the AIFM Law apply mutatis mutandis with respect to the provisions set out in Chapter 4 and in particular the transparency requirements, save for the operator/sponsor liability as described in paragraphs 7.256 to 7.260.

b. Operator/sponsor liability 7.256  The concept of operator or sponsor does not appear under the AIFM Law, as opposed to the concept of promoter81 used in the context of UCITS and which was further elaborated (p. 365) by the CSSF administrative practice for both UCITS and UCIs, in particular Part II UCIs. The promoter of a UCI was defined by the CSSF as the person with the founding and driving force behind the creation of the UCI, who determines its direction and benefits from its creation. Notably, the CSSF required the promoter to have important financial resources in place to compensate investors in the case of wrongdoing in the administration and management of the UCI. 7.257  In this context, to the extent that the concept of promoter was elaborated by the CSSF, no specific liability could be incurred by a promoter in such capacity under Luxembourg law. General principles of law would apply, which means that there may be instances where a promoter may be held liable for its wrongful acts on contractual or tort grounds, as the case may be. The liability of an operator/sponsor could also be exposed to the extent that it is acting in the capacity of employer of the persons in charge of the management of an AIF. Under Luxembourg law, a third party may take action against the employer of such a person if that person has acted not in a personal capacity but as a representative of his employer and provided he has committed a wrongful act or negligence. 7.258  The concept of promoter has now been abandoned by the CSSF further to the issuance of Circular CSSF 12/546 as far as UCITS are concerned. The CSSF considers that the concept of promoter, as well as the role and responsibilities linked to this concept, are no longer necessary for a UCITS having taken the form of a self-managed investment company or having designated a management company where these meet the requirements of the Circular 12/546. According to the CSSF, the objective of maintaining a high level of investor protection is fulfilled by the fact that the requirements of the Circular are met, to the extent that they are subject to stringent capital and own funds requirements as well as other guarantees in terms of financial soundness. 7.259  The CSSF has, however, further specified in its Press Release 12/4582 that for funds under Part II of the 2010 UCI law and for FCPs and SICAVs subject to Part II and managed by a management company subject to Chapter 16 of the 2010 UCI Law,83 the requirements as regards the promoter remain applicable according to the usual terms. The CSSF added that the situation of such UCIs will be revised after the transposition of the AIFMD. It is therefore expected that the CSSF will soon provide further guidance in relation thereto. It is likely that the CSSF will adopt the same approach as for UCITS management companies, and therefore renounce the concept of promoter for this type of fund, to the extent that From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

AIFMs will be subject to the same stringent requirements in terms of capital and own funds. Moreover, they will be subject to additional requirements to cover potential professional liability risks resulting from activities carried out by AIFMs pursuant to the AIFMD through either additional own funds or a professional indemnity insurance against liability arising from professional negligence. For this reason, there should be no additional regulatory requirement for the promoter to cover potential professional liability risks. (p. 366) 7.260  The management body of the AIFM has the responsibility to ensure that the information contained in the disclosure /annual report is accurate and not misleading. Therefore, the liability of the management body could be triggered for any errors. Under Luxembourg Law, members of the management body are subject to a specific liability regime, as detailed at paragraphs 7.128 et seq.

VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD

National implementation

Art 25 (use of information, supervisory cooperation, and limits to leverage)

AIFM Law, art 23

Art 26 (scope)

AIFM Law, art 24

Art 27 (notification of the acquisition of major holdings and control of nonlisted companies)

AIFM Law, art 25

Art 28 (disclosure in case of acquisition of control)

AIFM Law, art 26

Art 29 (annual report of AIFs exercising control of non-listed companies)

AIFM Law, art 27

Art 30 (asset stripping)

AIFM Law, art 28

Implementing Regulation

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

n/a

2. Section 1 (Article 25)—AIFMs managing leveraged AIFs 7.261  Numerous service providers and managers in the Luxembourg funds sector are already accustomed to calculating exposure using the methods under the UCITS Directive. It is generally expected that these providers will be quick to adjust to AIFMD methodologies. 7.262  It may also generally be stated that the CSSF has long-standing experience in the supervision of sophisticated UCITSs and UCIs using alternative investment strategies, including leverage. Hence, the fact that these types of Luxembourg collective investment schemes have already been subject to prudential supervision will permit the CSSF to quickly benchmark and assess the new obligations under article 23 (3) of the AIFM Law.

3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 7.263  Prior to the implementation of the AIFM Law, the acquisition of non-listed companies in Luxembourg was not subject to any special disclosure requirement. Hence, the new disclosure obligations will entail certain organizational consequences for AIFMs. While the Luxembourg market represents only a small portion of the target acquisitions,

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many private equity houses have set up, and are in the process of setting up, Luxembourg private equity AIFs. The new obligations will thus materially impact any acquisition process.

(p. 367) 4. Consequences of violating provisions relating to AIFMs managing specific types of AIF A. Regulatory law consequences 7.264  Article 51 of the AIFM Law provides a list of administrative sanctions.These sanctions apply mutatis mutandis to violations of duties in Chapter 5 of the AIFM Law. For a detailed summary, see section V.5.A.

B. Criminal law consequences 7.265  The AIFM Law does not provide for criminal sanctions in respect of violations of obligations in Chapter 5 of the AIFM Law.

C. Private law consequences 7.266  The analysis set out at section V.5.C regarding the private law consequences of a violation of the provisions of Chapter 2 of the AIFM Law apply mutatis mutandis with respect to the provisions under Chapter 5 of the AIFM Law and in particular in case of a breach of the leverage limits.

IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIF in the home Member State of the AIFM)

AIFM Law, art 29 where managers are established in Luxembourg and propose to market in Luxembourg shares or units of EU AIFs they manage

Art 32 (marketing of shares or units of EU AIF in Member States other than in the home Member State of the AIFM)

AIFM Law, art 30 where managers are established in Luxembourg and propose to market in another Member State shares or units of EU AIFs they manage

Art 33 (conditions for managing AIFs established in other Member States)

AIFM Law, art 32 where managers are established in Luxembourg managing EU AIFs established in another Member State

Implementing Regulation

National implementation

n/a

n/a

2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 7.267  The CSSF issued two communications on 30 July 2013. The first communication addresses the notification process to be complied with for the marketing by a duly authorized Luxembourg-based AIFM of units or shares of EU AIFs to professional investors in Luxembourg. It states that the relevant notification process does not apply in respect of (the distribution in Luxembourg of) Luxembourg AIFs subject to the prudential supervision of (p. 368) the CSSF. A contrario unregulated Luxembourg AIFs (for example, SCSs or SCAs) organized in Luxembourg are thus subject to the notification process.

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7.268  According to the CSSF communication, a Luxembourg-based AIFM which intends to market to professional investors in Luxembourg the units or shares of an EU AIF it manages, must submit a notification file to the CSSF. The notification file shall comprise the following information as set out in Annex III of the AIFM Law: (a)  a notification letter, including a programme of operations identifying the AIFs the AIFM intends to market and information on where the AIFs are established; (b)  the AIF rules or instruments of incorporation; (c)  identification of the depositary of the AIF; (d)  a description of, or any information on, the AIF available to investors; (e)  information on where the master AIF is established if the AIF is a feeder AIF; (f)  any additional information referred to in article 21(1) of the AIFM Law for each AIF the AIFM intends to market, consisting, inter alia, of the investment strategy, details on all service providers, delegations, valuation procedure, liquidity risk management, fee structure, demonstration of how fair treatment of investors is ensured, the latest annual report of the AIF, the procedure for the issue and sale of units or shares, the latest NAV of the AIF, the historical performance of the AIF, and details of prime broker arrangements; (g)  where relevant, information on the arrangements established to prevent units or shares of the AIF from being marketed to retail investors, including in the case where the AIFM relies on activities of independent entities to provide investment services in respect of the AIF. 7.269  Within 20 working days following receipt of a complete notification file, the CSSF will inform the AIFM whether it may start marketing the AIF identified in the notification file. In the case of a positive decision, the AIFM may market the AIF in Luxembourg from the date of the CSSF’s notification to that effect. The CSSF will also inform the competent authorities of the AIF that the AIFM may start marketing units or shares of the AIF in Luxembourg. 7.270  The AIFM Law provides that AIFs may also be placed with retail investors subject to meeting the requirements of article 46 of the AIFM Law which provides that authorized AIFMs established in Luxembourg, in another Member State, or in a third country, are authorized to market to retail investors in the territory of Luxembourg units or shares of AIFs they manage in accordance with the AIFMD, irrespective of whether or not such AIFs are marketed on a cross-border basis, or whether they are EU or non-EU AIFs. In such cases, the following preliminary conditions must be fulfilled. 7.271  The AIFs must be subject in their home State to permanent supervision of a supervisory authority set up by law to ensure the protection of investors. For AIFs established in Luxembourg, this condition will be deemed fulfilled by AIFs subject to Part II of the 2010 UCI Law. This will be without prejudice to conditions of eligibility applicable to investors in AIFs which are subject to regulation by a law of the financial sector in Luxembourg. 7.272  AIFs established in a Member State other than Luxembourg or in a third country must be subject in their home State to regulation providing investors guarantees of protection at least (p. 369) equivalent to those provided by Luxembourg laws governing AIFs authorized to be marketed to retail investors in Luxembourg. These AIFs must also be subject in their home State to supervision considered by the CSSF to be equivalent to that provided by Luxembourg laws governing AIFs authorized to be marketed to retail investors

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in Luxembourg. In such cases, cooperation between the CSSF and the supervisory authority of the AIF must also be ensured. 7.273  The AIFM Law further clarifies that the implementation of this retail distribution in Luxembourg is subject to more detailed rules to be set via CSSF regulation.

3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 7.274  Article 30 of the AIFM Law, transposing Article 32 of the AIFMD, specifies the conditions applicable to Luxembourg AIFMs marketing in another EU Member State units or shares of EU AIFs they manage. 7.275  The CSSF issued a second communication on 30 July 2013 addressing the marketing by a duly authorized Luxembourg-based AIFM of units or shares in a Luxembourg AIF in another Member State. According to the CSSF communication, a Luxembourg-based AIFM which intends to market to professional investors in other Member States the units or shares of an EU AIF it manages, must submit a notification file to the CSSF. The notification file must comprise the following information as set out in Annex IV of the AIFM Law: (a)  a notification letter, including a programme of operations identifying the AIFs the AIFM intends to market and information on where the AIFs are established; (b)  the AIF rules or instruments of incorporation; (c)  identification of the depositary of the AIF; (d)  a description of, or any information on, the AIF available to investors; (e)  information on where the master AIF is established if the AIF is a feeder AIF; (f)  any additional information referred to in article 21(1) of the AIFM Law for each AIF the AIFM intends to market, consisting, inter alia, of the investment strategy, details on all service providers, coverage of professional liability risks, delegation of management functions, valuation procedure, liquidity risk management, fee structure, demonstration of how fair treatment of investors is ensured, the latest annual report of the AIF, the procedure for the issue and sale of units or shares, the latest NAV of the AIF, the historical performance of the AIF, and details of prime broker arrangements; (g)  the indication of the Member State in which it intends to market the units or shares of the AIF to professional investors; (h)  information about arrangements made for the marketing of AIFs and, where relevant, information on the arrangements established to prevent units or shares of the AIF from being marketed to retail investors, including in the case where the AIFM relies on activities of independent entities to provide investment services in respect of the AIF. Therein, the CSSF also recommends that AIFMs consult the internet sites of the competent authorities of the host Member States on the laws, regulations, and administrative provisions which are specifically relevant to the arrangements made for the marketing of EU AIFs in those host Member States. (p. 370) 7.276  The CSSF will, no later than 20 working days after the date of receipt of the complete notification file, transmit the complete notification file to the competent authorities of the Member States where it is intended that the AIF be marketed, provided that the AIFM complies with and will continue to comply with the AIFM Law. The CSSF will enclose a statement to the effect that the AIFM concerned is authorized to manage AIFs with a particular investment strategy. Upon transmission of the notification file, the CSSF will directly notify the AIFM about the transmission. The AIFM may start marketing the AIF From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

in the host Member State as of the date of that notification. Where the AIF is established in another Member State, the CSSF will also inform the competent authorities of the AIF about the Member States in which the AIFM may start marketing the units or shares of the AIF. 7.277  The distinguishing element with respect to the UCITS Directive is that the marketing passport regime under that Directive is given to the UCITS itself (ie the product), whereas under the AIFMD it is granted to the AIFM. The notification must therefore be made by the AIFM itself even if it does not actually perform the marketing function itself and it is actually the AIF that directly delegates the distribution of the AIF’s units or shares in another Member State as permitted by the AIFM Law. 7.278  In the event of a material change to any of the particulars communicated in the notification letter, the AIFMD provides that the AIFM must give written notice of the changes to the competent authorities of its home Member State, which must then inform the competent authorities of the host Member State of such change without delay. 7.279  The UCITS regime differs on this point. UCITSs must give written notice of changes directly to the competent authorities of the host Member State before implementing the changes. A UCITS-to-regulator procedure therefore applies to amendments to any communication previously made regarding the marketing arrangements under the UCITS regime, whereas a regulator-to-regulator procedure applies in all cases under the AIFMD. 7.280  The practical and technical procedures a UCITS must follow for cross-border marketing were specified in Circular CSSF 11/50984 as no harmonization of the content of the notification letter or of any such procedures exists between EU Member States. In relation to the AIFMD marketing passport regime, the CSSF could also issue a circular specifying the details of the marketing procedure. However, under the AIFMD, ESMA may develop draft implementing technical standards to determine the content of the notification letter, a form of transmission, and written notice. Therefore, the need for a circular to specify the details of the notification procedure should be limited. 7.281  Finally, the marketing passport under the AIFMD may only be used for marketing to professional investors (in contrast with the UCITS passport, which may be used for marketing to both institutional and retail investors). However, the AIFMD authorizes Member States to allow AIFMs to market to retail investors in their territory units or shares of AIFs they manage. Such flexibility has been provided in the AIFM Law under certain conditions in article 45, and which will be further clarified in a Q&A.85 However, such possibility does not work (p. 371) under the passport regime, and placement to retail investors must be made on a country-by-country basis only. 7.282  In such cases, Member States may impose stricter requirements on the AIFM or AIF than the requirements applicable to AIFs marketed to professional investors in their territory. However, they may not impose stricter or additional requirements on EU AIFs established in another Member State and marketed on a cross-border basis than on AIFs marketed domestically.

4. Article 33—Conditions for managing AIFs established in other Member States 7.283  Article 33 of the AIFMD (transposed by article 32 of the AIFM Law) relates to the conditions applicable to authorized EU AIFMs for managing EU AIFs established in other Member States. The following discussion will therefore limit itself to this provision. 7.284  The AIFM passport regime will generally operate in a manner similar to the passport regime for UCITS management companies.

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7.285  However, one essential distinctive feature is the location of the central administration of Luxembourg AIFs, which must remain in Luxembourg, whereas under the UCITS Directive and the 2010 UCI Law, a UCITS (incorporated as a SICAV or FCP) can be directly administered by a UCITS management company located in another Member State and have its central administration located in that other Member State. 7.286  The reason for this difference is that the 2010 UCI Law allows Luxembourg UCITSs that have designated a management company located in another EU Member State to have their central administration situated in the management company’s home Member State. By contrast, the laws on SIFs, SICARs, and Part II UCIs provide that the central administration of such structures must remain situated in Luxembourg. The AIFM Law has not changed this rule, and in not doing so, it does not contradict the AIFMD, which does not provide otherwise (ie it is not aligned with the UCITS Directive in this regard). 7.287  When dealing with the activities of UCITS management companies pursued on a cross-border basis, the UCITS Directive, as implemented in the 2010 UCI Law, also elaborates on the rules of the EU Member State where the management company is located or the UCITS established and with which the management company must comply. The management company must comply with the rules of its home Member State as it relates to its organization, including delegation arrangements, risk-management procedures, prudential rules, and supervision, as well as the management company’s reporting requirements; whereas it also has to comply with the rules of the UCITS home Member State regarding its constitution and functioning. Such rules do not exist in the AIFMD to the extent that the Directive does not purport to regulate AIFs, whereas the UCITS Directive covers the rules applicable to the product and their management companies.

5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 7.288  The AIFM Law provides for a list of administrative sanctions applicable across different chapters. These sanctions apply mutatis mutandis to the violation of certain obligations in Chapter 6 of the AIFM Law. For a detailed summary, see section V.5.A.

(p. 372) B. Criminal law consequences 7.289  The AIFM Law does not provide for criminal sanctions for violations of the obligations contained in Chapter 6 of the AIFM Law.

C. Private law consequences 7.290  The analysis set out in section V.5.C regarding the private law consequences of a violation of the provisions of Chapter 2 of the AIFM Law apply mutatis mutandis with respect to the provisions of Chapter 6 of the AIFM Law concerning the rights of EU AIFMs to market and manage EU AIFs in the EU. 7.291  It should also be emphasized that breach of the provisions of Chapter 6 of the AIFM Law are assessed at the level of the AIF/AIFM even when consequences are produced in a Member State different than that in which they are authorized.

X. Specific Rules in Relation to Third Countries

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1. Implementation table AIFMD

National implementation (AIFM Law)

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

AIFM Law, art 34

Art 35 (conditions for marketing in EU with passport of non-EU AIFs managed by EU AIFMs)

AIFM Law, art 35 where the managers are established in Luxembourg AIFM Law, art 36 where the managers are established in another Member State

Art 36 (conditions for the marketing in EU without a passport of non-EU AIFs managed by an EU AIFM)

AIFM Law, art 37

Art 37 (authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Art 39 [EU AIFs] or 40 [nonEU AIFs])

AIFM Law, art 38

Art 38 (Peer review of authorization and supervision of non-EU AIFMs)

n/a

Art 39 (conditions for the marketing in the EU with a passport of EU AIFs managed by a nonEU AIFM)

AIFM Law, art 39, which concerns the commercialization in the EU with a passport of an EU AIF managed by a manager established in a nonEU Member State, where Luxembourg is the EU Member State of reference AIFM Law, art 40, which concerns the commercialization in Luxembourg with a passport of an EU AIF managed by a non-EU AIFM, where Luxembourg is not the EU Member State of reference

Art 40 (conditions for the marketing in the EU with a passport of non-EU AIFs managed by a non-EU AIFM)

AIFM Law, art 41, which concerns the commercialization in the EU with an AIF passport of a non-EU AIF, managed by a non-EU AIFM, where Luxembourg is the Member State of reference AIFM Law, art 42, which concerns the commercialization in Luxembourg with a passport of non-EU AIFs managed by a non-EU AIFM, where Luxembourg is not the Member State of reference

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by non-EU AIFMs)

AIFM Law, art 43 for the management of an AIF established in another Member State of the EU other than the Member State of reference by managers established in a non-EU Member State, where Luxembourg is the Member State of reference AIFM Law, art 44 for the management of the AIF established in Luxembourg by managers established in a non-EU Member State, where Luxembourg is not the Member State of reference of the AIFM

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AIFMD

National implementation (AIFM Law)

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs)

AIFM Law, art 45 which concerns the marketing in Luxembourg without a passport of AIFs managed by a non-EU AIFM

Implementing Regulation

National implementation

Arts 113–115 (re Arts 34(1), 35(2), 36(1), 37(7) (D), 40(2)(a), 42(1) AIFMD)

n/a

(p. 373) 2. Article 34—Conditions for EU AIFMs which manage nonEU AIFs not marketed in EU 7.292  The management of non-EU AIFs has so far been limited in Luxembourg due to the application of the real seat theory. Accordingly, if the central administration or the place of effective management of a non-EU AIF is found to be in Luxembourg because it is managed out of and from Luxembourg, then such non-EU AIF may become subject to all Luxembourg laws. Such a requalification may under certain circumstances raise regulatory and tax concerns.This situation has been frequently encountered in practice. Given that the core AIFM functions may be limited to portfolio and risk management, this potentially still leaves some room for allocating various responsibilities between the AIFM domicile and the AIF domicile (provided the AIF has an internal governing body or external management body in the same domicile). 7.293  Article 34 of the AIFM Law authorizes an AIFM established in Luxembourg and authorized under the AIFM Law to manage non-EU AIFs which are not marketed in the EU provided (i) the AIFM satisfies all the conditions of the AIFM Law except the provisions regarding the annual report and the depositary and (ii) appropriate cooperation arrangements are in place between the CSSF and the supervisory authorities of the third country where the non-EU AIF is established in order to ensure at least an efficient exchange of information that allows the CSSF to carry out its duties in accordance with the AIFM Law. 7.294  Pursuant to the AIFM Law, where a Luxembourg AIFM markets non-EU AIFs and does not wish to become AIFMD-compliant with respect to such non-EU AIFs (ie as of 2015, subject to conditions), the AIFM may in principle still benefit from the existing national private placement regimes until at least 2018. Thus, no registration would be required in such a case.

(p. 374) 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by EU AIFMs A. Article 35 (passport)—before 2015 7.295  A Luxembourg AIFM marketing non-EU AIFs will be able to continue to do so under the national private placement regime until at least 2018. Further guidance will be issued by ESMA in this respect.

B. Article 35 (passport)— presumably after 2015 7.296  Where a Luxembourg AIFM markets non-EU AIFs and wishes to become AIFMDcompliant, if the non-EU AIF is marketed in another Member State or in Luxembourg (Luxembourg being the home Member State of the EU AIFM) the Luxembourg AIFM will have to submit a notification to the CSSF in respect of each non-EU AIF it intends to market.

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C. Article 36 (private placement)—before 2018 7.297  An EU AIFM marketing non-EU AIFs will be able to continue to do so under the national private placement regime until at least 2018. Further guidance will be issued by ESMA in this respect. 7.298  If an EU AIFM markets non-EU AIFs and does not wish to become AIFMDcompliant, it will benefit from the private placement regime until at least 2018. Thus, no registration shall be required. 7.299  Article 36 of the AIFMD is transposed by article 37 of the AIFM Law and refers to Luxembourg-based AIFMs or EU AIFMs that are not based in Luxembourg that manage non-EU AIFs and market them without a passport in Luxembourg or in another Member State. 7.300  Luxembourg AIFMs marketing non-EU AIFs will be able to continue to do so under the national private placement regime until at least 2018. Further guidance will be issued by the CSSF in this respect.

4. Articles 37 to 41—Authorization of non-EU AIFMs managing and marketing AIFs in the EU A. Before 2015 7.301  Non-EU AIFMs marketing AIFs will be able to continue to do so under the national private placement regime until at least 2018. Further guidance will be issued by ESMA in this respect.

B. After 2015 7.302  Where a non-EU AIFM markets AIFs and wishes to become AIFMD-compliant, the following provisions will apply.

a. If Luxembourg is the home Member State of reference of the non-EU AIFM 7.303  If a non-EU AIFM intends to market AIFs in Luxembourg, defined as the Member State of reference of the AIFM, it must submit a notification to the CSSF for each AIF it intends to market. (p. 375) 7.304  No later than 20 working days after receipt of the notification, the CSSF must inform the non-EU AIFM whether it may start marketing the AIFs identified in the notification in Luxembourg. 7.305  Where a positive decision is given, the non-EU AIFM may start marketing the AIFs in Luxembourg from the date of the notification by the CSSF to that effect. 7.306  The CSSF will also inform ESMA that the non-EU AIFM may start marketing AIFs in Luxembourg. 7.307  Further guidance with respect to the registration content will be provided by the CSSF.

b. If Luxembourg is not the home Member State of reference of the non-EU AIFM 7.308  If a duly authorized non-EU AIFM intends to market AIFs with a passport (obtained in another Member State of reference) in Luxembourg, the CSSF must receive the notification file and the statement from the competent authorities of the Member State of reference of the non-EU AIFM. 7.309  Upon notification to the non-EU AIFM of the transmission to the CSSF by the competent authorities of its Member State of reference, it may market AIFs in Luxembourg as from the date of this notification.

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7.310  Further to ESMA’s approval of cooperation arrangements between EU securities regulators and 34 of their global counterparts, the CSSF has signed a memorandum of understanding with each of the following non-EU countries: Albania, Australia, Bahamas, Bermuda, Bosnia-Herzegovina, Brazil, British Virgin Islands, Canada, Cayman Islands, Guernsey, Hong Kong, India, Isle of Man, Israel, Japan, Jersey, Kenya, Macedonia, Malaysia, Maldives, Mauritius, Mexico, Montenegro, Morocco, Pakistan, Singapore, Switzerland, Tanzania, Thailand, Turkey, UAE, US.

5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by non-EU AIFMs 7.311  Non-EU AIFMs marketing AIFs will be able to continue to do so under the national private placement regime until at least 2018. Further guidance will be issued by ESMA in this respect.

6. Consequences of violating specific rules in relation to third countries A. Regulatory law consequences 7.312  Article 51 of the AIFM Law provides for a list of administrative sanctions. These sanctions apply mutatis mutandis to the violation of certain obligations in Chapter 7 of the AIFM Law by Luxembourg-based AIFMs only. For a detailed summary, see section V.5.A.

B. Criminal law consequences 7.313  The AIFM Law does not provide for criminal sanctions in respect of violations relating to obligations contained in Chapter 5 of the AIFM Law.

C. Private law consequences 7.314  The analysis set out in section V.5.C regarding the private law consequences of a violation of the provisions of Chapter 2 of the AIFM Law will apply mutatis mutandis with respect to the provisions under Chapter 7 of the AIFM Law concerning the specific rules in relation to third countries.

(p. 376) XI. Marketing to Retail Investors 1. Implementation table AIFMD

National implementation

Art 43 (marketing of AIFs to retail investors)

AIFM Law, art 46

Implementing Regulation

National implementation

n/a

2. Article 43—Marketing of AIFs by AIFMs to retail investors 7.315  The AIFMD’s conditions of marketing to retail investors do not preclude the eligibility requirements of Luxembourg law from having effect, and therefore it will be necessary to seek clarification from the CSSF on this point. 7.316  Luxembourg has elected to adopt Article 43 of the AIFMD, as transposed into the AIFM Law, allowing for the marketing of AIFs by AIFMs to retail investors subject to the provisions contained in Article 43(1)(a) and (b).86 The means of implementation will be laid down by way of a CSSF regulation at a later date.

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3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 7.317  The AIFM Law provides for a list of administrative sanctions in article 51. These sanctions will apply mutatis mutandis to the violation of certain obligations covered in Chapter 6 of the AIFM Law. For a detailed summary, see paragraphs 7.120 et seq.

XII. Competent Authorities and Supervisory Powers 1. Implementation table AIFMD

National implementation

Art 44

AIFM Law, art 47

Art 45

AIFM Law, art 48

Art 46

AIFM Law, art 50

Art 48

AIFM Law, art 51

Art 50

AIFM Law, art 53

Art 51

AIFM Law, art 54

Art 52

AIFM Law, art 55

Art 53

AIFM Law, art 56

Art 54

AIFM Law, art 57

Art 55

n/a

(p. 377) 2. Designation, responsibility, and powers of competent authorities 7.318  From a Luxembourg perspective, the CSSF will continue to fulfill the central regulatory role and has the powers to determine whether or not the AIFM is compliant with Luxembourg legislation. It will also be empowered to impose sanctions on the AIFM where the AIFM is in breach of certain provisions of articles 51 and 59 of the AIFM Law.

3. Other issues 7.319  Where the CSSF imposes a decision, the offending party has recourse to the administrative tribunal. 7.320  The CSSF must cooperate with the competent authorities of other Member States and with ESMA and European Systemic Risk Board (ESRB) as provided for in the AIFMD. 7.321  The CSSF is authorized to transmit to the competent authority of a third country necessary information provided the CSSF is assured that the transmission of the information is necessary for the application of the AIFMD. 7.322  The CSSF is authorized to exchange information on AIFMs with the relevant competent authority of an EU Member State where it is deemed necessary for monitoring

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the activities of individual AIFMs in order to assess the calculation of systemic risk and the proper functioning of the markets in which the AIFMs operate. 7.323  It is possible for the competent authorities of another EU Member State to request the cooperation of the CSSF for the purposes of surveillance or to verify information received from an AIFM. Different procedures as set out in article 57 of the AIFM Law are envisaged for the proper execution of the request for information. 7.324  Article 55 of the AIFMD has not been transposed into Luxembourg law.

XIII. Concluding Remarks 7.325  The AIFMD is a major piece of legislation that will have substantial effects on the international alternative funds industry. It comes at a time of change and challenges in the financial services sector and its implementation will need to balance the needs of better and fairer regulation without compromising the means of doing business in an efficient and proactive manner. 7.326  Luxembourg’s position as Europe’s most important fund domicile, the breadth and depth of its fund administration infrastructure, and the reach of its distribution know-how set it apart when it comes to its readiness in embracing what may be viewed as an evolution of the alternative funds sector in Luxembourg. 7.327  While 80% of the assets under management in Luxembourg funds are within UCITS funds, the regulated AIF sector is registering strong growth, with the number of AIFs already exceeding the number of UCITSs. 7.328  The 25-year-old UCITS track record and the resulting strong UCITS brand have set the scene for AIFs in Luxembourg to repeat the same success story.(p. 378)

Footnotes: 1

  Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ 1985 L375/3). 2

  Law of 30 March 1988 on undertakings for collective investment (the ‘1988 UCI Law’), substituted by the law of 17 December 2010 on undertakings for collective investment, as amended (the ‘2010 UCI Law’). 3 

Referring to UCIs which would not or could not adhere to the strict investment guidelines and restrictions applicable under the UCITS I Directive. Under Part II, it is thus possible to invest in assets other than transferable/listed securities. Part II funds can invest in real estate assets and private equity investments, or they can adopt a hedge fund strategy. Both Part I and Part II UCIs can be distributed to all investor categories, although the Luxembourg Supervisory Authority of the Financial Sector (Commission de Surveillance du Secteur Financier— the ‘CSSF’) introduced certain restrictions via Circular IML 91/75, which has been upheld until today. 4

  The 1991 UCI Law was not a stand-alone law but merely added to the 1988 UCI Law certain specific legal sections and altered or dis-applied only those parts in Part II of the 1988 UCI Law that were considered as overly restrictive for the development of alternative asset classes in Luxembourg. 5 

The law of 15 June 2004 on the investment company in risk capital, as amended (the ‘2004 SICAR Law’).

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6

  According to regulatory practice, the société d'investissement en capital à risqué (‘SICAR’) regime should not, in principle, be assimilated to the true fund regimes created under the 2010 UCI Law and the 2007 SIF Law. While a SICAR is also defined as an investment company and its structuring is largely similar, the core difference lies in its tax regime, which does not provide for the tax exempt status typically associated with investment funds. Instead, a SICAR will typically be fully subject to Luxembourg corporation taxes but will benefit from a specific exemption on gains and dividend income stemming from qualifying risk capital investments. 7

  It should be mentioned that no prior authorization was originally required for the launch of SIFs. The prior approval procedure for SIFs was introduced by the law of 26 March 2012 amending the law of 13 February 2007 relating to SIFs. 8

  Circular CSSF 05/177 of 6 April 2005, Abolition of any prior control by the CSSF of advertising material used by persons and companies supervised by the CSSF; abrogation of point II. of Chapter L. of Circular IML 91/75; abrogation of the two last sentences of point IV. 5.11 of Circular CSSF 2000/15. 9

  See Circular IML 91/75 of 21 January 1991, Revision and remodeling of the rules to which Luxembourg undertakings governed by the Law of 30 March 1988 on UCIs are subject, Chapter 1. Rules applicable to UCIs other than UCITS, which states: The detailed provisions which provide investors in traditional UCITS with certain safety guarantees may not be applied entirely as they stand to UCIs whose objective differs from that of UCITS, in particular with respect to the specific nature of the investment policy of the UCIs, which makes it impossible to apply certain operational rules which must be observed by traditional UCITS. UCIs whose objective differs from the objective of traditional UCITS must therefore be submitted to a certain extent to alternative regimes whose rules are differentiated according to the nature of their investments. To date, the supervisory authority has set up separate rules for three types of specialized UCIs the principal object of which is either: —  the investment in venture capital which refers to the investment in securities of unlisted companies either because these companies have been recently established or because they are still in the course of development and therefore have not yet obtained the stage of maturity required to have access to stock markets; or —  the investment in commodity futures contracts and/or financial futures contracts and/or in options; or —  the investment in real estate. The separate rules established by the supervisory authority for each of the three specialized types of UCIs do not replace the general rules which remain applicable, rather they only modify certain rules in order to adapt them to the particularities of each type of UCI. 10

  Circular CSSF 02/80 of 5 December 2012, Specific rules applicable to Luxembourg UCIs pursuing alternative investment strategies. 11

  Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/ EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ 2011 L174/1).

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12

  SOPARFI stands for société de participations financières.

13

  Circular CSSF 06/241 of 5 April 2006, The concept of risk capital under the Law of 15 June 2004 relating to the investment company in risk capital (SICAR). 14

  ‘[A] well-informed investor shall be an institutional investor, a professional investor or any other investor who meets the following conditions: 1) he has confirmed in writing that he adheres to the status of well-informed investor and 2) he invests a minimum of 125,000 Euro in the company, or 3) he has been subject to an assessment made by a credit institution within the meaning of Directive 2006/48/EC, by an investment firm within the meaning of Directive 2004/39/EC or by a management company within the meaning of Directive 2001/107/EC certifying his expertise, his experience and his knowledge in adequately appraising an investment in risk capital’; Association of the Luxembourg Fund Industry (ALFI), Luxembourg Real Estate Investment Vehicles, 16, fns 2, 3, available at . 15

  Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (‘MiFID’). 16

  Circular CSSF 08/356 of 4 June 2008, Rules applicable to UCIs, when they employ certain techniques and instruments relating to transferable securities and money market instruments. 17

  Circular CSSF 11/512 of 30 May 2011, Presentation of the main regulatory changes in risk management following the publication of CSSF Regulation 10-4 and ESMA clarifications: further clarifications from the CSSF on risk management rules and definition of the content and format of the risk management process to be communicated to the CSSF. 18

  In order to be authorized, the CSSF generally approves the constitutional documents of the relevant regulated AIF (Part II UCI, SIF, or SICAR) as well as the choice of the depositary. In addition, the CSSF will verify the honourability and experience of the management team members. When approving the documentation, the CSSF will verify a number of essential items meant to protect investors. These items will, inter alia, cover the financial aspects (including any fee flows), risk factor disclosures, conflicts of interest, and risk management systems and processes. 19

  See section VII.7.3.2. for further developments on the concept of ‘promoter’ in the specific case of Part II UCIs. 20

  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, and amending Directive 2001/34/EC (OJ 2003 L345/64) (the ‘Prospectus Directive’). 21

  Version No 3 dated 19 July 2013, available at . 22

  Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (OJ 2013 L83/1). 23

  It should be mentioned that the CSSF has recently challenged the capacity of a SCA and SCS to be deemed internally managed (whereby the managing general partner is considered as internal management body), thus only considering the external management options either by the managing general partner or a third party AIFM. However, the CSSF has since clarified its position and will allow SCAs and SCSs to be internally managed.

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24

  For each SCA, SCS, or SCSp, the interaction between the provisions of the 1915 Company Law and the AIFM Law will need to be considered. Under the 1915 Company Law, as revised by the AIFM Law, the management (gestion) of each SCA, SCS or SCSp may either be entrusted to one or more general partners or to any third party appointed as agent. The change of the 1915 Company Law in respect of this additional structuring option was driven by the developments of the AIFM Law and the intention to be in a position to combine the statutory management function and the AIFM functions within one and the same entity not being the general partner and hence not subject to the joint and several liability to which general partners are typically subject. The combination of the management and AIFM functions will, however, be subject to the AIFM being set up and organized in Luxembourg in order to maintain the place of central administration of the SCA/SCS/SCSp in Luxembourg. If the AIFM to be appointed is a foreign entity, the management (gérance) function should then not be entrusted to the AIFM. In practice this would mean that the management functions and the AIFM functions (ie the minimum investment management functions) would have to be kept separate and compliant with both the 1915 Company Law and the AIFM Law. Lastly, any such structuring should always be tested from a fiscal point of view. 25

  Press Release 13/32 of 18 July 2013, Practical guidance in relation to the registration or authorization under the AIFM Law of AIFMs established in Luxembourg. 26

  Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (OJ 2003 L235/10). 27

  AIFM Law, art 5(3).

28

  AIFM Law, art 6(4).

29

  2010 UCI Law, art 102.

30

  AIFM Law, art 8.

31

  AIFMD, Art 6(3).

32

  AIFM Law, art 8(7).

33

  Articles 12–15 of the Implementing Regulation further elaborate on: (i) the risks that the additional own funds or the professional indemnity insurance must cover; (ii) the conditions for determining the appropriateness of additional own funds or the coverage of the professional indemnity insurance; and (iii) the manner of determining ongoing adjustments of the additional own funds or of the coverage of the professional indemnity insurance. 34

  AIFM Law, art 8(8).

35

  AIFM Law, art 9; 2010 UCI Law, art 129(7).

36

  The grounds for restriction or rejection would be the protection of investors, any breach of the law, or applicable regulations. 37

  AIFM Law, art 51.

38

  AIFM Law, arts 3(3), 4(2), 5(2), (3), (5), (7), 8, 9(1).

39

  AIFM Law, art 59.

40

  Luxembourg Civil Code, art 1184.

41

  1915 Company Law, art 59-1.

42

  1915 Company Law, art 59-2.

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43

  Les Novelles, ‘Les Sociétés’, No 1875 + 1876, 310; Tribunal d’Arrondissement, 23 December 1987, Bulletin Cercle François Laurent, 1991, III, 23. 44

  Van Ryn, Principes de droit commercial (2ème édition, É. Bruylant, 1976), Book I, No 607. 45

  Luxembourg Civil Code, arts 1149–1151.

46

  Luxembourg Civil Code, art 1166.

47

  The UCITS Directive and the related UCITS Implementing Directive, Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (OJ 2010 L176/42), implemented in Luxembourg by the 2010 UCI Law; and CSSF Regulation 10-4 transposing Commission Directive 2010/43/EU, as specified in Circular CSSF 12/546 of 24 October 2012, Authorisation and organisation of the Luxembourg management companies subject to Chapter 15 of the 2010 UCI Law of 17 December 2010 and to investment companies which have not designated a management company within the meaning of art 27 of the 2010 UCI Law (‘Circular CSSF 12/546’). 48

  Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ 2009 L302/32) (the ‘UCITS Directive’). 49

  Implementing Regulation, Arts 27 and 28.

50

  Implementing Regulation, recital (45).

51

  Implementing Regulation, recital (46).

52

  Implementing Regulation, recital (40) and Art 19 for the specific requirements.

53

  Implementing Regulation, recital (41) and Art 20 for the conditions.

54

  Implementing Regulation, Art 23, states that the AIFM must ensure that its decisionmaking procedures and organizational structure result in fair treatment of investors. It further states that any preferential treatment accorded by an AIFM to one or more investors must not result in an overall material disadvantage to other investors. 55

  National structures are not directly impacted by the AIFMD and therefore Member States may continue to apply national requirements in respect of AIFs established in their territory; see AIFMD, recital (10). 56

  Circular CSSF 10/437 of 1 February 2010, Guidelines concerning the remuneration policies in the financial sector. 57

  Implementing Regulation, recital (51).

58

  In relation to regulated structures such as Part II UCIs or SICARs, compliance efforts may be more onerous, since these structures are currently not subject to specific risk and liquidity management rules. The AIFMD will therefore introduce a level playing field between all regulated AIFs in this regard. 59

  Transposing UCITS Implementing Directive 2010/43 (n 47).

60

  Circular CSSF 2000/8 of 15 March 2000, Protection of investors in the event of errors in the calculation of the NAV and compensation for non-compliance with the investment restrictions applicable to UCIs.

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61

  Circular CSSF 02/77 of 27 November 2002, Protection of investors in case of NAV calculation error and correction of the consequences resulting from non-compliance with the investment rules applicable to UCIs. 62

  2010 UCI Law, art 110, according to which the CSSF must be informed in an appropriate manner about the delegation of one or several functions. 63

  Implementing Regulation, Art 76.

64

  The Implementing Regulation has defined, in recital (91), the concept of letter-box entity as meaning that ‘the AIFM should at all times keep sufficient resources to supervise the delegated functions efficiently. The AIFM has to perform itself investment management functions, to have the necessary expertise and resources, to keep the power to take decisions which fall under senior management responsibility and to perform senior management functions, which could include implementation of the general investment policy and investment strategies’. Furthermore, Art 82 of the Implementing Regulation has introduced qualitative and quantitative criteria to assess whether the AIFM may no longer be considered as the manager of the AIF and thus deemed a letter-box entity. One of those criteria is where ‘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’. The Implementing Regulation therefore introduces a quantitative element implying that the AIFM must itself perform some of its core functions, whereas under the UCITS rules the performance of the functions can largely be entrusted to third parties, with the exception of the supervision thereof. 65

  Implementing Regulation, Art 82(d).

66

  Such as, eg, the implementation and monitoring of conflicts of interest policy; the decision regarding the choice of service providers to be appointed; the interpretation of analyses of risk management, including necessary corrective measures; and, of course, the monitoring and control of delegated functions. 67

  Current regimes being set out in (i) the 2010 UCI Law, (ii) the 2004 SICAR Law, and (iii) the 2007 SIF Law. 68

  ‘Relative’ because the duties of depositaries under the AIFMD are much more detailed than under the UCITS Directive. 69

  Ie ‘in relation to AIFs which have no redemption rights exercisable during the period of 5 years from the date of the initial investments and which, in accordance with their core investment policy, generally do not invest in assets that must be held in custody in accordance with point (a) of paragraph 8 or generally invest in issuers or non-listed companies in order to potentially acquire control over such companies in accordance with Article 26 [of the AIFMD]’ (see AIFMD, Art 21(3) and art 19(3)(i) AIFM Law). 70

  Luxembourg has thus opted for the possibility given to the Member States pursuant to Art 21.3(c), last paragraph of the AIFMD that depositary functions be assumed by ‘an entity which carries out depositary functions as part of its professional or business activities in respect of which such entity is subject to mandatory professional registration recognized by law or to legal or regulatory provisions or rules of professional conduct and which can provide sufficient financial and professional guarantees to enable it to perform effectively the relevant depositary functions and meet the commitments inherent in those functions’. 71

  This new category is governed by the provisions of a new art 26-1 of the 1993 Financial Sector Law. It is expected that Luxembourg service providers specializing in providing central administration services to funds such as private equity and real estate funds will broaden their services.

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72

  AIFM Law, art 19(7), mirroring AIFMD, Art 21(7).

73

  See the AIFMD, the Implementing Regulation, and ESMA’s Final Report for details on the way such cash monitoring will be carried out in practice. 74

  AIFMD, Art 21(11) and AIFM Law, art 19.11.

75

  The initial SICAR Law, art 8(3) provided for certain additional duties to be carried out by the depositary bank, which were repealed by a law dated 24 October 2008. 76

  Law of 19 July 1991 concerning UCIs, the securities of which are not intended to be placed with the public. 77

  AIFM Law, art 19(9): (a)  ensure that the sale, issue, re-purchase, redemption and cancellation of units or shares of the AIF are carried out in accordance with the applicable national law and the AIF rules or instruments of incorporation; (b)  ensure that the value of the units or shares of the AIF is calculated in accordance with the applicable national law, the AIF rules or instruments of incorporation and the procedures laid down in Article 19; (c)  carry out the instructions of the AIFM, unless they conflict with the applicable national law or the AIF rules or instruments of incorporation; (d)  ensure that in transactions involving the AIF’s assets any consideration is remitted to the AIF within the usual time limits; (e)  ensure that an AIF’s income is applied in accordance with the applicable national law and the AIF rules or instruments of incorporation.

