special report aifm directive update 2014 - hfm...

FEATURING ConceptONE // Laven Partners // Lawson Conner // ManagementPlus Group

REPORTINGClarifying Annex IV requirements

MARKETINGExploring the various distribution rules effecting the industry

UNCERTAINTYIndustry fears in a post-AIFMD environment

A I F M D I R E C T I V E U P D A T E 2 0 1 4

WEEKHFMS P E C I A L R E P O R T

H F M W E E K . CO M 3

he AIFMD has been the defining issue for European hedge funds over the past five years. While other issues have come and gone, the implementation of new European regulation has remained a challenging constant.

Now that the regulation is officially in effect, and many managers are fully licensed,

HFMWeek presents a guide to some of this new regime’s key aspects.This includes a full overview of the new regulations and the varying

challenges managers have experienced while trying to stay compliant. We also look at the arguments surrounding the importance of possessing a strong regulatory enterprise risk management system.

With the ability to sell and market at the heart of so much of the directive’s focus, HFMWeek’s report also examines how EEA and non-EEA managers have adapted differently to the changing distribution rules.

We also examine how good compliance is often an issue of resource, as large funds are able to throw the weight of their infrastructure behind preparations, whilst smaller managers have struggled and had to rely heavily on outside help.

Whether big or small, we hope all of the managers reading this report will develop a greater understanding of how this new regulation will continue to impact the industry over the next 12 months.

Drew NicolReport editor

TA I F M D I R E C T I V E U P D A T E 2 0 1 4

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REPORT EDITOR Drew Nicol T: +44 (0) 20 7832 6569 [email protected] STAFF WRITER Chris Matthews T: +44 (0) 20 7832 6656 [email protected] GROUP HEAD OF CONTENT Gwyn Roberts T: +44 (0) 20 7832 6623 [email protected] HEAD OF PRODUCTION Claudia Honerjager SUB-EDITORS Rachel Kurzfi eld, Eleanor Stanley, Luke Tuchscherer GROUP COMMERCIAL MANAGER Lucy Churchill T: +44 (0) 20 7832 6615 [email protected] SENIOR PUBLISHING ACCOUNT MANAGER Tara Nolan +44 (0) 20 7832 6612, [email protected] PUBLISHING ACCOUNT MANAGER Joakim (Joe) Nilsson T: +44 (0) 20 7832 6616 [email protected] PUBLISHING ACCOUNT MANAGER Jack Duddy T: +44 (0) 20 7832 6613 [email protected] CONTENT SALES Tel: +44 (0) 20 7832 6511 [email protected] CIRCULATION MANAGER Fay Muddle T: +44 (0) 20 7832 6524 [email protected] CEO Charlie Kerr

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I N T R O D U C T I O N

4 H F M W E E K . CO M

A I F M D I R E C T I V E U P D A T E 2 0 1 4 C O N T E N T S

FUND SERVICES

HOW TO IMPLEMENT THE NEW RULES UNDER THE AIFMD – COMPLIANTLY AND EFFICIENTLYGerhard Grueter, of Lawson Conner, talks to HFMWeek about the AIFMD’s impact on fund managers, the challenges of implementing the new regulations and what the newly approved firms can do today to stay compliant

CONSULTANCY

MAKING SENSE OF THE AIFMD DISTRIBUTION RULESPetra Hollis of Laven Partners talks to HFMWeek about changing distribution rules under the AIFMD and how solutions vary between EEA and Non-EEA managers

06 TECHNOLOGY

GLOBAL REGULATIONS PRESENT COSTLY AND BURDENSOME CHALLENGES FOR AIFMSGary S. Kaminsky, of ConceptONE, explores the changing landscape post-AIFMD and highlights the importance of having strong Regulatory Enterprise Risk Management systems in place

FUND SERVICES

AIMFD – MANY UNCERTAINTIES REMAIN AFTER IMPLEMENTATIONWilliam Jones, senior partner at ManagementPlus Group, confronts fund managers’ worries post-AIFMD

