draft directive on alternative funds word.doc

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COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, COM(2009)XXX final

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on Alternative Investment Fund Managers

(Text with EEA relevance)[SEC(2009) xxx] [SEC(2009) xxx]

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EXPLANATORY MEMORANDUM

1. CONTEXT OF THE PROPOSAL

1.1. Context, grounds for, and objectives of the proposal

The financial crisis has exposed a series of vulnerabilities in the global financial system. It has highlighted the powerful interdependencies that exist between financial market actors and has demonstrated how risks crystallising in one sector can be transmitted rapidly around the financial system, with serious repercussions for all financial market participants and for the stability of the underlying markets.

In this context, serious questions have been raised about the adequacy of the regulatory and supervisory framework for all financial market actors in the European Union. The European Commission has responded to these concerns with an ambitious programme of regulatory reform, designed to ensure that financial markets are secure and reliable and that all participants in these markets operate responsibly.1 In full accordance with the conclusions of the G-20 summit in November 2008, these reforms will ensure that all relevant actors and all types of financial instrument are subject to appropriate regulation and oversight. This will entail filling gaps in areas where European or national regulation is currently insufficient or incomplete.

One such gap relates to the oversight and supervision of the activities of the managers of alternative investment funds (AIFM). The need for closer regulatory engagement with this sector has been highlighted by the European Parliament - notably through the legislative recommendations contained in own-initiative reports on hedge funds and private equity and the transparency of institutional investors2 - and by the High-Level Group on Financial Supervision chaired by Jacques De Larosière, which recommended to 'extend appropriate regulation, in a proportionate manner, to all firms or entities conducting financial activities of a potentially systemic nature'.3 It is also the subject of ongoing discussion at international level, for example through the work of IOSCO and the Financial Stability Forum.

Alternative investment funds (AIF) are defined here as all funds that are not regulated under the UCITS Directive.4 Collectively, funds managed by AIFM constitute a very large and heterogeneous sector. Around €2 trillion in assets are currently managed by AIFM employing a variety of investment techniques, investing in different asset markets and catering to different investor populations. The sector includes hedge funds and private equity, as well as real estate funds, commodity funds, infrastructure funds and other types of institutional fund (such as special funds or qualified investor funds).

The financial crisis has underlined the extent to which AIFM are vulnerable to a wide range of risks. These risks are of direct concern to the investors in those funds, but also present a threat to creditors, trading counterparties and to the stability and integrity of European financial markets. These risks take a variety of forms:1 Commission communication on financial market reform published on 4 March 2009. See

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/351&format=HTML&aged=0&language=EN&guiLanguage=en

2 of the European Parliament with recommendations to the Commission on hedge funds and private equity (A6-0338/2008) ['Rasmussen' report] and European Parliament report with recommendations to the Commission on transparency of institutional investors (A6-0296-2008) ['Lehne'report].

3 Report of the High-Level Group on Financial Supervision in the EU, 25 February 2009, p. 25. See http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf

4 Council Directive 85/611/EEC as amended. A recast (so-called UCITS IV) has been adopted by the Europian Parliament in January 2009 and is expected to be adopted by the Council end of April/beginning of May 2009.

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http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf

Source of Risk

Macro-prudential (systemic) risks, relating in particular to the use of leverage

Direct exposure of systemically important banks (as the providers of leverage) to the AIFM sector (the 'credit channel'); and

Pro-cyclical impact of herding behaviour, risk concentrations in particular market segments and ('forced') deleveraging on the liquidity and stability of financial markets (the 'market channel')

Micro-prudential risks Weakness in internal risk management systems with respect to market risk, counterparty risks, funding liquidity risks (asset-liability liquidity mismatch) and operational risks.

Investor protection Inadequate investor disclosures on investment policy, risk management, internal processes etc as a barrier to effective due diligence by investors.

Conflicts of interest and failures in fund governance, in particular with respect to remuneration, valuation and administration.

Market efficiency and integrity

Impact of dynamic trading and short selling techniques on market functioning (both positive and negative impacts)

Potential for market abuse in connection with certain techniques, for example short-selling.

Impact on market for corporate control

Lack of transparency when building stakes in listed companies (e.g. through use of stock borrowing, contracts for difference), or concerted action in 'activist' strategies

Impact on social economy

Potential for misalignment of incentives in management of portfolio companies, in particular in relation to the use of debt financing.

Some of these risks are most closely associated with specific AIFM business models, such as those of hedge funds and private equity. The activities and techniques that form the core of many AIFM investment strategies are widely available, and the associated risks have manifested themselves throughout the AIFM industry over recent months. For example:

Hedge funds have come to play a significant role in financial markets and may have contributed to asset price inflation and to the rapid growth of structured credit markets. The subsequent rapid unwinding of leveraged positions appears to have contributed to market volatility. The use of short-selling strategies has also proved controversial during the financial crisis, provoking curbs on this practice in many jurisdictions.

Funds of hedge funds have faced a serious mismatch between liquidity and redemption intervals: while many apply relatively short redemption periods, their investments in hedge funds could not be liquidated as quickly due to the much longer redemption periods and some hedge fund closures. This led some funds of hedge funds to suspend or otherwise limit redemptions. The sector has also suffered from high-profile failures in due diligence, for example in relation to the Madoff scheme in the US.

Private equity funds have experienced a different set of challenges, relating to the availability of credit and the financial health of their portfolio companies. The inability to obtain leverage has significantly reduced buy-out activity. A number of PE portfolio

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companies that have been subject to leveraged buy-outs are reported to be faced with difficulties in finding new loans to finance their activities.. This credit rationing could result in bankruptcies.

Commodity funds were implicated in the commodity price bubbles that developed in late 2007.

To date, there has been no direct regulation of AIFM activity in Community law. The activities of AIFM are regulated by a combination of national financial and company law regulations and general provisions of Community law. They are supplemented in some areas by industry-developed standards.

It has become apparent that nationally fragmented approaches do not constitute a robust and comprehensive response to risks in this sector. Some of the risks associated with AIFM have been underestimated and are not sufficiently addressed by current rules. Where the risks are addressed by national regulation, the perspective is purely national. Experience has shown that this regulatory structure does not adequately reflect that many of the risks are inherently cross-border in nature, due to the interconnectedness of financial markets and the international character of AIFM counterparties and investors.

This is particularly striking in relation to the effective oversight and control of macro-prudential risks. The individual and collective activities of large AIFM, particularly those employing high levels of leverage, amplify market movements and have contributed to the ongoing instability of financial markets across the European Union. Macro-prudential oversight of AIFM has been largely indirect in nature, through the regulation of the providers of credit to the sector, the prime brokers, which are subject to Community banking law.

The crisis has demonstrated clearly that while this indirect model of supervision is, and will remain, a vital component of the regulatory framework, it does not provide national authorities with a sufficiently comprehensive overview of the potential systemic impact of the AIFM sector. Nor does it provide for effective oversight of the systems, controls and techniques employed by AIFM.

It is also the case at the micro-prudential level: the quality and transparency of internal governance arrangements and risk management systems also have important cross-border implications when investors, creditors and trading counterparties are domiciled in other Member States.

Effective management of the cross-border dimension of these risks therefore demands a common understanding of the obligations of AIFM; a coordinated approach to the oversight of risk management processes, internal governance and transparency; and clear arrangements to support supervisors in managing these risks, both at domestic level and through effective supervisory cooperation and information sharing at European level.

In addition to vulnerabilities in relation to the risks posed by AIFM, the current fragmentation of the regulatory environment also results in legal and regulatory obstacles to the efficient cross-border marketing of AIF. Provided that AIFM operate in accordance with strict common requirements, there is no obvious justification for restricting an AIFM domiciled in one Member State from marketing AIF to professional investors in another Member State market.

It is in recognition of these weaknesses and inefficiencies in the existing regulatory framework that the European Commission committed in the Communication on Driving European Recovery to bringing forward a proposal for a comprehensive legislative instrument establishing regulatory and supervisory standards for hedge funds, private equity and other systemically important market players.

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Specifically, the proposed Directive will:

provide for a secure, harmonised and all-encompassing EU framework for monitoring and supervising the risks that the activities of AIFM pose to their investors, counterparties, other financial market participants and to financial stability; and

contribute to the removal of barriers to the efficient operation of the AIFM market by allowing AIFM to market funds that they manage subject to compliance with a high, common level of regulatory safeguards.

While the enhancement of the regulatory and supervisory environment for AIFM at European level represents an important and necessary step, the process of placing global financial markets on a more secure footing will require complementary action at international level. The European Commission hopes that the principles embodied in this proposal will make an important contribution to the debate on the reinforcement of the architecture for global financial supervision, in the context of the G-20 discussions and elsewhere.

1.2. General approach

The following section sets out the key principles underpinning the provisions of the proposed Directive. Specific provisions are described in greater detail in Section 2.5.

The managers of all non-UCITS funds will require authorisation in accordance with the proposed Directive in order to manage and market AIF in the European Union

While the principal political focus is currently on hedge funds and private equity, the European Commission believes that it would be ineffective and short-sighted to limit any legislative initiative to these two categories of AIFM: ineffective because any arbitrary definition of these funds might not adequately capture all the relevant actors and could be easily circumvented; and short-sighted because, as described above, many of the underlying risks are also present in other types of AIFM activity. The regulatory solution which is likely to prove the most enduring and productive is therefore to capture all AIFM whose activities give rise to those risks, albeit to a greater or lesser extent.

These risks stem primarily from the conduct and organisation of the fund manager. Few material risks arise at the level of the AIF, which is typically merely a [shell] structure through which assets are gathered and held. The most effective way to tackle the risks is therefore to focus on the activities of the AIFM. Accordingly, in order to manage AIF in the European Union, all AIFM must be authorised and supervised in accordance with the requirements of the Directive.

This broad coverage does not imply a 'one size fits all' approach

A common set of basic provisions will govern the conditions for the initial authorisation and organisation of all AIFM. In addition to these common provisions, the proposal foresees a number of specific, tailored provisions which will only apply to AIFM that employ certain techniques or strategies when managing their AIF (for instance, systematic use of a high degree of leverage, short selling, acquisition of minority or majority stakes in companies) and will ensure an appropriate degree of transparency with respect to these techniques.

