AIFMD and Cayman funds Focus on major impacts for a US ... · 1 Marketing • US AIFM will have the...

March 2013

AIFMD and Cayman funds Focus on major impacts for a US based manager

© 2013 Deloitte Tax & Consulting AIFMD and US Managers 2

Our discussion today

Provide an overview of the AIFM Directive 1

Discuss case studies applicable to your clients and focus on non-EU managers, private placement and European passport provisions

2

Walkthrough limited (private placement) and full AIFMD compliance requirements

3

Benjamin Collette Partner EMEA AIFMD Leader

http://deloitteintranet/ShareBox/Deloitte People Photos/Collette Benjamin (low res.).jpg


The European Union AIFMD (“Alternative Investment Fund Manager Directive”)…

… has an implicit extra-territorial component. You will be impacted if you:

• Have alternative Investment Management Activities within the European Union, or

• Have Alternative Investment Funds domiciled in the European Union (regardless of the location of your investment management activities), or

• Market one of your Alternative Investment Fund to European Investors (regardless of the domicile of your fund or location of your investment management activities).

The scope is wide, the impacts are significant… you should know what your situation is !


Why the AIFMD?

Regulate an industry that operated under a very light regulatory framework up to now to bring closer to UCITS framework

Regulate 1

Achieve a single EU market and common rules (authorization/supervision) for AIF’s and AIFM’s

Harmonize 2

Increase transparency towards and protection of investors and stakeholders

Protect Investors 3

Increase Responsibility

4 Ensure regulators have proper tools and means to control the systemic risks and increase the responsibility and accountability of AIFM holding or controlling stakes in companies (e.g. Private Equity)

Source : AIFMD; Deloitte Analysis


Objectives of the Directive

• Regulate an industry that operated under a very light regulatory framework up to now to bring closer to UCITS framework

• Regulate 1

• Achieve a single EU market and common rules (authorization/supervision) for AIF’s and AIFM’s

• Harmonize 2

• Increase transparency towards and protection of investors and stakeholders

• Protect Investors 3

• Increase Responsibility

4 • Ensure regulators have proper tools and means to control the systemic risks and increase the responsibility and accountability of AIFM holding or controlling stakes in companies (e.g. Private Equity)

AIFMD brings the alternative asset classes under a new regulatory framework

Scope of AIFMD

Almost everyone is impacted

All the Managers of : • Private equity funds • Hedge funds • Real estate funds • Retail non-UCITS funds • Non-EU funds managed or marketed in the EU

Potential exclusions

Thresholds:

• Asset managed by the AIFM is not exceeding €100 million (or ≤ 500 million if unleveraged and 5 year lock-up period)

• Sub-threshold AIFMs are still subject to registration and regulatory reporting under AIFMD

Vehicle types: • Holding companies • Securitisation SPVs • Pension funds • Employee savings scheme


AIFMD – where do we stand ?

July 2012

July 2013

July 2014

2015

2018

Deadline for national

implementation - Applications start

for New AIFM/activities

Commission issued Level 2

Regulation

AIFM performing activities before July 2013 must submit

application for authorization Extension of

passport to non-EU

AIFM/Non-EU AIF (if positive

opinion of ESMA)

Ending of NPPR* (max. timeframe)

t

July 2011

AIFM Directive enacted

December 2012

Today


Pillars of AIFMD Main topics to be covered Key impacts for US AIFM

2013 2014 2015 2018 1

• US AIFM will have the possibility to market the AIF it manages (US or non-US) throughout EU countries by the means of private placement and/or EU passport under some conditions

EU Marketing through Private Placement regime (allowed until 2018)

Conditions

• Compliant with transparency and PE rules • cooperation arrangements for systemic risks oversight

between the European Member State (MS) where the AIF is marketed and the US

• MS may impose stricter rules

• AIFMD compliant • Prior authorization of AIFM by

its reference MS • Legal representative of AIFM

in the reference MS being the point of contact for investors, authorities and to perform the compliance function

• cooperation arrangements between AIF 3rd country, the US and AIFM reference MS of the AIFM to ensure information exchange

Conditions

EU Marketing through Passport (from 2015 on)

Marketing

The AIFMD is organised around 6 pillars

• Applicable to US AIFM managing:

• EU AIF, or • Non-EU AIF

NOT EXHAUSTIVE FOCUS ON US MANAGER


AIFMD Scope and Compliance Areas (2/2)

EU AIF Non-EU AIF

National Discretion but mandatory for EU passport

Not required for private placement but mandatory for EU Passport

Applicable

Authorization • Every AIFM will have to seek authorization from its

regulatory authority. • It will have to upgrade its current structure, provide

substance and meet capital requirements • Non-EU AIFM will need to appoint a local

representative

2

New roles or service providers

• Each AIF will have to appoint a depositary bank • The AIFM will be able to delegate some functions to

the extent it does not become a “letter box entity” (i.e. lack of operational substance)

3

Transparency

• Reporting to authorities includes market traded,

investment strategies, exposure and risk profile. • Enhanced disclosure to investors and potential

investors such as description of delegated functions, valuation procedures , all fees, liquidity risk management, gates, side pockets or similar arrangements

