Regulation of Alternative investment fund managers – new draft directive

Date 18 aug. 2008
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On April 29 2009, the European Commission published a draft directive on the regulation of Alternative Investment Fund Managers (AIFM). Among other things, the AIFM concept includes “managers” in private equity funds and hedge funds, and is translated to “forvaltere af alternative investeringsfonde” (FAIF) in the Danish version of the draft directive.


This article describes the draft directive’s (“The Directive”) most significant main areas. The directive contains a number of specific matters, which seem unclear for the time being. This article does not comment on this, as an updated draft directive is awaited.



About the directive in general

The EU basically regulates two kinds of collective investment funds etc. The first kind includes those mutual funds etc., which fall within the UCITS directive and are able to market themselves to retailers (in Denmark entities regulated by the The Investment Associations and Special-Purpose Associations Consolidated Act) The second kind does not fall within the UCITS directive and includes other collective investment funds (e.g. limited partnerships), hedge funds, venture capital funds, private equity funds etc. In the directive, these are referred to as Alternative Investment Funds (AIF).


The aim of the directive will be to regulate AIFM of the second kind, who will be subject to authorisation requirements in the future, if their portfolio of administrative funds is of a certain size.


In principle, the directive does not regulate the individual fund, but the AIFM of the fund instead. Whether an AIFM falls within the directive or not depends on whether or not it is domiciled within the EU. For this reason, an AIFM domiciled in a member state of the EU will fall within the directive, even if the fund itself is domiciled outside the EU. A Danish management company which manages private equity funds or hedge funds registered in Jersey will in principle fall within the directive.


According to the directive, an AIFM can be either a physical person or a legal entity.



Exceptions from the authorisation requirements

The directive applies to AIFM who manages portfolios on a minimum of 100 million euro including assets obtained with borrowed money.


If an AIFM only manages funds not financed by loans – or geared in another way – and where the owners for a period of at least 5 years after the incorporation of the fund cannot demand redemption, the particular AIFM only falls within the directive if the value of the portfolio is at least 500 million euro. This means that typical venture capital management companies will not fall within the directive, unless they have more funds under their management which combined total a minimum of 500 million euro.


It should be noted that AIFM who do not fall within the directive will not have the rights, which follow from the directive, unless they voluntarily apply for authorisation.



Requirements for AIFM

Pursuant to the directive, AIFM must comply with certain requirements for registration and authorisation along with a number of current conditions. These conditions are as described below. AIFM must:



Be able to show that they are adequately qualified to offer the relevant management services to a particular fund. It should be noted that, if the directive is adopted, private equity funds etc. will be subject to a number of requirements, which other types of companies will not be subject to, which among other things can have potential competitive consequences. Furthermore, the EVCA (European Private Equity & Venture Capital Association) has claimed that it does not make sense that medium-sized companies and their long-term investors are subject to substantial and cost-intensive disclosure requirements, which in the circumstances exceed the requirements imposed on companies with securities admitted to trade on a regulated market and which effectively increase expenses on investments in unlisted securities.



Give detailed information on their scheduled activities, the identity of the fund managed by the particular AIFM etc. In connection with applying for authorisation, and as a consequence of the above, the AIFM must give a number of details concerning both the set-up of the AIFM as well as its future plans. If circumstances change, about which information has been given, it can result in limitation or revoking of the authorisation. 



Meet certain minimum requirements for capital adequacy. In principle, an AIFM must have an equity of minimum 125,000 euro plus 0.02% of the specific part of the value of the particular AIFM’s portfolio that exceeds 250 million euro.



Regularly report to the competent authority on the most important markets where AIFM does business regarding exposure, risks etc. This means that private equity funds etc. must ensure the resources necessary to obtain a compliance function, which will demand both time and funding. The same applies to the qualified authorities, who will also need resources for planning the implementation of and the compliance with the rules. At the same time, the rules will apply to a number of companies and persons who at present are not subject to specific control procedures etc., extending the powers and duties of the qualified authorities.



Comply with additional duties of disclosure if the AIFM manages a fund based on loans – or geared in another way – or possesses controlling interests in companies. These duties of disclosure include information on the origin of borrowed money and how it is used. The directive proposes that the qualified authorities are able to limit the use of loan financing and other kinds of gearing under certain circumstances, and that the qualified authorities must provide information to the qualified authorities in other countries.



Comply with certain minimum requirements in relation to transparency. This especially includes situations where a fund obtains a controlling holding in a company. In such situations, the investment strategy and investment goals along with the portfolio company’s results after the acquisition of the control must be disclosed annually.