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HFMWeek (HFM): With the AIFMD deadline having passed on 22 July 2014, how have managers adopted the new regulation? Gerhard Grueter (GG): Like with all new fi nancial regu-lations, the challenge is not the theory but putt ing it into practice. Th e application for approval under the AIFMD is a documentation exercise and can be done with the help of a compliance consultant or a law fi rm. Th is exercise typically requires insight into fi ling the correct applications including supplementary materials. Th e real challenge for investment managers arrives aft er the AIFMD approval has been granted. Investment man-agers have to think about what the new directive really means for them on a daily basis. Lots of ques-tions will come up. What does the new risk management look like and how is it correctly documented? To what extent do we need to change governance structures and process-es? Are we really compliant when it comes to systems and controls, and monitoring? Th ere is a big respon-sibility for senior management who signed off on fi ling the AIFMD ap-plication, but who have most likely not spent the time on correctly devising, implementing and docu-menting all of these procedures, policies, and guidelines. But ultimately, it is the responsibility of the managers to develop their own processes and procedures in accordance with their risk, trading and investment strategies.

HFM: What are the real challenges you see when im-plementing the new AIFMD rules?

GG: Being fully compliant and non-compliant can be

a fi ne line and, let’s face it, COOs also have commercial objectives. Th ey need to ensure that the organisation can deliver the performance without being overburdened by new reporting requirements and other regulatory process-es. We believe that very few compliance fi rms have the in-house expertise to devise robust and effi cient investment procedures under the AIFMD that can satisfy all objec-tives at once.

HFM: Do you think some fi rms have underestimated the re-quirements of the AIFMD regu-lation?

GG: In our experience, we see two types of fund managers. Th e fi rst type has been preparing for AIFMD for a very long time and has involved fi rms like Lawson Conner early on in the develop-ment of their compliance func-tions. So therefore, when they submit the application they have ensured that AIFMD policies and procedures are implemented on day one. Th e other type of man-ager, will oft en wait until they get approved by the regulator and then they start thinking about the day-to-day changes. Th is more ‘reac-tive’ compliance strategy may have

worked in the past with minor regulatory changes but the AIFMD is a comprehensive new framework and requires more att ention. We think that devising new policies and procedures and replacing existing ones is oft en much more eff ective than trying to add the AIFMD processes on top of the old ones. At Lawson Conner we oft en discuss the impact of new regulations on our clients’ businesses and the analogy to sports cars oft en works. Th e AIFMD is not just a ‘facelift ’ for a good sports car. Th e AIFMD is like a

Gerhard Grueter is a founding partner of Sapia Partners and a co-founder of Lawson Conner, a market leader in compliance solutions to the investment fund industry. Gerhard has more than 15 years of experience in financial services, both as an adviser and as a principal investor in liquid and illiquid asset classes. Before co-founding Sapia and its compliance arm Lawson Conner, Gerhard was a former partner at a $500m distressed debt fund and a senior credit analyst at a $3bn multi-strategy hedge fund.

HOW TO IMPLEMENT THE NEW RULES UNDER THE AIFMD –

COMPLIANTLY AND EFFICIENTLY

GERHARD GRUETER, OF LAWSON CONNER, TALKS TO HFMWEEK ABOUT THE AIFMD’S IMPACT ON FUND MANAGERS, THE CHALLENGES OF IMPLEMENTING THE NEW REGULATIONS AND WHAT THE NEWLY APPROVED FIRMS CAN DO TODAY TO STAY COMPLIANT

THE AIFMD IS NOT JUST A ‘FACELIFT’ FOR A GOOD SPORTS CAR . THE AIFMD IS LIKE A WHOLE NEW

FRAME, A NEW ENGINE, BETTER BRAKES AND A

MORE RESPONSIVE DRIVE TRAIN

F U N D S E R V I C E S


whole new frame, a new engine, better brakes and a more responsive drive train. Just tinkering with the parts from the old model will just not get you to first place. And it is also not safe.

At Lawson Conner, we see that investment managers have very different approaches to compliance and that has a lot to do with their operational risk appetite in general. There are firms that really embrace new regulations. But, often it boils down to the resources available to the man-ager. Funds with more manpower are typically better pre-pared, whereas smaller managers clearly do not have ac-cess to the same resources and rely more on outside help.

HFM: Do you think there are also commercial reasons why a manager should be proactive, rather than reac-tive, when it comes to the AIFMD?

