ISS Magazine, March 2013

The AIFMD Level 2 Measures Have Been Published – But Many Questions Remain

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On 19 December 2012, the European Commission published Level 2 measures for the Alternative Investment Fund Managers Directive (AIFMD). These measures, which are set out in a Delegated Regulation, are intended to create a single rulebook for investment managers (AIFMs) in the EU. The Delegated Regulation is currently subject to a 3 month scrutiny period by the European Parliament and the Council of the European Union.

Although many details were clarified by the Level 2 measures, many points remain to be discussed with regard to the interpretation of practical aspects, and to how managers and service providers will implement the regulations. Market participants also need to think about future developments, especially specific AIFMD provisions relating to the Real Estate, Private Equity and Hedge Fund sectors, as they will be affected by the upcoming regulations in different ways.

Let us look in more detail at these three sectors.

Many international Real Estate fund Managers have been working for some time on implementing the Directive and ensuring full compliance with it, in order to obtain the “passport” as well as to set up the a pan-European AIFM platform. A large number of them consider that Luxembourg is an ideal place to be based, not only for their products but also for their management company covering both EU and non-EU domiciled real estate products.

The picture is somewhat different for Private Equity houses, as only a few of whom have taken a truly pan-European approach. Many of these managers will try and remain outside of the scope of the Directive as long as possible, and some that are currently fundraising have set up non-EU funds and management structures, which they aim to close before July 2013. However the larger players driven by pan-European distribution ambitions and institutional demand will create both product and the AIFMD domiciled in the EU. Luxembourg will need will need to ensure it continues to leverage its existing “tool-box” to attract these Private Equity players as it fits perfectly into Luxembourg`s natural role as a Global Distribution Hub. Dialogues with mid-sized managers should be maintained, in order to highlight the advantages of setting up their substance in Luxembourg and to encourage those houses to move into the Grand Duchy.

The approach of Hedge Fund Managers is somewhere between Private Equity houses and Real Estate fund Managers. On the one hand they are generally quite advanced in their thoughts about how to set up their structure. On the other hand they are some vital steps, such as the future depositary/prime broker operating model to be resolved. This is important since prime brokers will have to work together with depositaries much more closely, and in many cases be appointed as sub-custodians.

Indeed, these service providers are also impacted by the Directive. Depositaries in particular are mostly well advanced in their projects, defining their target operating model under the AIFMD. Nevertheless, a number of important discussion points still need validation, such as the scope of cash-flow monitoring, the handling of fund of fund and master-feeder structures, as well as the degree of reliance on third parties when performing preparatory tasks.

Many of the discussion points still open today need to be addressed urgently in order to leave enough time for the market participants to implement the necessary measures and to ensure they are fully AIFMD compliant. Close cooperation with all key stakeholders is essential, in order to get clarification and practical, workable solutions. A good example of this cooperation is the depositary/prime broker working group which has already been established, and in the future similar working groups may need to be formed for topics such as (intra-group) delegation and transitional provisions, as well as third country rules.

Undoubtedly, Luxembourg will do its utmost to ensure that the AIFMD is implemented as painlessly as possible.

Michael Ferguson, Chairman of the ALFI Hedge Funds Sub-Committee, Partner at EY SA

Michael Ferguson is a partner in Assurance Audit Services and the Asset Management Leader at EY Luxembourg.

His clients include a wide variety of mutual funds, hedge funds and structured products promoted by global asset managers. Michael has over 20 years experience in the asset management industry primarily in Luxembourg, Ireland, U.S.A. and the United Kingdom.

Michael is a member of EY’s Global Asset Management Advisory Board and their Global Hedge Fund Committee. He is also a member of AIMA (Alternative Investment Management Association), chairs and serves on various ALFI committees.

Michael has written several articles and publications about the investment fund industry.

He speaks regularly at various fund conferences including the recent ALFI conferences held in the United States and the United Kingdom.


Michael Ferguson, Chairman of the ALFI Hedge Funds Sub-Committee