AIFMD: Impact on US Investment Advisers - June 2013: Delegating to an EEA based sub-adviser

by Dechert LLP
Contact

In cases where a US investment adviser appoints an EEA sub-adviser, the parties concerned will need to analyse which entity will be the AIFM. Whether such arrangements relate to group entities or third parties, the parties may wish to avoid the EEA manager being deemed the AIFM in relation to the fund concerned. This is a potential risk if the activities of the EEA sub-adviser involve portfolio management or risk management in relation to the AIF concerned.

US entities (including US mutual funds, real estate funds and all other non-UCITS managers) investing in Europe through an EEA sub-adviser will need to consider this issue carefully.

Why is it important whether the AIFM is in the EEA or not?

An EEA AIFM will be fully subject to AIFMD, which will impose a wide range of structural and operational compliance constraints on the AIFM as well as, potentially, its delegates – including in regard to remuneration policy. EEA AIFMs also need to ensure that even non-EEA AIFs marketed in the EEA have appointed a depositary and comply with certain other requirements, which may significantly increase operating cost. Non-EEA AIFMs, on the other hand, need only to ensure that the transparency, disclosure and reporting requirements (discussed earlier in this note) are observed.

AIFMs must do more than just give advice

If the activities of the EEA sub-adviser consist solely of non-discretionary investment advice (i.e. making recommendations but not exercising final investment discretion) this would not generally be considered “portfolio management”. Consideration would need to be given to any risk management performed by the EEA sub-adviser, but overall it is unlikely that it would be the AIFM. Restricting the sub-adviser’s activities to non-discretionary advice only may, therefore, be a workable solution. However, the more frequently traded the portfolio is, the harder this model will be to operate; particularly if decisions need to be made quickly to react to market news or movements. It is most commonly used at present (in the UK at least) in the context of private equity and other illiquid asset classes.

Is the ‘letter-box’ test applicable to US managers?

If the EEA manager needs to exercise discretion over the portfolio, this raises the possibility that it could be viewed as the AIFM in relation to the AIF concerned, notwithstanding that it does not contract directly with the AIF. The question the relevant member state regulator should be asking here is “does the EEA entity have the correct authorisation?” – or in other words “is it correct to conclude that it does not need to be authorised as an AIFM?”. Although the letter-box test is contained in EU legislation that is not directly applicable to US investment advisers, national regulators in Europe may apply letter-box principles in assessing “inward” delegation structures, whereby US entities delegate to entities in Europe. Accordingly, the EEA manager should be prepared to show that its lead manager in the US would pass the letter-box entity test (see "Anti-Letter-box Provisions").

Practical steps: delegating to an EEA sub-adviser

  • Review all mandates for the management of open and closed ended funds to identify any that are AIFs.
  • Review management structures and identify the AIFM for each (including whether a new entity should be created for this purpose).
  • If it is not intended for the EEA sub-adviser to be an AIFM, it will be necessary to review overall structure to ensure that this will not be the case, taking advice as appropriate.
  • If the EEA sub-adviser will be an AIFM in any case (for example, because of other business it has), it will be important for the US investment adviser to understand how and to the extent that will impact the relationship.
  • Consider the impacts of the identified management structure and how this interfaces with marketing plans.

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!