TECHNIC AL
Investor Transparency Post-AIFMD What have we gained?
PETER ASTLEFORD, PARTNER, AND MIKHAELLE SCHIAPPACASSE, ASSOCIATE, DECHERT LLP T
he Alternative Investment Fund Managers Directive (2011/61/EU) (the “Directive” or “AIFMD”) states in Recital 94 that its
objective is:
...to ensure a high level of investor protection by laying down a common framework for the authorization and supervision of AIFMs [alternative investment fund managers]...
and opines that the deficiencies in the Member
States’ existing regimes demonstrate that such protection would be better provided at the European Union level.
The importance of investor disclosure (which is equated with investor protection) is emphasized throughout the Commission Delegated Regulation (EU) No 231/2013 (also known as “Level 2”) adopted pursuant to the Directive. It notes, for example, at recital 124 that:
It is essential for investors to obtain the minimum information necessary with respect to particular AIFMs and AIFs [alternative investment funds] and their structure in order to be able to take the right investment decisions tailored to their needs and risk appetite. That information should be clear, reliable, readily understandable and clearly presented...
These are great ideals.
Member States were required to implement the Directive by 22 July 2013 and, following a one-year grandfathering period in most Member States, all AIFMs (to the extent provided in the Directive) must now be compliant with AIFMD. For AIFMs of AIFs established in the European Economic Area (EEA)1 or AIFMs marketing into the EEA AIFs established outside of the EEA, this includes ensuring compliance with Articles 22 and 23 of AIFMD. These articles set out the Directive’s core requirements relating to investor transparency and are supplemented by Articles 103 through 109 of the Delegated Regulation.2
The historic position Disclosure and transparency requirements were historically driven by the rules of the jurisdiction in which the relevant AIF was established, the requirements of any exchange on which the AIF’s interests were listed and, on occasion, by the jurisdiction of an investor. These legal requirements, often limited, were buttressed by industry standards and voluntary codes of conduct.
Although there are many exceptions (particularly given the very broad definition of “AIF”, being generally any fund that is not a UCITS), the disclosure
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Many would argue (at least in the Anglo Saxon world) that funds not generally available to the retail market do not need a high level of regulation. In particular, innovation, beneficial risk-taking, freedom of competition and a healthy marketplace for the benefit of professional investors are fettered by extensive regulation.
Nonetheless the countries comprising the EEA have determined that restricting the types of investors who could invest in an AIF is not enough. Rather, the benefits of regulation (in the case of this article, specifically in relation to investor transparency) outweigh the disadvantages of added bureaucracy and cost together with, in all likelihood, a restricted supply of investment opportunities in Europe. This article considers the new rules and the extent to which they improve the position of investors.
AIFMD investor disclosure and transparency AIFMD provides a minimum level of relatively uniform disclosure that must be provided to prospective and existing investors before and during the course of their investment in an EEA-established or marketed AIF.
AIFMD mainly provides for investor transparency by requiring three types of disclosure: (1) point of sale or pre-investment disclosure (AIFMD Art. 23(1)); (2) periodic disclosure (AIFMD Art. 23(4)); and (3) regular disclosure (AIFMD Art. 23(5)).
The core requirements relating to pre-investment disclosure are set out in Article 23(1) which requires that certain information be “made available” to investors before they invest. This includes information relating to:
• The AIF’s investment objective, strategy, restrictions and risks (including the means by which the objective or strategy may be changed);
• Use of leverage and collateral and asset reuse arrangements;
• Service providers (with significant detail around prime brokerage arrangements) and fees;
• Delegation arrangements; • Dealing terms and liquidity management; • Valuation procedure and net asset value calculation;
• Fair treatment and preferential treatment of investors; and
• How periodic and regular disclosure will be made available.
Any material change to this information must also be made available prior to investment.
provided by an AIF was frequently dependent upon the professionalism of an AIF’s promoters, service providers and the AIF’s governing body.
AIFMD provides that this information must be made available in accordance with the “
...AIF rules or instruments of incorporation...” but gives no further guidance. Arguably, most of the required pre-investment disclosures should be (and indeed historically much of it has been) made in the offering document issued by the AIF, with material changes reflected either in an updated offering document or in a supplement to that document. However, certain information that needs to be made available may change too frequently or may otherwise be inappropriate or undesirable to include in the offering document. For example, the latest net asset value of the AIF will change as at each valuation day and information regarding preferential treatment (e.g., side letter terms) granted to any investor may change as investors invest and redeem. For information of this type, the rules of the AIF must state how the information may be obtained and this could be, for example, “upon request to the investment manager”, via a website or by a regularly updated investor information sheet. An alternative is for all AIFMD-mandated but changeable pre-investment disclosure to be made by way of a supplement to the offering memorandum which is kept updated. This requirement for changing information results in the key benefit of having all applicable information in one readily accessible place being lost.
A further question arises as to whether additional AIFMD-mandated disclosures should or could only be distributed when marketing to EEA investors. Consideration should be given to whether as a matter of fairness non-EEA investors should or indeed must receive the same disclosure as EEA investors. This will be an area of interest for litigators in years to come.
The requirements relating to periodic disclosure are set out in Article 23(4) of AIFMD and Article 108 of the Delegated Regulation. AIFMs are required periodically to disclose to investors:
• The percentage of assets that are subject to special arrangements arising from their illiquid nature (e.g., side pockets);
• Any new liquidity management arrangements; • The current risk management profile of the AIF (including, according to Article 108 of the Delegated Regulations, measures to assess the AIF’s sensitivity to the most relevant risks, any risk limits likely to be/that have been exceeded, a description of the circumstances and any remedial steps taken); and
• The corresponding risk management systems of the AIFM.
The Delegated Regulation provides at Article 108 that this information generally must be provided “
...as required by the AIF’s rules or instruments of incorporation, or at the same time as the [offering memorandum] and – as a minimum – at the same
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