By Peter Tyson and Simon Riveles
On 22 July 2013, the EU directive on alternative investment fund managers (AIFMD) will take effect in each European Union (EU) Member State. The AIFMD establishes an authorization regime as well as a rulebook for managing and marketing alternative investment funds (AIFs) by alternative investment fund managers (AIFMs) within the EU. In addition to retaining the private placement regime until at least 2018, the AIFMD also provides for a new passporting system, which will govern pan-European marketing of EU AIFs to professional investors across the EU. However, the passporting system will only be available to EU AIFMs until at least 2015, at which time the European Security and Markets Authority (ESMA) will determine whether the passporting system should be extended to non-EU AIFMs. Until 2015, non-EU AIFMs will have to primarily rely on the private placement regime for marketing non-EU AIFs to EU investors. While marketing under the private placement regime does not require prior authorization under the AIFMD, certain minimum requirements must still be met, and EU Member States retain some discretion in imposing stricter rules on non-EU AIFMs relying on the private placement regime. This brief describes in greater detail how the AIFMD will affect the marketing of non-EU AIFs by non-EU AIFMs, and the scope of the AIFMD’s compliance burden.
SCOPE OF THE AIFMD
The AIFMD applies to any legal person appointed by, or on behalf of, an AIF whose regular business is managing one or more AIFs in the EU. The AIFMD will apply to a non-EU AIFM if it is (a) managing or marketing one or more AIFs established in the EU to investors in the EU; or (b) marketing one or more AIFs established outside the EU to investors in the EU.
• Under the AIMFD, an “AIF” is essentially any fund that is not organized and authorized as an undertaking for collective investment in transferable securities (UCITS) as AIFs. The general test as to whether a fund is an AIF depends on whether there is an undertaking that raises capital from investors with a view to invest it in accordance with a defined investment.
• “Managing” an AIF means to provide risk management or portfolio management services to the AIF.
• “Marketing” an AIF means a direct or indirect offering or placement, at the initiative of the AIFM or on behalf of the AIFM, of units or shares of an AIF it manages to or with investors domiciled in the EU or with a registered office in the EU.
There are a number of exemptions to the scope of the AIFMD. Generally, the AIFMD will not apply to managers of:
1. One or more AIFs whose only investors are companies within the same group as the manager (provided that none of these investors itself is an AIF)
2. “Small” AIFs with leveraged assets of below €100m or unleveraged assets of below €500m where there are no redemption rights within five years of initial investment in the AIFs
3. Securitization special purpose vehicles (SPVs)
4. Close-ended AIFs that will not make any additional investments after July 22 2013, and close-ended AIFs whose subscription periods close prior to the transposition of the AIFMD and which will be wound up not later than 22 July 2016
Additionally, the AIFMD will not apply to “reverse solicitation” or “passive marketing” (i.e. marketing which is not at the direct or indirect initiative of the non-EU AIFM).
CHANGES TO THE PRIVATE PLACEMENT REGIME STARTING JULY 22 2013
Until the passporting system is extended to non-EU AIFMs, any marketing that takes place in a EU Member State after July 22, 2013 must be done through the private placement regime. The AIFMD private placement regime will be in place until at least 2018, at which time the ESMA will determine whether the private placement regime should continue to be an available route for accessing EU investors. Some EU Member States will adopt transitional arrangements, which will delay compliance with the AIFMD’s private placement regime requirements (for example, the UK is considering a one-year transitional period). Under such transitional arrangements, pre-AIFMD private placement regimes may be temporarily maintained, however compliance with the AIFMD’s private placement regime requirements must follow after the transitional period ends, which may not exceed two years.
The AIFMD will require that any non-EU AIFM who wants to continue to take advantage of the private placement regime in a EU Member State will have to comply, at a minimum, with the following three conditions:
1. Disclosure: A non-EU AIFM must comply with certain disclosure and transparency provisions in the AIFMD regarding:
(i) Making available an annual report for each non-EU AIF which is marketed in the EU (the report is required to contain, inter alia, a balance sheet, an income and expenditure account for the financial year, a report on the activities of the AIF for the financial year, and disclosures regarding the remuneration and management fees paid by the non-EU AIFM to its staff)
(ii) Making available certain pre-investment information to AIF investors (including, but not limited to, the AIF’s investment strategy, the circumstances in which it may use leverage, a description of the AIF’s liquidity risk management, the historical performance of the AIF, and any material changes to the required information. Similar information must continue to be provided to in an annual report)
(iii) Regularly reporting to the competent authorities in the EU Member State where the AIF is marketed (the reports must include, inter alia, the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature, and also must include the main categories of assets in which the AIF invests. How often a non-EU AIFM must report to regulators depends on the assets under management of all AIFs managed by a non-EU AIFM as well as the extent to which each AIF utilizes leverage)
2. Co-operation: Appropriate cooperation agreements must be in place between (i) the competent authorities in each EU Member State where the non-EU AIF is to be marketed; (ii) the supervisory authority of the domicile of the non-EU AIF; and (iii) the supervisory authority of the country where the non-EU AIFM is established. The cooperation agreements ensure that information on the non-EU AIF and its manager can be efficiently exchanged between regulators.
