Working Towards AIFMD Readiness in the Netherlands

Background
 
The events of the financial crisis have demonstrated the impact of alternative investment fund managers (“AIFM(s)”) on the European financial market and the shortfall of adequate regulations.  As a result in 2009 finance ministers from the G20 countries agreed to oversee and regulate hedge funds and their managers in order to assess potential financial systemic risks and to make sure that risks are adequately managed.  This resulted in the Alternative Investment Fund Managers Directive (“AIFMD”) which has entered into force as of 21 July 2011.  The AIFMD aims to establish a regulatory and supervisory framework for entities involved in the management of alternative investment funds (“AIF(s)”) which are active in the EU. 
 
The AIFMD needs to be implemented into Dutch law ultimately on 22 July 2013.  Currently a draft bill hereto is pending approval by the Dutch Senate (the “Bill”).
 
The AIFMD is a maximum harmonising directive leaving minimum room for national rules insofar as it relates to the supervision of AIFMs that manage AIF which offer units or shares solely to professional investors.  With respect to the supervision of AIFMs that manage AIF which also offer units or shares to retail investors (i.e. non professional investors), the AIFMD is a minimum harmonisingdirective.  As a result, EU member states are free to adopt a stricter regime.  The Dutch legislator has subjected AIFMs that manage AIF targeted at retail investors to a regime similar to the Undertakings for Collective Investment in Transferable Securities (“UCITS”) scheme. 
 
It is expected that, as a result of the implementation of the AIFMD, a large number of funds (currently estimated at 100 funds) who are currently not subject to supervision will require a license from the Dutch supervisory authority (“AFM”).  The Bill also applies to a small number of firms authorised as depositaries.
 
Hereunder we will highlight the most significant implications the implementation of the AIFMD in the Netherlands is likely to have.  However, the exact scope of the AIFMD is yet to be determined and will depend on further technical standards which still need to be developed. 
 
Scope
 
The Bill applies to AIFMs and firms authorised as depositaries.
 
AIFMs are legal entities which are (i) established in a member state of the EU whose regular business is managing one or more AIFs and, or (ii) established outside of the EU if they manage AIFs established within a member state of the EU, or market AIFs to investors in the EU.
 
Each AIF managed within the scope of the AIFMD must have a single AIFM.  This can either be an external manager appointed by the AIF or the AIF may elect to be self-managed (internal AIF). 
An AIF is a collective investment undertaking that (i) raises capital from a number of investors, (ii) with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and (iii) are not UCITS.
 
AIF’s therefore include a wide range of funds such as private equity funds, venture capital funds, hedge funds but also real estate funds regardless of whether or not the fund is open-ended or closed-ended, listed or unlisted. 
 
The Bill however does not apply to, amongst others:

• AIFM that manage AIF in which only pension funds invest;
• family offices; and
• holding companies.

 
Under the AFMD there are also exceptions for AIFMs whose collective assets under management fall below the following de minimis thresholds:
 
(i) EUR 100 million; or
(ii) EUR 500 million, if the AIFs are unleveraged and no redemption rights have been granted to the investors that can be exercises within a five year period following the date of the initial investment.
 
The Dutch legislator has however imposed an additional threshold.  AIFs which fall below either threshold, and which offer participations exclusively

(a) to retail investors, (b) to fewer than 150 persons or (c) in denominations of at least EUR 100.000 are not required to obtain a license either. 
 
AIFMs that are exempt on the basis of the above de minimis exemption must however (i) still be registered with the AFM, (ii) notify the AFM of the AIFs they manage and provide information on the investment strategies of such AIF, (iii) periodically provide the AFM with information on the main instruments in which they are trading, on the principal exposures and concentrations of the AIF they manage and (iv) notify the AFM if they cross the de minimis thresholds.
 
The AIFMD License
 
The most relevant change under the Bill is the introduction of a license requirement for AIFMs (that cannot make use of an exemption) which manage AIFs that offer units or shares solely to professional investors.  Currently, those AIFMs do not require a license.   The key benefit of this license is the opportunity for an AIFM to have a passport to market AIFs to professional investors located in any EU Member State.  However,AIFMs that are relying on the de minimis exemption cannot benefit from this passporting right.
 
