Interviewer (Simon Lovegrove): Hello there and welcome to the latest Financial Services Fireside Friday. In this Fireside Friday, we take a look at recent developments concerning the Alternative Investment Fund Managers Directive, the so-called AIFMD. Recently, the European Securities and Markets Authority has published a discussion paper concerning the determination of different types of alternative investment fund managers, AIFMs. Mercifully the ESMA discussion paper is much shorter than it’s recent consultation papers on the AIFMD. Imogen what do we think is the policy reason behind that?
Interviewee (Imogen Garner): The reason for it is because it’s a discussion paper rather than a formal proposal. ESMA is going to have to put out formal drafting suggestions for its technical standards in this area in the summer, so we’ll see more detail then. In the meantime, though, what they’re trying to do is formalise their policy approach on things like who is the AIFM, what kind of things constitute an AIF and how you can distinguish different types of AIF.
Interviewer (Simon Lovegrove): What does the paper tell us about who exactly is an AIFM?
Interviewee (Imogen Garner): What it tells us is that if you’re doing portfolio management or risk management as a delegate, this doesn’t in itself make you the AIFM but there are some quite interesting points on substance. I think a lot of commentators have taken the view that the AIFM is the person who is responsible for portfolio and risk management. What ESMA seems to be saying is you can delegate that out but if you delegate all of both portfolio management and risk management you end up as a letter-box entity and that raises questions as to what you need to actually do to prevent yourself from stopping being the AIFM.
Interviewee (Jonathan Herbst): And I think what’s interesting about that is it does broadly accord with the view the UK legal market has taken on this which is delegation doesn’t make you the AIFM, subject to the letter-box point. We’ve got to see how that plays out, it’s a really key issue for the industry.
Interviewer (Simon Lovegrove): And what does the paper talk about in relation to self-managed structures?
Interviewee (Jonathan Herbst): Well in relation to self-managed closed-ended funds, it takes a slightly different view to the one the FSA has taken. It does contemplate the ability of such a fund to actually appoint a separate AIFM that will be authorised. I think the UK, the FSA has taken a slightly different line in saying they’ve actually got to be AIFM themselves so I think we’ve got to see how that one plays out.
Interviewee (Imogen Garner): There’s also an interesting point in relation to limited partnerships in that ESMA seems to be contemplating that limited partnerships are a structure that’s capable of self-management. At least in the context of English limited partnerships that’s quite interesting because the AIFM has to be a legal person.
Interviewer (Simon Lovegrove): Turning now to the alternative investment funds themselves, what does the paper tell us?
Interviewee (Imogen Garner): The paper goes into each of the various aspects of the definition of AIF so it looks at what the inherent purposes of collective investment undertaking are, how many investors you need to have and that’s quite interesting for co-investment structures.
Interviewer (Simon Lovegrove): And what about distinguishing between different types of AIFs?
Interviewee (Jonathan Herbst): Well I think in terms of the open-ended, closed-ended issue it is interesting. It contemplates a test where basically if there’s a right to redeem annually or, you know, in substantive terms that will make it an open-ended fund. That’s very different from the approach we’ve taken in the UK, where there are a series of tests and certainly the view in the UK market, as sort of supported by PERG, has been historically that some of those funds, in fact most of those funds, would actually be closed-ended. So I think that’s a very important point to look for, obviously ties into marketing of funds issues as well.
Interviewee (Imogen Garner): There are some other areas actually as well where the directive distinguishes between different types of funds like funds that are leveraged or significantly leveraged or funds that are of a significant size where they have to have a remuneration committee. The paper touches on that and invites views but doesn’t actually offer any real suggestions, so I think for firms that those concepts are relevant to, they ought to make their views known now.
Interviewer (Simon Lovegrove): Jonathan, one thing which is noticeable from the paper is that it doesn’t really discuss SPVs, what are your thoughts on that?
Interviewee (Jonathan Herbst): It’s a very important issue for the market in terms of the distinction between the AIFs themselves and SPVs so I think the answer is if you’re one of those funds that, you know, this is an important issue for, either in holding co structures or SPV structures, get your comments in because otherwise it could go the wrong way.
Interviewer (Simon Lovegrove): It’s quite clear though that time is ticking because it’s a fairly short consultation period, it’s the 23rd of March which is the deadline, what should firms be doing?
Interviewee (Imogen Garner): I think what they shouldn’t do is wait for the formal technical draft standards to come out in the summer. I think once that happens timing is getting even tighter in terms of implementation and there may actually be less room for manoeuvre. So if there are key points that you want to get across, I think you should do so now.
Interviewer (Simon Lovegrove): Sooner rather than later?
Interviewee (Imogen Garner): Yes
Interviewer (Simon Lovegrove): That concludes this Financial Services Fireside Friday. Catch us next time. Bye-bye.