78

  For example, as regards private equity/real estate service providers. The same is true in relation to the assessment of ownership of such funds, since depositary banks must have in place all transactional documents prior to releasing cash for the purposes of making investments. 79

  Luxembourg Civil Code, art 1134.

80

  This may be in order to clarify the responsibilities of the AIF and the AIFM.

81

  The concept of ‘promoter’ in Luxembourg is not governed by a specific law or regulation and is only defined by administrative practice: •  Schedule C to the previous law of 20 December 2002 relating to undertakings for collective investment which requires a brief presentation of the ‘financial group (eg bank) promoting the UCITS’ to be disclosed in the simplified prospectus; and •  Chapter K of the IML Circular 91/75 of 21 January 1991, which includes ‘information on the promoter(s) such as recent financial reports’ in the file in support of the application for UCI authorization. 82

  Press Release 12/45 of 31 October 2012, UCI and promoter.

83

  No concept of promoter as developed by the CSSF expressly exists for SIFs and SICARs, where it is instead referred to as an‘initiator’. 84

  Circular CSSF 11/509 of 15 April 2011, New notification procedures to be followed by a UCITS governed by Luxembourg law wishing to market its units in another Member State

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of the European Union and by a UCITS of another Member State of the European Union wishing to market its units in Luxembourg. 85

  See also section IX.2.

86

  See also section IX.2.

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8 The Netherlands Kees Groffen, Bernard Spoor From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Undertakings for Collective Investment (UCIs) — Advertising and marketing and funds — Hedge fund

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(p. 379) 8  The Netherlands I. Introduction 8.01 1. Nature of the national non-retail investment industry 8.01 2. Legal structures used to form national AIFs 8.04 3. Companies (BV or NV) 8.06 4. Cooperative 8.09 5. Limited partnership (CV) 8.12 6. Common fund (FGR) 8.15 II. Pre-AIFMD Regulatory Framework 8.21 1. Regulation of AIFMs and national AIFs prior to the AIFMD 8.21 2. Regulation of national marketing of AIFs prior to the AIFMD 8.28 III. Regulation of National AIFs after the AIFMD 8.34 IV. General Provisions of the AIFMD and the Implementing Regulation 8.37 1. Implementation table 8.37 2. Articles 2 and 3—Scope and exemptions 8.37 3. Article 5—Determination of the AIFM 8.43 V. Authorization of AIFMs 8.47 1. Implementation table 8.47 2. Articles 6 to 8—Conditions and application for authorization 8.47 3. Article 9—Initial capital and own funds 8.51 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 8.55 5. Consequences of violating authorization provisions 8.56 VI. Operating Conditions for AIFMs 8.72 1. Implementation table 8.72 2. Section 1 (Articles 12 to 17)—General requirements 8.72 3. Section 2 (Articles 18 and 19)—Organizational requirements 8.87 4. Section 3 (Article 20)—Delegation of AIFM functions 8.90 5. Section 4 (Article 21)—Depositary 8.93 6. Consequences of violating operating conditions 8.99 VII. Transparency Requirements 8.102 1. Implementation table 8.102 2. Article 22—Financial reporting 8.102

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3. Article 23—Disclosure to investors 8.105 4. Article 24—Regulatory reporting 8.107 5. Impact of implementation of transparency requirements 8.108 6. Consequences of violating transparency requirements 8.111 VIII. AIFM Managing Specific Types of AIF 8.114 1. Implementation table 8.114 2. Section 1 (Article 25)—AIFM managing leveraged AIF 8.114 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 8.115 4. Consequences of violation of provisions relating to AIFMs managing specific types of AIF 8.121 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 8.124 1. Implementation table 8.124 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 8.124 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 8.125 4. Article 33—Conditions for managing AIFs established in other Member States 8.127 (p. 380) 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU 8.130 X. Specific Rules in Relation to Third Countries 8.133 1. Implementation table 8.133 2. General 8.133 3. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 8.136 4. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 8.137 5. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 8.138 6. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 8.140 7. Consequences of violating specific rules in relation to third countries 8.145 XI. Marketing to Retail Investors 8.148 1. Implementation table 8.148 2. Article 43—Marketing of AIFs by AIFMs to retail investors 8.148 3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 8.155

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XII. Competent Authorities and Supervisory Powers 8.156 1. Implementation table 8.156 2. Designation, responsibility, and powers of competent authorities 8.156 3. Other issues 8.167 XIII. Concluding Remarks 8.180

I. Introduction 1. Nature of the national non-retail investment industry 8.01  According to the Dutch Central Bank (De Nederlandsche Bank NV: DCB), the total number of collective investment funds (known as ‘investment institutions’) in the Netherlands is 1,468.1 Only 20 investment institutions are registered with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten: ‘AFM’) as undertakings for the collective investment in transferable securities (instellingen voor collectieve belegging in effecten: UCITSs)2 established in the Netherlands.3 This means that in principle, 1,448 investment institutions qualify as alternative investment funds (AIFs) (ie non-UCITSs) and would fall within the scope of the AIFMD. 8.02  Dutch pension funds in terms of value are the most significant investors. As at the end of 2011, Dutch pension funds together held EUR 383.6 billion in units in Dutch investment institutions, constituting 80.1 % of all units issued by Dutch investment institutions.4 Many Dutch pension funds have also created investment institutions themselves, in the form of common funds (fondsen voor gemene rekening: FGRs),5 for the purpose of pooling pension fund investments. 8.03  Pursuant to the explanatory memorandum to the Financial Markets Supervision Act (Wet op het financieel toezicht: FMSA) as a result of the implementation of the AIFMD, 240 Dutch managers will be authorized or registered for the first time, 185 of which will qualify for the (p. 381) light regime, ie they will only need to comply with the registration requirement set out in Article 3(3) of the AIFMD.6

2. Legal structures used to form national AIFs 8.04  Various types of ‘fund vehicles’ are available in the Netherlands to structure an investment institution. The customary vehicles are: a company (BV or NV), a cooperative (coöperatie), limited partnerships (in the form of a CV), or a common fund (FGR). BVs, NVs, and cooperatives are legal entities in their own right; CVs and FGRs are not. 8.05  The choice for a particular fund vehicle will depend, among other things, on taxation. All vehicles can be either open-ended or closed-ended. The various types of fund vehicles are discussed below.

3. Companies (BV or NV) 8.06  The BV (besloten vennootschap met beperkte aansprakelijkheid: private company with limited liability)7 and NV (naamloze vennootschap: public company with limited liability)8 are used as a fund vehicle. The NV is more commonly used and mostly in retail fund structures. The BV and NV have both legal personality and a capital divided into shares. The shares in an NV are in bearer or registered form; the shares in a BV are in registered form only.

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8.07  An NV can qualify as an investment company with variable capital (beleggingsmaatschappij met veranderlijk kapitaal: BMVK) (Burgerlijk Weboek: Dutch Civil Code (DCC), article 2:76a). This is a special type of NV which allows for more flexibility and for a transfer of the power to issue and repurchase shares to the managing board. Furthermore, no pre-emptive rights when issuing shares exist and, when cancelling repurchased shares, the opposition period for creditors that normally applies to NVs does not apply. 8.08  Both the BV and the NV (in the case of an NV, whether or not qualifying as a BMVK) are treated exactly the same for Dutch tax purposes. BVs and NVs are always opaque (nontransparent) for Dutch corporate income tax purposes (Wet op de vennootschapsbelasting 1969 (CITA), article 21(1)(a)) and subject to the regular corporate income tax regime or the special fiscal investment institutions regime (‘FII regime’) (CITA, article 28), and for an NV, the special exempt investment institution regime (‘EII regime’) (CITA, article 6a).

4. Cooperative 8.09  The cooperative (coöperatie)9 is the Dutch form of a mutual enterprise, ie an autonomous association of persons (legal entities or natural persons) united voluntarily, whose primary purpose is to satisfy their common needs and not to make profits or provide a return on capital. It is managed according to solidarity principles between members who participate in its corporate governance. It is therefore accountable to those whose needs it is created to serve. The cooperative is a legal entity under Dutch law. (p. 382) 8.10  The cooperative is suitable as a legal form of an investment institution in which the private equity mechanism can work very well. A cooperative is often used in structures in which the tax participation exemption is taken advantage of and in structures where the fund is a tax transparent entity. In the latter structure, the cooperative is held by the tax transparent entity. 8.11  A cooperative is always opaque for Dutch corporate income tax purposes and subject to the regular corporate income tax regime (CITA, article 2(1)(b)).

5. Limited partnership (CV) 8.12  The limited partnership (commanditaire vennootschap: CV) is a contractual arrangement between one or more general partners and one or more limited partners and is not a legal entity. The CV is a flexible legal structure. The conditions can, for example, state that the commitment will be denominated and drawn down in a different currency than the Euro and that the units in the investment institution have a nominal value in a different currency than the Euro. Furthermore, the number of voting rights of a unit-holder does not have to correspond with the amount of capital contributed by it. 8.13  Since the CV does not have legal personality, it cannot as such own its assets, but the assets are regarded to be legally owned by the general partner, and the partnership liabilities are considered liabilities of the general partner provided no separate depositary was appointed for that purpose. 8.14  A CV can be structured as either a transparent or an opaque entity for Dutch tax purposes.10 If a fund is transparent, the fund itself will not be subject to Dutch corporate income tax. A CV will be considered transparent if the accession and/or the replacement of limited partners may only take place with the prior consent of all (other) limited and general partners. Unanimous consent is considered given if all partners are requested to consent in writing but do not respond within four weeks.11

6. Common fund (FGR)

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8.15  A common fund (fonds voor gemene rekening: FGR) is a flexible legal form for an investment fund as no mandatory corporate law or civil law rules apply. For this reason the FGR is even more flexible than the CV. Dutch civil law does not address the FGR as such. However, the FGR does occur as a concept in Dutch tax law.12 8.16  An FGR is a contractual arrangement and not a legal entity. The qualification of an FGR for civil law purposes will differ, depending on the provisions of the contract. The contract is usually called ‘conditions of management and custody’ (‘voorwaarden van beheer en bewaring’). (p. 383) 8.17  The FGR is a flexible legal form. The conditions can state for example that the commitment be denominated and drawn down in a different currency than the Euro and that the units in the fund have a nominal value in a different currency than the Euro. Furthermore, the number of voting rights of a participant does not have to correspond with the amount of capital contributed by such participant. 8.18  If an FGR can rely on an exemption from the licence requirement set out below, it is not required by law that it must have a manager and depositary. However, if the FGR can rely on an exemption, it often will have a manager and depositary. These entities have legal personality in order to establish that the legal title to the assets is separated from the manager. Usually this is effected by the depositary, the owner of the legal title of the assets of the investment institution, and the manager acting as its proxy holder pursuant to a power of attorney issued by the depositary. The investors are beneficially entitled to the assets owned by the depositary. 8.19  An FGR can be structured as either a transparent or a non-transparent entity for Dutch tax purposes.13 8.20  The units of the FGR can be admitted to trading on Euronext Amsterdam by NYSE Euronext or any other regulated market. Therefore, the FGR is also suitable for public offerings.

II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD 8.21  An investment institution (beleggingsinstelling) was defined in the FMSA as an entity which requests or acquires funds or other goods for collective investment in order that the unit-holders may share in the proceeds of the investments (FMSA, article 1:1). The offering of units in investment institutions was regulated by the FMSA. 8.22  An investment institution could either be an investment fund (beleggingsfonds) or an investment company (beleggingsmaatschappij). An investment company is a legal entity (rechtspersoon) as defined in Book 2 of the DCC; an investment fund is not a legal entity. 8.23  Unless an exemption was available, it was prohibited to offer units in an investment institution in the Netherlands, unless the manager (beheerder) of the investment institution, or, if self-managed, the investment company, had obtained a licence from the AFM. 8.24  A licence for offering units in an investment institution was granted if the investment institution, its manager, and its depositary (bewaarder) (if any) complied with various requirements. A distinction can be made between requirements relating to governance and those relating to disclosure. 8.25  For the pre-AIFMD regulatory regime in the Netherlands, it was relevant whether an investment institution was open-ended or closed-ended, in particular in relation to prospectus and marketing requirements. This distinction will remain relevant post-AIFMD. An investment institution is an open-ended investment institution if the units are repurchased or repaid either directly or indirectly at the request of a unit-holder and at the

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expense of the assets of the investment (p. 384) institution. If the investment institution cannot be qualified as an open-ended investment institution, it qualifies as a closed-ended investment institution. 8.26  On 20 December 2013 the EC published the final RTS to ensure uniformity with regard to the concepts of open-ended and closed-ended investment institutions. According to the final RTS an open-ended investment institution shall be considered to be an investment institution the shares or units of which are, at the request of any of its investors, repurchased or redeemed prior to the commencement of its liquidation phase or winddown, directly or indirectly, out of the assets of the AIF and in accordance with the procedures and frequency set out in its rules or instruments of incorporation, prospectus or offering documents. A decrease in the capital of the investment institution in connection with distributions is not relevant for the determination of being open- or closed-ended. 8.27  The AFM and DCB are responsible for the supervision of the compliance of investment institutions with the FMSA. To perform their duties, the AFM and DCB have various powers. The AFM is the main supervisor with regard to investment institutions. It is responsible for the supervision of the business conduct of investment institutions. The DCB supervises the compliance of investment institutions with prudential requirements.

2. Regulation of national marketing of AIFs prior to the AIFMD 8.28  Managing an investment institution was not a regulated activity per se under Dutch law. A manager would only be required to be authorized if it offered units in an investment institution in the Netherlands, without the benefit of an exemption. In that case, the manager of the investment institution, or, if self-managed, the investment company, must have obtained a licence from the AFM. Certain Dutch managers also provide non-collective asset management services (ie managing a portfolio of a client or other MiFID-regulated services such as offering investment advice) without the benefit of an exemption, and accordingly a separate licence had to be obtained by them in relation thereto. 8.29  The FMSA provided several exemptions from the authorization requirement.14 Exemptions existed if the offer was made to qualifying investors (such as banks, insurers, investment firms, and pension funds), or to fewer than 100 persons, or the value of the offered units exceeded EUR 100,000, or the units could only by acquired for a price exceeding EUR 100,000 per investor. 8.30  The term ‘qualifying investor’ is similar to the definition set out in the Prospectus Directive.15 The exemption can only be relied upon if the offering material and any advertisements and documents that hold out the prospect of an offering include the statement that the offer is only made to qualifying investors. 8.31  An investment institution that solely offers units to qualifying investors may apply for the voluntary regulatory regime (FMSA, article 2:69a and b).16 This regime entails fewer (p. 385) requirements than the obligatory (‘full’) regulatory regime. The voluntary regulatory regime is attractive for investment institutions operating in the Netherlands as certain foreign institutional investors, especially insurers and pension funds, are only allowed to acquire units in investment institutions if these are regulated and supervised pursuant to the national legislation that applies to these investors and/or their fund policy. 8.32  In addition, certain ‘foreign’ investment institutions which are adequately supervised in their home state (‘adequate supervision funds’) pre-AIFMD do not require a licence from the AFM to offer units in the Netherlands (FMSA, article 2:66). Such investment institutions are only required to notify the AFM of their intention to offer units in the Netherlands and

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submit a declaration of the foreign state that the investment institution is adequately supervised (FMSA, article 2:73). 8.33  Many (managers of) investment institutions do not require a licence to offer their units in the Netherlands through the private placement regime and the ‘adequate supervision regime’ described at paragraph 8.32.

III. Regulation of National AIFs after the AIFMD 8.34  The AIFMD has been implemented in the FMSA. The FMSA is divided into several parts, each with its own specific subjects, such as market access, prudential supervision, and financial undertakings conducting supervision. The AIFMD has been implemented in Part 1 of the FMSA, which contains definitions and other general provisions,17 Part 2 on market access,18 and Part 4 on the market conduct of financial enterprises.19 Amendments have also been made in Part 3 on prudential supervision20 and Part 5 on financial markets supervision.21 Moreover, some small amendments to Dutch corporate law will be made in Book 2 of the DCC. 8.35  Only the main features of Dutch financial regulatory law have been laid down in the FMSA. A number of specific provisions have been set out in decrees issued under the FMSA.22 The decrees regularly refer to articles of the AIFMD if these articles are sufficiently specific and do not require to be transformed into national law. The legislature prefers this approach in order to adhere as close as possible to the language of the AIFMD and to ensure consistency with the delegated regulation. The Implementing Regulation23 has not separately been implemented in Dutch law. The additional requirements for offering units to retail investors have resulted in changes in the decrees referred to in this paragraph. (p. 386) 8.36  Since the AIFMD prescribes maximum harmonization where it concerns professional investors, we will not explicitly describe the implementation of each separate provision. But where the implementation of a certain provision of the AIFMD requires specific attention, this implementation is described in the relevant paragraph. In line with the AIFMD, the FMSA and the decrees issued under the FMSA regulate alternative investment fund managers (AIFMs), and through it the AIFs managed by them. In the Netherlands, AIFs are not regulated in their own right. Where an AIF is marketed to retail investors, its manager (AIFM) must comply with additional retail rules that apply to such marketing. These retail rules are also described in section XI.

IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

n/a

Art 2 (scope)

Definition of an AIF in FMSA, art. 1:1 in conjunction with FMSA, para 2.2.7.1

Art 3 (exemptions)

FMSA, arts 1:13a, 2:66a

Art 4 (definitions)

FMSA, art 1:1

Art 5 (determination of AIFM)

FMSA, arts 1:13, 4:37d

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AIFMD

National implementation

Implementing Regulation

National implementation

Arts 3–7 (re Art 3(2) AIFMD: calculation of AUM)

—

Arts 8–13 (re Art 4(3) AIFMD: calculation of leverage)

—

2. Articles 2 and 3—Scope and exemptions 8.37  The scope of the AIFMD is described in Article 2(1). The exemptions of the AIFMD are described in Articles 2(3) and 3(1). According to these articles, the AIFMD is not applicable, inter alia, to holding companies, institutions for occupational retirement provision (IORPs),24 central banks, and supranational institutions. According to the preamble of the AIFMD, the Directive is also not applicable to family office vehicles, which invest the private wealth of investors without raising external capital. The Explanatory Memorandum (to the FMSA) repeats this exemption. However, the exemption is not explicitly laid down in the AIFMD or the FMSA. 8.38  Some Dutch pension funds requested further explanation of the scope of the AIFMD from the Ministry of Finance. According to these pension funds, AIFs which offer units to pension (p. 387) funds only should be able to make use of the exemption for institutions for occupational retirement. The Ministry of Finance’s response was non-committal and referred the question to the European Commission. However, an amendment to the FMSA has been adopted in the Second Chamber of the Dutch Parliament to the effect that managers of the aforesaid AIFs do not require a licence.25 The Ministry of Finance26 announced that it has received feedback from the European Commission indicating that an exemption for AIFs in which only pension funds invest is not in accordance with the AIFMD. The FMSA has been amended accordingly. 8.39  Another commonly used form of investment is investing through asset pooling. Asset pooling means that several investment funds combine their assets in order to minimize certain costs and to maximize investment results. An administration office (administratiekantoor) will hold the assets for the investment funds. The investment policy, however, is determined at the level of the investment funds. It could be argued that an administration office without its own investment policy cannot qualify as an AIF. According to the Explanatory Memorandum,27 an ‘administrative pooling’ used in the performance of an individual asset management mandate by an investment firm does not qualify as an AIF. As there are many types of asset pooling in practice, it cannot be said with certainty whether or not each type qualifies as an AIF. The Explanatory Memorandum states that, in case of doubt, the AFM can be requested to give its point of view.28 8.40  According to Article 3(2) to (6) of the AIFMD, each Member State has the authority to introduce a mitigated regime for small AIFMs. Article 2:66a of the FMSA provides for such mitigation. The mitigated regime was introduced to prevent overregulation for small AIFMs, the activities of which will not normally have major consequences for the stability of the financial system. 8.41  Article 3(2) of the AIFMD attributes assets to an AIFM not managed by the AIFM itself but by an affiliated entity if the AIFM has ‘a substantive direct or indirect holding’ in such entity. According to article 2:66a of the FMSA such assets are attributed to the AIFM if it holds a ‘qualifying participation’ in such entity. A qualifying participation exists if—

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directly or indirectly—at least 10% of the shares or voting rights are being held. As a result, in theory, assets can be attributed to multiple AIFMs. 8.42  Small AIFMs may opt in and request a ‘full licence’ in accordance with article 2:65 of the FMSA. A full licence may be preferable in order to make the units in the AIFs more attractive for certain professional investors, which, according to their investment policies, may only invest in supervised AIFs (for example, certain insurance companies).

3. Article 5—Determination of the AIFM 8.43  As observed in sections I.2 and I.3, a distinction can be made between AIFs constituted as legal entities (NV, BV, or cooperative) and those not so constituted. A legal entity can be (p. 388) self-managed. In that case, the legal entity itself is the AIF and the AIFM. If the legal entity AIF is externally managed, the external manager must at least perform its portfolio management and risk management functions (which can only be delegated to a limited extent as described at paragraphs 8.45 and 8.46) in order to qualify as its AIFM. 8.44  AIFs not constituted as legal entities are generally formed as a limited partnership (CV) or as a common fund (FGR). 8.45  A limited partnership requires a general partner. In order to prevent statutory liabilities, the general partner will normally be a special purpose vehicle. This vehicle delegates the powers arising from the limited partnership agreement to the AIFM which actually performs (at least) the portfolio management and risk management functions of the AIF. The AIFM’s authorities arise from the agreement between the general partner and the AIFM. 8.46  A common fund (FGR) is often formed by an agreement between an entity holding the legal title to the assets and a manager. Investors can ‘join’ the FGR through separate subscription agreements. If the manager of the fund is a special purpose vehicle that does not actually perform the portfolio management and risk management functions for the FGR, it will delegate its fund management activities to another entity that does perform (at least) the portfolio management and risk management activities and qualifies as the AIFM.

V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as AIFM)

FMSA, arts 2:65, 2:67a, 2:97, 4:100f with respect to AIFMD, Art 6(8)

Art 7 (application for authorization)

FMSA, art 2:67

Art 8 (conditions for granting the authorization)

FMSA, arts 2:67, 4:13

Art 9 (initial capital and own funds)

FMSA, art 3:52, 3:57; FMSA Prudential Decree, arts 48, 50, 51, 63, 63b 90, 91

Art 10 (changes in the scope of the authorization)

FMSA, art 4:26; FMSA Market Conduct Decree, art 88a

Art 11 (withdrawal of the authorization)

No implementation necessary as FMSA, art 1:104 already offers such option for withdrawal

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AIFMD

National implementation

Implementing Regulation

National implementation

Arts 12–15 (re Art 9(7) AIFMD: own funds and insurance)

—

2. Articles 6 to 8—Conditions and application for authorization 8.47  Chapter II of the AIFMD describes the required authorization of AIFMs to manage an AIF. Chapter II of the AIFMD is mainly implemented in Part 2 of the FMSA on market access and most provisions of Chapter II of the AIFMD are implemented verbatim in the FMSA. See paragraph 8.50 for the use of the Member State option to allow the provision of certain investment services. (p. 389) 8.48  It is still unclear what the impact of the AIFMD will be on the structuring of an AIF in the Netherlands. Depending on the views the AFM will adopt, it is expected that some investment funds which serve as asset pooling vehicles on behalf of other investment funds or pension funds will amend their terms and conditions to reflect explicitly that these vehicles do not qualify as AIFs but are merely asset pooling vehicles without an investment policy. 8.49  Managers that, before 22 July 2013, were managing an investment institution or AIF must apply for a licence no later than 21 July 2014. Until the AFM has decided on the licence application, the manager may continue to manage and market investment institutions in accordance with the rules of the regime that was in place until 22 July 2013. Managers which already held a licence on 22 July 2013 do not need to apply for an AIFM licence. Their licence will be converted automatically into an AIFM licence on 22 July 2014. The requirement for AIFMs, prior to obtaining an AIFM licence, to take all necessary measures to comply with national law stemming from the AIFMD (Article 61(1)) has not been included in the FMSA. Although the Explanatory Memorandum mentions such obligation, this does not seem to be a sufficient legal basis to legally bind AIFMs. The AFM has indicated that it will not actively enforce this AIFMD requirement. 8.50  An AIFM is restricted in the activities it may conduct in (almost) the same way as a UCITS manager is restricted under the UCITS Directive.29 According to Article 6(4) of the AIFMD, Member States may authorize an external AIFM to provide certain additional services, such as individual management of portfolio investments. Article 2:67a (2) of the FMSA provides for this authorization. AIFMs authorized by the AFM may, accordingly, provide certain typical ‘investment undertakings’ services domestically, without requiring separate authorization as an investment firm within the meaning of MiFID.

3. Article 9—Initial capital and own funds 8.51  Article 9(1) of the AIFMD, as implemented in articles 3:52 and 3:57 of the FMSA, provides initial capital and own fund requirements for AIFMs. They correspond fully with the requirements for UCITS management companies in the UCITS Directive, as implemented in the Netherlands. 8.52  Depending on the volume of the assets under management and the number of AIFs managed by the AIFM, the initial capital and own funds requirements could influence the decision to choose an internal AIFM rather than an external AIFM. In addition, managers will consider converting investment funds into UCITSs if they also offer units in their fund to retail investors. Thus, it is expected that the number of UCITS managers will increase in

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the Netherlands and a considerable number of managers will be authorized to manage UCITSs as well as AIFs. 8.53  According to Article 9(6) of the AIFMD, Member States may authorize AIFMs not to provide up to 50% of the additional amount of own funds referred to in Article 9(3) of the Directive if they benefit from a guarantee. This option will not be implemented in the Netherlands, since under the FMSA guarantees do not qualify as (part of) equity.30 (p. 390) 8.54  Article 9(7), as implemented in article 63(b) of the FMSA Prudential Decree, provides that an AIFM should cover its potential professional liability risks by additional own funds or by an appropriate professional indemnity insurance. The question is whether this requirement could change the private law liability for an AIFM as there are some precedents in Dutch case law where being insured for a risk was in itself a reason to hold the insured party liable for the insured loss.31 Those cases, however, were also always decided in the context of an economic imbalance between parties. In the context of an AIF with professional investors, there seems little merit for such argument.

4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 8.55  The ‘change in scope’ and ‘withdrawal’ provisions of the AIFMD have been implemented in the FMSA in the same manner as their corresponding provisions in the UCITS Directive (AIFMD, Article 7) and MiFID (AIFMD, Articles 6 and 8). In addition, article 4:26(5) of the FMSA determines that managers of AIFs and UCITSs must notify the AFM and the regulators of the relevant Member State in which they offer units immediately if and when the redemption of units is suspended.

5. Consequences of violating authorization provisions A. Regulatory law consequences 8.56  Violation of the FMSA is an administrative offence, which means that the regulators may apply administrative enforcement through means of, inter alia, issuing an instruction (aanwijzing) to adhere to a particular line of conduct (FMSA, article 1:75), an order subject to an incremental penalty (last onder dwangsom) (FMSA, article 1:79), or an administrative fine (bestuurlijke boete) (FMSA, article 1:80) if the offender can be held responsible for the violation. 8.57  With respect to administrative fines, the Dutch penalty regime provides for a system of fixed and flexible fines. There are three categories of administrative fines (FMSA, article 1:81). The first category concerns fixed fines of in principle EUR 10,000, which can be imposed for relatively light and frequently occurring violations (for example, noncompliance with a notification obligation or breach of a time limit). The other two categories relate to flexible fines indicating that the amount can be adjusted depending on the circumstances of the case. These fines start with a base amount of EUR 500,000 for intermediate violations (such as violations of regulations governing consumer protection or non-compliance with integrity rules) and EUR 2 million for grave violations (such as market manipulation, insider trading, and conducting banking activities without a licence). The maximum fine for intermediate violations is EUR 1 million and for grave violations EUR 4 million. However, in case of recidivism and the obtaining of illegal proceeds, the maximum fine may be increased. This is discussed in more detail at paragraph 8.62. The power to impose a fine expires five years after the date on which the infraction was committed. (p. 391) 8.58  Enforcement is at the discretion of the AFM and the DCB, provided that certain statutory conditions are met. The AFM and the DCB will generally take into account the degree of culpability of the offender, the gravity and duration of the violation, the prejudicial effect of the violation with regard to third parties, whether an offender obtained illegal proceeds, whether a situation of recidivism exists, the financial means of the

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offender, whether the violation harmed the confidence of the market, and whether the offender was cooperative during an investigation. 8.59  Upon violation of certain provisions of the FMSA, the regulators may issue a public warning and, where necessary, state the reasons for such warning. 8.60  Furthermore, the regulator publishes its decision to impose an order subject to an incurred incremental penalty or an administrative fine. In principle, all decisions to impose fines for grave violations, as well as for certain other violations, must be published by the regulator (FMSA, article 1:97(1)). This obligation to publish exists irrespective of whether an appeal has been instituted against such decision before the administrative courts. However, publication may be suspended if a preliminary injunction against publication is instituted (FMSA, article 1:97(3)). 8.61  In addition, the AFM may withdraw the authorization of an AIFM if it has seriously or systematically infringed the provisions adopted pursuant to the AIFMD. A similar rule has already been set out in the FMSA with respect to licences in general. This provision (article 1:104) also applies to AIFMs. If the authorization of an AIFM is withdrawn, the AFM may determine that the AIFM should be dissolved and liquidated, wholly or partially, within a time frame to be set by the AFM. 8.62  Failing to comply with the regulations concerning the prohibition on offering units in an AIF without a licence is considered to be a grave offence, which may lead to the imposition of administrative fines up to a maximum amount of EUR 4 million for each violation. However, the FMSA also provides for possible additional increments. In the case of recidivism, the AFM may double the fine, which could lead to exceeding the statutory maximum (FMSA, article 1:81(1)). Consequently, in the case of recidivism of grave offences, potential fines up to EUR 8 million can be imposed by the regulator. In addition, it follows from the FMSA that if an offender obtains illegal proceeds of EUR 2 million or more, a maximum fine of twice the amount of the illegal proceeds can be imposed (FMSA, article 1:81(3)). In this case, the statutory maximum of EUR 4 million can thus also be exceeded.

B. Criminal law consequences 8.63  In general, violations of the FMSA qualifying as serious violations are also subject to the imposition of criminal sanctions such as a penal fine or imprisonment. Non-compliance with certain requirements qualifies as an economic offence pursuant to the Economic Offences Act (Wet op de economische delicten: EO Act). These violations carry sanctions of a maximum of six months’ imprisonment, community service, or a penal fine of EUR 19,000. If the offence was committed intentionally, the same sanctions apply except for the maximum duration of imprisonment, which can result in a prison sentence of a maximum of two years. Furthermore, the EO Act provides for additional sanctions, such as the deprivation of certain rights, (partial) cessation of the enterprise, putting the enterprise under administration, or publication of the judicial decision. The imposition of these additional measures rarely happens. (p. 392) 8.64  Criminal sanctions and an administrative fine may not be imposed for the same act cumulatively. As a result, violations of the several regulations cannot lead to the imposition of an administrative fine if criminal proceedings have been started for the same act, and vice versa. 8.65  As noted at paragraphs 8.56–8.62, the AFM and the DCB have far-reaching powers to impose substantial fines for infractions of the FMSA. However, the FMSA also provides for enforcement action against individual members of management. Enforcement actions may

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therefore lead to the imposition of administrative fines on individuals who were involved in the perpetration of an infraction by a legal entity. 8.66  This concept is derived from criminal law, which means that in a case of criminal prosecution of a legal entity, those individuals who either ordered the violation (opdrachtgevers) or who presided over the commission of an infringement by the legal entity (leidinggevenden) may be prosecuted and subject to sanctions. 8.67  With regard to the obligations and prohibitions arising under Dutch financial supervision laws and regulatory enforcement, a broad group of individuals within financial institutions may be subject to administrative fines if those obligations or prohibitions are violated. Besides members of the (supervisory) board, managers of a particular department within the enterprise could also be deemed to meet the relevant criteria in a particular situation. 8.68  Apart from the above, co-perpetrators (medeplegers) can also be considered offenders. The consequence is that if an infraction is committed jointly by two or more persons, each can be separately subject to sanctions. Conscious cooperation and joint commission of the infraction are in that case required. 8.69  Offering units in an AIF in violation of the prohibition set out in the FMSA qualifies as an economic offence pursuant to the EO Act. The consequences of such a violation are described at paragraph 8.63.

C. Private law consequences 8.70  In general, violation of the FMSA provisions does not necessarily result in civil liabilities, such as, inter alia, liability of the offender or nullity of the legal act (FMSA, article 1:23). The purposes of civil law provisions and regulatory law provisions differ. Therefore, violation of regulatory provisions will in general not lead to private law consequences. The EU Court of Justice32 recently ruled that each Member State has the discretion to determine the contractual consequences of violating a specific MiFID requirement,33 subject to observance of the principles of equivalence and effectiveness. 8.71  Under Dutch law, violation of requirements of the AIFMD may in certain circumstances support the argument that the AIFM has breached a duty of care. Such duty of care may originate from company law, which generally prescribes that a managing director must perform its duties diligently. A duty of care may also originate from contract law if the AIFM acts as a management company of a contractual AIF. In that case, the AIFM should act as a (p. 393) contractor acting diligently. In addition, violation of regulatory provisions may support a claim arising from the tort of negligence. It is questionable whether the civil courts, when setting the duty of care in cases, can determine a standard under contract law or tort law that is stricter than the regulatory rules set by the AIFMD.34 It has been argued that the EU Court of Justice decision referred to in paragraph 8.70 means that if FMSA-based conduct of business rules have been breached this results in a breach of duties under civil law as well.35

VI. Operating Conditions for AIFMs 1. Implementation table AIFMD

National implementation

Art 12 (general principles)

FMSA, arts 3:258(1), 4:9, 4:10, 4:14, 4:25; FMSA Market Conduct Decree, art 83a(1), (2)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 13 (remuneration)

Rules issued by supervisor pursuant to FMSA Market Conduct Decree and FMSA Prudential Decree

Art 14 (conflicts of interest)

FMSA, art 4:37e; FMSA Market Conduct Decree, art 115c

Art 15 (risk management)

FMSA, art 3:17; FMSA Prudential Decree, art 26(1); FMSA Market Conduct Decree, art 33a

Art 16 (liquidity management)

FMSA Prudential Decree, Pt 4.2, art 26(1)

Art 17 (investment in securitization positions)

FMSA, art 3:17(3)

Art 18 (general principles)

FMSA, art 4:14; FMSA Market Conduct Decree, art 29a

Art 19 (valuation)

FMSA, art 4:37k; FMSA Market Conduct Decree, art 115i

Art 20 (delegation)

FMSA, art 4:16; FMSA Market Conduct Decree, art 37a

Art 21 (depositary)

FMSA, arts 1:74, 4:11, 4:14, 4:16, 4:37f, 4:37g, 4:37h; FMSA Market Conduct Decree, arts 37a (2), 83b, 83c, 115d, 115f, 115h

Implementing Regulation

National implementation

Arts 16–30 (re Art 12(1) AIFMD: general principles)

—

Arts 31–37 (re Art 14 AIFMD: conflicts of interest)

—

Arts 38–45 (re Art 15 AIFMD: risk management)

—

Arts 46–49 (re Art 16 AIFMD: liquidity management)

—

Arts 50–56 (re Art 17 AIFMD: investment in securitization positions)

—

Arts 57–66 (re Art 18 AIFMD: organizational requirements— general principles)

—

Implementing Regulation

National implementation

Arts 67–74 (re Art 19 AIFMD: valuation)

—

Arts 75–83 (re Art 20 AIFMD: delegation of AIFM functions)

—

Arts 85–102 (re Art 21 AIFMD: depositary)

—

(p. 394) 2. Section 1 (Articles 12 to 17)—General requirements

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A. Article 12—General principles 8.72  The articles in the AIFM Directive relating to operating conditions are to a large extent implemented by increasing the scope of existing principles and rules under the FMSA and governmental decrees to AIFMs which were unregulated until 22 July 2013. 8.73  The pre-AIFMD law described later did not apply to a large number of AIFMs, as they were not regulated under pre-AIFMD law. Post-AIFMD law therefore has a material impact on their business operations. 8.74  The main principles in this respect under the FMSA applied pre-AIFMD to regulated AIFMs (ie retail investment fund managers), (managers of) UCITSs, and investment companies. Post-AIFMD, these principles will also apply to AIFMs and AIFs which, until 22 July 2013, were unregulated. The principles require (i) that such entity has a sound and prudent business operation, (ii) that it obeys certain rules, dictated by governmental decrees, in relation to treating its clients or participants with due care, (iii) that the day-today business of such entity is determined by policy makers and supervisors that are deemed fit and proper, and (iv) that policy makers and supervisors of such entities are trustworthy. 8.75  Where we refer to these principles in pre-AIFMD law, these law principles do apply to pre-AIFMD regulated AIFMs, investment companies, and (managers of) UCITSs. The execution of these principles may however vary between the different entities. Article 12 of the AIFMD has been implemented by extending the scope of these principles to AIFMs which, until 22 July 2013, were not regulated. 8.76  Article 12(1)(f) of the Directive has been reflected in the pre-AIFMD article 4:25 of the FMSA providing for the treatment of clients and participants with due care. Article 83a of the FMSA Market Conduct Decree provides that the AIFM should adhere to Article 12(1) (b), (d)–(f), and (2)(a) of the AIFMD. 8.77  Article 12(1)(a) has been brought under the scope of the pre-AIFMD fit and proper and trustworthiness requirement of policy makers and supervisors.

B. Article 13—Remuneration 8.78  Based on the aforementioned principle that specific financial undertakings should have a sound and prudent business operation, the DCB issued pre-AIFMD rules (Regeling beheerst beloningsbeleid) for, inter alia, investment companies that have their corporate seat in the Netherlands and provide investment services or conduct investment activities there. These rules provide that such investment companies must have a controlled remuneration policy in place, and outline several requirements in relation thereto. The rules do not apply to managers of UCITSs or of AIFs. However, article 86b of the FMSA Market Conduct Decree (p. 395) provides for a more general rule that managers of UCITSs and of regulated AIFs that have their corporate seat in the Netherlands must have a remuneration policy in places that does not encourage unacceptable risk taking. 8.79  It has been announced that supervisory authorities will issue new rules on remuneration. A controversial element of this will be the bonus cap of 20% of which managers of AIFs and UCITSs are exempted. A bonus cap determines the division between fixed and variable remuneration, which division is addressed in Article 1(j) of Annex II (‘Remuneration Policy’) of the AIFMD and should be determined on a case-by-case basis (‘fixed and variable components of total remuneration are appropriately balanced. . .’).

C. Article 14—Conflicts of interest 8.80  Pre-AIFMD law provided, in article 4:11 and 4:14 of the FMSA, that the aforementioned principle that specific financial undertakings should have a sound and prudent business operation includes obeying governmental decrees regarding the avoidance of conflicts of interest. Article 14 has been implemented in article 4:37e of the

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FMSA and in article 115c of the FMSA Market Conduct Decree, which refers to Article 14 of the AIFMD.

D. Article 15—Risk management 8.81  Pre-AIFMD law provided in articles 4:14 and 3:17 of the FMSA that the aforementioned principle that specific financial undertakings should have a sound and prudent business operation includes obeying governmental decrees regarding risk management. These decrees have been amended as a result of the implementation of the AIFMD. Article 33a of the FMSA Market Conduct Decree refers to Article 15 of the AIFMD and article 26.1(2) of the FMSA Prudential Decree also refers to Article 15 of the Directive. Article 26.1(2), inter alia, covers the maximum level of leverage which AIFMs may employ, and which maximum must be set by the AIFM taking into account the criteria set out in Article 15 of the AIFMD. Article 26.1(2) of the FMSA Prudential Decree does not provide for a specific maximum amount of leverage that can be employed by AIFMs licensed in the Netherlands.

E. Article 16—Liquidity management 8.82  Pre-AIFMD law provided in article 3:17(3) of the FMSA that the operations management of an open-ended regulated AIF should cover authorization procedures, limits control and procedures and emergency measures with respect to the AIF’s liquidity position. 8.83  According to informal AFM guidelines,36 an open-ended regulated investment fund manager may not suspend the issue or redemption of units in the long term or make issuance or redemption factually impossible. The AFM stipulated that a suspension event is only acceptable if it concerns special circumstances that occur regardless of the intentions of the AIF or AIFM. These special circumstances are to be specified in the AIF’s prospectus. 8.84  Regulated open-ended AIFs may create side-pockets to which illiquid investments are attributed provided such side-pockets are provided for in the fund documentation. Sidepockets (p. 396) are considered by the AFM to form a separate sub-fund and should be registered with the AFM as such. 8.85  Article 26.1(2) of the FMSA Prudential Decree explicitly refers to Article 16 of the AIFMD and requires an AIFM to maintain procedures and measures that will ensure compliance with the liquidity requirements of Article 16.

F. Article 17—Investment in securitization positions 8.86  Pre-AIFMD law provided, in article 3:17 of the FMSA, that the regulated AIFM and the AIF should manage the assets of the AIF in accordance with the investment policy and control and analyse risks in relation to the investment process in a systematic way. These rules did not apply to unregulated AIFMs. Article 17 of the AIFMD has been implemented in article 3:17(3) of the FMSA.

3. Section 2 (Articles 18 and 19)—Organizational requirements A. Article 18—General principles 8.87  Article 18 of the AIFMD has been implemented by bringing AIFMs under the scope of the aforementioned principle that certain financial undertakings should have a sound and prudent business operation. Article 29a of the FMSA Market Conduct Decree explicitly refers to Article 18 of the Directive.

B. Article 19—Valuation

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8.88  Pre-AIFMD law provided in article 4:46a of the FMSA that the net asset value (NAV) must be determined whenever the regulated AIF or AIFM offers, issues, or redeems units. There are no specific rules on how the NAV should be determined; however, the FMSA provided that procedures must be in place that safeguard a reliable, correct, and consistent determination of the NAV. It also provided that the process of determination of the NAV must be separated from other activities of the AIFM or the AIF. Once a year, an independent expert must value the assets of the AIF that are not (in short) listed (FMSA, article 4:52a). Annual accounts must be made available on the AIF’s behalf. 8.89  Article 4:37k of the FMSA implements Article 19 of the AIFMD, and, for the valuation of assets and calculation of the NAV, article 115i of the FMSA Market Conduct Decree explicitly refers to Article 19 of the Directive. For managers that, until implementation of the AIFMD, have not been regulated, the valuation requirements will have a material impact. The valuation function has generally not been separated from the portfolio management function and—given the small size of their teams—these managers will face problems separating these functions. It is expected that many of these managers will seek to delegate the valuation function to a depositary. Such depositaries will only be able to perform the valuation function if it is sufficiently separated from the depositary function (AIFMD, Article 19(4)).

4. Section 3 (Article 20)—Delegation of AIFM functions 8.90  Article 20 of the AIFMD has been implemented in article 4:16 of the FMSA and article 37a of the FMSA Market Conduct Decree, which explicitly refers to Article 20 of the Directive. An AIFM may only delegate and a delegate may only sub-delegate if the requirements of (p. 397) Article 20 are met. The AIFMD37 states that the AIFM’s liability towards the AIF and its investors will not be affected by the fact that the AIFM has delegated functions to a third party (or by any other sub-delegation). 8.91  The AIFMD seems to presume that the AIFM is liable towards the AIF and its investors. With respect to depositaries, the AIFMD provides that the depositary will be liable to the AIF or the investors by contract.38 Such requirement has not been included for AIFMs, probably because such requirement would not be appropriate for all the different types of AIFs throughout the EU. 8.92  As a general rule, a contract party under Dutch law is allowed to exclude its liability for damage caused by non-performance under an agreement, except for damage caused by wilful misconduct or gross negligence. In specific circumstances the principles of reasonableness and fairness may set aside a limitation of liability. It could be argued that an AIFM may also exclude its liability post-AIFMD. In the Netherlands such exclusion of liability pre-AIFMD was not prohibited by the AFM for managers of UCITSs, whereas the UCITS Directive contains a similar presumption of liability as set out in the AIFMD.

