The Alternative Investment Fund Manager Directive (Directive
2011/61/EU) (the "Directive") is due to
be transposed into the national laws of all Member States of the
European Union ("EU") by 22 July 2013
(the "Transposition Date"). This
means that the investment funds community has a scant 10 months to
finalise its preparations for the changes required of fund managers
under the Directive.
The Directive seeks to regulate the activities of alternative
investment fund managers ("Managers") in
relation to the alternative investment funds
("Funds") they manage or market to
professional investors in the EU. The Directive recognises
that many Funds marketed in the EU are managed by Managers
("non-EU Managers") established outside
the EU (i.e. in a "Third Country") and
many of the Funds that are marketed by Managers in the EU are
established in a Third Country ("non-EU
Funds").
Managers based in the EU ("EU AIFM")
are likely to be familiar with the challenges and opportunities
presented by the Directive, since the Directive has been one of the
main talking points for the EU alternative funds industry since the
proposals for the Directive were first mooted in 2009. These
include preparing for the EU-wide marketing passport (the
"Passport") for their Funds based in the
EU ("EU AIF"). alongside compliance with
the existing national private placement regimes (the
"Private Placement Regime") in each
Member State in which they market their non-EU Funds.
However, many non-EU Managers have yet to fully come to terms with
the implications of the Directive and, in particular, how it may
affect their ability to market their Funds in the EU once the
Transposition Date passes.
Implications for non-EU Managers
Excluded activities
Assuming the non-EU Manager is not providing portfolio, risk
management or similar services in the EU, the Directive only
applies to non-EU Managers where they are directly or indirectly
offering or placing units or shares of Funds they manage to or with
investors domiciled or having a registered office in the EU.
As such, passive marketing does not bring a non-EU Manager within
the scope of the Directive. In addition, the pre-amble to the
Directive also explicitly clarifies that an EU investor can
approach a Manager regarding investment in a Fund without causing
the Manager to have to comply with the Directive.
Where a non-EU Manager is looking to actively market its Funds in
the EU they will, for at least the first two years following the
Transposition Date, only be able to market their Funds under the
Private Placement Regimes of the EU Member States in which they
market their Funds, provided they meet certain conditions.
The conditions are imposed on both the non-EU Manager and the
jurisdiction in which the non-EU Manager and their non-EU Funds are
established. Non-EU Managers will not have an ability to opt
in to the Passport until at least 2015.
Conditions imposed on the Manager
The non-EU Manager will be required to comply with the transparency provisions (Articles 22, 23 and 24) in the Directive. In summary, these relate to the Manager procuring that all Funds they market in the EU:
(a) circulate an annual report containing certain prescribed information to investors and make this report available to the regulators;
(b) have an offering document or other disclosure statement which contains the matters set out in the transparency provisions and makes disclosure to investors when certain material changes affect the Fund; and
(c) report to the regulator periodically regarding the principal markets and instruments traded by the Fund.
In addition, the non-EU Manager will be subject to the
regulations relating to the takeover of large non-listed companies
and anti-asset stripping provisions of articles 26-30 of the
Directive.
Many non-EU Managers should not find the transparency conditions
overly burdensome, since they either follow best practice or are
similar to current or imminent reporting obligations in any
event.
Conditions imposed on the Jurisdiction of the non-EU Manager and non-EU Fund
In addition to the obligations imposed on the non-EU Manager, the regulators and governments of each of the non-EU Manager and the non-EU Fund will be required to undertake certain steps, as follows:
- The regulator of the non-EU Manager must have entered into a cooperation arrangement with the competent authorities in each EU Member State in which the non-EU Manager is marketing its Funds. In the case of a US Manager, this would require the SEC or other regulator of the US Manager to enter into cooperation arrangements with the competent authorities of each EU Member State in which the US Manager markets its Funds.
- The regulator of a non-EU Fund that is being marketed in the EU must have entered into a cooperation arrangement with the competent authorities in each EU Member State in which the non-EU Fund is being marketed. In the case of a British Virgin Islands ("BVI") fund, the Financial Services Commission will need to enter into cooperation arrangements with the competent authorities of each EU Member State in which the BVI fund is marketed.
- The jurisdictions in which each of the non-EU Manager and the non-EU Funds are established must not be on the list of non-cooperative countries and territories maintained by FATF.
Progress to date
Following the Directive coming into force on 21 July 2011, the
European Securities and Markets Authority
("ESMA") consulted widely with the EU
alternative funds industry and issued its technical advice on the
detail for the implementing provisions of the Directive (the
"Level 2 Advice") in November
2011.
The Level 2 Advice is expected to constitute much of the detail of
the final form of the implementing provisions (the
"Level 2 Regulations") that are due to
be published by the EU Commission, although there were indications
earlier in the year that the Level 2 Regulations may deviate from
the Level 2 Advice in some key areas, including those relating to
Third Country co-operation and reporting. At the time of
writing, the Level 2 Regulations have yet to be published.
In addition, ESMA was tasked to come up with a form of cooperation
arrangement for use between EU and Third Country regulators.
At the time of writing, the form of this agreement was yet to be
finalised.
The lack of clarity in relation to both these areas is leading to
some difficulty in determining the extent to which amendments to
existing regulatory powers are needed (if at all) in order to be
able to sign and implement the cooperation arrangements. Even
so, we understand that the Financial Services Commission of the BVI
is committed to ensuring that they have arrangements in place to
allow Funds and Managers that are established in the BVI to
continue to have access to the EU market after the Transposition
Date.
Originally published 8 October 2012
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.