Are you a fund manager with European investors? Will you market alternative investment funds to professional investors in the European Union after 22 July 2013? As a fund manager based outside the EU, you may be grappling with how the EU's Alternative Investment Fund Managers Directive (the AIFMD) affects your business.
The emphasis on cooperation between governments following the financial crisis, has seen regulatory standards rise globally in a flight to compliance. AIFMD continues the trend of increasing regulation and cost of doing business for private equity, hedge and other alternative fund managers who manage funds for professional investors. The Dodd-Frank Act increased requirements for managers with US clients. In February 2013, Singapore put in place a registered fund manager regime. The principles behind all these regulations - corporate governance, capital requirements, organization of functions, information disclosure to authorities and investors - put checks and balances on risk taking activity.
AIFMD applies to alternative investment fund managers based inside or outside the EU, who manage EU-based funds or wish to market funds to professional investors in the EU. Such managers will have to register in the EU State where they generally do the most business of managing or marketing, to get the benefit of an EU-wide passport for marketing to professional investors and managing funds in various EU countries.
Managers based in Asia which are not managing EU funds or marketing to EU investors will fall outside the AIFMD.
For managers and funds located outside the EU, wishing to raise money from EU investors, AIFMD introduces progressively higher requirements until 2018. The good news: full AIFMD compliance will only come into play from 2015 at the earliest.
Substantial registration requirements
EU-based managers are subject to the full scope of the AIFMD from 22 July 2013, although there is a one year transition period in some major EU jurisdictions. They will have to undergo a registration process, implement internal legal and compliance requirements and, possibly, restructure their businesses and funds. We note some of the substantive requirements below.
- Separation of risk management from portfolio management activities
- Arrangements to "identify, prevent, manage and monitor" conflicts of interest
- "Proper and independent" valuation of assets
- Remuneration policies which "promote sound and effective risk management"
- Delegation of functions by a fund manager is subject to conditions
- A depositary (custodian) of a fund's assets is required, having specific liability and responsibility for functions.
Are there exemptions?
Private wealth vehicles with only family members as investors are excluded. Special purpose entities used for securitisation are also exempt. Small fund managers are subject only to basic registration and information disclosure requirements, if they (with their affiliates) manage assets not exceeding:
- EUR 100 million for leveraged assets; or .
- EUR 500 million for unleveraged assets, where investors have no redemption rights within 5 years of initial investment.
Small fund managers based outside the EU may take advantage of marketing via private placement (which we discuss below), and can opt in to full registration from 2015 at the earliest to take advantage of the EU marketing passport.
Marketing to EU investors from 22 July 2013
There are benefits for fund managers in Singapore or Hong Kong, for example, when looking to market funds domiciled outside the EU to EU investors. They may use various national private placement regimes in EU countries until 2018, without being subject to the full requirements of AIFMD. This should represent significant savings in compliance costs. There are some conditions to using private placement:
- Cooperation agreements must be in place between EU countries where marketing occurs and the country where the fund is located. Fund domiciles like Singapore, Jersey, Cayman and Guernsey have recently signed such agreements with the major EU countries.
- The fund manager must prepare certain annual reports and disclosures to investors and the relevant EU regulatory authority.
- The fund must not be located in a Financial Action Task Force non-cooperative territory.
- Individual EU countries may impose further requirements on fund managers.
There are also benefits for EU based managers when managing or marketing non- EU funds, such as fewer requirements for the depositary function.
Marketing to EU investors from 2015 onwards
From 2015 it may be possible for managers based outside the EU to market non-EU funds using the AIFMD marketing "passport", subject to implementation by the EU. Managers will have to comply with the full scope of the AIFMD, which effectively imposes European rules and regulations on managers and funds based outside the EU. This may lead to conflicts between regulations in the country where a manager or fund is located and the requirements of the AIFMD.
Fund domiciles such as Jersey, Guernsey and Cayman have already taken steps to put in place arrangements to allow funds and managers to select an "AIFMD compliant" structure. This should smooth the transition to AIFMD compliance which non-EU managers and funds will face in the next few years.
2018 and Beyond
AIFMD provides for the phasing out of national private placement regimes from 2018 at the earliest. When this occurs, managers based in Asia will have to become AIFMD registered to market to EU investors or manage EU-based funds.
Action Points for non-EU Managers From 22 July 2013:
- If marketing to EU-based investors, in which countries are they and what are the specific requirements for using private placement?
- Is the country where the fund is based "compliant" for AIFMD purposes?
- Will an exemption apply, such as for small fund managers or reverse solicitation.
- Gear up for annual reporting and disclosure requirements.
Leading up to 2015:
- If continuing to market to EU investors, assess whether to continue using private placement or to become AIFMD registered.
- Do the countries where the fund manager and fund are based offer an "AIFMD compliant" regulation?
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.