5. Section 4 (Article 21)—Depositary 8.93  Pre-AIFMD, article 4:42 of the FMSA required that an FGR, a limited partnership, and a UCITS appoint a depositary. The depositary was required to hold legal title to the assets of an investment fund. 8.94  Given the requirement that the depositary must hold legal title to the assets, Dutch law also required that an AIF (of the contractual type) must have a separate dedicated depositary if a cross-liability risk exists. A cross-liability risk has been defined as a real risk arising from the AIF’s investment policy that the AIF’s assets will not be sufficient to satisfy claims in relation to (i) obligations relating to the management and custody of the AIF’s

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assets and (ii) the units in the AIF. Therefore, pre-AIFMD a depositary was only allowed to act as depositary of more than one AIF if such AIFs would not create a cross-liability risk. 8.95  Post-AIFMD a depositary must be appointed in respect of all AIFs. The requirement for the depositary to be the legal owner of the assets of an AIF has been abolished and has been replaced by an obligation for an AIF (of the contractual type) to have the legal ownership of assets of AIFs (or UCITSs) to be held by a separate legal entity and, if a crossliability risk exists, by a legal entity per AIF or UCITS (FMSA, article 4:37j and 4:44). A legislative proposal to amend the FMSA as of 1 January 2014 requires that the objects clause in the articles of association of the separate legal entity that must hold the legal title to the AIF’s assets only allows for the holding of the legal title of assets of investment funds and, in case a cross-liability could occur, a specific investment fund, and, if applicable, the custody and administration of assets. 8.96  Given the pre-AIFMD requirement that the depositary must be the legal owner of the assets and that a separate depositary must be established for each investment fund in respect of which cross-liability could occur, many special purpose depositaries have been established in the Netherlands. These depositaries only have to meet a relatively low capital requirement (p. 398) of EUR 112,500 and have delegated the custody function. Depositaries may be part of the same group as managers. It remains to be seen whether the substance requirements in respect of depositaries will be increased. For UCITSs, the draft UCITS V Directive proposes to modify Article 23(2) of the UCITS Directive, setting out an exhaustive list of entities that are eligible to act as depositaries. 8.97  It is expected that many special purpose depositaries will be transformed to entities that own only the legal title to the AIF’s assets. In these cases the depositary function will probably be transferred to third party depositaries, which often will also perform the custody function. 8.98  Article 115e(1) of the FMSA Market Conduct Decree requires that the agreement with the depositary must provide that the depositary is liable to the AIF or the investors of the AIF in accordance with Article 21(12) of the AIFMD. Neither the FMSA nor the FMSA Market Conduct Decree provides that the depositary will be liable. Therefore, the liability of the depositary will have only a contractual basis. Article 115e(2) of the FMSA Market Conduct Decree requires that the agreement with the depositary should provide that either the AIF or the investors may invoke any provision which has been included in the agreement pursuant to Article 21(12) of the AIFMD directly against the depositary.

6. Consequences of violating operating conditions A. Regulatory law consequences 8.99  See paragraphs 8.56 to 8.62.

B. Criminal law consequences 8.100  See paragraphs 8.63 to 8.69.

C. Private law consequences 8.101  See paragraphs 8.70 and 8.71.

VII. Transparency Requirements

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1. Implementation table AIFMD

National implementation

Art 22 (annual report)

FMSA, arts 4:37o(1), 5:25c(6); FMSA Market Conduct Decree, art 115m

Art 23 (disclosure to investors)

FMSA, arts 4:37l, 4:37m, 5:19a; FMSA Market Conduct Decree, art 115j, 115k

Art 24 (reporting obligations to competent authorities)

FMSA arts 4:37n, 3:74c; FMSA Market Conduct Decree, art 115l; FMSA Prudential Decree, art 135

Implementing Regulation

National implementation

Arts 104–112 (re Arts 22(2)A–E, 23(4), 24(1) AIFMD: disclosure to investors and regulatory reporting)

—

(p. 399) 2. Article 22—Financial reporting 8.102  Article 22 of the AIFMD, which includes a requirement regarding the annual report, has been implemented in articles 4:37o and 5:25c of the FMSA. The pre-AIFMD obligation on a licenced manager to provide the AFM with the annual accounts of the investment institutions it manages within four months after financial year end has been amended. This obligation will only extend to managers of UCITSs (FMSA, article 4:51). Article 4:37o requires an AIFM to provide the AFM with annual accounts within six months after financial year end. Article 115m of the FMSA Market Conduct Decree refers to articles 22(2), (4), and 29 for the information to be included in the annual report. 8.103  Article 22(3) of the AIFMD provides that the accounting information in the annual report must be audited by one or more persons empowered by law to audit accounts in accordance with Directive 2006/43/EC.39 Article 22(3) also permits Member States, by way of derogation, to subject annual reports of AIFMs marketing non-EU AIFs to an audit meeting international auditing standards in force in the country where the AIF has its registered office. 8.104  Article 4:37o of the FMSA provides that the annual accounts must be complemented by an audit statement, issued by an auditor or expert qualified to examine the annual report and accounts in accordance with the laws of the state in which the AIF has its registered office. The annual accounts must be drawn up in accordance with standards regarding annual accounts as applicable in the state where the AIF has its registered office.

3. Article 23—Disclosure to investors 8.105  Article 23(1) to (3) of the AIFMD, which includes requirements regarding disclosure to investors before they acquire units in an AIF, have been implemented in articles 4:37l and 5:19a of the FMSA. According to article 4:37l, a manager of an open-ended AIF must provide investors with a prospectus before acquiring units in that investment institution. The manager must keep such a prospectus up to date only with respect to material changes to the prospectus. Under article 5:19a of the FMSA, a manager that offers units in a closedended AIF to investors in the Netherlands must publish a prospectus. Article 115j of the FMSA Market Conduct Decree refers to Article 23(1) and (2) of the AIFMD.

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8.106  Article 23(4) to (6) of the AIFMD, which includes requirements regarding periodic disclosure to investors, have been implemented in article 4:37m of the FMSA. Article 115k of the FMSA Market Conduct Decree refers to Article 23(4), (5), and (6) of the AIFMD.

4. Article 24—Regulatory reporting 8.107  Article 24 of the AIFMD, which includes requirements regarding reporting to the competent authorities, has been implemented in articles 4:37n and 3:74c of the FMSA. The FMSA makes a distinction between reporting requirements regarding prudential matters, which must be reported to the DCB (pursuant to article 3:74c), and other matters, which must be reported to the AFM (pursuant to article 4:37n). Article 115l of the FMSA Market Conduct Decree refers to Article 24 of the AIFMD.

(p. 400) 5. Impact of implementation of transparency requirements 8.108  Under the pre-AIFMD regulatory framework, offering units in investment institutions to qualifying investors is exempted from licence requirements and certain ongoing obligations, including transparency requirements. Therefore, the impact of the implementation of the transparency requirements on Dutch law will be extensive. 8.109  The impact on the operating environment of AIFs and AIFMs will be less extensive since they already make use of certain disclosures to investors, for example in a private placement memorandum, and in certain cases are already required to publish annual reports pursuant to corporate law. However, post-AIFMD, AIFMs will be subject to strict rules regarding the annual report, disclosure to investors, and reporting to competent authorities. 8.110  Article115y of the FMSA Market Conduct Decree provides that the annual accounts of AIFs offered to retail investors must contain the same information as the annual accounts of UCITSs.

6. Consequences of violating transparency requirements A. Regulatory law consequences 8.111  See paragraphs 8.56 to 8.62.

B. Criminal law consequences 8.112  See paragraphs 8.63 to 8.69.

C  Private law consequences 8.113  See paragraphs 8.70 and 8.71.

VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD

National implementation

Art 25 (use of information, supervisory cooperation, and limits to leverage)

FMSA, arts 1:51i, 3:17, 3:18b

Art 26 (scope)

FMSA, art 4:37q, 4:37r, 4:37w, 4:37x, 4:37y, 4:37z

Art 27 (notification of the acquisition of major holdings and control of non-listed companies)

FMSA, art 4:37q, 4:37s, 4:37t, 4:37w; FMSA Market Conduct Decree, art. 115n

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AIFMD

National implementation

Art 28 (disclosure in case of acquisition of control)

FMSA, art 4:37t, 4:37y

Art 29 (annual report of AIF exercising control of nonlisted companies)

FMSA, art 4:37u; FMSA Market Conduct Decree, art 115m, 115o

Art 30 (asset stripping)

FMSA, art 4:37v, 4:37z

Implementing Regulation

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

—

(p. 401) 2. Section 1 (Article 25)—AIFM managing leveraged AIF 8.114  The requirements for leveraged AIFs set out in Article 25 of the AIFMD have been implemented verbatim in article 3:18b of the FMSA. The DCB is the competent supervisor in relation to leveraging in AIFs. It is unclear at present what the impact of the requirements for leveraged AIFs will be. The uncertainty caused by the requirements, and in particular the possible obligation of an AIF to reduce its leverage if and when required by the DCB, may have a negative impact on the ability of the AIF to obtain leverage from lenders. However, it is not anticipated that this will be any different in the Netherlands than in other Member States.

3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 8.115  Articles 26 to 30 of the AIFMD have been implemented in paragraphs 4.3.1.4.a and 4.3.1.4.b of the FMSA, which distinguish between information requirements with regard to control of non-listed companies and information requirements with regard to control of issuers. 8.116  Information requirements with regard to control of non-listed companies have been implemented in paragraph 4.3.1.4.a of the FMSA. Information requirements with regard to control of issuers have been implemented in paragraph 4.3.1.4.b. This distinction is because, pursuant to the Takeover Directive40 and the Transparency Directive,41 information requirements in relation to control of issuers are already implemented in Dutch law. Information requirements relating to control of non-listed companies have been introduced in Dutch law as a result of the AIFMD. 8.117  Pre-AIFMD, pursuant to article 5:33 to 5:52 of the FMSA, notification requirements were already applied with regard to reaching, exceeding, or falling below certain percentages of the voting rights or capital interests in an issuer’s capital. Pursuant to the AIFMD, additional obligations will only become applicable when ‘control’ in an issuer is acquired by an AIF, as is described immediately below. 8.118  Pre-AIFMD, there were no requirements with regard to the acquisition of control of, or a non-controlling participation (zeggenschap) in non-listed companies. Therefore, the impact of the requirements on the operating environment for AIFMs managing AIFs which have a non-controlling participation (zeggenschap) in or control of a non-listed company will be extensive. 8.119  Pre-AIFMD, the FMSA (article 5:38 and 5:39) already contained a number of provisions dealing with the notification of non-controlling participation (zeggenschap) in an issuer’s capital. Furthermore, the FMSA contains rules governing obligations of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

shareholders to make a public offer if they have a certain ‘control’ in a Dutch listed company. 8.120  The post-AIFMD additional obligations of an AIF that acquires ‘control’ in an issuer will probably not have an extensive impact on the operating environment for most AIFs/ AIFMs, whereas the investment an institution usually makes in one issuer in accordance with its investment policy represents less than 30% of the voting rights in an issuer. Furthermore, (p. 402) an AIF will in any case try to avoid acquiring ‘control’ in a listed company to prevent the ‘control’ obligations applying. The introduction of new obligations on ‘control’ will probably strengthen this.

4. Consequences of violation of provisions relating to AIFMs managing specific types of AIF A. Regulatory law consequences 8.121  See paragraphs 8.56 to 8.62.

B. Criminal law consequences 8.122  See paragraphs 8.63 to 8.69.

C. Private law consequences 8.123  See paragraphs 8.70 and 8.71.

IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIFs in the home Member State of the AIFM)

FSMA, para 2.2.7.1, art 4:37c; FMSA Market Conduct Decree, arts 88b, 115b

Art 32 (marketing of shares or units of EU AIFs in Member States other than in the home Member State of the AIFM)

FSMA, art 2:121c; Decree Market Access, art 56c42

Art 33 (conditions for managing AIFs established in other Member States)

FSMA, art 2:121d; Decree Market Access, art 56d

Implementing Regulation

National implementation

n/a

n/a

2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 8.124  Article 31 of the AIFMD has been implemented in paragraph 2.2.7.1 and article 4:37c of the FMSA and in articles 88b and 115b of the FMSA Market Conduct Decree. The FMSA does not deviate from Article 31 of the AIFMD. Therefore, an EU AIFM may market units in an EU AIF in its home Member State (in this case the Netherlands) if it notifies the AFM 20 days prior to the date of intended marketing. The notification must include information such as (among other things) a programme of operations, the AIF rules or instruments of incorporation, and a description of the AIF. For the information to be provided to the AFM, article 115b of the FMSA Market Conduct Decree refers to Article 31 of the AIFMD.

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(p. 403) 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 8.125  Article 32 of the AIFMD, which concerns the marketing of EU AIFs in Member States other than the home Member State of the AIFM, has been implemented in article 2:121c of the FMSA and article 56c of the Decree Market Access. The procedure is similar to that described at paragraph 8.124. However, a notification of the intention to market an AIF in a Member State other than its home Member State (in this case the Netherlands) will be forwarded by the AFM to the competent authority of the Member State where the marketing of the AIF is intended to occur. In addition, written notice of any changes to the particulars of the notification must be sent to the AFM one month before implementing the planned change, or immediately after any unplanned change has occurred. If the AIFM, pursuant to a planned change, no longer complies with applicable law, the AFM will inform the AIFM that it cannot implement the change. 8.126  The AIFMD has made it much easier to market and manage AIFs in the EU. The Directive has a substantial impact on the law and operating environment for AIFs/AIFMs in the Netherlands in that it has become easier to market Dutch AIFs in other Member States and for non-Dutch EU AIFs to be marketed in the Netherlands. In addition, the Directive has simplified the management of AIFs across the EU.

4. Article 33—Conditions for managing AIFs established in other Member States 8.127  Article 33 of the AIFMD, which includes conditions for managing EU AIFs established in other Member States, has been implemented in article 2:121d of the FMSA and article 56d of the Decree Market Access. 8.128  The procedure is similar to the procedure described at paragraph 8.124. However, notification of the intention to manage an AIF in a Member State other than its home Member State (in this case the Netherlands) for the first time (either by establishing a branch or cross-border) will be forwarded by the AFM to the competent authority of the Member State where it intends to market the AIF. If the AIFM intends to manage the AIF from a branch in the Member State where the AIF will be managed, the notification must include information on the organizational structure, the address of the branch, and the names and contact details of the persons responsible for management of the branch. 8.129  In addition, where changes are made to the particulars of the notification, written notice must be sent to the AFM one month before implementing the change, or immediately after any unplanned change has occurred. If the AIFM, pursuant to a planned change, no longer complies with applicable law, the AFM will inform the AIFM that it cannot implement the change.

5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 8.130  See paragraphs 8.56 to 8.62.

(p. 404) B. Criminal law consequences 8.131  See paragraphs 8.63 to 8.69.

C. Private law consequences 8.132  See paragraphs 8.70 and 8.71.

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X. Specific Rules in Relation to Third Countries 1. Implementation table AIFMD

National implementation

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

FMSA, art 2:121e; Decree Market Access, arts 56a, 56f

Art 35 (conditions for marketing in EU with passport of non-EU AIFs managed by an EU AIFM)

FMSA, art 2:121g; Decree Market Access, arts 56d, 56a

Art 36 (conditions for the marketing in EU without a passport of non-EU AIFs managed by an EU AIFM)

FMSA, art 2:66 and (as of 1 January 2014) art 1:13b(3); Decree Market Access, art 34

Art 37 (authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Article 38 (EU AIF) or 39 (non-EU AIF))

FMSA, arts 2:67b, 2:69, 2:69a; Decree Market Access, art 56c

Art 38 (peer review of authorization and supervision of non-EU AIFMs)

FMSA, art 1:69

Art 39 (conditions for the marketing in the EU with a passport of EU AIFs managed by a non-EU AIFM)

FMSA, arts 2:67b, 2:121c, 2:121f, 4:37c; Decree Market Access, art 56d

Art. 40 (conditions for the marketing in the EU with a passport of non-EU AIFs managed by a non-EU AIFM)

FMSA, arts 2:121c, 2:121g

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by a non-EU AIFM

FMSA, art 2:121h; Decree Market Access, art 56a

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM)

FMSA, arts 1:13b, 4:37b; Decree Market Access, art 56a

Implementing Regulation

National implementation

Arts 114–116 (re Art 34(1), 35(2), 36(1), 37(7)(D), 39(2)(A), 40(2) (a), 42(1) AIFMD)

FMSA Market Conduct Decree

2. General 8.133  The specific rules relating to third countries as set out in Articles 34 to 42 of the AIFMD have been implemented in paragraphs 2.2.7.1 and 2.3.4b of the FSMA. The implementation of the AIFMD in the FMSA entails a material change in relation to AIFs and AIFMs situated in third countries. Following the implementation of the Directive, the offering exemptions discussed previously43 will no longer be available. (p. 405) 8.134  Dutch pension funds are the most significant investors in the Netherlands in terms of size of investments. A large part of these investments are made outside the EU at the pension funds’ own initiatives. From their perspective, it is vital that they are able to invest in non-EU AIFs of their choice, irrespective of whether the AIFM or AIF has market access in the Netherlands or another EU Member State. In other words, if the definition of ‘marketing’ is interpreted restrictively, it could seriously affect the investment market available to Dutch pension funds and would not be in the interests of pension funds’ beneficiaries. Dutch pension funds are among the largest in the world, and unrestricted

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diversification of their investments is vital to their ability reliably to provide future retirement benefits. 8.135  Consequently, the Dutch pension industry strongly advocated the current wording of the definition of marketing in the AIFMD, thus ensuring that AIFs are not deemed to be marketed in a Member State if there is no offering at the initiative of the AIFM.

3. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 8.136  Article 34 of the AIFMD has been implemented verbatim in article 2:121e of the FMSA.

4. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 8.137  Pursuant to Article 36(2) of the AIFMD, Member States may, in addition to the rules imposed by the Directive, impose stricter rules on non-EU AIFs in respect of the marketing of their units or shares. A legislative proposal to amend the FMSA as of 1 January 2014 will require that EU AIFMs also comply with Article 21 of the AIFMD to ensure that a depositary is appointed in respect of a non-EU AIF in accordance with the Directive.

5. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 8.138  Articles 37 to 41 of the Directive have been implemented verbatim in the FMSA. Two comments can be made. First, in order for a non-EU AIFM to manage EU AIFs and/or market AIFs managed by them in the EU, they must obtain prior authorization from the competent authority of their Member State of reference. The most important group of Dutch investors for an AIF managed by a non-EU AIFM will most likely be Dutch pension funds. To the extent permitted by Article 37 of the AIFMD, as implemented in the FMSA, these investors may prefer the Netherlands as the Member State of reference. 8.139  The requirement of Article 41(4) of the AIFMD that the competent authority of the Member State of reference must also inform ESMA that the non-EU AIFM may manage the AIF in the host Member State does not appear in articles 2:67b, 2:69, 2:69a, 2:121d, and 2:121h of the FMSA. However, a general obligation to cooperate with ESMA and to provide it with information is set out in article 1:69.

6. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 8.140  Pursuant to Article 42 of the AIFMD, Member States may allow non-EU AIFMs to market AIFs in their territory until Article 42 is repealed, presumably in 2018, pursuant to Articles (p. 406) 66(4) and 68(6) of the Directive. There are two situations in which a nonEU AIFM managing a non-EU AIF may market an AIF in the Netherlands without a passport. 8.141  First, a non-EU AIFM may market an AIF in the Netherlands to qualifying investors provided that the requirements in Article 42 of the AIFMD are met. The offering material and any advertisements and documents that hold out the prospect of an offering must include a statement that the offer is only made to qualifying investors. As mentioned at paragraph 8.30, the term ‘qualifying investor’ is similar to the definition in the Prospectus Directive. 8.142  Second, an AIF may be marketed to the public in the Netherlands based on the regime for ‘adequate supervision funds’ as set out at paragraph 8.32. In addition to the requirements which must be met pursuant to the adequate supervision regime, a non-EU AIF must meet the requirements in Article 42 of the AIFMD. Post-AIFMD, non-EU AIFs situated in Guernsey, Jersey, or the US may use the regime for ‘adequate supervision funds’ From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

to offer their units to the public in the Netherlands. EU AIFs situated in France, Ireland, Luxembourg, Malta, and the UK which, pre-AIFMD, offered their units to retail investors in the Netherlands pursuant to the aforesaid regime, can no longer do so. Such AIFs will require an AIFM passport and must meet additional requirements for offering to retail investors (for the requirements, see paragraph 8.153). 8.143  AIFMs which marketed units in the Netherlands prior to 22 July 2013 relying on the exemptions described in paragraph 8.29 or on the adequate supervision regime will be able to rely on the transitional regime and may continue marketing on the same basis until 22 July 2014. 8.144  Pursuant to Article 42(2) of the AIFMD, Member States may, in addition to the rules imposed by the AIFMD, impose stricter rules on non-EU AIFMs in respect of the marketing of units or shares of AIFs. Such additional requirements have not been included in the FMSA.

7. Consequences of violating specific rules in relation to third countries A. Regulatory law consequences 8.145  See paragraphs 8.56 to 8.62.

B. Criminal law consequences 8.146  See paragraphs 8.63 to 8.69.

C. Private law consequences 8.147  See paragraphs 8.70 and 8.71.

XI. Marketing to Retail Investors 1. Implementation table AIFMD

National implementation

Art 43 (marketing of AIFs to retail investors)

FMSA, art 4:37p and FMSA Market Conduct Decree, para 10.3.1.1

Implementing Regulation

National implementation

n/a

n/a

(p. 407) 2. Article 43—Marketing of AIFs by AIFMs to retail investors 8.148  Article 4:37p of the FMSA imposes strict requirements where units in an AIF are marketed to retail investors in the Netherlands. 8.149  However, if units in an AIF are marketed to retail investors, and therefore not solely to professional investors, pursuant to article 2:66a of the FMSA a Dutch AIFM does not require a licence for offering units in, and managing the AIF, if: the offer is made to fewer than 150 persons, the total purchase price exceeds EUR 100,000 per investor, or the nominal value per unit exceeds EUR 100,000, provided that the AIFM benefits from the mitigated regime described in paragraph 8.40. 8.150  An AIFM that no longer meets the criteria of article 2:66a of the FMSA must inform the AFM immediately thereof and request a licence within 30 days.

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8.151  For the marketing of AIFs to retail investors for which an AIFM requires a licence, a level of investor protection is envisaged upon implementation of the AIFMD that is comparable to investor protection under the UCITS Directive. Only those rules and regulations relevant for investor protection will be applied—for example, the rules and regulations regarding investment policy will not be applied. The Dutch legislator has decided to apply the same regulatory framework as for UCITSs as this is explicitly tailored to protecting retail investors. Furthermore, in this way a level playing field has been established. Retail AIFs are subject to the same rules as UCITSs. 8.152  In order to reduce the number of regimes to a minimum, no differentiation in additional rules and regulations has been made. 8.153  Paragraph 10.3.1.1 of the FMSA Market Conduct Decree contains the additional national rules offered to retail investors which pertain to: the AIFM’s business operations,44 additional disclosure requirements,45 information to be provided to supervisory authorities, and fair treatment of investors. 8.154  As a result of referring to the UCITS regime for additional retail investor protection, specific Dutch requirements have been abolished such as: the requirement that the depositary’s consent is required for amendment of the fund terms and that the manager may dispose of fund assets only with the cooperation of the depositary.

3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 8.155  See the description of the regulatory, criminal, and private law consequences as described in paragraphs 8.56 to 8.71, which apply equally in cases of violation of national rules with respect to the marketing of AIFs by AIFMs to retail investors.

(p. 408) XII. Competent Authorities and Supervisory Powers 1. Implementation table AIFMD

National implementation

Art 44

No implementation required (FMSA, arts 1:24, 1:25)

Art 45

FMSA, arts 1:24, 1:58, 1:74, 4:1

Art 46

No implementation required (FMSA, arts 1:52, 1:55, 1:56, 1:58, 1:59, 1:69)

Art 48

FMSA, art 1:51e; no further implementation required (FMSA, arts 1:79, 1:80, 1:81)

Art 50

FMSA, arts 1:51, 1:51e, 1:58, 1:69; no implementation required (FMSA, art 1:110)

Art 51

No implementation required (FMSA, art 1:90)

Art 52

FMSA, art 1:65

Art 53

FMSA, arts 1:51e, 1:69

Art 54

FMSA, arts 1:51e, 1:55, 1:56

Art 55

No implementation required

2. Designation, responsibility, and powers of competent authorities

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8.156  Articles 44 to 46 and 48 to 55 of the AIFMD do not need much implementation since most of these provisions are already reflected in Dutch law. The amendments implement new terminology and reflect the new information requirements from the competent authorities to ESMA and to the home Member State. 8.157  Article 44 of the AIFMD needs no implementation. Articles 1:24 and 1:25 of the FMSA already designate the DCB and the AFM as the competent authorities. In principle, the DCB is responsible for prudential supervision and the AFM is responsible for market conduct supervision (the so-called ‘Twin Peaks’ model). 8.158  Article 45 of the AIFMD relates to the responsibility of competent authorities in Member States. Some aspects are already provided for in Dutch legislation. Prudential supervision is already assigned to the DCB by article 1:24 of the FMSA. Pursuant to article 1:74, AIFMs are required to provide information to the competent authority on request. Article 1:58 has been amended to provide for communications between the competent authorities of the home Member State and the host Member State of an AIFM. 8.159  Article 46 of the AIFMD relates to the powers of the competent authorities, which are already provided for in articles 1:52, 1:55, 1:56, 1:58, and 1:59 of the FMSA. The communication with ESMA was already provided for in article 1:69. 8.160  Article 48 of the AIFMD needs no implementation because administrative penalties are already provided for in articles 1:79, 1:80, and 1:81 of the FMSA. 8.161  In principle, the DCB is the competent authority with regard to prudential supervision and the AFM with regard to market conduct supervision. Prudential supervision focuses on the solidity of financial enterprises and contributes to a stable financial sector (FMSA, article 1:24). Market conduct supervision focuses on orderly and transparent financial market processes (FMSA, article 1:25). In short, the AFM issues licences, provides ongoing supervision of behaviour such as the type of financial instruments used and exposures taken (p. 409) by AIFs and AIFMs, and communicates with ESMA. The DCB is concerned with solvency, liquidity, leverage, and risk management of AIFs and AIFMs. In other words, the two regulators have their own separate, designated responsibilities and authority. To determine how to divide, cooperate, and coordinate these supervisory authorities, the AFM and the DCB entered into a covenant, most recently amended on 31 May 2011. 8.162  A good example of the impact of the covenant is article 1:74 of the FMSA, which states that if the AFM or DCB requires information, it must first enquire whether the information is already available to the other authority. As a consequence, double costs for managers should be avoided. 8.163  Both authorities have dual powers to regulate and to enforce. First, the powers to regulate are in general to enter places and to have access to documents; others are under a duty to cooperate.46 More specifically, the AFM and DCB have the power to conduct investigations, demand information, and communicate with the competent authorities of other countries and, if an emergency occurs, they are allowed to enact a governmental decree (FMSA, article 1:77a). 8.164  Second, the enforcement powers include giving instructions, appointing a bankruptcy trustee, imposing orders subject to a penalty for non-compliance, and imposing administrative fines. This is further set out in the Decree on administrative fines in the financial sector.47 8.165  In addition, both the AFM and the DCB have the authority and sometimes the duty to publish their decisions. They can issue a public warning or publish a fining decision or decision to impose an order subject to a penalty for non-compliance. Publication is not

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considered to be a punitive measure under Dutch law, although it may affect the reputation of a financial undertaking. 8.166  In addition, the AFM, DCB, and the Dutch Tax Authorities entered into a covenant to ensure that an individual can only be convicted once for a specific offence. To prevent any overlap between administrative sanction and criminal punishment, these three parties are obliged, in principle, to exchange all necessary information and to align their approaches in a specific matter.

3. Other issues 8.167  Article 49 of the AIFMD provides the right of appeal to the courts of any decision taken under laws, regulations, or administrative provisions. This is already possible under Dutch law pursuant to the General Administrative Law Act. All decisions taken by the DCB or AFM are subject to a right of appeal. An applicant may raise objections against the decision of the specific competent authority within six weeks (General Administrative Law Act, article 6:7). After expiration of this period, there is a right of appeal before the Court of Rotterdam (General Administrative Law Act, article 8:1). 8.168  Article 50 of the AIFMD obliges the competent authorities to cooperate with each other and with ESMA and the ESRB whenever necessary. This obligation has already been implemented in full. See paragraph 8.161 regarding the cooperation between the AFM and the DCB. (p. 410) 8.169  Article 50 of the AIFMD concerning the information flow from and to ESMA has been implemented, to the extent required, in articles 1:51 and 1:58 of the FMSA. Parts of the provisions of Article 50 of the Directive will be provided for with the implementation of Solvency II48 in article 1:51e of the FMSA. Other parts of the provisions, however, have already been provided for in article 1:69 with the implementation of the Omnibus I Directive.49 8.170  Following the establishment of ESMA by the ESMA Regulation,50 ESMA contributes to the promotion and monitoring of the efficient, effective, and consistent functioning of supervisors. ESMA was also assigned to have a legally binding mediation role to resolve disputes between competent authorities. It may even take supervisory decisions that are directly applicable to financial market participants. Since Regulation 1095/2010 already applies in Dutch law, no further implementation is required. 8.171  Article 51 of the AIFMD on the transfer and retention of personal data requires no implementation as this is already provided for in article 1:90 of the FMSA, which secures the right and obligation of a competent authority to transfer personal data to another competent authority or the competent authority of another country.51 8.172  Insofar as the data or information referred to above was obtained from a competent authority of another Member State, the authority may not disclose it to the other authority or to the competent authority of another Member State unless the competent authority of the other Member State from which the data or information was obtained has expressly consented to the disclosure of the data and information and, where applicable, has consented to the use of this data or information for a purpose other than that for which it was supplied. 8.173  The exchange of information relating to the potential systemic consequences of an AIFM’s activity will be fully implemented in Dutch law in article 1:51e of the FMSA following the implementation of Solvency II. Article 1:51e also provides a legal basis for further requirements regarding the manner and frequency of providing information to ESMA and the ESRB.

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8.174  Cooperation in supervisory activities is already provided for in articles 1:51, 1:55, and 1:56 of the FMSA. The competent authority of one Member State may request the cooperation of the competent authority of another Member State. (p. 411) 8.175  Article 52 of the AIFMD will be implemented in article 1:65 of the FMSA with the implementation of Solvency II in order to disclose information to competent authorities of third countries under the provisions of secrecy and solely for the purposes for which that competent authority provided its agreement. 8.176  Article 1:65 of the FMSA will be amended following implementation of Solvency II; as such, the provisions of Article 52 of the AIFMD relating to the transfer and analysis of data to other competent authorities do not need any further implementation. 8.177  Article 53 of the AIFMD will be implemented in article 1:51e of the FMSA with the implementation of Solvency II in order to provide for the exchange of information between competent authorities of Member States relating to the potential systemic consequences of the activity of the AIFM. 8.178  Article 54 of the AIFMD addresses the cooperation of supervisory activities. These aspects have already been implemented in articles 1:51, 1:55, and 1:56 of the FMSA. Final implementation in article 1:51e of the FMSA will take place with the implementation of Solvency II. 8.179  Article 55 of the AIFMD does not need any implementation since dispute settlement is already provided for. An AFM is already required to refer the matter to ESMA.

XIII. Concluding Remarks 8.180  The Netherlands will transpose the AIFMD into national law without deviations. Private placement, ie the marketing of AIFs without an AIFMD passport, will be possible in the Netherlands after 21 July 2013 to qualifying investors if the requirements set out in Article 42 of the AIFMD are met and the offering material and any advertisements and documents that hold out the prospect of an offering include a statement that the offer is made only to qualifying investors. 8.181  Certain non-EU AIFs situated in Guernsey, Jersey, and the US may continue to use the regime for ‘adequate supervision funds’ to offer their units to the public in the Netherlands (see paragraph 8.32). 8.182  The additional requirements for AIFs offered to retail investors are, to a large extent, identical to the UCITS requirements. 8.183  Managers holding a licence on 22 July 2013 will, on 22 July 2014, have their licence converted by operation of law into an AIFMD licence. 8.184  The depositary regime has been substantially amended by removal of the following requirements: that a depositary must own legal title to the assets of an investment institution; and that an investment fund in respect of which cross-liability could occur must have a separate dedicated depositary. 8.185  It is expected that many special purpose depositaries will be transformed to entities which own only the legal title to the AIF’s assets. In these cases the depositary function will probably be transferred to third party depositaries, which—in contrast to the pre-AIFMD situation—generally also perform the custody function.(p. 412)

Footnotes: 1 

Newsletter of the DCB dated 26 April 2012.

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2

  UCITSs are regulated by the UCITS Directive (Directive 2009/65/EC (OJ 2009 L302/32)).

3

  According to the AFM register as at 10 September 2012.

4

  AFM register (n 3) 1.

5

  See para 8.15 for a description of FGRs.

6

  Explanatory Memorandum to the act amending the FMSA (Kamerstukken II, 2011–2012, 33 235, nr. 3 (Memorie van Toelichting); ‘Explanatory Memorandum’) 27. 7

  The BV is described in, among others, DCC, Title 5 of Book 2.

8

  The NV is described in, among others, DCC, Title 4 of Book 2.

9

  The cooperative is described, among others, in DCC, Title 3 of Book 2.

10

  State Taxes Act (Algemene wet inzake rijksbelastingen: STA), art 2(3)(c) gives only a definition of an opaque CV. 11

  Decision of Minister of Finance dated 11 January 2007, nr. CPP2006/1869M, Stcrt. 2007, 15, BNB 2008/289. 12

  See eg CITA, art 2(1)(f) and 2(2) and Dividend Tax Act 1965 (Wet op de dividendbelasting 1965: DTA), art 1(2). 13

  CITA, art 2(2) only gives a definition of an opaque FGR.

14

  FMSA, art. 1:12 and FMSA Exemption Decree (Vrijstellingsregeling Wft), art 4.

15

  Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (OJ L345/64). Qualifying investors within the meaning of the Prospectus Directive and the FMSA include professional investors as defined in MiFID, as well as persons treated as professional investors on their own request in accordance with MiFID. 16

  FMSA, art 2:69a, b.

17

  Algemeen deel.

18

  Deel Markttoegang Financiële Ondernemingen.

19

  Deel Gedragstoezicht Financiële Ondernemingen.

20

  Deel Prudentieel toezicht Financiële ondernemingen.

21

  Deel Gedragstoezicht financiële markten.

22

  The most important prudential requirements are laid down in the FMSA Prudential Decree (Besluit prudentiële regels Wft) and the most important requirements on market conduct are laid down in the FMSA Market Conduct Decree (Besluit Gedragstoezicht financiële ondernemingen Wft). 23

  Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositories, leverage, transparency and supervision (OJ 2013 L83/1). 24

  Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision (OJ 2003 L 235/10). 25

  Kamerstukken II, 33 235, nr. 13 (Amendement van het lid Huizing c.s.).

26

  In its letter to the First Chamber dated 19 December 2012.

27

  Letter to First Chamber (n 26) 6.

28

  Letter to First Chamber (n 26) 6, p 11–2.

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29

  Letter to First Chamber (n 26) 2.

30

  Explanatory Memorandum, 35

31

  See, inter alia, HR 5 May 1968, NJ 1968, 102 (Fokker/Zentveld), HR 28 February 1992, NJ 1993, 566 (Iza/Vreerink), and HR 30 March 2007, LJN AZ7863. 32

  Case C-604/11 Genil 48 SL, Comercial Hostelera de Grandes Vinos SL v Bankinter SA, Banco Bilbao Vizcaya Argentaria SA; available at . 33

  An investment firm offering an investment service fails to comply with the assessment requirements laid down in Art 19(4) and (5) of MiFID. 34

  See, for more detail, D. Busch and L. Silverentand, The Netherlands, in D. Busch and D. DeMott, Liability of Asset Managers (Oxford University Press, 2012) paras 7.56–7.59. 35

  D. Busch, Ars Aequi, September 2013, 671.

36

  See. 37

  AIFMD, Art 20(3).

38

  AIFMD, Art 21(6)(e), (12), (13).

39

  Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts (OJ 2006 L157/87). 40

  Directive 2004/25/EC (OJ 2004 L142/12).

41

  Directive 2004/109/EC (OJ 2004 L390/38).

42

  Decree Market Access Financial Enterprises.

43

  See para 8.29.

44

  Including provisions relating to preventing conflicts of interests, or criminal or other offences or other acts which could harm the trustworthiness of the AIFM or financial markets in general: see FMSA Market Conduct Decree, article 115q. 45

  By means of maintaining a website and publishing information on the website, additional information to be included in a prospectus, and publishing NAVs if units are issued or repurchased. 46

  General Administrative Law Act (Algemene wet bestuursrecht), arts 5:15–20.

47

  Besluit bestuurlijke boetes financiële sector.

48

  Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (‘Solvency II’) (OJ 2009 L335/1). 49

  Directive 2010/78/EU in respect of the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority) (OJ 2010 L331/120). 50

  Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) (OJ 2010 L331/84). 51

  In principle, such transfer of data will take place unless: the purpose for which the confidential data or information will be used has not been adequately determined; the intended use of the confidential data or information does not fit into the context of the supervision of financial markets or of persons operating on those markets; the provision of the confidential data or information would not be compatible with Dutch law or public order; the non-disclosure of the data or information is not sufficiently guaranteed; the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

provision of the confidential data or information is or might reasonably be considered to be contrary to the interests that the FMSA seeks to protect; or there is insufficient guarantee that the confidential data or information will not be used for a purpose other than that for which it is supplied.

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9 Spain Emilio Díaz Ruiz, Salvador Ruiz Bachs From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Undertakings for Collective Investment (UCIs) — Hedge fund — Advertising and marketing and funds

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(p. 413) 9  Spain I. Introduction 9.01 1. Nature of the national non-retail investment industry 9.01 2. Legal structures used to form national AIFs 9.05 II. Pre-AIFMD Regulatory Framework 9.14 1. Regulation of AIFMs and national AIFs prior to the AIFMD 9.14 2. Regulation of national marketing of AIFs prior to the AIFMD 9.17 III. Regulation of National AIFs after the AIFMD 9.22 1. General 9.22 2. Amendment of Fund Law 9.23 3. Venture capital vehicles and other closed-ended AIFs (OSIs) (Closed Ended Funds Draft Law) 9.24 IV. General Provisions of the AIFMD and the Implementing Regulation 9.28 1. Implementation table 9.28 2. Articles 2 and 3—Scope and exemptions 9.28 3. Article 5—Determination of the AIFM 9.33 V. Authorization of AIFMs 9.37 1. Implementation table 9.37 2. Articles 6 to 8—Conditions and application for authorization 9.37 3. Article 9—Initial capital and own funds 9.45 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 9.49 5. Consequences of violating authorization provisions 9.52 VI. Operating Conditions for AIFMs 9.55 1. Implementation table 9.55 2. Section 1 (Articles 12 to 17)—General requirements 9.55 3. Section 2 (Articles 18 and 19)—Organizational requirements 9.74 4. Section 3 (Article 20)—Delegation of AIFM functions 9.80 5. Section 4 (Article 21)—Depositary 9.84 6. Consequences of violating operating conditions 9.94 VII. Transparency Requirements 9.101 1. Implementation table 9.101 2. Article 22—Financial reporting 9.101

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3. Article 23—Disclosure to investors 9.103 4. Article 24—Regulatory reporting 9.106 5. Consequences of violating transparency requirements 9.109 VIII. AIFM Managing Specific Types of AIF 9.113 1. Implementation table 9.113 2. Section 1 (Article 25)—AIFM managing leveraged AIF 9.113 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 9.117 4. Consequences of violating provisions relating to AIFMs managing specific types of AIF 9.120 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 9.124 1. Implementation table 9.124 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 9.124 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 9.128 (p. 414) 4. Article 33—Conditions for managing AIFs established in other Member States 9.131 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU 9.132 X. Specific Rules in Relation to Third Countries 9.136 1. Implementation table 9.136 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 9.136 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 9.138 4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 9.143 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 9.146 6. Consequences of violating specific rules in relation to third countries 9.148 XI. Marketing to Retail Investors 9.151 1. Implementation table 9.151 2. Article 43—Marketing of AIFs by AIFMs to retail investors 9.151 3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 9.152

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XII. Competent Authorities and Supervisory Powers 9.156 1. Implementation table 9.156 2. Designation, responsibility, and powers of competent authorities 9.156 3. Other issues 9.158 XIII. Concluding Remarks 9.160

I. Introduction 1. Nature of the national non-retail investment industry 9.01  It is difficult to make a detailed analysis on the AIFM industry in Spain for several reasons. First, the industry is generally divided into two broad groups: managers of collective investment schemes (including hedge funds and real estate funds) and managers of venture capital funds and companies. Second, a part of the industry is subject to licensing or regulatory requirements and, therefore, is captured by CNMV1 registry and records, and INVERCO2 and EFAMA3 official statistics, while another part is not subject to licensing and supervision, using closed-ended unregulated vehicles. Some of the vehicles have even been able to hide their investment character and have not been reflected in statistics at all. In addition, some of the industry statistics focus on products (the alternative investment fund (AIF)) or investments, but not on AIFM assets under management. As a result, any analysis bears the risk of being partial and not comprehensive of the AIFM sector in Spain. For that reason, it will probably only be after Spain has implemented the AIFMD and Spanish AIFMs are subject to regulation and ongoing reporting that reliable statistics and information on AIFMs and AIFs under management will be readily available. 9.02  In addition, Spanish law and regulations have traditionally allowed Spanish ordinary funds not to apply certain UCITS limitations on investments (on funds’ investment diversification, public debt diversification, or index tracking exceptional limits) and as a result, pre-AIFMD, (p. 415) many retail funds do not qualify as UCITSs.4 Thus, both UCITS and non-UCITS funds are subject to the same legal regime (except for passporting, which is only available for UCITS funds). 9.03  For that reason, many Spanish funds for retail distribution (as described in paragraph 9.10) were non-UCITS funds. However, this situation has recently changed following the passing of RD 1082/2012, which not only amended Spanish regulations on funds with the primary purpose of completing Spanish implementation of the UCITS Directive5 (by amendment of Law 35/2003, introduced by Law 31/2011 of 4 October 2011), but also introduced certain rules drawing a distinction between UCITSs and AIFs. Through this amendment, the investment and diversification rules of Spanish ordinary funds have been amended so as to fully comply with the UCITS rules. Some former exceptions to these rules have disappeared and others have been collected in article 72 of the Fund Regulations. Finally, the Fund Regulations have created two separate registries for UCITSs and AIFs. Spanish ordinary funds had up until 1 July 2013 to adapt their portfolios (or prospectuses) to these changes. 9.04  Having said that, according to EFAMA statistics,6 non-UCITS funds have approximately EUR 5,262 million net assets,7 which include assets of registered Spanish hedge funds, Spanish funds of hedge funds, and Spanish real estate funds, but not assets of venture capital funds. As of March 2012, only five out of 36 hedge funds (FILs) and 28 hedge funds registered with the CNMV were not affiliated to banking or investment firm groups but instead managed by seven independent AIFMs. In addition, only five open-ended real estate funds (all managed by AIFMs affiliated to Spanish banks) and eight real estate investment companies, which are mostly related to real estate companies, are currently

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registered with the CNMV. Therefore, the vast majority of Spanish non-UCITS collective investment schemes are managed by AIFMs affiliated to banking and investment services groups. Only a few belong to truly independent AIFMs. As regards investors, free investment funds (instituciones de inversion colectiva de inversión libre: IICIL) can only be marketed to professional investors, whereas funds of hedge funds (so-called ‘IIC of IICIL’) and real estate funds may also be marketed to retail investors. Under the Spanish Fund Law and Fund Regulations, an IICIL is any fund that permits broad manager discretion in relation to portfolio construction and has relevant exemptions from investment rules (it can invest in any type of financial asset), diversification, liquidity, and redemption obligations. As regards venture capital funds, the most reliable source of information is ASCRI8 and the CNMV registries. The vast majority of venture capital funds are managed by AIFMs not affiliated to banking or investment firm9 groups and are (p. 416) subject to a so-called simplified regime for venture capital funds. Venture capital funds subject to the simplified regime can only be offered privately, without marketing activities. Investors other than institutional investors and AIMF directors and officers cannot exceed 20 and must commit capital above EUR 500,000. Most venture capital funds are generally invested in by institutional investors. As regards AIF service providers, such as external valuers, administrators, prime brokers, and custodians, it should be noted that currently the appointment of a depositary is not a requirement for venture capital funds, but it is a requirement for all collective investment schemes with the exception of real estate investment companies. Under Spanish law, there is no need for a licence or registration for purely administrative fund tasks10 (including external valuers). However, real estate property external valuers are subject to certain regulations and to registration with the Bank of Spain.

