The financial world is full of jargon and abbreviations. Sometimes it is useful to know the background to an expression to really understand its relevance and importance. So in this edition of Blank’s series of financial jargon busters, we focus on AIFMD, the Alternative Investment Fund Managers Directive.
What is the Alternative Investment Fund Managers Directive?
The Alternative Investment Fund Managers Directive came into force on 21 July 2011 with a two-year implementation period. On 22 July 2013, the requirements of the AIFM Directive officially came into force. The AIFMD is a regulatory framework for, among others, private equity, hedge, infrastructure, real estate, equity and bond funds registered in the European Union, and aims to increase transparency towards investors and regulators, and to strengthen financial stability. It sets standards for private capital raising, remuneration policies, risk monitoring and reporting.
The 2008 global financial crisis and alternative investments
The 2008 financial crisis was the main trigger for the AIFMD. The European Commission considers that the activities of alternative investment fund managers (such as private equity and hedge funds) contributed significantly to amplifying and spreading the risks that shook the financial system in the time surrounding the 2008 financial crisis. With the AIFMD, the European Commission aims to regulate the activities of alternative investment fund managers at European level.
What does the AIFMD entail?
As the name suggests, the AIFMD aims to regulate the fund managers of alternative investment funds. Fund managers must apply for a licence to carry out their activities. A large number of requirements apply to the granting of the licence. For example, there are requirements regarding the minimum capital and the reliability and suitability of the daily policymakers. In addition, there are, among other things, rules for having a controlled and sound business operation, a depository and for an appropriate remuneration policy.
In addition to the rules for authorisation, the Directive imposes ongoing requirements on the manager, for example, with regard to preventing conflicts of interest, conducting appropriate risk and liquidity management, ensuring the independent valuation of assets and various transparency obligations.
Fund managers operating in the EU must comply with the Directive, even if the fund is established outside the EU’s borders.
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