5

Specific provisions

• Remuneration guidelines will apply • Leverage computation and limits • PE house will have to disclose major holdings and

control • Asset stripping restrictions over a period of 2 years

6

Pillars of AIFMD Main topics to be covered Key impacts for US AIFM

Conduct of business

• Valuation will have to be independent – being performed internally or delegated

• Functional and hierarchical separation of the risk management and valuation functions

• Permanent compliance and internal audit functions

4



)

)

PE House (General Partners)

US Private Equity managers will be impacted by AIFMD…

Non-EU Fund (Limited Partnership)

Executives / Managers

)

Non-EU investors (Limited Partners)

)

Non-EU

Non-EU

Legal Representative

) EU

Remuneration

• Contribute loan or cash • Repayment & agreed

return

Marketing within EU and AIFMD

Compliance

• Manage an EU-domiciled fund, or

• Market your EU or non-EU fund to EU-based investors

You will be affected by AIFMD if you

Mmgt. Fees / Carried interest

Areas impacted by AIFMD

)

EU Fund (Limited Partnership)

EU

EU investors (Limited Partners)

) EU


) Non-EU


) EU



… and impacts will extend beyond the current parties involved New actors / Functions

)

)

PE House (General Partners)

US

Non-EU Fund (Limited Partnership)

Executives / Managers

)

Non-EU


) Non-EU

Legal Representative in an EU Member State of

reference

)

EU Fund (Limited Partnership)

EU


) EU


) Non-EU


) EU

Custodian Bank

Prime Broker

Safekeeping Ownership verification

Administrator

Valuation, Reporting & Accounting

Seggregated Risk Management

Investment Management

AIFM License

AIF AIF

Custodian Bank

Prime Broker

Safekeeping Ownership verification

Administrator

Valuation, Reporting & Accounting



• Appointment of a depositary • Leverage limitations • Risks limits • Major holdings and controls • Liquidity Management

Fund

Manager

• License and approval • Substance and capital requirements • Delegation and operating model

impacts • Investment and risk management • Reporting to authorities • Independent valuation • Remunerations rules

• Reporting to investors • Private Placement and/or EU

passport

• Legal representative • Management compliance • Marketing compliance

Client

H

M

L

H

M

L

High

Low

H M L

AIFMD Impacts

Impacts of AIFMD on U.S Managers

If you market your fund to EU Investor you will automatically fall under the AIFMD provisions

H

M

L

© 2013 Deloitte & Touche 12

Introduction to AIFMD The new regime

12 Deloitte Investment Management

© 2013 Deloitte & Touche

AIFMD – key compliance areas

Deloitte Investment Management 13

AIFM

Authorisation as AIFM

Organisational rules

Distribution

Remuneration

Risk, liquidity, valuation

Reporting and disclosures

Delegation

Depositary and prime broker arrangements

Conduct of business

rules

Capital and

professional indemnity

• Cost minimisation

• Business strategy

• Regulatory

• Tax

• Organisational

• Operational

• People

• Processes

Change management


Case studies



AIFMD – overview of case studies


2013

2014

2015

2016

2017

2018

2019

1 US AIFM / Cayman AIF (no EU marketing)

No direct impact

No direct impact

No direct impact

No direct impact

No direct impact

No direct impact

No direct impact

2 US AIFM / Cayman AIF (EU marketing)

PP

PP

PP / EU passport

PP / EU passport

PP / EU passport

PP / EU passport

EU

passport

3 US AIFM / EU AIF (no EU marketing)

MS discretion

MS discretio

n

MS discretion /

full compliance

Full complianc

e

Full complianc

e

Full complianc

e

Full complian

ce

4 US AIFM / EU AIF (EU marketing)

PP

PP

PP / EU passport

PP / EU passport

PP / EU passport

PP / EU passport

EU

passport

5 EU AIFM / EU AIF (US manager uses an EU ManCo or SMIC and acts as a portfolio delegate)

EU

Passport

EU

Passport

EU Passport

EU

Passport

EU

Passport

EU

Passport

EU

Passport

PP = private placement requirements apply. Access to EU markets under private placement is permitted but may be restricted by individual member states

EU passport = requires full compliance with AIFMD but permits access to all EU markets once authorised in one EU member state

MS discretion = individual member state has the discretion to permit management only subject to local requirements

EU ManCo = management company established in the EU to manage UCITS or non-UCITS funds

SMIC = self managed investment company in which the governing body of the fund opts to be the manager, i.e. AIFM


AIFMD – case studies


Case 1: US AIFM / Cayman AIF (no EU marketing)

No EU marketing

US AIFM Cayman AIF

Not in scope

• US manager needs to ensure its activities do not meet the definition of “marketing”. Units of the Cayman AIF must not be offered directly or indirectly to EU based investors

• The US manager may rely on reverse solicitation from EU-based investors who request to subscribe into the non-EU AIF

• The strict depositary liability for assets held throughout the sub-custody network (see slides 42 and 43) could potentially impact the investment process for EU fund of fund investors, whose depositary may require a higher level of due diligence and/or a depositary to be appointed to the Cayman AIF