GG: Every investment manager will want to raise new cap-ital and the AIFMD is an opportunity for funds to also dif-ferentiate themselves. We live in a post-2008 world and be-ing able to demonstrate robust compliance processes does heavily influence a firm’s ability to raise institutional capi-tal. Pension funds, sovereigns and large institutional inves-tors have all taken a step back and reviewed their own risk appetite and approach to due diligence. Compliance pro-cedures are pivotal to a well developed fund sales strategy. At Sapia we raise capital and, therefore, we are very close to institutional capital. The phrase ‘Compliance Sells!’ is definitely true. That’s why Lawson Conner offers compli-ance support to emerging investment managers who are seeking capital. We offer a premium standard of compli-ance expertise to emerging managers which typically only large financial services firms can afford. Of course, not eve-ry start-up fund will raise £100m but we can at least ensure that the compliance framework is in place to get a foot in the door with investors.

HFM: If the implementation of the AIFMD has be-come so critical what can a manager do today?

GG: We believe that getting a second opinion is a good start. For example, as part of our ‘Compliance. In safe hands.’ solutions we have developed a new AIFMD score card model which maps out the compliance gaps and sug-gests practicable ways of filling the gaps. The advice I have is that managers should focus on what they are really good at. Generate returns and raise capital. And get some ad-vice on the compliance side from experts who understand both sides of the equation: the investment management business and the compliance requirements. We see a lot of growth on the compliance outsourcing side to Lawson Conner’s shared platform with Sapia, where the platform essentially runs a number of compliance support func-tions.

HFM: What do you think are the main reasons behind the growth in compliance outsourcing?

GG: I think there are many reasons. One is that it is more efficient and cheaper to outsource certain compliance procedures and processes to someone who is doing it on a daily basis and is at the forefront of regulations. It can

also give a firm the confidence that things are being done correctly because you have someone who is a specialist overseeing everything. Because regulations are constantly changing, we are finding that more and more firms are involving compliance firms on a continuing basis and at some point it makes sense economically and operationally to outsource some compliance functions to someone like Lawson Conner. Investors often feel more comfortable knowing certain compliance issues are being dealt with by a third-party, ensuring a much more pronounced segrega-tion of duties.

HFM: What is your view of the AIFMD in its current form?

GG: It is very difficult for a directive which is being ap-plied to all managers of AIFs across Europe operating very different fund structures, to suit everyone at the same time. By the very nature of the task it will not fit perfectly for every manager, because the directive is effectively treating a €100m fund just like a €5bn one – so clearly that is chal-lenging. However, certain rules are expected to be adapted and further guidance from the regulator with respect to the practical implementation of the AIFMD will benefit man-agers and investors. Our view at Lawson Conner is that the directive is going a long way to harmonise the industry across Europe and it is time to implement the directive as quickly and efficiently as possible.



HFMWeek (HFM): How has the AIFMD impacted distribution for EEA and non-EEA managers? Petra Hollis (PH): Th e AIFMD fundamentally changed the game for fund managers based in the EU, or just look-ing to market their funds to European investors. Matt ers weren’t made any easier by the fact that diff erent Europe-an countries were implementing the AIFMD at diff erent speeds, and regrett ably, with wildly diff erent outcomes for managers. Th is has resulted in a very fragmented dis-tribution regime for both EEA and non-EEA managers.

HFM: How do the distribution solutions vary for EEA and non-EEA managers?PH: EEA managers authorised as an AIFM and market-ing an EEA fund can benefi t from the passport mecha-nism to distribute their funds across Europe. However, if the EEA manager manages a non-EEA fund - say a Cay-man Islands fund, then the passport mechanism does not yet apply and such managers must abide by the local private placement rules or equivalent. To that regard, dis-tribution solutions do not vary that much between EEA and non-EEA managers.

HFM: Within the EU, what are some of the options under the AIFMD for distributing funds?PH: In essence, there are four dif-ferent scenarios:

1) EEA managers distributing an EEA AIF: as mentioned above, the AIFMD passport applies. Th e manager, who must be author-ised as an AIFM, has to notify its “home state” regulator of its wish to distribute the AIFs in other EEA states. Th e home state regu-lator must then transmit this no-tifi cation within 20 working days, to the relevant European regulators in the jurisdictions where the AIF is intended to be marketed. Th e managers can start marketing as soon as the home state regulator gives the manager the green light.

