The Journey Towards AIFM Authorization

Date: March 18, 2014

For the Alternate Investment Fund (AIF) industry, which was so far mostly unregulated, Alternate Investment Fund Manager’s Directive (AIFMD) will not only bring in a major shift in the way they do business but also aggravate the cost and complexities of compliance.

With just around 3 months to go until the deadline (July22) to comply with AIFMD, European fund managers are gearing up to fulfill the necessary changes that the regulation has put forward. It is no small a task to bring in new processes, systems and frameworks to meet the stringent levels of disclosure and governance, and in many cases beef up risk-management procedures.

The primary task fund managers must complete in order to comply with the regulation is to seek authorization from its home regulator. The directive elaborates that all EU domiciled AIFMs with assets under management above the threshold of 100 million EUR or, in case of AIF with no leverage and lock-in period of 5 years or more, above the threshold of 500 million EUR will need to be authorized by the home Member state competent authority (CA) and are subject to ongoing requirements. So what are the steps to seek authorization?

Application Process

The process of applying for authorization involves the AIFM to provide information about the funds and its management. According to the directive, AIFMs should provide information about the total value of assets under management (AUM) calculated according to the procedure set out in the directive. AIFMs should provide for each AIF the offer document or a description of the investment strategy they have adopted. The offer document or the description of the investment strategy should include the main categories of assets in which AIF may invest and any industrial segments, geographic or other market sectors or asset classes that are of prime focus. A description of the AIFs borrowing or leveraging policy and risk profiles should also be mentioned along the investment strategy. Additionally, AIFMs should also present information on where the AIF is established if the AIF is a feeder AIF. The fund rules or instruments of incorporation of the AIF also need to be mentioned in the application.

One of the main changes AIFMD is introducing in the industry is the appointment of a depository. Hence, the AIFMs should provide the home regulators with the information on arrangements made for the appointment of the depository.

Apart from disclosing the details of the fund, the application should also contain information relating to the fund managers.

  • The directive wants AIFMs to provide information on the persons who conduct the business of the AIFM
  • The remuneration policies and practices of the AIFM along with details of delegation arrangements
  • AIFMS should also disclose identity of direct and indirect shareholders who have 10 percent or more of the capital, have voting rights or have the ability to influence over the management of AIFMs and the amount of their holdings
  • AIFMs will also have to prepare a document explaining the organisational structure of the AIFM and also how the fund managers intend to comply with its obligations under the regulation.

Once an AIFM has all the required information, they can submit it to the home regulator who will verify these details. Format for submission and the cost of submission will depend on the discretion of the home regulator. Financial Conduct Authority of UK demands AIFMs to submit the application in both electronic and paper form.

Fee structure

The application form for authorization should be accompanied by fee for the processing. The application fee for AIFM authorization is fixed by the home regulator as per ESMA guidelines. This application fees must be paid in full at the same time as submitting the application. The fee can vary between Member states. In UK, the cost of new full-scope AIFM authorization is approximately £5000. The fee for applying for Variation of permission and NPPR application is much lower than the fee for authorization of new entities.

What happens next?

Once the home regulator receives all the required information from a fund manager, a small team of officers check if the application is complete and has all the required documents. If the application is deemed incomplete, the team will notify the firm and ask them to send the necessary information. Then it is passed to a case officer who studies the case in detail. He will contact the AIFM if he needs any additional information from them. Approximately, it will take about 3 months for the AIFM to verify the details and reach the decision whether to grant the authorization or not.

After the deadline of July 22, those AIFMs, which do not have authorization, will not be able to market their funds. However, if an AIFM is already authorized as a management company under the UCITS Directive and has already provided information to its home regulator, it need not apply for authorization. However, non EEA AIFMs wishing to market their funds in Member states will need to apply to the Member state through the National Private Placement Regime.

For the fund managers, it’s a daunting task to fulfill the application process given the long and complex processes the directive has demanded. 2014 is going to be a busy and tough year for fund managers in Europe.

Visit our AIFMD resource page for more articles and information.

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