CARNE WE CONNECT THE DOTS.

AIFMD GUIDE
FOR ASSET MANAGERS

© COPYRIGHT CARNE GROUP. ALL RIGHTS RESERVED.

 © Copyright Carne. All rights reserved.

No part of this guide may be reproduced in any form or by any means

without written permission from Carne.
ABOUT CARNE
Carne is the premier global provider of
Fund Management Solutions to the asset
management industry. We are experts
in AIFMD and UCITS funds and provide
governance services for regulated and
offshore funds in various jurisdictions both
within and outside the EU.

Carne has offices in Ireland, Luxembourg,

London, Cayman, Channel Islands, Chicago,
New York, Lisbon and Switzerland.

Our independent Fund Management

Solutions include:

• UCITS & AIFM Management Companies;

• UCITS & AIFM Fund Platforms;

• Non-EU AIFM Management Company;

• CORR Technology Solutions

• Fund Directors;

• UCITS & AIFM Risk Management Services;

• UCITS & AIFM Designated Person/

Conducting Officer Services;

• Distribution Support Services;

• Distributor Due Diligence;

• Fund Foreign Registrations;

• MLRO & AMLCO Services;

• Company Secretarial Services;

• Compliance Officer Services;

• Investment Manager Due Diligence;

• KIID Services;

• Annex IV Reporting (AIFMD).

3
 TABLE OF CONTENTS

01 Preface 5

02 Overview of the AIFM Directive 7

03 What is an AIF/AIFM? 11

04 Why launch an AIF? 13

05 What Do Investors Want? 14

06 Product types and fund structures 15

07 Operating model and practical solutions to the AIFMD 18

08 Choice of domicile 22

09 Considerations for non-EU AIFMs 25

10 AIFM authorisation process 27

11 Costs for set up 30

12 Delegation arrangements 32

13 Risk management requirements 34

14 Remuneration provisions 37

15 Transparency reporting 39

16 Role of the depositary 41

17 Distribution opportunities, issues and challenges 43

18 Converting existing structures to EU AIFs 45

19 How can Carne help? 46

Appendix 1: Abbreviations 49

 01

PREFACE
A WORD FROM THE CEO

The introduction of the Alternative Investment

Fund Managers Directive (“AIFMD” or
“Directive”) represented both a challenge and
an opportunity for alternative fund managers.
Many asset managers initially regarded the
Directive as an obstacle to future distribution
of their funds in the EU, but the Directive
also clarifies both the passporting regime for
alternative funds and provides a regulatory
framework that will encourage more investors
in Europe to revisit alternative strategies outside
the UCITS world. While much of the initial focus
surrounding the Directive was on its impact
for hedge funds, as the Directive has bedded
down more managers in the private equity,
infrastructure and real estate have embraced
the opportunities created by the Directive.

John Donohoe At Carne we work with alternative managers of

Chief Executive Officer
both UCITS and AIFs in a variety of jurisdictions,
Carne Group
helping them to meet the new regulatory
requirements in an effective and professional
manner. We have published this guide to help
these managers to understand what the AIFMD
means for them and some of the options it
delivers.

With the right support, it is possible to build

a governance and reporting framework that
will reassure investors and demonstrate the
seriousness of an organisation’s investment
proposition. With the uncertainty which
Brexit has brought flexible solutions which
maintain access to the EU’s single market will
be important to UK alternative managers.
Our AIFMD and risk teams have pooled
their collective experience within this guide
to bring managers an informative primer
on the Directive to aid them in launching or
converting products which they will be able
to distribute with confidence within the EU.

5
Carne believes that the passport allowed
under the Directive will over time be much
more important than the industry presently
recognises and will lead to a similar distribution
model to the highly successful UCITS brand
(which outside of the 40 Act regime is the
world’s leading investment product). In the
alternative investment space, we believe
that the “passported AIF” will become the
leading global alternative branded product
with tremendous distribution potential. This
comes at a time when liquid alternatives
are growing at a phenomenal rate and long
term income producing real assets are
critical to institutional investors for meeting
their future liabilities. As with the advent of
the UCITS product directive, Carne is again
taking a market leading role in seizing the
opportunities of this Directive by further
developing our leading governance team with
more risk management and investment
professionals in order to deliver best in class
AIFMD solutions.

Carne was the first third party AIFM to have

licences in both Ireland and Luxembourg
and was the third AIFM globally to receive
its licence. 2018 saw Carne launch an ACD
management company in the UK to act
as AIFM to UK structures and to provide a
complete toolkit for investment managers
seeking to deal with the uncertainties of
Brexit.

Carne also has a non – EU AIFM authorized

in the Channel Islands. Carne was involved
in four out of the first five AIFM applications
in Ireland and was among the first AIFMs to
launch a RAIF in Luxembourg. We are working
with many new and existing large global asset
manager and asset owner clients in providing
our innovative AIFMD solutions. This gives
Carne a unique perspective and puts us in
a market leading position as a provider of
independent third party AIFMD solutions.

