© 2011 Deloitte LLP. Private and confidential. AIFMD Update What does the AIFMD mean for you? Deirdre Power Partner, Investment Management Advisory Deloitte Dublin AIFMD Overview Getting this far has been difficult… • Directive finally published in the Official Journal on 1 st July 2011 • Political agreement reached in November 2010 after 19 months of intense debate and horse- trading • Generated the most amendments in the history of the European Parliament • Four ESMA papers amounting to over 500 pages 2 "This is a very dodgy Directive that's been poorly constructed. It was produced in a hurry. It's a process that makes those who support the European Union embarrassed." Treasury Minister Lord Myners (9th November 2009) “Almost all” of the Directive’s provisions need to be redrafted to make them appropriate, proportionate and adequate. Patrice Bergé-Vincent of French financial regulator AMF (9th October 2009) Some quotes at the beginning of the journey: AIFMD Overview Scope: • Direct regulation of Alternative Investment Fund Managers (AIFM) • Indirect regulation of Alternative Investment Funds (AIF) and their service providers • Applies if the AIFM or AIF is EU-based or if it is intended to market in the EU • An AIF is any fund that is not a UCITS Aims: • Provide common rules for the authorisation and supervision of AIFM • Increase the transparency of AIFM towards investors / stakeholders • Provide tools for regulators to monitor systemic risk • Ensure investor protection • Achieve a Single European Market for AIFs (EU Passport) • Increase the accountability of AIFM holding controlling stakes in companies (private equity) 3 Impacts how an AIFM distributes their funds, remunerates their people, operates their business and the support needed to do so AIFMD: Key Elements 4 Authorisation / Oversight Capital Risk/Liquidity Management , Leverage Depositary Transparency to Investors & Regulatory reporting Marketing & Third Country Provisions Remuneration Valuation Delegation Level 2 Implementation ESMA / Commission AIFMD Timeline 5 • July – September 2011 ESMA consultations • By 16 November 2011 ESMA will publish its final advice • By Quarter 2 2012 the European Commission will issue final implementing measures • 22 July 2013 member state transposition deadline (EU passport) • A non-EU AIFM may need to register with the FSA by 22 July 2013 to continue to privately place their funds in the UK • By 22 July 2014 AIFMs within scope and in business prior to the transposition date will need to be compliant. (An AIFM that is set up on or after the transposition deadline cannot avail of this 1 year grace period.) Directive published Level 2 measures National Implementation, EU passport End of private placement Third country Passport 2010/11 2011 2013 2015 2018 We are here AIFMD ESMA Consultations on Level 2 Measures 6 Main Consultation Supervision & Third Countries • Supervisory co-operation and exchange of information • Delegation of portfolio or risk management functions to third country entities • Assessment of equivalence of third country depositary frameworks Draft Technical Advice Key Areas Key Areas Deadline for Comments: 13 Sept. 2011 Deadline for Comments: 23 Sept. 2011 Final ESMA Advice to European Commission by 16 November 2011 • Depositary liability and requirements • Professional indemnity insurance / capital adequacy • Organisational requirements • Risk mgmt. / Liquidity mgmt. / Leverage • Transparency, disclosure and reporting • Valuation • Conflicts of interest • Delegation AIFMD Implications for Investment Managers 7 Investment Managers Operational & organisational requirements Third Country Provisions Erosion of Private Placement Transparency & Disclosure Professional Indemnity Insurance Capital adequacy Valuation rules Depositary requirements Governance / Segregation of activities Risk / leverage / liquidity framework Remuneration disclosure Fund Administrators Depositaries Prime Brokers Management Companies AIFMD Implications for Depositaries 8 Depositaries Appointment of Independent Depositary Safekeeping Oversight duties Due diligence & Delegation Cash monitoring Liability Verification of ownership of assets Segregation AIFMD Implications for Depositaries 9 Depositary Develop new processes, controls, procedures Strategic assessment of cost structures, fee models, activities Review of sub-custody arrangements New strategic alliances & scalability Investment in resources & expertise Increased specialisation Underlying all of this is increased risk with depositary liability which is disproportionate to the current level of depositary fees. AIFMD Implications for Depositaries 10 • Assets that can be held in custody subject to “strict liability” • ESMA: Transferable securities, money market instruments, units of CIS • Definition of loss • For “other assets“ – liability extends to “negligence or intentional failure” • ESMA: collateral, OTC derivatives Depositary Liability Assets held in Custody Other Assets Scope of Liability • Depositary not liable due to a CSD / settlement system failure • Liability can be removed if there was an “external event beyond reasonable control” – three step check process (ESMA) • Depositary liability for sub custodian actions / failure • Implications for operating in emerging markets • Additional liability cover will push up financing costs [...]