The European Union's Alternative Investment Fund Managers Directive (the ‘Directive’) provides for comprehensive changes in the regulatory framework applicable to alternative investment fund managers (AIFMs) that manage or market alternative investment funds (AIFs) within the European Union.
The Directive does not introduce rules and regulations on a harmonised level for AIFs. However, it provides for an authorisation and prudential supervision for AIFMs (including self-managed AIFs) which indirectly but heavily impacts the AIFs under management. Detailed rules are laid down in delegated regulations and, more specifically, in the Commission Delegated Regulation (EU) No 231/2013, which are all directly applicable in all EU member states.
The deadline for transposition of the Directive into national law by EU member states was 22 July 2013. Belgium did not meet this deadline. Finally, on 17 June 2014, the act of 19 April 2014 on alternative undertakings for collective management and their managers (the ‘AIFM-act’) was published in the Belgian Official Gazette and has generally entered into force on 27 June 2014.
The Directive and the AIFM-act define an AIF as a ‘collective investment undertaking’ which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, but excludes funds that are authorized under the EU UCITS regulations. The definition is intentionally broad, without regard to form of fund entity, fund structure (e.g., closed or open end), economic terms or jurisdiction of formation, and captures hedge funds, private equity funds, venture capital funds, real estate funds and infrastructure funds. Holding companies, pension funds, certain supranational institutions, national central banks, employee participation or saving plans and securitisation special purpose entities are excluded from the definition. The definition may potentially capture co-investment transactions or similar arrangements, however, depending on their structure and economic terms.
As such, the Directive and the AIFM-act effectively cover all AIFMs managing or marketing AIFs which do not currently require authorisation under the UCITS Directive in the following situations:
- in relation to EU AIFMs: all AIFs managed by them (whether or not EU based and whether or not marketed to EU investors)
- in relation to non-EU AIFMs: all EU AIFs managed by them (whether or not marketed to EU investors) and all non-EU AIFs managed by them (but only if marketed to EU investors)
In addition, there are de minimis exemptions for AIFMs that manage AIFs with aggregate assets (including those acquired through leverage) not exceeding EUR 100 million (the so-called hedge exemption) and AIFMs that manage AIFs with aggregate assets not exceeding EUR 500 million, so long as the AIFs are unleveraged and grant no redemption rights to investors which are exercisable in the first five years (the so-called private equity exemption).
Exempt AIFMs are still required to register with the Belgian Financial Services and Markets Authority (FSMA) and to comply with certain disclosure requirements on investment strategy and activities on an ongoing basis, so as to allow the FSMA to effectively monitor systemic risk. They may also at any time opt-in under the Directive in which case the AIFM can benefit from the ‘European Passport’.
Impact on the Belgian fund industry
Before the introduction of the Directive, the Belgian legal fund-framework was exclusively laid down in the act of 3 August 2012 on certain forms of undertakings for collective investment (the "UCITS Act"). With the implementation of the AIFM-act, only UCITS (including UCITS managers) and securitisation vehicles (which are excluded from the AIFM-act) remain regulated by the UCITS Act. All other Belgian types of open-end and closed-end undertakings for collective investment, such as the non-UCITS bevek/sicav and bevak/sicafi continue to exist, but are now regulated by the AIFM-act, because - with some exceptions - they can be considered an AIF.
Public AIFs and AIFMs managing public AIFs must, in addition to the rules imposed by the Directive, comply with a broad set of Belgian-specific rules and regulations.
AIFs which do not offer their units to retail investors can still opt for the form of an ‘institutional’ or ‘private’ AIF (which also has certain tax benefits). However, whether they opt for such statute or not, they will have to comply with the harmonized AIFM rules either way, resulting in a higher regulatory burden for non-public AIFs than before.
Some key provisions of the Directive and the AIFM-act
Disclosure and transparency
AIFMs are subject to a series of enhanced disclosure requirements in relation to major holdings and control positions in unlisted companies. When an AIF acquires shares, the AIFM managing such an AIF must make notifications to the FSMA, the portfolio company, its shareholders and, its employees or employee representatives any time when the proportion of shares being held by the AIF reaches, exceeds or drops below certain thresholds (10%, 20%, 30%, 50% and 75%), subject to exceptions for small or medium enterprises. If the threshold reaches 50% or more, the AIFM must make additional disclosures concerning the future intentions of the AIFM regarding the company and the likely repercussions on employment.
