AIFMD – It is a different ball game for non-EU fund managers
While the EU fund managers are slowly accepting and moving to implement Alternate Investment Fund Managers (AIFMD), for their counterparts in Asia, US and elsewhere, who are looking to market their funds in EU, the regulation has created a conundrum.
AIFMD introduces an EU passport system for the marketing of alternative investment funds whereby an Alternate Investment Fund Manager (AIFM) can market its funds to professional investors across the EU member states only after gaining authorization from competent authorities of member states. Though similar to the UCITS scheme, market is rife with speculation that AIFMD may not be a success like UCITS in countries outside Europe due to the cost of compliance and the need to bring in operational changes, which the directive specifies.
So how does AIFMD affect non-EU fund managers? What are its implications and what kind of changes should these fund managers make? At the outset, non-EU fund managers should assess their activities and operations to understand whether they will be subject to AIFMD compliance.
Who will be subject to compliance?
AIFMs who will fall within the scope of AIFMD will be
- Those managing alternate investment funds (AIFs) in or from the EU, regardless of fund domicile.
- Those marketing AIFs in or into the EU, regardless of fund domicile.
If you are managing a non-EU AIF, you will need to be authorized under the directive. Such AIFMs will need to comply with minimal requirements, which include but are not limited to risk management provisions, depositary requirements, remuneration requirements and prudential capital requirements.
However those marketing non-EU funds in EU will be subject to detailed rules and their route to the market will depend on adopting these rules. The idea is to route all non-EU AIFM to professional investors through the pan-European passport regime from 2015. Since the pan-European passport regime is yet to be implemented, all non-EU AIFMs who wish to market their funds in member states will need to seek authorization to the member state through the National Private Placement Regime (NPPR). Apart from authorization through NPPR, there must be co-operation agreements between the AIF home regulator and member state and the non-EU AIF should not be established in a jurisdiction designated as non-cooperative under Financial Action Task Force rules.
The major challenge for non-EU fund managers in a private placement regime is that the rules of NPPR differ from country to country. Moreover, member states can also impose additional requirements wherever it considers necessary. The lack of uniformity or even non-existence of co-operation agreements between the AIF home regulator and the member states will also have an impact on non-EU fund managers trying to market their funds in EU.
Since the primary aim of AIFMD is to increase investor protection and monitor systemic risk, non-EU fund managers have to adhere to various transparency, disclosure and reporting norms.
1. Disclosure to investors
AIFMD requires non-EU fund managers to disclose information regarding
- Investment strategies and restrictions
- Risk and liquidity profile including valuation
- Arrangements for leverage, collateral and prime brokerage
- Fees and expenses
2. Annual Report
Annual reports should be released within six months of year-end to both investors and regulators. Additionally, it should also include information on remuneration practices, expenses incurred and also on fund performance. It also insists minimum accounting information in consistent with GAAP norms. All information in the annual report should be as per the template released by ESMA.
3. Regulatory Requirements
The directive requires non-EU fund managers to report regularly to competent authorities of the member states in which they are marketing AIFs. Details regarding the leverage policy, assets under management (AUM) and remuneration policy should be made available to regulators at regular intervals. The directive also provides details of how leverage and AUMs should be calculated. The reporting of leverage and AUM must take place within a month after the period end. The directive also imposes additional reporting rules for private equity funds.
What non-EU fund managers should do?
With the date of compliance (22nd July) fast approaching fund managers need to assess the extent of their activity in EU member states and plan accordingly. Other than opting to market NPPR, non-EU managers also have the option to establish as a EU AIFM, in which case they will need to fully comply with AIFMD. However they will have simplicity and uniformity with regard to reporting and certainty with regard to regulation. NPPR regime could come to an end in 2018 and after that non-EU AIFMs will have no option but to go for full compliance. Another route that a non-EU AIFM can adopt is reverse solicitation but this also comes with its own restrictions and stringent compliance requirement.
For non-EU fund managers targeting European investors, the road ahead is a tough one. They will have to manage the increasing burden on cost and the impact it creates on its operation, governance and administration. A non-EU fund manager will also be saddled with regulations of multiple jurisdictions. So a non-EU fund manager needs to be fully prepared to deal with the demands of the region before venturing into the EU market.
This was posted in Bdaily's Members' News section by Jaya Smitha Menon .