... cooperation agreements with relevant supervisory authorities and tax information sharing agreements 19 AIFMD What does it mean for you? Who is the AIFM? Investment Manager or Implications Responsibility for valuations Conflicts of interest Delegation Remuneration disclosure 20 Contractual arrangements Self-managed AIFs AIFMD Implications for Investment Managers Third Country provisions Risk / Leverage /... professional investors* *Marketing means a direct or indirect offering or placement of shares or behalf of the AIFM The AIFM therefore needs to be authorised for this activity in its own right even if the marketing is being carried out by an intermediary 16 AIFMD Implications for Investment Managers Scenario 2: UK Manager managing a Cayman Fund Through PP (allowed until 2018) if: AIFMD compliance except depositary... on the interpretation One view is that all assets passed to the Prime Broker are to be strict liability / custody) If the PB lends out all the assets = counterparty If the PB retains some of the assets, is it acting as sub custodian? Relationship with Prime Brokers needs careful consideration 11 AIFMD Considerations for Fund Administrators Valuer role Valuation function AIFM is responsible for the. . .AIFMD Implications for Prime Brokers Prime Brokers under the new Depositary rules Governance PB cannot act as (1) a counterparty and (2) a depositary to the AIF unless it has functionally and hierarchically separated these activities from one another and conflicts of interest are properly dealt with rules Sub-Custody Could the prime broker become a sub custodian to the depositary? The answer... transparency and PE rules requirements until then 18 AIFMD Implications for Investment Managers Scenario 4: US Manager managing a Cayman Fund Conditions Third Country Passport (possible from 2015) Prior authorization of the reference MS AIFM must comply with the Directive Legal representative in the reference MS as contact for investors, authorities and performs the compliance function Cooperation arrangements... AIFM / Non-EU AIF *These are the minimum compliance requirements for private placement Member states may impose stricter regimes 14 AIFMD Implications for Investment Managers Third Country Cooperation Cooperation Agreements If the AIFM is from a Third Country (i.e Non-EU) or if the AIFM has delegated activities to a Third Country, there must be relevant agreements in place with the Third County competent... authorities and tax information sharing agreements 17 AIFMD Implications for Investment Managers Scenario 3: US Manager managing an Irish Fund Self-managed entity (e.g QIF VCC) or run by Irish Management Company US manager is investment adviser/manger and appointed by Irish entity Existing structure in place remains unchanged Irish Fund or Management company appoints US Manager AIFMD compliance? Either Irish... regulatory co-operation agreements? Challenges Not just cooperation agreements (enforcement) extra territorial reach Central negotiation vs regulatory arbitrage between EU Member States Third Country Passport hedge funds? will the bar be set too high for classic offshore Depositary equivalence in Third Countries - 15 AIFMD Implications for Investment Managers Scenario 1: UK Manager managing an Irish Fund Self-managed... disclosures Performance data and NAVs Detailed, onerous liquidity rules normal and exceptional circumstances Risk management / stress tests Leverage Applying aspects of the UCITS governance framework to AIFs Complexity Management 13 AIFMs will seek to outsource these complex, operationally intensive processes This presents an opportunity for fund administrators to provide more value-added services to their... Capital adequacy AIFMD Implications for Investment Managers Business strategy review Review organisational arrangements Complexity management & outsourcing Review policies and procedures 22 Review product structures Consider UCITS? Investment Manager Capital adequacy / PII review Evaluate routes to market Review remuneration arrangements AIFMD means increased compliance and operating costs AIFMD Conclusion . confidential. AIFMD Update What does the AIFMD mean for you? Deirdre Power Partner, Investment Management Advisory Deloitte Dublin AIFMD Overview. blacklisted by FATF AIFMD Implications for Investment Managers Scenario 4: US Manager managing a Cayman Fund AIFMD What does it mean for you? 20 Investment