Restrictions on delegation of AIFM functions
As a general principle, the AIFM may delegate functions to third parties under certain conditions. AIFM must continue to remain in charge of its basic functions (i.e., the AIFM must not delegate so many of its functions that it is reduced to a "letter-box entity"). Also, the delegation of functions must not serve as a means to bypass the Directive's requirements. Therefore, a third party assuming management functions must meet the same requirements as an AIFM would under the Directive. This includes authorisation as AIFM for the relevant AIF type.
The key provisions on delegation are set out in Article 20, however there are additional provisions dealing with delegation elsewhere in the Directive (see, for example, Article 21(11) on the delegation of the depositary functions).
Scope of restrictions on delegation
It is not clear from Article 20 (the provision relating to delegation) whether this applies to all functions of the AIFM or not. Whilst Recital (79) appears to confirm that the restriction only applies to the core functions in Annex I (namely portfolio management and risk management) and not the additional activities that may permit AIFM to provide. An important limitation to the rules on delegation is that it does not appear to prohibit the use of investment advisers (namely, providing investment advice to the AIFM or AIF without having power to make discretionary investment decisions).
Information of authorities
The AIFM must inform the competent authorities of investment advisers (namely, providing investment advice to the AIFM or AIF without having power to make discretionary investment decisions) in advance of any delegation of its functions.
The following conditions must be complied with in respect of any delegation (Article 20(1)):
- the AIFM must be able to justify its entire delegation structure with objective reasons;
- the delegate must have sufficient resources to perform the relevant tasks and the persons who effectively conduct the business must be of sufficiently good repute and sufficiently experienced;
- where the delegation relates to portfolio management or risk management, delegation may only be made to undertakings which are authorised or registered for the purpose of asset management and subject to supervision. Where this condition cannot be satisfied, delegation may only be given after prior approval by the relevant competent authorities;
- where the delegation concerns the portfolio management or the risk management and is given to a third-country undertaking, in addition to the above, there must be a co-operation agreement in place between the relevant competent authorities and the supervisory authority of the undertaking;
- the delegation must not prevent the effectiveness of supervision of the AIFM, and in particular, it must not prevent the AIFM from acting, or the AIF from being managed, in the best interests of its investors;
- the AIFM must be able to demonstrate that the delegate is:
- qualified and capable of undertaking the functions in question; and
- that the delegate was selected with all due care; and
- the AIFM must be able effectively to monitor at any time the delegated activity; give at any time further instructions to the delegate; and to withdraw the delegation with immediate effect when in the interests of investors.
No delegation to depositaries or other conflicted persons
In order to avoid conflicts of interests, the AIFM may not delegate portfolio or risk management functions to the depositary or to a delegate of the depositary, or to any other entity whose interests may conflict with those of the AIFM. The delegation to such entity may be allowed if it has functionally and hierarchically separated the performance of its portfolio management or risk management 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.
The AIFM remains liable with respect to its functions and is obliged to supervise the third party on an ongoing basis.
A delegate may sub-delegate any functions with the prior consent of the AIFM and provided that the sub-delegation has been notified to the relevant competent authorities. The requirements that a delegate must meet (see here) must also be met by a sub-delegate.