6
 02
AIFM
AN OVERVIEW OF THE DIRECTIVE
The Directive 2011/61/EU of the European
Parliament and of the Council of 8 June 2011
on Alternative Investment Fund Managers
(“AIFMD” or “Directive”) entered into force in the
European Union in 2011, with implementation
into national legislation by EU Member States
required by 22 July 2013. The aim of the
Directive is the monitoring and supervision
of alternative investment managers and
funds, such as private equity and hedge
funds, through the creation of an EU-wide
harmonised regulatory framework.
Since its release, the original Directive has
been supplemented by additional regulations
and implementing measures issued by the
European Commission, to provide further
details on a number of areas set out by the
Directive, as well as by detailed guidance from
ESMA and national regulatory authorities.
The Directive seeks to regulate the investment
managers of alternative funds. It applies to
entities managing Alternative Investment
Funds (“AIFs”) who distribute or domicile their
products within the European Union. The
managers of these products (referred to as
“Alternative Investment Fund Managers”, or
“AIFMs”) must comply with a comprehensive
set of compliance, risk, organisational and
reporting requirements under the Directive.
The Directive makes a distinction on the
basis of whether the AIFM is EU or non-EU
domiciled. EU domiciled AIFMs (“EU AIFMs”)
are required to register with their home
state regulatory authority for approval or
authorisation as an AIFM and must, as a result
of such registration, comply with a number of
provisions. The AIFs under the management
of the AIFM are in this way also caught by the
Directive and must by proxy comply with a
series of requirements around reporting,
oversight and disclosure.
Non-EU based AIFMs (“non-EU AIFMs”) are also
caught if they advise a European-domiciled
alternative investment fund (“EU AIF”) or a
non-European alternative investment fund
(“non-EU AIF”) that is currently distributed
in the EU. The obligations on non-EU AIFMs
are lighter than those imposed on their EU
counterparts. While the Directive provided
for the possibility of full registration being
made available to non-EU AIFMs from 2015
(subject to regulatory review and assessment
of the Directive’s effectiveness until then), with
associated requirements for full compliance
with the Directive’s provisions, this process has
not yet been completed and the timeframe for
implementation remains uncertain.
Key Dates
22 July 2013
EU member states required to implement
AIFMD into national law
22 July 2014
Deadline for those AIFMs that have been
carrying out activities within scope of AIFMD
prior to 22 July 2013 to submit application
for authorisation as an AIFM (a number of
jurisdictions have extended the deadline for
non-EU AIFMs of existing AIFs in their domicile
pending a decision on the third country
passport)
July 2015
ESMA reported on functioning of passporting
regime. A decision on a date for extending
the passport to third country AIFMs was
postponed but ESMA noted that there were
no obstacles to the passport being extended
to Jersey and Guernsey and no significant
obstacles to extending it to Switzerland.
7
June 2016
UK votes to leave the EU
July 2016
ESMA completes assessment on Cayman
Islands, USA, Singapore, Hong Kong, Canada,
Isle of Man, Bermuda, Australia and Japan (see
Section 7 below for outcome of assessment),
2017-2018
ESMA review of impact of AIFMD and whether
to end existing private placement regimes of
member states.
As noted above the UK’s decision to leave the
EU and the likelihood that this may be a “hard
Brexit” leaves the non EU AIF passporting
regime as less likely to happen, certainly in
the foreseeable future.
2019
European Commission Report on Operation
of AIFMD finds “AIFMD has played a major
role in helping to create an internal market
for AIFs and a harmonised and stringent
regulatory and supervisory framework for
AIFMs”
March 2019
UK to leave the EU?
The Directive allows for certain thresholds
and exemptions, whereby managers of funds
falling in the following categories are outside
the scope of the Directive:
• Small AIFMs, i.e. managers of AIFs with total
AUM of less than EUR 100 million or equivalent,
and managers of AIFs with total AUM of less
than EUR 500 million or equivalent, where the
AIFs are unleveraged and with no redemption
rights for five years following the date of initial
investment in each AIF;
• Securitisation special purpose vehicles;
• Single investor funds as defined in the
regulations;
8
• AIFs whose sole investors are group
companies of the manager (as long as none
of these investors is in itself an AIF).
Nonetheless there are still certain notification
requirements that the exempted AIFMs must
comply with (such as confirmation of below
threshold status to the regulatory authorities).
The key provisions of the Directive, applicable
to EU AIFMs, are as follows:
• Appointment of Depositary: For every AIF
under its management, the EU AIFM is required
to appoint a single independent depositary
with responsibility for the safekeeping of
assets, oversight of compliance by the AIF
with applicable laws and regulations and
monitoring of cash flows. In the case of EU
AIFs, the depositary must be established in the
home state of the AIF and must be a regulated
EU credit institution, EU investment firm or
another institution already approved to act as
a UCITS depositary. In the case of non-EU AIFs,
the depositary may be domiciled either in the
country of the AIF, or the home state of the
AIFM, or in a member state of reference and
further requirements apply in addition to the
prudential and supervisory equivalence.
For non-EU AIFs, the depositary may be a
non-EU institution equivalent to an EU credit
institution or EU investment firm, provided
that it is subject to EU-equivalent effective
prudential regulation (including minimum
capital requirements) and supervision. An
exemption from the depositary requirement
exists for private equity and real estate AIFs,
whereby they can use professional advisers to
act in this capacity. A lighter depositary regime
(“depo-lite”) applies to EU AIFMs managing
non-EU AIFs, if these schemes are marketed
or distributed across the EU.
The Directive introduced a number of
obligations on the depositary, the most
debated being in relation to the strict liability
of the depositar y with regards to sub-
custody / delegation arrangements (subject
to a negligence/intentional failure test). The
Directive specifies that a written agreement
must be in place with the depositary and
prescribes specific requirements for inclusion
in such agreement.
The AIFM must be a party to the depositary
agreement alongside the AIF and there needs
to be an ongoing exchange of information
and oversight between all parties (which is
formalised via a service level agreement).
• Delegation Arrangements: One of the key
provisions of the Directive is that the AIFM
cannot delegate functions to the extent that
it becomes a letterbox entity and while there
has so far been limited regulatory guidance to
assess what exactly would constitute this, the
understanding is that the AIFM must be able
to retain a certain level of substance, activity
and expertise, particularly in the area of risk
management and/or portfolio management,
even if certain roles are in practice delegated
to third parties.
An important area of focus is the need to have
appropriate due diligence prior to engaging
with the third party and what processes need
to be put in place for the ongoing monitoring
of the delegate.
• Governance and Oversight: The Directive
has a substantial impact on the governance
framework of AIFs and AIFMs as it imposes
additional responsibilities on the AIFM
itself. Emphasis is placed on having a robust
governance and effective risk management
culture, in particular in light of the AIFM’s
accountability for delegation arrangements,
responsibility for valuation, necessary flow of
information and ownership of key decisions.
• Risk Management: The risk management
activity needs to be functionally and
hierarchically segregated from the portfolio
management function and must operate
independently and with sufficient expertise,
authority and resources to ensure all risks in
the AIFM and AIFs are appropriately quantified,
monitored and managed on an ongoing basis.
• Policies and Procedures: The AIFM is required
to have in place a number of documented
policies and procedures to cover areas including
but not limited to delegation arrangements,
risk management, conflicts of interest, due
diligence processes, conduct of business,
valuation and remuneration practices, setting
out escalation arrangements, responsibilities
of senior management and oversight of the
board. These policies need to be reviewed on
a regular basis and should be aligned with the
operational complexity and characteristics of
the AIFM/AIFs.
• Valuation: Under the Directive, ultimate
responsibility for the valuation of the AIFs
under management falls to the AIFM, unless
this is delegated to an approved third party
acting as external valuer. Whilst in practice
the pricing activity may continue to be
undertaken by the administrator, the AIFM
is required to have procedures in place to
document the valuation process and for
escalation and review of any issues, with
ultimate responsibility resting with the AIFM’s
board.
• Remuneration: AIFMs are required to
have in place a written remuneration policy
designed to prevent conflicts arising from the
compensation arrangements of staff at the
AIFM, who, through their role within the AIFM
or the delegates’ activities, could materially
impact the risk profile of the AIFs.
While the Directive’s provisions in this regard
are similar to other EU regulatory initiatives
that are currently or have been implemented
in the EU (e.g. CRD IV, MIFID II & UCITS V), the
provisions represent completely new territory
for non-EU investment managers who are
now within the scope of these requirements
when acting as delegates to the AIFs for the
provision of portfolio management services.
9
• Transparency Reporting: AIFMs and AIFs
are required to provide substantial reporting,
commonly referred to as Annex IV reporting, to
the regulatory authorities on a quarterly, semi-
annual or annual basis (depending on AUM), as
well as additional reporting to investors on a
regular basis.
While a number of the requirements set out
in the Directive relating to investor disclosures
would already typically be covered in a
prospectus/offering memorandum, there are
some new items that must now be disclosed
to investors pre-investment (e.g. latest NAV,
historical performance) and on an ongoing
basis (e.g. total leverage employed).
• Leverage: there is no regulatory limit
for leverage but limits and actual leverage
employed must be disclosed on a regular
basis to investors and to the regulatory
authorities and the limits must be monitored
on an ongoing basis through the AIFM’s risk
management framework. For AIFs where the
leverage calculated under the commitment
method is 3X or greater, the fund is deemed
to be employing leverage on a substantial
basis and additional reporting requirements
will apply to the AIF. The amount of leverage
in the fund will have an effect on the amount
of capital required by the AIFM (see below).
• Capital Requirements: The Directive
imposes capital requirements on AIFMs.
AIFMs are required to hold minimum capital
of EUR 125,000 plus 2 basis points of assets
under management (NAV) greater than EUR
250 million.
The Directive provides detailed guidance as
to the basis for the calculation of the figure
for assets under management. In addition
AIFMs must ensure that they have in place
sufficient funds to cover risks arising from
professional liability, either in the form of
professional indemnity insurance provided
by a third party, or through additional own
funds (equal to 1 basis point of gross assets).
10
• AIF/AIFM Passport: Under the Directive it is
now possible for an AIF to obtain a “passport”
from the AIF’s home state, which allows its
cross-border marketing and distribution in
other member states across the EU to qualified
(i.e. non-retail) investors. The authorisation
process for the passport is straightforward
and based on an exchange of information
between regulators.
Approval can be obtained within a month of
the filing being made in the AIF’s home state.
It is also possible for the AIFM itself to obtain
a “passport” from its home state regulator,
allowing it to provide AIFM services cross-
border (i.e., to act as AIFM for AIFs domiciled
in another EU jurisdiction). The passport is
currently only available to AIFs and AIFMs
that are EU-domiciled, and the proposal to
extend the passport provisions to non-EU
AIFs/ AIFMs (subject to ESMA review) which
was due to be made in 2015 remains subject
to the approval of the EU institutions. The
UK’s departure from the EU throws this point
into stark relief as the UK was one of the
champions of the third country passport and
may now likely be the country most in need
of its benefits.
As noted above, the obligations on non-EU
AIFMs are less onerous than those imposed
on their EU counterparts. For the time being
a non-EU AIFM must continue to rely upon
the national private placement regime (NPPR)
to market AIFs in member states of the EU,
and whilst that situation persists the AIFM is
only subject to the transparency reporting
provisions of the Directive.
 03

WHAT IS
AN AIF/AIFM?
DEFINITION

The definitions of what should be considered • supranational institutions (such as the

an AIF and what is an AIFM are set out in the European Central Bank, the World Bank,
Directive under Article 4 (1) and a number of the International Monetary Fund, and
terms contained in the Directive for these other supranational institutions and similar
definitions were further clarified in a guidance international organisations), in the event that
paper from ESMA1. such institutions or organisations manage
AIFs and in so far as those AIFs act in the
Under the definition in the Directive, an AIF public interest;
is a collective investment undertaking, which
(i) raises capital from a number of investors • national central banks;
with a view to investing it in accordance with
a defined investment policy for the benefit • employee participation schemes
of those investors; and (ii) does not require or employee savings schemes;
authorisation as a UCITS scheme.
• securitisation special purpose entities.
In its definition of an AIF, the Directive therefore
aims to capture all collective investment
schemes that are not UCITS regardless of their
legal structure, domicile, investment strategy
or open-ended/closed-ended characteristics.

The definition of an AIFM is a legal person

whose regular business is managing one or
more AIFs.

There are a number of exemptions set out in

the Directive whereby the following entities
are not to be considered as AIFMs:

• holding companies;

• occupational retirement schemes and the

managers thereof (in so far as they do not
manage AIFs);