The proposal does not impose restrictions on AIF investment policies

The proposed Directive does not contain detailed rules relating to the organisation or structure of the AIF portfolio. This would be disproportionate (given that the marketing of AIF is to be restricted to professional investors), counter-productive (as such rules could excessively constrain investment policies without delivering clear regulatory benefit) and be infeasible (since they could not cover the large range of investment strategies available).

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Nevertheless, in the interests of transparency, the proposal envisages that the AIFM shall notify its competent authority of all AIF that it manages, and will be required to manage those AIF in accordance with the requirements of the Directive.

De minimis exemption for managers of small asset portfolios

AIFM managing AIF portfolios with total assets of less than XXX will be exempt from the provisions of the proposed Directive. The management of these funds is unlikely to pose significant risks to financial stability and market efficiency and hence the authorisation and reporting requirements would be disproportionate. These AIFM would have no rights under the Directive.5

The result of this exemption is that supervisory attention will be focused on the areas where risks are concentrated. A threshold of 250mio€ implies that roughly 15% of hedge fund managers, managing 76% of assets of EU domiciled hedge funds, would be covered by the Directive. It would capture 36% of managers of other non-UCITS (such as open-ended Dutch funds, open-ended real estate funds, institutional funds) and 96% of the assets invested in these funds. A 250mio€ threshold also ensures that most managers in niche businesses (such as start-up and venture capital) for whom the new requirements could be overly burdensome would not be caught by the Directive.

AIFM will be entitled to market AIF to professional investors only

Authorisation as an AIFM will entitle the manager to manage, administer and market the AIF to professional investors only, as defined by MiFID.6

Many AIF entail a relatively high level of risk (of loss of much or all of the capital invested) and/or have other features which render them unsuitable for retail investors. In particular, they may lock investors in to their investment for longer than is acceptable for retail funds. Investment strategies are typically complex and often involve investment in illiquid and harder-to-value investments. The marketing of these AIF will therefore be limited to those investors that are equipped to understand and to bear the risks associated with this type of investment.

The limitation to professional investors is consistent with the current situation in many Member States. However, some of the categories of AIF covered by the proposed Directive are accessible to retail investors in some Member States, subject to strict regulatory controls. For instance, open-ended real estate funds are available to retail investors in 12 Member States; and funds of hedge funds in several Member States.

The level of harmonisation achieved by the proposed Directive is not, however, sufficient to create the conditions for the pan-European distribution of these funds to retail investors. In order to recognise the existence of different approaches to the retail marketing of some AIFM managed funds, and in keeping with the principle of subsidiarity, each Member State will remain free to determine whether funds managed by some or all AIFM can be distributed to retail investors in their Member State and to impose any additional requirements to this end that they see fit.

AIFM will be permitted to manage AIF domiciled in third countries

The proposed Directive recognises the possibility for AIFM to manage AIF domiciled in third countries, subject to the following conditions:

5 An AIFM could be permitted to 'opt-in' to the provisions of the Directive were it to see benefit in operating under this regime.

6 This definition is not ideal for private equity investors: the regular transaction test excludes many sophisticated but irregular private investors: conversely the definition includes many SMEs.

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that the valuation be conducted by an EU domiciled valuator;

that the safekeeping of assets by depositaries domiciled in a third country is only permitted for offshore AIF subject to particular attention by the home authority of the AIFM. The AIFM home authority should only authorise the AIFM once it has satisfied itself that the custody arrangements provide adequate assurances as to the security of the AIF' assets and that the depositary is subject to prudential regulation, ongoing supervision and anti-money laundering rules equivalent to EU law.

that the third country domicile be a signatory to necessary information-sharing agreements with competent authorities in the European Union to ensure efficient supervision.

Authorised AIFM will be permitted to market AIF throughout the EU

Subject to authorisation in accordance with the Directive, the AIFM would enjoy certain rights within the European Union, notably:

The right to market AIF to professional investors on markets in other Member States on the basis of an authorisation obtained from the competent authorities of the home Member State. Cross-border marketing would be subject only to the filing of appropriate information with the host competent authority.

The right to manage AIF in other Member States – analogous to the management company passport in UCITS. This right explicitly recognises the well-established business model in some Member States whereby AIFM manage funds located in third countries.

1.3. Preparation of the proposal: consultation and impact assessment

The European Commission has consulted extensively on the adequacy of regulatory arrangements for non-UCITS fund managers and for the marketing of non-UCITS fund products in the European Union.

Drawing on the reports of two industry expert groups on hedge funds and private equity respectively and the subsequent public consultation, the White Paper on Asset Management in November 2006 committed to a review of the need to develop single market solutions for non-harmonised investment funds.7

Subsequent work in the area of retail-oriented funds has included study of the investment strategies, techniques and features of harmonised funds and retail-oriented non-harmonised funds; and on the marketing of non-harmonised funds to retail investors.8,9 An Expert Group was established on open ended real estate funds in June 2007; the Group published a report in March 2008 which was then put out for public consultation and was discussed at an Open Hearing on retail-oriented non-harmonised funds in April 2008.10,11

In relation to funds targeted at institutional investors, the need for and design of a 'private placement' regime at European level was explored through a call for evidence in spring 2007 and two workshops in January and February 2008. These provided valuable input for an impact assessment on private placement, published in July 2008.12

7 For details on the expert groups, their reports, a summary of the feedback in the public consultation as well as the individual contributions can be found on the Commission website: http://ec.europa.eu/internal_market/investment/ alternative_investments_en.htm#alternative.

8 "Study on "investment funds in the European Union: comparative analysis of use of investment powers, investment outcomes and related risk features in both UCITS and non-harmonised markets", http://ec.europa.eu/internal_market/investment/other_docs/index_en.htm#studies

9 http://ec.europa.eu/internal_market/investment/studies_en.htm 10 http://ec.europa.eu/internal_market/investment/real_estate_funds_en.htm 11 http://ec.europa.eu/internal_market/investment/consultations/index_en.htm#hearing0804 12 The executive summary of this impact assessment is attached as annex XXX.

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A public consultation on the adequacy of existing regulatory and supervisory arrangements for hedge funds was held between December 2008 and January 2009.13 Over 100 responses were received from hedge funds, industry associations, prime brokers, investor associations, trade unions, public authorities at national and European level and individuals. These contributions, together with a summary of the responses, are available on the European Commission website.14

This consultation was followed by a high-level conference on hedge funds and private equity, held in Brussels on 26-27 February 2009. The conference brought together representatives of the hedge fund and private equity industries, investors, members of the regulatory community and other experts to discuss emerging policy issues in these sectors. The conference focused in particular on financial stability, transparency and investor protection. A summary record of this event and the presentations delivered are available on the European Commission website.15

Drawing on the input from this consultation and in accordance with the principles of Better Regulation, the European Commission has conducted a [proportionate] assessment of the impact of alternative approaches to achieving the stated policy objectives. X options were considered:

[…]

It was concluded that legislative action at the European level offered the most effective and coherent response to the identified risks.

2. LEGAL ELEMENTS OF THE PROPOSAL

2.1. Legal basis

The proposal is based on Articles 47(2) and 95 of the EC Treaty

2.2. Subsidiarity and proportionality

The Commission proposal for a Directive on AIFM is in line with the principle of subsidiarity as laid down in Article 5(2) of the EC Treaty, which requires the Community to act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community.

The activities of AIFM affect investors, counterparties and financial markets located in other Member States and hence the risks associated with the activities of AIFM are inherently cross-border in nature. The effective monitoring of macro-prudential risks and oversight of AIFM activity thus requires a common level of transparency and regulatory safeguards across the EU. The Directive also provides a harmonised framework for the safe and efficient cross-border marketing of AIF, which could not be established as effectively through the uncoordinated action of Member States.

The principle of subsidiarity has also been taken into account when granting Member States the right to apply to AIFM domiciled within their territory requirements which are stricter than or additional to those laid down in the proposal. While providing rights for marketing to professional investors only, the Directive also recognises the right of Member States to

13 http://ec.europa.eu/internal_market/consultations/2008/hedge_funds_en.htm 14 [To be added]15 [To be added]

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http://ec.europa.eu/internal_market/consultations/2008/hedge_funds_en.htm

establish or maintain regulatory regimes to make AIF available to retail investors within their jurisdiction.

The proposed Directive is also proportionate, as required by Article 5(3) of the EC Treaty. Many of the provisions of the Directive relate to particular activities; if an AIFM does not engage in these activities, the provisions shall not apply. Moreover, the Directive is to incorporate a de minimis exemption: authorisation requirements are to be waived for AIFM managing AIF below a threshold of 250mio€, since these are unlikely to give rise to important systemic risks or to be a threat to orderly markets.

2.3. Choice of instrument

The choice of a Directive as the legal instrument represents a sensible trade-off between harmonisation and flexibility. The proposed Directive provides a sufficient degree of harmonisation to provide a consistent and secure pan-European framework for the authorisation of AIFM and their ongoing supervision. The choice of a Directive allows Member States a degree of flexibility in deciding how to adapt their national legal orders to the new framework. This is consistent with the principle of subsidiarity.

2.4. Comitology

The proposal is based on the Lamfalussy process for regulating financial services. The body of the proposed Directive contains the principles necessary to ensure that AIFM are subject to consistently high standards of transparency and regulatory oversight in the European Union.

2.5. Content of the proposal

The proposed Directive is organised according to the following structure:

General provisions, scope, definitions and exemptions Articles 1 – 3

Operating conditions for AIFM Articles 5 – 13

Transparency requirements Articles 14 – 16

Obligations for AIFM managing specific types of AIF Articles 17 – 24

Conditions and procedures for authorisation of AIFM Articles 25 – 29

Rights to provide AIF management services in the AIFM home Member State

Articles 30 – 31

Rights to provide AIF management services in an AIFM host Member State

Articles 32 – 33

Competent authorities Articles 34 – 41

Final provisions Articles 42 – 46

The principal elements of the proposed Directive are now described.

