11/10 AIFM Directive finally approved by European Parliament

Financial services and regulation alert email

Thursday 11 November 2010

Following their agreement with the EU Council of Ministers which we detailed last month, today the European Parliament voted to adopt the text of the new Alternative Investment Fund Managers Directive (AIFM Directive). This will now be formally approved by EU finance ministers by the end of 2010.

The directive will affect all funds not covered by the Undertakings for Collective Investment in Transferable Securities (UCITS) directives on the cross-border marketing of retail funds.

AIF Passports

Under the directive an EU marketing 'passport' will be introduced for alternative fund managers based within the 27-member union. After a two-year transition period, managers and funds based in non-EU countries will also be able to obtain a passport, provided certain conditions are met.

The directive also preserves the existing system of country-by-country private placement rules for distribution of alternative funds by non-EU managers for at least five years, or until the Commission and European Securities and Markets Authority (ESMA) determine that the passport system is operating satisfactorily.

Asset stripping by private equity firms

The directive sets limits on distributions and capital reductions within the first two years following the acquisition of a company by a private equity investor.

Strong information and disclosure requirements, which may include highly sensitive portfolio information, are also to be imposed on private equity investors, particularly regarding information for shareholders, employees and their representatives on the planned strategy for the company.

Other significant provisions include:

  • New transparency and capital requirements for AIFs. The directive imposes new registration, reporting and capital requirements on Alternative Investment Funds (AIFs).
  • AIF managers' remuneration. New rules will require the deferment of a substantial part of the remuneration of AIF managers.
  • Depositary liability. The responsibility of providing custody services to alternative funds will be tightened. If a depositary legally delegates its tasks to other institutions, it must include provisions within the contract that allow the fund or its manager to claim damages against the entity to which the tasks are delegated.

Next steps

More detailed secondary rule-making and legislation will follow during 2011 - 2012. This will be overseen by the European Commission following technical advice from ESMA. The directive's rules must be incorporated into national law by 2013.