Requirements
 
The Billintroduces, amongst others, the following requirements:
 

• General principles and conduct of business: The Bill contains a broad set of general principles that the AIFM must comply with.  These include (amongst others) the obligation to act honestly and with due skill, in the best interests of the AIF and the investors and to avoid conflict of interests.  In addition, AIFMs must have remuneration policies in place in order to avoid inappropriate risk taking, proper liquidity and risk management and segregation of assets and impose limits on investment in securitisations.
• Organisational requirements: AIFMs at all times need to use appropriate human resources necessary for the proper management of the AIF and make sure there are adequate internal control and reporting mechanisms in place.  Furthermore, the Bill contains rules regarding limitations on the manager's activities, obligations relating to the treatment of participants and various obligations relating to supervision by the authorities.
• Capital Requirements: An internally-managed AIF must have an initial capital of at least € 300,000 upon authorisation and an initial capital of at least € 125,000 for an external manager.  In addition to the initial capital, the AIFMs must retain ‘own funds’ equal to 0.02% of the assets under management in excess of € 250 million but with a cap of € 10 million. 
• Valuation: An AIFM needs to have appropriate and consistent procedures so that a proper and independent valuation of the assets can be performed.  The Bill also dictates who can value the assets, how and when they should be valued and the AIFMs’ liability towards the investors for valuations.
• Depositaries: An AIFM must appoint a single independent depositary in respect of each AIF it manages.  The depositary must monitor the cash flows of the AIF, hold financial instruments of the AIF in custody, ensure that the value of the shares or units of the AIF are calculated in accordance with the applicable law and ensure that the assets are correctly administered. 
• Transparency: The Bill includes information obligations towards supervisory authorities, employees and investors.  This includes the obligation to provide an annual report in relation to each AIF to be made available to investors and the Dutch central bank, the obligation to disclose certain information prior to making an investment decision and whenever a material change occurs and information to be disclosed to investor periodically.
• Leverage: The Bill requires disclosure to investors and a reporting obligation to the regulator in case of use of leverage.  An AIFM is obliged to set up leverage limits, to be disclosed to investors.

 
Transitional Measures
 
The Bill allows firms that were authorised to manage AIFs before 22 July 2013 a period of 12 months to comply with the Bill and to apply for a license (therefore ultimately 21 July 2014).  However, in the period between the implementation of the AIFMD and the actual authorisation, measures must be taken by the AIFM to prepare for AIFMD-readiness. 
 
A firm that wishes to begin managing an AIF for the first time after 22 July 2013 will not benefit from any transitional provision.  The same applies if a firm wishes to begin marketing AIFs in an EU Member State.  There are no general transitional provisions relating to depositaries. 
 
A manager of a closed-end AIF which makes no additional investments after 22 July 2012 may continue to manage the AIF without a license.
 
The same applies to a manager of a closed-end AIF which has not admitted any new investors after 22 July 2011 and was formed for a period ending no later than 22 July 2016.
 
For more information regarding the Bill, please contact Kennedy Van der Laan, who are more than happy to assist you in helping you to become AIFMD compliant.

 
Floor Veltman is a senior associate in the Corporate Group of Kennedy Van der Laan and specialises in guiding (cross-border) acquisitions and investments for national and international clients, including strategic buyers, private equity funds and venture capital investors.  Floor also has broad experience in drafting, assessing and negotiating various kinds of agreements such as shareholders’ agreements, cooperation agreements and service agreements.
 
Floor can be contacted by phone on +31 20 5506 842 or alternatively via email at floor.veltman@kvdl.nl
 
Joris van Horzen is a senior associate in the Banking & Finance Group of Kennedy Van der Laanand specialises in cross border finance transactions and financial regulatory laws.  Joris works a wide range of financial institutions, including banks, payment institutions and investment funds.  In the period 2007-2009, Joris was seconded to the legal departments of ABN Amro and The Royal Bank of Scotland.
 
Joris can be contacted by phone on +31 20 5506 655 or alternatively via email at joris.van.horzen@kvdl.nl
 
Joost Achterberg is a senior associate in the Banking & Finance Group of Kennedy Van der Laanand specialises in banking litigation and represents banks in legal proceedings concerning credits, securities and other bank-related subjects.  Besides, Joost regularly advises clients on implications of Dutch and European law with an emphasis on the funds practice.
 
Joris can be contacted by phone on +31 20 5506 826 or alternatively via email at joost.achterberg@kvdl.nl