Alternative views

There is less than a year to go before the alternative investment fund directive comes into force. Here are the salient points still to be discussed

In brief

The implementation period of the EU’s alternative investment fund managers directive is hurtling towards the funds industry. A recent discussion paper released by the European Securities & Markets Authority revealed some of the key outstanding issues

euro frames

After what now probably feels like endless discussion, arguments, negotiation and drafting, there is just under a year to go before the implementation of the EU’s alternative investment fund managers directive (AIFMD).

The directive was criticised for its potential to stifle the European fund management industry when it was originally mooted back in 2009, but industry outrage has turned into muted acceptance and a desire to work with the authorities to make the best of the situation.

At the moment the key task falls to the European Securities & Markets Authority (Esma), which is in the middle of assessing responses to its discussion paper on ‘key concepts’ of the AIFMD. The next step is the release of a consultation paper setting out formal proposals for draft regulatory technical standards, designed to determine which types of alternative funds will fall under the directive’s remit.

Into law

EU member states are still expected to transpose the directive by July 2013. Some countries are further ahead than others and Luxembourg is likely to be the first to pass implementing legislation into law.

Esma is considering responses from a range of bodies involved in the asset management industry, including a handful of law firms from across Europe. The discussion paper, published in February 2012, was designed to aid the alignment of supervisory practices across the EU to “achieve a harmonised application of the directive”.

The discussion paper followed the November 2011 publication of Esma’s 500-page technical advice on the directive. Luckily the most recent paper was more digestible.

Esma chose to define an alternative investment fund manager (AIFM) fairly simply as an organisation or person performing either the portfolio or risk management functions for an alternative investment fund. However, where the portfolio or risk management functions are delegated to an AIFM, the entity doing the delegation does not need to register.

Esma acknowledged that the scope of the AIFMD is “extremely wide-ranging in the context of the types of AIFs covered”.

“It is likely that there are many different types of AIF established in member states which are currently both regulated and unregulated and which will fall within the scope of the AIFMD,” the discussion paper noted.

Esma asked respondents for their thoughts on clarifying concepts such as family office vehicles and insurance contracts to ensure that all member states deal with them equally. At present these entities are excluded from the directive.


In a response by partner Kees Groffen on behalf of its family office clients, Dutch firm De Brauw Blackstone Westbroek agreed that a better definition was needed.

“Crucial for the notion of family office vehicles is what might be considered a family relationship. In our view, this should cover any family relationship recognised by national law,” said the firm.

A similar response from Skadden Arps Slate Meagher & Flom’s European investment management head Stephen Sims said the definition should make it clear that family members should be able to trace their relationship to a common ancestor “by blood or marriage”.

“We believe that any definition of a family relationship must be broadly drafted so that it encompasses all recognised forms of familial relationships and does not inadvertently exclude relationships such as civil partnerships or adopted, step or foster children,” added Sims.

De Brauw also noted that the wealth to be invested could come from more than one source. “Although the private wealth of a family might have a shared family-related source, either in the past or the present, we would not restrict contributions to a family investment vehicle to money or assets from such a source. In addition, we recommend not requiring assets or money to pre-date the relationship between the investors and the AIF or AIFM,” said the firm.

However, not everyone agreed that defining ‘family office’ more clearly is possible. The City of London Law Society’s (CLLS) response said the concept of a family office vehicle was already clear enough as it is based around the idea that the investment vehicle does not look to third parties for capital.

Complex picture

The Esma discussion paper said the authority had carried out a “mapping exercise” to try to determine the scope of AIFs existing in the EU. The exercise identified a wide variety of investment vehicles, leading Esma to the conclusion that “while the mapping exercise was useful, it does not give a definitive guide in relation to determining the types of AIF in existence. Moreover, AIFs may consist of one or more asset classes or a combination of many.”

It is suggested that regulatory authorities would be better to consider investment strategies than asset classes when they are regulating AIFs, but added that there was “merit in developing other criteria to identify AIFs with a view to establishing a harmonised application of the AIFMD.”

Esma went on to identify those criteria, which included that an AIF should be raising capital for the purpose of collective investment and have a defined investment policy.