2. Legal structures used to form national AIFs A. Law 35/2003 of 4 November (‘Fund Law’) 9.05  Collective investment schemes can be set up either as investment companies or investment funds (fondos de inversión). This follows from Law 35/2003 (the ‘Fund Law’) and Royal Decree 1082/2012 of 13 July 2012, approving the regulations of the Fund Law (RD 1082/2012 or the ‘Fund Regulations’). RD 1082/2012 has implemented the UCITS Directive as well as Directive 2010/43/EU,11 and, to a limited extent, the AIFMD. The above provisions have been developed, inter alia, by the Order of the Ministry of Economy and Finance 1199/2006, of 25 April 2006, and CNMV Circular No 1/2006 of 3 May 2006, and CNMV communiqué of 18 July 2013 (the ‘Communiqué’). 9.06  Investment companies are structured as sociedades anónimas (public limited liability companies), but they have several special features. They can set up sub-funds (compartimentos) within the same company. With the exception of real estate investment companies, which are set up as ordinary closed-ended companies, all other investment companies must be set up as open-ended investment companies with variable capital (Sociedad de Inversión de Capital Variable: SICAV). This means that shares of the investment company are issued at the request of new or existing shareholders and redeemed at the request of existing shareholders, and the company has its share capital increased or reduced between a minimum and maximum capital amount. The resolution of the general shareholders’ meeting is only necessary to change the minimum and maximum amount of share capital. Family offices and equivalent investment arrangements normally take the form of public or private limited liability companies (sociedades anónimas and sociedades de responsabilidad limitada). General rules regarding these types of companies are followed, and no special treatment is contemplated by the Fund Law and regulations.

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(p. 417) 9.07  Investment funds have a structure similar to the French and Luxembourg FCP (Fond Commun de Placement). Article 3 of the Fund Law defines an investment fund as a pool of assets without legal personality, belonging to a number of investors, of which management and representation is vested in a management company, which holds the management and ownership powers jointly with a depositary, and without being the owner of the pool. This pool of assets is segregated from the assets of the management company and the assets of the depositary or custodian. In an investment fund, the management company has all management and ownership powers but is subject to the supervision of the depositary, which must necessarily hold on deposit all assets of the fund. The management company may acquire and transfer assets, assume and cancel liabilities, enter into contracts, and carry out any actions and take any decisions for the management of the investment fund. Ownership of the fund, however, belongs to the unit-holders, even though they may not exercise any ownership powers or have any voting rights. 9.08  The choice of a certain structure is primarily based on regulatory and tax reasons. Regulated structures are more tax efficient but have regulatory constraints, whereas unregulated structures are more flexible. However, tax optimization is more difficult and may not be achievable in all cases. Most clients make a comparison between domestic and foreign structures. 9.09  Although the fund does not have legal personality, the management company may acquire assets, enter into contracts, and assume liabilities on its behalf. Payment obligations are exclusively discharged out of the fund’s assets. An investment fund can also set up sub-funds, which have separate liability. Investors in the fund subscribe and redeem units according to the fund’s regulations. Units are classified by the Fund Law as transferable securities for the purposes of Law 24/1988, dated 28 July 1988, of the Securities Market (the ‘Securities Market Law’ or ‘LMV’). The legal regime of the investment fund is set out in the Fund Law, its developing regulations, the prospectus, and the Fund Regulations. The fund rules are set out in a document, which generally follows a standard form approved by the CNMV. 9.10  Financial IICILs (ie those hedge funds which must necessarily invest in assets of a financial character, as opposed to those which may invest in other types of assets, eg real estate) must follow the organization and obligations established by the Fund Law and its regulations, which are very close to those of UCITSs, with several exceptions: (a)  their shares can only be acquired or subscribed by professional investors or to retail, but, in the latter case, minimum initial investment is EUR 50,000; (b)  they can only be marketed to professional investors; (c)  they must have a minimum of 25 shareholders; (d)  investments and divestments may be made not only in cash, but also in financial instruments, if so provided in the prospectus; (e)  calculation of the liquidation value may be quarterly or even six-monthly, and subscriptions and reimbursements will be linked to valuation dates, but the right of reimbursement may be restricted as established in the prospectus, which may also provide, with the approval of the CNMV, for a minimum stay or establish a prior notice for subscriptions and reimbursements; (f)  their management, deposit, subscription, and reimbursement fees and commissions are not subject to limitations; (g)  maximum deadlines for reimbursement do not apply;

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(p. 418) (h)  they may invest in any type of financial assets or instruments, without the limits applicable to UCITS; (i)  they may borrow up to five times their net asset value (NAV). In addition, they are subject to special rules on risk management and must obtain written confirmation from investors that they acknowledge the risks of investing in an IICIL. IIC of IICILs and real estate funds are subject to special rules, which also differ from those applicable to UCITSs. It should be noted that, in practice, AIFs normally incorporate in their prospectus, regulations, and by-laws the maximum degree of flexibility permitted by the Fund Law and the Fund Regulations.

B. Law 25/2005 (‘Venture Capital Law’) 9.11  Venture capital entities can be set up as venture capital companies or venture capital funds under Law 25/2005 of 24 November 2005 governing venture capital entities and management companies (‘Law 25/2005’ or ‘Venture Capital Law’), developed, inter alia, by CNMV Circular 11/2008 of 30 December 2008 on accounting rules and restricted information regarding the venture capital entities, and Circular 7/2008 of 26 November 2008 on annual accounts and restricted information reports of, inter alia, managing companies of venture capital entities. 9.12  Venture capital companies are closed-ended ordinary public limited liability companies which must be incorporated pursuant to certain specific requirements (minimum capital, registered shares, corporate purpose, etc). Venture capital funds are very similar to investment funds as regards legal nature. They are likewise defined as a pool of assets without legal personality, belonging to a number of investors, of which management and representation is vested in a management company, which holds the management and ownership powers without being the owner of the pool. The legal definition of a venture capital fund is thus the same as for investment funds, except that venture capital funds do not appoint a depository or custodian. Venture capital entities can be authorized and registered under the ‘ordinary’ regime or the ‘simplified’ regime. The requirements for the simplified regime have already been explained in paragraph 9.04 (those under ordinary regime must comply with all the requirements on diversification of investments, and can be marketed to private investors). Venture capital entities are flexible from a legal structure perspective. Spanish venture capital entities work very similarly to venture capital funds in other jurisdictions in the sense that unit-holders make a capital commitment to purchase units at a later stage and contribute funds to the fund if and when capital calls are made by the management company. Venture capital funds may theoretically be open-ended or closedended, although in practice they are typically closed-ended. Venture capital funds generally have fund rules (reglamento) which is the equivalent to articles of association, but which are generally more detailed and contain the main terms and conditions and the rights of the unit-holders of the fund. The regime of venture capital funds is more flexible and the law and regulations admit more freedom to the parties to set out the legal regime in their fund rules.12 (p. 419) 9.13  In addition, the CNMV approach to these vehicles is also more flexible allowing clauses like ‘key man clauses’ or termination rights of the manager by unitholders. In venture capital funds, the unit-holders have in some scenarios certain voting rights conferred by the fund rules.

II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD

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9.14  Spain has defaulted on timely implementation of the AIFMD. On 16 May 2013, two preliminary draft laws were made public for comment. At present (September 2013) no progress in the legislative works has been made public. 9.15  Before implementation of the AIFMD, alternative investment management is contemplated by two sets of legal provisions: the rules governing venture capital and those governing AIFs and companies, as well as real estate funds and companies. Venture capital is governed by Law 25/2005 (the ‘Venture Capital Law’) and its regulations (see paragraph 9.11),while AIFs and companies, as well as real estate funds and companies, are considered special types of collective investment schemes and, therefore, are governed by the Fund Law and its regulations (see paragraph 9.05). 9.16  Although most Spanish investment funds qualify as UCITSs, article 72 of the Fund Regulations provides for more flexible rules for index linked funds and guaranteed funds (a very popular fund product in Spain) than the equivalent provisions of the UCITS Directive (for example investment limits in other collective investment schemes or public debt securities issues). As the AIFMD applies to managers of non-UCITSs of any type, even though differences in relation to UCITSs may be minimal or marginal (funds following the principle of article 72 not qualifying as UCITSs), after the implementation of the AIFMD managers of ordinary collective investment schemes which are almost fully compliant with the UCITS Directive will have to decide whether they prefer to comply fully with said Directive, thereby losing some flexibility, or whether they prefer to comply with the Spanish laws implementing the AIFMD.

2. Regulation of national marketing of AIFs prior to the AIFMD 9.17  Until the AIFMD is implemented, the distribution of shares in an EU AIF or venture capital vehicle follows two basic regimes for distribution of securities or other financial instruments. If the fund is open, it is subject to the rules of the marketing of non-UCITS funds contained in the Fund Law and its regulations, and a special authorization is required from the CNMV before any marketing is carried out. Where a non-UCITS fund is based in a Member State other than Spain and is marketed in Spain, the authorization is subject to the conditions that (i) Spanish law regulates the same category of collective investment scheme, (ii) the non-UCITS is subject in its own country to a regulatory legislative framework protecting the interest of shareholders or unit-holders similar to the Spanish legal regime, and (iii) there is a favourable report of the home country regulator. In addition, Spanish law requires the registration and approval of certain fund documentation. The CNMV has been extremely reluctant to approve the marketing of non-UCITS funds. However, as the regulatory (p. 420) requirements and need for authorization by the CNMV are only triggered by the marketing of the non-UCITSs in Spain, fund managers have only been carrying out selling activities which do not amount to marketing (ie no publicity of the distribution and only addressing identified investors, normally institutional investors, with minimum individual investment and the shares not being freely transferable subsequently). 9.18  Unlike the very stringent regulatory framework for distributing open-ended funds, set out in paragraph 9.17, the regime for offering closed-ended fund is the general regime for the public offering of securities under the LMV, which implements the Prospectus Directive13 regime. Article 30 bis of the LMV sets out a full exemption from the requirements related to a public offering of securities (except that its placement must be carried out by licensed entities) which is the same as the exemption to publish a prospectus set out in Article 3(2) of the Prospectus Directive. As a result, any closed-ended AIFM may market freely and without any prior approval or consent being required if: (a)  the offer of securities is addressed solely to qualified investors; and/or

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(b)  the offer is addressed to fewer than 150 natural or legal persons per Member State, other than qualified investors; and/or (c)  the offer is addressed to investors who acquire securities for a total minimum consideration of at least EUR 100,000 per investor, for each separate offer; and/or (d)  the offer of securities’ denomination per unit amounts to at least EUR 5 million; and/or (e)  the offer of securities has a total consideration within the EU of less than EUR 5 million, which limit will be calculated over a period of 12 months. In general, it is unusual that investment in an AIF is lower than EUR 100,000; as such, in practice, AIFMs have been able to freely market closed-ended AIFs in Spain. 9.19  There is no general rule under Spanish law as regards the marketing of AIFs to retail or professional investors (marketing rules depend on the type of product). Many ordinary retail funds which are effectively AIFs have been marketed to retail investors (guaranteed and index-linked funds, for example). Real estate funds can also be marketed to retail investors. 9.20  Free investment funds (IICILs) follow the restrictive principles established by the AIFMD (even before the Directive has been implemented). Thus, promotional activities of Spanish-regulated AIFs can only be addressed to professional clients. In any event, the minimum initial investment must be EUR 50,000 (see paragraph 9.10). The IIC of IICIL (funds of hedge funds) can be distributed to retail investors under similar rules as the distribution of UCITSs (Fund Regulation, articles 73 and 74), with the additional requirement that retail investors must declare in writing, prior to the investment, that they accept the risk of the product (Fund Regulation, article 74.1.j). 9.21  The shares of Spanish venture capital vehicles can be distributed to retail investors without special restrictions, except when the venture capital fund or company is subject to the so-called ‘simplified regime’ (see also paragraph 9.04), in which case: (i) there are less (p. 421) transparency obligations; (ii) the fund can only be distributed to a limited number of investors (less than 20, not taking into account, for those purposes, institutional investors and directors or executives of the managing company or venture capital vehicle, if it is a company); (iii) the offer of shares must be made on a strictly private basis, without publicity of any kind, and with a minimum investment commitment of EUR 500,000 per investor (except when they are institutional investors or directors or executives of the managing company or venture capital company, in which case there is no minimum investment undertaking).14

III. Regulation of National AIFs after the AIFMD 1. General 9.22  Most of the AIFMD has not yet been implemented in Spain (see paragraphs 9.05 and 9.14). Two draft laws were made public for comment on 16 May 2013. It appears that the intention of the Spanish government is to implement the AIFMD by means of two separate laws, one (the ‘Open Ended Funds Draft Law’) amending the existing Fund Law and the other repealing the existing Venture Capital Law, which would be replaced by a new law, the ‘Closed Ended Funds Draft Law’. Thus, the traditional separation between collective investment schemes (irrespective of whether they are UCITSs or AIFs) and venture capital schemes would be preserved. The Fund Law (as amended by the Open Ended Funds Draft Law) would govern all open-ended investment schemes (real estate investment companies, which are closed-ended AIFs, appear now to be included in the Open Ended Funds Draft Law, but it seems probable that they will be moved to the Close Ended Funds Draft Law in the final version), while venture capital regulation would encompass all closed-ended

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investment schemes, each with its different set of rules. The contents of the two preliminary draft laws are as follows.

2. Amendment of Fund Law15 9.23  The Open Ended Funds Draft Law, implementing part of the AIFMD, intends to convert the Fund Law into a law governing all collective investment vehicles which are open-ended, irrespective of whether they qualify as UCITSs or AIFs. The draft law does not depart from the content of the AIFMD. It refrains from introducing significant changes in the regime of AIFs or UCITSs, but simply implements verbatim part of the AIFMD provisions. The draft law mainly focuses on cross-border activities and custodian liability. It does not implement many of the other AIFMD provisions. However, since the legal regime of AIFs prior to the implementation of the AIFMD is not so much contained in the existing Fund Law, but rather in the Fund Regulations, it is expected that the Fund Regulations will also be amended.

(p. 422) 3. Venture capital vehicles and other closed-ended AIFs (OSIs)16 (Closed Ended Funds Draft Law) 9.24  The Closed Ended Funds Draft Law creates a completely new set of rules for closedended collective investment schemes and their managers. It encompasses the regulation not only of venture capital vehicles but also of any other type of investment vehicle which qualifies as an AIF and which cannot be characterized as an open-ended AIF or a UCITS. 9.25  This second draft law has a similar structure and likewise implements in verbatim the AIFMD provisions. It regulates not only managing companies, but also investment vehicles as such (venture capital funds, venture capital companies, and other investment companies (OSIs)). The investment vehicle rules address the incorporation, registration, and internal organization of both venture capital vehicles and their managers, as well as the investments permitted and commercialization of the venture capital vehicles. 9.26  The implementation in two separate laws results in a complex situation. There are two sets of rules which apply depending on the type of vehicle under management. In addition, some of the AIFMD provisions will not be implemented by the two Draft Laws, and therefore it will be necessary to wait until further regulations are passed. 9.27  Finally, it seems extremely likely that the final versions of the two draft laws will notably differ from the drafts available at the time of writing of this chapter (December 2013). It is possible that they will take the form of Royal Decree laws rather than laws approved pursuant to the ordinary parliamentary proceedings in order to accelerate their approval; however, at this moment no action in one or other direction has been made.

IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

Not specifically implemented

Art 2 (scope)

Fund Law, art 2 Closed Ended Funds Draft Law, art 1

Art 3 (exemptions)

Not specifically implemented in Fund Law

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AIFMD

National implementation Closed Ended Funds Draft Law, arts 1, 24

Art 4 (definitions) Art 5 (determination of AIFMs)

Not specifically implemented Not specifically implemented in Fund Law Closed Ended Funds Draft Law, art 3

(p. 423) 2. Articles 2 and 3—Scope and exemptions 9.28  The analysis of the scope and exemptions of the AIFMD is difficult because in Spain the Directive will be implemented by amendment of the two existing laws on funds and venture capital. This complexity increases because the two draft laws will regulate both managers (AIFMs) and investment vehicles (AIFs). The draft law amending the Fund Law simply amends the terminology but it maintains a similar scope. The Fund Law as amended will cover any already regulated investment fund, which includes UCITS funds and the currently regulated AIFs (real estate funds, IICILs, which are Spanish domestic hedge funds, IIC of IICILs,17 which are Spanish domestic funds of hedge funds, and AIFs under article 72 of the Funds Regulation (following an index or guaranteed funds)), and foreign AIFs when marketed in Spain, UCITS management companies and depositaries, and AIFMs and depositaries of open-ended AIFs. 9.29  The Closed Ended Funds Draft Law regulates venture and private equity regulated AIFs, OSIs (other investment companies), which include any other company qualifying as an AIF and its AIFM. The draft laws do not contain a provision equivalent to Article 2(2) of the AIFMD, which states that a manager is an AIFM irrespective of whether it is of the openended or closed-ended type and irrespective of the legal structure of the AIF or AIFM. Under Spanish Law, an AIF can only take the form of an investment company (OSI). This restriction may raise questions of interpretation and application of the scope of the AIFM in Spain. 9.30  The exclusions from the scope of application of the AIFMD (holding companies, securitization vehicles, etc), are reflected only in article 1 of the Closed Ended Funds Draft law and not in the amendment of the Funds Law, although it is probably the case that none of them should fall into the Funds Law as amended. 9.31  Neither of the draft laws contains the set of definitions set out in Article 4(1) of the AIFMD. Some terms (for example holding company and securitization vehicles) have been implemented, but most have not. In addition, some implemented terms are not the exact terms of the AIFMD. For example, securitization special purpose entities have been replaced by securitization funds. These features may raise doubts as regards interpretation and application of the scope of the AIFMD. 9.32  Furthermore, only the Closed Ended Funds Draft Law contains the equivalent of Article 3 of the AIFMD on exemptions from the Directive. However, the Spanish draft law differs in two respects from Article 3: (i) Article 3(1) has not been implemented, and (ii) the exemption in Article 3(2) does not apply to AIFMs that market units or shares to nonprofessional investors.

3. Article 5—Determination of the AIFM 9.33  Article 5 of the AIFMD has been implemented in article 3 of the Closed Ended Funds Draft Law verbatim. This is not surprising as pre-AIFMD legislation governing both AIFs and (p. 424) companies and venture capital companies contains a similar rule as the AIFMD permitting an AIF to be either internally managed if it is a company or to have an external AIFM. Funds must necessarily be managed by an external AIFM, since this is the present From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

legal regime for both types of structures (alternative investment entities, including real estate collective investment schemes, and venture capital entities). 9.34  The Closed Ended Funds Draft Law states that AIFMs must carry out both portfolio management and risk management duties with respect to the AIFs under management. The only amendment of the Fund Law as regards the activities of an AIFM is that it must now include risk management and control as the object of open-ended management companies. Therefore, broadly speaking, the implementation maintains the pre-AIFMD requirement that the type of functions the manager must perform in order for it to qualify as an AIFM includes not only portfolio management, but also risk management and control for investment funds (without legal personality) and for companies. The AIFM may delegate investment management to a third party authorized to render the investment service of individual portfolio management. It may also delegate the management of the investments and administrative tasks to any licensed management company, but it may not delegate risk control. 9.35  In this regard, it should be noted that, traditionally, the CNMV has been extremely reluctant to accept managers that do not carry out any ‘investment management’. It is possible to delegate the investment management of part but not all funds, and the CNMV has not accepted ‘administration only’ management companies. It is expected that Spanish legislation will adhere strictly to the requirements set out in the Closed Ended Funds Draft Law in this respect. 9.36  It is also envisaged that the CNMV is likely to operate its discretion under Article 5(2) and (3) in the case of failure of an AIFM to ensure that the AIF complies with the requirements of the AIFMD.

V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as an AIFM)

Fund Law, arts 40–43 Closed Ended Funds Draft Law, arts 4, 5

Art 7 (application for authorization)

Fund Law, arts 40–43 Closed Ended Funds Draft Law, arts 4, 5

Art 8 (conditions for granting authorization)

Fund Law, arts 40–43 Closed Ended Funds Draft Law, arts 4, 5

Art 9 (initial capital and own funds)

Fund Regulations, art 100 Closed Ended Funds Draft Law, art 7

Art 10 (changes in scope of authorization)

Fund Law, art 44 Fund Regulations, arts 111, 112 Closed Ended Funds Draft Law, art 8

Art 11 (withdrawal of authorization)

Fund Law, art 49 Fund Regulations, art 117 Closed Ended Funds Draft Law, art 9

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AIFMD

National implementation

Implementing Regulation

National implementation

Arts 14–17 (re Art 9(7) AIFMD: own funds and insurance)

Not implemented

(p. 425) 2. Articles 6 to 8—Conditions and application for authorization 9.37  It is notable that in the Open Ended Fund Draft Law the authorization proceedings for management companies of open-ended funds do not differ from the pre-AIFMD proceedings, considering that the Fund Law governs both UCITS and AIF management companies. The current procedure for authorization of UCITS management companies will remain unchanged. The procedure for the incorporation of closed-ended funds managers will be subject to changes with the approval of the Closed Ended Funds Draft Law, although these changes will not lead to a radical departure from the current procedure set out in Law 25/2005. In practice, the two procedures follow a pattern similar to that used for authorizing most regulated financial institutions in Spain. This pattern consists of a threestep procedure which entails (i) regulatory licensing, (ii) corporate law incorporation or amendment of the by-laws of the company and registration with the Commercial Registry, and (iii) regulatory registration at the CNMV’s registry. The main changes will be that the authorization will be granted by the CNMV instead of the Ministry of Economy and Competition and that the registration will not be a requirement to start activity. 9.38  The first step is to file with the CNMV a full application form including all the basic information and proof of compliance with all the regulatory and corporate law requirements arising from the applicable laws. The CNMV has published on its website a basic standard form for obtaining a licence as a management company of a collective investment scheme, which is not expected to change following the implementation of AIFMD. The form contains the basic requirements set out under the Fund Law for management companies of UCITS and non-UCITS funds. Another standard form for obtaining a licence as a management company of private equity funds also exists, although this will probably be updated to match the requirements of the new law once the Venture Capital Draft Law is enacted. 9.39  The standard form for management companies of open-ended collective investment schemes is currently divided into seven chapters: (1) application for approval, (2) information on by-laws, (3) directors, (4) shareholders, (5) activities programme, (6) organization, and (7) rules of conduct and customer service. 9.40  The current standard form for management companies of private equity funds is divided into four chapters and covers (1) the application form, (2) the by-laws, (3) an explanation of the project, and (4) rules of conduct. The explanation of the project must include the names and CVs of the directors, shareholders, a description of the business plan, and a description of the organization and risk management controls. It is expected that the revision of this (p. 426) standard form in accordance with the implementation of the AIFMD will lead to greater and more detailed information requirements, thus making it similar to the standard form for open-ended management companies. 9.41  After filing the application form, the applicant will discuss the form with the CNMV and complete, if so requested, the application form and the necessary documentation. If the CNMV considers that the application form is complete and complies with all requirements, it will grant the authorization for an AIFM subject to the Closed Ended Funds Draft Law or submit the application to the Ministry of Economy and Competition, which has delegated

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such power to the General Directorate on Treasury and Financial Policy, who will approve or reject the application for an AIMF subject to the Funds Law. 9.42  The second step of the procedure may entail either the incorporation of a new company or the amendment of a company’s by-laws in order to comply with the conditions set out in the approval and the corporate requirements set out by laws and regulations. Thereafter, the deed of incorporation or the deed of amendment must be filed and registered with the Commercial Registry. 9.43  The third step of the procedure is the regulatory registration, which entails filing the deed of incorporation and other corporate resolutions and documentation needed to register the regulated manager with the CNMV’s registry. 9.44  As regards the requirements and conditions of the approval procedure, both the Open Ended Funds Draft Law and the Closed Ended Funds Draft Law generally match the requirements of the AIFMD (although with stricter requirements relating to initial capital and additional own funds). The Closed Ended Funds Draft Law directly implements Articles 6 to 8 of the AIFMD, whereas the Open Ended Funds Draft Law contains small modifications to the procedure under the UCITS Directive in order to adapt to the AIFMD. Certain corporate requirements are Spanish-specific (for instance, the type of company, number of directors, etc). Furthermore, the honorability requirements for directors and significant shareholders are further developed in CNMV Circulars, which are not expected to change.

3. Article 9—Initial capital and own funds A. General 9.45  The initial capital and own funds requirements of the AIFMD should not in principle introduce a major hurdle for the industry. Spanish law has traditionally imposed much higher initial capital and own fund requirements than EU legislation. For example, the Spanish initial capital for a management company of open-ended collective investment schemes (whether UCITSs or AIFs) is EUR 300,000, whereas in the UCITS Directive and the AIFMD the equivalent requirement is EUR 125,000. The amount of own funds required is also much higher. By implementing the AIFMD, no additional requirements will be imposed under the Draft Laws. The requirements under the AIFMD in relation to initial capital and own funds have already been implemented by the Fund Regulations and remain unchanged in the current text of the Draft Laws. While the minimum share capital for both open- and closed-ended management companies has been kept at EUR 300,000, the additional requirements of own funds are as follows.

(p. 427) B. Open-ended fund managers (UCITS or AIF) 9.46  For open-ended fund managers (UCITS or AIF) the initial capital requirements are as follows: (a)  Where the net assets of the collective investment schemes or venture capital funds and portfolios managed by the management company exceed EUR 250 million, 0.02% of the excess, but the total share capital required will never exceed EUR 10 million. (b)  Where the management company carries out discretional and individualized portfolio management, including portfolios of which the management is delegated, 0.2% of the actual value of the third party managed assets, when they do not exceed EUR 60 million; 0.1%, between EUR 60 million and EUR 600 million; 0.05% from EUR 6 million up to EUR 3 billion; 0.03% from EUR 3 billion to EUR 6 billion; and 0.02% of any excess over EUR 6 billion. It is permitted that 50% of the total own funds required pursuant to the above rules may be replaced by a guarantee issued by a credit entity,

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or an insurance policy issued by any insurance company, in compliance with the terms set by the CNMV. (c)  If the management company of collective investment schemes commercializes shares of collective schemes, the minimum own resources of the management company must be increased by EUR 100,000 before commencing those activities, plus 0.5% of the effective net worth of the shareholders whose commercialization has been directly made by the management company. (d)  4% of the gross revenue from commissions stemming from the management of the AIF or equivalent foreign institutions managed, calculated as an average of the last three years. The own resources should be the highest of the additional of all the above amounts (that is, the minimum share capital increased by the amounts indicated in paragraphs (a) to (d) above) and 25% of the general structural expenses corresponding to the previous fiscal year, including personnel, general expenses, taxes, depreciation, and other exploitation charges.

C. Closed-ended fund managers (venture capital and others) 9.47  The Closed Ended Funds Draft Law retains the initial capital requirement. It introduces a new obligation to provide additional own funds when the total value of all portfolios under management of the AIFM exceeds EUR 250 million up to 0.02% of such excess (with a maximum cap of EUR 10 million). 9.48  The reason for such high capital requirements is because the Spanish legislator and the Spanish supervisory authorities have traditionally regarded the equity of a management company as a surety that it will be able to meet its own liabilities both against investors and for fines imposed for regulatory infringements. An optional insurance coverage or bank guarantee as set out in Article 9(6) of the AIFMD has been accepted under Spanish law, which may cover up to 50% of the total own funds requirement. It is submitted that Article 9 of the AIFMD in general, and Article 9(7) in particular, do not change the private law liability of AIFMs.

4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 9.49  Changes in the scope of the authorization and withdrawal provisions under the AIFMD will be implemented in Spanish law verbatim. The Fund Law already applies the same (and in some cases stricter) rules to open-ended AIFM as to UCITS management companies, and this will not change in the implementation of the draft laws. (p. 428) 9.50  As regards managers of closed-ended AIFs, the former Venture Capital Law took a more flexible approach. The Closed Ended Funds Draft Law provides for implementation of Articles 10 and 11 of the AIFMD. The only difference appears in relation to Article 11(a): the Directive sets out that ceasing activity for a period of six months may entail the withdrawal of the authorization, whereas the Closed Ended Funds Draft Law extends this period to 12 months, and the implementation of the AIFMD will have an impact on the requirements with which these managers will have to comply. 9.51  Both article 49 of the Fund Law (which is not amended by the Open Ended Funds Draft Law) and article 9 of the Closed Ended Funds Draft Law set out other withdrawal causes deriving from national law; both provisions include insolvency, voluntary withdrawal, and mandatory dissolution of the company.

5. Consequences of violating authorization provisions

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A. Regulatory law consequences 9.52  The consequence of managing an AIF without authorization under Spanish law, or any misuse or breach of regulatory obligations attached to it, are generally administrative sanctions imposed on the company and directors (which may include significant fines, public reprimands, and bans from the exercise of executive positions in financial entities). The use of false declarations for the purpose of gaining an authorization can also lead to very serious consequences.

B. Criminal law consequences 9.53  As indicated above (see paragraph 9.52), carrying out a regulated activity without licence is generally a major infringement of Spanish regulatory law and normally leads to the imposition of heavy fines. However, such infringement does not normally entail, by itself, criminal law implications.

C. Private law consequences 9.54  The consequences of managing an AIF without authorization under Spanish law are generally administrative sanctions imposed on the company and directors, but such infringement does not normally entail, by itself, civil (or criminal) law implications. In particular, neither subscription agreements nor any other contract entered into by the AIFM or the AIF will be subject to rescission or declared null and void. However, there may be an obligation to pay damages (see paragraphs 9.97 to 9.100)

VI. Operating Conditions for AIFMs 1. Implementation table AIFMD

National implementation

Art 12 (general principles)

Fund Law, arts 43.i.j, 46.2, 46.3 Funds Regulation, art 141 Closed Ended Funds Draft Law, art 12

Art 13 (remuneration)

Fund Law, arts 41.2, 43 CNMC Circular 6/2009 Closed Ended Funds Draft Law, art 13

Art 14 (conflicts of interest)

Fund Law, arts 43.1.k, 138 Closed Ended Funds Draft Law, v 14

Art 15 (risk management)

Fund Law, art 43.i.k CNMV Circular 6/2009 CNMV Circular 1/2006 Closed Ended Funds Draft Law, art 15

Art 16 (liquidity management)

Fund Law, art 43 CNMV Circular 6/2009 Closed Ended Funds Draft Law, art 15

Art 17 (investment in securitization positions)

Not specifically implemented in Fund Law Closed Ended Funds Draft Law, art 48

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AIFMD

National implementation

Art 18 (general principles)

Fund Law, art 43 Funds Regulation, art 73 Circular 6/2009 Closed Ended Funds Draft Law, art 7.1.(c)

Art 19 (valuation)

Fund Law, art 43 Various CNMV Circulars Closed Ended Funds Draft Law, art 17

Art 20 (delegation)

Fund Law, art 40.5 Funds Regulation, art 98 Closed Ended Funds Draft Law, art 18

Art 21 (depositary)

Fund Law, Chapter V Closed Ended Funds Draft Law, art 7.4

Implementing Regulation

National implementation

Arts 18–30 (re Art 12(1) AIFMD: general principles)

Not implemented

Arts 31–38 (re Art 14 AIFMD: conflicts of interest)

Not implemented

Arts 39–46 (re Art 15 AIFMD: risk management)

Not implemented

Arts 47–50 (re Art 16 AIFMD: liquidity management)

Not implemented

Arts 51–56 (re Art 17 AIFMD: investment in securitization positions)

Not implemented

Arts 57–67 (re Art 18 AIFMD: organizational requirements—general principles)

Not implemented

Arts 68–75 (re Art 19 AIFMD: valuation)

Not implemented

Arts 76–83 (re Art 20 AIFMD: delegation of AIFM functions)

Not implemented

Arts 84–103 (re Art 21 AIFMD: depositary)

Not implemented

(p. 429) 2. Section 1 (Articles 12 to 17)—General requirements A. Article 12—General principles 9.55  Spain’s approach in implementing the AIFMD has been to preserve as much as possible the pre-AIFMD legal structure for open-ended funds, while implementing a new set of rules for closed-ended funds. This is because pre-AIFMD rules regarding open-ended funds are already similar to the AIFMD rules. (p. 430) 9.56  However, implementation of AIFMD is more complex than it appears at first sight. The UCITS Directive has been implemented by Spanish legislation in detail. As a result, the application and interpretation of these rules may lead to confusion when interpreting the rules applicable to AIFMs based on a regulatory regime which is basically the detailed national implementation of the UCITS Directive. In addition, some Spanish

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domestic provisions will be applied to AIFMs (such as transactions with related parties). In this regard, it is expected that a later amendment of the Funds Regulation will improve and clarify this complex and confusing regulatory framework. 9.57  As regards equal treatment, Article 12(1), last paragraph of the AIFMD provides that no investors in an AIF may receive a preferential treatment except when such preferential treatment has been contemplated in the rules or constitutive documents of the AIF (and even then, only when the preferential treatment is based on objective reasons such as volume of investment, etc). 9.58  Under present Spanish law, pre-AIFMD, article 5.2 of the Fund Regulations provides that the same management fees and depository fees must apply to all units of the same class in an investment fund. Subscription and redemption fees applying to AIFs and AIFMs (but not to the investment companies) may only differ on objective and non-discriminatory conditions, which must be reflected in the fund prospectus. Although these provisions do not contain an express prohibition of preferential treatment, it has been interpreted that the Fund Regulations require investors of the same class of units to be treated the same by the management company. 9.59  Finally, it should be noted that, although the LMV will not apply directly to collective investment schemes or venture capital schemes, when offering shares in these types of schemes to investors, the managing companies may be considered to be providers of financial services and, therefore, subject to the Securities Market Law. Therefore, if managing companies infringe the obligations in the Securities Market Law to prevent conflicts of interests and to treat all investors equal, they are breaching legal obligations, will be subject to the penalties under the Securities Market Law, and must indemnify the prejudiced investors. The rules of conduct for companies rendering investment services also apply to AIF managing companies under specific provisions of the Fund Law (article 65.1.a), as has been endorsed by the courts18 and scholars.19 9.60  However, articles 4.8 and 12 of the Closed Ended Funds Draft Law will implement Article 12 of the AIFMD verbatim. This will affect AIFMs managing private equity and venture capital, which have not previously been regulated in this respect.

B. Article 13—Remuneration 9.61  As regards Article 13 of the AIFMD on remuneration, the Draft Laws consider that the already existing Fund Law rules do not contradict AIFMD principles and therefore they have left relatively untouched the current pre-AIFMD regime, which basically implements the UCITS Directive in Spain. The Closed Ended Funds Draft Law cross-refers to the Fund (p. 431) Law (in this respect not amended by the Open Ended Funds Draft Law) regarding the remuneration policies and practices of AIFMs. 9.62  Technically speaking, the remuneration provisions impose an obligation on AIFMs to set out remuneration policies and practices for certain categories of directors and staff. Failure of the AIFM to comply with the relevant requirements may incur fines or other administrative regulatory sanctions, but it is unlikely that such failure will give rise to civil or criminal law consequences. It should be noted that the AIFMD regulations do not intend to regulate contractual relationships governed by civil, commercial or labour law and, as such, it will not have any direct implications for private relationships between the AIFM and its directors, senior officers, and other staff. In other words, the remuneration and other contractual conditions of the directors, senior officers, and staff will not be automatically amended by the approval of the remuneration code. The AIFM will have to negotiate with the relevant persons amendments to their employment or other contractual conditions.

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9.63  If the laws implementing the AIFMD in Spain follow the same approach as the laws implementing similar requirements for other financial regulated entities, the CNMV will probably have broad powers to require AIFMs to have sound remuneration policies and practices in place, and, in general, to interpret the application of the remuneration policies and other practices stemming from the AIFMD.

C. Article 14—Conflicts of interest 9.64  The Funds Regulation already provides for rules regarding conflicts of interest. The Funds Regulation submits to general provisions of MiFID (in this respect, incorporated in Spain by Royal Decree 217/2008 of 15 February 2008) and to the Fund Law. These pieces of Spanish domestic law already contemplate a very stringent regime in relation to conflicts of interest, fully compliant with MiFID and the UCITS Directive. In such context, no material changes have been included in the draft amendment of the Fund Law. In fact, the domestic legal provisions will operate in a manner similar to both the UCITS Directive and MiFID. Under Spanish law, an open-ended AIF is merely a sub-type of collective investment schemes. General rules applying to the latter are also applicable to the former, except where the legal provisions make an exception in favour of open-ended AIFs. Therefore, AIFMD will not lead to a material change, as the conflicts of interest rules applying to UCITS management companies also apply to AIFMs. On the contrary, the managers of private equity funds did not have a detailed regime on conflicts of interests and, therefore, AIFMD implementation will lead to a very significant change in this area.

D. Article 15—Risk management 9.65  As regards risk management for open-ended funds, the draft amendment of the Fund Law leaves untouched the pre-AIFMD rules contained in the Fund Law and its developing rules. In particular, CNMV Circular 6/2009 of 9 December 2009 on internal control of managing companies of collective investment schemes sets out risk management rules applicable to entities managing IICILs or IIC of IICILs and real estate funds. In addition, CNMV Circular 1/2006 of 3 May 2006 on IICILs and IIC of IICILs also provides specific rules on risk management applicable to these types of entities. Both sets of rules already include, in great detail, the content of Article 15 of the AIFMD, and therefore it is not expected that the future risk management framework will operate in a different way to the current framework. (p. 432) 9.66  The above-mentioned rules cover the following topics: (a)  separation of functions within the organization, especially of the management, administration, and control functions; in particular, the person or body in charge of risk management policy will report to a person in the organization with sufficient authority to promote its independence; (b)  the establishment, organization, role, and responsibilities of a permanent risk management function, including requirements in respect of its reporting to senior management and its functional and hierarchical separation from other operating units including portfolio management; (c)  the establishment of a risk management policy and the process and frequency of its assessment, monitoring, and review; and (d)  the processes and techniques for the measurement and management of risk. 9.67  For closed-ended funds, the Closed Ended Funds Draft Law reproduces almost verbatim the provisions of the AIFMD on risk management. Thus, article 14 of the Draft

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Law contains a similar provision to Article 15 of the AIFMD. However, it excludes Article 14(3) of the AIFMD, probably because it is not relevant to closed-ended AIFMs. 9.68  Changes will be substantial, as the new AIFMD rules set out by the Closed Ended Funds Draft Law (which are in terms almost identical to Article 15 of the AIFMD) will be stricter than the pre-AIFMD existing rules.

E. Article 16—Liquidity management 9.69  The amendment to the Fund Law does not incorporate any major change as regards liquidity management. In this regard, Circular 6/2009 on internal control of the managing companies of collective investment schemes and Circular 1/2006 on IICILs and IIC of IICILs already include the substance of Article 16 of the AIFMD, in particular (i) the systems and procedures that management entities should implement to ensure that the liquidity profiles of the funds or companies under their management comply with their underlying obligations; (ii) the content and frequency of stress tests to be performed by management entities; and (iii) the circumstances under which the investment strategy, liquidity profile, and redemption policy of each fund or company managed by a management entity can be considered to be consistent. 9.70  In light of the above, it is expected that Spanish management entities will not be required to make significant changes as regards liquidity management, at least not in connection with IICILs, IIC of IICILs, or real estate funds or companies. 9.71  In addition, article 75 of Royal Decree 1082/2012 regulates side-pockets (compartimentos de propósito especial) in Spain, which have been permitted since 2010. Side-pockets are devices that can be used by UCITSs, IICILs, IIC of IICILs, and real estate vehicles as a means of addressing issues arising when certain assets within a company’s/ fund’s portfolio become illiquid or comparatively hard to value. Side-pockets must comply with certain requirements and, before they are set up, the CNMV must be informed. Alternatively, the CNMV may allow the suspension of redemptions to deal with extraordinary circumstances (articles 44 and 93 of Royal Decree 1082/2012). The rules on liquidity management must be complied with by the relevant management entity which will be liable on a regulatory basis (as well as on a civil law basis, if any investor suffers damage) in the event of non-compliance. (p. 433) 9.72  However, the pre-AIFMD Venture Capital Law did not contain a similar rule; as such the Closed Ended Funds Draft Law will introduce an equivalent of Article 16 of the AIFMD, using similar wording.

F. Article 17—Investment in securitization positions 9.73  Current pre-AIFMD Spanish rules do not deal in particular with investment securitization positions. However, neither the draft amendment to the Fund Law nor the Closed Ended Funds Draft Law fully implements Article 17 of the AIFMD on investment in securitization positions. With respect to open-ended AIFMs it is expected that Article 17 will be implemented in the Fund Regulations, since this is where most investment rules are set out. However, it is surprising that the only reference to investment in securitization positions by closed-ended AIFs is contained in article 48 of the Closed Ended Funds Draft Law, as this provision applies only to very specific types of private equity AIFs, investing in small and medium capitalization companies. A change of approach in the implementation of Article 17 of the AIFMD is expected in this regard.

3. Section 2 (Articles 18 and 19)—Organizational requirements A. Article 18—General principles

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9.74  Pre-AIFMD Spanish rules dealing with organizational requirements in connection with IICILs, IIC of IICILs, and real estate funds and companies (ie article 43.1 of the Funds Law, article 106 of the Fund Regulations and CNMV Circular 6/2009 on internal control of the managing companies of collective investment schemes) and in connection with venture capital funds and companies (ie articles 42.1.c and 10.2.a of Law 25/2005, which will be replaced by article 7.1 of the Closed Ended Funds Draft Law) are already drafted in line with Article 18, and therefore neither of the two Draft Laws addresses this point. 9.75  In particular, the following topics are covered in the current pre-AIFMD Spanish regulation: (i) general requirements on procedures and organization; (ii) resources; (iii) electronic data processing; (iv) accounting procedures; (v) control by senior management and supervisory functions; (vi) compliance and internal audit functions; (vii) personal transactions; recording of portfolio transactions; (viii) recording of subscription and redemption orders; (ix) record-keeping requirements; and (x) complaints handling.

