There has been some uncertainty as to the terms on which non-EEA managers (including US investment advisers) will be able to continue to directly manage the portfolios of EEA domiciled AIFs (e.g. Irish or Luxembourg domiciled non UCITS funds) from 22 July 2013.
This uncertainty arose because the provisions permitting non-EEA managers to apply for authorisation as AIFM under AIFMD will not come into force, if at all, until July 2015 at the earliest and AIFMD makes no express provision for such management to continue in the interim.
It is hoped that relevant member state regulators which currently permit such direct appointments will find a pragmatic solution to this impending issue that allows US investment advisers to continue to manage the EEA AIF without the need for such compliance with all of the provisions of AIFMD. Both Ireland and Luxembourg have recently indicated that they intend to facilitate this under transitional arrangements.
Alternative options may include the following:
the EEA AIF could become a self-managed fund (and, therefore, itself be the AIFM) and delegate investment management functions to the US investment adviser; or
an existing or newly established local management company could take on the role of AIFM and delegate investment management functions to the US investment adviser.
These two scenarios in effect involve an EEA AIFM managing the EEA AIF. This means that AIFMD will apply in full and will drive significant compliance requirements in relation to the AIF, the AIFM and, via the AIFMD delegation requirements, the sub-adviser. A full consideration of the impact of AIFMD on EEA managers is beyond the scope of this OnPoint but the matters discussed below under “Sub-Adviser to an EEA Manager” will be relevant as regards the US sub-adviser. In addition, the EEA AIFM must not be a “letter-box entity”, as discussed further below.
The position for private equity and other closed-ended funds that are hard-closed may differ and US investment advisers in this position should check the status of each such fund.
Anti Letter-box Provisions
Under AIFMD, an EEA AIFM is not permitted to delegate investment management functions (which are the (undefined) functions of “risk management” and “portfolio management”) to such an extent that it becomes a “letter-box entity” and can no longer be considered to be the manager of the AIF.
European regulations made under AIFMD set out a number of situations where an EEA AIFM will be deemed to have become a letter-box entity in relation to any delegation. In addition to a failure to properly monitor and supervise delegates, these include situations where:
the AIFM no longer retains the necessary expertise and resources to supervise the functions delegated to a sub-adviser or effectively manage the risks associated with the delegation;
the AIFM no longer has the power to take decisions in key senior management areas or perform senior management functions in relation to investment policy and investment strategies; and
the AIFM delegates the performance of investment management functions to an extent which exceeds by a substantial margin the investment management functions performed by the AIFM. This is determined on the basis of qualitative criteria which include, for example, whether the delegations are within a corporate group.
We are closely involved in this issue on a range of fronts and can advise on a more detailed basis how sufficient substance can be retained in terms of risk management and portfolio management functionality, as required.