AIFMD: 22 July 2014 Deadline
Consideration for Non-EU Managers
The EU Alternative Investment Fund Managers Directive (“AIFMD”) introduces a new regulatory regime for alternative investment fund managers (“AIFM”) managing and or marketing alternative investment funds (“AIF”) in the EU. The term AIF covers a wide range of funds, with their managers and domiciles both inside and outside the EU. Examples of funds are Qualified Investment Funds (QIF), Investment Trusts, Cayman Private Funds, Hedge Funds, Jersey Unit Trusts, US and Swiss iShares, Real Estate funds, Private Equity funds and CDOs.
The Directive is required to be written to national law in respective EU member states (“Member States”) by 22 July 2013. Several Member States did not implement the directive by such deadline (Germany and UK included). Ireland was among few member states that implemented the directive by 22 July 2013; others have applied a transitional period provision under AIFMD and are expected to implement the Directive by 22 July 2014.
AIF can be marketed to professional investors in any EU Member States provided it has
a) AIFMD passport or
b) It has been registered for private placement
Non-EU AIFMs marketing to professional investors in the EU must comply with certain requirements of the Directive notably Article 42 [Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM] together with any applicable local law.
AIFMs with marketing activities before 22 July 2013 that continues to market in the EU without passport must register for authorisation by end of the transition period (22 July 2014). With the transitional period deadline fast approaching non-EU AIFMs who wish to continue marketing their AIFs in the EU member state will need to consider how to approach and implement AIFMD requirements. This article evaluates key requirements and considers aspect of the Directive that are most relevant to Non-EU AIFMs.
AIFMD Requirements for Non-EU AIFMS
A non-EU AIFMs willing to market its AIFs to professional investors in any member state must do so through relevant EU country private placement regime that permits such marketing until 2015 provided Non EU AIFMs comply with the requirements set under the Directive [Article 42 AIFMD – Conditions for the marketing in Member States without a passport of AIFs managed by a non-EU AIFM].
- Disclosure & Transparency Requirements: The non-EU AIFM complies with Article 22, 23 and 24 in respect of each AIF marketed by it.
- Cooperation Arrangements: Appropriate cooperation arrangements for the purpose of systemic risk oversight that are in line with the international standards are in place between the competent authorities of the member state where the AIFs are marketed and the regulator of the non-EU AIFMs home country. This arrangement and the exchange of information between the two regulators will be done directly. AIFMs need to be aware and ensure Data Protection law is observed.
- The home country of the non-EU AIFM and where applicable the country in which AIF is established must not be listed in the Non-Cooperative Country and Territory by the Financial Action Task Force.
- Country of Non-EU AIFs must not be listed on FATF Blacklist.
An EU passport is being introduced to allow AIFMs to market AIFs to professional investors. The passport will become available in 2015 and will run in parallel with the national private placement regimes until 2018.
It is important that the term marketing is well understood from AIFMD standpoint to avoid being in violation of the Directive. Marketing under the AIFMD means an offering (direct or indirect) or placement of units or shares of an AIF to or with such investors. As such, in the absence of the existence of a fund (with units or shares to be marketed), there is no “marketing”. To make the requirement less onerous to implement, the use of “active” marketing have been widely used across member states. This mean, where an AIFM did not take part in active marketing, but rather responds to a request from a potential investor, this is called a “reverse solicitation” and the AIFMD marketing restriction would not apply. AIFM will need to document and provide evidence that investors have not been approach directly/indirectly. The following could be regarded as active marketing; Sending Fund information by direct Email, telephone call, conference, Fund pitch, mass email and one-to-one email. The UK Financial Conduct Authority has provided guidance on reverse solicitation.
It is highly probable that the definition of “marketing” may not be implemented consistently across Member States. In the UK for instance, marketing will be considered to have taking place if AIFs shares or unit are made available for purchase, this would be different to where preliminary promotion is considered as active marketing.
Key AIFMD Requirements for Non-EU AIFM and non-EU AIF.