2.5.1. Scope and definitions (Articles 1 and 2)

In order to ensure that all AIFM operating in the European Union are subject to effective supervision and oversight, the proposed Directive introduces a legally binding authorisation and supervisory regime for all AIFM managing AIF in the European Union. The regime will apply irrespective of the legal domicile of the AIF managed.

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For reasons of proportionality, the Directive will not apply to AIFM managing portfolios of AIF with less than 250 million€ of assets. A manager authorised in accordance with the UCITS Directive requires an additional authorisation to operate under the AIFM regime.

2.5.2. Operating conditions and initial authorisation (Articles 5-29)

To operate in the European Union, all AIFM will be required to obtain authorisation from the competent authority of their home Member State. All AIFM operating on European soil will be required to demonstrate that they are suitably qualified to provide AIF management services and will be required to provide detailed information on the planned activity of the AIFM, the identity and characteristics of the AIF managed, the governance of the AIFM (including arrangements for the delegation of management services), arrangements for the valuation and safe-keeping of assets, audit arrangements, and the systems of regulatory reporting, where required. The AIFM will also be required to hold and retain a minimum level of capital.

To ensure that the risks associated with AIFM activity are effectively managed on an ongoing basis, the AIFM will be required to satisfy the competent authority of the robustness of internal arrangements with respect to risk management, in particular liquidity risks and additional operational and counterparty risks associated with short selling; the management and disclosure of conflicts of interest; the fair valuation of assets; and the security of depository/custodial arrangements. When managed AIF are domiciled in a third country and the assets of those AIF are also deposited in a third country, competent authorities will be required to pay particular attention to the robustness of these depository arrangements.

Given the diversity of AIFM investment strategies, the proposed Directive foresees that the precise requirements, in particular with regard to disclosure requirements, will be tailored to the particular investment strategy employed.

2.5.3. Treatment of investors (Article 10, 11, 14 and 15)

While the marketing of AIF will be limited to professional investors, the proposed Directive provides for a minimum level of service and information provision to such investors, on an initial and ongoing basis, to facilitate their due diligence and ensure a minimum level of investor protection. The proposed Directive requires AIFM to provide to their investors a clear description of the investment policy, including descriptions of the type of assets and the use of leverage; redemption policy in normal and exceptional circumstances; valuation, custody, administration and risk management procedures; and fees, charges and expenses associated with the investment.

AIFM will be required to treat their investors fairly and, if investors are not treated equally, to disclose any such preferential treatment clearly to all investors.

2.5.4. Disclosure to regulators (Article 16)

To support the effective macro-prudential oversight of AIFM activities, AIFM will also be required to report to the competent authority on a regular basis on the principal markets and instruments in which it trades, its principal exposures, performance data and concentrations of risk.

The AIFM will also be required to notify the competent authorities of the home Member State of the identity of the AIF managed, the markets and assets in which the AIF will invest and the organisational and risk management arrangements established in relation to that AIF.

These general requirements are supplemented by specific provisions applying to AIFM implementing particular investment strategies or trading techniques.

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2.5.4.1. Specific requirements for AIFM managing leveraged AIF (Articles17- 20)

The use of a systematically high level of leverage implies that the impact of that activity on the financial system is likely to be amplified. An AIFM employing leverage on a systematic basis above a defined threshold will be required to disclose aggregate leverage, the form of leverage (cash borrowing, securities borrowing, leverage embedded in derivatives), and the main sources of leverage (lending institutions such as prime brokers, banks etc) to the home authority of the AIFM. The draft proposal does not impose obligations upon competent authorities as regards the use of this information. It however recognises emergency powers for authorities to restrict the use of leverage in respect of individual managers and funds, if the stability and integrity of financial markets so requires. It requires competent authorities for such leveraged funds to aggregate and share, with other competent authorities, information that is relevant for monitoring and responding to the potential consequences of AIFM activity for systemically relevant financial institutions across the EU and/or for the orderly functioning of the markets on which IAFM are active. The proposed Directive requires that this information be transmitted on quarterly basis to the Economic and Financial Committee (or to the yet to be created European Systemic Risk Council) and without delay in the event of threat of imminent instability or counterparty failure.

2.5.4.2. Specific requirements for AIFM acquiring controlling stakes in companies (Articles 21 – 24)

The proposal provides for disclosures of information to other shareholders and interested parties at the time that the AIFM acquires a controlling interest. It also foresees provision whereby the AIFM issues annual disclosure on the investment strategy and objectives of its fund when acquiring control of companies, and some general disclosures about the performance of the portfolio company following acquisition of control. These reporting obligations are introduced in view of the need for private equity and buy-out funds to account publicly for the manner in which they manage companies of wider public interest, control of which they have acquired. The information requirements address the perceived deficit of strategic information about how private equity managers intend to, or have managed portfolio companies which they own. Demands for this type of disclosure are made in respect of larger buy-out investments and public to private transactions – to inform interested constituencies about the strategy in accordance with which the company will be run and (ex post) information on performance. For reasons of proportionality the draft proposal does not extend these requirements to acquisitions of control in SMEs – and thereby seeks to avoid imposing these obligations on start-up or venture capital providers (to the extent that they are not already exempted from the scope of the entire Directive). In reaction to concerns raised with regard to the delisting of public companies owned by private equity funds and the subsequent reduction of transparency the draft proposal requires that such delisted companies temporarily continue to be subject to reporting obligations for listed companies.

2.5.5. Rights of AIFM under the Directive (Articles 29 - 33)

In order to facilitate the development of the single market, an AIFM authorised in its home Member State will be entitled to market its funds to professional investors on the territory of any Member State. As a corollary of the high common regulatory standard achieved by the proposed Directive, Member States will not be permitted to impose additional requirements on AIFM domiciled in another Member State insofar as marketing to professional investors is concerned. The cross-border marketing of AIF shall be subject only to a notification procedure, under which relevant information is provided to the host Member State and transmitted to the host.

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The proposed Directive does not provide rights in relation to marketing AIF to retail investors. Member States may allow for marketing to retail investors within their territory and may apply additional regulatory safeguards for this purpose. Such requirements shall not discriminate according to the domicile of the AIFM.

AIFM shall also be entitled to freely provide management services in Member States other than their Member State of domicile, subject to a notification procedure.

2.5.6. Supervisory cooperation and information sharing (Articles 39 - 41)

In order to ensure the secure functioning of the AIFM sector, competent authorities of the Member States will be required to cooperate whenever necessary so as to achieve the aims of the Directive.

Given the cross-border nature of risks arising in the AIFM sector, a prerequisite for effective macro-prudential oversight will be the timely sharing of relevant macro-prudential data at the European, or even global, level. The competent authorities of the home Member State will thus be required to transmit relevant macro-prudential data, in a suitably aggregated format, to public authorities in other Member States.

2.6. Budgetary Implications

The proposal has no implications for the Community budget.

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Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on Alternative Investment Fund Managers

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Articles 47(2) and 95 […] thereof,

Having regard to the proposal from the Commission16,

Having regard to the opinion of the European Economic and Social Committee17,

Having regard to the opinion of the Committee of the Regions18,

Acting in accordance with the procedure laid down in Article 251 of the Treaty19,

Whereas:

(1) Managers of alternative investment funds (AIFM) are responsible for management of a significant amount of invested assets in Europe, account for significant amounts of trading in markets for financial instruments, and can exercise an important influence on markets and companies in which they invest;

(2) The impact of AIFM on the markets in which they operate is largely beneficial, and AIFM represent an important and welcome source of investment capital, the activities of AIFM may also give rise to risks for their investors, and to financial stability, market efficiency and integrity. Recent financial difficulties have underlined how activities of AIFM may also serve to spread or amplify risks through the financial system in unexpected ways. Some of these risks may be cross-border or systemic in nature, uncoordinated national interventions to these risks have not created a framework which is conducive to the efficient management of or response to these risks. This Directive establishes common requirements governing the authorisation and supervision of AIFM in order to provide a coherent approach to supervising the related risks and their impact on European investors and markets.

(3) AIFM implement a diverse range of investment strategies and techniques, resulting in different forms and intensities of risk for investors, other market participants and markets. Recent difficulties in financial markets have underlined that many AIFM strategies are vulnerable to some or several important risks. In order to provide comprehensive arrangements for supervising these risks, it is necessary to establish a framework capable of addressing these risks in whatever AIFM strategy they materialise. Consequently, this Directive encompasses managers of all funds which are not covered by Directive 85/611/EEC. AIFM cannot manage UCITS funds on the basis of authorisation under this Directive.

16 OJ C […], […], p. […].17 OJ C […], […], p. […].18 OJ C […], […], p. […].19 OJ C […], […], p. […].

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(4) The scope of this Directive is confined to the management of collective investment vehicles which are asset pooling vehicles created with the sole purpose of raising capital from a number of investors with a view to investing the proceeds in accordance with a defined investment policy. This Directive does not extend to persons managing or administering non-pooled investment vehicles such as endowments or sovereign wealth funds (or to actively managed investments in the form of securities – certificates, managed futures, index-linked bonds)). It shall include managers of all such collective investment vehicles which are not authorised as UCITS funds – irrespective of the legal or contractual manner in which the manager is entrusted with responsibility.

(5) This harmonisation shall establish high requirements for AIFM, it does not prevent Member States from adopting additional requirements in respect of AIFM established on their territory. Any additional requirements on locally domiciled AIFM cannot be invoked to prevent the exercise of rights conferred by this Directive on AIFM authorised in another Member State in accordance with this Directive.

(6) It is desirable to avoid imposing excessive or disproportionate requirements through this Directive and preventing small fund managers from entering the market. To this end, the Directive provides for an exemption for managers where the cumulative funds under management fall below a certain threshold and the activities of the AIFM concerned are unlikely to have significant consequences for financial stability or market efficiency.