B. Article 19—Valuation 9.76  The approach to valuation is again to leave substantially untouched the current regulatory regime for open-ended funds and implement verbatim in article 17 of the Closed Ended Funds Draft Law the rules of the AIFMD on closed-ended funds. 9.77  The current valuation of assets of regulated AIFs and the calculation and disclosure of units or share prices are subject to very strict and detailed rules contained in CNMV Circular 3/2008 of 11 September 2008 on accounting rules, annual reports, and confidential financial statements of collective investment schemes, and CNMV Circular 11/2008 on accounting rules, annual reports, and confidential information statements of private equity entities. These rules supplement and develop the general accounting rules applying in Spain. 9.78  As regards the NAV calculation by the AIFM, which must follow the rules discussed in paragraphs 9.76 and 9.77 (except for real estate funds, where the rule is precisely the contrary), the usual practice in Spain is that the NAV is not calculated by an external valuer or administrator (p. 434) (as is often the case in many other jurisdictions) but by a department in the management company. However, the management companies of some collective investment schemes, such as hedge funds, must ensure that the persons involved in the fund management do not participate in the calculation of the value of the assets. Further, rule 7 of CNMV Circular 1/2006 on AIFs provides that, if necessary, any contribution of a manager to the valuation of the assets must be justified in writing and kept for five years. In general, under the current pre-AIFMD regime, NAV calculation can be delegated to third parties, apart from the depository. Under the current pre-AIFMD regulatory framework no duty of the manager can be delegated to the depository. In general, with the exception of external valuers of real estate property, which are subject to registration with the Bank of Spain, the calculation of NAV or accounting of the AIF does not require any registration or licence. 9.79  Article 17 of the Closed Ended Funds Draft Law reproduces Article 19 of the AIFMD verbatim. Having said that, the existing pre-AIFMD regulatory regime already contains detailed rules on the valuation of investments for private equity funds. It is possible, therefore, that the detailed and strict rules for valuation of investments in private equity funds will be maintained following implementation of the AIFMD.

4. Section 3 (Article 20)—Delegation of AIFM functions 9.80  As regards delegation of an AIFM’s functions, the draft bills do not amend the Fund Law. However, article 18 of the Closed Ended Funds Draft Law reproduces Article 20 of the AIFMD, except that it does not include an express requirement that such delegation be notified to the competent authorities before the delegation arrangements become effective. Presently, delegation of the functions of an AIFM managing open-ended AIFs and subject to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the Fund Law and Fund Regulations (in this respect treated as a UCITS management company) is regulated by article 98 of the Fund Regulations, in connection with IICILs, IIC of IICILs, and real estate funds and companies. The terms of the delegation are substantially the same as those set out in Article 20 of the AIFMD, except that subdelegation is not expressly permitted (although not prohibited either). It should be noted that Spanish AIFs make frequent use of delegation.20 9.81  Venture capital managing companies are permitted to delegate (Law 25/2005, article 46), albeit under more general terms and not fully in compliance with Article 20 of the AIFMD. All delegation is subject to prior approval from the CNMV, and therefore, in practice, the regime governing delegation for venture capital managing companies is similar to that of the AIFMD. In this sense, the only difference is that article 46 of Law 25/2005 specifically permits sub-delegation.21 9.82  Delegation of the management of assets and risk must be subject to a contract, and is not specifically governed by any legal provision, although the provisions of the Civil Code on the agency contract (contrato de mandato) (articles 1709 to 1739) and of the Commercial Code on Commercial Agency (Comisión Mercantil) (articles 244 to 280) apply. However, (p. 435) the provisions of the contract normally prevail, since those of the Civil and Commercial Codes are not, in general, mandatory. The only legal provision regarding the content of the delegation agreement is found in article 98.4 of the Fund Regulations, which provides that the agreement must be in writing, and which includes provisions aimed at facilitating the supervision of the CNMV. 9.83  While in Spain it is common that portfolio management is partially delegated in ordinary collective investment schemes, it is rare that venture capital managing companies or AIF managing companies will delegate part of the portfolio management. In any event, since provisions similar to Article 20 of the AIFMD already apply to AIFs under Spanish law and, de facto, to venture capital schemes, it is not expected that there will be a major impact on the creation or structuring of an AIF under Spanish law once the AIFMD is implemented.

5. Section 4 (Article 21)—Depositary 9.84  In relation to depositaries, the Open Ended Funds Draft Law and the Closed Ended Funds Draft Law will have to create a new regime or make substantial changes to the existing regime. 9.85  Under the pre-AIFMD regulatory regime, the appointment of a depositary is a requirement for financial collective investment schemes (including hedge funds, funds of hedge funds, and other financial funds) and for real estate investment funds set up under Law 35/2003, but it is not a requirement for real estate investment companies regulated by Law 35/2003 and private equity vehicles set up both as venture capital companies and venture capital funds under Law 25/2005. Under Law 35/2003, only credit institutions (banks, saving banks, and credit unions) and investment firms licensed as custodians (securities broker dealers (Sociedades de Valores) and securities brokers (Agencia de Valores)) are authorized to act as depository. Article 58 of Law 35/2003 specifically requires that the depository is Spanish or has a branch in Spain. The appointment of a depository is one of the requirements of the regulatory procedure to obtain authorization to set up an investment fund or an investment company under Law 35/2003. Therefore, if a depository is not designated on the application form, the set-up of the investment fund or the investment company will not be approved by the CNMV. The appointment of the depository is thus an essential requirement to set up a collective investment scheme. A depository cannot cease to act as depository of a collective investment scheme until it is replaced by another entity able to act as such. If an insolvency procedure is initiated with respect to a depository appointed in relation to a collective investment scheme, the insolvency procedure does not by itself cause the dissolution of the collective investment scheme; however, the CNMV is From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

empowered to take any actions it deems appropriate, including, inter alia, the transfer of all the assets from the insolvent depository to another qualifying entity. 9.86  The pre-AIFMD legal regime of Law 35/2003, the Fund Regulations, and the rules on the role of depositaries, in particular (i) Order EHA/596/2008 of 5 March 2008 regulating certain legal aspects of depositories of collective investment schemes and investors’ position statements and (ii) CNMV Circular 3/2009 of 25 March 2009 on the semi-annual report of the depositories of collective investment schemes have the UCITS Directive as their basis. The pre-AIFMD Spanish legal regime for depositories is much more detailed and specific than that under the UCITS Directive. The AIFMD will change this regime in some important respects. For example, the specific rules of the AIFMD regarding the role and (p. 436) tasks of the depository are much more developed and diverge in some respects from the role of the depository in the pre-AIFMD regime. Nevertheless, the most important difference between the pre-AIFMD regime and the AIFMD regime is the liability of the depository. 9.87  The liability of a depository in the pre-AIFMD regime is based on negligence. The current regime imposes regulatory duties on the depository, and its failure to comply with such duties may trigger civil liability. However, a depository will only be liable for breach of its own obligations due to its negligence or wilful misconduct. This is the general standard of liability under Spanish law. Strict liability only applies when the law expressly so provides. A regime like the AIFMD, where the depository is liable to return the assets except where it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary (especially as interpreted in the ESMA technical advice to the European Commission on possible implementing measures), is a much higher standard of liability than in the current regime. 9.88  The approach of the AIFMD depositary regime deviates from that taken in implementing the AIFMD provisions set out in paragraphs 9.84 to 9.86. Article 7.4 of the Closed Ended Funds Draft Law provides that there is an obligation to appoint a depositary for an AIF as soon as the exemption thresholds for closed-ended AIFMs are passed. However, the depositary regime itself is the same as that set out for open-ended funds in the Fund Law. 9.89  The Closed Ended Funds Draft Law contemplates as eligible custodians for AIFs only credit institutions and investment firms based in or with a branch in Spain. It also requires that the depositary is a participant in the relevant clearing and settlement system or that it acts through a participant in such a system. The designation of an AIF depositary will be developed in further regulations (probably an amendment to the Fund Regulations). If the depositary is assigned a credit rating, this should be disclosed in quarterly and semi-annual reports. 9.90  The duties of the depositary under the Fund Law have not been replaced by equivalent duties to those in Article 21(9) of the AIFMD. Although some of the duties may be similar, the wording is different and some tasks and duties have been omitted. For example, there is no duty similar to the AIFMD duty to ensure that an AIF’s income is applied in accordance with the applicable national law and the AIF rules or instruments of incorporation. Certain duties under the current Spanish legislation are maintained, such as the joint obligations of the depositary and AIFM to draft the management regulations of investment funds and to grant, amend, and liquidate deeds of set-up. Article 60 ter 2 of the Fund Law, as amended, provides a similar rule to Article 21(8) of the AIFMD in relation to

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custody. It is expected that the specific duties will be detailed in a developing regulation (probably the Fund Regulations). 9.91  The amendment to the Fund Law also states that the requirements for delegating depositary functions will be provided in the planned amendment to the Fund Regulations. 9.92  Finally, as regards liability of a depositary, article 62 of the Fund Law, as amended, implements Article 21(10), first paragraph and (12) of the AIFMD. The rules on excluding liability in accordance with Article 21(13) of the AIFMD will be implemented by amendment to the Fund Regulations. 9.93  It is interesting to note that the Fund Law as amended preserves the obligation of depositaries to report to the CNMV any wrongdoings by the AIFM with respect to an AIF which the depositary discovers while acting as custodian for the AIF. The depositary also has a (p. 437) duty to provide the CNMV upon request with all information obtained while acting as custodian.

6. Consequences of violating operating conditions A. Regulatory law consequences 9.94  Under present pre-AIFMD Spanish law, a breach of obligations similar to those contained in Articles 12(1)(c)–(e), 14, and 18 of the AIFMD would be considered very serious infringements of the Fund Law, the LMV, and/or the Venture Capital Law. There is consistent case law confirming that penalties are imposed by the CNMV in these cases.22 9.95  Infringement of such AIFMD obligations may be subject to administrative penalties, ranging from fines to revocation of the authorization to act as a managing company. Directors of the managing company may also be fined or prohibited temporarily or permanently from acting as a director of the entity or of any financial entity. The same consequences may occur under articles 52 and 53 of the Venture Capital Law.23

B. Criminal law consequences 9.96  Breach of any of the requirements of Articles 12(1)(c)–(e), 14, or 18 of the AIFMD will not by itself amount to criminal liability, but may do so if combined with other actions.

C. Private law consequences 9.97  Spanish rules applying to AIFMs which presently manage AIFs in Spain in the form of special collective investment schemes are very similar to those contained in Articles 12(1) (c)–(e), 14, and 18 of the AIFMD. Thus, the consequences for violating organizational requirements should not differ, following implementation of the Directive, from those under the present law. In this sense, case law has sometimes interpreted in very strict terms the existing legal provisions and has established that, (i) when failing to operate with due diligence or in the best interest of the funds, or (ii) not having had sufficient resources, or (iii) not having avoided conflicts of interests, or (iv) if there is unequal treatment of investors, the managing companies will be personally liable vis-à-vis the fund managed or the investors (when commercialization has occurred).24 9.98  Spanish law does not currently impose a specific standard of care on management companies of collective investment schemes or management companies of private equity funds for civil liability purposes. The Fund Law and the Venture Capital Law generally require that a manager must act in the interest of the unit-holders or shareholders, that it exercises its powers in the interest of such investors, and that it complies with the duties set out by the regulatory regime, but it does not apply a standard of care dramatically different or more stringent than that applying to any asset manager. However, as explained at paragraphs 9.59 and 9.122, it (p. 438) follows from Spanish case law that breach of the regulatory duties of management companies under the financial regulatory regime have private law implications where the requirements for contractual or extra-contractual (for

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example due to negligence) liability are also met and managers may be liable in civil law where they have breached regulatory rules. 9.99  Under pre-AIFMD law, a management company is liable vis-à-vis the unit-holders or shareholders for damage caused by breach of its legal duties. The regulatory duties of an AIFM may differ in some respects from those under the laws implementing MiFID and this will lead in some cases to a different duty owed to fund investors. However, broadly speaking, the implementation of the rules of Article 12(1)(a) and (b) of the AIFMD should not lead to a specific standard of care for AIFMs different from the typical standard of care of individual portfolio managers, which is the stricter duty applied to professionals, and the private law duties and liability of an AIFM should not be materially different from those applying to any other asset manager. 9.100  Article 1101 of the Spanish Civil Code provides that those who act with wilful misconduct or negligence must pay damages to the prejudiced party. Once the AIFMD is implemented, obligations regarding risk management, liquidity management, and securitization position will be obligations of the AIFM. As such, investors will be entitled to be indemnified should the AIFM violate such obligations and generate prejudice to the AIF or its investors where the requirements for contractual or extra-contractual (for example due to negligence) liability are also met. Although some provisions of the AIFMD (such as Articles 19(10), 20(3), 21(12) and (13), and 37(13)) seem to create private law rights and obligations, neither the Open Ended Funds Draft Law nor the Closed Ended Funds Draft Law contain any provision in this regard; however, as indicated at paragraphs 9.97 to 9.99 and immediately above, general provisions of the Civil Code on liability, as applied by the courts, will govern the obligation to pay damages to investors if managers or depositaries of funds breach their regulatory obligations.

VII. Transparency Requirements 1. Implementation table AIFMD Art 22 (annual report)

National implementation Fund Law, art 17.4 Fund Regulations, art 26 Closed Ended Funds Draft Law, art 29

Art 23 (disclosure to investors)

Fund Law, art 17.4 Fund Regulations, arts 22, 25 Closed Ended Funds Draft Law, art 20

Art 24 (reporting obligations to competent authorities)

Fund Regulations, art 22 in fine Closed Ended Funds Draft Law, arts 19.3, 21

Implementing Regulation

National implementation

Arts 104–112 (re Arts 22(2)A–E, 23(4), 24(1) AIFMD: disclosure to investors and regulatory reporting)

No preparatory legislation for such implementation has been made public

(p. 439) 2. Article 22—Financial reporting A. Open-ended AIFs

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9.101  Under the pre-AIFMD Fund Law, requirements for information are similar to those applying to ordinary collective scheme entities (UCITSs). In this sense, the provisions of article 26 of the Fund Regulations basically contain all the obligations set out in Article 22 of the AIFMD and therefore not much amendment will be required to implement Article 22 in Spanish law. Although the Open Ended Funds Draft Law has not been amended in this respect, it is likely that the Fund Regulations will be amended for this purpose. In fact, the Communiqué has already set out that an AIFM must provide the CNMV with the information contemplated in the AIFMD even before it is implemented in Spain, and within the time limits also indicated in the Directive.

B. Closed-ended AIFs 9.102  Article 19 of the Close Ended Funds Draft Law implements verbatim Articles 22 and 23 of the AIFMD, with the exception of the third paragraph of Article 22(3). Articles 22 and 23 are much stricter than the current article 26 of the Venture Capital Law. No doubt, the implementation of Articles 22 and 23 of the AIFMD will introduce a high degree of complexity from an administrative point of view for venture capital activities in Spain.

3. Article 23—Disclosure to investors A. Open-ended AIFs 9.103  Pre-AIFMD disclosure requirements under the UCITS Directive as implemented in Spain also apply at present to IICILs, IIC of IICILs, and real estate funds and companies, including key investor information document (KIIDs). Articles 22 to 25 of the Fund Regulations already contain all the information requirements set out in Article 23 of the AIFMD, and therefore not much amendment would be required to implement Article 23. In fact, the Open Ended Funds Draft Law has not been amended in this respect, but it is likely that relevant provisions of the Fund Regulations will be amended for this purpose since the prospectus envisaged in the AIFMD differs from that contemplated in the Fund Regulations and does not contemplate KIIDs; however, at this stage, it is difficult to predict how the final wording of the implementing legal and regulatory provisions will deal with this matter.

B. Closed-ended AIFs 9.104  Articles 19.3 and 21 of the Close Ended Funds Draft Law implement Article 24 of the AIFMD verbatim. 9.105  Currently (pre-AIFMD), venture capital funds and companies must disclose to investors only the prospectus and the annual report. The content of the prospectus is regulated by CNMV Circular 3/2010 of 14 October 2010 and is very similar to the UCITS prospectus.

4. Article 24—Regulatory reporting A. Open-ended AIFs 9.106  The current article 22 in fine of the Fund Regulations provides for a regulatory reporting requirement in only very general terms. The level and frequency of such requirements are (p. 440) detailed for IICILs, IIC of IICILs in CNMV Circular 3/2008 on accounting rules, annual accounts, and supervisory reporting of collective investment schemes. It is submitted that the AIFMD regulatory reporting requirements will not exceed or be stricter than the current reporting requirements.

B. Closed-ended AIFs 9.107  Articles 19.3 and 21 of the Closed Ended Funds Draft Law implements Article 22 of the AIFMD verbatim, with the exception of the third paragraph of Article 22(3).

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9.108  Taking into account the current level and frequency of CNMV reporting requirements applicable to real estate funds and companies in accordance with the CNMV Circular 11/2008 on accounting rules, annual accounts, and supervisory reporting of venture capital entities, the Closed Ended Funds Draft Law will not impact greatly on the current reporting requirements.

5. Consequences of violating transparency requirements A. Regulatory law consequences 9.109  As regards open-ended AIFs, wilful misconduct or gross negligence which results in omission or falsity of accounting or information to facilitate or publish pursuant to the Fund Law and its regulations, as well as any default with regards to the obligations of filing of periodical information, will amount to very serious infringements in accordance with article 80 of the Fund Law. This has not been amended by the Open Ended Funds Draft Law. Penalties range from fines to the prohibition to act as managing company in the future. Directors of the managing company may also be penalized with fines or a prohibition to act as director of managing companies or, in the worst scenario, prohibition to act as director of any other type of financial company. 9.110  As regards closed-ended AIFs, article 73 of the Closed Ended Funds Draft Law provides for the following: (i) omission or irregularities of accounting preventing knowledge of assets and the financial position of the entity will amount to a very serious infringement; (ii) failure to comply with the disclosure obligations to investors will amount to a serious infringement. The penalties are fines of variable amounts and, for very serious infringements, the investment manager’s authorization may also be revoked by the Spanish authorities.

B. Criminal law consequences 9.111  In principle, a breach of transparency rules should not have criminal law consequences. However, in the most serious cases of default, such breach could amount to the crime under article 282 bis of the Spanish Criminal Code. This provision penalizes those who are legally or de facto directors of a company which has offered securities to the public, and who falsify the prospectus (or other information that the issuer must publish) with the purpose of obtaining investors or getting any type of financing from third parties. The penalty is a prison term from one to four years or, where the prejudice is very serious, imprisonment from one to six years and a fine from six to 12 months.25

(p. 441) C. Private law consequences 9.112  Under the general principles of article 1101 of the Civil Code, investors prejudiced by a breach of transparency requirements are entitled to sue the AIFM to recover damages. See also paragraphs 9.97 to 9.100.

VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD Art 25 (use of information, supervisory cooperation, and limits to leverage)

National implementation Not specifically implemented in the Fund Law Closed Ended Funds Draft Law, art 79

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AIFMD

National implementation

Art 26 (scope)

Not specifically implemented

Art 27 (notification of the acquisition of major holdings and control of non-listed companies)

Closed Ended Funds Draft Law, art 23

Art 28 (disclosure in case of acquisition of control)

Closed Ended Funds Draft Law, art 23

Art 29 (annual report of AIFs exercising control of non-listed companies)

Not specifically implemented

Art 30 (asset stripping)

Not specifically implemented

Implementing Regulation

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

Not implemented

2. Section 1 (Article 25)—AIFM managing leveraged AIF 9.113  Article 25 of the AIFMD has not been implemented in the Fund Law, but only in article 79 of the Closed Ended Funds Draft Law. 9.114  It is expected that Article 25 will be implemented with respect to open-ended funds by amendment of the Fund Regulations. The pre-AIFMD legal regime is different as regards scope and approach. The current regulatory framework is based on product regulation which sets: limits on the type of investments; quantitative ratios; strict rules on diversification; and liquidity ratio. Further, depending on the type of entity, the current regulatory framework also limits leverage and indebtedness. The approach of this preAIFMD legal regime is to ensure the solvency of the investment vehicle and not to control systemic risk. Having said that, given that Spanish collective investment schemes and venture capital funds are on average smaller than their European and US peers, the likelihood of any of such investment vehicles becoming systematically important seems remote. The restrictions on leverage are different and depend on the type of collective investment scheme. 9.115  A Spanish registered hedge fund is subject only to a quantitative limit on indebtedness or cash leverage of five times its NAV. However, Spanish registered hedge funds do not have to compute synthetic leverage such as those arising under derivatives, repos, sell buy backs, and securities lending. Real estate funds may borrow through mortgage loans to acquire their investment in real estate assets up to 50% of their own assets and up to 10% on a transitory basis to resolve temporary financial problems. Other financial collective investment schemes (p. 442) which may become AIFs are subject to strict limits on indebtedness. They can borrow only up to 10% of their assets to resolve temporary financial problems with the prior consent of the CNMV and submitting a report to investors. Such indebtedness is unusual. Financial collective investment schemes can normally enter into derivatives and other financial instruments which cause indebtedness, being broadly speaking subject to the limitations under the UCITS Directive. 9.116  As with closed-ended AIFs, article 79 of the Closed Ended Funds Draft Law will implement Articles 25(1)–(4) and 8 AIFMD, which deal with the duties of the competent supervisory authority (the CNMV). Article 25(7) and (8) of the AIFMD will not be implemented, probably because they explain the role of ESMA in any such decision.

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3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 9.117  Article 23 of the Closed Ended Funds Draft Law partially implements the obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers. 9.118  There is no provision in the Fund Law on this matter because private equity and venture capital funds have traditionally been regulated by the Venture Capital Law. Although it is theoretically possible to create a private equity fund as an IICIL, such fund will probably have to overcome significant hurdles due to its open-ended nature. The current pre-AIFMD regime does not contain any duty or obligation similar to those contained in Articles 26 to 30 of the AIFMD. There is no obligation to notify the acquisition of major holdings and control of non-listed companies, no duties of disclosure of the acquisition of control, no annual reporting duty, and no rules relating to asset stripping. Such obligations will be completely new to the Spanish legal regime and will probably affect the current practice in the merger and acquisitions market on non-listed companies. 9.119  Article 23 of the Closed Ended Funds Draft Law implements only Articles 27(1) and (2) and 28(1) and (2) of the AIFMD. It only partially implements Article 26 (to the extent that it refers to control) and does not implement Article 29 at all (specific provisions regarding the annual report of AIFs exercising control of non-listed companies). Further, it does not implement Article 30 (asset stripping). As the Closed Ended Fund Drafts Law already provides for the contents of Article 23 of the AIFMD to be detailed in further regulations, it is expected that the rest of this AIFMD regime will be detailed in such regulations.

4. Consequences of violating provisions relating to AIFMs managing specific types of AIF A. Regulatory law consequences 9.120  As with many other aspects of the AIFMD, it is expected that the infringement of the AIFMD rules following their implementation will have regulatory implications, principally fines and other administrative sanctions (see paragraphs 9.94, 9.95, and 9.109).

B. Criminal law consequences 9.121  It is not expected that there will be any criminal law consequences for violation of the national implementation provisions on AIFMs managing specific types of AIF.

(p. 443) C. Private law consequences 9.122  The infringement of any limitations on leverage and any other similar product-based limitations usually triggers the civil liability of a management company under Law 35/2003 and the Venture Capital Law. In this regard, the approach of the CNMV and of the Spanish courts is that in such cases the management company will be liable for any potential loss suffered by investors as a consequence of a breach of such limitations. This is very similar to the approach taken by Spanish courts with respect to the liability of a portfolio manager following a breach of express instructions and limitations imposed by a client.26 9.123  As regards civil liability, the implementation of these new AIFMD duties will raise the question whether an AIFM is subject to liability regarding the target company, its shareholders, or its employees. It is submitted that the new rules will not alter the basic principle that an AIFM is liable from a civil law point of view to the shareholders or unitholders of the AIF, who are the only parties to whom it owes duties (see paragraphs 9.97 to 9.100).

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IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIFs in the home Member State of the AIFM)

Not specifically implemented

Art 32 (marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM)

Fund Law, art 15 bis

Art 33 (conditions for managing AIFs established in other Member States)

Fund Law, arts 54 bis, 55 bis

Implementing Regulation

Closed Ended Funds Draft Law, art 81

Closed Ended Funds Draft Law, art 82

Closed Ended Funds Draft Law, arts 86, 87

National implementation

n/a

2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM A. Open-ended AIFs 9.124  Distribution of open-ended (AIF) funds will remain unchanged, since the implementation of Article 31 of the AIFMD in its own terms would have resulted in a more restrictive marketing regime than that pre-AIFMD. 9.125  The Open Ended Funds Draft Law retains the present regime of distribution of IICILs and IICs of IICILS. This means that pure AIFs (IICILs) can only be marketed to MiFID professional investors and to other investors provided that such investors commit to investing EUR (p. 444) 100,000 and declare in writing in a separate document setting out the investment commitments that they are aware of the risks arising from such commitment. If an AIF is marketed to non-professional investors, the prospectus and constitutional documents of the AIF must be delivered before subscription. However, real estate AIFs and IICs of IICILS, as well as any AIFs which do not qualify as IICILs, can also be marketed to retail investors. It is expected that the Open Ended Funds Draft Law will be significantly amended in this regard, probably incorporating a completely new set of rules for marketing AIFs when they do not entail a significant risk for retail investors.

B. Closed-ended AIFs 9.126  The regime for closed-ended AIFs will be as described in Article 31 of the AIFMD. Under article 28 of the Closed Ended Funds Draft Law, the set-up of a closed-ended AIF will only be subject to (i) notification of the incorporation project and certain information, (ii) (for companies only) registering a public deed with the commercial registry, and (iii) registering with the CNMV. 9.127  Article 81 of the Closed Ended Funds Draft Law also contains a definition of marketing and publicity activity to determine when such marketing has occurred.

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3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 9.128  There are no notable differences between the AIFMD passporting regime and the UCITS passporting regime. The passporting regime for AIFs should be no more burdensome than the passporting regime for UCITSs. This is a very substantial change to the current pre-AIFMD regime, where AIFs could not previously be marketed in Spain, since a prior approval from the CNMV was required (and basically never obtained). 9.129  Due to the very stringent regulatory framework for distributing open-ended funds, non- Spanish open-ended EU AIFs can only be sold in Spain by using selling methods that do not amount to marketing. When the marketing regime of Article 32 of the AIFMD is implemented in Spain, the marketing of non-Spanish EU AIFs to professional investors will be permitted without being subject to current restrictions. 9.130  On the other hand, under the pre-AIFMD regime, non-Spanish (EU and non-EU) venture capital vehicles can be marketed in Spain subject to the general regime for the public offering of securities under Law 24/1988 on the Securities Market, since shares and units of venture capital vehicles are qualified in the Venture Capital Law as negotiable securities. This regime implies in practice that non-Spanish venture capital vehicles can be marketed to professional investors without being subject to prior registration or authorization. Further, if the minimum investment is more than EUR 100,000 (which is very common in the venture capital industry), they can be also marketed to retail investors. Therefore, the new AIFMD passporting regime for venture capital vehicles is stricter than the current regime.

4. Article 33—Conditions for managing AIFs established in other Member States 9.131  Article 33 of the AIFMD has been implemented in Spain almost verbatim. The only remarkable point is that AIFMs will have to appoint a Spanish tax representative in order to meet Spanish tax obligations.

(p. 445) 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 9.132  In view of the general principles established in articles 77 to 94 of the Fund Law (as amended by Law 31/2011 implementing the UCITS Directive in Spain), it is likely that the legal regime will be exactly the same as for infringement of the equivalent UCITS provisions and, in this sense, the marketing or management of EU AIFs in violation of the Spanish rules which will implement the AIFMD will be considered a very serious infringement (Fund Law, article 80.(m), (n), (u), and (z)). This could give rise to the imposition of fines of up to five times the net profit obtained from the infringement. When such profit cannot be determined, a fine of up to EUR 300,000 may be imposed. In addition, the AIFM may be temporarily excluded from the registries of the CNMV for between two and five years (with its activities suspended during such term), permanently excluded from the official registries (if the AIFM is a Spanish AIFM), permanently prohibited from carrying out cross-border transactions (if the AIFM is a foreign or EU AIFM), limited in the types of activities that it can carry out in Spain for a term not exceeding five years, and publicly reprimanded or replaced as the depositary. Individuals who are senior managers or directors of the company may also be sanctioned with fines not exceeding EUR 300,000, and suspended from exercising the position of senior manager or director for a term not exceeding three years, and prohibited from exercising management or director positions in the entity for

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five years or in any other financial entity of a similar character for a term not exceeding 10 years. 9.133  The Closed Ended Funds Draft Law does not currently provide for specific infringement of this rule.

B. Criminal law consequences 9.134  Infractions of the rules contained in Chapter VI of the AIFMD should not lead to any criminal liability per se. However, in combination with additional circumstances, such as an intention to deceive investors, criminal liability consequences may arise.

C. Private law consequences 9.135  Private law consequences will be the same as described in paragraphs 9.122 and 9.123. However, it should be noted that most consequences for breach of the conditions are linked to lack of consent. Therefore, civil liability will depend on whether the investor was capable of understanding the product and not whether the AIFM or distributor complied with the administrative procedures. Furthermore, courts will normally apply a stringent test with respect to professional investors.

X. Specific Rules in Relation to Third Countries 1. Implementation table AIFMD

National implementation

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

Fund Law, art 56 bis

Art 35 (conditions for marketing in EU with passport of non-EU AIFs managed by an EU AIFM)

Fund Law, art 15 ter

Closed Ended Funds Draft Law, art 88

Closed Ended Funds Draft Law, art 83

Art 36 (conditions for the marketing in EU without a passport of non-EU AIFs managed by an EU AIFM)

Not implemented

Art 37 (authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Art 38 (EU AIF) or 39 (non-EU AIF))

Not implemented

Art 38 (peer review of authorization and supervision of non-EU AIFMs)

Not implemented

Art 39 (conditions for the marketing in the EU with a passport of EU AIFs managed by a non-EU AIFM)

Fund Law, art 15 ter

Art 40 (conditions for the marketing in the EU with a passport of non-EU AIFs managed by a non-EU AIFM)

Fund Law, art 15 ter

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by a non-EU AIFM)

Closed Ended Funds Draft Law, art 83

Closed Ended Funds Draft Law, art 83

Not implemented

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AIFMD

National implementation

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM)

Not implemented

Implementing Regulation

National implementation

Arts 114–116 (re Arts 34(1), 35(2), 36(1), 37(7)(D), 39(2)(A), 40(2)(a), 42(1) AIFMD)

Not implemented

(p. 446) 2. Article 34—Conditions for EU AIFMs which manage nonEU AIFs not marketed in EU 9.136  Under the pre-AIFMD regime, the management of non-EU AIFs will qualify as crossborder services which, under article 54.6 of the Fund Law and article 122 of the Fund Regulations, require prior authorization of the CNMV. Such authorization may be denied, for example if there are reasons to doubt the administrative organization or the financial soundness of the AIFM. 9.137  Article 56 bis of the Fund Law and article 88 of the Venture Capital Law implement Article 34 of the AIFMD verbatim.

3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 9.138  The current pre-AIFMD legal regime for marketing and distributing AIFs does not distinguish between EU and non-EU AIFs or EU and non-EU AIFMs. However, there is a distinction between them in (i) the regulatory procedure to get approval, (ii) the condition for approval of the marketing of an AIF in Spain taking into account the laws and regulations governing the AIF and the AIFM, and (iii) the existence of effective supervision by a home country regulatory authority. In fact, no marketing of a non-EU AIF has ever been approved by the CNMV. 9.139  Article 15 ter of the Fund Law and article 83 of the Closed Ended Funds Draft Law set out a regime which is an adaptation of the stringent pre-AIFMD regime to some of the requirements of the AIFMD. These articles require the CNMV’s previous authorization of (p. 447) the non-EU AIF. For this purpose, the CNMV will need to verify that Spanish legislation provides for the same category of funds as that intended to be marketed in Spain, and that the home legislation of the non-EU fund has the same or equivalent rules on investor protection. Furthermore, a favourable report from the home State regulator must be provided. Finally, the regime requires the registration with the CNMV of certain information, including the prospectus, marketing memorandum, and list of measures implemented to impede marketing to retail investors. Authorization may be rejected for prudential reasons, or where Spanish AIFs do not receive equivalent treatment in the home country of the non-EU fund, where the rules of Spanish securities markets or for the protection of Spanish investors have not been complied with, or where competition with Spanish AIFs will be disrupted. In practice, this is a strict regime that will render it difficult for a non-EU AIF to be marketed in Spain. 9.140  The Open Ended Funds Draft Law and the Closed Ended Funds Draft Law do not include the possibility provided for in Article 36 of the AIFMD of marketing in Spain without a passport of non-EU AIFs managed by an EU AIFM. 9.141  However, both Funds Draft Laws provide for the possibility of marketing non-EU AIFs managed by an EU AIFM to retail clients, subject to compliance with the very

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stringent regime for the marketing of non-EU AIFs in Spain, and, with respect to openended AIFs, the registration of a KIID with the CNMV. 9.142  Infringement of the AIFMD rules will have regulatory implications in the form of fines or other administrative sanctions as is the case in the pre-AIFMD legal regime. No private law or criminal law implications are expected.

4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 9.143  Neither the Open Ended Funds Draft Law nor the Closed Ended Funds Draft Law provides for a non-EU AIFM to manage a Spanish AIF on a cross-border basis or through a branch. However, article 56 of the Fund Law provides that a non-EU asset manager may manage a Spanish UCITS through a branch in Spain. 9.144  The regime under the Fund Law and the Closed Ended Funds Draft Law is the same as in paragraphs 9.138 to 9.141 for the marketing in the EU with a passport of a non-EU AIF managed by a non-EU AIFM. 9.145  Likewise, the Fund Law and the Closed Ended Funds Draft Law permit the marketing of AIFs or non-EU AIFs managed by a non-EU AIFM to retail clients provided that (i) the regime provided for in paragraph 9.144 is complied with, (ii) the minimum investment will be EUR 100,000 and (iii) the retail client declares in writing that he/she is aware of the risks linked to the relevant AIF.

5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 9.146  Under Spanish Law, no national private placement regime exists for open-ended funds. The only permitted selling activities with respect to open-ended funds are those that do not constitute marketing under national law. Marketing of closed-ended funds is subject to the Prospectus Directive private placement regime. (p. 448) 9.147  The Fund Law and the Closed Ended Funds Draft Law do not provide for the marketing in Spain without a passport of AIFs managed by an EU AIFM, as set out in Article 42 of the AIFMD.

6. Consequences of violating specific rules in relation to third countries A. Regulatory law consequences 9.148  Violation of the national implementation provisions pursuant to Chapter VII of the AIFMD will be considered to be very serious infringements of article 80 of the Fund Law and, therefore, subject to administrative penalties which may vary from fines to revocation of the authorization to act as a managing company. Directors of the managing company may be also fined or prohibited temporarily or permanently from acting as director of the entity or any financial entity.

B. Criminal law consequences 9.149  There are no criminal law consequences under Spanish criminal law.

C. Private law consequences 9.150  Infringement of the specific rules in relation to third countries will not normally entail civil implications per se. However, in the case of wilful misconduct or gross negligence by the AIFM, investors may be entitled to claim damages (see paragraphs 9.122 and 9.123).

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XI. Marketing to Retail Investors 1. Implementation table AIFMD

National implementation

Art 43 (marketing of AIFs to retail investors)

Closed Ended Funds Draft Law, art 81

Implementing Regulation

National implementation

n/a

2. Article 43—Marketing of AIFs by AIFMs to retail investors 9.151  As discussed in paragraphs 9.124 to 9.127 in relation to Articles 31 and 32 of the AIFMD, the current Spanish regime allows marketing of some types of AIFs to retail investors. As such Spain will probably elect to implement Article 43 of the AIFMD in order to maintain the current regime.

3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 9.152  The Fund Law was recently amended by Law 31/2011 in this regard. In accordance with article 80.u of the Fund Law, the legal regime (and the Open Ended Funds Draft Law does not amend the Fund Law in this respect) will be exactly the same as for infringement of UCITS provisions and, in this sense, the marketing or management of EU AIFs to retail investors in violation of the Spanish rules which will implement the AIFMD will be (p. 449) considered a very serious infringement, leading to: (i) the imposition of fines of up to five times the net profit obtained from the infringement; (ii) when such profit cannot be determined, a fine of up to EUR 300,000; (iii) temporary exclusion from the registries of the CNMV for between two and five years (with activities suspended during such term); (iv) permanent exclusion from the official registries (for Spanish AIFMs); (v) permanent prohibition on carrying out cross-border activities (for foreign or EU AIFMs); (vi) limitation of the types of activities that can be carried out in Spain for a term not exceeding five years; (vii) public reprimand or replacement of the depositary. In addition, senior managers or directors of the company may also be sanctioned with (i) fines not exceeding EUR 300,000, (ii) suspension in the exercise of their position as senior manager or director for a term not exceeding three years, and (iii) cessation of their position as senior manager or director in the entity for five years or in any other financial entity of a similar character for a term not exceeding 10 years. 9.153  Under the Closed Ended Funds Draft Law, marketing to non-permitted investors is considered to be a very serious infringement. Penalties are imposition of a fine between EUR 150,000 and 300,000, a fine of up to double the tax benefits, or revocation of licence. 9.154  Infraction of any of the requirements of Article 43 of the AIFMD will not, per se, give rise to any criminal consequences. It would be necessary to combine such infringement with other actions in order to generate criminal liability. 9.155  Retail investors prejudiced by the failure of managing companies to comply with Article 43 of the AIFMD are entitled to recover damages under general principles of article 1101 of the Civil Code (see paragraphs 9.59 and 9.97 to 9.100).

XII. Competent Authorities and Supervisory Powers

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1. Implementation table AIFMD Art 44

National implementation Securities Market Law, arts 84, 85 Closed Ended Funds Draft Law, arts 69 et seq.

Art 45

Securities Market Law, arts 84, 85 Closed Ended Funds Draft Law, arts 69 et seq.

Art 46

Securities Market Law, arts 84, 85 Closed Ended Funds Draft Law, arts 69 et seq.

Art 48

Fund Law, arts 77 et seq. Closed Ended Funds Draft Law, arts 73 et seq.

Art 50

Securities Market Law, arts 91 et seq.

Art 51

Securities Market Law, arts 91 et seq.

Art 52

Securities Market Law, arts 91 et seq.

Art 53

Securities Market Law, arts 91 et seq.

Art 54

Securities Market Law, arts 91 et seq.

Art 55

Regulation (EU) No 1095/2010

(p. 450) 2. Designation, responsibility, and powers of competent authorities 9.156  The regulatory framework and supervisory powers of local supervisory authorities and ESMA, the cooperation between competent authorities in different Member States, the transfer of personal data, the disclosure of information to third countries, and the exchange of information and dispute-settlement with respect to AIMFs is provided for in the Fund Law and the Securities Market Law. In the Venture Capital Law, the idea was not as developed as in the Fund Law, but the Closed Ended Funds Draft Law includes a very similar regulation in this respect. The implementation of the AIFMD will not therefore result in any major change in the regulatory framework already existing under the Securities Market Law. 9.157  The competent authority in Spain to regulate AIFMs will be the CNMV, which is already the regulatory and supervisory authority for management companies of collective investment schemes and venture capital fund managers. In some cases, the Ministry of Economy, which in turn delegates its power to the Spanish Treasury and Financial Policy Directorate, must decide on a specific matter or confirm decisions of the CNMV. Decisions of the CNMV can generally be appealed to Spanish courts, in particular, at first instance, before the Spanish National Court (Audiencia Nacional) and subsequently before the Supreme Court or the Constitutional Court.

3. Other issues

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9.158  Obligations to cooperate with other national regulators and ESMA are included in the Securities Market Law and match the requirements of the AIFMD; as such, no modification of this law is deemed necessary. Provisions in relation to closed-ended managers have been specifically implemented by the Venture Capital Draft Law. 9.159  The right of appeal is not specifically provided for, but general provisions of Spanish administrative procedural law provide for a general right of appeal before upper administrative bodies, and, at last instance, judicial challenge of decisions of the CNMV.

XIII. Concluding Remarks 9.160  Since the AIFMD is still in the process of being implemented in Spain, it is difficult to come to definitive conclusions on the effects such implementation will have on the Spanish alternative investment and venture capital market. Nevertheless, thus far, the rules applicable to alternative and real estate vehicles closely follow those applying to UCITSs, although with their own specification regarding the type of investments that the companies and funds involved can carry out. For that reason, the effects on the management company of collective investment schemes will not be significant, with the exception that AIFs will be freely tradable within the EU, meaning that present restrictions for the distribution of EU AIFs will be removed and Spanish AIFs may also be marketed as provided for in the AIFMD. The preliminary draft law confirms this impression. 9.161  However, with respect to venture capital, which thus far has been subject to a very flexible regime, the implementation of the AIFMD will have very significant repercussions regarding, particularly, the transparency and conduct of business obligations, as well as the restructuring of internal control of AIFMs. It will entail some restrictions on the distribution of closed-ended venture capital companies established in other EU countries, since, until now, it has been relatively easy to distribute such companies among institutional or professional investors.

Footnotes: 1

  Spanish Securities Exchange Commission or Comisión Nacional del Mercado de Valores.

2

  Association of Spanish Investment and Pension Funds.

3

  European and Fund Management Association.

4 

At the same time, this did not have any major impact because, thus far, very few Spanish funds market their units or shares on a cross-border basis using the UCITS passport, mostly due to local tax constraints, but also to the size of the vehicles and the competition of other established fund product jurisdictions (such as Luxembourg). Some Spanish fund managers are currently establishing products in those jurisdictions. 5

  Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions regarding the undertaking for collective investment in transferable securities (OJ 2009 L302/32). 6  7

As of 31 March 2013.

  Compared to 151,755 million for UCITSs.

8

  Asociación Española de Entidades de Capital Riesgo (the Spanish Venture Capital Firms Association). 9

  As of June 2013, there are more than 70 Spanish AIFMs registered on the CNMV register.

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10

  Under Spanish law, administration tasks should be carried out by the asset management company. Nevertheless, purely administrative tasks can be delegated to third parties which need not be licensed entities for this purpose. 11

  Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (OJ 2010 L176/42). 12

  A complete study of the venture capital legal regime prior to the AIFMD can be found in J.L. Iglesias and E. Díaz Ruiz (eds), Comentarios a la Ley 25/2005, de 24 de noviembre, reguladora de las entidades de capital-riesgo y sus sociedades gestoras, (Thomson, 2006) aa.vv. 13

  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003, on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC ( OJ 2003 L345/64). 14

  It should be noted that, after UCITS IV, there is the possibility of structuring the socalled ‘newcits’ or hedge funds in form of UCITSs; see J.I. González and M.D. Malpica, ‘Hedge Funds bajo formato UCITS en el marco de UCITS IVs’, Revista de Derecho del Mercado de Valores, No 8, 211 et seq. 15

  It has been difficult to select a terminology to define each of the draft Laws, since both regulate funds, and the Open Ended Funds Draft Law covers AIFM closed-ended funds as well as open-ended funds. 16

  Otras Sociedades de Inversión or other investment companies.

17

  Collective investment schemes of collective investment schemes of free investments, which are hedge funds that invest in other hedge funds. 18

  See judgment of the National Court of 3 April 2006, appeal 61/2005.

