On the 22nd of July 2013, the EU introduced Directive 2011/61/EC concerning managers of alternative investment institutions (AIFMD).

This legislative tool was translated into Dutch national law in the Financial Supervision Act (Wft).

In theory, the legislation calls for all managers of investment institutions to have a license or registration with the Netherlands Authority for Financial Markets (AFM).

The category of 'investment institutions' encompasses hedge funds, private equity funds as well as equity and bond funds, among other fund types.

The definition and scope for managers of investment institutions that need to comply with the legislation can be found in Art.1:1 Wft, which refers to Article 4(1) of Directive 2011/61/EC.

The latter definition identifies 'investment institutions’ as:

* The definition of ‘collective investment undertakings’ further includes sub-funds, namely administratively separated parts of the assets of an investment institutions who abide by separate investment policies.

To complement the definition with additional elements important for determining the scope of the definition with certainty, the European Securities Markets Authority (ESMA) released the ESMA Guidelines on Key Concepts of the AIFMD (hereinafter ‘the Guidelines’) on 13 August 2013.

The Guidelines set cumulative characteristics for an enterprise to be identified as a ‘collective investment undertaking’ in its 12th paragraph:

* This criterion only pertains to the collective rights of all shareholders, and is still met in the eventuality that a single or multiple shareholders are granted day-to-day control.

An enterprise which possesses ‘general business purpose’ will fall outside of the scope of ‘undertaking for collective investment’, as it is no longer solely an investment vehicle.

The Guidelines define an enterprise having a ‘general commercial or industrial purpose’ when the latter encompasses in its business strategy:

i) a business activity, involving the purchase, sale and/or the exchange of goods, commodities and/or the supply of non-financial services; OR

ii) an industrial activity, involving the manufacturing of goods or building real estate infrastructure; OR

iii) a combination of the latter activities.

These alternative conditions thus result in the exclusion of manufacturing and trading companies from falling within the scope of the definition.

Since the legislation’s entry into force in the Netherlands, the AFM has released and frequently updates a document where it answers frequently asked questions (FAQs) concerning the scope of the AIFMD, to be found on this page.

In this FAQ, the AFM successfully clarified the presence of venture capital and private equity enterprises in the scope of the definition of investment institutions (to be found on page 3 of the document).

The second cumulative characteristic pertains to the enterprise’s collection of capital intended to generate a pooled return for investors.

Pooled returns pertains to revenue generated by the pooled risk that emanates from the sale, holding, or purchase of investment assets.

Individual investment for a single investor, which results in individual risk, thus falls outside of the scope of the definition.

Interestingly, the AFM’s current legislative stance appears to be that collective investment vehicles which exclusively raise capital from investors in the form of debt (e.g. through the issuing of loan or borrowed equity) does not qualify as an investment institution (to be found on page 8 of the AFM’s FAQ document).

The third and last cumulative characteristic requires that the collective investment undertaking’s day-to-day control do not rest with the investors, but rather with management.

The Guidelines provide a definition of ‘day-to-day discretion or control’.

The latter describes a form of direct and continuous decision powers concerning the daily management of the enterprise’s assets.

ESMA further clarified that the control must expand considerably beyond the scope of the ordinary exercise of control exerted by investors.

Ordinary exercise of control by investors includes voting rights during shareholder meetings on issues of mergers, liquidation, election of shareholder representatives, the assignment of directors or auditors, or consent of annual accounts.

2. Raising Capital from a Range of Investors

To be identified as investment institution, collective investment undertakings must raise capital from a range of investors.

The commercial activity of the enterprise must thus consist in obtaining the commitment or transfer of capital of multiple investors, with the purpose of investing the latter in conformity with a specific investment policy.

Chapter VIII of the Guidelines specify that any undertaking which is not prohibited by national legislation, its articles of association, or any other provision with binding legal effect, from raising capital from more than a single investor should be considered as an undertaking that raises capital from a range of investors.

An undertaking with a single investor that falls within the above definition will thus still be considered as one which raises capital from a range of investors.