11
ACCESS TO THE MARKET

AIF is the gateway to

the European market.
 04
WHY LAUNCH
AN AIF?
ADVANTAGES & OPPORTUNITIES
One of the primary reasons to launch an AIF
is to access the European market. Since the
Directive came into force many EU countries
have tightened their private placement
regimes that had been used traditionally to
sell AIFs, thereby restricting active marketing.
From a fund manager’s perspective, an
AIFMD compliant structure will enable active
marketing, a key advantage for raising capital.
Coupled with the tightening of private
placement regimes are the warnings issued
by many regulators and lawyers about the
pitfalls of relying on the so-called reverse
solicitation option and many managers are
now wary of using this route to sell their
product in Europe. These changes have made
it more difficult for Cayman Islands funds and
other offshore domiciled funds to market
proactively in continental Europe.
Allocators to alternative funds are heavily
solicited. Not being able to actively market,
to have the visibility expected by investors,
is a serious impediment to the success of
an AIF. With an AIFMD- compliant structure
the investment manager can register the
fund in the various EU jurisdictions for active
marketing purposes, allowing it to actively
solicit business using one-on-one meetings
and investor promotion events.
AIFMD did bring enhanced investor protection
to alternative funds and the fact that AIFs are
regulated by onshore EU jurisdictions delivers
a certain level of comfort to a number of
institutional investors such as pension funds,
and financial institutions such as banks and
insurance companies. Another element which
comforts European clients is the AIF’s obligation
to have a European financial institution acting
as depositary which is responsible for the safe
keeping of the assets.
13
 05
WHAT DO
INVESTORS WANT?
Within Europe, if investors are sophisticated
and have no internal restrictions regarding
investment in offshore funds, they will typically
continue to favour those offshore funds, as
they are cheaper to run and offer scope for the
investment manager to manage assets with no
restrictions. However investors that fall into this
category are shrinking in number, which would
restrict European marketing considerably. The
new European regulatory framework is already
giving most investors a higher level of comfort
and the depositary aspect of AIFMD and
UCITS will also provide additional confidence
regarding the safekeeping of their assets.
Liquidit y is also of ten an impor tant
consideration and while the approach of
investors will vary, the UCITS framework has
already shown how successful a regulated
European structure can be in this regard.
14
For private clients and family offices tax
reporting will also be a key element. Some
European countries will have a lower capital
gains tax rate than the income tax rate.
Private clients in these jurisdictions will want
to report capital gains, and compliant funds
will have to allow such reporting, already
provided for in UCITS funds and a fairly easy
process for AIFs. Offshore funds may find it
difficult to report such data in a properly tax
compliant manner.
Increasingly Continental European institutional
allocators are coming under pressure from the
political environment and their shareholders
to steer away from offshore centres, which
have become fiscally less tolerable for
governments. Large investors in alternative
assets will be under pressure to custody their
assets in Europe in a European fund structure.
 06
PRODUCT TYPES AND
FUND STRUCTURES
An AIF that comes under the scope of the
directive is broadly defined as being a
Collective Investment Scheme (“CIS”) that is
not a UCITS. Therefore AIFs are going to take
many shapes and forms in the context of
domicile, fund structure and product type.
The table on the following page illustrates
some common jurisdictions where managers
may choose to domicile their AIF in order to
market the fund to European investors. It must
be highlighted that an AIF can be domiciled
anywhere and take many different forms and
can comply with the Directive (although the
date on which Non-EU AIFs will be able to avail
of the passport remains uncertain more than
5 years after the Directive was implemented).
Table 1 (on following page):
Product structures and passporting
under the AIFMD
As Ireland and Luxembourg are well
developed alternative fund jurisdictions, a
growing number of asset managers set up
new AIF products in these jurisdictions to avail
themselves of the AIFMD passport. European
Institutional investors are very familiar with
Irish QIAIF structures and Luxembourg SIFs as
hedge fund/alternative investment vehicles.
2016 also saw the launch of the innovative
new RAIF product in Luxembourg. The RAIF
itself is not authorized by the CSSF but it must
appoint an AIFM to manage the vehicle so it
is subject to indirect supervision. The RAIF
benefits from the full AIFMD distribution
passport and speed to market is increased
as it does not need to go through the same
product approval process as the SIF. We have
also seen a growing number of clients set up
SCSp structures which are unregulated but
can benefit from the AIFMD passport where
a regulated AIFM is appointed.
With the advent of the ICAV structure for funds
in Ireland, both Luxembourg and Ireland have
AIF products with corporate legal structure
(which don’t require a management company)
that would allow US investors to tick the box.
This enables asset managers to develop one
single product that can be marketed and
sold to global and US investors. In addition,
the CCF in Ireland is gaining in popularity
among asset managers looking to attract
large pension investors where minimum tax
leakage is a large consideration.
Initially UK LPs were being used as AIFs for
Private Equity and Real Asset Funds as these
structures are well known by institutional
investors.
However, Luxembourg has increasingly
become the main location for these vehicles
as Brexit casts doubt on future EU access for
UK products
15
The LPs may not typically regulated themselves, however, the appointment of the regulated AIFM
anchors the regulatory status of the AIF for example a Luxembourg AIFM managing a Luxembourg
SCSp AIF. New limited partnership legislation is expected in Ireland in 2019 which may offer an
alternative location to Luxembourg.

Fund
Passport Passport
Jurisdiction Product Types Structure (any
EU AIFM Non-EU AIFM
product type)

Ireland QIAIF Yes - for TBC* VCC ICAV

RIAIF - Retail AIF institutional Unit Trust CCF
investors only
Yes

Luxembourg SICAR Yes TBC* SA

UCI Part II SCA
SIF SCS
RAIF SCSp
Sàrl

Partnership Yes TBC* SCS (CLP)

SCSp (SLP)

United NURS QIS Yes* TBC* LPs OEIC-s

Kingdom Unregulated LPs Unit Trusts
CCS

Cayman Licensed Fund ESMA review to ESMA review to LP SPC

Administered Fund be completed be completed
Registered Fund by June 30 2016 by June 30
2016

Jersey/ Jersey/Guernsey Positive ESMA Positive ESMA ListCo (plc)

Guernsey AIF** review but review but LP
passporting passporting
date remains date remains
uncertain uncertain

* Subject to EU decision on extending the passport to third countries

** There are various fund structures which have been designated under Jersey/Guernsey law as AIFs

Some European institutional investors are comfortable with investing in non-EU regulated
jurisdictions, e.g. Cayman Islands or Channel Islands. This will remain the case and these funds (as
non-EU AIFs) may adapt to become compliant with the Directive as and when required. They may
be sold on a private placement basis (where eligible) and eventually may look to access Europe via
the 3rd country passport should it be implemented.

16
Jersey and Guernsey, given their nature as
significant private equity fund and property
fund domiciles, are likely to be key jurisdictions
within the AIFMD regime.

Private equity and property fund managers in

many cases will be subject to an EU financial
regulatory regime for the first time as a
consequence of the Directive. Many existing
private equity and property funds in these
jurisdictions will become AIFs under the
new regime and will have to comply with the
Directive. Jersey, Guernsey and Switzerland
have all been given positive reviews by ESMA
but no decision has yet been on extending
a 3rd country passport to AIF’s managed by
AIFM’s in these jurisdictions.

Legislation providing for the Reserved

Alternative Investment Fund (“RAIF”) designed
for professional investors was passed in July
2016. Like the SIF, RAIFs are dedicated to
qualified or “well-informed” investors with a
minimum investment requirement of €125 000.

However, unlike SIFs or other Luxembourg

AIFs, RAIFs are not subject to direct regulation
by the Luxembourg regulator (CSSF). RAIFs
can be launched without obtaining regulatory
approval thus increasing speed to market.
Nonetheless, RAIFs must appoint an
authorized AIFM as the RAIF legislation
is based on the Alternative Investment Fund
Managers Directive. RAIFs are therefore
indirectly subject to AIFMD requirements
applicable to authorized AIFMs.

17
 07

OPERATING MODEL & PRACTICAL

SOLUTIONS TO THE AIFMD
(options for accessing EU markets under the Directive)

A. EU AIFMs 3. The Fund itself becomes an AIFM as an

“internally managed AIF” - it is possible
Implementation of the Directive across the for AIFs to be authorised themselves as
EU has been varied, with jurisdictions such “internally managed AIFs”, whereby the AIFM
as Ireland and Luxembourg being among requirements are internalised within the
the early adopters of the Directive. There fund. This means that the AIF legal entity must
are three distinct models that have been demonstrate local substance (for example
adopted by alternative investment funds as through employees or secondees) to design
they restructured as AIFs: and implement the required frameworks of
oversight, governance, compliance and risk
1. The fund’s EU-based investment as per the Directive.
manager is appointed as an AIFM - this
requires the investment manager to file an Similar to the set up described in point 2 above,
application for authorisation as an AIFM with whereby substance on the ground may be
its home state authority. The AIFM will then an issue, it would be possible for the AIF to
passport its license to the Home Member insource the day-to-day activities in respect
State of the AIF; of its AIFM tasks and responsibilities to
secondees from a local third party provider.
2. An EU-based third party provider is It is fair to say that the internally managed
appointed as an AIFM - There are a number AIF has become an increasingly rare species
of EU based AIFMs who have approval to act as EU regulators have put additional focus on
as AIFMs and would offer to act as AIFM for substance requirements.
third party funds. For the EU fund manager
who may not wish to undertake this function
in-house, the solution can be convenient
from a risk and timing perspective as the
regulatory responsibility rests with the third
party for AIFM activities (in terms of oversight,
risk management, reporting, etc.). The fund
manager, appointed as a delegate to the
AIFM/AIF to provide portfolio management
services, can concentrate on providing the
discretionary portfolio management activity.
For non-EU managers who cannot be
authorized as an AIFM this route allows
them to act as investment managers to
EU AIFs which can then benefit from the
EU passport.

18
B. Non-EU AIFMs
Under the provisions of the Directive, non-EU
AIFMs are not required to seek authorisation
until such time as the passport becomes
available. However, until then their marketing
and distribution activities across the EU will
be impacted by the AIFMD regimes that have
been implemented by the different countries
in Europe in relation to private placement,
whereby even if the funds are distributed
under the private placement regimes certain
initial and ongoing disclosures to investors
need to be complied with. In addition,
the private placement regime in different
countries is changing and some jurisdictions
have either repealed existing private
placement regimes or have ‘gold plated’ the
requirements. Non-EU AIFMs distributing
their funds in Europe need to be mindful of
and adapt to the more restrictive regime.
Country
Canada, Guernsey, Japan,
Jersey and Switzerland
Hong Kong & Singapore
Australia
USA
Cayman Islands & Bermuda
Isle of Man
In July 2016, ESMA published its advice to
the European Parliament, the Council and
the Commission on the application of the
AIFMD passport to non-EU AIFMs and AIFs
This review covered 12 jurisdictions and a
summary of the findings in noted below.
This advice must now be considered by
the European Parliament, the Council and
the Commission and the timeline for the
conclusion of this process and the possible
extension of the passport remains uncertain.
As noted above the UK’s decision to leave the
EU and the likelihood that this may be a “hard
Brexit” may mean the non EU AIF passporting
regime is less likely to happen, certainly in the
foreseeable future.
Product Types
No significant obstacle impeding the application of the AIFMD
Passport
No significant obstacles impeding the application of the
AIFMD passport to AIFs. Some issues in relation to market
access for certain EU Member State UCITS
No significant obstacles regarding market disruption and
obstacles to competition impeding the application of the
AIFMD passport, provided the Australian Securities and
Investment Committee (ASIC) extends to all EU Member
States the ‘class order relief’, currently available only to
some EU Member States
No significant obstacles regarding investor protection and
the monitoring of systemic risk which would impede the
application of the AIFMD passport, however, a potential
extension of the AIFMD passport to the US risks an un-
level playing field between EU and non-EU AIFMs
ESMA cannot give definitive advice with respect to the
criteria on investor protection and effectiveness of
enforcement since both countries are in the process of
implementing new regulatory regimes
ESMA cannot give definitive advice with respect to the
criteria on investor protection and effectiveness of
enforcement since both countries are in the process of
implementing new regulatory regimes
19
This uncertainty need not lead to paralysis.
For the non-EU based fund manager, at the
moment there are a few options available:
1. Leverage off established third party AIFM
providers (e.g. management companies) to
launch/operate an AIF under the management
company of the existing approved third party
AIFM.
2. Utilise an existing authorised AIF Platform.
Platforms are established umbrella AIFs which
are typically managed by a third party AIFM.
The third party AIFM may then delegate the
portfolio management of individual sub-funds
to an investment manager.
3. Leverage off its existing presence in an EU
jurisdiction (e.g. a subsidiary or branch) with a
view to upgrading the local EU entity to AIFM
status – again, depending on the existing set
up the entity will need to comply with the
full suite of AIFMD organisational, risk and
compliance requirements.;
5. Establish a presence in an EU jurisdiction
and apply for authorisation as an AIFM (for
example a management company) – this
solution requires substantial investment in
terms of substance, personnel, systems, etc.,
as the entity will need to establish a brand
new management company to be approved as
an AIFM;
6. Wait and see if the passport is extended to
non-EU managers and apply for authorisation
as a non-EU AIFM (via member state of
reference).
This solution would require the non-EU
manager to have in place a substantial
organisational, risk and compliance framework
required by the Directive, including new
policies and procedures (e.g. for remuneration,
transparency reporting, delegation, etc.), and
most importantly to fall under the regulatory
scrutiny of the EU regulators;

