Scope of application
The Directive establishes rules for the authorisation, operation, and transparency of AIFM. Pursuant to Article 21, the Directive applies to:
- all EU AIFM;
- non-EU AIFM managing EU AIF; and
- non-EU AIFM marketing EU AIF or non-EU AIF within the EU.
The Directive will apply to in-scope AIFM regardless of:
- whether the AIF is open- or closed-ended;
- whether the AIF is constituted in accordance with contract law, trust law, or statute or has any other legal form; or
- what the legal structure of the AIF is.
See also here on what constitutes an AIF and here on exemptions.
Fully and partially exempt AIFM
The extent of regulation to be applied to certain types of AIFM depends on the level of risk posed by the AIFM in question. That level of risk depends in large part on the nature of the AIF managed, as well as the extent to which the relevant fund management and marketing activities are already subject to regulation. As such, the Directive fully exempts certain AIFM (discussed further here), and partially exempts certain AIFM (discussed further here).
EU based and third country AIFM
AIFM established outside the EU, including AIFM established in the Americas or in Asia, are subject to regulation under the Directive but only to the extent they market AIF to European investors, or manage AIF established in the EU.
Only professional investors
The Directive allows AIFM to market shares or units of AIF to professional investors2. AIFM authorisation in accordance with the Directive does not automatically allow AIFM to market units or shares in AIF to retail investors3.
Marketing to retail investors
Pursuant to Article 43(1), Member States have the option to allow AIFM to market AIF to retail investors on their territory. In opting to allow AIFM to market to retail investors, Member States may choose to impose stricter requirements on the AIFM or the AIF than the requirements applicable to AIF marketed to professional investors on their territory. However, Member States may not impose stricter or additional requirements on EU AIF established in another Member State and marketed on a cross-border basis than on AIF marketed domestically.
Pursuant to Article 43(2), Member States permitting the marketing to retail investors on their territory must inform the Commission and ESMA of the types of AIF which AIFM may market to retail investors on their territory, and any additional requirements that the Member State imposes on the marketing of AIF to retail investors.
The Directive does not apply to the following entities4:
- holding companies (Article 2(3)(a));
- institutions covered by the directive on the activities and supervision of institutions for occupational retirement provision (IORP)5 (Article 2(3)(b));
- supranational institutions, such as World Bank, IMF, ECB, EIB, European development finance institutions (DFIs) and bilateral development banks, EIF, other supranational institutions and similar international organizations (Article 2(3)(c));
- national central banks (Article 2(3)(d));
- national, regional and local governments and bodies or other institutions which manages funds supporting social security and pensions systems (Article 2(3)(e));
- employee participation schemes or employee saving schemes (Article 2(3)(f));
- securization special purpose entities (Article 2(3)(g)); or
- AIFM that manage one or more AIF whose only investors are:
- the AIFM;
- the parent undertakings or subsidiaries of the AIFM; or
- other subsidiaries of those parent undertakings, provided that none of those investors itself is an AIF (Article 3(1))).
Furthermore, investment firms which have already been granted authorisation under MiFID or credit institutions authorised under the Directive Relating to the Taking Up and Pursuit of the Business of Credit Institutions6 will not require additional authorisation under the Directive. They may, however, be obliged to comply with AIFM regulations to the extent that their management activities relating to AIF are not already covered by the aforementioned directives.
Meaning of AIF
Pursuant to Article 4(1)(a), AIF is defined to mean any collective investment undertaking (including any sub-compartments or sub-funds) that:
- raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of these investors; and
- does not require authorisation pursuant to Article 5 of the UCITS IV- Directive.
A key point to note is that, whilst the Directive is often described as regulating the private equity and hedge fund industry, it goes a lot wider than this. Essentially, it applies to any fund other than a UCITS and so will cover not only private equity and hedge funds, but also real estate, securities, funds of funds, buy-out funds, debt funds, venture capital funds, infrastructure funds etc.
Recital (7) makes it clear however that the Directive will not apply to family offices and other situations where external funds are not raised. This should also hold true for single investor funds and managed accounts (also referred to as segregated accounts or discretionary mandates). See also here on exemptions from regulation which, in essence, states what types of entities and structures are not considered to be, or to manage, collective investment undertakings.
Additional regulations permitted
Recital (10) makes it clear that national regulators and national law may still impose regulation on AIFs. This is not a "maximum harmonisation" directive (such as MiFID) where Member States are restricted from imposing additional regulations.
Footnotes: 1. All references in this note to an "Article" are to an article of the Directive unless otherwise stated.
2. See Section (8) of the Directive's recitals. According to Article 4(1)(ag) of the Directive, "professional investor" means any investor which is considered to be a professional client or may be treated as a professional client on request within the definition of Annex II of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on Markets in Financial Instruments:
"(1) Entities which are required to be authorized or regulated to operate in the financial markets. The list below should be understood as including all authorized entities carrying out the characteristic activities of the entities mentioned: entities authorized by a Member State under a Directive, entities authorized or regulated by a Member State without reference to a Directive, and entities authorized or regulated by a non Member State:
(a) Credit institutions
(b) Investment firms
(c) Other authorized or regulated financial institutions
(d) Insurance companies
(e) Collective investment schemes and management companies of such schemes
(f) Pension funds and management companies of such funds
(g) Commodity and commodity derivatives dealers
(i) Other institutional investors
(2) Large undertakings meeting two of the following size requirements on a company basis:
— balance sheet total: EUR 20,000,000,
— net turnover: EUR 40,000,000,
— own funds: EUR 2,000,000.
(3) National and regional governments, public bodies that manage public debt, Central Banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organizations.
(4) Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions."
Client categorizations under MiFID are currently the subject of review, however it is not expected that there will not be a significant alternation to these classifications.
3. "Retail investor" is defined in Article 4(1)(aj) as any investor who is not a professional investor.
4. Recital (8) also gives some background to this provision.
5. Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003.
6. Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006.