The SFDR and AIFM light managers

It has long been unclear whether or not AIFM light managers would fall under the obligations of the Sustainable Finance Disclosure Regulation (SFDR). A Q&A from the European Commission (EC), published on July 14, 2021, finally provided clarity: the SFDR does apply to AIFM light managers.

In doing so, the EC acknowledges that several documents to which the SFDR refers (such as the prospectus or Information Memorandum/Annual Report) are not mandatory for AIFM light managers, but the Commission states that the SFDR obligations should be applied by analogy to these.

Nicely said, but what does that mean?

What rules apply to AIFM light managers?

Based on the Wft, AIFM light managers are not required to have a license. They only have to register with the regulator (in the Netherlands: AFM), registering a limited number of details. They also have to report financial data to DNB annually.

The further obligations under the AIFM Directive do not apply to AIFM light managers. However, in the Netherlands they must comply – in the area of financial supervision – with the requirements under the Sanctions Act, the Money Laundering and Terrorist Financing (Prevention) Act (Wwft) and the Market Abuse Regulation, among others. If the investment institutions are also offered to non-professional investors, a Key Information Document from the PRIIPS Regulation must also be drawn up and provided.

What does an AIFM light manager need to do now for the SFDR?

First of all, as an AIFM-light manager, you must realize that the SFDR is also relevant to you. So you need to take action to implement the SFDR transparency obligations. The Regulation is already in effect as of March 10, 2021. Action is therefore urgently needed, especially now that clarity on the applicability of the SFDR has been provided by the European Commission in July 2021.

Important for implementation is the distinction in obligations for the entity (the manager) and for the products it manages (investment vehicles). The SFDR provides that some information should be on the website of the manager and other information in pre-contractual information (and in periodic information) related to the product. Which product information must be included in pre-contractual (and periodic information) depends on the extent to which a product is classified as “gray,” light green,” or “dark green.”

For an overview of basic obligations and how they can be implemented, please see our article on the impact of the SFDR for financial companies that do not (explicitly) focus on sustainability.

Below you can read how you as an AIFM-light manager can deal with transparency obligations from the SFDR divided into entity information and product information.

Entity information

Website obligations

It follows from several articles of the SFDR that a licensed AIFM must have a website on which certain information must appear. Logically, then, this also applies to AIFM light managers. In practice, however, we see that not all “ordinary” licensed AIF managers have a website yet. This is because there is no such obligation under the AIFM Directive.

For AIFM light managers who use the criterion of offering their investment institutions to less than 150 persons for the exemption from the AIF license, there is an issue here. The moment the AIFM light manager would also post product information on the website when implementing the SFDR, it can be argued that products are then offered to more than 150 persons. As a result, the exemption could no longer be invoked, making the AIFM light manager subject to licensing.

To avoid this, one solution is to share only the general SFDR information about the entity on the website. The product information can be shared via a secure log that is only viewable by participants. Below we discuss the obligations of the SFDR that must be published on the website at the entity level.

Information on integration of sustainability risks into investment policy

The SFDR requires you to integrate sustainability risks into your investment decision-making process. This obligation applies regardless of whether you want to engage in sustainability as an AIFM light manager. This means that AIFM light managers must consider whether there is a material risk that the value of an investment may decline as a result of a sustainability event. On the website, you must indicate how this process is set up. You should also include this requirement and then, what the impact on the return on investments may be, in the pre-contractual information.

Information on inclusion of adverse effects on sustainability factors

Article 4 SFDR requires you, as an AIFM light manager, to indicate via a statement on the website the extent to which you include the adverse effects of your investment decisions on sustainability factors.

Do you not include these effects? Then you must indicate the reasons for this, and possibly when they will be included in the future. So here you have a choice; comply or explain.

Either way, this choice will also have to be included in the pre-contractual information. When not including the negative effects, this obligation already applies now. If these effects are taken into account, this obligation will apply by December 30, 2022 at the latest.

Information on remuneration policy

According to Art 5 SFDR, the website of the manager must include information on how the manager’s remuneration policy is consistent with the integration of sustainability risks.

Now, due to the limited size of the organization, many AIFM light managers will not have a specific remuneration policy (this is also not mandatory). If there is no remuneration policy, the obligation in article 5 SFDR would in our opinion not apply and no information about this needs to be included on the website. If you do have a remuneration policy, then you must include the integration of sustainability risks in the remuneration policy and in the information on your website. You may also consider indicating on the website that since you have not established a remuneration policy, you do not need to indicate the extent to which that policy is consistent with sustainability risks.

Product Information

Pre-contractual information.

The SFDR requires financial products, such as investment vehicles, to be classified as gray, light green or dark green. This information must be shared with the end investor in the pre-contractual information. If you offer gray products, the requirements for this are more limited than for light green or dark green products.

Ordinary AIF managers must have an information memorandum or prospectus as pre-contractual information for their investment vehicles. There is no such requirement for an AIFM light manager. There will then undoubtedly also be documentation/information provided to (potential) participants in some way about the investment institution before participants enter.

It is then logical that the required pre-contractual information under the SFDR will be included in the aforementioned document (via an annex, for example). For closed end funds that have been previously offered and are not marketable, the SFDR does not, for that matter, require the adaptation of pre-contractual information.

Again, we point out that AIFM light managers should not start publishing product information on the general website. For product information that needs to be provided pre-contractually, and is required to be published on the website – for light green and dark green products – this can be made transparent to the participant via a secure log.

Periodic information

With regard to periodic information, for licensed AIF managers, the SFDR refers to the – under the AIFM Directive mandatory – annual report of the investment institutions. AIFM light managers are not required to have an annual report for their investment institutions and could not be required to do so through the SFDR. However, it does seem logical for AIFM light managers to incorporate any required periodic SFDR information about an investment institution, for example, in an annual newsletter. Note that periodic disclosures under the SFDR apply only to light green and dark green products.
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