4. Establish a new EU AIF (or convert an existing

alternative investment fund) as an internally
managed AIF, whereby the AIFM requirements
are undertaken not by a separate entity but
met by the fund itself. This means that the AIF
would need to demonstrate the necessary
substance, infrastructure and organisational
framework as required by the Directive (one
solution may be for the fund to appoint
employees, or have staff seconded from a
local entity to provide substance);

20
GUIDANCE & SUPPORT

We guide you to make sure

you are always on the right track.
 08
CHOICE OF DOMICILE
EU vs non-EU
For an asset manager interested in
establishing an AIF, the choice of domicile
will be dictated by a number of factors, the
principal considerations being: tax, investor
demand/requirements, the quality of the
domicile (in terms of product, servicing
capability and regulatory regime), and cost.
Another factor that will determine the
domicile is whether or not the asset manager
wants to avail itself of the passporting
provisions under the Directive. If so, then
the asset manager must domicile the AIF in
the EU. In addition, to access the passport
the AIF must have an EU domiciled AIFM (as
mentioned below the AIF could be its own
AIFM if structured as an “internally managed
AIF”). Therefore an Irish/ Luxembourg AIF set
up as an internally-managed fund can access
the passport.
Other options include: an Irish/Luxembourg
AIF appointing a third party AIFM (i.e. not the
asset manager or related entity) in Ireland/
Luxembourg or in any other EU country;
or an Irish/Luxembourg AIF appointing the
Investment Manager as AIFM (or related
entity), as long as the entity acting as AIFM
is regulated as an AIFM with its home state
regulatory authority. The key point is that
any AIFM regulated in an EU jurisdiction can
passport its services to act as AIFM for an
AIF domiciled in any other EU country for the
purposes of complying with the Directive and
accessing the passport.
22
Ireland versus Luxembourg
For asset managers setting up new structures
who want to market the fund globally and
avail themselves of the passport immediately,
the predominant choice is to set up the AIF in
either Ireland or Luxembourg.
These two fund domiciles have the necessary
infrastructure to service AIFMD-compliant
AIFs for international investors with a wide
choice of administrators, depositaries, law
firms and consultants.
It is important to note also that for AIFs
established in Luxembourg and Ireland there
is no taxation on the income or capital gains
of the fund. In addition each jurisdiction has
extensive and beneficial double taxation
treaty networks. Luxembourg and Ireland
are materially similar as domiciles for AIFs.
There are, however, some subtle differences
between these two domiciles. Some of these
are outlined below:
a) Legal System
Luxembourg has a continental European
civil law legal system whereas Ireland has
a common law legal system. Despite the
different legal systems, the nature of the
legal agreements and fund documentation
are similar. Both jurisdictions have excellent
law firms, both locally based and subsidiaries
of international law firms.
b) Language/Culture
Business in Luxembourg is usually conducted
in French although German and English are
widely spoken and legal documentation can
be drafted and submitted to the CSSF in
English, French or German. All business in
Ireland is conducted in English.
c) Service Providers
Both Luxembourg and Ireland are very well
served by administrators/depositaries. Most
of the international service providers have
substantial operations in both locations.
Ireland, however, is more widely recognised
for the servicing of hedge funds and is the
predominant jurisdiction globally for servicing
European managed hedge funds. Due to its
limited partnership regime Luxembourg has
been the jurisdiction of choice for private
equity and real estate managers.
d) Independent Directors /
Conducting Officers
Where an AIF is structured in corporate form
in Luxembourg (e.g. SICAV-SIF), there is no
formal requirement to have Luxembourg-
resident Directors. However the market
practice is that there is usually at least one
Luxembourg-resident Director. In addition,
the CSSF’s requirements for internally-
managed AIFs are very much in line with the
existing substance requirements imposed on
UCITS funds and management companies,
with a requirement for the AIF to have an
administrative centre in Luxembourg and
to be able to demonstrate proper local
infrastructure, organisation and substance.
The Board of the AIF is ultimately responsible
for the oversight function in relation to
the various provisions of the Directive (e.g.
compliance, risk management, supervision
of delegates, etc.) and these activities can be
discharged by the Board itself, or by dedicated
senior management (which in Luxembourg
is understood to correspond to the role
of “conducting officer/dirigeant” already
implemented under the UCITS framework).
In this regard, members of the board can act as
conducting officers, or separately appointed
individuals can be employed/seconded to
undertake such role. Because of the potential
for conflicts arising from the oversight of
certain activities being undertaken by the
same person (e.g. risk management and
portfolio management) and to cater for cover
arrangements, at least two conducting officers
should be appointed.
More may be required depending on the
complexity of the AIF and nature of investments.
Normally both Conducting Officers must be
Luxembourg resident.
An Irish-domiciled AIF structured in a corporate
form (e.g. a plc or ICAV) must appoint a minimum
of two Irish resident Directors. Regardless of
the domicile of the AIF, it is considered good
practice to have locally resident Directors to
anchor the tax residency of the fund in the
domicile of the AIF. The Irish funds industry
has issued a voluntary Corporate Governance
Code (the “Code”), which sets out, among other
things, the requirements as to the role and
make-up of the Board of Directors of an Irish
fund or management company. Further details
can be accessed at www.irishfunds.com.
Furthermore, the Central Bank of Ireland has
a fitness and probity regime, which serves as
a further improvement to investor protection.
In addition, the Central Bank’s requirements
for internally-managed AIFs, similar to
Luxembourg, are very much in line with the
existing substance requirements imposed on
UCITS funds and management companies.
The Central Bank requires a number of
suitably experienced individuals (“Designated
Persons”) to oversee the managerial functions.
Recently issued guidance from the CBI entitled
“Fund Management Companies – Guidance”
(or “CP86”, a reference to the Central Bank’s
consultation paper 86 which preceded the
guidance) imposes the following conditions
on the residency of directors and designated
persons for Irish management companies
(and self-managed funds):
23
Where a management company or fund has a
PRISM impact rating of:
1) Medium Low or above, the management
company shall have at least:
As in Luxembourg the Designated Persons
could be members of the Board or separately
appointed employees or secondees. Further
details are set out later in the booklet under
“Organisation of AIFM”, on page 28.

• 3 directors resident in the State or, at least,
2 directors resident in the State and one
designated person resident in State,
• half of its directors resident in the EEA, and
• half of its managerial functions performed
by at least 2 designated persons resident in
the EEA, or
While Ireland and Luxembourg dominate
the cross border landscape for traditional
and hedge fund vehicles, the landscape in
Private Equity, Real Estate and Infrastructure
is still evolving. In the real assets space for
those funds looking for an EU solution we
have seen an increasing use of Luxembourg
partnership structures.

2) Low, the management company shall have

at least:

• 2 directors resident in the State,

• half of its directors resident in the EEA, and

• half of its managerial functions performed

by at least 2 designated persons resident in
the EEA.