Key considerations

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Case 2: US AIFM / Cayman AIF (EU marketing)

EU marketing

US AIFM Cayman AIF

• Cooperation arrangements necessary for private placement have not yet been signed with Cayman or the US, which creates distribution uncertainty

• Under private placement individual member states reserve the right to impose stricter requirements or refuse access altogether

• Some member states will not permit private placement into their markets • The EU passport for non-EU managers will only be available from 2015 and will

require the US based AIFM to fully comply with AIFMD, including the remuneration provisions

Key considerations

Private placement (allowed until 2018)

• Comply with reporting/disclosure and private equity rules

• EU cooperation arrangements with US/Cayman Islands

• US/Cayman not blacklisted by FATF

EU passport (from 2015)

• Full compliance with AIFMD • Authoristion by a member state of

reference • Legal representative in the

reference MS as contact for investors, authorities and performs the compliance function

• EU cooperation arrangements with the US, Cayman Islands


• US/Cayman compliance with OECD Model Tax Convention





Case 3: US AIFM / EU AIF (no EU marketing)

No EU marketing

US AIFM EU AIF

• From July 2013 individual member states may impose differing requirements on non-EU AIFMs who manage (but do not market) AIFs on their territory. This may include full compliance with AIFMD

• From 2015, authorisation and full compliance would be required. The US AIFM will need to consider the costs versus benefits of a full AIFMD authorisation if it does not wish to market in the EU at this point

Key considerations

Member state requirements (until 2015)

• Management only may be permitted by the AIF member state subject to its local requirements

Full compliance (from 2015)

• Full compliance with AIFMD • Authorisation by a member state of

reference • Legal representative in the reference MS

as contact for investors, authorities and performs the compliance function

• EU cooperation arrangements with the US

• US not blacklisted by FATF • US compliance with OECD Model Tax

Convention





Case 4: US AIFM / EU AIF (EU marketing)

EU marketing

US AIFM EU AIF

Private placement (allowed until 2018)

• Comply with reporting/disclosure and private equity rules

• EU cooperation arrangements with US/Cayman Islands


EU passport (from 2015)

• Full compliance with AIFMD • Authoristion by a member state of

reference • Legal representative in the

reference MS as contact for investors, authorities and performs the compliance function

• EU cooperation arrangements with the US, Cayman Islands


• US/Cayman compliance with OECD Model Tax Convention

• Cooperation arrangements necessary for private placement have not yet been signed with Cayman or the US, which creates distribution uncertainty

• Under private placement individual member states reserve the right to impose stricter requirements or refuse access altogether

• AIF member state regulator has discretion to impose further requirements on an AIF it authorises, e.g. appointment of a depositary

• Some member states will not permit private placement into their markets

• The EU passport for non-EU managers will only be available from 2015 and will require the US based AIFM to fully comply with AIFMD, including the remuneration provisions

Key considerations





Case 5: EU AIFM / EU AIF (EU marketing)

Or

EU marketing

US delegate

EU AIF(s)

EU ManCo

US manager sets up an EU AIFM (structured as a ManCo or SMIC)

• Management companies and self managed investment companies (SMICs) are frequently used by US managers acting as portfolio management delegates

• AIFMD permits management companies and “internally managed” investment companies to be the AIFM

• The EU ManCo / AF is authorised as the AIFM and can access EU markets through the EU passport

• The EU AIFM ensures full compliance with AIFMD and delegates portfolio / risk management to the US manager

• EU cooperation arrangements must be in place with the US • The US delegate must be authorised and supervised in the US • The US delegate will be subject to due diligence by the EU AIFM

EU SMIC

EU marketing

US delegate

• AIFMD imposes new requirements in relation to the delegation of investment management functions by an AIFM

• In order not to be deemed a “letter-box entity” the EU management company or SMIC acting as AIFM will need to perform qualitative investment management functions and maintain appropriate control and oversight

• This may involve strengthening the functions currently performed by a ManCo/SMIC and its board if that entity is to fulfil the role of an AIFM

• ESMA’s guidelines on remuneration also apply to portfolio and risk management delegates

Key considerations




Non-EU rules



AIFMD – non-EU rules


• AIFMD covers a wide range of compliance areas

• The so called “third country” provisions govern the treatment of non-EU AIFs and AIFMs in scope

• These rules determine the extent to which non-EU AIFMs and AIFs must comply with other aspects and by when

AIFM

Authorisation as AIFM

Organisational rules

Remuneration

Risk, liquidity, valuation

Reporting, disclosures,

PE rules

Delegation

Depositary regime

Conduct of business

rules

Capital and

professional indemnity

Distribution and Non-EU

23

Jul. 2013 2014 2015 2016 2018 2019 2020 Marketing Routes Private placement EU passport (EU) EU passport (Non-EU)

EU passport may be available from 2015 National private placement may be turned off from 2018

National discretion but mandatory for access to EU passport

Not required for private placement but mandatory for EU passport

Depositary functions but no strict liability (depositary lite)

