Alternative Investment Fund Managers Directive 2011 (2011/61/EU) is a legal act of the European Union on the financial regulation of hedge funds, private equity, real estate funds, and other "Alternative Investment Fund Managers" (AIFMs) in the European Union. The Directive requires all covered AIFMs to obtain authorisation, and make various disclosures as a condition of operation. It followed the global financial crisis. Before, the alternative investment industry had not been regulated at EU level.
It was reported in May 2014 that only one-third of EU member states had successfully implemented the directive into law. As of 2014, the countries that had transposed Directive 2011/61/EU into law include Cyprus, the Czech Republic, the United Kingdom, Luxembourg, (Germany), France, Malta and Ireland. In December 2014, the European Commission issued a formal warning to countries including Spain, Latvia and Poland for not complying with implementation of Directive 2011/61/EU.
Background
Directive 2011/61/EU was prompted as part of a wider regulatory effort undertaken by G20 nations following the global market downturn of 2008. Provisions of Directive 2011/61/EU include increasing transparency by AIFMs and assuring that national supervisors, the European Securities and Markets Authority (ESMA), and the European Systemic Risk Board (ESRB) have the information they need to monitor financial systems in the EU. Directive 2011/61/EU also is intended to protect investors.
On the need for the directive, an explanatory document from the European Commission stated that AIFMs had become "very significant actors in the European financial system, managing a large quantity of assets on behalf of pension funds and other investors; accounting for a significant proportion of trading activity in financial markets; and constituting an important source of counterparty risk for other market participants" and that they had "contributed to the build-up of leverage in the financial system, the consequences of which for the stability of financial markets became apparent when leverage in the hedge fund sector was rapidly unwound during the crisis".
When the directive was approved by the European Parliament, José Manuel Barroso, then President of the European Commission, said "The adoption of the directive means that hedge funds and private equity will no longer operate in a regulatory void outside the scope of supervisors. The new regime brings transparency and security to the way these funds are managed and operate, which adds to the overall stability of our financial system."
Contents
Ch I, General provisions
The scope of the application of the directive is defined. The directives apply to EU AIFMs which manage one or more AIFs irrespective of whether such AIFs are EU AIFs or non-EU AIFs; non-EU AIFMs which manage one or more EU AIFs; and non-EU AIFMs which market one or more AIFs in the Union irrespective of whether such AIFs are EU AIFs or non-EU AIFs. Specific entities that are exempt from the directives are also listed.
Ch II, Authorisation
An AIFM must be authorised with the AIFM's home state regulator for AIFMs that have assets under management in AIFs above the thresholds of: (1) 100 million EUR, if the AIF uses leverage; or (2) 500 million EUR, if the AIF does not use leverage.
Ch III, Operating conditions for AIFMs
The reporting regulations of Directive 2011/61/EU require each AIF to be named using a series of codes, including its national identification code, the Bank Identifier Code (BIC) and the Legal Entity Identifier code. AIFMs must select only brokers and counterparties that are subject to regulatory supervision, that are financially sound, and that have the necessary organizational structure to provide services to the AIFM or the AIF. All AIFMs must submit quarterly, semi-annual, or annual reports to their respective member state regulator with information about the AIFM and its AIFs as well as an annual report with information such as the fund's financial statements, activities, and information about the total amount of remuneration paid by the AIFM to its staff.