24
 09
CONSIDERATIONS
FOR NON-EU AIFMS
The primary consideration for non-EU
fund managers is marketing, since AIFMD
requirements apply where an AIF is being
marketed. As mentioned previously, several
EU jurisdictions have implemented definitions
of marketing that limit the scope of the
Directive to “active” marketing. This definition
appears to allow the concept of “reverse
solicitation” to continue, however managers
should be aware that the documentation
should be comprehensive and the burden of
proof to evidence whether client interaction
was carried out on the basis of reverse
solicitation lies with the fund. Additionally,
fund managers should be warned that
regulators will be sensitive to attempts to
circumvent the provisions of the AIFMD via a
reverse solicitation veil.
Fund managers who decide to actively
market their fund products via the various
national private placement regimes should
be cognisant of the minimum required
standards and any member state’s specific
requirements.
Minimum required standards
• A cooperation agreement must be in place
between the regulatory authority of the
member state being targeted for distribution
and the regulatory authority of the AIFM. In
addition the regulatory authority of the AIF’s
domicile (typically an offshore jurisdiction)
must have in place a cooperation agreement
with the member state.
• Neither the country where the non-EU AIF
is domiciled nor the country where the non-
EU AIFM is domiciled may be listed as a non-
cooperative country and territory by FATF.
• The non-EU AIFM must also comply with
the transparency requirements set forth in
the regulations which includes additional
disclosure to investors in the AIF’s offering
documents, regular reporting to member
states as outlined in the AIFMD’s Annex IV,
and the provision of additional information
in the AIF’s annual report including disclosure
concerning remuneration.
As mentioned above, EU member states
have the option of imposing additional
requirements to the minimum standards
for private placement. Some jurisdictions
require the appointment of local agents or
have restrictions on the type and content of
documentation that can be provided as well
as target audience, while other jurisdictions
impose an extremely restrictive regime which
effectively eliminates private placement
opportunities.
As noted in Section 7, clarity on the availability
of the passport for non-EU AIFMs remains
some way off.
Notwithstanding this, those fund managers
who pursue the private placement road,
should note that member states may
terminate their private placement regimes
at any point and may eventually be required
to do so. However, given the delay in
implementing the 3rd country passport the
original date for phasing out the national
private placement regimes will certainly be
later than the originally scheduled 2018 date.
25
THE PROCESS DEFINES YOUR BEST APPROACH

We are next to you, assisting and

advising you through the process.
 10
AIFM AUTHORISATION PROCESS
While the requirements for AIFMs and AIFs
are set out in the Directive the procedural
details for authorisation are provided by
each EU regulatory authority in its own local
transposition of the Directive. The application
process will vary from regulator to regulator.
Authorisation timescales are typically 4-6
months for the authorisation of an AIFM,
however the process could take longer
depending on the availability and workload
of each regulatory authority. Sub-threshold
AIFMs are only required to register with the
regulatory authorities and the registration
process is much quicker.
It should be noted that any EU-domiciled
asset manager who manages an AIF (which
is not deemed to be out of scope), regardless
of where the AIF is domiciled, is required to
be authorised as an AIFM, unless the AIF has
appointed another entity as its AIFM (e.g. a
third party AIFM). This means that, for example,
a UK-based asset manager who manages a
US 40 Act Fund (which would be considered a
non-EU AIF) must obtain approval as an AIFM,
unless the fund has appointed another party
to act as its AIFM.
AIF Authorisation Ireland and Luxembourg
In Ireland the Central Bank has published
application forms to assist with the submission
of the application pack. The AIFM is required to
prepare a “Programme of Activity” document,
setting out in detail its proposed organisational
structure, the role of the Board and the
oversight framework in place to supervise and
monitor the various activities of the AIFs under
management, the delegation arrangements,
the risk management framework in place, the
compliance framework and in particular the
arrangements in place to ensure compliance
with required conduct of business rules, the
arrangements in place to monitor prudential
capital requirements and a summary of the
various required policies and procedures (e.g.
around remuneration provisions, conflicts
of interest, valuation etc.). The information
contained in the Programme of Activity must
be supplemented by organisational charts
and corporate details of the applicant AIFM
(e.g. ownership structure, etc.).
In Luxembourg, the CSSF has also issued
application forms and AIFMs are required
to complete these and provide supporting
documentation in the same way as in Ireland.
The information required by the CSSF is the
same as required to be provided in Ireland,
even if the format of the submission is
slightly different (in Luxembourg there is no
requirement to prepare a “Programme of
Activity” document, although the information
contained therein is the same as would need
to be filed with the CSSF).
Legal counsel or specialised consultants (such
as Carne) can assist firms with the preparation
of the AIFM application pack and in drafting
the relevant policies and procedures.
AIF
The AIF authorisation process is streamlined
for products targeting qualified and
sophisticated investors (e.g. QIAIFs, RAIFs,
SIFs), whereby various legal documentation
needs to be filed with the regulatory authorities
(e.g. fund constitutional documents and
offering documents) as well as material
agreements with third parties and delegates
(e.g. depositary agreements, investment
management agreement, administration
agreement, etc.). Timescale for approval
will depend on the type of structure and
jurisdiction, with Ireland offering approval
for QIAIFs within 24 hours upon submission
of a completed fund application. The CSSF
27
approval for SIFs takes longer (3-4 months)
while the new RAIF structure doesn’t require
CSSF approval and therefore offers faster
speed to market.
Where the AIF is appointing an AIFM in another
EU jurisdiction, the authorisation process is
reasonably straightforward from a regulatory
point of view. The AIFM would need to apply
to its home state regulator for a passport
to provide cross-border services (as per the
provisions of the Directive), which would
allow it to manage AIFs domiciled in another
EU jurisdiction. The passporting process for
AIFMs is based on a regulator-to-regulator
notification, whereby the application is made
by the AIFM to its own home state regulator
and the intention is then communicated by
said regulator to the host-state regulatory
authority. The most difficult part of the process
in this instance is the negotiation of the legal
agreements for the cross-border services,
particularly the depositary agreement, and
agreeing the operational set-up. The home
state regulator must be satisfied that the
AIFM will be able to oversee and manage the
local delegation arrangements in the host
jurisdiction, so comfort is usually sought by
the regulator in this regard.
Internally managed AIF
Where it is intended that the AIF is internally
managed, the authorisation process becomes
much more cumbersome, as in addition to the
AIF being authorised, a full AIFM authorisation
also has to be granted by the regulatory
authorities. The internally managed AIF must
demonstrate sufficient local substance and
provide details on how it proposes to comply
with the full provisions of the Directive from
an organisational and operational perspective
(for example, through the employment of
dedicated individuals to carry out oversight
and management tasks, or through secondee
arrangements). The timescale for the approval
of an internally managed AIF is likely to be in
the region of six months. While a number of
internally managed AIFs were authorized in the
12-18 months following the implementation of
28
the Directive this route has been used much
less frequently of late due to operational
complexity of managing the structure and
regulators scrutinising the substance of such
AIFs.
Organisation of AIFM
(Ireland and Luxembourg)
In Ireland, the Central Bank has implemented
the provisions of the Directive in relation
to the oversight arrangements of the AIFM
over the AIFs under management through
a framework of “managerial functions”,
effectively areas of supervision and review
that must be allocated to named individuals
within the AIFM (or the internally managed AIF
as the case may be). The AIFMD managerial
functions framework is akin to that already
in place for UCITS funds and management
companies.
The Central Bank has recently amended
the managerial functions for AIFMs. A new
function of distribution has been added which,
in addition to complaints handling, includes
monitoring the fund’s distribution strategy
and keeping track of arrangements with the
distributor(s) to ensure marketing activities
are consistent with those agreed upon.
In addition to the newly condensed six
functions, the Central Bank will require that
one of the independent directors of a fund
management company, which may be the chair
of the Board (if independent), undertakes an
Organisational Effectiveness role. This person
has the specific task of ensuring that the
organisational arrangements of the company
are under constant review, submitting regular
reports to the Board for discussion and
decision.
As noted in Section 8 above, the Central Bank
has updated its location rules for directors
and designated persons.
Ireland - AIFMD managerial functions

Managerial Functions

Investment Management*

Fund Risk Management*

Operational Risk Management*

Regulatory Compliance

Distribution

Capital and Financial Management

Organisational Effectiveness (the organisational

effectiveness role may encompass Internal Audit,
Conflicts of Interest and Supervision of Delegates
to the extent those functions are not undertaken
by Designated Persons)**

* Fund risk management and operational risk management cannot be undertaken by the same person who is
responsible for investment management

** Organisational effectiveness is not a managerial function per se but it is a role that must be carried out by an
independent director who could be the chairman.

In Luxembourg, the CSSF has not been as prescriptive with the implementation of the Directive and
has not set out specific roles that must be allocated, however the Luxembourg AIFMD framework is
based on the same proviso whereby the various areas identified in the Directive as being key areas of an
AIFM’s operations must be monitored and supervised appropriately and remain the responsibility of the
governing body of the AIFM, or the management function (i.e. the “conducting officers”).

The various areas of review must be allocated between named individuals and would include oversight
of compliance with conduct of business rules for both the AIFM and the AIFs under management,
supervision of delegated arrangements, risk management in its various aspects, etc.

29
 11

COSTS
FOR SETUP
Ireland & Luxembourg

The costs involved will depend on the

complexity of the structure of the fund,
whether the AIF will have an AIFM appointed
to it or be an internally managed AIF, and how
much work (e.g. legal work) can be carried
out by the fund manager versus how much
will be outsourced.

The main costs incurred will be legal fees and

consultancy costs where some of the project
set-up work is outsourced. Should the AIF be
internally managed, the costs are likely to be
significantly more as the AIFM application
documents will have to be prepared and
submitted for approval with the relevant
financial regulator (Central Bank of Ireland
or CSSF) along with fund legal agreements,
constitutional documents and of fering
documentation.