2) EEA managers distributing a non-EEA AIF: as mentioned above, even if the manager is authorised as an EEA AIFM and located in the EU, it cannot yet ben-efi t from the passport to distribute its non-EEA AIFs in other European countries. It will therefore have to abide by national private placement rules or registration re-quirements of each of the EEA jurisdictions where the

AIF is intended to be marketed. Although the manager must be authorised as an AIFM and comply with the requirements of the AIFMD in full, there is one excep-tion to this rule. Th e manager does not have to appoint a single depositary which is subject to full compliance under article 21 (including strict liability), instead the AIFMD requires that the manager appoints a so called ‘depo-lite’ for each of the non-EEA AIFs it wishes to mar-ket. Th ere are fewer restrictions on where the depo-lite has to be based, fewer requirements for the depo-lite to comply with and of course, no strict liability on the depo-lite which is refl ected in the costs for this service. Finally, the manager has to check that the necessary cooperation arrangements have been signed between the supervisory authority of the non-EEA AIF and the supervisory au-thority of the manager and that the AIF does not hail from a jurisdiction which is listed as a ‘Non-Cooperative Country and Territory’ (NCCT).

3) Non-EEA managers distributing a non-EEA AIF: the manager will have to comply with the transparency requirements of the AIFMD, namely the prescribed dis-closure requirements to investors as well as the reporting

obligations to the European regu-lators in jurisdictions where the non-EEA AIF is marketed. Typi-cally this involves amendments to the prospectus to comply with the investor transparency rules and sending the regulator(s) both an annual report on the AIF’s fi -nances and a report on the trading exposures and principle markets of the AIF. Similar requirements about co-operation agreements and prohibition on jurisdictions listed as an NCCT apply before the non-EEA manager can distrib-ute a non-EEA AIF.

At Laven we call the above the ‘first level of compli-ance’. On top of this come the various local require-ments of the EEA states where the AIF is to be market-ed. In this regards, the EU seems to be divided in three: there are the flexible jurisdictions, which require only a notification from the manager, without additional requirements (the UK and the Netherlands are among these countries). Then there are the stricter jurisdic-tions, which impose additional requirements, such as the requirement to appoint a depo-lite for the AIF and where the local regulator may take a few months to re-

Petra Hollis is managing director, Laven Partners. Petra has been with Laven Partners since 2007 and works on international regulatory compliance and tax structuring. She advises on compliance services such as regulatory applications, regulatory reporting, passporting and compliance monitoring. Petra graduated from King’s College, University of London with a Bachelor in Law (LLB) and also holds a Master of Laws (LLM) from University College London.

MAKING SENSE OF THE AIFMD DISTRIBUTION RULES

PETRA HOLLIS OF LAVEN PARTNERS TALKS TO HFMWEEK ABOUT CHANGING DISTRIBUTION RULES UNDER THE AIFMD AND HOW SOLUTIONS VARY BETWEEN EEA AND NON-EEA MANAGERS

THE AIFMD CHANGED THE GAME FOR MANAGERS

BASED IN THE EU, OR JUST LOOKING TO MARKET THEIR

FUNDS TO EUROPEAN INVESTORS


C O N S U LTA N C Y

view the manager’s request to market their AIF. Good examples of jurisdictions like this are Germany and Denmark. Finally, there are the EEA states that have adopted a very conservative approach to the AIFMD and non-EEA managers looking to market their AIFs in countries like France or Austria, are subject to near-full compliance with the AIFMD, includ-ing limitations on remuneration, valuation and risk management.

4) Non-EEA managers distributing an EEA-AIF: if the manager is not domiciled in the EU and wishes to distribute its EU non-UCITS fund (SIF, QIF, whichever), then as detailed above, the first level of compliance applies to the manager as well as the local private placement rules or registration, as opposed to the AIFMD passport.

HFM: How can Laven Partners help with fund distribution in the EU?

PH: Laven Partners’ Global Fund Distribution Desk is aimed at tackling the regulatory fragmentation by of-fering an entryway for managers to market their funds in their chosen jurisdictions. The Global Fund Dis-tribution Desk provides a turnkey solution to deliver

clear information about local requirements, a straightforward plan to meet those requirements and a cost-effective solution that positions man-agers to raise assets.