AIFMD – the new distribution landscape Overview of different marketing regimes and requirements

EU AIFM / non-EU AIF EU AIFM / EU AIF Non-EU AIFM /

Non-EU AIF Non-EU AIFM /

EU AIF

Marketing routes EU passport Private placement n/a Required compliance Capital Depositary Operational Transparency


AIFMD – non-EU rules

24

• EU AIFMs with EU AIFs must comply fully with AIFMD and will be able to avail of an “EU passport” to market freely to professional investors across EU Member States (similar to the current “UCITS passport”)

• In all other cases, AIFMs marketing in Europe will need to rely on private placement ,or the EU passport from 2015, subject to the conditions and requirements outlined below

Private Placement (from 22 July 2013 until at least 2018)

EU Passport (from 2015)

Minimum requirements: 1. Co-operation arrangements must be in place

between relevant EU authorities and the jurisdiction of the non-EU AIFM and AIF

2. The non-EU jurisdictions must not be listed as “non-cooperative” by FATF

3. Detailed EU regulatory reporting and investor disclosures

4. Compliance with private equity rules on control disclosures and asset stripping

Note: Member states reserve the right to impose stricter requirements or refuse access under private placement.

1. Co-operation arrangements must be in place between relevant EU authorities and the jurisdiction of the non-EU AIFM and AIF

2. The non-EU jurisdictions must not be listed as “non-cooperative” by FATF

3. The non-EU jurisdictions must comply with standards under the OECD Model Tax Convention

4. Full AIFMD compliance required with authorisation and legal representative appointed in “member state of reference”

Note: Member states cannot impose further restrictions or refuse access under the EU passport.


AIFMD – marketing and managing


Marketing • “Marketing” means “a direct or indirect offering or placement at the initiative of the AIFM or on behalf of

the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union.”

• Non-EU fund managers may accept “reverse solicitation” (investor requests to subscribe) without coming within scope of AIFMD

• The concept of marketing may be further defined and managers seeking to rely on reverse solicitation will need to ensure that they remain outside the definition of marketing in each member state

• Non-EU fund managers who are managing an EU AIF but not marketing this fund in Europe are still impacted by AIFMD

Managing but not marketing funds in the EU

Management of an EU AIF by a non-EU AIFM (with no distribution into the EU)

Up to 2015

• Management only permitted if AIF member state allows, subject to local regulatory requirements

• Some member states may permit existing arrangements to continue while others may require full AIFMD compliance

From 2015

• Full AIFMD compliance required with authorisation and legal representative appointed in “member state of reference”

• Cooperation arrangements with non-EU jurisdiction, FATF cooperation and OECD Model Tax Convention compliance required as for EU passport


AIFMD – cooperation arrangements


Co-operation arrangements agreed (as of March 2013): • Switzerland • Brazil

• Cooperation arrangements with non-EU jurisdictions are necessary in all cases for marketing and/or managing AIFs when either the AIFM or the AIF is non-EU based

• Cooperation arrangements are also necessary for the delegation of portfolio management by an EU AIFM to a non-EU AIFM

• Cooperation arrangements must be in place with each EU member state where the AIF is marketed (under private placement) and with the “member state of reference” (state of authorisation /management activity and/or state where most marketing takes place) under the third country EU passport

• ESMA is centrally negotiating the cooperation arrangements on behalf of the EU 27, with each member state signing a common memorandum of understanding (MoU)

• If multiple non-EU jurisdictions are involved (e.g. US manager and Cayman fund), each non-EU jurisdiction must have signed its own cooperation arrangements with EU authorities

• Exchange of information for supervisory and enforcement purposes

• Access to information • Ability to carry out on-site inspections • Enforcement assistance • Exchange of information for systemic risk oversight

purposes

Cooperation arrangements cover:


Private placement requirements



AIFMD – private placement compliance


• US-based managers will be able to avail of private placement until at least 2018, unless the target EU member state has closed the private placement route

• AIFMs availing of private placement will need to meet the transparency (reporting and disclosure)requirements of AIFMD and also the requirements in relation to private equity control and disclosures, if applicable

• These are the minimum requirements and individual member states reserve the right to impose further requirements in cases were AIFS are privately placed

© 2013 Deloitte & Touche Deloitte Investment Management 29

AIFMD – regulatory reporting Information required Frequency

thresholds Report by

AIFM level • Principal markets traded comprising top 5 most important markets / instruments traded and AuM data

• < €100 Mn (annually)

• €100 Mn to €1.5 Bn (half-yearly)

• > €1.5 Bn (quarterly)

• Any AIF >€500 Mn (quarterly)

• Report to each target MS regulator under PP or MS of reference under third country passport

• End Oct 2013 (if reporting quarterly)

• End Jan 2013 (if reporting annually)

• End Jul 2013 (if reporting half-yearly)

• Note: National regulatory authorities will provide detail on timeframes and mechanisms for reporting

AIF level

• Breakdown of investment strategies by predetermined category

• Principal exposures and most important concentrations - main instruments traded, geographical focus, most important portfolio concentrations and principal markets, investor concentrations

