Understanding Unauthorized Alternative Investment Funds: What You Need Know

An unauthorised alternative investment fund (AIF) is a fund that does not require authorisation under the UCITS Directive. AIFs are collective investment schemes that raise capital from a number of investors to invest in assets that generate favourable returns. AIFs can include hedge funds, private equity funds, real estate funds, and funds for investing in rare coins or fine wines. The Alternative Investment Fund Managers Directive (AIFMD) provides the legal basis for AIFs and aims to create uniform requirements for the authorisation and supervision of Alternative Investment Fund Managers (AIFMs) in the European Union.

What is an unauthorised alternative investment fund?

An unauthorised alternative investment fund (AIF) is a fund that does not require authorisation under the UCITS Directive. AIFs are collective investment undertakings that raise capital from a number of investors to invest in assets with the aim of generating favourable returns for those investors. The Alternative Investment Fund Managers Directive (AIFMD) provides the legal basis for AIFs and aims to create uniform requirements for the authorisation and supervision of Alternative Investment Fund Managers (AIFMs) in the European Union.

AIFs encompass a diverse range of asset classes, including hedge funds, private equity funds, real estate funds, and funds for investing in rare assets such as fine wines or rare coins. They are generally defined as funds that do not meet the criteria for regulation as UCITS, which specifically invest in liquid financial assets such as bonds, shares, and money market instruments.

While AIFs are subject to the legislation outlined in the AIFMD, there are exemptions that allow certain AIFMs to fall outside the scope of the directive. These include the intra-group exemption, which applies when the investors of the managed funds consist only of specific entities related to the AIFM, and the de minimis exemption, which excludes smaller AIFMs from the burden of regulation based on their total assets under management and the absence of investor redemption rights for a defined period.

Firms intending to act as depositaries of authorised or unauthorised AIFs must apply for permission to do so. The AIFM and the depositary of an unauthorised AIF can be separate but connected entities within the same group, provided they properly manage and disclose potential conflicts of interest.

What is an 'alternative investment fund' (AIF)?

An alternative investment fund (AIF) is a collective investment scheme managed by an alternative investment fund manager (AIFM). AIFs are established to raise capital from several investors, which is then invested in assets to generate favourable returns. The term AIF refers to any vehicle established for this purpose.

The Alternative Investment Fund Managers Directive (AIFMD) is the legal basis for AIFs. The AIFMD aims to create uniform requirements for the authorisation and supervision of AIFMs in the European Union. The directive defines an AIF as any collective investment undertaking that raises capital from multiple investors to invest in accordance with a defined investment policy for the benefit of those investors.

Examples of AIFs include hedge funds, private equity funds, real estate funds, and funds formed to invest in rare coins or fine wines. AIFs are subject to the legislation outlined in the AIFMD and must be compliant with its regulations.

Firms can act as depositaries of authorised or unauthorised AIFs, but they need to apply for permission to do so. The AIFM and the depositary of an authorised AIF must be independent of each other. However, the AIFM and the depositary of an unauthorised AIF can be separate yet connected entities within the same group, provided there is proper management and disclosure of potential conflicts of interest.

What is the Alternative Investment Fund Managers Directive (AIFMD)?

The Alternative Investment Fund Managers Directive (AIFMD) is a European Union (EU) regulation that applies to alternative investments, many of which were largely unchecked before the 2008-2009 global financial crisis. The directive sets standards for marketing, raising private capital, remuneration policies, risk monitoring and reporting, and overall accountability.

The primary goal of the AIFMD is to protect investors and reduce the systemic risk posed by alternative investment funds to the EU and its economy. The directive applies to EU-registered hedge funds, private equity funds, and real estate investment funds.

The AIFMD was implemented in 2013 to regulate alternative investment fund managers rather than the funds themselves. It applies to any manager operating a fund in the EU, regardless of whether the fund is set up within or outside the EU. The directive has two major objectives: protecting investors and removing systemic risks to the EU economy.

To achieve these objectives, the AIFMD introduces stricter compliance requirements for information disclosure, including conflicts of interest, liquidity profiles, and independent valuation of assets. It also mandates that remuneration policies be structured to avoid encouraging excessive risk-taking and that financial leverage be reported to the European Systemic Risk Board (ERSB). Additionally, the directive requires robust risk management systems that consider liquidity.

Compliance with the AIFMD is necessary for obtaining a passport to sell financial services across the EU market. The directive is supplemented by directly applicable Level 2 Regulations, which apply in all Member States in addition to domestic legislation.

What are the requirements for an AIF?

An Alternative Investment Fund (AIF) is a type of investment fund that is not typically covered by conventional investment regulations. These funds can invest in assets outside the usual stock and bond markets, making them a diverse and potentially lucrative option for investors seeking different risk and return profiles.