(7) Authorisation in accordance with this Directive covers the services of management and administration of alternative investment funds. The AIFM may delegate responsibility for functions in accordance with the relevant provisions of the Directive. The AIFM shall remain responsible for the proper performance of its function and compliance with the rules set out in this Directive – except where the Directive expressly provides that certain functions or processes shall be undertaken by an independent entity.

(8) Many AIFM currently manage funds which are domiciled in third countries. It is considered appropriate to permit AIFM authorised under this Directive to continue to manage funds in third countries, subject to appropriate arrangements needed to ensure the sound administration of those funds and the effective safe-keeping of assets invested by EU investors. This Directive introduces provisions which clarify the conditions that competent authorities should impose before authorising an AIFM to place those funds on its home market or that of any other Member State.

(9) The level of harmonisation and standards of supervision imposed by this Directive are sufficiently high to permit the cross-border provision of services by AIFM and the cross-border marketing of funds managed by AIFM, subject to some conditions inherent to the investment strategies proposed by AIFM.

(10) Authorisation under this Directive also covers the right for the AIFM to market its funds to or place its funds with professional investors throughout the single market. In order to permit effective supervisory cooperation and permit host authorities to verify respect for distribution and marketing arrangements as well as enforce other public order considerations, the marketing of funds managed by an AIFM in other Member States shall be the object of a communication from the competent authority of the AIFM to the authorities where the funds will be distributed.

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(11) The Directive establishes common requirements for the authorisation and ongoing supervision of the AIFM, and lays down requirements regarding the way in which it shall manage funds under its responsibility. The Directive imposes particular requirements on AIFM employing certain techniques giving rise to particular risks. It would be disproportionate and counterproductive to regulate the structure or composition of the portfolios of the funds managed by AIFM and such prescriptive harmonisation could not be undertaken for the very diverse range of fund-types managed by AIFM.

(12) AIFM employing high levels of leverage in their investment strategies are, under certain conditions, considered as capable of contributing to the build up of systemic risk or disorderly markets. The information needed to detect, monitor and respond to such developments has not been collected in a consistent way throughout Europe, and not shared across Member States so as to identify potential sources of risk to the stability of European financial markets. To this end, the Directive lays down particular requirements for AIFM, above a certain size, which consistently use high levels of leverage in their investment strategies to disclose information regarding their use and sources of leverage. The Directive, moreover, foresees that this information shall be aggregated and shared with other EU authorities so as to facilitate a collective analysis of and response to the impact of AIFM leverage and trading on the European financial system.

(13) Funds managed by AIFM encompass a wide range of investment strategies and techniques giving rise to different risk profiles, from the investor perspective these funds are often illiquid and subject to higher risk of substantial capital loss. This Directive stipulates that these investment strategies are not adapted to the investment profile or needs of retail investors and are more suitable for professional investors, and investors having a sufficiently large investment portfolio so as to be able to absorb the higher risks of loss associated with these investments. Member States retain the right under this Directive to authorise the marketing of AIF managed by AIFM to retail investors in their own Member State, subject to any additional safeguards that the Member State considers necessary to protect its retail investors. Where a Member State allows the marketing of AIFM managed funds to its retail investors, the same possibilities are also open to AIFM in other Member States subject to the same, non-discriminatory requirements.

(14) It is necessary to provide for the application of minimum capital requirements to ensure the continuity and the regularity of the management services by the AIFM. These requirements are similar to those applicable to the collective portfolio investment managers authorised under Directive n° 85-611. However, on going capital requirements have been amended to cover the potential exposure of AIFM to professional liability in respect of all its activities – including management services provided under delegation or on the basis of a mandate.

(15) It is necessary to ensure that AIFM operate subject to robust governance controls and that the AIFM is organised to ensure that it is soundly managed and organised so as to minimise conflicts of interest. Recent developments, underline the crucial need to separate asset safe-keeping and management functions, and segregate investor assets from those of the manager. To this end, this Directive establishes requirements governing the custody of investor subscriptions, cash and financial instruments and the safe-keeping of other non-financial assets by the AIFM. These arrangements will be adapted taking account of the nature of the assets acquired by AIFM on behalf of the AIF.

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(16) Reliable and objective asset valuation is critical for the protection of investor interests. Different AIFM, depending on the assets and markets in which they predominantly invest, employ different methodologies and systems for valuing assets. It is necessary to recognise these differences but to, nevertheless, require the valuation of assets be undertaken (under the responsibility of) by an entity which is (functionally/legally) independent of the AIFM.

(17) It is necessary to ensure that AIFM provides all companies over which it can exercise a controlling or dominant influence, with the information necessary for the company to assess how this event in the short to medium term impacts the company's economic and social situation. It is also necessary to enhance the understanding and available information about the progress of the controlled companies. To this end, the Directive foresees particular requirements for AIFM managing AIF which are in a position to exercise controlling or dominant influence over a listed or non-listed company, to notify the existence of this position and to disclose information to the company and all its other shareholders about the AIFM intentions with regard to the future business development and other planned changes of the controlled entity. In order to ensure transparency over the progress of the controlled entity, the Directive provides for enhanced reporting requirements for AIFM to supplement annual reports of theirs AIF with information that is specific to the type of investment and the controlled entity.

(18) It is necessary to clarify the powers and duties of competent authorities responsible for implementing this Directive, and to strengthen the mechanisms needed to ensure the necessary level of cross-border supervisory cooperation.

(19) Member States should lay down rules on sanctions applicable to infringements of the provisions of this Regulation and ensure that they are implemented. The sanctions should be effective, proportionate and dissuasive.

(20) Any exchange or transmission of information between competent authorities, other authorities, bodies or persons should be in accordance with the rules on transfer of personal data as laid down in Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data.

(21) The measures necessary for the implementation of this Regulation should be adopted in accordance with Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission.

(22) Since the objectives of the action to be taken, namely to ensure a high level of consumer and investor protection by laying down a common framework for the authorisation and supervision of AIFM cannot be sufficiently achieved by the Member States, as evidenced by the deficiencies of existing nationally based regulation and oversight of these actors, and can therefore, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.

HAVE ADOPTED THIS DIRECTIVE:

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Title I: General provisions

Article 1

General provisions and scope

1. This Directive shall apply to all managers of alternative investment funds (AIFM) which are providing management services to one or more alternative investment funds (AIF), provided that the AIFM is established in a Member State.

It shall apply irrespective of:

– whether the AIF is established or domiciled inside or outside of the European Union;

– whether the AIF belongs to the open-ended or closed-ended type; and

– the legal structure of the AIF and of the AIFM.

2. For the purpose of this Directive, an AIFM is deemed to be established in the Member State where it has its registered office. The AIFM must have its head office in the same Member State as its registered office.

Article 2

Definitions

For the purpose of this Directive, the following definitions shall apply:

(a) 'Alternative investment fund' (AIF) means any collective investment undertaking of whatever legal form which is not authorised pursuant to Article 5 of Directive 2009/XX/EC [the UCITS Directive].

AIF shall include investment compartments thereof.

(b) 'Alternative investment fund manager' means any legal/natural person or company, whose regular business is to manage one or several AIF;

(c) 'Valuator' means any legal/natural person or company valuing the assets and establishing the value of the shares or units of an AIF;

(d) 'AIF management services' means the activities of managing, administering and marketing one or more AIF on behalf of one or more investors;

(e) 'Professional investor' means any investor meeting the criteria foreseen in the Annex;

(f) 'Retail investor' means any investor who is not a professional investor;

(g) 'AIFM home Member State' means the Member State in which the manager has been authorised to manage an AIF;

(h) 'AIFM host Member State means the Member State, other than the home Member State, within the territory of which a manager provides AIF management services;

(i) 'AIF home Member State' means the Member State in which the AIF is established, provided that the AIF is not established in a third country;

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(j) 'AIF host Member State' means the Member State, other than the country where the AIF is established, in which the units or shares of the AIF are marketed;

(k) 'Competent authorities' mean the authorities which each Member State designates under paragraph 1 of Article 34;

(l) 'Financial instruments' means an instrument as specified in Annex I Section C of Directive 2004/39/EC;

(m) 'Market operator' means a person or persons who manage(s) and/or operate(s) the business of a regulated market, as defined in Article 4(1)(13) of Directive 2004/39/EC as amended by …;

(n) 'Leverage' means any method by which the AIFM increases the exposure of an AIF it manages to a particular investment whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means; and

(o) 'Marketing' means any general offering or placement of units or shares in an AIF to or with investors domiciled or established anywhere in the European Union, regardless of at whose initiative the offer or placement takes place.

Article 3

Exemptions

1. This Directive shall not apply

to AIFM managing

– portfolios of AIF whose assets under management (including any assets acquired through use of leverage) in total do not exceed a threshold of 250 million Euro; and;

– to UCITS or their management or investment companies authorised in accordance with Directive 2009/XX/EC [the UCITS Directive]. An AIFM may hold an authorisation pursuant to this directive and be authorised as a management or investment company pursuant to the UCITS Directive.

2. The Commission may adopt implementing measures with a view to modifying the threshold referred to in the first paragraph, and to defining the conditions and procedures under which AIFM managing portfolios of AIF whose assets under management do not exceed this threshold may opt to be covered by this Directive.

These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2).

Article 4

Member States shall ensure that AIFM may provide their AIF management services within the Community only if they comply with the provisions of this Directive on an ongoing basis.

Entities which are not authorised in accordance with the provisions of this Directive shall not be allowed to provide AIF management services in respect of AIF within the European Union.

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Title II: Operating conditions for AIFM

SECTION 1: CAPITAL REQUIREMENTS

Article 5

Initial and ongoing capital

1. AIFM shall have an initial and ongoing capital of at least EUR125 000, taking into account the following :

(i) when the value of the portfolios of AIF managed by the AIFM exceeds EUR 250 000 000, the AIFM shall be required to provide an additional amount of own funds; this additional amount of own funds shall be equal to 0,02 % of the amount by which the value of the portfolios of the manager exceeds EUR 250 000 000;

(ii) for the purpose of this paragraph the following portfolios shall be deemed to be the portfolios of the AIFM:

– any AIF portfolios managed by the AIFM, including AIF for which the AIFM delegated one or more functions to another entity in accordance with Article 22;

– anyAIF portfolios that the AIFM is managing under delegation;

(iii) irrespective of the amount of these requirements, the own funds of the AIFM shall never be less than the amount prescribed in Article 21 of Directive 2006/49/EC as amended by …;

2. Member States may authorise AIFM not to provide up to 50 % of the additional amount of own funds referred to in point (i) if they benefit from a guarantee of the same amount given by a credit institution or an insurance undertaking; the credit institution or insurance undertaking shall have its registered office in a Member State, or in a third country provided that it is subject to ongoing supervision considered by the competent authorities as equivalent to those laid down in Community law.

