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ESMA's definitions of AIFMD terms

Some of the terms used in the Alternative Investment Fund Managers' Directive (AIFMD) are subject to definitions provided by EU financial regulator the European Securities and Markets Authority (ESMA). 

This guide was last updated in June 2013. 

The Alternative Investment Fund Managers Directive (AIFMD) is one of a package of measures drawn up by the European Commission to regulate financial services in the wake of the global financial crisis. It aims to establish a harmonised regulatory framework for monitoring and supervising the perceived risks posed by unregulated funds such as private equity and hedge funds. Rather than regulate the funds themselves, the Directive targets their fund managers. For more see Out-Law.com's guide to the AIFMD.

The ESMA's guidelines to 'key concepts of the AIFMD' (33-page / 474KB PDF) provides definitions of a number of terms in the Directive.

The purpose of the definitions is to ensure that there is a "common, uniform and consistent

application of the concepts in the definition of ‘AIF’ in Article 4(1)(a) of the AIFMD by providing clarification on each of these concepts," the guidelines say.

Definitions in the Guidelines

The Directive's definition

Article 4(1)(a) of the AIFMD defines an alternative investment fund (AIF) as:

'AIFs' means collective investment undertakings, including investment compartments thereof, which:

  1. raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and
  2. do not require authorisation pursuant to Article 5 of Directive 2009/65/EC (the UCITS Directive).

The guidelines provide definitions for:

  • collective investment undertaking
  • investment compartments
  • raising capital
  • number of investors
  • defined investment policy

Collective Investment Undertaking

The Guidelines say that something is a 'collective investment undertaking' if:

  1. the undertaking does not have a "general commercial or industrial purpose";
  2. the undertaking pools together capital raised from investors with a view to investing and generating a pooled return from those investors;
  3. it does not give its unitholders or shareholders, as a collective group, day-to-day discretion or control.

The Guidelines define "general commercial or industrial purpose" as the purpose of pursuing a business strategy which includes running a predominantly commercial or industrial activity.

ESMA has included a definition of 'day-to-day discretion or control', defined as a form of direct and on-going power of decision over operational matters which extends further than the ordinary exercise of decision through voting at shareholder meetings. Even if one of more of the shareholders/unitholders have day-to-day control the fact that others do not have control implies that the undertaking may still be a collective investment undertaking.

Investment compartments

The Guidelines confirm that where an investment compartment of an undertaking exhibits all the elements in the definition of AIF, this should be sufficient to determine that the undertaking as a whole is an AIF.

Raising capital

Where an undertaking (or person acting on its behalf) takes steps to procure the transfer or commitment of capital by one or more investors to an undertaking in order to invest it in accordance with a defined investment policy then this should amount to the activity of "raising capital".

It is immaterial to the meaning of "raising capital" if the activity takes place only once.

Where capital is invested in an undertaking by a member of a 'pre-existing group' – for the investment of whose private wealth the undertaking has been exclusively establish - this would fall out of the scope of what amounts to "raising capital".

The concept of 'pre-existing group' is based on the notion of family members. The Guidelines provide a clear list of people included within the family relationship and also confirm that a 'pre-existing group' may be established irrespective of the type of legal structure put in place by the family group, provided the family members remain the sole ultimate beneficiaries.

The most significant change to the definition of 'raising capital' in the final guidelines is the removal of an exemption from the scope of 'raising capital'. The draft guidelines suggested that capital investment in an undertaking by a member of the undertaking's governing body, a legal person managing the undertaking or an employee of the undertaking should fall outside the scope of 'raising capital' in Article 4(1)(a) of the AIFMD. ESMA has removed this exemption from Guidelines.  

Number of investors

An undertaking which is not prevented by national law, rules or instruments of incorporation from raising capital from more than one investor should be regarded as an undertaking which raises capital from a number of investors, even if there is only one investor.

In circumstances where the undertaking is prevented from raising capital from a number of investors it should still be regarded as an undertaking which raises capital from a number of investors if the sole investor:

  1. invests capital which it has raised from more than one legal or natural person with a view to investing it for the benefit of those persons; and
  2. consists of an arrangement or structure which in total has more than one investor for the purposes of the AIFMD.

The effect of this is that master/feeder fund structures (where the single feeder invests in a master) would still be viewed as raising capital from a number of investors.

Defined Investment Policy

A 'defined investment policy' is a policy specifying how the pooled capital in an undertaking is to be managed to generate a 'pooled return' for the investors from whom it has been raised.

The term 'pooled return' means the return generated by the pooled risk arising from the acquiring, holding or selling of investment assets, irrespective of whether different returns to investors are generated.

The Guidelines set out factors that would, singly or cumulatively, tend to indicate the existence of a defined investment policy.  The factors are:

  1. the investment policy is determined and fixed, at the latest by the time that investors’ commitments to the undertaking become binding on them;
  2. the investment policy is set out in a document which becomes part of or is referenced in the rules or instruments of incorporation of the undertaking;
  3. the undertaking or the legal person managing the undertaking has an obligation (however arising) to investors, which is legally enforceable by them, to follow the investment policy, including all changes to it;
  4. the investment policy specifies 'investment guidelines', with reference to criteria including any or all of the following:
  1. to invest in certain categories of assets, or conform to restrictions on asset allocation;
  2. to pursue certain strategies;
  3. to invest in particular geographical regions;
  4. to conform to restrictions on leverage;
  5. to conform to minimum holding periods; or
  6. to conform to other restrictions designed to provide risk diversification.

ESMA deems 'investment guidelines' to mean any guidelines of an undertaking that determine investment criteria other than those set out in an undertaking's business strategy which have a 'general commercial or industrial purpose'.

For more information contact:

Monica Gogna; Michael Lewis; Frank Doran