• Instruments traded and individual exposures comprising the main categories of assets traded, long and short value exposures, typical deal/position size dominant influence

• Risk Profile of the AIF comprising data on market risk, counterparty risk, liquidity risk, borrowing risk, exposure risk,

• Liquidity risk profile, including percentage of assets subject to ‘special arrangements’ and any new arrangement for managing the AIF’s liquidity

• The results of periodic stress tests under normal and exceptional circumstances

• Borrowing and exposure risk including report of leverage figures

Substantially leveraged

• Break-down between leverage from cash/securities and embedded in derivatives and the extent to which these assets have been reused

• The identity of the five largest sources and the amount received

Significant volumes of data reporting similar to Form PF in the USA


AIFMD – disclosure to investors

Disclosure to investors

Key areas of disclosure • The procedure for changing the AIF’s investment strategy • The main legal implications for investors owing to the jurisdiction of the AIF. • How professional indemnity risks are covered • Description of delegated functions • Valuation procedures • All fees (direct and indirect) and maximum values thereof • How a fair treatment of investors is ensured • A description of any preferential treatment, the type of investors who obtain such preferential treatment as

well as, where relevant, their legal or economic links with the AIF or AIFM • Description of the AIF’s liquidity risk management, including the redemption rights both in normal and

exceptional circumstances, existing redemption arrangements with investors • The percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid

nature • Risk profile and risk management systems employed by the AIFM • Rights of re-use of collateral • Notify investors immediately where gates, side pockets or similar arrangements are activated • Disclose material changes in line with accounting standards and rules adopted by the AIF

Gates and side pockets

Risk management activities

Liquidity management

Leverage

30


AIFMD – annual report

Annual report of the AIF

Key areas of disclosure

• Material changes to the information provided to investors

• Minimal changes to the IFRS/US GAAP/UK GAAP accounting formats

• Remuneration: the split between variable and fixed remuneration and, on an aggregated basis, amounts 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

• Remuneration: choice as to format of disclosure but must disclose fixed and variable proportions ‒ Full remuneration for all staff of the AIFM ‒ Full remuneration for AIFM staff that are involved in the

activities of the AIF ‒ Pro-rata allocation of remuneration

• Overview of investment activities during the year or period, and an overview of the AIF’s portfolio at year-end or period end

• Overview of AIF performance over the year or period

Local rules

IFRS AIFMD


AIFMD – private equity rules

• Not applicable to SMEs or Real Estate SPVs

• Notification thresholds to regulator of 10%, 20%, 30%, 50% and 75%.

• @ 50%, the AIFM shall notify the non-listed company, its shareholders and its home Member State

• @50%, AIFM shall also ensure that the board of the acquired company informs its employees

• @ 50%, AIFM must make available its intentions regarding the future of the non-listed company and the likely repercussions on employment, including any material change in the conditions of employment

Disclosures “Asset Striping” Restrictions

Upon obtaining control over a non-listed company, for a period of 2 years the AIFM must:

• Not vote in favour, facilitate, support or instruct any distribution, capital reduction, share redemption and/or acquisition of own shares by the company which:

1. would reduce the net assets lower than the amount of subscribed capital plus reserves which may not be distributed under local law

2. would exceed the amount of accumulated profit in reserves

Private Equity


What does full compliance look like?



AIFMD – full compliance


• While US AIFMs will be able to avail of the transitional private placement regime until at least 2018, it is envisaged that full compliance and authorisation will be required from 2019

• For distribution access, US AIFMs may seek authorisation earlier under the EU passport for third countries, which is due to become available in 2015

• Also with a view to capital raising in the EU, US managers may wish to establish an EU AIFM at the commencement of the regime to ensure continued EU market access

• Full compliance entails a wide range of areas


AIFMD – appointment and authorisation of an AIFM

Letter-box criteria

Cost

Marketing strategy

Transitional arrangements

MiFID restrictions

Entity consolidation

Business model / objectives

Tax implications

Investor expectations

• Different entities could be appointed as the AIFM − Management company − Investment manager − The fund in the case of a self-managed structure

• A number of factors will need to be considered in determining which type of AIFM is most

suitable and there may be non “one size fits all”


Delegation – letter-box entity criteria

Key factors to determine if AIFM is a letter-box entity

• Does not have the necessary resources and expertise to supervise delegates

• Loss of contractual rights over delegates

• Cannot mitigate risks of delegation

• Balance of investment management (portfolio management & risk management) functions delegated compared to those performed by the AIFM

• Delegation of the core and other investment management (IM) functions is possible

• But an AIFM may not delegate IM functions to the extent that it becomes a “letter-box entity”

• IM functions cannot be delegated “to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself”

AIFM has to perform functions relating to either PM or RM and must be “closely involved in the decision making of its delegates”

AIFM Core Functions

Portfolio Mgmt.

Risk Mgmt.

?