SECTION 2: ORGANISATIONAL REQUIREMENTS

Article 6

General principles

AIFM must use adequate and appropriate resources at all times, including material, financial, technical and human resources, that are necessary for the proper performance of their management activities.

They must be organised and have updated systems, documented internal procedures and regular internal controls of their conduct of business, in order to mitigate and manage the risks associated with their activity.

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Article 7

Valuation

1. All assets of the AIF must be valued at least once a year, and each time shares or units of the AIF are issued or redeemed if this is more frequent. The rules for the valuation of assets and the rules for calculating the net asset value per unit or share of the AIF must be laid down in the law the of country where it is established or domiciled in the AIF rules or instruments of incorporation.

2. AIFM shall ensure that the assets of the AIF are valued by a valuator which is legally or functionally independent of the AIFM.

3. The valuator appointed to value the assets of the AIF shall have its registered office in a Member State. AIFM shall ensure that the valuator has appropriate, updated, and consistent procedures to value the assets of the AIF in accordance with existing applicable accounting standards and rules, in order to reflect the true and fair value of the shares or units of the AIF.

4. The Commission may adopt implementing measures further specifying the requirements for valuing the assets of AIF under the management of the AIFM and the requirements regarding the independence of the valuation process. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2).

Article 8

Depositary

1. Member States shall ensure that a depositary is appointed to:

(a) safeguard all subscriptions made by investors of the AIF in a segregated account in the event that the AIFM receives money from investors;

(b) to safe-keep any financial instruments which belong to the AIF; and

(c) to secure the ownership of all other assets the AIF invests in.

2. No single company shall act both as AIFM and depositary. The depositary must act independently and solely in the interest of AIF investors.

3. The depositary shall be subject to prudential regulation and on-going supervision. It shall furnish sufficient financial and professional guarantees as are needed to be able effectively to pursue its business and meet the commitments inherent to that function.

4. If the AIF is domiciled in a Member State, the depositary must be a credit institution having its registered office in a Member State and be authorised in accordance with Directive 2000/12/EC, as amended by ...

If the AIF is domiciled outside the European Union, the depositary can either be a credit institution complying with the conditions laid down in the first subparagraph or a credit institution having its registered office in a third country provided that:

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(a) the depositary is subject to prudential regulation and on-going supervision considered by the competent authorities of the AIFM home Member State as equivalent to those laid down in Community law;

(b) co-operation between authorities is sufficiently ensured;

(c) the standards to prevent money laundering and terrorist financing are considered by the competent authorities of the AIFM home Member State as equivalent to those laid down in Community law; and

(d) the competent authorities of the AIFM home Member State consider that the liability of the depositary towards the AIFM and investors as equivalent to those under the law of the AIFM home Member State.

5. The depositary shall be liable to the AIFM and the investors of the AIF for any losses suffered by them as a result of the depositary's unjustifiable failure to perform its obligations or its improper performance of them. Liability to AIF investors may be invoked either directly or indirectly through the AIFM, depending on the legal nature of the relationship between the depositary, the AIFM and the investors. The depositary's liability shall not be affected by the fact that it has entrusted to a third party all or some of the assets in its safe-keeping.

6. The Commission may adopt implementing measures further specifying the tasks and requirements for depositaries, the requirements for delegating depositary functions and the liability of the depositary having regard to the different degrees to which investors are exposed to the risk of loss of assets invested with the AIFM


SECTION 3: DELEGATION OF AIFM FUNCTIONS

Article 9

Delegation

1. AIFM which intend to delegate to third parties the task of carrying out on their behalf one or more of their functions shall obtain prior authorisation from the competent authorities of the AIFM home Member State for each delegation.

The following preconditions have to be complied with:

(a) when the delegation concerns the portfolio management or the risk management, the third party must also be authorised as an AIFM under this Directive by the competent authorities of the AIFM's home Member State to manage an AIF of the same type. In all other cases the third party must at least be established in a Member State of the European Union or of the European Economic Area, must be creditworthy and the persons who effectively conduct the business must be of sufficiently good repute and sufficiently experienced;

(b) the delegation shall not prevent the effectiveness of supervision of the AIFM, and in particular it must not prevent the AIFM from acting, or the AIF from being managed, in the best interests of its investors;

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(c) the AIFM must demonstrate that the third party is qualified and capable of undertaking the functions in question, that it was selected with due care and that the AIFM is in a position to monitor effectively at any time the delegated activity, to give at any time further instructions to the third party and to withdraw the delegation with immediate effect when this is in the interest of investors;

(d) no delegation shall be given to the depositary, the valuator, or to any other undertaking whose interests may conflict with those of the AIF or its investors;

(e) the AIFM must review the services provided by each third party on an ongoing basis.

2. In no case shall the AIFM's liability be affected by the fact that the AIFM delegated functions to a third party, nor shall the AIFM delegate its functions to the extent that it becomes a letter box entity.

3. The third party may not sub-delegate any of the functions delegated to it by the AIFM.

4. The Commission may adopt implementing measures further specifying:

(a) when the delegation concerns the portfolio management or the risk management, the conditions for determining whether the third party is authorised to manage the same type of AIF;

(b) when the delegation does neither concern the portfolio management nor the risk management, the requirements for third parties;

(c) the conditions for approving the delegation; and

(d) under which conditions the manager would become a letter box entity by way of delegation.


SECTION 4: CONDUCT OF BUSINESS

Article 10

General principles

1. The AIFM shall:

(a) act honestly, with due skill, care and diligence and fairly in conducting its activities;

(b) act in the best interests of the AIF it manages, the investors of those AIF and the integrity of the market; and

(c) ensure that all AIF investors are treated fairly. No investor may obtain a preferential treatment, unless this is disclosed in the AIF rules or instruments of incorporation.

2. The Commission may adopt implementing measures, with a view to ensuring that the AIFM complies with the duties set out in paragraph 1.

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Article 11

Conflicts of interest

1. AIFM shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest, as defined in this Article, from adversely affecting the interests of the AIF and its investors.

AIFM shall segregate within its own operating environment, tasks and responsibilities which may be regarded as incompatible with each other. AIFM shall assess whether its operating conditions may involve any other material conflicts of interest and disclose them to the AIF investors.

2. Member States shall require AIFM to take all reasonable steps to identify conflicts of interest between the AIFM, including their managers, employees or any person directly or indirectly linked to the AIFM by control, and the investors in AIF managed by the AIFM or between one investor and another that arise in the course of managing one or more AIF.

Where organisational arrangements made by the AIFM to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to investors' interests will be prevented, the AIFM shall clearly disclose the general nature and/or sources of conflicts of interest to the investors before undertaking business on their behalf, and develop appropriate policies and procedures.

3. The Commission may adopt implementing measures further specifying how AIFM shall prevent or manage conflicts of interest.


Article 12

Risk management

1. The AIFM must functionally separate the tasks and responsibilities for risk management and for portfolio management.

2. The AIFM must implement updated risk management systems in order to measure and monitor appropriately all risks associated to each AIF investment strategy and to which each AIF is or can be exposed to.

3. The AIFM shall at least:

(a) implement an appropriate due diligence process when investing on behalf of the AIF, according to the investment strategy, the objectives and risk profile of the AIF. Such due diligence process shall be documented and regularly updated;

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(b) ensure that the risks associated to each investment position of the AIF and its overall effect on the AIF's portfolio can be accurately identified, measured and monitored at any time. To that end, AIFM shall implement all appropriate stress testing procedures; and

(c) ensure that the risk profile of the AIF shall correspond to the size, portfolio structure and investment strategies and objectives of the AIF as laid down in the AIF rules or instruments of incorporation.

4. In the case of AIFM which engage in short selling when investing on behalf of one or more AIF, Member States shall ensure that the AIFM operates procedures which provide it with access to the securities or other financial instruments at the date when the AIFM committed to deliver them, and that the AIFM implements a risk management procedure which allows the risks associated with the delivery of short sold securities or other financial instruments to be adequately managed.

5. The Commission may adopt implementing measures further specifying:

(a) the risk management requirements to be employed by AIFM as a function of the risks which the AIFM incurs on behalf of the AIF that it manages; and

(b) arrangements needed to enable AIFM to manage the particular risks associated with short selling transactions, including any relevant restrictions that might be needed to protect the AIF from undue risk exposures.


Article 13

Liquidity management

1. AIFM shall adopt an appropriate liquidity management framework and procedures to ensure that the liquidity profile of the AIF's investments complies with the AIF's underlying obligations. The AIFM shall regularly conduct stress tests, both under normal and exceptional liquidity conditions and monitor the liquidity risk of the AIF accordingly.

2. AIFM shall ensure that the AIF has an appropriate redemption policy which must be laid down in the AIF rules or instruments of incorporation.

3. The Commission may adopt implementing measures further specifying the liquidity management requirements. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 42(2).

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Title III: Transparency requirements

SECTION 1: ANNUAL REPORT

Article 14

Annual report

1. For each of the AIF it manages an AIFM shall publish an annual report for each financial year. The annual report shall be published no later than four months following the end of the financial year.

2. The annual report shall include a balance-sheet or a statement of assets and liabilities, a detailed income and expenditure account for the financial year, a report on the activities of the financial year as well as any significant information which will enable investors to make an informed judgement on the development of the activities of the AIF and its results.