19

  See Belén Rico Arévalo, ‘La aplicación de la MiFID a las sociedades gestoras de instituciones de inversión colectiva’, Revista de Derecho del Mercado de Valores, No 2, 303 et seq. 20

  Excessive use, in the opinion of some scholars: see A.J. Tapia Hermida, ‘Crisis, regulación y supervisión de los mercados financieros’, Revista de Derecho de Mercado de Valores, No 5, 69. 21

  See Emilio Díaz Ruiz, in J.L. Iglesias Prada and Emilio Díaz Ruiz (eds), Comentarios a la Ley 25/2005 de 24 de noviembre, reguladora de las entidades de capital-riesgo y sus sociedades gestoras (2006), 270 et seq. and 351 et seq. 22

  See judgments of the National Court of 15 December 2006 (appeal 502/2004); 3 April 2006 (appeal 61/2005); 2 November 2006 (appeal 46/2004); and 21 January 2006 (appeal 507/2004). 23

  See judgments of the National Court of 15 December 2006 (appeal 502/04); 2 November 2006 (appeal 46/2004); and 21 January 2006 (appeal 507/2004). 24

  See, inter alia, Provincial Court of Madrid, Section 14, judgment of 25 February 2011 (appeal 353/2010); Provincial Court of Madrid, Section 25, judgment of 7 May 2009 (appeal 541/2008); Provincial Court of Madrid, Section 20, judgment of 27 November 2009 (appeal 684/2008); Supreme Court, First Chamber, decision (‘auto’) of 24 February 2009 (appeal 2155/2006).

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25

  The Criminal Code imposes fines not of financial amounts but of time periods, in the sense that, depending of the economic situation of the infractor, the day value of the time fine will be higher or lower. 26

  See Salvador Ruiz Bachs and Emilio Díaz Ruiz, in D. Busch and D.A. DeMott (eds), Liability of Asset Managers (Oxford University Press, 2012) 285, 286 for a full explanation of the consequences for an asset manager for breaching the customer’s instructions.

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10 Sweden Dan Hanqvist From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

Subject(s): Supervision — Alternative Investment Fund Managers Directive (AIFMD) — Alternative investment fund — Undertakings for Collective Investment (UCIs) — Hedge fund — Advertising and marketing and funds

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(p. 451) 10  Sweden* I. Introduction 10.01 1. Nature of the national non-retail investment industry 10.01 2. Legal structures used to form national AIFs 10.03 II. Pre-AIFMD Regulatory Framework 10.09 1. Regulation of AIFMs and national AIFs prior to the AIFMD 10.09 2. Regulation of national marketing of AIFs prior to the AIFMD 10.10 III. Regulation of National AIFs after the AIFMD 10.12 IV. General Provisions of the AIFMD and the Implementing Regulation 10.16 1. Implementation table 10.16 2. Articles 2 and 3—Scope and exemptions 10.16 3. Article 5—Determination of the AIFM 10.19 V. Authorization of AIFMs 10.22 1. Implementation table 10.22 2. Articles 6 to 8—Conditions and application for authorization 10.22 3. Article 9—Initial capital and own funds 10.27 4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 10.30 5. Consequences of violating authorization provisions 10.31 VI. Operating Conditions for AIFMs 10.35 1. Implementation table 10.35 2. Section 1 (Articles 12 to 17)—General requirements 10.35 3. Section 2 (Articles 18 and 19)—Organizational Requirements 10.46 4. Section 3 (Article 20)—Delegation of AIFM functions 10.49 5. Section 4 (Article 21)—Depositary 10.50 6. Consequences of violating operating conditions 10.52 VII. Transparency Requirements 10.57 1. Implementation table 10.57 2. Article 22—Financial reporting 10.57 3. Article 23—Disclosure to investors 10.58 4. Article 24—Regulatory reporting 10.60 5. Consequences of violating transparency requirements 10.61

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VIII. AIFM Managing Specific Types of AIF 10.66 1. Implementation table 10.66 2. Section 1 (Article 25)—AIFM managing leveraged AIF 10.66 3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing (p. 452) AIFs which acquire control of non-listed companies and issuers 10.68 4. Consequences of violating provisions relating to AIFMs managing specific types of AIF 10.69 IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 10.74 1. Implementation table 10.74 2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 10.74 3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 10.77 4. Article 33—Conditions for managing AIFs established in other Member States 10.79 5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU 10.82 X. Specific Rules in Relation to Third Countries 10.86 1. Implementation table 10.86 2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 10.86 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 10.87 4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 10.90 5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 10.94 6. Consequences of violating specific rules in relation to third countries 10.97 XI. Marketing to Retail Investors 10.101 1. Implementation table 10.101 2. Article 43—Marketing of AIFs by AIFMs to retail investors 10.101 3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 10.102 XII. Competent Authorities and Supervisory Powers 10.103 1. Implementation table 10.103 2. Designation, responsibility, and powers of competent authorities 10.103 3. Other issues 10.104

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XIII. Concluding Remarks 10.110

I. Introduction 1. Nature of the national non-retail investment industry 10.01  Broadly speaking, the Swedish funds market may be divided into four categories: (1) UCITS funds; (2) hedge funds, that is, funds investing in financial assets in a manner different from UCITS funds; (3) real estate funds; and (4) private equity funds, a category that may be further divided into one segment for mature companies and one venture capital segment for other types of companies. An emerging category (5) is various debt-fund structures. ‘Hedge fund’ is not a well-defined term in the Swedish market but it is often used in a loose sense as designating any open-ended fund structure that invests in financial assets on terms other than those that apply to UCITSs. A further category (6) would be the National Pension funds (AP-fonderna), usually referred to, in English terms, as ‘AP Funds’1 (Nos 1, 2, 3, 4, 6 and 7—there is no 5), which are agencies of the central administration of the Kingdom of (p. 453) Sweden charged with the management of certain assets to balance deficits in the public pensions system. AP Fund No 7 acts as manager of ‘synthetic’ UCITS funds and AP Fund No 6 is a significant investor in private equity funds and as such may be impacted by the AIFMD to the extent that the Directive affects the private equity market. 10.02  Various Swedish institutions—such as insurance companies and private and public pension providers—invest widely in all four types of funds and in foreign AIFs.

2. Legal structures used to form national AIFs 10.03  Broadly speaking, Swedish AIFs may be divided into (a) ‘special funds’ (specialfonder) and (b) all others. Special funds are open-ended (with the possibility of introducing some restrictions as to categories of investors and minimum investment amounts) contractual funds set up under a specific statutory regime (common to both special funds and Swedish UCITSs) and already regulated prior to the AIFMD. Swedish hedge funds invariably take the form of special funds; indeed, in market parlance ‘hedge fund’ is often taken as simply another term for special funds. Other AIFs—such as real estate funds—are usually set up as public or private limited liability companies (aktiebolag). AIFs are also occasionally set up as partnerships (handelsbolag) or limited partnerships (kommanditbolag). 10.04  The specific regulation of ‘investment funds’ has been limited to the Investment Funds Act 2004 (as amended) (lag (2004:46) om investeringsfonder), which has regulated both special funds and UCITS funds. Upon the implementation of the AIFMD, the Investment Funds Act 2004 was renamed the ‘Mutual Funds Act’ (lag om värdepappersfonder) (‘MFA’) because the sections dealing with special funds were removed from that Act and reinserted, virtually unchanged, into the Alternative Investment Funds Managers Act 2013 (lag (2013:561) om förvaltare av alternativa investeringsfonder) (the ‘AIFMA’),2 which regulates all AIFs. 10.05  Special funds consist of financial assets co-owned by the unit-holders and cannot sue or be sued, enter bankruptcy, or acquire rights or contract obligations (AIFMA, Chapter 12, section 1). An investment fund must accordingly be represented by a fund manager in every aspect of its organization (AIFMA, Chapter 12, section 2). Permission to manage the fund is given to a management company (AIFMA, Chapter 3, section 1). The manager—which is invariably a limited liability company (AIFMA, Chapter 3, section 3, second paragraph) is subject to general insolvency laws on its own behalf but the fund’s assets will not be available to the fund’s creditors. In the event that the fund company becomes insolvent, its authorization and appointment as fund manager of the fund will lapse automatically (AIFMA, Chapter 12, section 18, read with reference to MFA, Chapter 9, section 1). A new fund company will be appointed by the Swedish Financial Supervisory Authority (SFSA) From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(AIFMA, Chapter 12, section 18, read with reference to MFA, Chapter 9, section 2), with the custodian acting as manager in the interim (AIFMA, Chapter 12, section 18, read with reference to MFA, Chapter 9, section 1, second paragraph). The manager is prohibited from exercising (p. 454) any control over property comprising the fund, or, in respect of the fund, taking or granting loans, standing surety, or selling securities which are not at the disposal of the fund company in respect of the fund (AIFMA, Chapter 12, section 18, read with reference to MFA, Chapter 5, section 23). 10.06  Special funds are subject to investment restrictions essentially along the lines of Swedish UCITSs; however, special funds may obtain—and invariably have obtained— exemptions from the UCITS rules by special dispensation of the SFSA, for instance as to the instruments in which they may invest, concentrations limits, the type of investors allowed, and the conditions of redemption of units (AIFMA, Chapter 12, section 13, second paragraph, read with reference to MFA, Chapter 5). 10.07  AIFs organized as limited liability companies have all the governance structures required for limited liability companies, such as a board of directors and, if appropriate, a CEO (verkställande direktör). The relationship between the Swedish AIFM Regulations and general corporate law has not been analysed in any detail in the run-up to Swedish implementation of the AIFMD. This means that there may well be issues of conflict and other glitches that will have to be resolved in future. 10.08  Special funds and limited liability companies are taxed.

II. Pre-AIFMD Regulatory Framework 1. Regulation of AIFMs and national AIFs prior to the AIFMD 10.09  Pre-AIFMD only special funds were specifically regulated and subject to the jurisdiction of the SFSA under the Investment Funds Act 2004. Limited liability company AIFs were subject only to the general law, such as the law on prospectuses. Promoters of such AIFs were specifically regulated only to the extent that their involvement with AIFs was tantamount to investment business under the terms of MiFID.

2. Regulation of national marketing of AIFs prior to the AIFMD 10.10  The marketing of closed-ended AIFs pre-AIFMD was largely unregulated, subject only to the general prospectus rules or, if exempted, the general law on fair marketing practices. Mere promotion was not regulated. 10.11  Open-ended funds marketing required authorization from the SFSA, without any private placement or other exemptions being available. Controversially, these requirements apply already for mere promotion. This was a major change introduced gratuitously together with the implementation of the UCITS Directive.3 The change in respect of promotion was hotly contested and severely criticized by the industry and, for instance, the Swedish Bar Association. The rules make no distinction between promotion to various categories of investors. The same controversy broke out in connection with the implementation of the AIFMD, as the government chose to extend the authorization requirements—and therefore also the passporting requirements—beyond the mere offering or placing of AIFs in Sweden to include promotion of AIFs.

(p. 455) III. Regulation of National AIFs after the AIFMD 10.12  Swedish implementation of the AIFMD has produced the first comprehensive fund regulation framework in Sweden. The central piece of legislation is the AIFMA. The preAIFMD regulation and structures for special funds will be retained, with some liberalizing reform in respect of special funds offered to professional investors. Technically, there is a new Alternative Investment Funds Managers Act, which (a) incorporates the current regulation of special funds (the Investment Funds Act 2004 has been amended by the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

removal of all references to special funds) and (b) provides the basic regulatory structure for the management of all other types of AIFs. 10.13  In implementing the AIFMD, the same requirements for authorization for the promotion of AIFs that was so controversial in the context of the UCITS Directive will be extended to the whole funds regime. 10.14  A radical novelty in the AIFMA is the distinction made between professional and non-professional investors. Historically, this distinction has not been made in Swedish funds regulations. The AIFMA closes the non-professional investor regime to all AIFs except special funds and AIFs admitted to trading on a regulated market (or an equivalent non-EU market). 10.15  The SFSA’s Alternative Investment Funds Managers Regulations (Finansinspektionens föreskrifter (2003:10) om förvaltare av alternative investeringsfonder) (the ‘Swedish AIFM Regulations’) closely shadow the corresponding regulations for UCITSs.

IV. General Provisions of the AIFMD and the Implementing Regulation 1. Implementation table AIFMD

National implementation

Art 1 (subject matter)

AIFMA, Ch 1, s 1

Art 2 (scope)

AIFMA, Ch 1, ss 12, 13, second para

Art 3 (exemptions)

AIFMA, Ch 1, s 13, first para; Ch 2, ss 3–5; Ch 3, s 1

Art 4 (definitions)

AIFMA, Ch 1, ss 2–11

Art 5 (determination of AIFMs)

AIFMA, Ch 1, s 2, fourth para; Ch 1, s 3; Ch 3, s 10; Ch 15, s 1

Implementating Regulation

National implementation

Arts 3–7 (re Art 3(2) AIFMD: calculation of AUM)

None

Arts 8–13 (re Art 4(3) AIFMD: calculation of leverage)

None

2. Articles 2 and 3—Scope and exemptions 10.16  For special funds the implementation of the AIFMD will have limited impact as they have been subject to regulation (in some respects more heavy regulation) prior to the AIFMD implementation. For the rest of the Swedish AIF industry the changes will be of a more far reaching nature—at least in theory. (p. 456) 10.17  The vast majority of private equity funds managed by Swedish private equity houses have been foreign. Swedish private equity structures are expected to be exempted from the authorization requirements due to their limited size. However, subject to suitable tax treatment, the Swedish private equity industry may well set up their future structures on shore, which would produce a significant inflow of AIFs, the management of which would be regulated by Swedish law.

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10.18  It is expected that the greatest impact of AIFMD implementation will be on the real estate fund regime.

3. Article 5—Determination of the AIFM 10.19  Special funds are always necessarily externally managed. A fund company authorized as such in respect of special funds will necessarily engage in both activities specified in Annex I of the Directive, under 1(a) and 1(b). Outsourcing is permitted but restricted to non-core activities and is subject to close SFSA scrutiny. 10.20  The requirements of Article 20(1)(f) of the AIFMD (the AIFM ‘must be able to demonstrate that the delegate is qualified and capable of undertaking the functions’ and that the AIFM ‘is in a position to monitor effectively at any time the delegated activity’) correspond to the standard to which the SFSA holds all regulated entities in terms of outsourcing. The standard is usually satisfied by filing the outsourcing agreement with the SFSA and by describing the outsourcing and internal measures taken to comply with the organization plan, which all regulated entities are required to maintain and keep up to date. This is usually an important and relatively time-consuming talking point at the SFSA. 10.21  It is expected that the SFSA is likely to operate its discretion under Article 5(2) and (3) in the case of failure of an AIFM to ensure that the AIF complies with the requirements of the AIFMD in a manner consistent with its behaviour in respect of other transgressions of regulatory law. The SFSA usually begins with informal contacts and then escalates the sanctions and remedial requirements in the face of the reaction of the regulated entity (cf Chapter 14 of the AIFMA). However, recent sanctions indicate that the SFSA may escalate sanctions rapidly and may proceed without accepting any mitigating effect of self-reporting or voluntary remedial action.

V. Authorization of AIFMs 1. Implementation table AIFMD

National implementation

Art 6 (conditions for taking up activities as AIFM)

AIFMA, Ch 3, s 1,

Art 7 (application for authorization)

AIFMA, Ch 3, ss 1, 5

Art 8 (conditions for granting authorization)

AIFMA, Ch 3, ss 3–9

Art 9 (initial capital and own funds)

AIFMA, Ch 7, ss 1–6

Art 10 (changes in scope of authorization)

AIFMA, Ch 3, s 10

Art 11(withdrawal of authorization)

AIFMA, Ch 15, ss 1, 4

Implementing Regulation

National implementation

Arts 14–17 (re Art 9(7) AIFMD: own funds and insurance)

None

(p. 457) 2. Articles 6 to 8—Conditions and application for authorization 10.22  The Swedish AIFM Regulations follow closely those of UCITS managers and other regulated entities.

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10.23  In respect of special funds, there will be no choice but to have external management. For other AIFs in the form of limited liability companies, again there will be no choice but to have internal management. Partnerships and limited partnerships have more freedom, but it is not expected that the management of Swedish partnerships and limited partnerships will be other than by the partners themselves (for partnerships) and the general partner (komplementär) (for limited partnerships). Swedish implementation is clearly coloured by the previous regulation of special funds which always have an external manager. It may therefore be challenging for the SFSA to adapt its current practices to a situation where there will of necessity be internally managed AIFs. 10.24  AIFMs that have previously combined the management of UCITS and special funds —which is very common—are expected to continue to do so. However, it is also expected that managers of types of AIFs other than special funds will not combine the management of UCITSs with the management of AIFs. 10.25  The procedures and the exercise of regulatory discretions under Articles 7 and 8 of the AIFMD are expected to conform closely to the corresponding procedures and discretions under the sister provisions in Articles 7 and 8 of the UCITS Directive. 10.26  Some managers of special funds may continue to combine that business with individual portfolio management business under MiFID. However, managers of other types of AIFs are not expected to do so.

3. Article 9—Initial capital and own funds 10.27  For managers of special funds, the implementation of AIFMD does not impose any new requirements. However, for managers of other AIFs, the capital and liquidity requirements all constitute new requirements, and it is widely thought that some managers may struggle to meet these requirements. 10.28  The option in Article 9(6) of the AIFMD Directive has been selected by Sweden and implemented as Chapter 7, section 4, third paragraph of the AIFMA. 10.29  It is not likely that the provisions of Article 9 in general, and Article 9(7) in particular, will affect the private law liability of AIFMs. However, this area of the law is developing and new case law may emerge.

4. Articles 10 and 11—Changes in the scope of the authorization and withdrawal 10.30  The ‘change in scope’ and ‘withdrawal’ provisions of the AIFMD are expected to operate in a manner similar to the sister provision of the UCITS Directive (Article 7) and MiFID (Articles 6 and 8).

5. Consequences of violating authorization provisions A. Regulatory law consequences 10.31  The SFSA may order anyone who, without requisite authorization, engages in an activity requiring authorization to cease and desist, backed up, if appropriate, with conditional fines payable upon non-compliance with SFSA orders (AIFMA, Chapter 14).

(p. 458) B. Criminal law consequences 10.32  No criminal law consequences have been foreseen specifically for breaches of the AIFMA, except where a prosecutor has made enquiries with an AIFM under obligations of confidentiality and the confidentiality has been compromised deliberately or by gross

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negligence, in which case punishment is limited to monetary fines (AIFMA, Chapter 8, section 27). This is in line with Swedish regulatory law generally.

C. Private law consequences 10.33  Except as provided in contract, violations of the authorization provisions are unlikely to have any private law consequences. It is trite law that violations of public law requirements (such as the AIFM authorization requirements) would not have a negative impact on the validity or enforceability of, for instance, subscription agreements entered into in breach of those requirements. 10.34  The law of damages in respect of breaches of regulatory requirements is developing in Sweden. It is clear (and there is case law and authoritative writing to that effect) that breaches of regulatory requirements will be taken into account by the courts in assessing whether an AIFM has acted in an appropriate manner as a matter of contract, both in deciding whether rescission of a contract is justified and in assessing damages.4 It is less clear to what extent there will also be tortious liability. In the context of previous implementations of capital adequacy rules for the financial sector there has been discussion on whether the capital adequacy rules could give rise to liability in damages. This is a private law matter and the Swedish Constitution prohibits delegation of private law matters from Parliament. This argument would invalidate private law claims based on any norm issued by the SFSA, or indeed the EU (as the Swedish Constitution regards the EU’s authority as having been delegated by the Swedish Parliament), under delegation. This matter has not, however, been finally resolved. If an analogy is permitted between the capital adequacy rules and Chapter III of the AIFMD, the same considerations would be relevant for the discussion of private law liability for breaches of the obligations set out in the AIFMD.

VI. Operating Conditions for AIFMs 1. Implementation table AIFMD Art 12 (general principles)

National implementation AIFMA, Ch 8, ss 1, 20, 24 Investor Protection Act, s 3

Art 13 (remuneration)

AIFMA, Ch 8, s 23

Art 14 (conflicts of interest)

AIFMA, Ch 8, ss 20–22

Art 15 (risk management)

AIFMA, Ch 8, ss 4, 5

Art 16 (liquidity management)

AIFMA, Ch 8, s 3

Art 17 (investment in securitization positions)

No national transposition.

Art 18 (general principles)

AIFMA, Ch 8, s 2

Art 19 (valuation)

AIFMA, Ch 8, ss 7, 8, 10, 12, 14; Ch 14, s 7

Art 20 (delegation)

AIFMA, Ch 8, ss 15–18

Art 21 (depositary)

AIFMA, Ch 9, ss 1–21, 23; Ch 14, s 14

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AIFMD

National implementation

Implementing Regulation

National implementation

Arts 18–30 (re Art 12(1) AIFMD: general principles)

None

Arts 31–38 (re Art 14 AIFMD: conflicts of interest)

None

Arts 39–46 (re Art 15 AIFMD: risk management)

None

Arts 47–50 (re Art 16 AIFMD: liquidity management)

None

Arts 51–56 (re Art 17 AIFMD: investment in securitization positions)

None

Arts 57–67 (re Art 18 AIFMD: organizational requirements— general principles)

None

Arts 68–75 (re Art 19 AIFMD: valuation)

None

Arts 76–83 (re Art 20 AIFMD: delegation of AIFM functions)

None

Arts 84–103 (re Art 21 AIFMD: depositary)

None

(p. 459) 2. Section 1 (Articles 12 to 17)—General requirements A. Article 12—General principles 10.35  In general, the implemented standards set out as general principles in Article 12 of the AIFMD and Articles 18–30 of the Implementing Regulation would operate in a manner similar to the sister provisions in the UCITS Directive (Article 14 and Implementing Directive5) and MiFID (Articles 13(3), (4), 19(1) and Implementing Directive). ESMA advice will be treated as non-binding ‘general advice’ (which the SFSA may also issue). In practice, there is little to distinguish SFSA ‘advice’ from its ‘regulations’. 10.36  The Swedish version of Article 12(1)(f) of the AIFMD speaks of treating all investors ‘fairly’. This language is reflected in Chapter 8, section 1 of the AIFMA. This is in line with the requirements that apply to other regulated entities. In practice, this has not—under current UCITS rules, for instance—been taken to preclude differential treatment of investors, for instance in terms of management fee and redemption fee rebates for large investors. Such practices are common. Although it is arguable that this contravenes a largely unwritten principle against preferential treatment (along the lines of Swedish company law) there are no reported cases where a fund manager has been sanctioned by the SFSA or the courts for breaching such a principle. 10.37  In Chapter 8, section 1 of the AIFMA, Articles 12 (1)(c)–(e) and 12(1)(a), (b), and (f) of the AIFMD have been collapsed into two principles: (1) an obligation to act honestly, fairly, (p. 460) professionally, and in a manner that benefits the AIF and its investors and maintains the general public’s confidence in the market; and (2) an obligation to have access to and effectively utilize resources and routines that are necessary for the AIFM’s business to operate well. It appears that these two principles are separate in the sense that neither is part of the other. Principle (2) may be seen as stipulating means for observing principle (1), but without being exhaustive or limiting. It is entirely possible for an AIFM to comply with principle (2) while still running foul of principle (1).

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10.38  Chapter 8, section 1 of the AIFMA, if read literally, imposes an obligation of efficiency. This may be the effect of an imperfect rendering of what in the English version of the AIFMD is referred to as effectiveness (other language versions have the same implications as the English one). It is submitted that the ‘efficiency’ requirement is to be read as in fact mandating an effectiveness requirement also under Swedish law.

B. Article 13—Remuneration 10.39  There is no formal single remuneration code applicable to all firms whether authorized under the AIFMD, the UCITS, or to provide portfolio management services under MiFID. However, the remuneration requirements set out in the various specialized regulations come to the same thing. In substance, therefore, there is a single remuneration code. For AIFs, the ‘code’ is primarily set out in Chapter 8, section 22 of the AIFMA and Chapter 9 of the Swedish AIFM Regulations.

C. Article 14—Conflicts of interest 10.40  In general, the implemented Article 14 of the AIFMD and Articles 31 to 38 of the Implementing Regulation will operate in a manner similar to the sister provision in the UCITS Directive (Articles 12(1)(b), 14(2)(c) and Implementing Directive) and MiFID (Article 18 and Implementing Directive). ESMA advice will be treated as non-binding ‘general advice’ (which the SFSA may also issue). In practice, there is little to distinguish SFSA ‘advice’ from its ‘regulations’. The conflicts of interests rules are set out in Chapter 8, sections 19 and 20 of the AIFMA. The Swedish AIFM Regulations do not address conflicts of interest.

D. Article 15—Risk management 10.41  In general, the implemented risk management framework of Article 15 of the AIFMD and Articles 39 to 46 of the Implementing Regulation will operate in a manner similar to the sister framework in the UCITS Directive (Article 51 and Implementing Directive). The riskmanagement requirements are set out in Chapter 8, section 4 of the AIFMD. 10.42  For managers of special funds, it is not expected that they will be required to make meaningful changes to the manner in which they operate national AIFs or to make corresponding changes to the offering documentation. However, managers of other AIFs are expected to have to make substantial changes to the offering documentation.

E. Article 16—Liquidity management 10.43  The AIFMA does not contain any discussion or guidance over and above the AIFMD as to which liabilities of an AIF are to be taken into account for liquidity management purposes. The SFSA has not been given authorization to issue regulations on liquidity management. The liquidity requirements are set out in Chapter 8, section 3. (p. 461) 10.44  It is not expected that managers of special funds will be required to make meaningful changes to the manner in which they operate national AIFs and to make corresponding changes to the offering documentation. However, managers of other AIFs are expected to have to make substantial changes to the manner in which they operate national AIFs and to make corresponding changes to the offering documentation.

F. Article 17—Investment in securitization positions 10.45  The Swedish authorities have issued no guidance as to how compliance with the requirements of Article 17 of the AIFMD and Articles 51 to 56 of the Implementing Regulation is expected to work in practice.

3. Section 2 (Articles 18 and 19)—Organizational Requirements

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A. Article 18—General principles 10.46  The implemented standards set out as general principles in Article 18 of the AIFMD and Articles 57 to 67 of the Implementing Regulation will operate in a manner similar to the sister provisions in the UCITS Directive (Article 12 and Implementing Directive) and MiFID (Article 13 and Implementing Directive). ESMA advice will be treated as non-binding ‘general advice’ (which the SFSA may also issue). In practice, there is little to distinguish SFSA ‘advice’ from its ‘regulations’. The general principles have been codified as Chapter 8, sections 1 and 2 of the AIFMA.

B. Article 19—Valuation 10.47  Pre-AIFMD, a manager of a special fund would be responsible for correct valuation as envisaged in the new rules under Article 19 of the AIFMD and Articles 68 to 75 of the Implementing Regulation, both from a regulatory perspective as well as from a private law perspective in view of the typical terms and conditions that apply to the manager/sponsor of a national AIF. For managers of other AIFs, the obligations of the AIFM to effect valuation would be a matter for contract. It is usual for such AIFM contractually to be bound to effect correct valuations. The valuation requirements are set out in Chapter 8, sections 7 to 13 of the AIFMA. The Swedish AIFM Regulations do not address valuation issues. 10.48  Chapter 9, section 12 of the AIFMA requires the custodian to ‘ensure that’ (se till att —a vague expression that does, however, imply the achievement of a particular result) valuations are in conformity with the AIFMA, the Implementing Regulation, and any fund rules or by-laws. Presumably the custodian is required independently to verify the AIFM’s or an external valuer’s valuations and report any discrepancies to the AIFM or, where appropriate, the SFSA. (Under the UCITS regime, it is common for custodians to alert the SFSA that a manager may be violating the rules.)

4. Section 3 (Article 20)—Delegation of AIFM functions 10.49  The implemented standards set out as general principles in Article 20 of the AIFMD and Articles 76 to 83 of the Implementing Regulation will operate in a manner similar to the sister provision in the UCITS Directive (Article 13 and Implementing Directive) and MiFID (Article 13 and Implementing Directive). ESMA advice will be treated as non-binding ‘general advice’ (which the SFSA may also issue). In practice, there is little to distinguish SFSA ‘advice’ from its ‘regulations’. The delegation requirements are set out (p. 462) in Chapter 8, sections 14 to 18 of the AIFMA. The Swedish AIFM Regulations do not address delegation.

5. Section 4 (Article 21)—Depositary 10.50  In general terms, there are no meaningful differences between the national regime for depositaries set out in Article 21 of the AIFMD and Articles 84 to 103 of the Implementing Regulation and the national UCITS regime or the national regime for nonretail funds. However, as there appears to be no domestic market for AIFMD depositaries, there is grave concern in the Swedish market whether any custody services will be available for Swedish AIFs—other than special funds, for whom there is a function market jointly with UCITSs. The requirements for the delegation by the depositary are set out in Chapter 9, sections 13 to 16 of the AIFMA. The Swedish AIFM Regulations do not address depositaries. 10.51  It is not expected that managers of special funds will be required to make meaningful changes to the manner in which they operate national AIFs and to make corresponding changes to the offering documentation. However, managers of other AIFs

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are expected to have to make substantial changes to the manner in which they operate national AIFs and to make corresponding changes to the offering documentation.

6. Consequences of violating operating conditions A. Regulatory law consequences 10.52  The SFSA has wide discretionary powers to act on any breaches of the AIFMA, its own regulations, the internal regulations of AIFMs, and any other statutory or delegated official norms governing the manager’s business activities. The SFSA is empowered to require ‘suitable action’ to be taken, backed up, if appropriate, with conditional fines payable upon non-compliance with SFSA orders. The SFSA may also impose administrative fines (up to a maximum of SEK 50 million) and, ultimately, revoke any authorization given to the AIFM. On more than one occasion the SFSA has imposed administrative fines of the maximum amount and has requested government to introduce legislation to raise the maximum. These powers are set out in Chapter 14 of the AIFMA.

B. Criminal law consequences 10.53  No criminal law consequences have been foreseen for breaches of the AIFMA. This is in line with Swedish regulatory law generally.

C. Private law consequences 10.54  Except as provided in contract, violations of the authorization provisions are unlikely to have any private law consequences. It is trite law that violations of public law requirements (such as the AIFM authorization requirements) would not have a negative impact on the validity or enforceability of, for instance, subscription agreements entered into in breach of those requirements. 10.55  The law of damages in respect of breaches of regulatory requirements is developing in Sweden. It is clear (and there is case law to that effect) that breaches of regulatory requirements will be taken into account by the courts in assessing whether an AIFM has acted in an appropriate manner as a matter of contract, both in deciding whether rescission of a contract is justified (p. 463) and in assessing damages.6 It is less clear to what extent there will also be tortious liability. In the context of previous implementations of capital adequacy rules for the financial sector there has been discussion on whether the capital adequacy rules could give rise to liability in damages. This is a private law matter and the Swedish Constitution prohibits delegation of private law matters from Parliament. This argument would invalidate private law claims based on any norm issued by the SFSA, or indeed the EU (as the Swedish Constitution regards the EU’s authority as having been delegated by the Swedish Parliament), under delegation. This matter has not, however, been finally resolved. If an analogy is permitted between the capital adequacy rules and Chapter III of the AIFMD, the same considerations would be relevant for the discussion of private law liability for breaches of the obligations set out in the AIFMD. 10.56  A novelty in the AIFMA is that various grounds of tortious liability have been codified (see Chapter 8, sections 28 to 31 for AIFMs and Chapter 9, sections 17 to 23 for depositaries). This should in practice make it procedurally easier for claimants to obtain redress in the form of damages.

VII. Transparency Requirements

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1. Implementation table AIFMD

National implementation

Art 22 (annual report)

AIFMA, Ch 10, ss 4–7

Art 23 (disclosure to investors)

AIFMA, Ch 10, ss 1, 8–10

Art 24 (reporting obligations to competent authorities)

AIFMA, Ch 14, ss 2, 3, 5, 6

Implementing Regulation

National implementation

Arts 104–112 (re Arts 22(2)A–E, 23(4), 24(1) AIFMD: disclosure to investors and regulatory reporting)

Swedish AIFM Regulations, Ch 16 and, specifically in respect of special funds, Ch 15, ss 11, 12

2. Article 22—Financial reporting 10.57  Pre-AIFMD, only special funds were required to report finances to the SFSA. Limited liability companies, partnerships, and limited partnerships already file their annual accounts with the Companies Registration Office (Bolagsverket). Public companies and other issuers with instruments admitted to trading on a regulated market have been required to file appropriate financial statements. It appears that AIFMs will continue to be able to rely on external auditors and financial reporting as would have been required/was customary for AIFs prior to the AIFMD.

3. Article 23—Disclosure to investors 10.58  In general terms, the requirements of Article 23 of the AIFMD and Articles 109 to 110 of the Implementing Regulation will operate in respect of national AIFs in a manner similar to the (p. 464) previous requirements for special funds, including the practice of key investor information documents (KIDDs) under the UCITS Directive. 10.59  As the reporting requirements are imposed on the AIFM, it is likely that the AIFM will be liable in negligence for mistakes or errors in the disclosure materials.

4. Article 24—Regulatory reporting 10.60  In general terms, the requirements of Article 24 of the AIFMD and Articles 111 to 112 of the Implementing Regulation will operate in respect of national AIFs in a manner very similar to the regulatory reporting requirements under the Swedish UCITS and special funds regimes. The reporting requirements are set out in Chapter 13, sections 2 to 7 of the AIFMA and Chapter 9 of the Swedish AIFM Regulations.

5. Consequences of violating transparency requirements A. Regulatory law consequences 10.61  The SFSA has wide discretionary powers to act on any breaches of the AIFMA, its own regulations, the internal regulations of AIFMs, and any other statutory or delegated official norms governing the manager’s business activities. The SFSA is empowered to require ‘suitable action’ to be taken—backed up, if appropriate, with conditional fines payable upon non-compliance with SFSA orders. The SFSA may also impose administrative fines (up to a maximum of SEK 50 million) and, ultimately, revoke any authorization given to the AIFM. On more than one occasion, the SFSA has imposed administrative fines of the maximum amount and has requested government to introduce legislation to raise the maximum. These powers are set out in Chapter 14 of the AIFMA.

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B. Criminal law consequences 10.62  No criminal law consequences have been foreseen for breaches of the AIFMA. This is in line with Swedish regulatory law generally.

C. Private law consequences 10.63  Except as provided in contract, violations of the authorization provisions are unlikely to have any private law consequences. It is trite law that violations of public law requirements (such as the AIFM authorization requirements) would not have a negative impact on the validity or enforceability of, for instance, subscription agreements entered into in breach of those requirements. 10.64  The law of damages in respect of breaches of regulatory requirements is developing in Sweden. It is clear (and there is case law to that effect) that breaches of regulatory requirements will be taken into account by the courts in assessing whether an AIFM has acted in an appropriate manner as a matter of contract, both in deciding whether rescission of a contract is justified and in assessing damages.7 It is less clear to what extent there will also be tortious liability. In the context of previous implementations of capital adequacy rules for the financial sector there has been discussion on whether the capital adequacy rules could (p. 465) give rise to liability in damages. This is a private law matter and the Swedish Constitution prohibits delegation of private law matters from Parliament. This argument would invalidate private law claims based on any norm issued by the SFSA, or indeed the EU (as the Swedish Constitution regards the EU’s authority as having been delegated by the Swedish Parliament), under delegation. This matter has not, however, been finally resolved. If an analogy is permitted between the capital adequacy rules and Chapter III of the AIFMD, the same considerations would be relevant for the discussion of private law liability for breaches of the obligations set out in the AIFMD. 10.65  A novelty in the AIFMA is that various grounds of tortious liability have been codified (see Chapter 8, sections 28 to 31 of the AIFMA for AIFMs and Chapter 9, sections 17 to 23 for depositaries). This should in practice make it procedurally easier for claimants to obtain redress in the form of damages.

VIII. AIFM Managing Specific Types of AIF 1. Implementation table AIFMD

National implementation

Art 25 (use of information, supervisory cooperation, and limits to leverage)

AIFMA, Ch 8, ss 5, 6

Art 26 (scope)

AIFMA, Ch 11, ss 1–4, 8

Art 27 (notification of the acquisition of major holdings and control of nonlisted companies)

AIFMA, Ch 11, ss 4–7

Art 28 (disclosure in case of acquisition of control)

AIFMA, Ch 11, s 8

Art 29 (annual report of AIFs exercising control of non-listed companies)

AIFMA, Ch 11, s 98

Art 30 (asset stripping)

AIFMA, Ch 11, s 10

Implementing Regulation

National implementation

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AIFMD

National implementation

Art 113 (re Art 25(3) AIFMD: leverage limits)

None

2. Section 1 (Article 25)—AIFM managing leveraged AIF 10.66  The calculation of leverage set out in Articles 8 to 13 of the Implementing Regulation are not expected to be problematic for operators of national AIFs. 10.67  The Swedish authorities have provided no guidance on how compliance with the requirement of the first sentence of Article 25(3) of the AIFMD (the AIFM must demonstrate that leverage limits are reasonable and that it complies with them at all times) will operate in practice. This will have to be worked out between the AIFMs and the SFSA.

3. Section 2 (Articles 26 to 30)—Obligations of AIFMs managing AIFs which acquire control of non-listed companies and issuers 10.68  The regime set out in Articles 26 to 30 of the AIFMD will introduce a novel principle in Swedish law and will to that extent materially change the national regime for corporate acquisitions of non-listed companies. Certain investor categories (such as public pension (p. 466) funds, AP-funds, and UCITSs) are constrained in their investments, but there is no general regime for imposing obligations on acquirers of control of non-listed companies. As the shareholder register and annual accounts of all Swedish companies are available to the public, there has been little need for any such obligations.

4. Consequences of violating provisions relating to AIFMs managing specific types of AIF A. Regulatory law consequences 10.69  The SFSA has wide discretionary powers to act on any breaches of the AIFMA, its own regulations, the internal regulations of AIFMs, and any other statutory or delegated official norms governing the manager’s business activities. The SFSA is empowered to require ‘suitable action’ to be taken, backed up, if appropriate, with conditional fines payable upon non-compliance with SFSA orders. The SFSA may also impose administrative fines (up to a maximum of SEK 50 million) and, ultimately, revoke any authorization given to the AIFM. On more than one occasion the SFSA has imposed administrative fines of the maximum amount and has requested government to introduce legislation to raise the maximum.

B. Criminal law consequences 10.70  No criminal law consequences have been foreseen for breaches of the AIFMA. This is in line with Swedish regulatory law generally.

C. Private law consequences 10.71  Except as provided in contract, violations of the authorization provisions would be unlikely to have any private law consequences. It is trite law that violations of public law requirements (such as the AIFM authorization requirements) would not have a negative impact on the validity or enforceability of, for instance, subscription agreements entered into in breach of those requirements. 10.72  The law of damages in respect of breaches of regulatory requirements is developing in Sweden. It is clear (and there is case law to that effect) that breaches of regulatory requirements will be taken into account by the courts in assessing whether an AIFM has acted in an appropriate manner as a matter of contract, both in deciding whether rescission of a contract is justified and in assessing damages.8 It is less clear to what extent there will also be tortious liability. In the context of previous implementations of capital adequacy From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

rules for the financial sector there has been discussion on whether the capital adequacy rules could give rise to liability in damages. This is a private law matter and the Swedish Constitution prohibits delegation of private law matters from Parliament. This argument would invalidate private law claims based on any norm issued by the SFSA, or indeed the EU (as the Swedish Constitution regards the EU’s authority as having been delegated by the Swedish Parliament), under delegation. This matter has not, however, been finally resolved. If an analogy is permitted between the capital adequacy rules and Chapter III of the AIFMD, the same considerations would be relevant for the discussion of private law liability for breaches of the obligations set out in the AIFMD. (p. 467) 10.73  A novelty in the AIFMA is that various grounds of tortious liability have been codified (see Chapter 8, sections 28 to 31 of the AIFMA for AIFMs and Chapter 9, sections 17 to 23 for depositaries). This should in practice make it procedurally easier for claimants to obtain redress in the form of damages.

IX. Rights of EU AIFMs to Market and Manage EU AIFs in the EU 1. Implementation table AIFMD

National implementation

Art 31 (marketing of shares or units of EU AIFs in the home Member State of the AIFM)

AIFMA, Ch 4, ss 1, 2, 5–7

Art 32 (marketing of shares or units of EU AIF in Member States other than the home Member State of the AIFM)

AIFMA, Ch 5, ss 3, 4, 7, second para; Ch 6 ss 2, 3, second para, 4, 5; Ch 16, s 1

Art 33 (conditions for managing AIFs established in other Member States)

AIFMA, Ch 5, s 1; Ch 6, ss 1, 3, first para, 4, 5

Implementing Regulation

National implementation

n/a

2. Article 31—Marketing of shares or units of EU AIFs in the home Member State of the AIFM 10.74  Swedish AIFMs may market special funds to professional investors without any authorization or notification procedure over and above the rules that apply specifically to special funds (and that have not been materially changed by the implementation of the AIFMD). In respect of other Swedish AIFs or AIFs established in another EEA Member State, a Swedish AIF may market AIFs to Swedish professional investors after having notified the SFSA of its intention to do so. 10.75  Swedish AIFMs may market non-EEA established AIFs to professional investors in Sweden after having been authorized by the SFSA to do so. 10.76  Swedish AIFMs may market special funds to non-professional investors without any authorization or notification procedure over and above the rules that apply specifically to special funds (and that have not been materially changed by the implementation of the AIFMD). In respect of other Swedish AIFs or AIFs established in another EEA Member State, a Swedish AIF may market AIFs to Swedish non-professional investors only if: (i) in respect of Swedish AIFs other than special funds, they are admitted to trading on a regulated market; and (ii) in respect of foreign EEA-established AIFs (a) the AIF is subject

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to regulation commensurate to the Swedish regulation of special funds or (b) it is admitted to trading on a regulated market.

3. Article 32—Marketing of shares or units of EU AIFs in Member States other than the home Member State of the AIFM 10.77  A foreign EEA-established AIFM which is authorized pursuant to the AIFMD in its home state may market EEA-established AIFs to Swedish professional investors after notification from the home state supervisory authority. (p. 468) 10.78  A foreign EEA-established AIFM which is authorized pursuant to the AIFMD in its home state may market special funds to Swedish non-professional investors without further Swedish authorization. Such an AIFM may also market other AIFs to Swedish nonprofessional investors with SFSA authorization if: (i) in respect of Swedish AIFs other than special funds, they are admitted to trading on a regulated market; and (b) in respect of foreign EEA-established AIFs (a) the AIF is subject to regulation commensurate to the Swedish regulation of special funds or (b) it is admitted to trading on a regulated market.

4. Article 33—Conditions for managing AIFs established in other Member States 10.79  Swedish AIFMs may manage AIFs established in another EEA Member State after having notified the intention to do so. 10.80  For non-national EEA AIFMs there is no material change in respect of special funds. For other types of Swedish AIFs—the management of which was not regulated prior to the AIFMD—the implementation of the AIFMD leads to a fundamental change. After implementation the management of all Swedish AIFs must be passported from the AIFM’s home Member State. 10.81  The AIFM passporting regime is not much different from the passporting regime for UCITS management companies.

5. Consequences of violating conditions for EU AIFMs to market and manage EU AIFs in the EU A. Regulatory law consequences 10.82  The SFSA may order anyone who, without requisite authorization, engages in an activity requiring authorization to cease and desist, backed up, if appropriate, with conditional fines payable upon non-compliance with SFSA orders.

B. Criminal law consequences 10.83  No criminal law consequences have been foreseen for breaches of the AIFMA. This is in line with Swedish regulatory law generally.