Delegation – letter-box entity criteria The Commission’s final Letter-box entity criteria have moved away from a solely quantitative approach to a more nuanced qualitative approach

National regulators are charged with making an assessment of the delegation structure based on qualitative criteria such as:

• the types of assets the AIF or the AIFM • the importance of the assets under

delegation for the achievement of investment goals

• the geographical and sectoral spread of the AIF's investments

• the risk profile of the AIF • the type of investment strategies pursued • the types of tasks delegated in relation to

those retained • Whether the delegates are within the

same corporate group

The Commission is to review the application of the rules after 2 year and may specify further measures. ESMA may issue delegation guidelines. !

National interpretations

?

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AIFMD – capital requirements

Initial Capital External AIFM: €125, 000 Internal AIFM: €300,000

Additional funds (if AuM exceeds €250 million)

• Additional amount is 0.02% of the amount by which the AUM exceeds €250m

• Additional own funds must not be less than ¼ of fixed overheads

Professional negligence

To cover potential professional liability risks AIFMs must have either • Additional own funds cover of 0.01% of AuM

(A Member State has discretion to reduce to 0.008% of AuM for an AIFM based on historical assessment)

• Hold professional indemnity insurance (PII) equal to at least 0.7% of AuM and at least 0.9% of AuM for aggregate claims per year.

1

2

3

+

+


AIFMD – organisational and conduct of business rules

Operating conditions • Acting in the best interests of the

AIF/investors • Due diligence • Selection and appointment of

counterparties and prime brokers • Acting honestly, fairly and with due

skills • Sufficient resources • Fair treatment of investors • Inducements • Placing/handling orders • Best execution • Conflicts of interest policy

Organisational rules • Decision-making procedures • Electronic data processing • Accounting procedures • Control by governing body • Permanent compliance function • Permanent internal audit function • Personal transactions • Recording of portfolio transactions • Recording of subscription and

redemption orders • Recordkeeping requirements

Functions

• Functional and hierarchical separation of the risk management and valuation functions

• Permanent compliance and internal audit functions • Operational impact of delegation and letter-box rules • MiFID v AIFMD restrictions


AIFMD – remuneration

Overview

• Applicable to AIFMs with specific requirements in relation to “identified staff” - exec. and non-exec. members of the governing body, senior management, control functions, various departmental heads, other risk takers

• Implement a detailed remuneration policy and governance structure which adheres to AIFMD’s remuneration principles and ESMA’s guidelines aimed at avoiding conflicts of interest and excessive risk taking

Key rules • Appropriate balance between fixed and variable

remuneration (variable remuneration should decrease as a result of negative performance)

• At least 50% of variable remuneration should consist of units or shares of the AIF or equivalent

• At least 40% to 60% of variable remuneration should be deferred over a minimum period of 3 to 5 years, and vest no faster than on a pro-rata basis.

• Variable remuneration should be subject to overall financial performance and downward adjustment by way of malus (pre-vesting) or clawback (post-vesting) adjustments

• Payment on termination of employment should reflect performance and not reward failure

Framework • AIFM’s supervisory function is responsible for

approving an maintaining the remuneration policy

• Certain rules may not apply under proportionality

• Larger AIFMs will need to set up a Remuneration Committee to support operation of the policy

• Document a remuneration policy to promote sound and effective risk management

• Review the remuneration policy at least annually

• External and internal remuneration disclosures

• Portfolio and risk management delegates must be subject to requirements that are “equally as effective” or put in place contractual arrangements with the delegate to ensure compliance


AIFMD – remuneration

Remuneration Committee

• Non exhaustive list of factors in determining if a “RemCo” should be set up • AIFMs managing not more €1.25 billion with no more than 50 employees may not need a

RemCo • AIFMs that are part of a wider group may rely on the group’s RemCo • RemCo composition should include non-executive members and an independent chair

Proportionality

• Criteria: size, internal organisation and nature, scope, complexity of activities • Requirements that may be disapplied: variable remuneration in instalments, retention,

deferral and malus/clawback • AIFMs need to perform an assessment in relation to every single requirement they intend to

disapply and need to be able to justify this decision

Disclosure

Annual report • The total amount of remuneration for the financial year paid by the AIFM to its staff, split into

fixed and variable remuneration. • The total 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. Commission Recommendation: • Disclose at least annually detailed information regarding remuneration policies and

procedures which must not necessarily be made public (proportionality applies)


AIFMD – risk management

• Permanent, independent • Functionally and hierarchically

separated from other business units • Identify, measure, manage and

monitor all revenant risks • Disclose to investors • Monitor compliance • Provide regular updates to the

governing body and senior management

Risk Management Function • Documented procedures, tools

and techniques to manage risk • Describe independence safeguards • Allocation of responsibilities • Risk limits and justification • Frequency of reporting • Take into account nature, scale and

complexity

Risk Management Policy • Set quantitative and qualitative

risk for each AIF • Align limits with risk profile of AIF

− Market risks − Credit risks − Liquidity risks − Counterparty risks − Operational risks

Risk Limits

• Duty to be proactive and foresee breaches

• Senior management of the AIFM should be responsible for and actively involved in RM control

• Adequacy and effectiveness • Level of compliance with RM policy • Review measures to address

deficiencies

Risk Monitoring and Review • Comprehensive and regular risk

reporting to management • Risk information disclosure to

investors • Risk figures and stress tests • Failures in various processes, e.g.

