On 11 November 2010 the European Parliament voted overwhelmingly to implement the AIFMD (the 'Directive') following the compromise agreement revising the Directive from its original form. The Directive has since had formal approval by the EU finance ministers at a meeting of the Economic and Financial Affairs Council ('ECOFIN').
The Directive first appeared in draft form in April 2009 with little consultation with the industry as a reaction to perceived failures during the economic crisis of 2008.
The Directive has had numerous draft versions in the intervening period as governments and interested parties have had input with consensus on the latest version finally being reached by ECOFIN on 19 October after much compromise.
The intervening eighteen months have seen a great deal of uncertainty in the Funds industry as doubts as to the impact of the Directive have exacerbated the effect of the caution being shown by investors taking longer to make investment decisions.
The final completion of the process of enacting the Directive should at the very least remove that uncertainty and allow the industry to move forward positively.
What does the Directive do?
In general the Directive introduces restrictions on and makes requirements of alternative investment fund managers wishing to market their products into the EU. These requirements cover areas such as compliance, remuneration and custody arrangements amongst others and will introduce greater responsibilities and subsequently costs for funds operating under the Directive.
However, with regard to those service providers and fund managers outside the EU, the key area of concern with the original draft of the Directive was in relation to the restrictions that would apply to them under third country rules, making it difficult to market non EU funds within the EU.
This approach to addressing the regulatory issues that existed was also strongly criticised by a number of member states who felt that this would have a significant detrimental impact on the industry within the EU.
The final version of the Directive has largely addressed these concerns and the current regime of marketing funds under national private placement regulations and agreements is set to continue during the phased introduction of a 'passporting' regime allowing third country fund managers to market within the EU without relying on those national private placement regimes.
The timetable for change
The timetable for the implementation of the Directive can be summarised as follows:
- 2013: the Directive should be in force in all EU member states.
- 2013 – 2015: Private placement regimes will remain in place and be able to be utilised subject to certain conditions concerning transparency and cooperation whilst the newly created European Securities and Markets Authority ('ESMA') draws up the rules and regulations under which the Directive will operate.
- 2015: Assuming that ESMA meets its timetable, it will be possible to start marketing funds into the EU under the new 'passporting' regime.
- 2015 - 2018: It will continue to be possible to use the current national private placement regimes and this may be extended if the timetable slips.
- 2017: The commission is expected to conduct a review of the operation of the Directive.
- 2018: Full implementation of the Directive is planned.
Third country requirements under the private placement regime
For Jersey based funds to continue using the current private placement regimes up until 2018, Jersey will need to comply with the following:
- Remain off the list of non-cooperative countries as produced by the Financial Action Task Force ('FATF')
- Have entered into a reciprocal agreement with the EU country in which a fund is to be marketed.
In cases where the fund manager is based in Jersey they will also need to adhere to a number of other specific disclosure requirements under the Directive.
Third country passports
The above two requirements will also form part of the criteria by which countries' eligibility for pan European passports will be judged.
In addition to those requirements Jersey will have to have entered into a Tax Information Exchange Agreement ('TIEA') with the EU member state of the fund manager and any member state in which the fund is to be marketed.
There is no reason why Jersey should not meet all these criteria as Jersey is a full member of IOSCO, is not on the FATF list of non-cooperative jurisdictions, was deemed by a recent IMF review to be ahead of most G20 and EU countries in implementing the 40 + 9 recommendations from FATF regarding Anti Money Laundering and already has reciprocal regulatory cooperation agreements and tax information exchange agreements in place with many EU countries.
Jersey Finance (the body representing the industry on the island) has already publicly stated that it is confident that Jersey will be among the first countries to obtain a passport on their introduction in 2015.
A further positive note for the industry outside of the EU is that the Directive will not apply to funds for which marketing is a passive rather than an active process. Such funds will be allowed to accept EU investors if they are obtained by reverse solicitation or passive means.
This means that long standing and well known funds that do not require to market to obtain new investors will be able to continue as they are.
Opportunity not a threat
There are a number of ways the Directive can be seen as an opportunity for the funds industry in Jersey rather than a threat.
Understandably, the member states did not want to do anything that might affect the flow of inward investment into their countries. Whilst the Directive, therefore, will apply universally to funds within the EU wherever they aim their marketing, third country funds which do not plan to market within the EU will not be subject to the Directive even if they are investing within the EU.
This means that Jersey will still be in as strong a position as before for marketing itself as a home for such funds and may well become an even more preferred option as complying with the more restrictive rules and regulations of the Directive will clearly have a cost implication.
We can now be confident that Jersey funds and fund managers will be able to continue to operate under the current private placement agreements until at least 2018 and after that operate under the 'passporting' regime where necessary.
Indeed the structuring of fund vehicles in Jersey can allow the separation of EU and non EU elements to meet specific requirements which could present further possibilities for Jersey service providers.
The final end to the uncertainty can only be seen as a good thing for the funds industry generally as we now know where we stand and that those jurisdictions, like Jersey, that are properly regulated and transparent will be able to continue to operate on a reasonably level playing field within the EU.
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.