The Alternative Investment Fund Managers Directive (AIFMD) provides a strong framework for delegation of alternative investment fund manager (AIFM) functions to ensure that the AIFM retains strong and effective management of the alternative investment (AIF) and to avoid the creation of “letter-box” entities.
Conditions for delegation of functions
The AIFM is allowed to delegate some of the functions it performs provided the following conditions are fulfilled:
- No delegation of functions to the extent that the AIFM becomes a letter-box entity.
- Advance notification to the competent authorities before delegation arrangements become effective.
- An objective reason for the entire delegation structure.
- The delegate has sufficient resources to perform the task, and is of good repute and sufficiently experienced.
- Selection of the delegate is based on a proper due diligence.
- The delegation does not prevent the effectiveness of supervision of the AIFM, and must not prevent the AIF from being managed in the best interests of investors.
- The AIFM is able to monitor at any time the delegated activity.
- Sub-delegation is possible, subject to prior consent by the AIFM and to notification to the competent authorities before sub-delegation arrangements become effective.
Delegation of portfolio management
There are specific requirements where the AIFM intends to delegate its portfolio management or risk management functions:
- The entities to whom risk management or portfolio management may be delegated is limited to authorized Undertakings for Collective Investments in Transferable Securities (UCITS) management companies, Markets in Financial Instruments Directive (MiFID) investment firms, credit institutions (e.g. banks), AIFMs and authorized third country asset managers where a co-operation arrangement exists between the supervisory authorities.
- For third country asset managers, the co-operation arrangement must satisfy a number of conditions set out in the regulation.
- Delegation or sub-delegation is not allowed to the depositary or a delegate of the depositary.
- Delegation is not allowed to any other entity whose interest may conflict with those of the AIFM or the investors of the AIF, unless such entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from other potentially conflicting tasks.