investment/divestment, valuations • Failures in infrastructure, e.g. IT • Risks specific to specific investments,

e.g. fraud, lease negotiation, property rights, tax

Risk Reporting • Periodic back-testing of risk

measurement arrangements • Testing of model-based forecasts • Periodic stress tests and scenario

analysis • Corrective actions to be taken in

case of particular vulnerability

Risk Testing


AIFMD – liquidity management Alignment of investment strategy, liquidity profile and redemption policy

Ensure investors can redeem: • In a manner consistent with the fair treatment of all investors • In accordance with AIF redemption policy and obligations

Liquidity management policies and procedures

Prior disclosure of ‘Special Arrangements’ Gates, side pockets etc.

Liquidity monitoring • Marginal contribution of individual assets which may have a material impact on liquidity • Profile of the investor base • Relative size of investments and redemption terms

Liquidity stress testing • Simulate shortage of liquidity • Cover market risks and account valuation sensitivities under stressed conditions • Conduct at a frequency appropriate to the nature of the AIF

43


AIFMD – Valuation

Who can perform the valuation?

• An AIFM can perform the valuation task if functionally separated from the portfolio management and the remuneration policy and other conflicts of interests are managed internally

• If performed in-house, a Member State can ask for AIFM valuation procedure reviews either by an external valuer or auditor.

Internal valuation • Valuation independence whether external or internal

• AIFM retains responsibility for proper valuation and the calculation of the NAV. The AIFM’s liability is not affected by the appointment of an external valuer.

Key valuation controls

• Independent valuation model validation • Valuation methodologies should be applied consistently across AIF • Policies and procedures • Additional controls around complex and illiquid asset valuation

Frequency of valuation

• For open-ended AIFs: on a frequency appropriate for assets and fund issuance/redemption • For closed-ended AIFs: align with AIF capital increase/decrease • NAV per share must be calculated at least once per year

External valuer • Subject to mandatory professional registration, rules on professional conduct. • Must have professional indemnity insurance for any losses suffered by the AIFM, AIF or AIF investors. • Third party fund administrator calculating NAV only may not be the “external valuer”

44


AIFMD – Leverage

Use of leverage: • AIFM sets a maximum level of leverage for each AIF taking into account various factors, such as the type of

AIF and the investment strategy • AIFMs must also set the extent of the right to reuse collateral or guarantee that could be granted under a

leveraging agreement • Regulators will receive new reporting on leverage and will have the power to impose leverage limits on AIFMs

if they deem this necessary for the avoidance of systemic risk • Additional regulatory reporting for ‘substantially leveraged’ funds

Calculation of leverage:

Gross • The sum of the absolute value of all the positions • No netting or hedging arrangements taken into account

Commitment • Takes into account some netting and hedging arrangements subject to criteria • E.g. the netting arrangements should relate to the same asset class

Advanced • The Commission will consider allowing a more flexible ‘advanced’ approach in 2015

The Commission provides for only the Gross and Commitment methods which may result in the disclosure of higher leverage figures. Substantially leveraged funds are defined as 3xNAV under the commitment approach.


AIFMD – depositary regime • Applicable for EU-AIFs managed by an EU AIFM

• Depositary functions must be carried out by one or more entities for a non-EU AIF with EU AIFM

• To access the EU passport in 2015, non-EU AIFs will need a depositary

• Oversight and safekeeping duties are now more prescriptive with increased liability – reversal of burden of proof

• New cash flow monitoring duty to which the Commission Regulation has added a daily reconciliation requirement which will involve “duplicating” the administrator’s reconciliations

Custody Oversight Cash Monitoring

Liability Contracts Asset Verification

Compliance Monitoring Valuation Delegation

Depositary regime key features

Key new duty

New level of strict liability with onerous requirements


AIFMD – depositary regime

Safekeeping Requirements: • Certain financial instruments “held in custody” will be subject to a form of strict liability and must be

returned by the depositary “without undue delay” in the event of loss

• The strict liability apples liability throughout the sub-custody network, e.g. liability for the loss of a financial instrument due to fraud at an unaffiliated sub-custodian

• Ability to discharge liability severely restricted

• Negligence test for “other assets”, which are subject to ownership verification and record-keeping

Financial instruments in custody • Transferable securities • Embedded derivatives • Money market instruments • Units of CIS (if registered in the

name of the depositary) • Financial instruments registered

or held in an account directly or indirectly in the name of the depositary

• Collateral. Any “custody assets” provided or received as collateral

Other assets • OTC derivatives • Cash deposits • Private equity shares • Shares in SPVs • All securities registered directly

with the issuer/registrar/TA

Risk factors will increase price

• Frontier and emerging markets • Non-affiliated sub-custodians and

prime brokers • Depositary risk assessment of

sub-custodian/PB • Range of prime broker activities • Number of counterparties



Step 2: Event beyond reasonable control

Step 3: Could the consequences

have been avoided with reasonable efforts?