While the criteria were broadly supported, some respondents had additional thoughts on the definition of an AIF. For example, Berwin Leighton Paisner’s (BLP) response said the firm disagreed with Esma’s definition of “the number of investors” involved in an AIF. The firm pointed out that “it would be unreasonable and unworkable” for an investment vehicle with a single investor to have to explictly prohibit the sale of units to third party investors for it to be excluded from the directive’s scope.

“Such vehicles should only fall within the scope of the ‘number of investors’ element of the definition when it is intended that they become, or they actually become, collective vehicles,” BLP wrote.

The CLLS response thought Esma had oversimplified its analysis of how to define the ownership of underlying assets in an AIF. Esma said: “Investors in AIFs are generally not the registered holders of the underlying assets and do not individually directly own the underlying assets, but rather their ownership of the assets is represented by shares/units in the AIF.”

The CLLS said it agreed that investors are not the registered holders of the underlying assets, but said that whether the investor had any beneficial or legal ownership rights depended both on the legal nature of the fund and the applicable law.

“It is also important to distinguish between situations where assets are held collectively. In some cases, where assets are raised for collective investment in accordance with a defined investment policy, there may be an AIF. If the assets are collectively owned and registered in a nominee name, the investors will be beneficial owners… In other cases, there may be joint registration in a nominee but no common investment policy or pooled ownership and no AIF,” the law society argued.

The Esma paper also examined what will happen in the case of AIFs already registered under the successful Undertakings in Collective Investment in Transferable Securities (Ucits) directive. Alternative investment strategies within the boundaries of Ucits have become popular in the past couple of years – partly as a result of the uncertainty caused by the AIFMD proposals – but Esma suggested that once the AIFMD is in force, management companies for these funds would come under the aegis of the AIFMD, rather than the Ucits directive.

However investment firms that are already EU-authorised under the Markets in Financial Instruments Directive (MiFID) will not need to become re-authorised under AIFMD.

BLP said this was a flawed argument, suggesting that many MiFID investment firms might wish to become AIFMs, provided the directive allowed them to continue providing discretionary portfolio management.

“If such a process was not possible, MiFID investment firms that are AIFMs would need to establish separate legal entities to act as AIFMs,” BLP pointed out, adding that this would entail significant operational and organisational investment.

The Irish Funds Industry Association agreed with BLP’s interpretation, saying there was nothing in the AIFMD to prevent a MiFID firm from becoming AIFMD-authorised or vice-versa.

The CLLS noted that an AIFM permitted to carry on limited MiFID activities such as discretionary management was subject to the full constraints of the capital adequacy regime, without getting benefits such as a passport across the EU for those activities.

“This puts the AIFM on an unlevel playing field compared with MiFID and Ucits firms, which are subject to CAD but which are both entitled to passports for the full range of their permitted activities. We believe this to be an oversight in the AIFMD as there can be no policy reason to subject a firm to the burden of a European capital regime and MiFID conduct of business rules, and not provide it with the benefit of a passport,” the CLLS said.

It called on Esma to remedy this oversight, noting that the UK’s Financial Services & Markets Act 2000 has a precedent for rectifying the situation.

Such issues are now being considered by Esma. Simultaneously, the UK’s Financial Services Authority (FSA) is mulling over responses to its AIFMD discussion paper – which closed for discussion on the same day as Esma. An FSA consultation paper on implementing the AIFMD in the UK is expected later this year.

The debate is far from over, and lawyers and other industry professionals still have plenty of time to make their voices heard before the directive finally has a real impact next year.


29 April 2009 – European Commission publishes draft proposal for AIFMD

11 November 2010 – European Parliament and Council of Ministers reach agreement over AIFMD text

13 May 2011 – final text of AIFMD published

21 July 2011 – text comes into force

16 November 2011 – European Securities & Markets Authority (Esma) submits technical advice to European Commission

23 February 2012 – Esma publishes key concepts discussion paper

23 March 2012 – discussion paper closes for responses

Remainder of 2012 – consultation on draft regulatory technical standards

22 July 2013 – EU member states required to implement AIFMD into national law