WR Asset Management: AIF Manager – License or Just Registration?

Below we provide a brief overview that answers these questions. This includes looking at the various rights and obligations that come with an authorisation, and the limitations and simplifications that come with being "just" registered (without a license).

Starting Point: An AIF Manager Must Be Authorised Unless Exemptions Apply

All alternative investment funds (AIF) must have a manager. This is often a separate management company, but an AIF can also be internally managed (typically by the board of the AIF).

The main rule is that managers of AIFs must be authorised by the Financial Supervisory Authority of Norway. However, managers with limited assets under management (AUM) may be exempt. Such "sub-threshold" managers must register with the Financial Supervisory Authority and comply with certain reporting requirements but are subject to a far less comprehensive regulatory regime than licensed managers.

Managers who qualify as "sub-threshold" managers may still choose to apply for a license to take advantage of the further opportunities it offers, for instance, when it comes to the marketing the fund.

Exemption: Limited AUM, Only Professional Investors and Marketing Only in Norway

AIFMs may utilise the sub-threshold regime if their AUM is below the following thresholds (NOK equivalent, calculated across all funds under management):

• EUR 500 million when the portfolio consists of AIFs without leverage and without redemption rights within a five-year period from the first investment in each fund (typically private equity funds), or
• EUR 100 million (including leverage at the fund level) for other funds, i.e., AIFs that have leverage at the fund level or are "open funds" (typically hedge funds and similar funds with redemption rights).

The thresholds apply regardless of whether the management is carried out directly by the manager, or indirectly through a company that the manager is associated with through joint management, control or significant direct or indirect ownership.

The lower threshold for funds that use leverage is justified by the need for investor protection. Leverage involves increasing the fund's exposure through borrowing money, securities, derivative positions, or otherwise.

The exemption also requires that the manager does not (i) market funds to retail investors in Norway, or (ii) manage funds above the threshold values specified above. Under certain conditions, however, registered managers may also receive subscriptions from other investors (including "retail investors" in Norway). Such scenarios include sales based purely on "passive sales" ("reverse solicitation"), as well as national rules in relevant jurisdictions.

Note that registered managers can also manage so-called EuVECA funds (venture capital) and EuSEF funds (social entrepreneurship) under certain conditions, and such funds can be marketed cross-border to other EEA states (including to retail investors) if such investors invest at least EUR 100,000 and declare that they understand the risk associated with such funds.

Rights for Authorised Managers

Compared to registered managers, authorised managers have access to a much broader range of rights under the AIF Act and AIFM Directive:

• Marketing: A key advantage is the ability to use the notification procedures in the AIF Act (the so-called passporting regime), including being able to market and manage AIFs on a cross-border basis throughout the EEA, as well as market funds under management to retail investors.
  
  However, an authorisation does not grant an automatic right to market the funds under management; a separate notification to the Financial Supervisory Authority is required to market AIFs established in an EEA country (including Norway) to professional investors.
  
  Furthermore, a special permission is required to market AIFs to retail investors. An application for marketing (and the marketing itself) to retail investors is subject to increased disclosure requirements and special conditions. The definition of retail investors is regulated in the Securities Trading Act.
   
• Leverage: Authorised managers can manage funds with higher levels of leverage (see the thresholds for registered managers above).
  
  However, this does not imply a carte blanche for leverage at the fund level; the manager is obliged to ensure that the leverage limits for each fund are reasonable and always adhered to. In determining appropriate levels of leverage, the manager must consider, among other things, the type of fund, the investment strategy of the fund, the source of leverage, etc.
   
• Top-up Services: External, authorised managers can also apply to the Financial Supervisory Authority to provide certain top-up services, including discretionary management of investors' portfolios on an individual basis and in accordance with the investor's mandate. Managers so authorised, may also apply to provide additional services such as receiption and transmission of orders on behalf of clients, investment advice, as well as safe-keeping and administration of fund units. When providing top-up services, the manager is also subject to several provisions of the the Securities Trading Act, in addition to the AIF Act.
   
• Certain Fund Types: So-called ELTIFs  (European Long-Term Investment Funds) can only be managed by authorised managers.

Obligations for Authorised Managers

Compared to registered managers, authorised managers are subject to substantial regulation, including the AIF Act in its entirety. This means a higher degree of requirements and obligations, which in turn can entail higher costs and increased use of resources.

Authorised Managers must, among other things, meet requirements related to:

