In the case of U.S.-based hedge fund managers, the EU’s Alternative Investment Fund Managers Directive (the “AIFMD”), which goes into effect on July 22, 2013, sets forth a new regulatory regime likely to affect most hedge fund managers, wherever based, if they are actively marketing their funds (“alternative investment funds” or “AIFs”) to EU investors, since such managers would likely be considered alternative investment fund managers (“AIFMs”) under the AIFMD.

While EU-domiciled AIFMs will be able to market their EU AIFs through a “passport” regime, U.S.-based AIFMs actively offering their funds (e.g., via a Cayman-based fund or an EU-based fund) to EU investors will, for the near future, not have access to a marketing passport, and will be required to comply with the relevant private placement rules within the given EU jurisdictions and certain aspects of the AIFMD, including:

• Extensive disclosure requirements to investors;
• Additional financial reporting to investors and EU regulators; and
• A comprehensive reporting on the manager’s operations under Annex IV.

First, the AIFMD specifies various disclosures that must be made to EU investors. The required information to be disclosed prior to an investment, which resembles offering memoranda data, includes, among other things: (a) the AIF’s investment policy, strategies and restrictions; (b) circumstances where leverage may be utilized and details of any collateral and asset rehypothecation arrangements; (c) a description of the valuation procedure and pricing methodology for assets; (d) a description of the liquidity arrangements; (e) a description of fees and expenses; (f) details of side letters and the types of investors who obtain them; and (g) a description of prime brokerage arrangements. In addition, periodic disclosures must be made about the percentage of illiquid assets subject to special arrangements (e.g., side pockets), new arrangements to manage AIF liquidity, and the current risk profile and risk management systems employed by the AIF. Lastly, regular disclosures must be made relating to the amount of leverage used.

Second, an annual report must be produced and made available to investors and regulators in the relevant EU Member State(s). In addition to financial statements, the annual report must include information on any material changes to the information disclosed to investors (as described above), as well as detailed information on the manager’s remuneration, including the total amount and the aggregate amount of remuneration broken down by senior management and staff members whose actions have a material impact on the risk profile of the AIF.

Finally, a non-EU AIFM is required to report information on Annex IV (i.e., a form somewhat similar to Form PF) either semi-annually or quarterly (depending on size) to each of the EU Member States where its AIFs are marketed. If AIFs employ leverage on a “substantial basis”, the non-EU AIFM is required to provide the relevant regulators with information about the overall levels employed, a breakdown between leverage arising from borrowings (including identifying the five largest sources) and from derivatives, and the extent to which the AIF’s assets have been made subject to rehypothecation. It should be noted that, despite requiring information similar to Form PF, Annex IV differs considerably from it with respect to format and content.

For more information relating to the AIFMD, please feel free to contact your primary Investment Management Group attorney at Seward & Kissel LLP or refer to the more detailed memorandum, the Top Ten Things Every US Hedge Fund Manager should know about AIFMD, jointly prepared with our investment management alliance partner, Simmons & Simmons LLP.