Disclosure and Reporting

The Directive imposes requirements for information to be given to investors and regulators, both in the marketing process and on an ongoing basis.

Disclosure to investors

Under Article 23 of the Directive, for each EU AIF an EU AIFM manages and for each AIF either an EU AIFM or a non-EU AIFM markets in the EU, AIFMs must make certain information available to investors before they invest in the AIF, together with any updates. This information includes a description of:

  • the investment strategy and objectives of the AIF and the techniques it may employ and all associated risks, any applicable investment restrictions and details in relation to any leverage and collateral and asset re-use arrangements (including the maximum level of leverage under the Gross Method and Commitment and if such limit has been set). It is a requirement for all AIFMs authorised under the Directive to set such leverage limits in relation to each of the AIFs they manage;
  • the procedures by which the AIF may change its investment strategy or investment policy;
  • the main legal implications of the contractual relationship entered into for the purpose of investment (which will normally include the constitutional document(s) of the AIF and any subscription agreement), including information on jurisdiction, applicable law and the existence of any legal instruments providing for the recognition and enforcement of judgments in the territory where the AIF is established;
  • the identity of the AIFM, the AIF’s depositary, auditor and any other service providers, together with a description of their duties and the investors’ rights in relation thereto;
  • how the AIFM complies with the requirements to cover professional liability risks under the capital requirement provisions, i.e. either via additional own funds or professional indemnity insurance;
  • any delegated management or depositary function and any associated conflicts of interest;
  • the AIF’s valuation procedure and pricing methodology;
  • the AIF’s liquidity risk management, including redemption rights;
  • all fees, charges and expenses (including maximum amounts) borne by investors (including amounts borne indirectly by investors, e.g. fees and expenses at the master level for feeder funds); 
  • how the AIFM ensures fair treatment of its investors;
  • any preferential treatment received by an investor (e.g. by way of a side letter);
  • the latest annual report (see above);
  • the procedure and conditions of issue and sale of units or shares;
  • the latest net asset value of the AIF or the latest market price of the units or shares of the AIF according to the valuation provisions;
  • where available, the historical performance of the AIF;
  •  prime brokerage arrangements;
  • any arrangements made by the depositary to contractually discharge itself of its liability under the Directive, together with any changes with respect to depositary liability; and
  • how and when periodic disclosures will be made (see periodic disclosures to investors below).

In the UK, these rules are set out in the FCA Handbook (FUND 3.2.2 to 3.2.4).

In addition, in relation to feeder AIFs, the information needs to include details on where the master fund is established and, in relation to fund of funds, details on where the underlying funds are established.

Where any information listed above is already disclosed to investors in a Directive-compliant prospectus, it does not need to be repeated.

Whilst it is common practice to disclose the majority of the information listed above in the offering documents in relation to the AIF, it is not an obligation (in most EU jurisdictions including the UK) to include all of such information in the offering documents, provided it will otherwise be made available to the investors before they invest (e.g. by way of a data room or an EU specific wrapper).

A non-EU AIFM marketing an AIF in the EU will not be subject to the Directive’s requirements on professional liability risks, depositaries, maximum level of leverage, valuation and liquidity risk management (subject to any express requirements in the national implementation of the Directive in the relevant Member States). Unless, for example, the AIFM has imposed leverage limits or undertakes liquidity management, such AIFMs will not need to provide any information on these points.

Each AIFM must periodically disclose the following information to investors:

  • the percentage of assets which are subject to special arrangements arising from their illiquid nature;
  • any new arrangements for managing the liquidity of the AIF;

  • the current risk profile of the AIF and risk management systems employed by the AIFM; and
  • where an AIFM manages or markets in the EU an AIF employing leverage, it shall disclose on a regular basis, and without undue delay, the maximum level of leverage permitted (as well as any right of re-use of collateral or any guarantee granted under the leveraging arrangement) and the total amount of leverage employed by the AIF.

Click here for the provisions of the Level 2 Regulations on the content requirements for periodic disclosures in relation to the points listed above and the mode and frequency of such disclosures.

Annual Report

Under Article 22 of the Directive, audited annual reports must be made available by an EU AIFM for each EU AIF it manages and by both an EU AIFM and a non-EU AIFM for each AIF they market in the EU, within six months following the end of the financial year. The annual report must be provided to investors on request and made available to the home Member State regulator of the AIFM (for EU AIFMs) and, in case of an EU AIF, to the EU AIF’s home Member State regulator. A non-EU AIFM marketing an AIF in the EU under the national placement regimes will additionally have to make the annual report available to the relevant regulator in each Member State in which the AIF is marketed.