• Substance and resources: The activities of the manager shall be carried out by at least two persons.
• Suitability requirements: Board members and senior employees must meet requirements for conduct and experience, including the presentation of a police certificate.
• Capital requirements: The manager must have an initial capital in Norwegian kroner equivalent to at least EUR 125,000 (EUR 300,000 for internally managed funds), as well as own funds in Norwegian kroner that (i) at least corresponds to the sum of the requirement for initial capital and an amount corresponding to 0.02 percent of the manager's AUM in excess of EUR 250 million, limited upwards to an amount equivalent to EUR 10 million, and (ii) own funds shall at all times at least correspond to one quarter of the manager's fixed costs in the previous year.
• Liquidity management: The manager shall have an appropriate system for liquidity management for each AIF managed (with the exception of closed-ended funds without leverage), as well as guidelines for monitoring the fund's liquidity risk. The manager shall regularly perform stress tests to assess liquidity risk.
• Organization of the business: The manager must have sufficient and suitable resources for proper management, sound administration and accounting routines, control and security arrangements, rules for employees' personal transactions, sound internal control routines, guidelines, etc.
• Risk management: The manager shall have systems for risk management that continuously identify, measure, manage, and monitor all risks relevant to the investment strategy of each of the AIFs managed, and which the funds may be exposed to. The manager shall have a risk management function that is separate from the manager's operational business.
• Compliance: The manager's business and operations shall be operated in compliance with laws, regulations, and internal guidelines, and be supported by a permanent and effective compliance function, which operates independently.
• Transparency and reporting: Managers shall provide periodic reports to investors and the Financial Supervisory Authority. Reporting frequency depends on the size of the AUM, with simplified reporting at least quarterly.
• Pre-investment disclosures: Managers are required to provide detailed, , and understandable information about the fund before an investment is made, including a description of the investment strategy, principles for equal treatment of investors, direct and indirect costs, and conditions and procedures for subscription and redemption.
• Handling of conflicts of interest: The manager shall have policies and procedures for identifying and managing potential conflicts of interest, including organizational separation between business areas that may entail systematic conflicts of interest.
• Due diligence: Managers shall perform thorough due diligence when selecting and monitoring investments to ensure that they are in line with the fund's investment strategy, investment objectives, and risk profile.

These are just some of several requirements that authorised managers are subject to under full-scope regime.

Registered Managers are Subject to a Simpler Regulatory Regime

Registered managers benefit from a significantly simplified regulatory regime and are only subject to the provisions of the AIF Act § 1-4 (on exceptions from parts of the Act) and chapter 9 (on supervision, administrative sanctions, and other management measures). This means, among other things, much less bureaucracy compared to authorised managers.

The simplifications include, among other things, that the AIF Act chapter 11 on criminal sanctions does not apply. However, the Financial Supervisory Authority may deny a sub-threshold manager to use the registration regime in the event of a breach of law. Such breaches may further affect the suitability assessment of employees, board members, and owners in the event of an application for a full license. In addition, the Money Laundering Act applies, where violations may result in orders to cease illegal conditions, a ban on holding management functions, fines for violations, and criminal sanctions.

Obligations for Registered Managers

In order to comply with the rules as a registered manager, the manager must, among other things, meet requirements related to:

• Registration: The manager must be registered in the business register with the Financial Supervisory Authority and in this regard provide information on the identity and strategy of the funds, and report any significant changes in this information. Registration is done by submitting a form in Altinn, the digital Norwegian Government portal.
• Reporting: The manager must annually inform the Financial Supervisory Authority about the investment strategies, main categories of instruments traded, principal exposures and most important concentrations of the AIFs (so-called Annex IV reporting). Such reporting is done by submitting a form in Altinn. In addition, the manager must submit report on anti-money laundering matters to the Financial Supervisory Authority, as well as CRS/FATCA reporting to the Tax Administration if it foreign investors have been admitted to an AIF.
• Auditor: Both the manager and the AIF must have an auditor, even if the company as such is below the ordinary thresholds for appointing an auditor.
• Investor classification: Before marketing to professional investors in Norway, potential investors must be classified as professional according to the definition in the Securities Trading Act.
• Risk assessment: Managers of alternative investment funds are subject to the Money Laundering Act. This entails, among other things, an obligation to prepare a business-oriented risk assessment. This risk assessment shall form the basis for the manager's internal routines for dealing with identified risks on an ongoing basis. Furthermore, the manager must, when onboarding investors in an AIF, carry out both initial and on-going customer due diligence, as well as training and educating its staff on relevant legal obligations, risks faced by the business etc..
• Policies and procedures: The manager is be subject to the general rules of the Companies Act, including on internal control, the tasks of the board and the CEO, and certain other general duties. The managers' policies and procedures  for complying with such requirements should be documented in an policies and procedures adopted by the board of directors.
• Monitoring of threshold: A registered manager who exceeds the relevant AUM thresholds , must immediately notify the Financial Supervisory Authority and apply for a full license within 30 days from the day the relevant threshold was exceeded.
• SFDR: A registered manager is subject to the Act on Sustainable Finance and the EU's regulation on Sustainable Finance Disclosure (SFDR). In practice, this means that the manager must at least provide information about the integration of sustainability risks, the use of PAI indicators (exclusion), and compensation.
• EuVECA/EuSEF: For registered managers managing EuVECA/EuSEF funds, additional requirements apply including, among other things, rules on good business practices, conflicts of interest, outsourcing, reporting, investor disclosures, and own funds.

Tax and VAT Are Relatively Similar

It is worth noting that AIFMs will typically be covered by the financial tax regardless of whether they are authorised or are just registered. This means that profits in the manager are taxed at 25% (instead of 22%) and an additional five percentage points are added to the employer's national insurance contribution. The AIFs themselves are generally not covered by the financial tax, as they do not have employees (employer basis).

Furthermore, the management fee will normally be exempt from VAT regardless of whether the manager is authorised or registered. The VAT liability for other services must be assessed on a case-by-case basis.