HFM: Lastly, what would you say, other than talk to Laven Partners, for EEA and non-EEA managers wishing to distribute to European investors?PH: Be pragmatic. Decide where you wish to market your funds and understand in detail the requirements for entry. Perhaps, most impor-tantly, determine a plan of action to gain entrance while not overly distracting you, or your team, from the day-to-day operations.

BE PRAGMATIC. DECIDE WHERE YOU WISH TO

MARKET YOUR FUNDS AND UNDERSTAND IN DETAIL

THE REQUIREMENTS FOR ENTRY

1 0 H F M W E E K . CO M


The AIFMD, Dodd-Frank, MiFID II, Emir, Ucits V, Fatca – the list of regulatory ini-tiatives impacting AIFMs these days appears endless. Managers are suff ering from regula-tory fatigue and feeling overburdened from costly new obligations that make running

a management company increasingly challenging. Long gone are the days when a good trader need only obtain a Bloomberg terminal and promise alpha generation to raise millions. In order to be successful in the current regulatory intensive environment, a manager is required to devote as much focus and resources to its middle- and back-offi ce operations as it does to its front-offi ce portfolio manage-ment.

As a prerequisite to allocat-ing capital, institutional investors are demanding AIFMs provide evidence of robust internal infra-structure. Th e AIFMD, Dodd-Frank and MiFID II specifi cally mandate that managers develop, implement and maintain Regula-tory Enterprise Risk Management (RegERM™) systems to comply with the directives. In short, the cost, complexity and risk of being an AIFM has increased exponen-tially in both monetary and regula-tory terms.

AIFMs’ most common response to these burdens is to decry the cost of compliance and question how unneces-sary it is. While it is true the cost has increased, the necessi-ty of some of the obligations is clear. Th e industry brought a good deal of the increased scrutiny on itself. For years, AIFMs have operated in a shadow space, outside the pur-view of regulators other than for overt violative conduct. Global regulators formerly cast a blind eye to the internal operations and business of the unregistered AIFM, rather choosing to focus on the activity that impacted regulated markets. Th e global fi nancial crisis of 2008, and the nu-

merous examples of lax internal controls in the fi nancial services industry forced regulators to revisit this approach and direct their att ention to the global issue du jour of ‘sys-temic risk’. Being a reactive force, legislators att acked such issues with vigour and hammered out a series of compre-hensive broad new laws designed to enable them to have their proverbial fi ngers on the pulse of this scourge.

Unfortunately, a wide swathe of the hammer has fallen on the alternative investment fund industry as it was viewed as a perilous shadow banking machine with the potential to compromise global markets. When the regulators from major market centres around the world addressed the problem at the 2009 G20 Summit, the con-

sensus was that greater transpar-ency was needed in order to enable the oversight and understanding of the risks to which the markets were subjected. Th e resulting legislative directives contained onerous obli-gations to provide increased trans-parency and improved regulatory and operational infrastructure.

As is typical of regulation, the provisions in certain areas are vague, broad and appear to be akin to shooting a fl ea with an elephant gun. Regulation is not surgery, it cannot be focused narrowly for fear of leaving large loopholes.

Consequently, smaller AIFMs that appear not to be sys-temically important are subjected to the same obligations as large more ‘risky’ organisations. Th is has led to many complaints among the AIFM community, a complaint that frankly has fallen on deaf ears with regulators. Broad regulation of the AIFM industry is here to stay.

One suggested way of dealing with this reality is to ad-just focus away from the cost of compliance to the cost of non-compliance. Since the die has been cast that AIFMs will need to adopt the requisite policies and procedures to comply, fi rms are bett er served by appreciating the con-

Gary S. Kaminsky has over 27 years’ experience in the securities industry, particularly with issues relating to the legal/compliance and operational infrastructure of asset management companies. At ConceptONE, he continues a distinguished career in the financial services sector that began as an attorney with the Enforcement Division of the Securities and Exchange Commission and includes stints as CCO of Susquehanna Investment Group and principal and co-founder of two AIFMs.

