The Alternative Investment Funds Managers Directive ("AIFMD" and / or the "Directive") has dichotomised the funds industry into EU and non-EU funds jurisdictions. This has put Gibraltar which was one of a dozen such domiciles into a category of one of four European alternative fund domiciles. This is particularly significant because United Kingdom managers with AIFM licenses will be looking for European vehicles for their funds in order to market to European investors.
Until now, these managers tended to use Cayman vehicles which they will probably continue to use for their non-EU business. For those that wish to use their newly earned passporting rights it stands to reason that in their search for European vehicles for their funds, they should look to the jurisdiction which is closest legally, and in regulatory approach to what they are used to in the Cayman Islands. Gibraltar is the only European jurisdiction that allows for the pre-authorisation launch of a fund, as Cayman does.
Furthermore Gibraltar being a common law jurisdiction with the Privy Council as the alternate Court of Appeal and with English as its primary language, is likely to cause less of a culture shock for UK managers who have decided to use a European vehicle.
The Alternative Investment Fund Managers Directive
The AIFMD will operate alongside and create a separate European regulatory regime from UCITS IV and MiFID. Effectively, all European funds will fall under either the AIFMD or UCITS IV. All EU member states were supposed to implement AIFMD into their national laws by 22 July 2013, in fact only 13 jurisdictions did (including Gibraltar).
Since 22 July 2013, European AIFMs managing EU AIFs, such as Gibraltar AIFs, have been able to obtain authorisation under AIFMD and therefore benefit from the EU marketing passport provided for by the Directive. Such AIFMs will be able to market to professional investors freely within the EU. There is the possibility that managers from third jurisdictions such as those in the US, the Caribbean and the Channel Islands will be able to obtain authorisation and therefore access to the EU marketing passport under AIFMD subject to certain conditions but only as from mid-2015 at the earliest. There is some doubt in the industry which is probably justified as to the true willingness of the somewhat politically motivated ESMA to approve certain non-European jurisdictions particularly some of those in the Caribbean as authorised third jurisdictions under the Directive. At least one politician who was involved in the drafting of the Directive has expressed such doubts.
The issue for offshore jurisdictions is less related to any failings as to their means of undertaking business. There will no doubt remain a place for the better off-shore jurisdictions. The "if it ain't broke, don't fix it" attitude however is simply less relevant in an investment industry that has changed almost beyond recognition from that which existed just a few years ago.
Permissible Distinctions – Gibraltar's Advantage
The national Private Placement regimes, which under the Directive are supposed to be phased out by 2018, have already begun to be tightened by some of the member states. In Germany for example, a market which is not insignificant, it is nearly impossible for a non-European fund to use their private placement regime where as a European fund can even if it is out of scope of the Directive simply because of the fact it is domiciled in the EU. For this and other reasons, we are seeing UK managers setting up parallel or master AIFs (as opposed to feeder) in Gibraltar and other EU jurisdictions in order to assist with their European marketing efforts.
In their implementation of the Directive, Member States were free to decide how they exercise the derogations provided for in AIFMD. They also needed to decide whether they wished to "gold plate" the Directive by adding provisions to their national fund regimes that were not required by the Directive. Critical distinctions in implementation may exist in such topics as regulation of the national fund regimes for funds and managers that are below the de minimis thresholds of the Directive (i.e. €100million for open-ended funds and €500million for close-ended funds), including application of the depositary regime in the Directive to funds that are out of scope of the Directive and applicability of any private placement regimes.
The Gibraltar approach to the above issues, following an in-depth consultation involving a collaboration of Government, the Regulator, the Financial Services Commission ("FSC"), and the Gibraltar Funds and Investments Association ("GFIA"), the representative body of Gibraltar's funds and investment industries, retains as much flexibility as possible as is offered by the Directive. Accordingly Gibraltar has kept its EIF regime for those funds and managers that are out of scope of the Directive while allowing those that wish to, in order to avail themselves of the EU wide marketing passport, to opt in to the AIFM regime even if they are below the de minimis thresholds. Obviously those that opt in will have to abide by all the terms of the AIFM regime as if they had been "in scope".
Experienced Investor Funds ("EIFs") will therefore form the basis for the regulatory regime to be used as the "in scope" AIF. As they have to comply with the terms of the Directive they will essentially be "Super EIFs". This is very significant because, as mentioned below, this is likely to dramatically reduce the licensing time of "in scope" AIFs thus retaining Gibraltar's place as the European jurisdiction with the quickest potential for time to market for new funds.
AIFMs wishing to set up Gibraltar funds will be able to do so by establishing "Super EIFs" utilising the existing pre-authorisation launch process available to out of scope EIFs. In other EU jurisdictions, AIFMs wishing to establish in scope AIFs will have to undergo an authorisation process for those AIFs (which can take anywhere between a few weeks and several months depending on the fund and the jurisdiction). The Gibraltar process however is simply to establish and commence trading the EIF on the basis of the pre-authorisation launch process. This entails the submission of the EIF documentation to the FSC along with an opinion from Gibraltar Counsel stating that the fund has been properly established. At the same time the passporting notices can be submitted to the FSC. The FSC will then have up to 20 business days to consider the AIF documentation and the passporting notices.
The FSC is in the process of completing its approach to many of the key issues that are raised by the Directive such as remuneration, delegation and depositaries. Although these are yet to be finalised, the approaches seem to be that Gibraltar will follow the UK / FCA's proportionality approach in respect of remuneration. Furthermore, delegation will be permitted so long as overall supervision and responsibility remains within the jurisdiction. Depositary requirements are probably the most difficult of the three issues with many operational questions remaining open among all of the European jurisdictions. In any case, the depositary provisions have been deferred until 2017 so that any European depositaries may be used until that time.
Given that Gibraltar is the jurisdiction which is closest legally and in regulatory approach to the Cayman Islands, UK investment managers should seriously consider Gibraltar as a centre in which to domicile their funds.
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.