AIFMD: A Guide for UK Alternative Investment Fund Managers

The Alternative Investment Fund Managers Directive (AIFMD) governs the regulation of managers of alternative investment funds — hedge funds, private equity funds, real estate funds, infrastructure funds and other vehicles outside the UCITS framework. In the UK post-Brexit, AIFMD has been retained in UK law with amendments, creating a domestic regime that diverges incrementally from its EU equivalent.

What Is AIFMD?

The Alternative Investment Fund Managers Directive (AIFMD) is the regulatory framework governing managers of alternative investment funds — any collective investment undertaking that raises capital from investors with the aim of investing it, and which is not a UCITS fund. Hedge funds, private equity funds, real estate funds, infrastructure funds and other alternative vehicles fall within the AIFMD scope. The directive was implemented in the EU in 2013 and has been retained in UK law post-Brexit as the UK AIFMD, with amendments introduced by UK regulations.

Who Is an AIFM?

An Alternative Investment Fund Manager (AIFM) is the legal entity responsible for managing an AIF — performing portfolio management and risk management functions in respect of one or more AIFs. The AIFM can be the AIF itself (self-managed AIF) or an external entity appointed to manage the fund. The regulatory obligations under AIFMD attach to the AIFM, not the fund, which means that the regulatory compliance programme, capital requirements, depositary arrangements and reporting obligations are managed at the manager level rather than individually for each fund.

UK AIFMD Post-Brexit

Following Brexit, AIFMD was retained in UK law as the Alternative Investment Fund Managers Regulations 2013 (as amended). UK AIFMs managing UK-domiciled AIFs are subject to the UK AIFMD regime supervised by the FCA. UK AIFMs wishing to manage EU-domiciled AIFs or market AIFs to EU investors cannot use the EU passporting system post-Brexit and must instead use the National Private Placement Regime (NPPR) in each relevant EU member state, or establish a presence within the EU.

FCA Authorisation for UK AIFMs

UK AIFMs must be authorised by the FCA under the UK AIFMD. The authorisation process is aligned with the standard FCA authorisation framework and requires the submission of a regulatory business plan, financial projections, governance documentation and SMCR senior manager appointments. The FCA assesses whether the AIFM meets the threshold conditions and whether it has adequate risk management, liquidity management and operational infrastructure for the type of AIFs it intends to manage.

The National Private Placement Regime

The NPPR allows UK AIFMs to market UK AIFs to professional investors in EU member states without passporting — subject to notification to, and in some cases approval by, the competent authority in each member state. The conditions for marketing under NPPR vary by member state: most require notification to the local regulator, compliance with AIFMD disclosure requirements and a cooperation agreement between the FCA and the local regulator. The NPPR is typically available only for marketing to professional investors; retail investor marketing to EU investors requires additional steps.

Depositary Requirements

AIFMs managing AIFs above the AIFMD thresholds must appoint a depositary for each AIF. The depositary’s role is to hold the AIF’s assets in safekeeping (for assets that can be held in custody) or to verify ownership and maintain records (for other assets), to monitor cash flows, and to oversee the AIFM’s compliance with fund documentation and applicable law. The depositary must be independent of the AIFM and must be an authorised credit institution, investment firm or eligible institution in the relevant jurisdiction.

Leverage and Risk Management

AIFMs must establish, implement and maintain a risk management framework that is separate from portfolio management and that includes: identification and measurement of all risks to which AIFs are exposed; procedures for monitoring and managing leverage at both the AIF and portfolio level; and systems for ensuring that the risk profile of each AIF is consistent with its documented investment strategy. The AIFMD leverage requirements include two standardised leverage calculation methodologies — gross and commitment — and disclosure of leverage employed to the FCA and to investors.

SMCR and the Compliance Function

The SMCR applies to FCA-authorised AIFMs. The compliance function at an AIFM must navigate a particularly complex regulatory landscape — combining AIFMD obligations (leverage, risk management, depositary oversight, remuneration), MIFIDPRU capital requirements, CASS client asset rules, MLR 2017 AML obligations and SMCR senior manager accountability. Alternative investment fund compliance is a specialist area where compliance officers with the breadth of technical knowledge required are in consistent demand.

Key References

• Alternative Investment Fund Managers Regulations 2013
• FCA — Alternative investment fund managers