GLOBAL REGULATIONS PRESENT COSTLY AND

BURDENSOME CHALLENGES FOR AIFMS

GARY S. KAMINSKY, OF CONCEPTONE, EXPLORES THE CHANGING LANDSCAPE POST-AIFMD AND HIGHLIGHTS THE IMPORTANCE OF HAVING STRONG REGULATORY ENTERPRISE RISK MANAGEMENT SYSTEMS IN PLACE

REGULATION IS NOT SURGERY, IT CANNOT BE FOCUSED NARROWLY FOR FEAR OF LEAVING LARGE

LOOPHOLES

T E C H N O L O G Y


sequences of not taking this mandate seriously. We have seen firms devote more resources to exploring ways to avoid complying than they would have had they invested in RegERM systems that would facilitate compliance. A common example is the AIFM which describes its strat-egy for dealing with the AIFMD as reverse solicitation. By definition, reverse solicitation must be passive and, there-fore, cannot be a strategy. Managers appear to be under the impression that reverse solicitation is a panacea to the added burdens that the AIFMD may place on them. This is a perilous position rife with serious potential negative consequences to the AIFM and its business.

It is ironic that the same portfolio managers who effec-tively analyse the probabilities and expectancies of trade opportunities, fail to use the same metrics when it comes to regulatory matters. Rather than focusing on the cost of complying with the AIFMD and using that as the deter-mining factor for marketing activity, a better approach is assessing the probability of obtaining EU capital and the positive expectancy the AuM growth will bring to the business. RegERM is good business – better alignment of a firm’s front, middle and back office is accretive to the organisation and profits. Engaging in regulatory arbitrage and betting on the probability of not ‘getting caught’ is a losing trade. Embracing the need to build an institutional business is the only alternative.

The starting point of any RegERM system is a robust technological platform. Given the number of regulatory reports (Form PF, Annex IV, Emir, MiFID II) and other third-party transparency (Open Protocol, DDQs) and the frequency of reporting, it is nearly impossible to effectively comply without a systematic and repeatable process. The primary goal of that process is to align the third-party dis-closures to minimise disparate reporting that can lead to unwarranted scrutiny.

While regulatory reporting was born to provide regula-tors with the ability to monitor systemic risk, that is not the AIFMs’ problem. Their challenge is to aggregate the requisite data into a centralised warehouse, enrich it and seamlessly populate each reporting template in accord-ance with prescribed protocols. To meet this challenge, in addition to technology, AIFMs will require a team with a multi-discipline expertise, legal/regulatory, operations, finance, risk management and the wild card of govern-ment prognosticator (how do you answer the questions properly). Additionally, the firm needs to maintain a de-tailed audit trail of where the data was derived from, why the questions were answered the way they were and who was responsible for the answer. This serves two purposes, facilitating the repeatability and, more importantly, allow-ing the firm to justify its data when the regulator makes an inquiry.

As earlier stated, the regulators have put the industry on notice that they intend to use regulatory reports for a number of their mandates. The SEC recently highlighted its use of Form PF data in connection with its examina-tion and enforcement programmes. The FCA and Esma similarly intend to scrutinise Annex IV data. The simplest case for a regulator is when a firm has inconsistent disclo-sures in multiple reports. RegERM will ensure AIFMs do not cause an ‘own goal’ for the benefit of their National Competent Authority. The FCA has made clear that it will be much more understanding of errors in Annex IV if the firm can demonstrate it has deliberative processes and has made the effort to comply.

Global regulations continue to present AIFMs with substantial challenges. Regulatory reporting, one of the key components of this, is the most comprehensive and complex exercise an AIFM has today. Complying with the multitude of regulatory directives and third-party con-stituent demands for internal data can be overwhelming and without the appropriate resource allocation virtu-ally impossible. The exercise requires multiple personnel within the firm, as well as outside experts and technology, to co-ordinate in aligning, aggregating and maintaining the integrity of the firm’s data. Reporting has become a 12-month perpetual challenge. One that can only be met with a robust RegERM system.

THE STARTING POINT OF ANY REGERM SYSTEM IS A ROBUST TECHNOLOGICAL PLATFORM

How does HFMCompliance work?

HFMCompliance provides a comprehensive guide to the specifi c trading and marketing regulations within each country from the top 50 most requested global hedge fund trading and marketing venues.

