With less than three weeks to go until AIFMD becomes law the industry is still scratching its head as to the implications of a directive dealing with the murky world of alternatives. Can they catch up?



The Directive is designed to place more regulatory controls on managers of alternative investment funds to ensure investors are better protected and informed than previously.

It applies to all funds not subject to the Ucits Directive, including hedge funds, real estate funds and funds of funds, and its requirements are uniform across each fund type, despite their very different risk profiles.

It was initially met with derision from across the alternatives industry, with criticism it was a political knee-jerk reaction to the financial crisis and concerns no industry experts were involved in drawing up the proposals.

A survey of European alternative fund managers conducted at the end of 2010 found just 32% believed the legislation was necessary and just under a third, 31%, were supportive of it.


A little over four years later and we are just three weeks away from the directive becoming law, yet only 15% of AIFMs are ready for its implementation, according to a survey by KNEIP. Fund managers are clearly unhappy about the new rules, but why have they left their preparation to the last minute?

Experts have argued that even at this late stage in the process confusion as to exactly which funds or companies are included in the regulation remains.

Monica Gogney, a financial services expert at Pinsent Masons, said: “If an AIF delegates the actual investment management function to another company and that other company performs more of the investment management then it will be the one regulated by the directive.

“This means the company listed in fund documentation as the ‘manager’ will not be the manager as far as the Directive goes, which will cause confusion.”

Further confusion occurs at a local level in terms of how regional regulators are going to administer the transition to regulatory compliance.

The FCA only unveiled its process for registering as an AIFM or for varying the permissions relating to an organisation’s existing AIFM status at the end of last week, meaning that many firms have simply been in state of limbo up until the last few days.

Cross-Europe legislation… with some exceptions

Non-EU fund managers marketing to investors in the region will also have to register as an AIFM in order to continue their European activities, but they too have been left in the dark as to what exactly they need to do in order to comply with the new rules.

While authorisation requirements for non-EU managers are to be phased in between 2015 and 2019, they will be subject to the disclosure and reporting requirements of the directive as of 22 July in the same way as domestic fund managers.

Several countries, including the UK, however, have stated they will extend the compliance deadline for non-European Economic Area (EEA) managers and non-EEA funds marketing to investors in their country for another year. The specific rules for the extension period vary from country to country, and some countries have chosen not to adopt an extension period at all. This means non-EEA fund managers will need to check with individual country regulators as to what it is they need to do to continue trading in their region, creating further uncertainty and an administrative headache for those operating in multiple jurisdictions.

Money matters

The Directive’s rules aim to discourage risk taking and include requirements that firms should spread the payment of any performance-based earnings over a period which takes into account the redemption of the fund and the investment risks. Those deemed to be a significant size are also required to set up a renumeration committee.

A recent ESMA consultation paper on this topic, however, did not specify a threshold at which the committee must be established, and it is still in the process of developing guidelines on the matter.

Reporting concerns

With three weeks to go, the biggest concern is the reporting requirements of the Directive, and 40% of fund managers have yet to install the necessary infrastructure to enable them to meet their obligations.

Under the legislation, over 130 pieces of data are to be reported to the regulators at both the fund manager and fund specific level on a quarterly basis. This is a significant requirement for an industry which, up until now, has not been subject to formal reporting requirements. Many fund managers are without existing back office operations, with the ability to deal with the increased regulatory requirements.

Mario Mantrisi, chief strategy and research officer at KNEIP, said: “The key challenge facing AIFMs is how best to collect the data required by the regulators. Organising different workflows and developing a streamlined procedure for each stage of data collection can be a time consuming and potentially costly enterprise. As a result, it is no surprise that so many fund managers are considering outsourcing this process altogether.”

The AIFMD has been cited by some as a watershed moment, and by others as the most significant change to the alternatives industry in history, yet those affected have been kept in the dark as to what they need to do to meet its strict requirements, is it really any wonder they remain unprepared?



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