Point out a depositary, who handles certain tasks in relation to received funds and financial instruments. These tasks include receiving payments from investors in connection with subscription for holdings and shares in an AIF, which is managed by an AIFM; bookkeeping of these payments on a separate account; storing financial instruments, which belong to AIF; and supervising that AIF, or AIFM on behalf of AIF, has obtained ownership to the remaining assets which the AIF is investing in. AIFM may not practise as depositary, which can only be handled by credit institutions. The use of a depositary is known from the areas of collective investment funds, where the instrument of the collective investment funds must be managed and stored separately by an independent custodian, which also has certain powers to supervise the collective investment fund according to section 106 of the Danish Financial Business Act and section 4(8), cf. section 3(1) no. 5 of the The Investment Associations and Special-Purpose Associations Consolidated Act.



Let assessments of assets be performed by an independent party.


9.  Comply with different requirements of funds and investors, handling of conflicts of interest and risk management and show compliance with these requirements. For this reason, AIFM must ensure functional separation between risk management and portfolio management along with implementing relevant risk management systems, which must be reviewed at least once every year and adjusted if necessary. 


The directive does not contain detailed rules on when the member states must grant authorisation. It is not proposed that an assessment on aptitude and honesty (fit & proper) must be performed of the individual AIFM, as known from the areas of investment management companies. Still, the qualified authorities must be convinced that an AIFM is capable of complying with the conditions set by the directive, and they must state the reasons for rejecting such authorisation. It remains to be answered how the process and documentation will work in practice.


An AIFM who has authorisation pursuant to the directive will be entitled to market the funds he manages to professional investors – as defined by MiFID – in any of the member states of the EU. Such a cross-border activity is done based on a notification procedure, in which the home state passes on information about the particular AIFM to the other state. The suggested set of rules is thereby intended to both regulate supervision and inspection of AIFM and to ensure AIFM a wider access to market themselves within the EU than presently exists, where they must comply with the particular rules applicable in every different member state. The possibilities for doing cross-border activities is also known from e.g. the Executive Order on Marketing Carried out by Certain Foreign Invest-ment Undertakings in Denmark, within which certain foreign investment institutes, who do not fall within the UCITS-directive, can obtain permission from the Danish Financial Supervisory Authority to market their products in Denmark. According to this executive order on marketing, the Danish Financial Supervisory Authority approves the marketing, when certain distinct requirements are met.


Different special rules and temporary arrangements will apply to funds residing in third countries.


Correspondingly, an AIFM will – also based on a notification procedure – be entitled to carry out management services in other member states than their own.


The member states can allow that the above-mentioned funds are marketed to others than professional investors and they may in that context lay down tightened rules in relation to the relevant funds.



Transitional rules

It is stated in the directive’s transitional provision that existing AIFM who, prior to the implementation of the directive, have been doing relevant business also fall within the directive, and therefore must take necessary action to comply with it’s requirements. As a result of the transitional provision, the ones in question have been given a time-limit of one year after the time-limit for implementation of the directive to apply for authorisation. The time-limit for the member states’ implementation of the directive is presently unknown.


The directive does not distinguish between funds, which are already being managed as the directive comes into force, and funds, in which management occurs after this point. For this reason, authorisation as AIFM will also be necessary to continuously manage such funds in the future.



Changes within managed funds

It is not stated in the directive whether a closed fund will be deducted from the calculation of the above-mentioned limits for when an AIFM falls within the directive, and neither is it stated what significance it has, if a write-down occurs in the bound capital e.g. following a sell-off. If such changes occur in the funds managed by AIFM, it can have the effect that AIFM no longer falls within the directive’s authorisation requirements. In such situations, AIFM must for this reason consider, if he wants to maintain his authorisation.


It should be noted in this context that the directive states that AIFM has an obligation to point out an evaluator, who is independent from the particular AIFM. This evaluator must ensure that an assessment of the assets, shares and holdings in AIF is made every time shares in AIF are issued or redeemed, or at least once every year.




The directive contains an extensive regulation on certain AIFM with focus on supervision and transparency. At the same time, the directive proposes that the qualified authorities in the individual member states must work together in relation with their supervision of AIFM. Furthermore, the directive proposes a certain standardisation of the regulation of AIFM in the individual member states, and the directive also implements rules for when an AIFM can do cross-border business.


For the AIFM who fall within the directive, or who voluntarily choose to apply for authorisation pursuant to this, the directive implies a number of new duties and, as a result thereof, added expenses. In addition, the competent authorities must arrange a number of new functions in relation to carrying out the necessary supervision and receive the required reporting from the individual AIFM.


It is presently unclear how a number of the directive’s rules will be implemented and put into practice. A clarification of this will have to await an updated draft directive.



If you have any questions or require additional information on the above, please contact attorney Dan Moalem ( or attorney Henning Hedegaard Thomsen (


The above does not constitute legal counselling, and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.