C. Private law consequences 10.84  Except as provided in contract, violations of the authorization provisions would be unlikely to have any private law consequences. It is trite law that violations of public law requirements (such as the AIFM authorization requirements) would not have a negative impact on the validity or enforceability of, for instance, subscription agreements entered into in breach of those requirements. 10.85  The law of damages in respect of breaches of regulatory requirements is developing in Sweden. It is clear (and there is case law to that effect) that breaches of regulatory requirements will be taken into account by the courts in assessing whether an AIFM has acted in an appropriate manner as a matter of contract, both in deciding whether rescission of a contract is justified and in assessing damages.9 It is less clear to what extent there will also be tortious liability. (p. 469) In the context of previous implementations of capital adequacy rules for the financial sector there has been discussion on whether the capital From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

adequacy rules could give rise to liability in damages. This is a private law matter and the Swedish Constitution prohibits delegation of private law matters from Parliament. This argument would invalidate private law claims based on any norm issued by the SFSA, or indeed the EU (as the Swedish Constitution regards the EU’s authority as having been delegated by the Swedish Parliament), under delegation. This matter has not, however, been finally resolved. If an analogy is permitted between the capital adequacy rules and Chapter III of the AIFMD, the same considerations would be relevant for the discussion of private law liability for breaches of the obligations set out in the AIFMD.

X. Specific Rules in Relation to Third Countries 1. Implementation table AIFMD

National implementation

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

AIFMA, Ch 6, s 6

Art 34 (conditions for EU AIFMs which manage non-EU AIFs not marketed in EU)

AIFMA, Ch 6, s 5

Art 35 (conditions for marketing in EU with passport of non-EU AIFs managed by an EU AIFM)

AIFMA, Ch 4, ss 5, 6; Ch 5, s 7, second para; Ch 6, ss 2, 4

Art 36 (conditions for the marketing in EU without a passport of nonEU AIFs managed by an EU AIFM)

AIFMA, Ch 4, s 3; Ch 5, s 5

Art 37 (Authorization of non-EU AIFMs intending to manage EU AIFs and/or market AIFs managed by them in the EU in accordance with Art 38 (EU AIF) or 39 (non-EU AIF))

AIFMA, Ch 5, ss 10–15, 17; Ch 14, s 11

Art 38 (peer review of authorization and supervision of non-EU AIFMs)

No national transposition

Art 39 (conditions for the marketing in the EU with a passport of EU AIFs managed by a non-EU AIFM)

AIFMA, Ch 5, ss 18, 22; Ch 16, s 1

Art 40 (conditions for the marketing in the EU with a passport of nonEU AIFs managed by a non-EU AIFM)

AIFMA, Ch 5, ss 19, 22, 23, second para; Ch 14, s 14; Ch 16, s 1

Art 41 (conditions for managing EU AIFs established in Member States other than the Member State of reference by non-EU AIFM)

AIFMA, Ch 5, ss 21, 23, first para, 24

Art 42 (conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM)

AIFMA, Ch 5, s 9; Ch 14, s 14

Implementing Regulation

National implementation

Arts 114–116 (re Arts 34(1), 35(2), 36(1), 37(7)(D), 39(2)(A), 40(2)(a), 42(1) AIFMD)

None

2. Article 34—Conditions for EU AIFMs which manage non-EU AIFs not marketed in EU 10.86  Swedish AIFMs may manage AIFs not established in the EEA and not marketed in the EEA after having obtained authorization from the SFSA. Authorization is premised on ‘suitable arrangements’ (lämpliga arrangemang) having been put in place for the

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cooperation between the SFSA and the authorities in the country where the AIFs are established.

(p. 470) 3. Articles 35 and 36—Conditions for marketing in EU with and without a passport of non-EU AIFs managed by an EU AIFM 10.87  A foreign EEA-established AIFM which is authorized pursuant to the AIFMD in its home state may market EEA-established AIFs to Swedish professional investors after having obtained authorization from the SFSA. Authorization is premised on ‘suitable arrangements’ having been put in place for the cooperation between the SFSA and the authorities in the country where the AIFs are established. 10.88  A foreign EEA-established AIFM which is authorized pursuant to the AIFMD in its home state may market EEA-established AIFs to Swedish non-professional investors after having obtained authorization from the SFSA if: (i) in respect of Swedish AIFs other than special funds, it is admitted to trading on a regulated market; and (ii) in respect of foreign EEA-established AIFs (a) the AIF is subject to regulation commensurate to the Swedish regulation of special funds or (b) it is admitted to trading on a regulated market. 10.89  The provisions of Articles 35 and 36 change the regime for marketing of nonnational, non-EU AIFs in Sweden by also requiring authorization for marketing closedended AIFs.

4. Articles 37 to 41—Authorization of non-EU AIFMs and managing and marketing AIFs in the EU 10.90  The authorization of non-national non-EU AIFMs will not change in respect of openended AIFs. In respect of closed-ended AIFs, implementation of the AIFMD introduces an authorization requirement for the first time in respect of the management of AIFs. 10.91  For non-EU AIFMs there will be no passporting regime. This is the same as for nonEU UCITS management companies. 10.92  For the marketing of open-ended non-EU AIFs there will be no change post-AIFMD. However, for the marketing of closed-ended non-EU AIFs in Sweden the introduction of an authorization requirement is a major change. 10.93  Article 38(5) and (6) of the AIFMD have not been implemented by the AIFMA. In the government’s concordance setting out under what measure the various Articles of the AIFMD have been implemented, nothing is indicated for Article 38. This is similar to what happened in the context of the implementation of the Omnibus I Directive,10 where the government’s concordance stated ‘No implementation’ against the corresponding Articles in various other directives (such as MiFID and the Transparency Directive11).12 The SFSA’s position is that (p. 471) no specific implementation is necessary as the cooperation requirements already follow in a directly binding fashion from Article 16 of the ESMA Regulation.13

5. Article 42—Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM 10.94  Prior to the implementation of the AIFMD it was possible to market closed-ended AIFs to Swedish investors without authorization or notification. Post-AIFMD this is no longer possible; and there are no private placement exemptions. 10.95  A foreign non-EEA-established AIFM may market EEA-established AIFs to Swedish professional investors after having obtained authorization from the SFSA. Authorization is

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premised on ‘suitable arrangements’ having been put in place for the cooperation between the SFSA and the authorities in the country where the AIFs are established, 10.96  A foreign non-EEA-established AIFM may market AIFs to Swedish non-professional investors after having obtained authorization from the SFSA if: (i) the AIFs are subject to regulation commensurate to the Swedish regulation of special funds or (ii) are admitted to trading on a regulated market, ‘suitable arrangements’ having been put in place for the cooperation between the SFSA and the authorities in the country where the AIFs are established; and (iii) the AIFM is engaged in the management of AIFs in its home jurisdiction and is subject to satisfactory supervision in that jurisdiction. These requirements do not apply to AIFs that do not allow redemptions for at least five years from the first investment and do not invest in financial instruments requiring deposition or generally invest in private companies to acquire control.

6. Consequences of violating specific rules in relation to third countries A. Regulatory law consequences 10.97  The SFSA may order anyone who, without requisite authorization, engages in an activity requiring authorization to cease and desist, backed up, if appropriate, with conditional fines payable upon non-compliance with SFSA orders.

B. Criminal law consequences 10.98  No criminal law consequences have been foreseen for breaches of the AIFMA. This is in line with Swedish regulatory law generally.

C. Private law consequences 10.99  Except as provided in contract, violations of the authorization provisions would be unlikely to have any private law consequences. It is trite law that violations of public law requirements (such as the AIFM authorization requirements) would not have a negative impact on the validity or enforceability of, for instance, subscription agreements entered into in breach of those requirements. (p. 472) 10.100  The law of damages in respect of breaches of regulatory requirements is developing in Sweden. It is clear (and there is case law to that effect) that breaches of regulatory requirements will be taken into account by the courts in assessing whether an AIFM has acted in an appropriate manner as a matter of contract, both in deciding whether a rescission of contract is justified and in assessing damages.14 It is less clear to what extent there will also be tortious liability. In the context of previous implementations of capital adequacy rules for the financial sector, there has been discussion on whether the capital adequacy rules could give rise to liability in damages. This is a private law matter and the Swedish Constitution prohibits delegation of private law matters from Parliament. This argument would invalidate private law claims based on any norm issued by the SFSA, or indeed the EU (as the Swedish Constitution regards the EU’s authority as having been delegated by the Swedish Parliament), under delegation. This matter has not, however, been finally resolved. If an analogy is permitted between the capital adequacy rules and Chapter III of the AIFMD, the same considerations would be relevant for the discussion of private law liability for breaches of the obligations set out in the AIFMD.

XI. Marketing to Retail Investors

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1. Implementation table AIFMD

National implementation

Art 43 (marketing of AIFs to retail investors)

AIFMA, Ch 4, s 4; Ch 5, s 6

Implementing Regulation

National implementation

n/a

2. Article 43—Marketing of AIFs by AIFMs to retail investors 10.101  The election of the option in Article 43 of the AIFMD will introduce a major and controversial novelty into Swedish law. The marketing of AIFs, other than special funds, will essentially be prohibited. Permission may be given, however, if (i) the AIFs are admitted to trading on regulated markets (or corresponding non-EU markets) or (ii) foreign AIFs are subject to regulation similar to the Swedish regulation of special funds.

3. Consequences of violating national rules with respect to marketing of AIFs by AIFMs to retail investors 10.102  The discussion in paragraphs 10.52 et seq., 10.61 et seq., 10.69 et seq., 10.82 et seq., and 10.97 re criminal, regulatory, or private consequences of violation of national rules, also apply in the retail context.

(p. 473) XII. Competent Authorities and Supervisory Powers 1. Implementation table AIFMD

National implementation

Art 44

AIFMA, Ch 1, s 9

Art 45

AIFMA, Ch 14, s 1; Ch 15, ss 7, 14, 17, 19

Art 46

AIFMA, Ch 14, ss 9, 10; Ch 15, ss 1, 3, 8

Art 48

AIFMA, Ch 15, ss 9–16

Art 50

AIFMA, Ch 14, ss 11, 12, 14

Art 51

Public Access and Official Secrets Act 2009 (as amended) (Offentlighets- och sekretesslagen (2009:400)), Ch 8, ss 1–3 §§; Ch 30, s 4

Art 52

AIFMA, Ch 13, s 12

Art 53

Art 53(1): AIFMA, Ch 13, ss 10, 11 Art 53(2): AIFMA, Ch 13, s 10 Art 53(3): No national transposition Art 53(4): No national transposition

Art 54

AIFMA, Ch 14, s 12

Art 55

AIFMA, Ch 14, s 14

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2. Designation, responsibility, and powers of competent authorities 10.103  In respect of special funds there are no material changes post-AIFMD. For managers of other types of AIFs, this is a new situation to be subject to a regulatory system. However, this system is in line with other regulated financial entities. The SFSA will have essentially the same powers in respect of AIFMs as it has previously held in respect of UCITS managers.

3. Other issues 10.104  The AIFMA conforms to the general pattern in Swedish administrative law in allowing appeals against most SFSA decisions. Appeals lie to the Administrative Tribunal in Stockholm (Förvaltningsrätten i Stockholm). Leave to appeal is required for further appeals to the Administrative Appeals Tribunal in Stockholm (Kammarrätten i Stockholm) and to the Supreme Administrative Tribunal (Högsta Förvaltningsdomstolen). Appeals are dealt with in Chapter 16 of the AIFMA. There is a common perception that appeals are likely to fail in the Administrative Tribunal in Stockholm. The Administrative Appeals Tribunal in Stockholm has been relatively liberal in granting leave to appeal. As the AIFMA is new legislation it may prove relatively easy to obtain leave to appeal all the way to the Supreme Administrative Tribunal for AIFMA-related cases, certainly during the early years of the new regime. 10.105  The obligation of the SFSA to cooperate with ESMA and the authorities of other Member States is set out in Chapter 13, sections 10, 11, and 13 of the AIFMA. 10.106  The disclosure of information to third countries is set out in Chapter 13, section 12 of the AIFMA. 10.107  The obligation of the SFSA to cooperate with the ESRB is set out in Chapter 13, section 10 of the AIFMA. (p. 474) 10.108  The SFSA is authorized to use the dispute-settlement mechanism contemplated by Article 55 of the AIFMD by explicit provisions in Chapter 13, section 13 of the AIFMA. 10.109  Although Sweden operates a system of liberal access to public documents, documents and other information the disclosure to the public of which may harm a private financial interest will be kept confidential by the SFSA under the terms of the Public Access and Official Secrets Act 2009 (as amended).

XIII. Concluding Remarks 10.110  For a large section of the Swedish AIF market—the market for special funds—the implementation of the AIFMD will entail minimal changes. Swedish implementation has ensured that as few changes to the current special funds regulation as possible will be made. Special funds are still very much the paradigm in the Swedish funds regulation, which will create challenges for both the SFSA and the market when the AIFMD is implemented in practice. 10.111  For AIFs other than special funds, the AIFMD represents a major departure and will almost certainly have far-reaching ramifications for the Swedish market, since the management of these AIFs has previously not been regulated in Sweden. Parts of the industry are poorly prepared and will face stiff challenges in the months and years ahead. 10.112  There are grave concerns about the availability of essential services for AIFs other than special funds. There is currently no solution on how depositary services will be provided to AIFs other than special funds in the Swedish market.

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10.113  All in all, the implementation of the AIFMD may have far-reaching consequences for the Swedish funds market that may take years to work through.

Footnotes: *  In December 2013 the Swedish Government drew up draft revisions to the statutory AIFM and AIF regime. The proposal was circulated for consultation in January 2014. The draft revisions include market access for third-country AIFMs and AIFs (to enter into force in 2015 at the earliest and as ordered by Government); certain changes to third-country access (not to enter into force until 2018); choice-of-law and jurisdiction provisions; clarifications on the disciplinary powers of the Swedish Financial Supervisory Authority in respect of third-country AIFMs and AIFs; and changes to the anti-money laundering and anti-terrorist financing rules subjecting AIFMs and AIFs to rules commensurate to those that already apply to UCITSs and their managers. Unless otherwise indicated, the intention is for the changes to enter into force on 1 July 2014. A draft Government Bill was published on 13 February 2014. The draft will be subject to technical vetting by the Justices sitting on the advisory Legislative Counsel (lagrådet). 1

  In Swedish, the funds are formally referred to as Allmänna Pensionsfonder—‘public pension funds’—but are in practice invariably referred to as AP-fonder. The ‘AP’ abbreviation has largely lost any independent meaning in the public’s mind and is commonly employed when the funds are referred to in a foreign language. 2

  The AIFMA was adopted by Parliament on 18 June 2013; promulgated by government on 19 June 2013; and published in the Official Gazette (Svensk författningssamling) on 28 June 2013. The Swedish Financial Supervisory Authority (Finansinspektionen) (SFSA) issued its own regulations (föreskrifter (FFFS 2013:10) om förvaltare av alternativa investeringsfonder) on 28 July 2013 (the ‘Swedish AIFM Regulations’). 3

  Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast) (OJ 2009 L302/32). 4

  There are numerous cases from the lower courts in which the courts have looked at the regulatory rules in the context of a claim for contractual remedies. These cases are not reported in a regular manner but the principle is well recognized: see, eg Jan Hellner and M. Radetzki, Skadeståndsrätt, 8th edn (Norstedts juridik, 2010) 129 ff; and B. Bengtsson and E. Strömbäck, Skadeståndslagen. En kommentar, 4th edn (Norstedts juridik, 2011) 51. 5

  Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (OJ 2010 L176/42). 6

  There are numerous cases from the lower courts in which the courts have looked at the regulatory rules in the context of a claim for contractual remedies. These cases are not reported in a regular manner but the principle is well recognized; see eg Hellner and Radetzki (n 4) and Bengtsson and Strömbäck (n 4). 7

  There are numerous cases from the lower courts in which the courts have looked at the regulatory rules in the context of a claim for contractual remedies. These cases are not reported in a regular manner but the principle is well recognized; see eg Hellner and Radetzki (n 4) and Bengtsson and Strömbäck (n 4).

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8

  There are numerous cases from the lower courts in which the courts have looked at the regulatory rules in the context of a claim for contractual remedies. These cases are not reported in a regular manner but the principle is well recognized; see eg Hellner and Radetzki (n 4) and Bengtsson and Strömbäck (n 4). 9

  There are numerous cases from the lower courts in which the courts have looked at the regulatory rules in the context of a claim for contractual remedies. These cases are not reported in a regular manner but the principle is well recognized; see eg Hellner and Radetzki (n 4) and Bengtsson and Strömbäck (n 4). 10

  Directive 2010/78/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 98/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC, 2005/60/EC, 2006/48/EC, 2006/49/EC and 2009/65/EC in respect of the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority) (OJ 2010 L331/120). 11

  Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (OJ 2004 L390/38). 12

  See prop 2011/12:70.

13

  Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ 2010 L331/84). 14

  There are numerous cases from the lower courts in which the courts have looked at the regulatory rules in the context of a claim for contractual remedies. These cases are not reported in a regular manner but the principle is well recognized: see eg Hellner and Radetzki (n 4) and Bengtsson and Strömbäck (n 4).

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Index Edited By: Lodewijk van Setten, Danny Busch From: Alternative Investment Funds in Europe Edited By: Lodewijk van Setten, Danny Busch Content type: Book content Product: Financial Law [FBL] Published in print: 29 May 2014 ISBN: 9780199657728

(p. 475) Index AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers annual report (AIF) 1.498, 1.520–1.522 asset stripping provisions 1.498, 1.523–1.525 confidential information 1.506 control 1.504–1.505 disclosure provisions 1.498–1.499, 1.503, 1.513–1.519 exemptions 1.501 France 3.100 generally 1.498–1.499 Germany 4.85–4.87 Ireland 5.155 Italy 6.140–6.144 Luxembourg 7.263 minimum harmonization 1.507 Netherlands 8.115–8.120 notification provisions 1.498–1.499, 1.502, 1.508–1.512, 1.516 scope of AIFMD provisions 1.500–1.507 Spain 9.117–9.119 Sweden 10.68 United Kingdom 2.139–2.140 voting rights 1.505 criminal law sanctions France 3.102–3.103 Germany 4.89 Ireland 5.157

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Italy 6.145 Luxembourg 7.265 Netherlands 8.122 Spain 9.121 Sweden 10.70 United Kingdom 2.141 leveraged AIFs ESMA action 1.496–1.497 ESMA responsibility 1.495 France 3.96–3.99 Germany 4.84 Ireland 5.152–5.154 Italy 6.139 level of leverage 1.486 leveraged limits 1.493 Luxembourg 7.261–7.262 national regulators’ action 1.493–1.495 Netherlands 8.114 sharing information 1.492 Spain 9.113–9.116 Sweden 10.66 –10.67 systemic risk 1.491, 1.493 transparency requirements 1.486 United Kingdom 2.137–2.138 use of information 1.491 private law sanctions France 3.104 Germany 4.90–4.91 Ireland 5.158 Italy 6.145 Luxembourg 7.266 Netherlands 8.123 Spain 9.122–9.123 Sweden 10.71–10.73 United Kingdom 2.141 regulatory law sanctions France 3.101 Germany 4.88 Ireland 5.156 Italy 6.145 Luxembourg 7.264 Netherlands 8.121 Spain 9.120 Sweden 10.69 United Kingdom 2.141 violations France 3.101–3.104 Germany 4.88–4.91 Ireland 5.156–5.158 Italy 6.145–6.146 Luxembourg 7.264–7.266

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Netherlands 8.121–8.123 Spain 9.120–9.123 Sweden 10.69 – 10.73 United Kingdom 2.141–2.142 AIFMD provisions and implementing regulation determination of AIFM France 3.36–3.39 Germany 4.29–4.35 Ireland 5.91–5.93 Italy 6.48–6.51 Luxembourg 7.85–7.91 Netherlands 8.43–8.46 Spain 9.33–9.36 Sweden 10.19–10.21 United Kingdom 2.29–2.41 scope and exemptions France 3.32–3.35 Germany 4.25–4.28 Ireland 5.88–5.90 Italy 6.45–6.47 Luxembourg 7.75–7.84 Netherlands 8.37–8.42 Spain 9.28–9.32 Sweden 10.16–10.18 United Kingdom 2.19–2.28 Alternative Investment Fund Managers (AIFMs) AIFM managing specific types of AIF see AIFM managing specific types of AIF appointment to manage 1.94–1.97 authorization 1.06, 1.130–1.180, 1.186–1.197, 1.200–1.208 see also authorization of AIFMs (p. 476) best execution provision effective arrangements 1.229 execution of decisions and orders 1.226–1.230 placing orders 1.231–1.233 portfolio management 1.226–1.227 close-ended AIFs 1.102, 1.104–1.110, 1.113–1.114 conflicts of interest 1.268–1.281, 1.352–1.355 see also conflicts of interest counterparties and brokers approval 1.247 selection 1.245–1.246, 1.248 delegation of AIFM functions 1.332–1.362 see also delegation of AIFM functions due diligence generally 1.217 illiquid assets 1.218 EU-AIFMs authorization 1.147–1.150 exemptions 1.148–1.150 passporting of management authorization 1.151–1.160 exposure/net asset value 1.121, 1.128–1.129 external AIFM 1.98–1.99, 1.114 general duties

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AIFM governing body 1.219 AIFM personnel 1.220 best interests of AIFs/investors 1.212, 1.215–1.216, 1.226–1.233 compliance with regulatory requirements 1.212 conflicts of interest 1.212 due diligence 1.217–1.218 duty of care 1.212–1.214 fair treatment of investors 1.212, 1.221–1.223 inducement rules 1.224–1.225 integrity of the markets 1.212, 1.215 proper performance 1.212 initial capital and own funds AIFMD provisions 1.190–1.195 France 3.41–3.42 Germany 4.40–4.41 Ireland 5.101–5.103 Italy 6.59–6.61 Luxembourg 7.102–7.109 Netherlands 8.51–8.54 Spain 9.45–9.48 Sweden 10.27–10.29 United Kingdom 2.46–2.55 internal AIFM 1.98–1.99, 1.114 investment in securitization positions 1.296–1.309 see also investment in securitization positions liability 1.15 low dealing frequency 1.111 management 1.50 non-EU AIFMs AIFMD compliance 1.168 authorization 1.161–1.167, 1.181–1.184, 1.203–1.204 compliance with foreign law 1.168–1.175 depositary 1.392 legal representative 1.184 marketed in EU 1.162, 1.164–1.168 not marketed in EU 1.148, 1.163 passporting management authorization 1.176–1.177 transparency requirements 1.488 open-ended AIFs 1.102–1.103, 1.105–1.110, 1.112–1.114 operating requirements 1.210–1.211 order handling aggregation and allocation 1.238–1.242 general principles 1.234–1.237 subscription and redemption orders 1.243–1.244 portfolio management 1.226–1.227, 1.249–1.250 redemption opportunities 1.108–1.110 remuneration 1.251–1.267 see also remuneration regulation 1.46–1.49 responsibility 1.06, 1.15–1.16, 1.23 risk management 1.23, 1.282–1.289 see also risk management shorting 1.119

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swap agreements 1.118 Alternative Investment Fund Managers Directive (AIFMD) AIFMD provisions and implementing regulation see also AIFMD provisions and implementing regulation Alternative Investment Fund Managers (AIFMs) appointment to manage 1.94–1.97 best execution provision 1.226–1.233 close-ended AIFs 1.102, 1.104–1.110, 1.113–1.114 conflicts of interest 1.268–1.281, 1.352–1.355 counterparties and brokers 1.245–1.248 delegation of functions 1.332–1.359 due diligence 1.217–1.218 external AIFM 1.98–1.99, 1.114 general duties 1.212–1.220 individual portfolio management 1.249–1.250 internal AIFM 1.98–1.99, 1.114 low dealing frequency 1.111 managing specific types of AIF 1.491–1.525 open-ended AIFs 1.102–1.103, 1.105–1.110, 1.112–1.114 operating requirements, 1.210–1.211 order handling 1.234–1.244 redemption opportunities 1.108–1.110 remuneration 1.251–1.267 risk management 1.282–1.289 Alternative Investment Funds (AIFs) appointment of manager 1.72 authorization 1.06, 1.130–1.177 close-ended 1.102, 1.104–1.110, 1.113–1.114 definition 1.51–1.56 exclusions from definition, 1.58–1.61 liquidity management 1.290–1.295 low dealing frequency 1.111 management 1.71–1.80, 1.98–1.101, 1.114 open-ended 1.102–1.103, 1.105–1.110, 1.112–1.114 redemption opportunities 1.108–1.110 asset-backed securitizations 1.62–1.63 asset stripping provisions 1.498, 1.523–1.525 (p. 477) authorization of AIFMs 1.06, 1.130–1.180, 1.186–1.197, 1.200–1.208 see also authorizat of AIFMs compliance 1.06, 1.48–1.49 competent authorities and supervisory powers 1.571 conflicts of interest 1.268–1.281, 1.352–1.355 see also conflicts of interest cooperation between authorities 1.571, 1.576–1.577 criticism 1.32–1.34 de minimis exceptions 1.07 delegation of AIFM functions 1.332–1.362 see also delegation of AIFM functions depositary 1.363–1.370, 1.391–1.399, 1.405–1.464 see also depositary designation, powers and redress procedures ESMA powers 1.574–1.575 generally 1.571–1.572 powers of competent authorities 1.573

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exemptions 1.89–1.93, 1.114 expansion of regulatory framework 1.02–1.03, 1.08, 1.23 exposure/net asset value 1.121, 1.128–1.129 final provisions 1.578 harmonized standards 1.04, 1.11 implementation 1.04, 1.06, 1.08 investment in securitization positions 1.296–1.309 see also investment in securitization positions investor protection 1.68 judicial interpretation 1.22 jurisdiction clause 1.21 legislative framework 1.41–1.45 leverage commitment methodology 1.24–1.25 definition of leverage 1.120 determination of leverage 1.120–1.129 exposure/net asset value 1.121, 1.128–1.129 gross methodology 1.124, 1.126–1.127 level of leverage 1.486 leveraged AIFs 1.114, 1.116–1.117 managing specific types of AIF 1.491–1.497 measurement 1.121–1.126 shorting 1.119 substantial basis 1.486 swap agreements 1.118 transparency requirements 1.486 unleveraged AIFs 1.114 liability for loss 1.18–1.19 liquidity management 1.290–1.295 see also liquidity management managing specific types of AIF 1.491–1.525 see also AIFMD managing specific types of AIF marketing AIFs see marketing of AIFs notional proofs 1.66, 1.70 organizational requirements administrative and accounting procedures 1.316 electronic data processing 1.316 governance structure 1.317 human and technical resources 1.316 internal control mechanisms 1.316 policy rationale 1.23–1.25, 1.32 private law aspects 1.13–1.22 questionable logic 1.28–1.31 remuneration 1.251–1.267 see also remuneration risk management 1.23–1.24, 1.26–1.29, 1.66–1.67, 1.69, 1.282–1.289 see also risk management scope 1.06, 1.46–1.50, 1.81–1.88. 1.500–1.507 stated case 1.23–1.27 structured debt arrangements 1.62, 1.64–1.65 technical standards 1.44 transitional provisions 1.578 transparency requirements 1.465–1.490 see also transparency requirements

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valuation 1.318–1.331 see also valuation Alternative Investment Funds (AIFs) administrative function 1.73 AIFM managing specific types of AIF see AIFM managing specific types of AIF annual report accounting standards 1.473 auditing 1.474–1.475 available on request 1.470, 1.520 content 1.472 control of non-listed companies 1.520–1.522 generally 1.467–1.471 information provision 1.471, 1.521–1.522 minimum requirements 1.466 appointment of manager 1.72 authorization 1.06, 1.09 close-ended AIFs 1.102, 1.104–1.110, 1.113–1.114 collective investment undertakings 1.05, 1.51, 1.54–1.55, 1.85 collective management 1.75 definition 1.51–1.56 exclusions from definition 1.58–1.61 investment in securitization positions 1.304–1.306 see also investment in securitization positions leverage commitment methodology 1.24–1.25 definition of leverage 1.120 determination of leverage 1.120–1.129 exposure/net asset value 1.121, 1.128–1.129 gross methodology 1.124, 1.126–1.127 level of leverage 1.486 leveraged AIFs 1.114, 1.116–1.117 managing specific types of AIF 1.491–1.497 measurement 1.121–1.126 shorting 1.119 swap agreements 1.118 transparency requirements 1.486 unleveraged AIFs 1.114 liability for loss 1.18–1.19 liquidity management 1.290–1.295 see also liquidity management management appointment of manager 1.72 collective management 1.75 common fund 1.100 contractual form 1.100–1.101 corporate form 1.100 external management 1.98–1.99, 1.114 generally 1.04, 1.06, 1.10, 1.71 governance structure 1.98–1.101 (p. 478) internal management 1.98–1.99, 1.114 portfolio management 1.73, 1.76–1.79 risk management 1.76, 1.80, 1.89 trust form 1.100–1.101

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marketing see also EU AIFMs marketing/managing EU AIFS in EU AIFM initiative 1.82, 1.84 definition 1.81 EU AIFs 1.526–1.551 investment firms 1.86–1.88 marketing and distribution 1.73 marketing to professional investors 1.06 non-EU AIFs 1.552–1.565 offering or placement 1.81–1.85, 1.88 requests for proposals 1.83 retail investors 1.566–1.570 notification requirements 1.06 open-ended AIFs 1.102–1.103, 1.105–1.110, 1.112–1.114 private law rights 1.14 redemption opportunities 1.108–1.110 regulation 1.12 single market 1.09–1.12 transparency requirements 1.465–1.490 see also transparency requirements asset stripping provisions prohibited activities 1.498, 1.523–1.525 authorization of AIFMs application for authorization information requirements 1.178–1.180 non-EU AIFMs 1.181–1.184 rejection 1.201 UCITS management company 1.185 authorization effective 1.205 central public register 1.209 changes in scope and withdrawal AIFMD provisions 1.206–1.207 France 3.43 Germany 4.42 Ireland 5.104–5.105 Italy 6.62 Luxembourg 7.110–7.119 Netherlands 8.55 Spain 9.49–9.51 Sweden 10.30 United Kingdom 2.56–2.57 conditions and application France 3.40 generally 1.186 Germany 4.36–4.39 indemnity insurance 1.189 initial capital and own funds 1.189–1.195 Ireland 5.94–5.100 Italy 6.52–6.58 Luxembourg 7.92–7.101 management, shareholders, members, head office 1.187–1.188 Netherlands 8.47–8.50 professional negligence liability 1.189, 1.196–1.197

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Spain 9.37–9.44 Sweden 10.22–10.26 UCITS management companies 1.197 United Kingdom 2.42–2.45 consultation prior to authorization 1.198–1.199 criminal law sanctions France 3.45 Germany 4.44 Ireland 5.108 Italy 6.69–6.70 Luxembourg 7.125 Netherlands 8.63–8.69 Spain 9.53 Sweden 10.32 United Kingdom 2.58–2.59 disagreement 1.203–1.204 EU-AIFMs authorization 1.147–1.150 exemptions 1.148–1.150 passporting of management authorization 1.151–1.160 grant of authorization 1.200 information requirements 1.178–1.180 initial capital and own funds AIFMD provisions 1.190–1.195 France 3.41–3.42 Germany 4.40–4.41 Ireland 5.101–5.103 Italy 6.59–6.61 Luxembourg 7.102–7.109 Netherlands 8.51–8.54 Spain 9.45–9.48 Sweden 10.27–10.29 United Kingdom 2.46–2.55 legal representative 1.184 Markets in Financial Services Directive 1.140–1.142, 1.144–1.146 Member State jurisdiction 1.130–1.137 non-EU AIFMs application for authorization 1.181–1.184 authorization 1.161–1.175, 1.203–1.204 information requirements 1.182 passporting of management authorization 1.176–1.177 prior authorization 1.130 private law sanctions France 3.46–3.49 Germany 4.45 Ireland 5.109–5.110 Italy 6.71–6.72 Luxembourg 7.126–7.140 Netherlands 8.70–8.71 Spain 9.54 Sweden 10.33–10.34

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United Kingdom 2.59 regulatory law sanctions France 3.44 Germany 4.43 Ireland 5.106–5.107 Italy 6.63–6.68 Luxembourg 7.120–7.124 Netherlands 8.56–8.62 Spain 9.52 Sweden 10.31 United Kingdom 2.60, 2.62 (p. 479) restriction 1.202 scope of authorization 1.138–1.139 UCITS management company 1.143 violations France 3.44–3.49 Germany 4.43–4.45 Ireland 5.106–5.110 Italy 6.63–6.72 Luxembourg 7.120–7.140 Netherlands 8.56–8.71 Spain 9.52–9.54 Sweden 10.31–10.34 United Kingdom 2.58–2.62 withdrawal of authorization 1.208 Committee of European Banking Supervisors (CEBS) 1.39 Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) 1.39 Committee of European Securities Regulators (CESR) 1.39 competent authorities France 3.135–3.141, 3.143 Germany 4.122–4.124 Ireland 5.192–5.196 Italy 6.181–6.192 Luxembourg 7.318–7.324 Netherlands 8.156–8.179 Spain 9.156–9.159 Sweden 10.103–10.109 United Kingdom 2.186 conflicts of interest conflicts management 1.274 conflicts of interest policy 1.272–1.273 delegation of functions generally 1.352 separation of functions 1.354 types of conflict 1.353 depositary 1.427 see also depositary disclosure 1.355 exercise of voting rights 1.281 France 3.55 generally 1.268

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Germany 4.52 identification 1.269, 1.355 informing senior management 1.275 Ireland 5.116 Italy 6.77 Luxembourg 7.159–7.161 management 1.355 monitoring 1.276, 1.355 Netherlands 8.80 prime brokers 1.279–1.280 redemption 1.278 segregation of tasks and responsibilities 1.271 Spain 9.64 Sweden 10.40 types 1.269–1.270 United Kingdom 2.71–2.73 delegation of AIFM functions allocation of rights and obligations 1.340 confidential information 1.350 conflicts of interest generally 1.352 separation of functions 1.354 types of conflict 1.353 contingency planning 1.351 continuity 1.349 delegation conditions 1.334, 1.336–1.351 delegation rules 1.335 effective supervision 1.345, 1.347–1.348, 1.359 extent of delegation 1.358–1.360 features of delegates 1.341 further instructions 1.346 generally 1.332–1.335 justification delegation 1.337–1.338 letter-box entity 1.358 liability of AIFM 1.356–1.357 management functions 1.334 monitoring 1.346, 1.348 notification provision 1.336 portfolio and risk management 1.342–1.344 right of information and access 1.348 risk management 1.348 see also risk management selection of delegate 1.346 sub-delegation 1.333, 1.356, 1.361–1.362 transfer agency function 1.332 valuation 1.332 see also valuation withdrawal of functions 1.346 written agreement 1.339 depositary AIFMs 1.394, 1.403–1.404 appointment 1.364 conflicts of interest 1.427 see also conflicts of interest

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delegation of safekeeping functions conditions for delegation 1.436–1.440 delegation of supporting tasks 1.434–1.435 delegation to third party 1.441 limitation 1.429–1.431 omnibus accounts 1.432 securities settlement systems 1.433 sub-delegation 1.442 depositary contract 1.369–1.390 see also depositary contract depositary regime 1.363 different business models 1.364 duty of information 1.464 eligibility 1.391 France 3.70–3.73, 3.80–3.81 Germany 4.65–4.68 Ireland 5.134–5.136 Italy 6.98–6.102 liability delegation of custody functions 1.455–1.461 delegation to local entity or third country 1.454 discharge 1.455–1.461 failure of obligations 1.454 generally 1.443–1.444 liability invoked 1.463 loss of financial instruments 1.445–1.453 negligence 1.454 transfer of liability 1.457–1.458 (p. 480) location depositary 1.400–1.401 loss of financial instruments external events beyond control 1.449–1.453 generally 1.445 insolvency of third party 1.447 instruments held in custody 1.446–1.448 Luxembourg 7.202–7.222 monitoring function cash flows 1.402 cash monitoring 1.365 duties 1.402 subscription of units or shares 1.404 Netherlands 8.93–8.98 non-EU AIFs 1.392 oversight of operational functions 1.365, 1.425–1.426 prime brokers 1.395–1.399 private equity 1.393 real estate funds 1.393 re-use of assets (re-hypothecation) 1.379, 1.428 safekeeping of assets access to information 1.418 AIF’s assets 1.365 escalation procedures 1.386, 1.422 generally 1.416

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look-through approach 1.423–1.424 provision of information 1.417 records 1.420 reliable information 1.419 verification procedures 1.421 safekeeping of financial instruments custody risks 1.410 delegation of custody functions 1.413 due care 1.409 financial instruments held in custody 1.405 fraud 1.411 inadequate registering 1.411 look-through approach 1.414–1.415 negligence 1.411 poor administration 1.411 proper registration 1.406 reconciliations 1.408 records and segregated accounts 1.407 verification of ownership rights 1.412 single depositary 1.366–1.368 Spain 9.84–9.93 strict liability 1.363 Sweden 10.50–10.51 United Kingdom 2.87–2.106 venture capital funds 1.393 depositary contract amendment 1.374 amendments to AIF rules 1.380 applicable national law 1.390 cancellation 1.381 cash accounts 1.385 confidentiality 1.375 depositary enquiries 1.388 escalation procedures 1.386, 1.422 financing of terrorism 1.384 insolvency risk 1.387 issue 1.381 liability 1.373 money laundering 1.384 oversight function 1.372, 1.382 parties 1.369 redemption 1.381 repurchase 1.381 re-use of assets (re-hypothecation) 1.379, 1.428 review of performance 1.389 safe-keeping 1.372 sale and subscription 1.381 services provided 1.371 termination 1.374 third parties 1.383 transmission of information 1.376–1.378

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validity 1.374 written form 1.370 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions France 3.111–3.112 Germany 4.102 Ireland 5.179 Italy 6.157–6.158 Luxembourg 7.289 Netherlands 8.131 Spain 9.134 Sweden 10.83 United Kingdom 2.166 managing AIFs established in other Member States France 3.109 Germany 4.100 Ireland 5.174–5.177 Italy 6.153–6.154 Luxembourg 7.283–7.287 Netherlands 8.127–8.129 Spain 9.131 Sweden 10.79–10.81 United Kingdom 2.156–2.161 marketing in home Member State France 3.105 Germany 4.92–4.94 Ireland 5.159–5.166 Italy 6.147–6.148 Luxembourg 7.267–7.273 Netherlands 8.124 Spain 9.124–9.127 Sweden 10.74–10.76 United Kingdom 2.146–2.149 marketing into other Member States France 3.106–3.108 Germany 4.95–4.99 Ireland 5.167–5.173 Italy 6.149–6.152 Luxembourg 7.274–7.282 Netherlands 8.125–8.126 Spain 9.128–9.130 Sweden 10.77–10.78 United Kingdom 2.153 private law sanctions France 3.113 (p. 481) Germany 4.103 Ireland 5.180 Italy 6.159–6.160 Luxembourg 7.290–7.291 Netherlands 8.132 Spain 9.135

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Sweden 10.84–10.85 United Kingdom 2.167–2.168 regulatory law sanctions France 3.110 Germany 4.102 Ireland 5.178 Italy 6.155–6.156 Luxembourg 7.288 Netherlands 8.130 Spain 9.132–9.133 Sweden 10.82 United Kingdom 2.162–2.165 violating marketing/managing conditions France 3.110–3.113 Germany 4.102–4.104 Ireland 5.178–5.180 Italy 6.155–6.160 Luxembourg 7.288–7.291 Netherlands 8.130–8.132 Spain 9.132–9.135 Sweden 10.82–10.85 United Kingdom 2.162–2.168 European Banking Authority (EBA) 1.39 European Central Bank (ECB) Securitization Regulation 1.301 European Insurance and Occupational Pensions Authority (EIOPA) 1.39 European Securities and Market Authority (ESMA) managing AIFs ESMA action 1.496–1.497 ESMA responsibility 1.495 powers 1.574–1.575 remuneration policies 1.265– 1.266 role 1.39, 1.43, 1.45 European Supervisory Authorities (ESAs) 1.39–1.40, 1.42 European System of Financial Supervision (ESFS) 1.40, 1.45 European Systemic Risk Board (ESRB) 1.40 France AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 3.100 criminal law sanctions 3.102–3.103 leveraged AIFs 3.96–3.99 private law sanctions 3.104 regulatory law sanctions 3.101 violations 3.101–3.104 AIFMD provisions and implementing regulation determination of AIFM 3.36–3.39 impact 3.142–3.143 implementation 3.26, 3.29 scope and exemptions 3.32–3.35 AIFs AIFs by nature 3.27

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AIFs by object 3.27–3.28 authorization of AIFMs changes in scope and withdrawal 3.43 conditions and application 3.40 criminal law sanctions 3.45 initial capital and own funds, 3.41–3.42 private law sanctions 3.46–3.49 regulatory law sanctions 3.44 violations 3.44– 3.49 competent authorities 3.135– 3.141, 3.143 depositary appointment 3.73 banking groups 3.73 liability 3.72, 3.80 monitoring cash flow 3.71 regulation 3.70–3.71 retention of assets 3.72 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions 3.111–3.112 managing AIFs established in other Member States 3.109 marketing in home Member State 3.105 marketing into other Member States 3.106–3.108 private law sanctions 3.113 regulatory law sanctions 3.110 violating marketing/managing conditions 3.110–3.113 legal structures forming AIFs 3.06–3.14 national non-retail investment industry 3.01–3.05 marketing to retail investors marketing by AIFM 3.130–3.133 violation of national rules 3.134 operating conditions for AIFMs conflicts of interest 3.55 criminal law sanctions 3.75 delegation of AIFM functions 3.68–3.69, 3.77 depositary 3.70–3.73, 3.80–3.81 general principles 3.50–3.52, 3.62 general requirements 3.50–3.61 investment in securitization positions 3.61 liquidity management 3.59–3.60 market integrity 3.84 organizational requirements 3.62–3.67 outsourcing to third party 3.84 private law sanctions 3.76–3.85 professional obligations 3.83, 3.85 remuneration 3.53–3.54 regulatory law sanctions 3.74 risk management 3.56–3.58 valuation 3.63–3.67, 3.76, 3.79 violations 3.74–3.85 pre-AIFMD regulatory framework regulation of AIFMs and AIFs 3.15–3.19

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

regulation of national marketing (AIFs) 3.20–3.25 regulation of national AIFs after AIFMD 3.26–3.31 rules relating to third countries AIFs managed by non-EU AIFM 3.124–3.125 authorization of non-EU AIFMs 3.123 EU AIFMs managing non-EU AIFs not marketed in EU 3.114–3.115 managing/marketing of AIFs 3.123 (p. 482) non-EU AIFs managed by EU AIFMs 3.116–3.122 passporting regime for non-EU AIFs 3.116–3.118 specialized professional funds 3.10 supervisory powers 3.135–3.141 taxation 3.14 transparency requirements criminal law sanctions 3.94 disclosure to investors 3.88–3.89 financial reporting 3.86–3.87 private law sanctions 3.95 regulatory law sanctions 3.93 regulatory reporting 3.90–3.92 violations 3.93–3.95 Germany AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 4.85–4.87 criminal law sanctions 4.89 leveraged AIFs 4.84 private law sanctions 4.90–4.91 regulatory law sanctions 4.88 violations 4.88–4.91 AIFMD provisions and implementing regulation determination of AIFM 4.29–4.35 impact 4.125–4.126 scope and exemptions 4.25–4.28 AIFs close-ended AIF 4.24 open-ended retail AIF 4.23 authorization of AIFMs changes in scope and withdrawal 4.42 conditions and application 4.36–4.39 criminal law sanctions 4.44 initial capital and own funds 4.40–4.41 private law sanctions 4.45 regulatory law sanctions 4.43 violations 4.43–4.45 competent authorities 4.122–4.124 contractual fund 4.14 depositary appointment 4.65–4.66 liability 4.68 responsibility 4.67 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions 4.102