30
CARNE IS WHERE YOU NEED TO BE

An alternative manager setting up

a Passported AIF could be able to
attract new investors and money
not otherwise available to them.
 12
DELEGATION
ARRANGEMENTS
Delegation is a key concept of the Directive.
The core activities of an AIFM are portfolio
management and risk management (these
are listed in Annex 1 of the Directive). It is
possible for the AIFM to delegate certain
aspects of these activities to third parties,
but not to the extent that the delegation
results in the AIFM becoming a “letter box
entity”. While there is no exact definition or
guidance as to what would constitute being
a letter-box entity, the Directive sets out that
delegation of the portfolio management and
risk management functions is only permitted
where delegation does not result in the AIFM
becoming a letter box entity and:
• it can be objectively justified by the AIFM,
• the delegate has sufficient resources and
qualified personnel to perform the delegated
functions, and
• the delegation arrangements do not prevent
the effective supervision of the AIFM by the
relevant regulatory authorities.
The AIFM may delegate a number of functions
to third parties to take advantage of the
expertise of the delegates in their own fields
and to allow for business functions and
processes to be optimised, but it must always
retain overall responsibility for ensuring that
the delegates perform their duties in line with
applicable regulations and at all times in the
best interest of the AIFs and their investors,
as well as remaining fully liable towards the
AIFs and their investors, so that the delegation
arrangements would not affect such liability.
32
Where the AIFM decides to delegate certain
aspects of risk management and portfolio
management, it must ensure that the parties
to whom these activities are delegated are
authorised or registered for the purposes of
asset management and subject to supervision
(or, where this condition cannot be met, that
their appointment is subject to prior approval)
by the relevant regulatory authorities.
In order to comply with the delegation
requirements the AIFM must have objective
reasons for delegating the activity.
The delegation arrangements will be
monitored on an ongoing basis. Should the
AIFM fail to properly implement and oversee
the delegation arrangements it may be
deemed to be a so-called ‘letter box’ entity.
The impact of this would mean that the
letter box entity would no longer be an AIFM
removing any ability to market and potentially
opening up the AIF and the letter box entities
to additional regulatory sanction.
It is important that where delegation of
portfolio management or risk management
occurs, the AIFM still retains the ability to
intervene in the direct management of the AIF
and override any decision taken by delegates
in respect of the delegated functions when
necessary, where the delegates’ decisions
may be contrary to the duties owed to the AIFs
and their investors, (e.g. retaining the power
to set appropriate investment limits and risk
parameters). Overall the AIFM must be able
to monitor and manage the risks associated
with each delegation.
A documented delegation policy must be in
place, setting out the AIFM’s framework of
supervision of the delegates throughout the
full life cycle of the delegation arrangement,
from initial delegate selec tion and
appointment, through ongoing monitoring
and with regards to termination arrangements.
A key component of the AIFM’s delegation
framework is a process of due diligence on the
delegates, both initial and ongoing.
As an alternative, having the resources
and substance of a staffed management
company with expertise in the application of
the Directive, the oversight of delegates and
a robust programme of activity is an effective
way to demonstrate compliance with the
requirements of the regulations.

In this regard, when appointing any delegates,

the AIFM is responsible for ensuring that
the delegate has sufficient resources and
employs sufficient personnel with the skills,
knowledge and expertise necessary for the
proper discharge of the tasks delegated
to it, as well as having an organisational
structure which is appropriate to support the
performance of the delegated tasks. Such
assessment should be the basis of the AIFM’s
initial due diligence process on the delegates
while on an ongoing basis the AIFM should
ensure that these requisites continue to be
complied with.

The Directive also requires that any

delegation arrangements are subject to
written contracts and where appropriate
these should set out certain details, such as
the AIFM’s rights for instruction, monitoring
and termination of the arrangements,
the AIFM’s inspection rights and access to
books and premises, provisions around
AIFM notification/approval of sub-
delegation arrangements, liability provisions,
notification of material changes to delegates’
operations etc. In addition to contractual
arrangements a service level agreement
would typically be agreed between the AIFM
and its delegates.

It is vital that delegation arrangements be

effectively implemented, resourced and
supervised. For an internally managed AIF
this can be achieved by appointing designated
directors or persons to carry out the required
functions. These individuals will be required
to have day to day responsibility for managing
the oversight of any delegated functions.

33
 13
RISK MANAGEMENT
REQUIREMENTS
Organisation and structure
One of the key areas of focus of the Directive
is in relation to risk management and each
AIFM is required to implement an effective
and suitable risk management framework
to allow the identification, monitoring and
management of the risks that the AIFM and
the AIFs under its management are exposed
to.
One of the central components of the risk
management framework is the permanent
risk management function, which must have
a primary role in shaping the risk policy of
the AIFs under management of the AIFM,
risk monitoring and risk measuring in order
to ensure that the risk level complies on
an ongoing basis with the AIF’s risk profile.
The permanent risk management function
should have the necessary authority, access
to all relevant information and regular
contacts with the senior management and
the governing body of the AIFM in order to
provide them with updates so that they can
take prompt remedial action where needed.
The risk management function within the
AIFM should be functionally and hierarchically
separate from other operational units,
up to governance level. In particular, this
means that the risk management function
should be separate from the portfolio
management function and that staff involved
in the risk management function should be
remunerated under clearly defined criteria,
separate from other staff, and in accordance
with the performance of the risk management
function. The risk management function
must be reviewed at least annually to assess
its adequacy and effectiveness.
34
Risk management policy
Another key component of the risk management
framework is the risk management policy.
The Directive requires each AIFM to have
in place an appropriately documented risk
management policy detailing, in particular,
measures and procedures employed to
measure and manage risks, the safeguards
for independent performance of the risk
management function, the techniques used to
manage risks and the details of the allocation
of responsibilities within the AIFM for risk
management and operating procedures. The
risk management policy must be reviewed at
least annually by the AIFM’s governing body or
senior management.
In particular, the risk management policy
should include:
• the identification of all the material risks
that AIFs are exposed to;
• an explanation of the structures used to
guard the independence of the risk
management function within the AIFM;
• the techniques, tools and arrangements
used by the AIFM to manage risk, including
operational risk and liquidity risk;
• the roles and responsibilities pertaining to
the risk management function;
• the risk limits placed on each AIF, in line
with the AIF’s offering documents and any
applicable regulatory restrictions;
• the nature of any conflicts of interest
identified between the AIFM and the AIFs
under management
• and between different AIFs, together with
details of the measures that have been put in
place to manage and monitor these conflicts;
• details of the reporting and escalation
processes within the risk management function.
Details of the risk management arrangements
in place within the AIFM must be communicated
to the AIFM’s regulatory authority as part
of the AIFM’s application for authorisation.
Additionally, the AIFM must advise its national
regulator of any material changes to the RMP
as they arise.
AIF risk profile
Although the Directive does not impose any
investment restrictions on AIFs, the risks
incurred by each AIF cannot be managed
effectively if the risk limits have not been set
in advance by the AIFM. The risk limits should
be in line with the risk profile of the AIF and
should be disclosed to the AIF’s investors, in
accordance with the Directive. Limits should
be set for the following categories of risk:
• market risk
• credit risk
• liquidity risk
• counterparty risk
• operational risk
Limits may be either quantitative or qualitative
in nature. In setting these limits, the AIFM
must ensure they are consistent with the risk
profile of the AIF as disclosed to investors (e.g.
in the AIF’s offering documentation). Actual
risk levels employed by each AIF must operate
within the agreed risk limits and appropriate
reporting and escalation procedures must
be established with the AIFM to ensure
compliance with these limits.
Disclosure to the AIF’s investors must include:
• details of the AIF’s investment objective,
policies and strategy and how these are
consistent with the AIF’s risk profile;
• any applicable risk or investment limits and
restrictions placed on the AIF;
• details on the risk management systems
used to measure, manage and monitor the
applicable risks for each AIF (e.g. portfolio risk
and liquidity risk);
• details on how operational risks for each AIF
are identified, monitored and managed;
• details on the most relevant risks to the AIF
and an assessment of the risk levels pertaining
to each.
Leverage
The Directive requires that for each AIF, the
AIFM should establish a limit on the maximum
leverage level it will employ and this limit
must be disclosed to investors. Leverage
may be calculated under both the gross and
commitment methods.
Under the gross method, all positions of the
AIF are taken into account, and derivative
exposures are translated into the market
value of equivalent positions; the leverage is
the gross sum of all the translated exposures.
Under the commitment method, hedged or
offsetting positions are netted against each
other before the leverage is calculated.
If the leverage figure calculated under the
commitment method is 3X or greater, the
AIF is deemed to be employing leverage on
a substantial basis and additional reporting
requirements will apply to the AIF.
The AIFM must also conduct periodic stress
tests and scenario analysis to assess the
vulnerability of the portfolio to extreme or
unusual market events or conditions.
35
The Directive is not prescriptive on how these
tests may be conducted, but they would
typically comprise testing the portfolio against
historical scenarios and market shocks as well
as against set movements in the underlying
asset classes invested in by the AIF.

In addition, the AIFM must conduct periodic

back testing of its own risk management
arrangements to assess the robustness
and reliability of the models employed within
the risk management function.

Liquidity risk management

The AIFM must ensure that consistency exists

between the investment strategy, liquidity
profile and redemption policy for each AIF, so
that investors may redeem their investments
in a manner fair to all investors and in
accordance with the AIF’s redemption policy
and obligations as set out in the AIF’s offering
documentation.

The AIFM must monitor the liquidity profile

of the AIF’s portfolio and assess the profile
of the AIF’s investor base, the type and size
of individual investments, as well as the
redemption terms investors are subject to.
The AIFM must have a full understanding of
the factors that may affect the liquidity of
the assets of the AIF’s portfolio and have in
place appropriate tools and arrangements to
monitor the liquidity profile of the AIFs under
its management.

The AIFM may maintain liquidity limits on each

AIF consistent with the stated redemption
policy and must have in place measurement
tools to monitor the actual liquidity profile of
the AIF against these limits.

The actual liquidity characteristics of the AIF

should be stress-tested on a regular basis to
assess the AIF’s sensitivity to extreme market
conditions and its ability to meet its redemption
obligations in exceptional circumstances.