3. The accounting information given in the annual report shall be audited by one or more persons empowered by law to audit accounts in accordance with Directive 2006/43/EC. The auditor's report, including any qualifications, shall be reproduced in full in the annual report.

4. The Commission may adopt implementing measures further specifying the content and format of the annual report.


SECTION 2: DISCLOSURE TO INVESTORS

Article 15

Disclosure to investors

1. AIFM shall ensure that AIF investors receive the following information before they invest in the AIF and have regular updates thereof:

– a description of the investment strategy and objectives of the AIF, all the assets which the AIF can invest in and of the techniques it may employ and of all associated risks, any applicable investment restrictions, the circumstances in which the AIF may use leverage, the types and sources of leverage permitted and the associated risks and of any restrictions to the use of leverage;

– a description of the procedures by which the AIF may change its investment strategy and/or investment policy;

– the identity of the AIF's depositary, valuator, auditor and any other service providers and a description of their duties and the investors' rights should any failure arise;

– a description of any delegated management or depositary function and the identity of the third party to whom the function has been delegated;

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– a description of the AIF's valuation procedure and, where applicable, of the pricing models for valuing assets, including the methods used in valuing hard-to-value assets;

– a description of the AIF's liquidity risk management, including the redemption rights both in normal and exceptional circumstances, existing redemption arrangements with investors, gates, side pockets and how the AIFM ensures a fair treatment of investors;

– a description of all fees, charges and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors;

– whenever an investor obtains a preferential treatment or the right to obtain preferential treatment, the identity of the investor and a description of this preferential treatment; and

– the latest annual report.

2. For each AIF an AIFM manages, it shall periodically disclose to investors:

– the percentage of the AIF's assets which are hard-to-value, illiquid and assets placed in side pockets;

– any new arrangements for managing the liquidity of the AIF;

– the current risk profile of the AIF and the risk management systems employed by the AIFM to manage these risks..

3. The Commission may adopt implementing measures further specifying the disclosure obligations of AIFM and what is to be understood by 'periodically' in paragraph 2.


SECTION 3: REPORTING TO COMPETENT AUTHORITIES

Article 16

Reporting obligations to competent authorities

1. AIFM shall regularly report to the competent authorities of its home Member State on the principal markets and instruments in which it trades on behalf of the AIF it manages. It shall provide aggregated information on the main instruments in which it is trading, markets of which it is a member or where it actively trades, and on the principal exposures and most important concentrations of each of the AIF it manages.

2. For each AIF an AIFM manages, it shall periodically report to the competent authorities of its home Member State:

– the percentage of the AIF's assets which are hard-to-value, illiquid and of assets placed in side pockets;

– any new arrangements for managing the liquidity of the AIF;

– the actual risk profile of the AIF and the risk management tools employed by the AIFM to manage these risks; and

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– the main categories of assets in which the AIF invested;

– and, where relevant, the use of short selling during the reporting period.

3. For each of the AIF it manages the AIFM shall submit the following documents to the competent authorities of its home Member State:

– an annual report of each AIF managed by the AIFM for each financial year, within four months from the end of the periods to which it relates; and

– a detailed list of all AIF which the AIFM manages for the end of each quarter.

4. The Commission may adopt implementing measures further specifying the reporting obligations referred to in paragraphs 1, 2 and 3 and their frequency.


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Title IV: Obligations regarding AIFM managing specific types of AIF

SECTION 1: OBLIGATIONS FOR AIFM MANAGING LEVERAGED AIF

Article 17

Definitions and general principles

1. The provisions of this section shall apply only to AIFM which manage one or more AIF employing high levels of leverage on a systematic basis, provided that the total assets under management, including leverage, of the AIFM of such AIF exceed 500 million€.

2. An AIF employs high levels of leverage on a systematic basis when the combined leverage from all sources exceeds the value of the equity capital of the AIF on two out of the past four quarters.

3. The Commission may adopt implementing measures with a view to modifying the threshold referred to in paragraph 1 or the definition of 'high levels of leverage on a systematic basis' referred to in paragraph 2 and to defining reporting obligations for AIFM whose use of leverage no longer meets the levels foreseen in paragraph 2.


Article 18

Disclosure to investors

AIFM managing one or more AIF employing high levels of leverage on a systematic basis shall for each such AIF:

– disclose to investors the maximum level of leverage which will, under normal conditions, be employed by the AIF as well as any right of re-use of collateral or any guarantee granted under the leveraging arrangement; and

– regularly disclose to investors the total amount of leverage employed by each AIF in the preceding period.

Article 19

Reporting to competent authorities

1. AIFM managing one or more AIF employing high levels of leverage on a systematic basis shall regularly provide, to the competent authorities of its home Member State, information about the overall level of leverage employed by each AIF it manages, and a break-down between leverage arising from borrowing of cash or securities and leverage embedded in financial derivatives. This shall include information on the identity of the five entities which are the principal source of borrowed cash or

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securities for each of the AIF managed by the AIFM, and on the amounts of leverage received from each of these entities for each of the AIF managed by the AIFM.

2. The Commission may adopt implementing measures further specifying the disclosure requirements with regard to leverage and the frequency of regular reporting to competent authorities and of regular disclosure to investors.


Article 20

Use of information by competent authorities, supervisory cooperation and emergency powers

1. Member States shall ensure that the competent authorities of the AIFM home Member State use the information to be reported under Article 23 for the purposes of identifying the extent to which the use of leverage contributes to the build-up of systemic risk in the financial system or risks of disorderly markets.

2. AIFM home Member States shall ensure that all information received under Article 23, aggregated in respect of all AIFM that it supervises, are made available to other competent authorities through the procedure set out in Article 40 on supervisory co-operation. It shall, without delay, also provide information through this mechanism, and bilaterally to other Member States directly concerned, if an AIFM under its responsibility could potentially constitute an important source of counterparty risk to a credit institution or other systemically relevant institution in other Member States.

3. If the stability and integrity of financial markets so require, the AIFM home Member State may oblige an AIFM to restrict the level of leverage employed when managing one or more AIF.

SECTION 2: OBLIGATIONS FOR AIFM MANAGING AIF WHICH ACQUIRE CONTROLLING INFLUENCE IN COMPANIES

Article 21

Notification of the acquisition of controlling influence in non-listed companies

1. Member States shall ensure that when, under the conditions foreseen under paragraph 2, an AIFM is in a position to exercise 30 % or more of the voting rights of a non-listed company, such AIFM notifies the non-listed company and all other share-holders the information provided in paragraph 3.

This notification shall be made, as soon as possible, but not later than four trading days the first of which being the day on which the AIFM has reached the position of being able to exercise 30% of the voting rights.

2. This Article shall apply to:

– AIFM managing one or more AIF which either individually or in aggregation acquires 30 % or more of the voting rights of the non-listed company;

– AIFM having concluded an agreement with one or more other AIFM which would allow the AIF managed by these AIFM to acquire 30 % or more of the non-listed company.

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This Article shall not apply when the non-listed company employs fewer than 250 persons, has an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.

3. The notification required under paragraph 1 shall contain the following information:

(a) the resulting situation in terms of voting rights;

(b) the conditions under which the 30% threshold has been reached, including information about the identity of the different shareholders involved;

(c) the date on which the threshold was reached or exceeded.

Article 22

Disclosure in case of acquisition controlling influence in issuers or non-listed companies

1. Without prejudice to Article 21, Member States shall ensure that when an AIFM acquires 30 % or more of the voting rights of an issuer or a non-listed company, such AIFM makes the following information available to the issuer, the non-listed company and their respective shareholders:

Regarding issuers, the AIFM shall make available the following:

(a) the information provided under Article 6 (3) of Directive 2004/25/EC

(b) the policy for preventing and managing conflicts of interests, in particular between the AIFM and the issuer;

(c) the policy for external and internal communication of the issuer in particular as regards employees.

Regarding non-listed companies, the AIFM shall make available the following information:

(a) the identity of the AIFM which either individually or in agreement with other AIFM have reached the 30 % threshold;

(b) the development plan for the non-listed company;

(c) the policy for preventing and managing conflicts of interests, in particular between the AIFM and the non-listed company;

(d) the policy for external and internal communication of the issuer or non-listed company, in particular as regards employees.


– both issuers in the meaning of Article 2 (d) of Directive 2004/109/EC and non-listed companies;

– AIFM managing one or more AIF which either individually or in aggregation acquires 30 % or more of voting rights of the issuer or the non-listed company;

– AIFM having concluded an agreement with one or more other AIFM which would allow the AIF managed by these AIFM to acquire 30 % or more of the voting rights of the issuer or non-listed company.

This Article shall not apply when the issuer or the non-listed company employs fewer than 250 persons, has an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.

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3. The Commission may adopt implementing measures defining:

– the detailed content of the information provided under paragraph 1;

– the way the information shall be communicated.

These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny refereed to in Article 42 (2).

Article 23

Specific provisions regarding the annual report of AIF exercising controlling influence in issuers or non-listed companies

1. Member States shall ensure that AIFM include in the annual report foreseen in article 14 for each AIF that they manage, the additional information provided in paragraphs 3 and 4 below.


– AIFM managing one or more AIF which either individually or in aggregation acquires 30 % or more of the voting rights of the issuer of the non-listed company;

– AIFM having concluded an agreement with one or more other AIFM which would allow the AIF managed by these AIFM to acquire 30 % or more of the voting rights of the issuer or the non-listed company.

This Article shall not apply when the issuer or the non-listed company employs fewer than 250 persons, has an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.

3. The AIF annual report shall include the following additional information for each issuer and non listed company in which the AIF has invested:

(a) operational and financial developments: presentation of revenue and earnings by business segment, statement on the progress of company's activities and financial affairs, assessment of expected progress on activities and financial affairs, report on significant events in the financial year;

(b) financial and other risks: financial risks associated with capital structure, impact on environment, etc.;

(c) employee matters: turnover, terminations, recruitment.

(d) statement on significant divestment of assets.

In addition, the AIF annual report shall, for each issuer in which it has acquired a controlling interest, contain the information provided for in Art. 46a(1)(f) of Directive 78/660/EEC and an overview of the capital structure as referred to in Art. 10(1), points a and d, of Directive 2004/25/EC.

