On 19 December 2012 the European Commission issued the implementing measures of the AIFM Directive (AIFMD). This Level 2 regulation is published in the form of a European regulation. This means that these measures will become effective from 22 July 2013 and no longer need to be implemented into the national legislation.
From the requirements stated in the Implementing Regulation it once more appears that parties that fall under the AIFMD and at this moment are not yet under supervision, have a considerable amount of work to do before July 2013 in order to comply with the requirements resulting from the AIFMD and to be ready to apply for an AIFMD licence.
The following important topics from the AIFMD will be treated below:
- The organisation of the administrator
- The coverage for liability
- Sound management
- Risk management
- Liquidity management
What is the Level 2 regulation about?
The AIFM Directive (‘Level 1’) was published on 8 June 2011. It was immediately evident that many provisions written on Level 1 still needed to be further elaborated on Level 2. The publication of the Level 2 Regulation has made it more concrete with which requirements the parties under the AIFMD will have to comply as of 22 July 2013.
The Level 2 Regulation touches on numerous subjects. In total, the Implementing Regulation contains 117 articles covering 73 full pages, excluding an explanation and enclosures with a detailed elaboration of rules.
Due to the commencement of the AIFMD many investment institutions that are not yet financially supervised have to apply to the AFM for a licence (Do you need a licence? See the enclosed decision tree). Before applying for a licence investment institutions need to ensure that their organisation and processes are organised in such a way as to meet the requirements that have been compiled from the AIFMD.
The organisation of the administrator
The structure and organisation of the administrator are important and extensive topics in the AIFMD. The topics correspond to a great extent with the principles of restrained management as implemented in the Wft for investment institutions that are already under supervision.
Subjects, which are regulated are, among others:
- Requirements to the interpretation of the role of the management and supervisory board
- Division of functions
- Decision processes
- Internal control
- The continuity of the administrator
- The compliance function
- The internal audit function
- Data recording and storage
In articles 64 and 65 of the Implementing Regulation further detailed requirements have been laid down regarding the data to be recorded in transactions performed on behalf of the investment institution, as well as participant orders of participation rights of the investment institution.
The coverage for liability and risks
Administrators must take measures to cover risks. In particular, concerning risks regarding damage or loss caused by the conduct and actions of the administrator’s employees. Article 12 of the Implementing Regulation contains a survey of the types of risks concerned.
Administrators need to have procedures at their disposal to identify, measure and control these risks. In addition, each administrator needs to have a database at his disposal to keep track of events that could possibly lead to liability, in order to improve existing procedures and to prevent recurrence.
Subsequently administrators are obliged to cover liability risks by either keeping (additional) own funds or taking out a professional liability insurance fitting the risks that are to be covered. Article 14 of the Implementing Regulation indicates which requirements the insurance needs to fulfil.
In case the administrator chooses to cover these risks by supplementing with his own funds, in principle 0.01% of the value of the funds managed by their investment institutions needs to be kept as their own funds. This comes on top of the 125,000 Euros (minimum) that the administrators are in any case required to keep as their own funds. The supervisor (DNB) has the possibility to permit the percentage to be lowered to 0.008% when the administrator can prove with historical data that the liability risks are well managed. Furthermore a higher percentage can be charged.
Sound management of the company
Within the framework of sound company conduct administrators of investment institutions need to:
- have at their disposal procedures that guarantee that the administrator works in an honest way;
- act in the interest of the investors; and
- prevent or control conflicts of interest.
For all of these (and other) subjects further rules have been laid down in the Implementing Regulation. An example of such a stipulation is that the administrator needs to have a strategy to guarantee that voting rights resulting from the investment portfolio are used in such a way that the investment institution and its participants benefit as much as possible from them.
An example of a stipulation that the administrator must act in the interest of its participants is that orders from multiple investment institutions (and possibly individual clients) may only be performed collectively when the administrator has a procedure for the assignment of (partial) implementations. In addition, orders may only be combined when there is enough reason to assume that this does not lead to the possible disadvantage of an investment institution or individual client.
Managing risks is an important task of administrators of investment institutions. The administrator must have a permanent and independent risk management function with clear capacities and reporting lines. It is clearly indicated which tasks must be performed by this function and how minimum independence can be secured.
In addition, the requirements that policy in the field of risk management should meet have been elaborated and which elements need to be included in its annual evaluation.
Article 44 of the Implementing Regulation stipulates that an extensive analysis of the risks, limits and control should be made for each investment institute. The resulting risk management policy must be approved of explicitly by the management or the supervisory board. The functioning of risk management must be tested periodically to establish whether risks are controlled.
For all investment institutions, with the exception of closed-end investment institutions without leverage, the administrator must set up an adequate liquidity management system to comply with current liquidity obligations. Part of this is that the investment strategy, the liquidity profile and the repayment policy are attuned to one another.
The administrator must have a good view of the liquidity of the investments of the investment institutes by analysing them periodically in a quantitative and qualitative way. Matters as trading volume and volatility need to be taken into account, also during special market circumstances.
In this news item a short explanation has been given for a number of topics from the requirements for Level 1 and 2 in the AIFMD. Be aware that AIFMD also covers several other topics (transparency requirements, reward policy, evaluation criteria) and that the topics treated have many more stipulation than those covered in this news item.
Although AIFMD licences have to be applied for not later than mid 2014, investment institutions falling under the AIFMD are supposed to meet all the requirements of Level 1 and 2 from 22 July 2013. Meeting these requirements implies significantly more than just drawing up different kinds of policies and documents. It requires organising or changing processes and in many cases the strengthening of the actual organisation, the interpretation of which needs to be based on underlying analyses. Only then can a full application be made for an AIFMD licence.
In a following news item Charco & Dique will look at the role of the custodian and outsourcing of activities, explaining what this means for the administrator of an (alternative) investment institution.
Examples of activities we can perform for you:
- Supporting a licence or notification procedure
- Helping you think about the way you can organise your company to meet AIFMD requirements
- Drawing up the necessary procedures and measures
- Implementing procedures and measures
- Performing a (quick) scan to evaluate whether you are AIFM compliant
- Temporary or permanent filling of the function of external compliance officer and/or risk manager.
For more information please contact Charco & Dique Risk Management and Compliance via phone number +31 (0)20-4165403 or e-mail address firstname.lastname@example.org