36
 14
REMUNERATION
PROVISIONS
The Directive imposes a requirement on
all AIFMs to have in place a remuneration
policy, to ensure that the compensation
arrangements of staff that could materially
impact the risk profile of the AIF do not cause
the AIFM or the AIFs under its management
to incur improper and unacceptable levels of
risk.
While the provisions of the Directive in this
regard are relatively broad, they have been
supplemented by detailed requirements
set out in ESMA’s “Guidelines on sound
remuneration policies under the AIFMD”
which was finalised in July 2013 (ESMA
2013/232 HR).
The remuneration provisions set out in the
Directive and detailed in the ESMA guidelines
apply in relation to the remuneration policies
and practices of the AIFM’s “Identified Staff”,
which comprises members of the AIFM’s
Board (both executive and non-executive),
senior management and officers of the AIFM,
staff whose activities may have a material
impact on the risk profile of the AIFs under
management, as well as staff whose total
remuneration package brings them into the
same category as senior management.
In addition to the individuals identified within
the AIFM, the definition of Identified Staff also
includes persons within the entities to which
portfolio management and risk management
for a specific AIF have been delegated, whose
job functions and responsibilities may have
a material impact on the risk profile of that
particular AIF (i.e. CIOs, CEO, CFOs, risk officers,
portfolio managers, traders, etc.).
Where por t folio management or risk
management activities have been delegated,
the AIFM must ensure that:
a) the entities to which portfolio management
or risk management activities have been
delegated are subject to regulatory
requirements on remuneration that are equally
as effective as those applicable under these
guidelines;
or
b) appropriate contractual arrangements, to
cover any payments made to the delegates’
identified staff, as compensation for the
performance of portfolio or risk management
activities on behalf of the AIFM, are put in place
with entities to which portfolio management
or risk management activities have been
delegated in order to ensure that there is no
circumvention of the remuneration rules.
The ESMA guidelines provide a definition of
total remuneration that covers both fixed and
variable components of remuneration as well
as other additional benefits (pension, company
cars, etc.). In addition, the ESMA guidelines set
out a number of detailed requirements including
conditions for how the variable portion of
remuneration should be paid, the type/nature of
such compensation and its proportionality with
any fixed remuneration, the appropriateness
of performance assessment periods, vesting
of payments, claw back/malus arrangements,
restrictions around “golden parachutes” or
guaranteed discretionary payments, etc.
37
Where appropriate to the nature, type and
complexity of the AIFs under management,
the AIFM should consider the establishment
of a remuneration committee and there must
be adequate disclosure in appropriate AIF
documentation (such as financial statements)
regarding both qualitative and quantitative
aspects of the AIFM’s remuneration
arrangements.

It is important that identified staff are assessed

for the materiality of their influence over the
AIFM’s risk profile or that of the AIFs under
management through an analysis of:

• whether that person’s role has significant

impact on the AIFM’s results and/or balance
sheet;

• whether that person’s role has significant

impact on the performance of the AIFs under
management;

• the risk taking profile of particular business

units.

There is a certain element of proportionality

that can be applied to the implementation of
the remuneration provisions of the Directive
and the ESMA Guidelines and a number
of EU regulatory authorities have issued
consultations or guidance papers on their
interpretation and implementation of certain
aspects of the ESMA guidelines, most notably
the UK’s FCA.

Ultimately it is the Board of the AIFM that is

responsible for ensuring that the ultimate goal
of having sound and prudent remuneration
policies and structures is not improperly
circumvented and that procedures at the
AIFM and the delegates as relevant are
aligned to the requirements of the Directive
and the ESMA Guidelines.

38
 15
TRANSPARENCY
REPORTING
The Directive introduces new requirements
on AIFMs in relation to transparency reporting
obligations to the AIFs under management.
These reporting obligations include initial
and ongoing reporting to investors, as well as
reporting to regulatory authorities.
Most of the details that are required to be
disclosed to the investors on a pre-investment
basis in relation to the AIF will typically
already be covered in existing fund offering
documentation, for example the prospectus
(such as details of the investment strategy, risk
warnings, use of leverage and collateral, etc.),
however there are a few items that would have
been typically included in the prospectus/
offering memorandums for alternative funds
and which must be provided to investors
in advance of any investment made in the
AIF. Such items include a description of what
cover for professional indemnity may be in
place, details of the latest NAV/fund price and
historical performance. They can be separately
covered in marketing presentations.
Once the investor has invested in the AIF,
certain information will require ongoing
investor disclosure, such as details of the AIF’s
current risk profile, the percentage of assets
subject to special liquidity arrangements
(e.g. side pockets), a description of risk
management systems used, as well as details
of the maximum and current leverage and
any rehypothecation rights or guarantees.
The AIFM must ensure that annual reports are
prepared in accordance with the provisions
of the Directive and that these are made
available to the regulatory authorities and
investors for each AIF under management
and for each AIF that may be marketed in the
EU no later than six months following the end
of the financial year.
On a regular basis, AIFMs are required to
provide reporting to the regulators in the
format specified in Annex IV of the Delegated
Regulation with details of their activities as
an AIFM and of the AIFs under management,
including specific risk data for each AIF,
investor geographical spread, portfolio
holdings breakdown, etc. The frequency of
the reporting is determined by the aggregate
AUM volume of the AIFM as well as by the
AUM of individual AIFs under management
and is detailed in the ESMA Guidelines on
AIFM Reporting Requirements2.
2 8.08.2014 | ESMA/2014/869
39
An AIFM can delegate
functions but must not become
a “letterbox entity”.
 16
ROLE OF THE DEPOSITARY
The role of the depositary breaks down into
three broad areas defined under Articles 21(7),
(8) and (9) of the Directive; the safekeeping of
assets held in custody; monitoring of cash
flows and an oversight role. For full depositary
these roles must be carried out by a single
entity. However, a depositary may delegate
the safekeeping of assets to sub-custodians,
but may not delegate the cash monitoring or
oversight duties.
To those familiar with UCITS the role of the
depositary, or trustee or custodian as it has
previously been called, will be well known.
In the world of alternative funds these roles
are not as well utilised. For many hedge
funds, the prime broker will fulfil the role
of custodian and for private equity funds a
custodian has been traditionally surplus to
requirements.
Strict liability
Under AIFMD the depositary remains liable
for the loss of any of the AIF’s assets held in
custody unless it can prove that the loss has
arisen as a result of an external event beyond
its reasonable control, the consequences of
which would have been unavoidable despite
all reasonable efforts to the contrary. This
effectively makes the depositary strictly
liable for the loss of assets in custody
which is a significantly higher standard than
has pertained previously. The pre-AIFMD
standard of liability contractually assumed by
depositaries did not extend to loss of assets
by their agents or sub-custodians, except
where they breached their legal standard
of care in the selection, appointment and
monitoring of such agents or sub-custodians.
This contrasts to the AIFMD position where,
absent force majeure events, or a discharge
of liability, or a safe harbour for assets held
through a central securities depositary, a
depositary is strictly liable for loss of assets
in custody by any party beneath them in the
chain of custody, including all sub- custodial
agents and prime brokers (and their own
independent sub-custody networks).
Assets in custody versus other assets
The strict liability standard imposed on
depositaries under AIFMD only applies to
assets which are held in custody. Such assets
would include transferable securities which
can be held in custody such as listed shares,
debt securities, money market instruments
and collective investment schemes which
can be held in custody. The Directive also
assigns responsibilities to depositaries for
so-called ‘other assets’ which are typically
assets which cannot be held in safekeeping.
These assets include derivative contracts,
shares of unlisted companies which cannot
be held in custody, bank loans, real property,
etc. In relation to other assets the depositary
must keep a record of these holdings and
periodically verify the legal entitlement of the
AIF to the assets.
Oversight duties
The Directive imposes a number of oversight
duties on depositaries. These duties are
similar to those imposed on depositaries
of UCITS funds and in summary include
oversight of the calculation of the NAV, share
dealing, cash flow monitoring and adherence
to investment and borrowing restrictions.
41
Prime brokers
Given the additional liability faced by a
depositary in its role as custodian of an AIF’s
assets right through the custody chain, the
issue of delegating custody to third parties
and prime brokers in particular has exercised
the minds of many general counsels.
Unsurprisingly depositaries are cautious
about being strictly liable for assets held by a
third party who may have been chosen by the
manager rather than themselves.
The Directive does permit the discharge
of liability for the safekeeping of assets
where there is an objective reason for doing
so. It imposes a number of conditions on the
depositary if it is using a contractual discharge
of liability. Whether the appointment of
a prime broker is an objective reason to
warrant a depositary’s discharge of liability
has been the subject of considerable debate
but has become the prevalent model for
funds utilising prime brokers. In deciding on
the depositary arrangements, funds with
prime brokers should pay careful attention
to the apportionment of liability between the
depositary and prime broker.
Who acts as depositary and who appoints
the depositary?
The depositary is appointed by the AIFM
on behalf of the fund and the depositary
agreement should be a tri-party agreement
between the AIFM, the AIF and the depositary.
Entities eligible to act as depositaries include
EU credit institutions, certain EU investment
firms and other institutions which are
subject to prudential regulation and ongoing
supervisions and are eligible to act as a
depositary under the UCITS Directive.
An AIFM may not act as a depositary nor may
a prime broker who acts as counterparty
to an AIF unless it has functionally and
hierarchically separated the performance of
its depositary function from its tasks as prime
broker and complies with certain conflicts of
interest provision.
42
For EU AIFs the depositary should be
established in the same country in which the
AIF is domiciled.
What is ‘depositary lite’?
Depositary lite is the term used to describe
the obligations of a depositary appointed to
a non-EU AIF managed by an EU AIFM which
markets in Europe under a private placement
regime under Article 36 of the Directive. The
obligations of a depositary lite are similar to
those applied to a full depositary with a few
key differences. The liability standard for the
loss of the AIF’s assets in custody is negligence
rather than the strict liability standard. It is
possible for different entities to undertake
the different depositary lite tasks; therefore,
a prime broker could be responsible for
safekeeping (assuming it had segregated the
depositary function from the prime broker
one), an administrator for cash monitoring
and a supervising entity for oversight.
Factors to consider in appointing
a depositary
A service level agreement (“SLA”) between
the depositary, the AIFM and the AIF
should be entered into outlining duties,
reporting obligations and relevant sharing of
information.
Fund promoters should assess the suitability
of arrangements that the depositary may
have in place with the chosen administrator,
in particular as, in light of the obligation by the
depositary to monitor cash flows and to verify
the ownership of non-custodied assets, the
flow of information between these entities
is key. Furthermore, given the additional
liability of depositaries, fund promoters must
be comfortable that the chosen depositary
has the financial strength to make good any
losses.
The operational model of AIFs is based on
a strong relationship with prime brokers, so
assessing the depositary’s attitude to dealing
with prime brokers is also essential.
 17
DISTRIBUTION OPPORTUNITIES,
ISSUES AND CHALLENGES
For an EU AIFM managing an EU AIF, the
AIFMD passport is the most efficient solution
to effectively improve the AIF’s distribution
footprint. The AIFMD passport facilitates
the distribution of AIFs to institutional
investors on a cross border basis by way
of a passport notification procedure. Once
an EU AIF is created, it can be distributed
in all EU jurisdictions by informing the host
regulator in advance. This facility to market
AIFs to institutional investors in the chosen
EU markets and reduce the administrative
burden associated with the past pan-
European distribution strategy is similar to
the UCITS passport in place for many years.
Since July 2013, aside from reverse solicitation,
there are two options open to fund promoters
to market AIFs to EU investors:
• Where the fund promoters have appointed
an EU AIFM with an EU AIF or set up an EU-
AIF that is internally managed, they can utilise
the AIFMD passport;
and
• Non-EU AIFs may distribute in each EU
jurisdiction in line with National Private
Placement Rules (“NPPRs”) to the extent
that these rules remain available, and they
properly monitor their evolution.
The AIFMD passport is currently only available
to EU AIFMs of EU AIFs but, following ESMA
assessment, it may be extended to non-EU
AIFs (the “Third Country Passport”) but the
initial date for implementation, July 2015,
has now passed and there is no firm timeline
for switching on the Third Country Passport
notwithstanding that five countries have
had a favourable review. For non-EU fund
promoters wanting to market across the
whole of Europe for now, waiting for the Third
Country Passport regime to be implemented
is an uncertain option.
For non-EU fund promoters, targeting a small
number of investors, in a few territories,
distributing funds in line with the NPPRs in
each EU jurisdiction may be a distribution
solution. However, the challenge is that
existing NPPRs vary from jurisdiction to
jurisdiction and the regimes are constantly
evolving across territories. In addition, some
EU countries have tightened their NPPR in
preparation for their eventual abolition,
which was originally scheduled under AIFMD
for 2018 For example, Germany effectively
requires non-EU managers to undertake
a full registration process if they want to
sell alternative funds. In addition, greater
enforcement of distribution rules is likely,
and regulators will be alert to the possibility
of abuse of reverse solicitation rules.
ESMA’s planned “impact assessment” of
the NPPR is due between the end of 2017
and July 2018, and this will potentially result
in the phasing out of NPPRs. The phasing
out of this regime, one assumes, will be
contingent on the implementation of the
Third Country Passport and therefore it may
continue in a limited form beyond 2018 given
the uncertainty as to the extension of the
passport.
In the meantime, in this evolving distribution
landscape, reliance on NPPRs or reverse
solicitation may not be a viable way for non-
EU fund promoters to target the EU market
as a whole.
43
The use of the AIFMD passport has been
possible since July 2013 for EU AIFMs managing
EU AIFs and is creating straightforward
distribution possibilities in countries like
France, Italy and Spain where efficient private
placement regimes do not exist. Having an AIF
benefit from the passport in these jurisdictions
can provide a clear competitive advantage.

