The Alternative Investment Fund Managers Directive, 2011/ 61/ EU (AIFMD), came into force on 22 July 2013, affecting the management and marketing of Alternative Investment Funds (AIFs) in the European Union (EU). As well as harmonising the rules applicable to management and marketing of AIFs in the EU, the directive aims to provide for an internal market for Alternative Investment Fund Managers (AIFMs) within the EU, and offers a marketing passport to compliant EU AIFMs of EU AIFs. This passport is expected to be extended to non-EU AIFs, and to non-EU AIFMs from 2015, which will be of interest to Cayman AIFMs and AIFs alike.
The effects of the directive are already felt in Cayman to the extent that AIFMs of Cayman funds (whether EU- or non-EU based) are marketing Cayman funds in the EU or, for EU-based AIFMs, managing Cayman AIFs.
Marketing and Managing Cayman Funds under the Directive
An AIFM is a legal person whose regular business is managing one or more AIFs (irrespective of where the AIF is established). Managing means providing at least investment- management services and risk management, therefore advisory or marketing companies are not AIFM. Similarly, a sub-manager of an AIF may not be that AIF's AIFM. A sub- investment manager of a Cayman AIF marketed, or managed, from Europe, need not be concerned that it will be that AIF's AIFM. Where that Cayman AIF is managed by a European AIFM, however, the sub-investment manager will be a delegate of that AIFM and is likely to be required to update its contract of appointment in order to allow the EU AIFM to comply with certain requirements, including disclosure requirements around remuneration.
Marketing means any direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units in an AIF it manages or with investors domiciled or with a registered office in the EU. As has been well documented at this stage, the directive's definition of marketing excludes unsolicited approaches by investors; however, extreme caution should be exercised by Cayman AIFs seeking to rely on this "reverse solicitation" exclusion.
The exclusion simply means that reverse solicitation is not subject to the directive. Any marketing of a Cayman AIF in the EU will still be subject to the national laws in place in each member state, almost all of whom differ in their interpretation of what constitutes reverse solicitation and the rules applicable to same.
Selling Cayman Funds Into the EU and the Impact of Transparency Provisions
Although the marketing of Cayman AIFs by way of passport is the most favourable method of accessing EU investors, this passport will only be available to Cayman AIFs from 2015 at the earliest (see below). In the interim (but only until around 2018 – see below), Cayman AIFs may, provided that co-operation agreements between the relevant countries are in place and subject to compliance with certain provisions of the directive -- most significantly including the transparency rules -- continue to be sold to professional investors 1 in the EU via the national private-placement rules (NPPRs) of each member state.
The transparency rules impose reporting requirements 2 in respect of annual reports, disclosure to investors, and reporting to competent authorities, and Cayman AIFs will need to familiarise themselves with these requirements in advance of contemplating sale into the EU. Equally as important, though more difficult to navigate, are the NPPRs. Each EU member state has its own regime under NPPR, imposing additional rules around private placement within its territory. Certain jurisdictions may prove too costly or difficult to access and Cayman AIFs and their AIFMs will need to take local advice in each member state it wishes to sell into before contemplating use of the NPPRs for sale to EU investors.
Relevant Timelines for Cayman Entities
As mentioned, the directive came into effect on 22 July 2013, subject to certain transitional periods for existing EU AIFMs. EU AIFMs, whether managing Cayman or other AIFs, can benefit therefore from a "grandfathering period" and have until 22 July 2014 to apply for authorisation as an AIFM.
Most significantly for Cayman AIFs in the immediate term is that the transparency rules came into effect on the same date and Cayman AIFs being marketed in the EU should now have taken steps (or be taking steps) to comply with these provisions.
At present the passport is available only to compliant EU AIFMs and their EU AIFs. The directive envisages that in 2015 the European Securities and Markets Authority (ESMA) will issue an advice on the extension of the European passport to EU AIFM marketing non-EU AIF in the EU and to non-EU AIFM managing and/or marketing AIF in the EU. Subject to the provisions of this advice, it is envisaged that certain provisions of the AIFMD will then be "switched on" to allow for EU AIFs to apply for a passport for their Cayman funds, and for non-EU AIFMs, including Cayman AIFMs, to apply for authorisation under the AIFMD, which authorisation will afford them the benefit of the passport for their Cayman, as well as EU, funds.
Most significantly for Cayman AIFs and AIFMs of Cayman AIFs in the longer term, the directive envisages that three years after the European passport becomes available to EU and non-EU AIFMS of Cayman AIFs (i.e. 2018 assuming the European passport becomes available to such AIFM in 2015), ESMA will issue a further opinion on the continuation of the NPPR regime in the EU. Subject to the provisions of this advice, it is envisaged that the EU will adopt rules to terminate the NPPRs as a means of access to the EU. Therefore, post-2018, the AIFMD passport will become the sole and mandatory regime applicable in all member states for Cayman AIFs seeking to raise capital in the EU. All other avenues will be closed to Cayman AIFs.
Cayman's Position Post-AIFMD
Much has been made of the position of non-EU jurisdictions, including Cayman, in the post-AIFMD era. Although it is fair to say that significant obstacles to marketing in the EU have been imposed by AIFMD, these obstacles are faced equally by all non-EU jurisdictions, including traditional "onshore" jursidictions. Further, after 2015, a more level playing field will open up, allowing Cayman AIFs to have access to a European passport for the first time. It will be up to Cayman AIFs and their AIFMS to decide, at that stage, whether the costs of compliance are worth the benefit of the passport, putting Cayman AIFs and AIFMs in a very similar position to their EU counterparts.
About the Author
Engaging primarily with the investment-fund industry, Derbhil O''Riordan's expertise lies in establishing, structuring and ongoing operation of Cayman and AIFMD Hedge Funds and sophisticated UCITS. She also advises on the impact of AIFMD on Cayman funds and has advised on the rules of listing on the Irish Stock Exchange.
1.A professional Investor is an investor which is considered a professional client, in accordance with Annex II of Directive 2004/39/EC (the MiFID Directive).
2 In brief, the reporting requirements relate to the required disclosures to be made to investors on a pre-contractual and ongoing basis, to regulatory reporting, which will be made to a Cayman AIF's "member state of reference" on a quarterly, semi-annual or annual basis and disclosure requirements around an AIF's annual report.
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.