For each non-listed company in which it has acquired a controlling influence, the AIF report shall provide an overview of management arrangements and the information provided for in Article 3, points b, c and e to h, of Directive 77/91/EEC.

4. The Commission may adopt implementing measures defining the detailed content of the information to be provided under this Article.

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These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny refereed to in Article 42 (2).

Article 24

Specific provisions regarding companies whose shares are no longer admitted to trading on a regulated market

1. Member States shall ensure that when an AIFM is in a position to exercise 30 % or more of the voting rights of an issuer whose shares, after that acquisition, are no longer admitted to trading on a regulated market, such issuer continues to fulfil the requirements provided for in Articles 4 and 5 of Directive 2004/109/EC for a period of two complete financial years following its withdrawal from the regulated market. Articles 2, 3, 7, 19, 20, 21, 23, 24, 25, 26, 27 and 28 of Directive 2004/109/EC shall also apply, mutatis mutandis, in connection to this obligation.


– AIFM managing one or more AIF which either individually or in aggregation acquires 30 % or more of the voting rights of the issuer;

– AIFM having concluded an agreement with one or more other AIFM which would allow the AIF managed by these AIFM to acquire 30 % or more of the issuer.

–

TITLE V: CONDITIONS AND PROCEDURE FOR AUTHORISATION OF AIFM

Article 25

Requirement for authorisation

1. Member States shall provide that no AIFM may provide AIF management services to one or more AIF unless it has been authorised by the competent authorities of the AIFM home Member State.

2. AIFM may be authorised to provide management services either for all or certain types of AIF.

3. The Commission may adopt implementing measures further specifying the types of AIF.


Article 26

Procedure for granting the authorisation

1. AIFM wishing to apply for an authorisation shall provide the following to the competent authorities of their home Member State:

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(a) information on the identities of the AIFM shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings and of the amounts of those holdings;

(b) a programme of activity, including information on how the AIFM intends to comply with its obligation under titles 2, 3 and, where applicable, 4 ;

(c) detailed information about the characteristics of the AIF it intends to manage, including the identification of the Member States or third countries on whose territory they are established;

(d) the fund rules or instruments of incorporation of each AIF the AIFM intends to manage;

(e) information on arrangements made for the delegation to third parties of AIF management services functions;

(f) a written agreement with the depositary;

(g) information on the arrangements made for the safe-keeping of the assets of AIF established in third countries;

(h) where applicable, information on marketing and distribution arrangements including measures taken to prevent units or shares of AIF from being marketed to retail investors; and

(i) any additional information referred to in paragraph 1 of Article 15.

Article 27

Conditions for granting the authorisation

1. The competent authorities of the AIFM home Member State shall grant authorisation only if they are satisfied that the AIFM fulfils the conditions of this Directive.

2. Such authorisation is valid for all Member States.

3. The competent authorities of the AIFM home Member State shall refuse authorisation if the laws, regulations or administrative provisions of a third country governing one or more natural or legal persons with which the AIFM has close links, or difficulties involved in their enforcement, prevent the effective exercise of their supervisory functions.

4. The competent authorities of the AIFM home Member State may restrict the scope of the authorisation decision, in particular as regards the type of AIF the AIFM is allowed to manage. The authorisation decision shall cover the delegation arrangements made by the AIFM and communicated in the application.

5. An applicant shall be informed, within two months of the submission of a complete application, whether or not authorisation has been granted. Reasons shall be given whenever an authorisation is refused or when restrictions are imposed.

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Article 28

On-going supervision and changes in the scope of the authorisation

1. AIFM shall provide the competent authorities of the AIFM home Member State with the information they require to monitor compliance with the conditions referred to in this Directive on a continuous basis.

2. AIFM shall inform the competent authorities of the AIFM home Member State, before they are implemented, of any change regarding the information provided in their initial application that may substantially affect the conditions under which their authorisation has been granted. This shall notably include information on any changes of the investment strategy and policy of AIF managed by the AIFM and of the AIF rules or instruments of incorporation.

Competent authorities shall, within a month of their communication, either approve, or impose restrictions, or reject these changes.

Article 29

Withdrawal of the authorisation

The competent authorities may withdraw the authorisation issued to an AIFM only where that AIFM:

(a) does not make use of the authorisation within 12 months, expressly renounces the authorisation or has ceased the activity covered by this Directive more than six months previously unless the Member State concerned has provided for authorisation to lapse in such cases;

(b) has obtained the authorisation by making false statements or by any other irregular means;

(c) no longer fulfils the conditions under which authorisation was granted;

(d) has seriously and/or systematically infringed the provisions of this Directive; or

(e) falls within any of the cases where national law provides for withdrawal.

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Title VI: Right to provide AIF management services in the AIFM home Member State

Article 30

Beginning of the right to provide AIF management services

1. An AIFM authorised in accordance with Title V may start to manage a certain AIF and to market the units or shares thereof to professional investors within the territory of its home Member State as soon as the conditions laid down in this Article and in Article 35 are met.

For the purposes of paragraph 6 of Article 19 of Directive 2004/39/EC, Member States shall ensure that AIF managed by AIFM are to be deemed as complex financial instruments.

2. The AIFM home Member States may also permit AIFM to market the units or shares of all or certain types of AIF to retail investors on their territory and, for that purpose, impose additional requirements on AIFM or the AIF.

3. For the purposes of Directive 2004/39/EC, Member States shall ensure that AIF managed by AIFM are only marketed to professional investors unless appropriate provision is made by the AIFM home Member State to permit their marketing to retail investors.

4. Member States that permit AIFM to market AIF to retail investors on their territory, shall, within one year of the implementation of this Directive, inform the Commission of:

(a) the types of AIF which AIFM may market to retail investors on their territory;

(b) any additional requirements that the Member State imposes for the marketing of AIF to retail investors on their territory.

Member States shall also inform the Commission of any subsequent changes with regard to the afore-mentioned subparagraph.

Article 31

Notification of intention to manage or market a specific AIF

1. The AIFM shall submit a notification to the competent authorities of its home Member State in respect of each AIF that it intends to manage and/or market.

That notification shall comprise the elements referred to under lit. (c) to (i) of Article 26(1), where not already provided in the application for authorisation.

2. No later than ten working days after receipt of a complete notification pursuant to paragraph 1, the competent authorities of the AIFM home Member State shall inform the AIFM that it may start the AIF management services referred to in paragraph 1

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one month thereafter, unless the competent authorities of the AIFM home Member State prohibits this before the expiry of one month.

With regard to AIF established in a non-EU Member State , or where the AIFM intends to market the units or shares of the AIF also to retail investors on the territory of the AIFM home Member State, the competent authorities of the AIFM home Member State may prolong the period referred to in subparagraph 1, when this is necessary to check whether the conditions of this Directive or any additional requirements that the Member State imposes are met.

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Title VII: Right to provide AIF management services in an AIFM host Member State

Article 32

Conditions for marketing in another Member State

1. If an authorised AIFM intends to market the units or shares of an AIF it manages in another Member State, it shall submit the following documents to the competent authorities of its home Member State:

(a) a notification letter, including a programme of operations identifying the AIF it intends to market;

(b) the AIF rules or instruments of incorporation;

(c) the prospectus of the AIF;

(d) the Member State in which it intends to market the units or shares of an AIF under its management to professional investors;

(e) information on the arrangements established to prevent units or shares of that AIF from being marketed to retail investors.

2. The competent authorities of the AIFM home Member State shall transmit the complete documentation referred to in paragraph 1 to the competent authorities of the Member State where the other AIF will be marketed, no later than ten working days after the date of receipt of the complete documentation. They shall enclose an attestation that they authorised the AIFM to manage the AIF and that the AIFM may market the AIF in question on the territory of the AIFM home Member State.

3. Upon transmission of the documentation, the competent authorities of the AIFM home Member State shall immediately notify the AIFM about the transmission. The AIFM may access the market of the host Member State as of the date of this notification.

4. Member States shall ensure that the notification letter and the attestation as referred to in paragraph 1 are provided in a language customary in the sphere of international finance. Member States shall ensure that the electronic transmission and filing of the documents referred to in paragraph 2 is accepted by their competent authorities.

5. In the event of a change in any of the particulars communicated in accordance with paragraph 2, an AIFM shall give written notice of that change to the competent authorities of its home Member State at least one month before implementing the change. The competent authorities of the AIFM home Member State shall without delay inform the competent authorities of the AIF host Member State of those changes.

6. The Commission may adopt implementing measures specifying:

(a) the form and content of a standard model of the notification letter; and

(b) the form and content of a standard model of attestation;

These measures shall be adopted in accordance with the regulatory procedure referred to in Article 42(2).

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Article 33

Freedom to manage AIF domiciled in other Member States

1. Member States shall ensure that any AIFM authorised by the competent authorities of its home Member State in accordance with this Directive may freely manage an AIF established in another Member State either directly or via the establishment of a branch, provided that the AIFM is authorised to manage this type of AIF by the competent authorities of the AIFM home Member State.

2. Any AIFM wishing to manage an AIF established in another Member State for the first time shall communicate the following information to the competent authorities of its home Member State:

(a) the Member State in which it intends to operate or establish a branch;

(b) a programme of operations stating in particular the services which it intends to perform and identifying the AIF it intends to market; and

(c) information on the arrangements made for the marketing of the AIF.

3. If the AIFM intends to establish a branch, it shall provide, in addition to paragraph 2, the following information:

(a) the organisational structure of the branch;

(b) the address in the home Member State from which documents may be obtained;

(c) the names of persons responsible for the management of the branch.

4. The competent authority of the AIFM home Member State shall, within 10 days of receiving of a complete file, forward it to the competent authority of the AIFM host Member State and shall immediately notify the AIFM about the transmission.

The AIFM may then start to provide its services in the AIFM host Member State.

5. The AIFM host Member States shall not impose any additional requirements on AIFM managing an AIF established in another Member State in respect of the matters covered by this Directive.

