New clarifications on capital requirements and notification processes for alternative investment fund managers (“AIFMs”) provided by ESMA.
Initial capital and own funds
ESMA has released a new question and answer (“Q&A”) on the alternative investment fund managers directive (“AIFMD”). One key area of focus is the initial capital and additional own funds requirements for internally managed alternative investment funds (“AIFs”) and self-managed undertakings for collective investment in transferable securities (“UCITS”) investment companies.
Summary of requirements
- Internally managed AIFs and self-managed UCITS must hold and maintain initial capital and additional own funds that are kept separate from the collective investment undertaking’s assets.
- These funds should not be included in the net asset value (“NAV”) calculation.
- These own funds must be used exclusively to cover professional liability risks and remain within the minimum regulatory capital thresholds.
Important considerations
- The AIFMD Article 9 and UCITS Directive Article 29 establish that minimum capital requirements are designed to:
- ensure the continuity and regularity of the AIFs' internal management and UCITS' self-management.
- cover any potential professional liabilities arising from the above-mentioned manager’s activities.
- Article 31 of the UCITS Directive and Article 18 of AIFMD further distinguish the roles and purposes of an investment company’s own funds versus the fund’s assets:
- own funds should remain within the company for liability purposes.
- fund assets should be managed and invested according to the fund’s investment strategy and objectives.
The updated Q&A clarifies that own funds must not be used for investment purposes or to satisfy redemptions for investors. This distinction aims to maintain the integrity and solvency of AIFs and UCITS, ultimately enhancing investor protection.
Notification requirements for establishing a branch
The Q&A also addresses the notification requirements when an AIFM establishes a branch in another member state of the EU, providing a clearer understanding of when notifications are necessary.
Key points
Notification is mandatory when an AIFM:
- intends to manage EU AIFs established in another member state.
- establishes a branch to perform investment management functions listed under point 1 of Annex I to the AIFMD.
However, if the AIFM sets up a branch solely for ancillary activities pursuant to point 2 of Annex I to the AIFMD, no notification is required under Article 33 (2) and (3) of the AIFMD.
Ancillary activities cannot be performed independently of the core management functions outlined in point 1 of Annex I.
Additional information
Even if a formal notification is not required, the AIFM may still need to inform the competent authorities under other legal provisions.
The Q&A do not introduce new obligations but clarify the application of existing rules, contributing to a more coherent regulatory environment. These updates reinforce the importance of maintaining adequate capital reserves and complying with notification obligations when managing AIFs across different member states.
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