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Guest Comment: Alternative Investment Firms - Should They Restructure As New Regulations Approach?

Rosalyn Breedy

Breedy Henderson Solicitors

18 July 2013

Alternative Investment Fund Management Groups - do you need to re-structure?

Managers of EU alternative investment funds, or non-EU alternative investment funds marketed into the EU, with assets under management above or nearing the €100 million ($130.9 million) threshold need to lift their heads up from trying to comply with the detail of the Alternative Investment Fund Managers Directive. According to Rosalyn Breedy, of Breedy Henderson Solicitors, some managers may need to step back from the small print and consider whether they need to re-structure or even close down.

Managers of EU alternative investment funds (AIFs), or of non-EU AIFs marketed into the EU, have faced an onslaught of new regulation and legislation over the last three years. They have had to consider whether they need to register with the SEC under The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 which reduced the available foreign advisor SEC registration exemptions. They have to review the requirements under US Foreign Account and Tax Compliance Act and, if necessary, implement a compliance programme. And, they need to keep an eye on the G8 focus on fiscal recovery which is likely to affect taxation of their staff and investors.

In keeping their heads down and focusing on the detailed application of these changes, some managers may be neglecting key strategic issues brought on by these changes in the post 2008 macro-environment.  Big picture issues which may have been put to one side include issues such as retirement and succession planning, re-structuring the group, change or at least re-evaluation of current service providers, merger or other transformational changes.

As managers are well aware, for the purposes of the AIFMD the key issue to resolve is which entity within the group will be treated as the Alternative Investment Manager (AIFM).  This is the entity with the portfolio and risk management responsibilities, which because of the application of the AIFMD ‘letterbox’ provisions may not be the offshore entity with those responsibilities legally ascribed at present.

Managers looking to stay as a non-EU AIFM may need to bulk up their offshore presence by moving people offshore. They will need to review the associated impact on transfer pricing if group activities are moved to low tax jurisdictions.

Non-EU AIFMs, and those who market non-EU AIFs for them, need also to revisit their processes for marketing within the EU. This is because, although the national private placement regime and reverse solicitation rules will still apply until 2018, the application of these regimes in some member states may be stricter. The directive has narrowed the definition of the professional investor and their ability to elect as such. This will affect those targeting family office investors. Notification with individual EU member states may be also required. The non-EU AIFMs need to ensure that the appropriate global supervisory co-operation agreement is in place with the European Securities Markets Authority for the domicile of their non-EU AIF.

Non-EU managers of above-threshold EU AIFs, or of above-threshold non-EU AIFs marketed into the EU, need also to understand the detailed content, accounting standards and shorter timing requirements for their next set of annual report and accounts, the information required to be reported to their EU member state regulator and investor disclosure requirements. They should be speaking to their accountants now and reviewing any special arrangements such as side letters and side pockets, liquidity management, risk profile and the calculation and reporting of leverage if employed.

EU AIFMs managing above threshold EU AIFs or above threshold non-EU AIFs have to add to that list the requirement to separate risk management from portfolio management.  They will need to apply the remuneration code, considering to whom it applies, types of remuneration covered, the internal governance relating to remuneration including the application of deferral and claw-back, disclosure in report and accounts, etc. There is also a requirement to have procedures for the calculation and disclosure of proper and independent valuation.

The requirement to appoint a full depositary applies to EU-based managers of the above-threshold EU AIF. But, managers of above-threshold non-EU AIFs marketed into the EU will also need to appoint someone to carry out reduced AIFMD article 36 depositary functions which include safe custody, cash flow monitoring and oversight.

There are other issues facing managers looking to become authorised under the new directive, whether because they have to or because they wish to avail themselves of the EU marketing passport. First, there is the application of initial capital requirement, own funds requirement and the requirement to maintain qualifying professional indemnity insurance or additional own funds to cover professional negligence liability.  Second, the choice of member state for authorisation is important as although there is not much scope for deviation it is clear that there are differences in the approaches of the individual EU member state regulators. 


There will be substantial increased costs incurred because of the need to seek professional advice, implement changes to structure, appoint or at least review the scope of existing service providers, comply with additional regulatory burdens and the need for some to increase their regulatory capital.

Indirect costs will arise from keeping own funds in liquid instruments, the mismatch between the AIFMD remuneration deferral requirements and the timing of taxation on payments.

Opportunities to market may be lost as managers take time to learn the new marketing rules, and spend more time on compliance rather than managing money.

The threshold for being successful has changed. Managers of EU-AIFs or non-EU AIFs marketed into the EU nearing the threshold of Eur 100 mn will need to get bigger to be able to amortise the increased costs, or should consider whether to shut down.

The opportunity to passport through the EU and through that to develop other international market will be enhanced because of the increased barriers to entry for competitors.

Finally, it is important to consider the human dimension with each fund’s talent pool comprising a range of professionals at differing stages in their career and life. Any manager thinking of retiring in the not-too-distant future might want to bring those plans forward.

In any event, at a time of such strategic change it is worth considering whether the current fund structure and plans are fit for purpose.