Eligibility Criteria

The eligibility criteria for applying for registration as an AIF include:

• The applicant, manager, and sponsor must be "fit and proper" persons as per the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
• The manager of the key investment team of the AIF must have adequate experience, and at least one key personnel should have five years of experience in managing pools of capital or advising in fund, wealth, asset, or portfolio management. Alternatively, they should have experience in the business of selling, buying, and dealing with securities or other financial assets.
• At least one key personnel must have a professional qualification in accountancy, finance, commerce, business management, capital market, economics, or banking from an institution or university recognised by the Central or State Government.
• The applicant must clearly state the targeted investors, investment objective, investment style, proposed corpus, strategy, and proposed tenure of the fund or scheme.
• The Memorandum of Association (MoA) of a company or the Trust Deed of a Trust or the Partnership deed of an LLP must give permission to carry on the activity of an AIF.
• The applicant should be prohibited by its MoA and Articles of Association (AoA) or Partnership Deed or Trust Deed from inviting the public to subscribe to its securities.
• Additional requirements apply if the applicant is a Trust, LLP, or a body corporate.

Registration Process

To register an AIF, applicants must submit an application to the Securities and Exchange Board of India (SEBI) in Form A, along with the necessary documents and a non-refundable application fee. SEBI will review the application and approve it if all requirements are met. The typical timeframe for registration is around 2-3 months after the submission of all necessary documentation.

Documentation

The following documents are required for AIF registration:

• Certificate of Incorporation or Registration of the applicant entity.
• Partnership Deed in the case of an AIF registration by a Partnership registered under the Limited Liability Partnership Act, 2008.
• Original Deed of Trust in the case of an AIF registration by a society or trust registered under the Trusts Act, 1882.
• Information on the directors and shareholders with respect to the AIF.
• Copy of the Placement Memorandum of the applicant entity.
• Contact information and other relevant information of the applicant entity.
• Any other business information relating to the expansion plans of the company or LLP.
• Address and particulars of the Registered Office of the applicant entity.
• Memorandum of Association and Articles of Association of the applicant entity.

Compliance Requirements

After obtaining the AIF Registration Certificate, the AIF must comply with ongoing reporting requirements, including:

• Adhering to the reporting requirements as stated by the SEBI from time to time.
• Regularly checking the SEBI website for any circulars, updates, or guidelines issued relating to AIF activity.
• Intimating SEBI of any material changes in the details already furnished within a reasonable time.

How do you apply to act as a depositary of an AIF?

To apply to act as a depositary of an AIF, you must apply for permission to do so. The type of application you need to complete depends on whether your firm is already authorised or not.

Application Process for Authorised Persons

If your firm is already authorised, you must complete the Variation of Permission (VoP) form for depositaries of AIF(s).

Application Process for Unauthorised Persons

If your firm is not authorised, you must complete the Variation of Permission (VoP) form for depositaries of AIF(s) and the application pack for wholesale investment firms (which should be appended to the completed VoP form for depositaries of AIFs).

Eligibility Criteria

To be eligible to act as a depositary of an AIF, your firm must be one of the following:

• An EEA credit institution
• An authorised MiFID investment firm which provides the services of safe-keeping and administration of financial instruments and has own funds of not less than €730,000 under Article 28 of the CRD (2013/36/EU) (for a UK firm, this would be an IFPRU 730k firm with permission to safeguard and administer investments)
• A firm which, on 21 July 2011, had a Part 4A permission of acting as a trustee of an authorised unit trust scheme or depositary of an open-ended investment company that, in either case, is a UCITS scheme
• Another type of authorised or unauthorised person which will, if authorised as a depositary of AIF, only:
• Act as a trustee or depositary for AIFs of the kind defined in FUND 3.11.12R (a PE AIF depositary)
• Provide one or more depositary services to non-EEA AIFs

It is important to note that a depositary of an AIF cannot be an AIFM or a UCITS management company. Only depositaries of the types listed above can act for an authorised AIF. Additionally, the AIFM and the depositary of an authorised AIF must be independent of each other. However, the AIFM and the depositary of an unauthorised AIF can be separate yet connected entities in the same group, provided there is proper management and disclosure of potential conflicts of interest.

Submission Process

Once you have completed the relevant forms, please send electronic versions of your application form and supporting documentation to to ensure your application can be processed quickly and smoothly. A signed paper copy of the VoP form will also be required. The email subject line should contain your full firm name followed by the words ‘AIFMD Depositary Application’, for example, ‘XYZ Group AIFMD Depositary Application’. Incomplete applications will not be accepted.

When sending your data electronically, it must be encrypted either by using the FCA's PGP key or by using a password-protected WinZip file. Alternatively, you can provide the data on a CD or USB (password protected – the password will be requested upon receipt of the application).

Once you have submitted your data, the FCA will review your submission and confirm receipt via email.

Frequently asked questions