What general principles must an AIFM follow, and how must it handle conflicts of interest?

An AIFM must act honestly, lawfully and fairly, with due skill, care and diligence, and serve the best interests of the funds it manages, their investors and the integrity of the market, rather than its own interests. It needs effective resources and procedures, must avoid conflicts where it can and otherwise identify, manage, monitor and, where relevant, disclose them, must comply with every regulatory requirement and must treat every investor fairly.

Fair does not mean identical. An investor may receive preferential treatment, such as a lower fee, only where the fund's rules or instruments of incorporation provide for it (the Directive says disclosed in them). An AIFM that also manages discretionary portfolios may place a client's money, wholly or partly, in funds it manages only if the client has given prior general consent; neither consent for each investment nor CySEC approval is required.

The AIFM takes all reasonable steps to identify conflicts arising in managing AIFs in five pairings: the AIFM itself, including its managers, employees and anyone linked to it by control, against a fund it manages or that fund's investors; one fund or its investors against another; a fund or its investors against another client of the AIFM; a fund or its investors against a UCITS the AIFM manages or its investors; and one client against another. The first pairing concerns the funds the AIFM itself manages; funds run by other managers are not on the list.

Delegated Regulation 231/2013 lists what to look for: whether the AIFM, a relevant person or a person linked to it by control may gain, or avoid a loss, at the expense of the fund or its investors; has an interest in an outcome that differs from the fund's; has an incentive to favour another fund, client or investor; does the same work for the fund and for others; or receives from someone other than the fund or its investors an inducement beyond the standard fee. The AIFM also needs a written conflicts policy proportionate to its size, organisation and business.

The AIFM keeps effective organisational and administrative arrangements so that conflicts are found, prevented, managed and monitored before they harm its funds and investors. Within its own operations it keeps apart tasks and responsibilities that are incompatible or could generate systematic conflicts, and it assesses whether its operating conditions involve other material conflicts, which it discloses to investors.

Disclosure is the last resort. Where the arrangements cannot ensure, with reasonable confidence, that investors will not be harmed, the AIFM clearly discloses the general nature or sources of the conflicts to them before acting on their behalf, and develops suitable policies and procedures.

Where a prime broker is used for a fund, a written contract sets out how the two cooperate and any transfer and reuse of fund assets, which must respect the fund rules, and it must provide for the depositary to be told about the contract. Prime brokers are selected and appointed with due skill, care and diligence.