Users can search for specifi c regulations for each country including:

• Short selling rules and reporting conditions.• Thresholds for reporting long only holdings.• Marketing stipulations for selling funds,

including information on private placement, licensing regimes and reverse solicitation.

• Information on key regulators and reporting methods.

• Contact details for key local legal experts and counsel.

• Fund and manager domiciliation information.

How to access HFMCompliance

HFMCompliance is available exclusively to HFMWeek subscribers.

To fi nd out more HFMCompliance and how to become a subscriber, contact the HFMWeek team on:+44 (0) 20 7832 [email protected]

About HFMCompliance

HFMCompliance is a new online data resource providing access to key reporting, marketing information and updates from a host of international legal advisors.

The service, which is due to launch at the end of 2013, will provide COOs, legal and compliance professionals at hedge funds with a comprehensive breakdown of key rules and regulatory considerations on a jurisdictional basis. This free to access service – exclusively for HFMWeek subscribers - is designed as a fi rst port of call for management fi rms seeking guidance on global trading rules, short selling reporting, domiciliation and marketing conditions in 50 of the most requested jurisdictions (as suggested by managers themselves).

HFMCompliance is produced by the publishers of HFMWeek, the leading supplier of news and business intelligence to the global hedge fund sector.

The facility benefi ts from HFM’s background of extensive industry knowledge and contacts to ensure that the information delivered is relevant, informative and essential for a hedge fund user.

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THE NEW HEDGE FUND REGULATORY AND COMPLIANCE ONLINE RESOURCE




Many in the alternative funds industry expected to have greater clarity re-garding the AIFMD in the run-up to and aft er the operational date of 22 July 2014. While Esma, national reg-ulators, lawyers and the industry as

a whole have provided guidance and achieved consensus in a number of areas, some key points remain as obscure and misunderstood as ever. To the extent that these points result in legal debates concerning a very low probability event, then AIFMs and their AIFs can probably continue to operate according to their AIFMD structures and busi-ness plans without giving much thought to these academic points. However, if a point relates to a spe-cifi c issue that causes operational, legal or regulatory uncertainty, it could actually have unintended and harmful consequences for the fund – and even the industry. I have experienced a few issues during my practice as a fund director over the past few weeks that illustrate my concern.

By far the main issue that arises continually is the potential tension between the AIFM and the board of the AIF. Th ere are other issues of course but, in my view, this is the primary one as it determines who ultimately controls the AIF.

Th ere has been extensive legal analysis devoted to de-fi ning the roles of the AIFM and the board (or governing body) of the AIF. It is clear that the AIFMD charges the AIFM with the management and operation of the AIF (with barely any reference to the governing body of the AIF). It is also clear that the AIFs are governed by the na-tional company law of the country in which they are es-tablished. Th is assumes a corporate fund structure, but the same issue arises to the extent that the fund has a limited partnership or trust structure involving a corporate gen-eral partner or trustee. Th e key question relates to the ex-treme scenario where the board of the AIF disagrees with

an action properly taken by the AIFM in accordance with the AIFMD. What happens then?

Some lawyers have indicated that the AIFMD overrides national law (which I disagree with), so the AIFM is the ultimate decision maker. Others have suggested that the AIFM serves at the board’s pleasure – in other words, the board could remove the AIFM if they disagree with an ac-tion taken by the AIFM. However, this may not be pos-sible under the relevant management agreements, not to mention that it would probably be diffi cult in practice to remove the AIFM, who typically is the sponsor of the AIF. Such removal could even be against the preference of in-

vestors in the AIF. Some lawyers have suggested a

practical approach requiring the AIFM and the board to discuss and reach agreement on the specifi c point. While this is sound practi-cal advice, which in reality refl ects the predominant practice prior to the AIFMD, this approach ignores the possibility of an impasse. I do not believe anyone expects regula-tors to provide guidance on legal or operational points, although the industry could be pleasantly surprised if regulators were to de-velop a formal or informal process to obtain their guidance on specifi c points. To make the potential situ-

ation worse, I have seen competent and reputable interna-tional law fi rms provide diff erent advice to clients on the same point, even at times being diametrically opposed to each other on the positions taken. All of this leaves the board of the AIF with a very diffi cult decision to make if they disagree with an action of the AIFM.