Conflicts of interest
The Directive and the AIFM-act create a regulatory framework related to conflicts of interest. AIFMs are required to implement a suitable structure and organisational procedures to minimise such conflicts of interest. Conflicts also need to be disclosed to investors to prevent them from adversely affecting the interests of the AIF and its investors and to ensure that all the AIFs managed by a given AIFM are fairly treated.
An AIFM will be required to maintain a minimum level of regulatory capital. This must be at least EUR 125,000, and, if assets under management exceed a EUR 250 million threshold, the AIFM must provide an additional amount of own funds equal to 0.02% of the amount by which the portfolios of the AIFM exceeds EUR 250 million but the required total of the initial capital and the additional amount shall not, however, exceed EUR 10 million. Self-managed AIFs must have an initial capital of at least EUR 300,000.
The Directive and the AIFM-act prohibit asset stripping in portfolio companies controlled (solely or jointly) by the AIF during the first two years of ownership. This translates into an effective ban on distributions, capital reductions, share redemptions or buy-backs in or by the portfolio company. An AIFM must not vote to allow such actions and must use its best efforts to ensure that these and similar events do not occur.
The depositary rules in the Directive and the AIFM-act specify that all AIFMs are required to appoint a (regulated) depositary to hold the AIF’s assets. The AIFM may not act as a depositary for its own AIFs. The liability imposed upon depositaries is onerous and has two main strands, both aimed at preventing depositaries from evading what is effectively a ‘strict liability’ standard.
The first provision regulates the delegation of a depositary’s services such that, prior to a depositary delegating its functions to a third party, it must ensure that a right of claim is established between the AIF or AIFM and the third party, or that the depositary can make a claim against the third party on the AIF’s or AIFM’s behalf.
The second provision provides that depositaries are liable for losses of financial instruments owned by an AIF and held by the depositary. A depositary will be liable for such losses unless it demonstrates that the loss was a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable regardless of its reasonable efforts.
AIFMs managing one or more AIFs employing leverage on a substantial basis are required to disclose to the FSMA information on the overall level of leverage employed by each AIF they manage, the nature of leverage and the reuse of assets under leveraging arrangements. Further, there are a broad range of provisions to keep leverage under control and to prevent it from causing systemic risks.
AIFMs are required to put in place remuneration policies and practises for those categories of staff whose professional activities have a material impact on the risk profile of the AIF they manage, including senior management, risk takers, control functions and any employee with an equivalent remuneration package.
Assessment for rewards must be based on longer-term performance and a framework appropriate to the life-cycle of the AIF. Guaranteed variable pay should be the exception rather than the rule and must be limited only to new staff in their first year. In addition, a substantial proportion of the variable remuneration component (at least 40% and in some cases up to 60%) must be deferred over an appropriate period.
Pierre Berger is a partner in our Antwerp office. He advises Belgian and foreign multinationals on all aspects of banking, funds, financial services and insurance law. He also advises on restructuring & insolvency matters, and mergers and acquisitions. His principal area of expertise is in the banking, funds and insurance industry, including regulatory matters. He has also extensive experience in advising clients active in the Antwerp port, diamond and fashion industry. Pierre has a Law degree from the University of Antwerp and KU Leuven and a Licentiate degree in Business Sciences from Lessius Hogeschool (Antwerp). He studied abroad in Amiens (France), Berlin (Germany) and Champaign (Illinois, USA) in the framework of exchange programs. He is the author of numerous articles on corporate, financial and insurance law.
Simon Landuyt is an associate in our Antwerp office. He advises Belgian and foreign multinationals on aspects of project finance and insurance law. He further specializes in advising on a large variety of regulatory, corporate matters, including mergers and acquisitions and insolvency issues. Simon has a particular interest in dispute settlement and litigation practices. Simon has a law degree from the University of Ghent and currently also is a PhD assistant at the University of Ghent.
Olivier Van den broeke is a junior associate from the Antwerp office. He advises Belgian and foreign multinationals on all aspects of Banking & Finance Law, Financial Services and Insurance Law, Corporate Law and Commercial Law. Olivier has a law degree from the University of Antwerp and a Master of Law Degree (LLM) from the College of Europe, Bruges.
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