Fund promoters who want to make immediate

use of the AIFMD’s passporting provisions
and not be compelled to rely on NPPRs
and reverse solicitation regimes can either
make use of third party EU AIFMs such as
established management companies, or set
up an EU domiciled internally managed AIF. In
either case the EU AIF can avail of the AIFMD
passport for distribution across the EU.

44
 18

CONVERTING EXISTING
STRUCTURES TO EU AIFS
As with most structural changes (which are
not compelled by regulation), the driving
consideration for converting an existing
offshore structure to an EU AIF will be client
demand (potential and/or existing clients).
Fund managers considering this significant
change should have a fair degree of confidence
that capital raising or capital retention will be
positively impacted in a substantial manner.
That being said, EU regulators (notably in
Ireland and Luxembourg) are anxious to attract
fund managers converting their offshore fund
structures and have developed streamlined
processes to facilitate the conversions.
While there are several options, the
movement of the fund’s registered office
is the least disruptive and allows the legal
personality of the fund to remain intact and
will in most cases not give rise to a taxable
event for either the fund clients or the
fund itself.
The structure of the fund itself (e.g. internally
managed, use of internal or third party
management company, etc.) will impact
the timing and costs associated with the
conversion and will likely have an impact on the
marketability of the product down the road.
It will also be important for fund managers
to be able to articulate to existing investors
that the positive changes associated with the
conversion are significant and outweigh the
incremental on- going costs associated with
the fund operating as an EU AIF under a more
tightly controlled regulatory regime.
Clearly a decision to convert an existing
structure is a big one and should only be taken
after a comprehensive analysis. However, the
path to conversion is quite clear and once
the decision is in place, competent service
providers are able to guide the product into
its new home without disrupting the existing
client base, all the while setting the fund up
for future sustainability and growth.

Once the decision has been made to move

forward with converting the structure, a
full review of all operating elements of the
existing product should be conducted and
compared to the requirements established
under the AIFMD for an EU AIF with gaps and
required enhancements noted. The potential
capability of existing service providers to
support the revamped product will be a
major consideration since full conversions to
new providers will impact both the associated
cost and internal effort. A review of potential
product domiciles should also take place
because, while the basis requirements of each
domicile are consistent, there are differences
(both apparent and nuanced) which will drive
the determination of the appropriate “home”
for the product.

45
 19
HOW CAN CARNE HELP
As the premier global provider of Fund
Management Solutions to the asset
management industry, Carne can provide
a flexible solution to investment managers
that may be looking for an external EU-
domiciled AIFM for their AIFs, or that may
need assistance with discharging oversight,
the risk management function and substance
obligations for their own AIFMs. Carne can
also assist and has considerable experience
in project management of fund re-
domiciliations.
The Carne group comprises management
companies domiciled in both Ireland and
Luxembourg, each having dual authorisation
as UCITS management companies and
AIFMs. The management companies are
supported by the additional resources of the
Carne group and have access to the multi-
disciplinary and multi-jurisdictional expertise
of senior individuals within Carne.
Carne provide AIFMD and other services
across multiple jurisdictions including: EU,
US, offshore centres (Cayman, Bahamas, BVI)
and the Channel Islands (Jersey, Guernsey).
The principal solutions under AIFMD that
Carne can provide are:
1. A third party AIFM in either Ireland,
Luxembourg or UK;
2. AIF Platform in Ireland;
3. Provision of directors for internally
managed AIFs who discharge the substance
and risk management requirements of the
Directive;
46
4. Risk management and substance services
supporting the board of an AIFM or internally
managed AIF (this includes supporting US 40
Act Funds);
5. Other services supporting the AIF e.g.
Directors, Company Secretarial, MLRO (in
Ireland), Annex IV, and passporting/foreign
registration services.
Carne AIFM Management Company
Typically the Carne AIFM solution will entail
the delegation of the portfolio management
function to the investment manager and
retention (as required under the provisions of
the Directive) of the risk management function.
The Carne management companies can be
appointed as AIFM to third party AIFs, but
can also provide substance to existing client
AIFMs and internally managed AIFs, offering
the following advantages:
• Embed experienced risk management
team;
• Incorporate the additional capital
requirement introduced by the AIFM
Directive;
• Deliver a regulatory solution for businesses
that may not want to be the ‘structural’
AIFM;
• Provide a solution for businesses that do
not want to compromise their MIFID licensed
business;
• Allow delegation of certain activities to
specialist service providers;
• Provide an efficient governance solution
with a simple organisational structure;

• Management and supervision by an

experienced team;

• Offer cost efficiencies derived from

economies of scale.

In particular the Carne offering provides:

• A robust oversight framework on the funds

under management and the delegated
activities, with an experienced team
responsible for:
- An effective compliance framework;
- A comprehensive risk management
framework.

Non-EU Solution - Carne Channel Islands

Management Company

Carne has established a Management

Company in Jersey which carries out the
functions of an AIFM. AIFs managed by the
Management Company may access the EU
via the private placement regime. In common
with the Irish and Luxembourg management
companies it will typically delegate investment
management to an onshore investment
manager whilst retaining the risk management
function. It has the same robust framework
in place for oversight, compliance and risk
management as the other management
companies. For the purposes of the Directive
the Jersey Management Company will be
viewed as the AIFM which may be a desirable
outcome for EU MiFID managers with no
AIFM permissions.

For full details of Carne services please refer

to www.carnegroup.com

47
AIFMD provides a robust risk
management framework through
its prescribed rules on governance,
risk, regulation of service providers
and safekeeping of assets.
APPENDIX:
ABBREVIATIONS
AIF Alternative Investment Fund

AIFM Alternative Investment Fund Manager

AIFMD Alternative Investment Fund Managers Directive

CCF Common Contractual Fund

CIS Collective Investment Scheme

CSSF Commission de Surveillance du Secteur Financier (Luxembourg financial regulator)

ESMA European Securities and Markets Authority

FCP Fonds Commun de Placement

ICAV Irish Collective Asset-management Vehicle

LP Limited Partnership

MiFID II Markets in Financial Instruments Directive NPPR National Private Placement Rules

Part II Fund Part II of the law of 20 December 2002 (retail funds)

SPC Segregated Portfolio Company

QIAIF Qualifying Investor Alternative Investment Fund

RAIF Reserved Alternative Investment Fund

RIAIF Retail Investor Alternative Investment Fund

RMP Risk Management Policy

SICAV Société d’investissement à Capital Variable

SICAR Société d’Investissement en Capital À Risqué

SIF Specialised Investment Fund

UCITS Undertakings for Collective Investment in Transferable Securities

VCC Variable Capital Company

49
NOTES
 CARNE

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or refraining to act, in reliance on the information contained in this publication or for any
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