A non EU AIFM intending to market AIFs in the EU member states must ensure they are familiar with local rules on private placement regime. Certain member states have gold plated AIFMD and have imposed additional local requirements. For example, Germany has lengthy registration process and imposes depositary obligations on non-EU AIFs. AIFs marketing in Germany will need to comply with Article 21 (7), (8) and (9) [Cash Monitoring, Safekeeping, and Oversight duties]. In addition, where AIF is a feeder fund, BaFin requires substantive look through of assets to Master Level. This depositary obligation is not a requirement for non-EU AIFs marketing in the UK.
Other than the additional requirements that may be imposed by any member state, the main requirement to comply with is the Transparency Requirements described below
- Article 22 – Annual Reports
- Article 23 – Investors Disclosure
- Article 24 – Reporting to competent authority
The Non-EU AIFM is required to prepare an annual reports & financial statements for each AIF it is marketing in EU. The annual reports must be made available to investors no later than 6 months after the end of the year. Level 2 Regulations provides substantive detail on the contents, and disclosure requirements. Significant material changes and certain remuneration information in respect of those who perform control functions within AIFM are key consideration. ESMA has published guidelines in relation to the AIFMD remuneration regime. In addition to remuneration provision under AIFMD, ESMA provide that AIFMs should consider disclosing its remuneration policy and process in the annual report.
Disclosure to investors
AIFM must disclose certain information to investors prior to investment being made and on a regular basis. In view of this, AIFs must regularly update prospectus or Offering Memorandum as soon as significant material changes are known. It is advisable to carefully assess the requirement of this article to determine which of the requirements is appropriate for static data such as Prospectus or frequent reporting such as annual reports. Level 2 Regulations on AIF Risk Profile and Leverage Limit should be carefully appraised.
Reporting to Competent Authority (Regulators)
The Non-EU AIFM is required to report certain specified information to regulators in Member State country where the AIF is being marketed. AIFMD Annex IV provides detail requirements and ESMA has published guidelines in relation to the Annex IV Report
Points to Consider by Non-EU AIFMs
These are suggested action points to be considered by Non EU AIFMs wishing to market in EU Member States.
- Identify the member state to which AIFs will be marketed
- Check with local regulators and legal counsel in EU member state of interest to ensure local requirements are fully understood.
- To ensure there is adequate process & procedure in place for marketing of AIFs. More importantly to be able to provide evidence of reverse solicitation. Also need to ensure that information made available on AIFMs website does not constitute active marketing.
- Ensure that member state have entered into cooperation agreements with the AIFMs and applicable AIFs home countries. Also, that AIFs home countries are not in the FATF blacklists
- To conduct a gap analysis of the existing prospectus and annual reports to ensure AIFMD requirements will be met.
- Careful assessment of EU Member State that has gold plated AIFMD requirements
- To assess the cost of registration in the relevant EU member state in which they intend to market and the impact on AIFs revenue
Considering there is 100 days left before the deadline, I suspect most Non EU AIFMs would have considered the above points. Should this not be the case, AIFMs will need to work closely with their legal counsel to develop a suitable approach to marketing AIFs in the EU. Gradient Consulting Limited will be available to provide assistance on preparing gap analysis and implementation of AIFMD Transparency requirements.
The contents of this article are for general information purposes only and are intended to raise awareness of certain issues. The commentary is not a substitute for proper advice; appropriate legal advice should be sought. It may be not be quoted or referred to in any other publication or proceeding without the prior written consent of the Company. The views set forth herein are the personal views of the author and do not necessarily reflect those of the Company.
 The qualifying conditions for transitional periods differ across Member States. For example, Under the proposed amendments to the transitional provisions announced by the Treasury on 19 December 2013, firms’ managing AIFs entitled to the benefit of the transitional period who submit their application without sufficient time for the FCA to determine that application by 22 July 2014 will be able to continue managing AIFs until the FCA has determined the application. http://www.fca.org.uk/firms/markets/international-markets/aifmd/latest-news
The AIFMD National Private Placement Regime (NPPR) is a mechanism to allow AIFMs to market AIFs that are not allowed to be marketed under the AIFMD domestic marketing or passporting regimes. This principally relates to the marketing of non-EEA AIFs and AIFs managed by non-EEA AIFMs. However, it also relates to the marketing of feeder AIFs where the master AIFM is a non-EEA AIFM or the master AIF is a non-EEA AIF.