Single investors are further to be considered as falling within the AIFMD classification if the sole investor:

a) invests capital which was obtained from more than one legal or natural person for the purpose of investing it for the benefit of said persons; AND

b) consists of a formation or arrangement which has more than one investor.

3. Investing in Accordance with an Investment Policy

Finally, for an enterprise to fall within the scope of ‘investment institution’ within the meaning of the AIFMD, it is required that the business vehicle has established an investment policy which determines the management of the pooled capital, with a view of generating pooled returns for the investors.

Chapter IX of the Guidelines lay out a non-exhaustive list of factors that typically are indicative of the presence of such investment policy:

a) the investment policy is determined in its finalised version, at the latest by the time the shareholders' commitments to the undertaking become legally binding;

b) the investment policy is written in a document which becomes part of or is referenced in the articles of association of the enterprise;

c) the enterprise or legal person responsible for the enterprise’s management has a legally binding obligation to investors to follow the investment policy;

d) the investment policy specifies investment guidelines, referring to any or all of the following criteria:

i) investing in specific categories of assets, or abide by specific restrictions concerning asset allocation;

ii) investing in specific geographical areas;

iii) to follow specific strategies;

iv) to conform to minimum holding periods;

v) to conform to restrictions on leverage;

vi) to conform to other restrictions designed to provide risk diversification.

If a collective investment undertaking raises capital from a range of investors and possesses an investment policy within the meaning of the aforementioned criteria, the latter undertaking is considered as falling under the definition of an investment institution of the AIFMD.

A number of important exceptions have been laid out from the scope of the AIFMD, complemented by ESMA’s Guidelines.

The Guidelines introduced the concept of ‘pre-existing group’, defining the latter as a group of family members, irrespective of the form of legal organisation they use to invest in an entity, and provided that the sole beneficiaries of such legal entity are the family members, where the group’s existence precedes the creation of the enterprise.

Family members are allowed to join the group after the establishment of the business vehicle.

The Guidelines further specify that the term ‘family members’ relates to spouses, individuals living in committed intimate relationships, in a stable joint household, direct line relatives, as well as siblings, uncles, aunts, first cousins and the persons that depend on the individual.

Such ‘pre-existing groups’ fall outside of the scope of investment institutions within the meaning of AIFMD. The Guidelines state that in such instances one cannot speak of ‘raising capital’, as required for an undertaking to be considered as an ‘investment institution’.

The AIFMD defines another category of enterprises which fall outside of the scope of the definition, namely those that are controlled by what are termed ‘captive managers’.

The exception is laid down in Article 3(1) AIFMD, which was transposed into Article 1:13a(1)(g) Wft.

The latter provision excludes investment fund managers who manage one or more investment institutions in which investments are made solely by the managers themselves or their parent companies, their subsidiaries or other subsidiaries of the parent company from the scope of the AIFMD.

The inclusion of such exception stems from the rationale that these conditions preclude any of the investors from being an investment institution themselves.

A further exception exists for certain end-of-life institutions, created under the grandfathering regime.

Article 61(3) of AIFMD stipulates that managers that manage an investment institution of closed-ended type (meaning the units of which are not directly or indirectly repurchased at the request of the investors at the expense of assets) can continue to manage the institution outside the scope of the Directive if no additional investments have been made after 22 July 2013.

Article 61(4) states that an institution of the closed-ended type whose subscription period for investors has closed before 22 July 2011, and which was established for a period ending at the latest by 22 July 2016, also falls outside the scope of the definition.

Article 2(3) of AIFMD lists seven further instances in which an enterprise falls outside the scope of the definition of investment institution.

The latter exemptions have been transposed in Article 1:13a Wft.

The list excludes:

Although the EU's Sustainable Finance Action Plan might seem as a complex legislative package with many interlinkages between various legislative instruments, the SFDR is the first regulatory tool to be finalised and to be in force since 10 March 2021.

This article aims to help financial market participants in understanding whether their investment vehicle type is required to comply with the reporting obligations emanating from the SFDR as a result.