Much has been published on the newly proposed Alternative Investment Fund Directive ('AIFM') which if it materialises in its proposed form would affect all fund managers in Europe who manage or market a fund which is not regulated in Europe as suitable for retail sales (effectively, any non-UCITS fund). This would include not only funds in their purest form, but any arrangement that can be characterised as a 'collective investment undertaking' that is either managed in Europe or is seeking investors in Europe.
The burdens of the AIFM are weighty and include among other things, rules relating to suitable qualification, risk management, liquidity management, the management of conflicts, and prescriptive disclosure to potential investors while the benefit on the flip side would be easier marketing to professional investors (as defined by MiFID) but this is of little comfort to most managers.
The Commission's justification for the directive is the management of risk arising from Alternative Investment Funds (AIF's) based on recent market events and to address issues raised in previous consultations. This seems strange given that the detailed analysis of these same events (such as the Larosiere report, the Turner Review and the work produced from the G20 summit) has laid no blame for market events on hedge funds or other private pools of capital involved in the financial markets. It is unclear why all non-UCITS funds should be affected by the directive in such a broad way and although the Commission has maintained that this is not a one size fits all approach it is difficult to envisage a scenario where those AIF's which present very limited risks (other than to the investors in them) would not be unintentionally 'caught' by the Directive.
The potential effects of the Directive are already being felt in the industry with several of London's largest hedge funds poised to launch onshore funds in order to avoid any uncertainty. The Financial Times recently reported that Cheyne Capital, the £3.6bn hedge fund manager, was set to become the latest high profile London name to launch a UCITS III fund. This would allow the fund to operate within the existing European regulatory framework for an investment vehicle that can be marketed across the EU, but this might not be an option for most smaller managers currently operating within the EU who will face a different set of implications and potential restrictions.
Marketing Non-European Funds in Europe
The classic scenario might be of a smaller manager managing a Cayman Island hedge fund, or a Jersey limited partnership property fund (Non-EU). If the Directive were to come into force in 2011 as proposed, rules on non-European funds and non-European managers would come into effect three years later in 2014. Until then, existing rules will continue to apply, for example, marketing on the basis of the private placement regime (if one exists) in the relevant country where the fund is being marketed. However, there is also the clear possibility that some European countries could restrict their private placement regimes in the meantime which could result in managers finding it even more difficult to market offshore funds in Europe.
After 2014 the Directive (Article 35) provides clear limitations on the distribution of Non-EU funds. No fund domiciled outside of Europe can be marketed to any professional investor unless the country in which that fund is domiciled has signed an agreement with the relevant member state in which the marketing will take place. This agreement must comply with the standards set in Article 26 of the OECD Model Tax Convention and ensure effective exchange of information in tax matters. This is a significant burden and ultimately, European-domiciled funds, such as Gibraltar funds, could be placed at a significant advantage to their offshore counterparts.
Furthermore, Non-EU managers will not be able to rely on the private placement regime and will also need to be authorised but this deals with a separate issue.
Gibraltar is a member of the European Union by virtue of Article 229(4) of the Treaty establishing the European Economic Community. All EU Directives and Regulations are fully transposed into Gibraltar law.
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