Can you still rely on transitional provisions for closed-ended funds?

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Summary: The European Commission's draft delegated regulation under the AIFMD dated 17 December 2013 provides that an alternative investment fund (an "AIF") may also be treated as “closed-ended” if, broadly speaking, it has no redemption rights for at least an initial five year period. Consequently, once this regulation enters into force, AIF structures which offered any redemptions during the five year period from an investor’s subscription, may now be treated as “open-ended” and so will no longer have the Article 61(3) or (4) transitional provisions available to them.

Article 61(3) and (4) of the transitional provisions of the Alternative Investment Fund Managers Directive (“AIFMD”) provides that the AIFMD will not fully apply to managers of closed-ended alternative investment funds (“AIFs”) which have either stopped investing before 22 July 2013 or which have both held their final closing before 21 July 2011 and will terminate prior to 22 July 2016.

An earlier draft European Commission regulation issued in August 2013 allowed for national laws to determine the meaning of “closed-ended” for the purpose of these transitional provisions.

In the UK, this was considered to include structures which offered redemptions on an annual or less frequent basis.

The European Commission’s draft delegated regulation dated 17 December 2013 provides that an AIF may also be treated as “closed-ended” if, broadly speaking, it has no redemption rights for at least an initial five year period.

Consequently, once this regulation enters into force, AIF structures which offered any redemptions during the five year period from an investor’s subscription, may now be treated as “open-ended” and so will no longer have the Article 61(3) or (4) transitional provisions available to them. This in turn means that managers will need to ensure that such AIFs are managed by an authorised alternative investment fund manager and subject to appropriate compliance requirements.

It will therefore be worthwhile looking back over structures that you are currently treating as falling under these transitional provisions to see if they offer or have ever offered any redemption rights (however limited) in case you can now no longer rely on them having been “closed-ended”.

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