Th e potential confrontation can be avoided in a num-ber of practical ways. First, actively discuss the roles of the AIFM and the board of the AIF and map out the respective responsibilities. I have undertaken this exercise a number of times and confi rm that it goes a long way in defi ning ex-pectations and clarifying roles. Second, agree on key sen-sitivity points at the board level and ensure that the AIFM

William Jones is the founder and senior partner of ManagementPlus Group (MPL). MPL was established in February 2006 and provides directorship, management company and consulting services from offices in Luxembourg, the Cayman Islands, Singapore and New York. Jones has 23 years’ experience in the hedge fund industry and has held senior positions within Commodities Corporation, Goldman Sachs Asset Management International and Bank of Bermuda/HSBC.

AIMFD – MANY UNCERTAINTIES REMAIN AFTER IMPLEMENTATIONWILLIAM JONES, SENIOR PARTNER AT MANAGEMENTPLUS GROUP, CONFRONTS FUND MANAGERS’ WORRIES POST-AIFMD

BY FAR THE MAIN ISSUE THAT ARISES CONTINUALLY

IS THE POTENTIAL TENSION BETWEEN THE

AIFM AND THE BOARD OF THE AIF


1 4 H F M W E E K . CO M


understands them and has escalation procedures to inform and consult the board as appropriate when the issues come up (which they will). Finally, more than ever the board needs to understand the regu-latory context in which it operates (ie the AIFMD relative to national company law) and how the AIFM operates within the same context. In-person board meetings and on-site visits to the AIFM im-prove communication between the board and the AIFM and enable them to develop a more detailed under-standing of each other.

From the AIFM’s perspective as sponsor, it is crucial that the AIF board has relevant background and experi-ence in the asset class(es) of the AIF, is at least conversant and ideally has expertise in the AIFMD, and can provide valuable input in the types of regulatory, legal, operational, portfolio and risk issues that constitute the day-to-day ac-tivities of the typical AIFM.

The following examples illustrate the potential tension between the board of the AIF and the AIFM. I have en-countered them already during the short operational life of the AIFMD.

Under the AIFMD, certain service providers to the AIF can be appointed by either the board or the AIFM. The most frequent appointments by the board are that of the AIFM, the custodian and the administrator, although it could also appoint others. The AIFM usually appoints any service provider that is not appointed by the board. In the context of one fund for which I act as a director, the AIFM wished to appoint a delegate to perform services. It was clear that the AIFM had the ability to make the ap-pointment, but had to inform the board prior to the ap-pointment as part of a procedure agreed in advance with the board. The board concluded that the delegate was not acceptable which led to a difficult discussion but one in

which the AIFM understood the concerns of the board and ultimately appointed a different service provider.

The AIFM is charged by the AIFMD with the determination of valuation issues unless a valua-tion agent has been appointed. The board required a notice provision in the valuation policy for write-downs (and other matters) to be implemented by the AIFM. The AIFM wants to write down a secu-

rity but the board believes that the write down should be greater than that proposed by the AIFM. The AIFM even-tually agreed that the assumptions which were the basis for its recommendation were too liberal. The security was written down by more than the original proposal, but by less than the board had originally considered.

The AIFM appointed the administrator to an AIF. The administrator informed the AIFM and the board that a PEP submitted a subscription to the fund. The AIFM wished to accept the subscription as the PEP had passed the administrator’s and the AIFM’s AML checks, but the board preferred not to accept it given the identity of a fam-ily member of the PEP. The AIFM and the board agreed to ask the potential PEP investor for more information re-lated to source of funds and ultimately agreed to reject the subscription mainly due to reputational concerns.

The common denominator in all three cases is that an issue was identified early in the process, the AIFM and the board engaged in direct and constructive discussion, and a decision was reached and implemented that was ac-ceptable to the AIFM and the board. While I suspect that the various uncertainties related to AIFMD will exists as long as they are not resolved by a regulatory decision or court order, AIFMs and AIF boards can, and should, work together to minimise the impact of such uncertainty and ultimately protect investors’ interests.

IT IS CRUCIAL THAT THE AIF BOARD HAS RELEVANT

BACKGROUND AND EXPERIENCE IN THE ASSET

CLASS(ES) OF THE AIF

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