3. FATF: At the time of marketing, neither the non-EU AIF nor the non-EU AIFM should be authorized or registered in a country which is listed by the Financial Action Task Force on anti-money laundering and terrorist financing as a “Non-cooperative Country and Territory.”
If any of the above minimum conditions are not satisfied after July 22 2013 (subject to transitional arrangements), then a non-EU AIFM cannot continue to market to EU investors. It is also important to note that EU Member States have discretion under the AIFMD to impose stricter conditions on non-EU fund managers relying on EU Member State private placement regimes. Consequently, local advice regarding marketing in a particular EU Member State should be sought on a case-by-case basis to determine the relative burdens and benefits of a given EU Member State’s private placement regime.
THE PASSPORTPORTING SYSTEM
The passporting system under the AIFMD will take effect on July 22 2013. Currently, the passporting system will only allow EU AIFMs to market AIFs established in the EU to investors across the EU. In 2015, the ESMA will determine whether the passporting system should extend to non-EU AIFMs of non-EU AIFs.
If the passporting system is extended to non-EU AIFMs in 2015, then non-EU AIFMs will be required to obtain authorization under the AIFMD from the regulatory authorities in its Member State of Reference, as well as fully comply with all of the provisions of the AIFMD. Full compliance with the AIFMD will include adherence to provisions regarding the use of liquidity, limits on leverage, use of depositaries, delegation to service providers, valuation of assets, minimum capital requirements, remuneration policies and practices, use of risk management systems and more general reporting obligations. In the case of private equity and hedge funds, non-EU AIFMs will also have to restructure their existing custodian and prime brokerage relationships to comply with the AIFMD.
Non-EU AIFMs will have to comply with the cooperation and FATF conditions set forth under the AIFMD’s private placement regime, in addition to one extra condition regarding the establishment of a tax information exchange agreement between (i) the EU Member State of Reference for the non-EU AIFM; (ii) the non-EU country in which the non-EU AIF is domiciled; and (iii) the non-EU country in which the non-EU AIFM is established. This tax information exchange agreement must also fully comply with Article 26 of the OECD Model Tax Convention.
WHAT ACTION IS NEEDED NOW?
If non-EU AIFMs wish to market or continue to market their AIFs to EU investors after July 22 2013, then they should consider the changes that may be needed to existing fund documentation, as well as consider the various disclosure and transparency obligations that non-EU AIFMs must meet under the AIFMD. Non-EU AIFMs should also follow the progress of the Level 2 implementing measures of the AIFMD in order to asses any further impact these measures could have on non-EU AIFMs.
Considerations for marketing under the AIFMD’s private placement regime
After July 22 2013 (absent any transitional arrangements), non-EU AIFMs should ensure that existing fund documents conform to the disclosure and transparency requirements of the AIFMD (annual reports, disclosures to investors, disclosures to regulators, etc.), as well as ensure that the cooperation agreement and FATF requirements are satisfied. Non-EU AIFMs should also consider any changes that may needed to the operational and marketing activities of the AIF in order to comply with the AIFMD private placement regime. Finally, non-EU AIFMs should seek local advice on the private placement regimes of various EU Member States in order to assess the relative burdens and benefits of each Member State’s private placement regime.
Considerations for marketing under the AIFMD’s passporting system
If a non-EU AIFM wants to take advantage of the passporting system (assuming it is extended to non-EU AIFMs in 2015), then full authorization and compliance with the AIFMD will be required. Fund documents will need to be significantly reviewed and internal arrangements will need to be made in order to ensure, inter alia, that appropriate remuneration and management fee policies are in place to enable the non-EU AIFM to promote effective risk management, that there is independence between the valuation and portfolio management functions (i.e. appropriate conflict of interest policies established), that there is adequate separation between the risk management function and the portfolio management function, and that the non-EU AIFM’s liability to a non-EU AIF is not affected by any delegation or sub-delegation.
Share this Post