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

managing AIFs established in other Member States 4.100 marketing in home Member State 4.92–4.94 marketing into other Member States 4.95–4.99 private law sanctions 4.103 regulatory law sanctions 4.102 violating marketing/managing conditions 4.102–4.104 investment company 4.14 investment limited company 4.14 legal structures forming AIFs 4.11–4.14 national non-retail investment industry 4.01–4.10 marketing to retail investors marketing by AIFM 4.116–4.120 violation of national rules 4.121 operating conditions for AIFMs conflicts of interest 4.52 criminal law sanctions 4.70 delegation of AIFM functions 4.61–4.64 depositary 4.65–4.68 general principles 4.46–4.50, 4.59 general requirements 4.46–4.58 investment in securitization positions 4.58 liquidity management 4.55–4.57 organizational requirements 4.59–4.60 private law sanctions 4.71–4.73 remuneration 4.51 regulatory law sanctions 4.69 risk management 4.53–4.54 valuation 4.60 violations 4.69–4.73 pre-AIFMD regulatory framework regulation of AIFMs and AIFs 4.15–4.17 regulation of national marketing (AIFs) 4.18–4.22 regulation of national AIFs after AIFMD 4.23–4.24 rules relating to third countries AIFs managed by non-EU AIFM 4.112 authorization of non-EU AIFMs 4.109–4.111 criminal law sanctions 4.114 EU AIFMs managing non-EU AIFs not marketed in EU 4.104 managing/marketing of AIFs 4.109–4.112 non-EU AIFs managed by EU AIFMs 4.106–4.108 passporting regime for non-EU AIFs 4.106–4.108 private law sanctions 4.115 regulatory law sanctions 4.113 violations 4.113–4.115 supervisory powers 4.122– 4.124 transparency requirements criminal law sanctions 4.82 disclosure to investors 4.78–4.79 financial reporting 4.74–4.77 private law sanctions 4.83 regulatory law sanctions 4.81

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

regulatory reporting 4.80 violations 4.81–4.83 initial capital and own funds AIFMD provisions 1.190–1.195 France 3.41–3.42 Germany 4.40–4.41 Ireland 5.101–5.103 Italy 6.59–6.61 Luxembourg 7.102–7.109 Netherlands 8.51–8.54 Spain 9.45–9.48 Sweden 10.27–10.29 United Kingdom 2.46–2.55 investment in securitization positions authorization 1.304 Banking Directive 1.303, 1.306 compliance obligation 1.311 debt securities 1.296–1.297 ECB Securitization Regulation 1.301 France 3.61 (p. 483) Germany 4.01–4.10, 4.58 investment by AIF 1.304–1.306 Ireland 5.122 Italy 6.01–6.02, 6.83 Luxembourg 7.174 Netherlands 8.86 retention requirements 1.307–1.309 securitization special purpose entity (SSPE) 1.297–1.300, 1.304–1.305 securitizations 1.297, 1.299–1.303 Spain 9.73 sponsors and originators 1.310–1.311 Sweden 10.45 synthetic securitization 1.303 United Kingdom 2.80 Ireland AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 5.155 criminal law sanctions 5.157 leveraged AIFs 5.152–5.154 private law sanctions 5.158 regulatory law sanctions 5.156 violations 5.156–5.158 AIFMD provisions and implementing regulation determination of AIFM 5.91–5.93 impact 5.197 scope and exemptions 5.88–5.90 approval of directors 5.55–5.57 approval of promoter/investment manager 5.49–5.50 authorization of AIFMs changes in scope and withdrawal 5.104– 5.105 conditions and application 5.94–5.100

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

criminal law sanctions 5.108 initial capital and own funds 5.101–5.103 private law sanctions 5.109–5.110 regulatory law sanctions 5.106–5.107 violations 5.106–5.110 Central Bank 5.03 common contractual fund 5.16–5.19 competent authorities 5.192–5.196 custodian/administrator 5.58–5.60 depositary information requirements 5.135 liability 5.134 safe-keeping function 5.136 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions 5.179 managing AIFs established in other Member States 5.174–5.177 marketing in home Member State 5.159–5.166 marketing into other Member States 5.167–5.173 private law sanctions 5.180 regulatory law sanctions 5.178 violating marketing/managing conditions 5.178–5.180 fund structures 5.10, 5.25–5.31 investment company 5.11–5.13 investment limited partnership 5.20–5.24 Irish Funds Industry Association 5.03 legal structures forming AIFs 5.08–5.32 legal vehicles 5.10 management company 5.54 marketing to retail investors marketing by AIFM 5.190 violation of national rules 5.191 multi-class funds 5.31 national non-retail investment industry 5.01–5.07 operating conditions for AIFMs conflicts of interest 5.116 criminal law sanctions 5.138 delegation of AIFM functions 5.130–5.133 depositary 5.134–5.136 general principles 5.111–5.113, 5.123–5.125 general requirements 5.111–5.122 investment in securitization positions 5.122 liquidity management 5.120–5.121 organizational requirements 5.123–5.129 private law sanctions 5.139 remuneration 5.114–5.115 regulatory law sanctions 5.137 risk management 5.117–5.119 valuation 5.126–5.129 violations 5.137–5.139 pre-AIFMD regulatory framework regulation of AIFMs and AIFs 5.33–5.35

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

regulation of national marketing (AIFs) 5.61–5.63 private equity funds 5.06, 5.47–5.48 professional investor funds 5.02, 5.44–5.45, 5.78–5.79 qualifying investor funds 5.02–5.03, 5.36–5.42, 5.68–5.71, 5.75 real estate funds 5.47 regulation of national AIFs after AIFMD AIF promoters 5.49–5.50, 5.80–5.81 AIF Rulebook 5.65–5.68 extent of change 5.64 fair treatment of investors 5.82 initial offer period 5.74 performance fees 5.86 professional investor funds 5.78–5.79 qualifying investor AIF 5.68–5.71, 5.75 Retail Investor Alternative Investor Fund 5.68, 5.75–5.77 side-pockets 5.83–5.85 unregulated funds 5.72–5.73 valuation deals 5.87 retail funds 5.43 rules relating to third countries AIFs managed by non-EU AIFM 5.186 authorization of non-EU AIFMs 5.184–5.185 criminal law sanctions 5.188 EU AIFMs managing non-EU AIFs not marketed in EU 5.181 managing/marketing of AIFs 5.184–5.185 non-EU AIFs managed by EU AIFMs 5.182–5.183 passporting regime for non-EU AIFs 5.182 private law sanctions 5.189 regulatory law sanctions 5.187 violations 5.187–5.189 segregated liability between sub-funds 5.29–5.30 supervisory powers 5.192–5.196 (p. 484) taxation 5.32 transparency requirements criminal law sanctions 5.150 disclosure to investors 5.144–5.147 financial reporting 5.140–5.143 private law sanctions 5.151 regulatory law sanctions 5.149 regulatory reporting 5.148 violations 5.149–5.151 umbrella funds 5.27–5.28 unit trust 5.14–5.15 Italy AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 6.140–6.144 criminal law sanctions 6.145 leveraged AIFs 6.139 private law sanctions 6.145 regulatory law sanctions 6.145 violations 6.145–6.146

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

AIFMD provisions and implementing regulation determination of AIFM 6.48–6.51 impact 6.193–6.198 implementation 6.39–6.41 scope and exemptions 6.45–6.47 terminology 6.44 authorization of AIFMs changes in scope and withdrawal 6.62 conditions and application 6.52–6.58 criminal law sanctions 6.69–6.70 initial capital and own funds 6.59–6.61 private law sanctions 6.71–6.72 regulatory law sanctions 6.63–6.68 violations 6.63–6.72 common investment fund 6.03–6.05, 6.07, 6.09 competent authorities 6.181–6.192 Consolidated Law on Finance Intermediation (TUF) 6.06–6.08 depositary appointment 6.99 eligibility 6.98 minimum assets 6.99 responsibilities 6.101 safe-keeping function 6.101 sub-deposit 6.98, 6.100 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions 6.157–6.158 managing AIFs established in other Member States 6.153–6.154 marketing in home Member State 6.147–6.148 marketing into other Member States 6.149–6.152 private law sanctions 6.159–6.160 regulatory law sanctions 6.155–6.156 violating marketing/managing conditions 6.155–6.160 Italian Supreme Court ruling 6.08–6.10 legal structures forming AIFs 6.03–6.10 national non-retail investment industry 6.01–6.02 marketing to retail investors marketing by AIFM 6.170–6.176 violation of national rules 6.177–6.180 operating conditions for AIFMs conflicts of interest 6.77 criminal law sanctions 6.111–6.116 delegation of AIFM functions 6.91–6.97 depositary 6.98–6.102 general principles 6.73–6.75, 6.84–6.86 general requirements 6.73–6.83 investment in securitization positions 6.01–6.02, 6.83 liquidity management 6.82 organizational requirements 6.84–6.90 private law sanctions 6.117–6.126 remuneration 6.76 regulatory law sanctions 6.103–6.110

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

risk management 6.78–6.81 valuation 6.87–6.90 violations 6.103–6.126 pre-AIFMD regulatory framework close-ended funds 6.24 guaranteed funds 6.26 harmonized open-ended funds 6.21 non-harmonized open-ended funds 6.22–6.23 non-UCITS funds (AIFs) 6.17–6.31 non-UCITS management companies 6.11–6.16 regulation of AIFMs and AIFs 6.11–6.34 regulation of national marketing (AIFs) 6.35–6.38 regulatory bodies 6.32–6.34 reserved funds 6.25, 6.30 speculative funds 6.27–6.28, 6.30 regulation of national AIFs after AIFMD 6.39–6.43 rules relating to third countries AIFs managed by non-EU AIFM 6.166 authorization of non-EU AIFMs 6.164–6.165 criminal law sanctions 6.168 EU AIFMs managing non-EU AIFs not marketed in EU 6.161 managing/marketing of AIFs 6.164–6.165 non-EU AIFs managed by EU AIFMs 6.162–6.163 passporting regime for non-EU AIFs 6.162–6.163 private law sanctions 6.169 regulatory law sanctions 6.167 violations 6.167–6.169 SICAVs 6.04–6.07 supervisory powers 6.181–6.192 transparency requirements criminal law sanctions 6.136–6.137 disclosure to investors 6.128–6.133 financial reporting 6.127 private law sanctions 6.138 regulatory law sanctions 6.135 regulatory reporting 6.134 violations 6.135–6.138 Lamfalussy procedure framework legislation 1.35 implementing measures 1.36 organizing principle 1.38 regulatory guidelines 1.37 legal structures forming AIFs France 3.06–3.14 (p. 485) Germany 4.11–4.14 Ireland 5.08–5.32 Italy 6.03–6.10 Luxembourg 7.18–7.19 Netherlands 8.04–8.20 Spain 9.05–9.13 Sweden 10.03–10.08

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

leveraged AIFs commitment methodology 1.24–1.25 definition of leverage 1.120 determination of leverage 1.120–1.129 exposure/net asset value 1.121, 1.128–1.129 France 3.96–3.99 Germany 4.84 gross methodology 1.124, 1.126–1.127 Ireland 5.152–5.154 Italy 6.139 level of leverage 1.486 leveraged AIFs 1.114, 1.116–1.117 Luxembourg 7.261–7.262 managing specific types of AIF 1.491–1.497 see also AIFM managing specific types of AIF measurement 1.121–1.126 Netherlands 8.114 shorting 1.119 Spain 9.113–9.116 substantial basis 1.486 swap agreements 1.118 Sweden 10.66– 10.67 transparency requirements 1.486 United Kingdom 2.137–2.138 unleveraged AIFs 1.114 liquidity management investment strategy 1.292, 1.294–1.295 liquidity profile 1.292, 1.294–1.295 meeting payment obligations 1.290–1.291 redemption policy 1.292–1.295 Luxembourg AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 7.263 criminal law sanctions 7.265 leveraged AIFs 7.261–7.262 private law sanctions 7.266 regulatory law sanctions 7.264 violations 7.264–7.266 AIFMD provisions and implementing regulation determination of AIFM 7.85–7.91 impact 7.17, 7.325–7.328 scope and exemptions 7.75–7.84 AIFs close-ended AIFs 7.64– 7.66 open-ended AIFs 7.67–7.69 regulated AIFs 7.24–7.58 unregulated AIFs 7.20–7.23 authorization of AIFMs breach of company law 7.133–7.135 changes in scope and withdrawal 7.110–7.119 conditions and application 7.92–7.101

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

criminal law sanctions 7.125 delegation of management function 7.128–7.131 external authorized AIFM 7.136–7.140 initial capital and own funds 7.102–7.109 management errors 7.132 private law sanctions 7.126–7.140 regulatory law sanctions 7.120–7.124 violations 7.120–7.140 Chapter 15 management companies 7.81–7.82 Chapter 16 management companies 7.81–7.82 competent authorities 7.318–7.324 depositary additional oversight duties 7.217–7.219 cash monitoring 7.208–7.209 custody of financial instruments 7.210–7.212 delegation 7.215 eligible service providers 7.205 force majeure 7.213–7.214 generally 7.202 impact on offering documentation 7.220–7.222 intellectual safe-keeping 7.206–7.207 legal regimes 7.216 responsibility 7.204 supervisory role 7.203 verification of ownership 7.206–7.207 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions 7.289 managing AIFs established in other Member States 7.283–7.287 marketing in home Member State 7.267–7.273 marketing into other Member States 7.274–7.282 private law sanctions 7.290–7.291 regulatory law sanctions 7.288 violating marketing/managing conditions 7.288–7.291 investment companies in risk capital (SICARs) 7.24–7.32 legal structures forming AIFs 7.18–7.19 limitation of counterparty risk 7.51 marketing to retail investors marketing by AIFM 7.315–7.316 violation of national rules 7.317 national non-retail investment industry 7.01–7.17 operating conditions for AIFMs conflicts of interest 7.159–7.161 convergent approach 7.141–7.142 criminal law sanctions 7.224 delegation of AIFM functions 7.191–7.201 depositary 7.202–7.222 distinctive features 7.143–7.149 general principles 7.141–7.154 general requirements 7.141–7.174 impact on national structures 7.150–7.154 investment in securitization positions 7.174

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

liquidity management 7.171–7.173 organizational requirements 7.175–7.190 private law sanctions 7.225–7.233 remuneration 7.155–7.158 regulatory law sanctions 7.223 risk management 7.162–7.170 valuation 7.186–7.190 violations 7.223–7.233 Part II UCIs 7.02, 7.15, 7.39–7.56 pre-AIFMD regulatory framework close-ended AIFs 7.64– 7.66 (p. 486) open-ended AIFs 7.67–7.69 regulation of AIFMs and AIFs 7.59–7.61 regulation of national marketing (AIFs) 7.62–7.69 regulation of national AIFs after AIFMD 7.70–7.74 repo transactions 7.49–7.50 rules relating to third countries AIFs managed by non-EU AIFM 7.311 authorization of non-EU AIFMs 7.301–7.310 criminal law sanctions 7.313 EU AIFMs managing non-EU AIFs not marketed in EU 7.292–7.294 Luxembourg Member State of Reference 7.303–7.307 Luxembourg not Member State of Reference 7.308–7.310 managing/marketing of AIFs 7.301–7.310 non-EU AIFs managed by EU AIFMs 7.295–7.300 passporting regime for non-EU AIFs 7.295–7.300 private law sanctions 7.314 private placements 7.297–7.300 regulatory law sanctions 7.312 violations 7.312–7.314 securities lending transactions 7.48 SICAR Law 7.07, 7.09, 7.57 specialized investment funds (SIFs) 7.06–7.07, 7.33–7.38 Supervisory Authority of the Financial Sector (CSSF) 7.10–7.14, 7.16 supervisory powers 7.318–7.324 transparency requirements AIF/AIFM liability 7.255 criminal law sanctions 7.254 disclosure to investors 7.237–7.250 financial reporting 7.234–7.236 operator/sponsor liability 7.256–7.260 private law sanctions 7.255–7.260 regulatory law sanctions 7.253 regulatory reporting 7.251–7.252 violations 7.253–7.260 unregulated AIFs 7.20–7.23 marketing of AIFs see also EU AIFMs marketing/managing EU AIFS in EU EU AIFs marketing authority 1.526–1.528 marketing by non-EU AIFM 1.537–1.538, 1.541–1.542 material change 1.534–1.536, 1.550–1.551

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Member State of reference 1.537 non-home Member State 1.539 notification procedure 1.529–1.533, 1.537, 1.544–1.549 passporting rights 1.539–1.543 professional investors 1.543 non-EU AIFs authorized EU AIFM 1.557 compliance with requirements 1.554, 1.559 conditions to be met 1.554–1.555 EU AIFMs 1.552–1.553 material change 1.556 national regimes 1.557, 1.559, 1.564–1.565 non-EU AIFMs 1.552, 1.558–1.563 notification procedure 1.556 passporting rights 1.552–1.555 professional investors 1.557 systemic risk 1.559 marketing to retail investors AIFMD provisions 1.566–1.570 marketing by AIFMs France 3.130–3.133 Germany 4.116–4.120 Ireland 5.190 Italy 6.170–6.176 Luxembourg 7.315–7.316 Netherlands 8.148–8.154 Spain 9.151 Sweden 10.101 United Kingdom 2.179–2.183 violation of national rules France 3.134 Germany 4.121 Ireland 5.191 Italy 6.177–6.180 Luxembourg 7.317 Netherlands 8.155 Spain 9.152–9.155 Sweden 10.102 United Kingdom 2.184–2.185 national non-retail investment industry France 3.01–3.05 Germany 4.01–4.10 Ireland 5.01–5.07 Italy 6.01–6.02 Luxembourg 7.01–7.17 Netherlands 8.01–8.03 Spain 9.01–9.04 Sweden 10.01–10.02 Netherlands AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 8.115–8.120

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

criminal law sanctions 8.122 leveraged AIFs 8.114 private law sanctions 8.123 regulatory law sanctions 8.121 violations 8.121–8.123 AIFMD provisions and implementing regulation determination of AIFM 8.43–8.46 impact 8.180–8.185 scope and exemptions 8.37–8.42 authorization of AIFMs changes in scope and withdrawal 8.55 conditions and application 8.47–8.50 criminal law sanctions 8.63–8.69 initial capital and own funds 8.51–8.54 private law sanctions 8.70–8.71 regulatory law sanctions 8.56–8.62 violations 8.56–8.71 common fund (FGR) 8.15–8.20 companies (BV or NV) 8.06–8.08 (p. 487) competent authorities 8.156–8.179 cooperative 8.09–8.11 depositary appointment 8.93, 8.95 cross-liability risk 8.94, 8.96 liability 8.98 separate dedicated depositary 8.94, 8.96 third party depositaries 8.97 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions 8.131 managing AIFs established in other Member States 8.127–8.129 marketing in home Member State 8.124 marketing into other Member States 8.125–8.126 private law sanctions 8.132 regulatory law sanctions 8.130 violating marketing/managing conditions 8.130–8.132 legal structures forming AIFs 8.04–8.05 limited partnership (CV) 8.12–8.14 marketing to retail investors marketing by AIFM 8.148–8.154 violation of national rules 8.155 national non-retail investment industry 8.01–8.03 operating conditions for AIFMs conflicts of interest 8.80 criminal law sanctions 8.100 delegation of AIFM functions 8.90–8.92 depositary 8.93–8.98 general principles 8.72–8.77, 8.87 general requirements 8.72–8.86 investment in securitization positions 8.86 liquidity management 8.82–8.85 organizational requirements 8.87–8.89

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

private law sanctions 8.101 remuneration 8.78–8.79 regulatory law sanctions 8.99 risk management 8.81 valuation 8.88–8.89 violations 8.99–8.101 pre-AIFMD regulatory framework regulation of AIFMs and AIFs 8.21–8.27 regulation of national marketing (AIFs) 8.28–8.33 regulation of national AIFs after AIFMD 8.34–8.36 rules relating to third countries AIFs managed by non-EU AIFM 8.140–8.144 authorization of non-EU AIFMs 8.138–8.139 criminal law sanctions 8.146 EU AIFMs managing non-EU AIFs not marketed in EU 8.136 generally 8.133–8.135 managing/marketing of AIFs 8.124–8.129 non-EU AIFs managed by EU AIFMs 8.137 passporting regime for non-EU AIFs 8.137 private law sanctions 8.147 regulatory law sanctions 8.145 violations 8.145–8.147 supervisory powers 8.156–8.179 transparency requirements criminal law sanctions 8.112 disclosure to investors 8.105–8.106 financial reporting 8.102–8.104 impact on implementation 8.108–8.110 private law sanctions 8.113 regulatory law sanctions 8.111 regulatory reporting 8.107 violations 8.111–8.113 non-UCITS retail scheme (NURS) regulation 1.02, 1.33 single market 1.33 operating conditions for AIFMs conflicts of interest France 3.55 Germany 4.52 Ireland 5.116 Italy 6.77 Luxembourg 7.159–7.161 Netherlands 8.80 Spain 9.64 Sweden 10.40 United Kingdom 2.71–2.73 criminal law sanctions France 3.75 Germany 4.70 Ireland 5.138 Italy 6.111–6.116

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Luxembourg 7.224 Netherlands 8.100 Spain 9.96 Sweden 10.53 United Kingdom 2.110 delegation of AIFM functions France 3.68–3.69 Germany 4.61–4.64 Ireland 5.130–5.133 Italy 6.91–6.97 Luxembourg 7.191–7.201 Netherlands 8.90–8.92 Spain 9.80–9.83 Sweden 10.49 United Kingdom 2.86 depositary France 3.70–3.73, 3.80–3.81 Germany 4.65–4.68 Ireland 5.134–5.136 Italy 6.98–6.102 Luxembourg 7.202–7.222 Netherlands 8.93–8.98 Spain 9.84–9.93 Sweden 10.50–10.51 United Kingdom 2.87–2.106 general principles France 3.50–3.52, 3.62 Germany 4.46–4.50, 4.59 Ireland 5.111–5.113, 5.123–5.125 Italy 6.73–6.75, 6.84–6.86 Luxembourg 7.141–7.154 Netherlands 8.72–8.77, 8.87 Spain 9.55–9.60, 9.74–9.75 Sweden 10.35–10.38, 10.46 United Kingdom 2.63–2.68, 2.81–2.83 (p. 488) general requirements France 3.50–3.61 Germany 4.46–4.58 Ireland 5.111–5.122 Italy 6.73–6.83 Luxembourg 7.141–7.174 Netherlands 8.72–8.86 Spain 9.55–9.73 Sweden 10.35–10.45 United Kingdom 2.63–2.80 investment in securitization positions France 3.61 Germany 4.58 Ireland 5.122 Italy 6.83 Luxembourg 7.174

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Netherlands 8.86 Spain 9.73 Sweden 10.45 United Kingdom 2.80 liquidity management France 3.59–3.60 Germany 4.55–4.57 Ireland 5.120–5.121 Italy 6.82 Luxembourg 7.171–7.173 Netherlands 8.82–8.85 Spain 9.69–9.72 Sweden 10.43–10.44 United Kingdom 2.78–2.79 organizational requirements France 3.62–3.67 Germany 4.59–4.60 Ireland 5.123–5.129 Italy 6.84–6.90 Luxembourg 7.175–7.190 Netherlands 8.87–8.89 Spain 9.74–9.79 Sweden 10.46–10.48 United Kingdom 2.81–2.85 private law sanctions France 3.76–3.85 Germany 4.71–4.73 Ireland 5.139 Italy 6.117–6.126 Luxembourg 7.225–7.233 Netherlands 8.101 Spain 9.97–9.100 Sweden 10.54–10.56 United Kingdom 2.111–2.126 regulatory law sanctions France 3.74 Germany 4.69 Ireland 5.137 Italy 6.103–6.110 Luxembourg 7.223 Netherlands 8.99 Spain 9.94–9.95 Sweden 10.52 United Kingdom 2.107–2.109 remuneration France 3.53–3.54 Germany 4.51 Ireland 5.114–5.115 Italy 6.76 Luxembourg 7.155–7.158 Netherlands 8.78–8.79

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Spain 9.61–9.63 Sweden 10.39 United Kingdom 2.69–2.70 risk management France 3.56–3.58 Germany 4.53–4.54 Ireland 5.117–5.119 Italy 6.78–6.81 Luxembourg 7.162–7.170 Netherlands 8.81 Spain 9.65–9.68 Sweden 10.41–10.42 United Kingdom 2.74–2.77 valuation France 3.63–3.67, 3.76, 3.79 Germany 4.60 Ireland 5.126–5.129 Italy 6.87–6.90 Luxembourg 7.186–7.190 Netherlands 8.88–8.89 Spain 9.76–9.79 Sweden 10.47–10.48 United Kingdom 2.84–2.85 violations France 3.74–3.85 Germany 4.69–4.73 Ireland 5.137–5.139 Italy 6.103–6.126 Luxembourg 7.223–7.233 Netherlands 8.99–8.101 Spain 9.94–9.100 Sweden 10.52–10.56 United Kingdom 2.107–2.126 pre-AIFMD regulatory framework regulation of AIFMs and AIFs France 3.15–3.19 Germany 4.15–4.17 Ireland 5.33–5.35 Italy 6.11–6.34 Luxembourg 7.59–7.61 Netherlands 8.21–8.27 Spain 9.14–9.16 Sweden 10.09 United Kingdom 2.01–2.07 regulation of national marketing (AIFs) France 3.20–3.25 Germany 4.18–4.22 Ireland 5.61–5.63 Italy 6.35–6.38 Luxembourg 7.62–7.69 Netherlands 8.28–8.33

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Spain 9.17–9.21 Sweden 10.10–10.11 United Kingdom 2.08–2.13 (p. 489) regulation of national AIFs after AIFMD France 3.26–3.31 Germany 4.23–4.24 Ireland 5.64–5.86 Italy 6.39–6.43 Luxembourg 7.70–7.74 Netherlands 8.34–8.36 Spain 9.22–9.27 Sweden 10.12–10.15 United Kingdom 2.14–2.18 remuneration basic principles 1.258–1.264 efficiency of the principles 1.267 ESMA Guidelines 1.265–1.266 financial crises 1.251, 1.253–1.254 financial euphoria 1.251, 1.253–1.254 governance structure 1.261 payment structures 1.263 proportionality 1.264 regulation 1.255 remuneration committee 1.262 remuneration policies 1.258–1.260 remuneration principles 1.257 remuneration structures 1.256 speculative success 1.251–1.252 risk management categories of risk 1.27–1.28 financial crisis 1.23–1.24, 1.26 France 3.56–3.58 Germany 4.53–4.54 independent risk function 1.282–1.283 investor protection 1.23–1.27 Ireland 5.117–5.119 Italy 6.78–6.81 leverage limit 1.288–1.289 Luxembourg 7.162–7.170 Netherlands 8.81 regulatory framework 1.25 risk limits 1.286–1.287 risk management systems 1.284–1.285 Spain 9.65–9.68 Sweden 10.41–10.42 United Kingdom 2.74–2.77 rules relating to third countries AIFs managed by non-EU AIFM France 3.124–3.125 Germany 4.112 Ireland 5.186

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Italy 6.166 Luxembourg 7.311 Netherlands 8.140–8.144 Spain 9.146–9.147 Sweden 10.94–10.96 United Kingdom 2.175–2.176 authorization of non-EU AIFMs France 3.123 Germany 4.109–4.111 Ireland 5.184–5.185 Italy 6.164–6.165 Luxembourg 7.301–7.310 Netherlands 8.138–8.139 Spain 9.143–9.145 Sweden 10.90–10.93 United Kingdom 2.174 criminal law sanctions France 3.127 Germany 4.114 Ireland 5.188 Italy 6.168 Luxembourg 7.313 Netherlands 8.146 Spain 9.149 Sweden 10.98 United Kingdom 2.177 EU AIFMs managing non-EU AIFs not marketed in EU France 3.114– 3.115 Germany 4.105 Ireland 5.181 Italy 6.161 Luxembourg 7.292–7.294 Netherlands 8.136 Spain 9.136–9.137 Sweden 10.86 United Kingdom 2.169 managing/marketing of AIFs France 3.123 Germany 4.109–4.112 Ireland 5.184–5.185 Italy 6.164–6.165 Luxembourg 7.301–7.310 Netherlands 8.138–8.139 Spain 9.143–9.145 Sweden 10.90–10.93 United Kingdom 2.174 non-EU AIFs managed by EU AIFMs France 3.116–3.122 Germany 4.106–4.108 Ireland 5.182–5.183 Italy 6.162–6.163

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Luxembourg 7.295–7.300 Netherlands 8.137 Spain 9.138–9.142 Sweden 10.87–10.89 United Kingdom 2.171–2.172 passporting regime for non-EU AIFs France 3.116–3.118 Germany 4.106–4.108 Ireland 5.182 Italy 6.162–6.163 Luxembourg 7.295–7.300 Netherlands 8.137 Spain 9.138–9.142 Sweden 10.87–10.89 United Kingdom 2.170, 2.173 private law sanctions France 3.128–3.129 Germany 4.115 Ireland 5.189 Italy 6.169 Luxembourg 7.314 Netherlands 8.147 Spain 9.150 Sweden 10.99– 10.100 United Kingdom 2.177 (p. 490) regulatory law sanctions France 3.126 Germany 4.113 Ireland 5.187 Italy 6.167 Luxembourg 7.312 Netherlands 8.145 Spain 9.148 Sweden 10.97 United Kingdom 2.177 violations France 3.126–3.129 Germany 4.113–4.115 Ireland 5.187–5.189 Italy 6.167–6.169 Luxembourg 7.312–7.314 Netherlands 8.145–8.147 Spain 9.148–9.150 Sweden 10.97–10.100 United Kingdom 2.177–2.178 Spain AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 9.117–9.119 criminal law sanctions 9.121 leveraged AIFs 9.113–9.116 private law sanctions 9.122–9.123

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regulatory law sanctions 9.120 violations 9.120–9.123 AIFMD provisions and implementing regulation determination of AIFM 9.33–9.36 impact 9.160–9.161 scope and exemptions 9.28–9.32 AIFs close-ended AIFs 9.24–9.27, 9.102, 9.104–9.105, 9.107–9.108, 9.126–9.127 open-ended AIFs 9.101, 9.103, 9.106, 9.124–9.125 authorization of AIFMs changes in scope and withdrawal 9.49–9.51 close-ended fund managers 9.47–9.48 conditions and application 9.37–9.44 criminal law sanctions 9.53 initial capital and own funds 9.45–9.48 open-ended fund managers 9.46 private law sanctions 9.54 regulatory law sanctions 9.52 violations 9.52–9.54 competent authorities 9.156–9.159 depositary appointment 9.85, 9.88 delegation of functions 9.91 duties 9.90, 9.93 eligibility 9.89 liability 9.87, 9.92 role 9.86 statutory regime 9.84 EU AIFMs marketing/managing EU AIFS in EU close-ended AIFs 9.126–9.127 criminal law sanctions 9.134 managing AIFs established in other Member States 9.131 marketing in home Member State 9.124–9.127 marketing into other Member States 9.128–9.130 open-ended AIFs 9.124–9.125 private law sanctions 9.135 regulatory law sanctions 9.132–9.133 violating marketing/managing conditions 9.132–9.135 Fund Law 9.05–9.10 legal structures forming AIFs 9.05–9.13 marketing to retail investors marketing by AIFM 9.151 violation of national rules 9.152–9.155 national non-retail investment industry 9.01–9.04 operating conditions for AIFMs conflicts of interest 9.64 criminal law sanctions 9.96 delegation of AIFM functions 9.80–9.83 depositary 9.84–9.93 general principles 9.55–9.60, 9.74–9.75 general requirements 9.55–9.73

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investment in securitization positions 9.73 liquidity management 9.69–9.72 organizational requirements 9.74–9.79 private law sanctions 9.97–9.100 remuneration 9.61–9.63 regulatory law sanctions 9.94–9.95 risk management 9.65–9.68 valuation 9.76–9.79 violations 9.94–9.100 pre-AIFMD regulatory framework regulation of AIFMs and AIFs 9.14–9.16 regulation of national marketing (AIFs) 9.17–9.21 regulation of national AIFs after AIFMD close-ended funds 9.24–9.27 generally 9.22 legislative amendment 9.23 venture capital vehicles 9.24–9.27 rules relating to third countries AIFs managed by non-EU AIFM 9.146–9.147 authorization of non-EU AIFMs 9.143– 9.145 criminal law sanctions 9.149 EU AIFMs managing non-EU AIFs not marketed in EU 9.136–9.137 managing/marketing of AIFs 9.143–9.145 non-EU AIFs managed by EU AIFMs 9.138–9.142 passporting regime for non-EU AIFs 9.138–9.142 private law sanctions 9.150 regulatory law sanctions 9.148 violations 9.148–9.150 supervisory powers 9.156–9.159 transparency requirements close-ended AIFs 9.102, 9.104–9.105, 9.107–9.108 criminal law sanctions 9.111 disclosure to investors 9.103–9.105 financial reporting 9.101–9.102 open-ended AIFs 9.101, 9.103, 9.106 private law sanctions 9.112 (p. 491) regulatory law sanctions 9.109–9.110 regulatory reporting 9.106–9.108 violations 9.109–9.112 Venture Capital Law 9.11–9.13 supervisory powers AIFMD provisions 1.571 France 3.135–3.141 Germany 4.122–4.124 Ireland 5.192–5.196 Italy 6.181–6.192 Luxembourg 7.318–7.324 Netherlands 8.156–8.179 Spain 9.156–9.159 Sweden 10.103–10.109 United Kingdom 2.186

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Sweden AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 10.68 criminal law sanctions 10.70 leveraged AIFs 10.66–10.67 private law sanctions 10.71–10.73 regulatory law sanctions 10.69 violations 10.69–10.73 AIFMD provisions and implementing regulation determination of AIFM 10.19–10.21 impact 10.110–10.113 scope and exemptions 10.16–10.18 authorization of AIFMs changes in scope and withdrawal 10.30 conditions and application 10.22–10.26 criminal law sanctions 10.32 initial capital and own funds 10.27–10.29 private law sanctions 10.33–10.34 regulatory law sanctions 10.31 violations 10.31–10.34 competent authorities 10.103–10.109 contractual funds 10.03 depositary delegation 10.50 offering documentation 10.51 statutory provisions 10.50 EU AIFMs marketing/managing EU AIFS in EU criminal law sanctions 10.83 managing AIFs established in other Member States 10.79–10.81 marketing in home Member State 10.74–10.76 marketing into other Member States 10.77–10.78 private law sanctions 10.84–10.85 regulatory law sanctions 10.82 violating marketing/managing conditions 10.82–10.85 hedge funds 10.03 investment funds 10.04–10.05 legal structures forming AIFs 10.03–10.08 limited liability companies 10.07–10.08 marketing to retail investors marketing by AIFM 10.101 violation of national rules 10.102 national non-retail investment industry 10.01–10.02 operating conditions for AIFMs conflicts of interest 10.40 criminal law sanctions 10.53 delegation of AIFM functions 10.49 depositary 10.50–10.51 general principles 10.35–10.38, 10.46 general requirements 10.35–10.45 investment in securitization positions 10.45 liquidity management 10.43–10.44

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

organizational requirements 10.46–10.48 private law sanctions 10.54–10.56 remuneration 10.39 regulatory law sanctions 10.52 risk management 10.41–10.42 valuation 10.47–10.48 violations 10.52–10.56 pre-AIFMD regulatory framework regulation of AIFMs and AIFs 10.09 regulation of national marketing (AIFs) 10.10–10.11 real estate funds 10.03 regulation of national AIFs after AIFMD 10.12–10.15 rules relating to third countries AIFs managed by non-EU AIFM 10.94–10.96 authorization of non-EU AIFMs 10.90–10.93 criminal law sanctions 10.98 EU AIFMs managing non-EU AIFs not marketed in EU 10.86 managing/marketing of AIFs 10.90–10.93 non-EU AIFs managed by EU AIFMs 10.87–10.89 passporting regime for non-EU AIFs 10.87–10.89 private law sanctions 10.99–10.100 regulatory law sanctions 10.97 violations 10.97–10.100 special funds 10.03, 10.06, 10.08 supervisory powers 10.103–10.109 taxation 10.08 transparency requirements criminal law sanctions 10.62 disclosure to investors 10.58–10.59 financial reporting 10.57 private law sanctions 10.63–10.65 regulatory law sanctions 10.61 regulatory reporting 10.60 violations 10.61–10.65 transparency requirements additional information requirements 1.489 additional reporting requirements 1.490 annual report (AIF) accounting standards 1.473 auditing 1.474–1.475 available on request 1.470 content 1.472 generally 1.467–1.471 information provision 1.471, 1.485 minimum requirements 1.466 criminal law sanctions France 3.94 Germany 4.82 Ireland 5.150 Italy 6.136–6.137 Luxembourg 7.254

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(p. 492) Netherlands 8.112 Spain 9.111 Sweden 10.62 United Kingdom 2.135 disclosure to investors EU disclosure requirements 1.477 France 3.88–3.89 generally 1.476–1.477 Germany 4.78–4.79 information required 1.476, 1.478 Ireland 5.144–5.147 Italy 6.128–6.133 Luxembourg 7.237–7.250 material changes 1.478 national requirements 1.477, 1.479 Netherlands 8.105–8.106 periodic disclosure 1.480 Prospectus Directive 1.479 regular disclosure 1.481 Spain 9.103–9.105 Sweden 10.58–10.59 United Kingdom 2.130–2.131 financial reporting France 3.86–3.87 Germany 4.74–4.77 Ireland 5.140–5.143 Italy 6.127 Luxembourg 7.234–7.236 Netherlands 8.102–8.104 Spain 9.101–9.102 Sweden 10.57 United Kingdom 2.127–2.129 generally 1.465–1.466 investment risks 1.465 monitoring risk 1.484, 1.489 private law sanctions France 3.95 Germany 4.83 Ireland 5.151 Italy 6.138 Luxembourg 7.255–7.260 Netherlands 8.113 Spain 9.112 Sweden 10.63–10.65 United Kingdom 2.135 regulatory law sanctions France 3.93 Germany 4.81 Ireland 5.149 Italy 6.135 Luxembourg 7.253

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Netherlands 8.111 Spain 9.109–9.110 Sweden 10.61 United Kingdom 2.135 regulatory reporting France 3.90–3.92 Germany 4.80 Ireland 5.148 Italy 6.134 Luxembourg 7.251–7.252 Netherlands 8.107 Spain 9.106–9.108 Sweden 10.60 United Kingdom 2.132–2.134 reporting obligations annual report (AIF) 1.466–1.475, 1.485, 1.520–1.522 generally 1.482–1.483 information requirements 1.484–1.487 level of leverage 1.486, 1.488 monitoring market activities 1.482 national regulators 1.483–1.485, 1.489 non-EU AIFMs 1.488 risk profile 1.484 substantial obligations 1.482 violations France 3.93–3.95 Germany 4.81–4.83 Ireland 5.149–5.151 Italy 6.135–6.138 Luxembourg 7.253–7.260 Netherlands 8.111–8.113 Spain 9.109–9.112 Sweden 10.61–10.65 United Kingdom 2.135–2.136 undertaking for collective investment in transferable securities (UCITS) authorization 1.01, 1.05, 1.143, 1.185, 1.197 management 1.74, 1.143, 1.185, 1.197 regulation 1.02 UCITS Directive 1.74 United Kingdom AIFM managing specific types of AIF AIFs controlling non-listed companies and issuers 2.139–2.140 criminal law sanctions 2.141 leveraged AIFs 2.137–2.138 private law sanctions 2.141 regulatory law sanctions 2.141 violations 2.141–2.142 AIFMD provisions and implementing regulation compliance of external AIFM 2.41 determination of AIFM 2.29–2.41 holding companies 2.21–2.26

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impact 2.187 internal management 2.37–2.40 managing AIFs 2.29–2.36 scope and exemptions 2.19–2.28 sub-threshold AIFMs 2.27–2.28 authorization of AIFMs authorized persons/permission to manage AIFs 2.60 breach of FCA Rules 2.61–2.62 changes in scope and withdrawal 2.56–2.57 conditions and application 2.42–2.45 criminal law sanctions 2.58–2.59 initial capital and own funds 2.46–2.55 private law sanctions 2.59 regulatory law sanctions 2.60, 2.62 unauthorized persons 2.58–2.59 violations 2.58–2.62 (p. 493) competent authorities 2.186 depositary AIFMD changes 2.88 duties 2.99–2.106 eligibility 2.91–2.98 liability 2.89, 2.116–2.122 mandatory requirement 2.88 method of implementation 2.87 segregated accounts 2.90 EU AIFMs marketing/managing EU AIFS in EU authorized persons 2.163–2.164, 2.167 comparison with UCITS marketing regime 2.154–2.155 criminal law sanctions 2.166 draft documentation 2.145 investment firms 2.144 investor 2.145 managing AIFs established in other Member States 2.156–2.161 marketing in home Member State 2.146–2.149 marketing into other Member States 2.150–2.155 offering or placement 2.145 private law sanctions 2.167–2.168 regulatory law sanctions 2.162–2.165 restrictions on marketing 2.143 territoriality 2.145 unauthorized persons 2.165, 2.168 unlawful marketing 2.163–2.168 violating marketing/managing conditions 2.162–2.168 legal structures forming AIFs 2.01–2.13 marketing to retail investors marketing by AIFM 2.179–2.183 violation of national rules 2.184–2.185 national non-retail investment industry 2.02–2.08, 2.10–2.11 operating conditions for AIFMs conflicts of interest 2.71–2.73 criminal law sanctions 2.110

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

delegation of AIFM functions 2.86 depositary 2.87–2.106, 2.116–2.122 general principles 2.63–2.68, 2.81–2.83 general requirements 2.63–2.80 investment in securitization positions 2.80 liquidity management 2.78–2.79 negligence 2.124–2.125 organizational requirements 2.81–2.85 private law sanctions 2.111–2.126 remuneration 2.69–2.70 regulatory law sanctions 2.107–2.109 restitution 2.114 risk management 2.74–2.77 valuation 2.84–2.85 violations 2.107–2.126 pre-AIFMD regulatory framework close-ended bodies corporate 2.11–2.12 collective investment schemes 2.02–2.06, 2.10 investment vehicles 2.02, 2.07, 2.11–2.12 non-mainstream pooled investment products 2.13 regulation of AIFMs and AIFs 2.01–2.07 regulation of national marketing (AIFs) 2.08–2.13 regulation of national AIFs after AIFMD copy out approach 2.14, 2.19, 2.187 FCA Rules and Guidance 2.15–2.16, 2.18 implementing rules 2.14–2.18 Investment Funds Sourcebook (FUND) 2.15–2.16 non-EU AIFMs 2.15 parallel regulation 2.14 rules relating to third countries AIFs managed by non-EU AIFM 2.175–2.176 authorization of non-EU AIFMs 2.174 criminal law sanctions 2.177 EU AIFMs managing non-EU AIFs not marketed in EU 2.169 managing/marketing of AIFs 2.174 non-EU AIFs managed by EU AIFMs 2.171–2.172 passporting regime for non-EU AIFs 2.170, 2.173 private law sanctions 2.177 regulatory law sanctions 2.177 violations 2.177–2.178 supervisory powers 2.186 transparency requirements criminal law sanctions 3.135 disclosure to investors 2.130–2.131 financial reporting 2.127–2.129 private law sanctions 2.135 regulatory law sanctions 2.135 regulatory reporting 2.132–2.134 violations 2.135–2.136 valuation assets and liabilities 1.322–1.323

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France 3.63–3.67, 3.76, 3.79 Germany 4.60 Ireland 5.126–5.129 Italy 6.87–6.90 liability for valuation 1.329–1.331 Luxembourg 7.186–7.190 net asset value (NAV) 1.318–1.321 Netherlands 8.88–8.89 responsibility for valuation 1.324–1.328 Spain 9.76–9.79 Sweden 10.47–10.48 United Kingdom 2.84–2.85

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020