The annual report must disclose:

  • a balance sheet or a statement of assets and liabilities (click here for the provisions of the Level 2 Regulations on the content of the balance sheet);
  • an income and expenditure account for the financial year (click here for the provisions of the Level 2 Regulations on the content of the income and expenditure account);
  • a report on the activities of the financial year (click here for the provisions of the Level 2 Regulations on the content of the report on the activities of the financial year);
  • any material changes to the information that was disclosed to investors under the Directive during the financial year in question. The provisions of the Level 2 Regulations on material changes may be found here, but essentially a change will be considered material for these purposes if there is a substantial likelihood that a reasonable investor, becoming aware of such information, would reconsider its investment in the AIF, including because such information could impact an investor’s ability to exercise its rights in relation to its investment, or otherwise prejudice the interests of one or more investors in the AIF;
  • total remuneration for the financial year (split into fixed and variable remuneration) paid by the AIFM to its staff members, the number of beneficiaries and, where relevant, carried interest paid by the AIF; and
  • the aggregate amount of remuneration broken down by senior management and members of staff whose actions have a material impact on the risk profile of the AIF. Click here for the provisions of the Level 2 Regulations on remuneration disclosure.

In the UK, these rules are set out in the FCA Handbook (FUND 3.3.5).

Listed AIFs only need to provide investors with the information noted above on request (either separately or as part of the annual report). However, if it is included as an additional part of its annual financial report then the information must be made available within four months of the end of the financial year.

Annual reports must be prepared in accordance with the accounting standards of the AIF’s home Member State or the third country where the AIF has its registered office. The information in the annual report needs to be presented in a manner that provides materially relevant, reliable, comparable and clear information.

The accounting information given in the annual report must be audited by an EEA auditor. For non-EU AIFs, certain individual Member States (e.g. the UK) have allowed the annual report to be audited by an auditor meeting international standards and based in the country where the non-EU AIF has its registered office.

Reporting Obligations to Competent Authorities

An EU AIFM will be required to regularly report to the regulator of its home Member State on aggregated information on the main instruments in which it trades, the markets of which it is a member or actively trades and the diversification of the AIF’s portfolio, including its principal exposures and most important concentrations of each of the AIFs it manages. In the UK, these rules are set out in FUND 3.4.

An EU AIFM shall also provide the following information to the regulator of its home Member State:

  • the percentage of the AIF’s assets subject to special arrangements arising from their illiquid nature;
  • new arrangements for managing the liquidity of the AIF;
  • the risk profile of the AIF and risk management systems employed;
  • the main categories of assets in which the AIF is invested; and
  • the results of stress tests required by the Directive in respect of investment risk and liquidity risk.

The regulator of the home Member State could require additional information, including:

  • the annual report of each EU AIF and each AIF marketed in the EU;
  • a list of all AIFs which the AIFM manages for the end of each quarter; and
  • additional information which the home regulator may require to monitor risk effectively.

A non-EU AIFM marketing an AIF it manages in the EU under the national placement regimes will have to report the information listed above to the relevant regulator in each Member State in which the AIF is marketed.

When reporting information on a feeder AIF in a master/feeder structure, subject to specific requirements issued by particular Member States, it is not necessary to look through to the master AIF’s assets and trading activity. However, according to guidance issued by ESMA to national regulators, national regulators may seek additional information on the master AIF if the feeder AIF and the master AIF are managed by the same AIFM.

The information must be provided to the regulator by the AIFM:

  • on a half-yearly basis, if the total assets under management in relation to the portfolio of AIFs managed by it exceed either EUR 100m (if the underlying AIFs use leverage) or EUR 500m (if the underlying AIFs do not use leverage), but do not exceed EUR 1bn for each EU AIF;
  • on a quarterly basis, if the total assets under management in relation to the portfolio of AIFs managed by it (excluding non-EU AIFs not marketed in the EU) and/or marketed in the EU exceed EUR 1bn;
  • for AIFMs otherwise subject to the half-yearly reporting, on a quarterly basis in relation to those AIFs whose assets under management (on a single AIF basis and including any assets acquired through leverage) exceed EUR 500m; and
  • on an annual basis, for unleveraged AIFs whose core investment policy includes investment in and acquiring control of Non-Listed Companies and Issuers.

Click here for the provisions of the Level 2 Regulations regarding the above reporting obligations.

ESMA has released a detailed report on reporting obligations under the Directive which can be accessed here and regularly issues new guidance on reporting obligations as part of their Q&A on the Directive, available here. ESMA has also developed specific reporting documents which can be accessed here.

Certain national regulators have released their own guidance on reporting obligations and/or set-up electronic reporting platforms. Please click here to access the website on reporting prepared by the FCA.

Leverage

Please click here for a summary of the disclosure requirements in respect of AIFs that employ leverage.