6. In the event of a change in any of the particulars communicated in accordance with paragraph 2, an AIFM shall give written notice of that change to the competent authorities of its home Member State at least one month before implementing the change. The competent authority of the AIFM home Member State shall inform the competent authority of the AIFM host Member State of those changes.

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Title VIII: Competent authorities

SECTION I: DESIGNATION, POWERS AND REDRESS PROCEDURES

Article 34

Designation of competent authorities

1. Member States shall designate the competent authorities which are to carry out the duties provided for in this Directive. They shall inform the Commission thereof, indicating any division of duties.

2. The authorities of the AIFM home Member State shall be competent to supervise that AIFM. However, the authorities of the AIFM host Member State shall be competent to supervise compliance with the provisions falling outside the field governed by this Directive.

Article 35

Powers of competent authorities

1. Competent authorities shall be given all supervisory and investigatory powers that are necessary for the exercise of their functions. Such powers shall be exercised in any of the following ways:

(a) directly; or

(b) in collaboration with other authorities; or

(c) under their responsibility by delegation to entities to which tasks have been delegated; or

(d) by application to the competent judicial authorities.

2. The competent authorities shall have at least the following powers of investigation:

(a) have access to any document in any form and to receive a copy of it;

(b) demand information from any person and if necessary to summon and question a person with a view to obtaining information;

(c) carry out on-site inspections with or without announcements;

(e) require records of telephone and data traffic.

Article 36

Supervisory powers

The competent authorities of the AIFM home Member States may take the following measures:

(a) withdraw the authorisation in accordance with Article 29;

(b) impose a temporary prohibition of professional activity;

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(c) adopt appropriate measures to ensure that AIFM continue to comply with legal requirements;

(d) refer matters for criminal prosecution to the competent jurisdictions.

Article 37

Administrative sanctions

1. Member States shall lay down the rules on measures and sanctions applicable to infringements of the provisions adopted in the implementation of this Directive and shall take all measures necessary to ensure that they are implemented. Without prejudice to the procedures for the withdrawal of authorisation or to the right of Member States to impose criminal sanctions, Member States shall in particular ensure, in conformity with their national law, that the appropriate administrative measures can be taken or administrative sanctions be imposed against the persons responsible where the provisions adopted in the implementation of this Directive have not been complied with.

The measures and sanctions applied must be effective, proportionate and dissuasive.

2. Member States shall provide that the competent authorities may disclose to the public any measure or sanction that will be imposed for infringement of the provisions adopted in the implementation of this Directive, unless such disclosure would seriously jeopardise the financial markets, be detrimental to the interests of investors or cause disproportionate damage to the parties involved.

Article 38

Right of appeal

1. Competent authorities shall give, in writing, reasons for any decision to refuse authorisation, and any negative decision taken in implementation of this Directive, and communicate them to the addressee of the decision.

2. Member States shall provide that any decision taken under laws, regulations or administrative provisions adopted in accordance with this Directive is properly reasoned and is subject to the right of appeal to the courts. That right to appeal to the courts shall apply also where, in respect of an application for authorisation which provides all the information required, no decision is taken within six months of its submission.

SECTION II: CO-OPERATION BETWEEN DIFFERENT COMPETENT AUTHORITIES

Article 39

Obligation to co-operate

1. The competent authorities of the Member States shall co-operate with each other whenever necessary for the purpose of carrying out their duties under this Directive or of exercising their powers under this Directive or under national law.

2. Member States shall take the necessary administrative and organisational measures to facilitate the co-operation provided for in this section.

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3. Competent authorities shall use their powers for the purpose of co-operation, even in cases where the conduct under investigation does not constitute an infringement of any regulation in force in that Member State.

4. The competent authorities of the Member States shall immediately supply one another with the information required for the purposes of carrying out their duties under this Directive.

5. The Commission may adopt implementing measures relating to the procedures for exchange of information between competent authorities.

6. Those measures shall be adopted in accordance with the regulatory procedure referred to in Article 42(3).

Article 40

Exchange of information relating to the potential systemic consequences of AIFM activity

1. The competent authorities responsible for the authorisation and supervision of AIFM under this Directive shall communicate information to the competent authorities of other Member States where this is relevant for monitoring and responding to the potential implications of the activities of individual AIFM or AIFM collectively for the stability of systemically relevant financial institutions and the orderly functioning of markets on which AIFM are active. .

2. Aggregated information relating to the activities of AIFM under its responsibility shall be communicated on a quarterly basis by the competent authority of the AIFM to the Economic and Financial Committee established by Article 114(2) of the EC Treaty (or to the European Systemic Risk Council as established by (yet to be proposed initiative).

3. The Commission may adopt implementing measures specifying the modalities, content and frequency of the information to be exchanged pursuant to paragraph 1.

4. Those measures shall be adopted in accordance with the regulatory procedure referred to in Article 42(3).

Article 41

Co-operation in supervisory activities

1. The competent authorities of one Member State may request the co-operation of the competent authorities of another Member State in a supervisory activity or for an on-the-spot verification or in an investigation on the territory of the latter within the framework of their powers pursuant to this Directive. Where a competent authority receives a request with respect to an on-the-spot verification or an investigation, it shall:

(a) carry out the verification or investigation itself,

(b) allow the requesting authority to carry out the verification or investigation, or

(c) allow auditors or experts to carry out the verification or investigation.

2. If the verification or investigation is carried out on the territory of one Member State by the competent authority of the same Member State, the competent authority of the Member State which has requested co-operation, may ask that members of its own personnel accompany the personnel carrying out the verification or investigation.

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The verification or investigation shall, however, be subject to the overall control of the Member State on whose territory it is conducted.

If the verification or investigation is carried out on the territory of one Member State by the competent authority of another Member State, the competent authority of the Member State on whose territory the verification or investigation is carried out may request that members of its own personnel accompany the personnel carrying out the verification or investigation.

3. Competent authorities may refuse to exchange information as provided for in paragraph 2 or to act on a request for co-operation in carrying out an investigation or on-the-spot verification as provided for in paragraph 4 only where:

(a) such an investigation, on-the-spot verification or exchange of information might adversely affect the sovereignty, security or public policy of the Member State addressed;

(b) judicial proceedings have already been initiated in respect of the same actions and the same persons before the authorities of the Member State addressed;

(c) final judgment has already been delivered in the Member State addressed in respect of the same persons and the same actions.

4. The competent authorities shall notify the requesting competent authorities of any decision taken under paragraph 3. That notification shall contain information about the reasons of their decision.

5. Competent authorities may bring the following situations to the attention of the Committee of European Securities Regulators20:

(a) situations where a request to exchange information as provided for in Article 40 has not been acted upon within a reasonable time or has been rejected;

(b) situations where an application to carry out an investigation or a verification as provided for in this Article has not been acted upon within a reasonable time or has been rejected; or

(c) situations where a request for authorisation for its officials to accompany those of the competent authority of the other Member State has not been acted upon within a reasonable time or has been rejected.

6. The Commission may adopt implementing measures concerning procedures for on-the-spot verifications and investigations.

Those measures shall be adopted in accordance with the regulatory procedure referred to in Article 42(3)

20 As established by Commission Decision 2001/527/EC of 6 June 2001, OJ L 191, 13.7.2001, p 43.

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Title IX: Final provisions

SECTION I: IMPLEMENTING POWERS

Article 42

1. The Commission shall be assisted by the European Securities Committee established by Commission Decision 2001/528/EC21.

2. Where reference is made to this paragraph, Article 5a (1) to (4) and Article 7 of Decision 1999/468/EC shall apply, having regard to the provisions of Article 8 thereof.

3. Where reference is made to this paragraph, Articles 5 and 7 of Decision 1999/468/EC shall apply, having regard to the provisions of Article 8 thereof.

The period laid down in Article 5(6) of Decision 1999/468/EC shall be set at three months.

SECTION II: FINAL PROVISIONS

Article 43

1. Member States shall adopt and publish by XXXX at the latest, the laws, regulations and administrative provisions necessary to comply with this Directive. They shall forthwith inform the Commission thereof.

2. They shall apply those provisions from the date referred to in the first subparagraph.

3. When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. They shall also include a statement that references in existing laws, regulations and administrative provisions to the directive[s] repealed by this Directive shall be construed as references to this Directive.

4. Member States shall communicate to the Commission the text of the main provisions of national law which they adopt in the field covered by this Directive.

Article 44

X years after the adoption of this Directive the Commission shall, on the basis of public consultation and in the light of the discussions with competent authorities, report to the European Parliament and Council on the possible extension of the scope of this Directive, and in particular, with regard to the application to AIFM when marketing AIF to retail investors.

Article 45

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

Article 46

This Directive is addressed to the Member States.

21 OJ L 191, 13.7.2001, p. 45. ▌

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Done at Brussels, […]

For the European Parliament For the CouncilThe President The President[…] […]

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ANNEX: PROFESSIONAL INVESTORS FOR THE PURPOSE OF THIS DIRECTIVE

Professional investor is an investor who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs. In order to be considered a professional investor, the investor must comply with the following criteria:

I. Categories of investor who are considered to be professionals

The following should all be regarded as professionals for the purposes of this Directive.

(1) Entities which are required to be authorised or regulated to operate in the financial markets. The list below should be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned: entities authorised by a Member State under a Directive, entities authorised or regulated by a Member State without reference to a Directive, and entities authorised or regulated by a non-Member State:

(a) Credit institutions

(b) Investment firms

(c) Other authorised or regulated financial institutions

(d) Insurance companies

(e) Collective investment schemes and management companies of such schemes

(f) Pension funds and management companies of such funds

(g) Commodity and commodity derivatives dealers

(h) Locals

(i) Other institutional investors

(2) Large undertakings meeting two of the following size requirements on a company basis:

— balance sheet total: EUR 20 000 000,

— net turnover: EUR 40 000 000,

— own funds: EUR 2 000 000.

(3) National and regional governments, public bodies that manage public debt, Central Banks, international and

supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.

(4) Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.

The entities mentioned above are considered to be professionals. They must however be allowed to request non-professional treatment.

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