Step 1: External Event

Yes

Yes

No

No

No Yes

No Liability

Liability

Discharge of depositary liability only in very limited circumstances, such as the occurrence of an ‘external event’

External Events:

• Acts of State (e.g. nationalisation), war, riots or any other major upheaval

Internal Events:

• Accounting errors, operational failures, fraud and failure to apply the asset segregation requirements properly

• Depositary liability for actions of unaffiliated sub custodians

• Implications for operating in emerging markets and for certain asset classes

• Additional liability cover will drive costs higher for depositaries and their clients

!



Alternative Investment Fund

Alternative Investment Fund Manager

Sub-custodian

Depositary

Administrator Prime Broker Transfer Agent Prime Broker

Delegation Oversight

• Collateral provided by the AIF in the form of financial instruments held in custody will now fall under the strict depositary liability regime, unless there is title transfer

• PB in sub-custody relationship with depositary for “custody” assets

• PB right of re-use of assets restricted = increase fees?

• Oversight relationship for other assets, require greater operational integration between the depositary and the prime broke

• The EU depositary regime will impact on the due diligence EU depositaries will undertake when EU fund of fund investors invest in offshore funds

• EU depositaries may require that underlying offshore funds in fund of fund investments appoint a depositary


How we can help



AIFMD – our AIFMD solutions framework


A strategic cost-benefit analysis taking into account your existing business model and objectives, tax and regulatory issues to identify the best compliance approach to AIFMD for your business.

Deloitte offers a distribution hub to assist you to benefit from the cross-border distribution passport or understand national private placement regimes. We can assist with local regulatory filing and tax requirements.

We can conduct a gap analysis against existing reporting and identify how the reporting can be adapted and enhanced, as well as advice on the areas of the control framework that can be outsourced.

We can conduct an impact analysis of the remuneration requirements and identify where proportionality can be applied. We can advice on tax and HR aspects and on the drafting of new policies and procedures.

We can perform a detailed gap analysis between the requirements of AIFMD and your current business and operating models to identify the shortcomings of your current framework and define a plan for remedial action.

Deloitte provides assistance in the set up and review of an AIFMD compliant risk manager, including the risk framework, leverage calculation and liquidity management as well as providing risk stress testing and back testing. Our solution also covers a review and implementation of new controls, procedures and reporting.

Deloitte provides assistance in designing and reviewing valuation models. Our experts can also provide independent valuation services depending on applicable local regulations and requirements.

Our solution to the increased reporting requirements consists of conducting a gap analysis based on the requirements compared to existing reporting processes and how these can be adapted and enhanced, as well as advice on the areas of the control framework that can be outsourced.

Deloitte’s auditors can assess your entity under the ISAE 3402 on the investment management function, the ISAE 3000 on the risk management process and the ISRS 4400 agreed upon procedures on delegated functions.

Strategic assessment

Reporting

Remuneration compliance

Compliance management

Risk governance

Independent valuation advice

Operational alignment

Audit attest

Distribution


Deloitte contacts



Your key Deloitte EMEA and Luxembourg contacts EMEA Leadership

Benjamin Collette Partner – EMEA AIFMD Leader T: + 352 451 452 809 M: +352 621 283 574 E: [email protected]

Marc Noirhomme Director– PMO, EMEA AIFMD T: +352 451 452 613 M: +352 621 301 239 E: [email protected]

Michael Booth Senior Manager – PMO, EMEA AIFMD T: +44 20 7303 0383 M: +44 7767 436 755 E: [email protected]

Distribution Private Equity Real Estate

Brian Jackson Partner – PMO, EMEA AIFMD T: +353 1 417 2975 E: [email protected]

Patrick Rooney Manager – PMO, EMEA AIFMD T: +353 1 417 2962 E: [email protected]

Lou Kiesch Partner T: + 352 451 452 456 M: +352 621 182 193 E: [email protected]

Vincent Gouverneur Partner – EMEA IM Leader T: + 352 451 452 451 M: +352 621 235 268 E: [email protected]

Flip Gilbert Partner T: +352 451 452 743 M: +352 621 307 384 E: [email protected]

Remuneration Risk Management & Valuation

Nick Tabone Partner T: + 352 451 452 264 M: +352 621 676 611 E: [email protected]

Raymond Krawczykowski Partner T: + 352 451 452 500 M: +352 621 220 483 E: [email protected]

Xavier Zaegel Partner T: + 352 451 452 748 M: +352 621 364 628 E: [email protected]

Benjamin Lam Partner T: +352 451 452 429 M: +352 621 160 561 E: [email protected]

David Capocci Partner T: +352 451 452 437 M: +352 621 229 575 E: [email protected]

Johnny Yip Partner T: + 352 451 452 489 M: +352 621160560 E: [email protected]

Carrie Brown Director– Cayman Islands T: + 345 814 3383 E: [email protected]

Cayman Contact

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Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte Cayman Islands is an affiliate of Deloitte Caribbean and Bermuda Limited, a member firm of Deloitte Touche Tohmatsu Limited. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals, all committed to becoming the standard of excellence. This publication contains general information only, and none of the Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. © 2013 Deloitte Caribbean and Bermuda Limited and its affiliates

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