The recent economic landscape has seen a significant regulatory overhaul of the financial services sector in Europe. This article highlights the impact of the European Union Directive on Alternative Investment Fund Managers (AIFMD) and how it will affect Australian fund managers seeking to undertake capital raising activities in Europe.
Due to the wide scope of the reforms, it is important that fund managers should start thinking about how the reforms may impact them and what they may need to do to prepare for when the reforms take place.
European Union Directive on Alternative Investment Fund Managers (AIFMD)
What is the AIFMD?
The AIFMD came into force on 21 July 2011 and will bring a wide range of currently unregulated funds under the regulatory framework of the European Union (EU). Each EU member state will be required to transpose the AIFMD into national law by 22 July 2013.
The AIFMD creates a comprehensive EU-wide regulatory and supervisory framework for the management of alternative investment funds (AIFs). It lays down rules for the authorisation, ongoing operation and transparency of managers of AIFs. An AIF is defined as any collective investment undertaking (which is not an undertaking for collective investment in transferable securities (UCITS)) which raises capital from a number of investors for investment in accordance with a defined investment policy for the benefit of those investors.
All non-UCITS open and closed end funds will be caught by the AIFMD unless a specific exemption applies to them (discussed further below). A wide range of AIFs are captured by the AIFMD including real estate funds, hedge funds, private equity funds, commodity funds, debt funds, energy and carbon funds, infrastructure funds, investment trusts and real estate investment trusts.
The scope of the AIFMD is wide and will apply to any legal person appointed by or on behalf of the AIF who will be responsible for managing one or more AIFs. It will also apply to "internally managed" AIFs, where the governing body elects not to appoint an external fund manager. It will therefore be important for external fund managers to understand their position and identify whether they are appointed by or on behalf of the AIF, or as a delegate of the person appointed. 'Managing' means providing risk management or portfolio management services to the AIF. This distinction will need to be made in order for fund managers to understand how and when the AIFMD applies to them.
The AIFMD will not apply to the managers of:
- 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);and
- "small" AIFs with aggregate total assets of (a) less than €100 million, including any assets financed through leverage; or (b) less than €500 million, subject to the AIF not having any debt and not having redemption rights during a period of five years following the date of initial investment in the AIF; and
- certain securitisation special purpose vehicles.
Managers of small AIFs will however be subject to separate compliance obligations. The nature of the obligations of such managers is being finalised, and is expected to include the obligation to:
- register with the competent authorities in their home Member State;
- notify the competent authorities of any AIFs they manage, and provide information on their investment strategies;
- provide regular information to the competent authorities on the main instruments in which they are trading, principal exposures and most important concentrations; and
- notify the competent authorities if they no longer meet the size conditions above and (where this is the case) apply for full authorisation within 30 days.
The passporting system
As of 2013, EU fund managers authorised under the AIFMD will be permitted to market their funds to professional investors across the EU in reliance on a passport. In effect, this passporting system will ensure that EU fund managers do not require a licence to market their funds in other member states. As of late 2015, this passporting system may (if recommended by the European Securities and Markets Authority (ESMA)) be extended to allow non EU fund managers to passport their non EU AIFs throughout the EU (and it may become compulsory from late 2018). Non EU fund managers wishing to use the passport will have to become authorised in the EU and comply with the AIFMD's requirements in full. Until 2015, non EU fund managers' only option will be to market in the EU using national private placement regimes (provided certain preconditions are met (see section 2 below)). From 2015 until late 2018, they will be able to choose between private placement and the passport.
What will a non EU fund manager need to comply with if they elect to apply for the passporting system in 2015?
To obtain a passport, non EU fund managers of non EU funds must become authorised in an EU "Member State of reference" and must comply with the AIFMD in full. This includes compliance with strict provisions in relation to 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. For many non EU managers of private equity funds and hedge funds, the requirements under the AIFM D would also mean that their existing custodian and prime brokerage relationships would need to be restructured in order to comply with the AIFMD.
If however a non EU manager decides that adherence to the passporting requirements would be unduly burdensome, then it could continue to operate under the national private placement regimes until at least 2018.
What will a non EU fund manager need to comply with when they operate under the national private placement regimes from 2013?
Non EU fund managers should be aware that, in order to continue to market to professional investors in an EU member state via that member state's national private placement regime, a minimum of three conditions must be met, as follows:
- Disclosure: The first condition is that the non EU manager must comply with certain disclosure and transparency provisions under the AIFMD, these being in relation to:
- making available an annual report for each non EU AIF which it markets in the EU;
- making available to investors certain information before they invest, as well as notifying them of any material changes in that information;
- regular reporting by the non EU manager to the competent authorities in the EU member state where the AIF is marketed; and
- where a non EU AIF acquires "control" (individually or jointly) of an unlisted or listed EU company, the non EU Manager must make a number of disclosures to that company, its shareholders and to regulators and may not (if the company is unlisted, and subject to exemptions) facilitate any share buy-back, distribution, capital reduction or share redemption for two years after acquiring control.
- Co-operation: The second condition is that appropriate information exchange agreements must be in place between (a) the competent authorities in EU member state where the non EU AIF is to be marketed; (b) the supervisory authority of the domicile of the non EU AIF; and (c) the supervisory authority of the country where the non EU manager is established. This is to ensure that information on the non EU AIF and its manager can be exchanged efficiently to allow the competent authorities of the relevant EU member states to carry out their supervisory duties effectively under the AIFMD.
- Financial Action Task Force (FATF): The third condition is that at the time of marketing neither the non EU AIF nor the non EU manager should be authorised or registered in a country which is listed by FATF on anti money laundering and terrorist financing as a "Non-Cooperative Country and Territory".
If any of these "minimum" conditions are not satisfied, then a non EU manager cannot continue to market to, and therefore raise capital from investors in the EU.
In addition, non EU managers should be aware that EU member states have discretion under the AIFMD to impose stricter conditions on non EU fund managers. As a result, the three conditions referred to above may not be exhaustive.
What does this mean for you in 2012?
With such a significant overhaul of the regulatory system, if the EU is a key ongoing source of capital, Australian fund managers should carefully consider what changes may need to be made to their operations and marketing activities in order to comply with the AIFMD. In particular, managers that choose not to seek the new passport will need to be in a position to meet the new transparency and disclosure obligations being introduced by the AIFMD for those undertaking private placements in the near term.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.