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Marketing in Europe: Life after AIFMD for non-EU managers
With the advent of the Alternative Investment Fund Managers Directive (AIFMD) hedge fund managers located outside Europe who wish to target European investors will need to develop an understanding of the AIFMD marketing requirements. This is due to the broad extraterritorial effect of AIFMD which could ultimately require a manager who wishes to remain outside its scope to cease all activities which have a connection to the European Union (EU). However, for those managers unwilling to abandon the prospect of attracting European investors, there is a range of marketing options available under the new regime. These include (i) private placement in accordance with local marketing rules and certain minimum provisions of AIFMD in relation to disclosure to investors and regulators, and (ii) marketing on a passported basis to professional investors in each member state of the EU.
The purpose of this article is to assist managers in selecting the appropriate marketing regime to unlock European investment. It also outlines a potential route to AIFMD compliance, through a selfmanaged Irish Qualifying Investor Alternative Investment Fund (QIAIF), which would allow a non-EU manager to act in relation to an EU fund, with the benefit of the full passport, without incurring some of the operational costs of adapting in full to AIFMD.
Overview of AIFMD
The AIFMD applies to alternative investment fund managers (AIFM) based inside or outside the European Union, who manage EU-based funds or wish to market funds to professional investors in the EU. In practice the legislation is extremely broad in scope and the only way for a manager to ensure that it remains out of scope is to be located outside of Europe, manage no-EU funds and refrain from any marketing activity to EU investors.
While compliance with the AIFMD may seem a daunting prospect, there are some transitional provisions available to a non-EU manager, including the ability to avail of national private placement regimes (NPPRs) until 2018 where they are marketing funds in Europe (or 2015 where they are managing EU funds). However, there may be managers who wish to unlock the European market through the use the EU-wide marketing passport. This option should be available to non-EU managers from July 2015.
A summary of the requirements under the private placement regime and under the AIFMD passport is set out below.
Non-EU managers currently cannot avail of the passport and therefore compliance with NPPRs will be the primary marketing tool available to them from July 2013 until the formal extension of the passport.
One point worth noting is that the application of NPPRs will be driven by the rules in the member state in which it is intended to market. Some member states such as Germany have moved to abolish or restrict the use of NPPRs in implementing the AIFMD and it will be important to confirm the position in each jurisdiction in which it is intended to market. Ireland has not imposed additional requirements to those set out in the AIFMD, save that a written notification of intention to market is required to be made to the Central Bank of Ireland (the Central Bank). The Central Bank has indicated that such notification is not required to be made until 22 July 2014 and that pending notification, the pre-AIFMD private placement rules will continue to apply, thereby affording a one-year transitional period to non-EU AIFM.
The AIFMD also imposes a number of additional requirements which apply to those managers seeking to rely on NPPRs.
- the non-EU manager must comply with the provisions of the AIFMD relating to the annual report and disclosure to investors (including disclosure as to aggregate remuneration);
- the non-EU manager must comply with detailed reporting requirements under the AIFMD to national regulators in each of the member states in which they intend to privately place their alternative investment funds (AIFs). Such reporting must be done either quarterly, semiannually or yearly depending on the value of the assets under management of the manager and includes reporting on the principal markets on which a manager trades, instruments traded, principal exposures, important concentrations, illiquid assets, special arrangements, risk profiles, risk management systems, stress testing results, list of all AIFs managed, leverage in the AIFs and sources of leverage. Individual member states may impose stricter reporting rules;
- if the non-EU manager manages an AIF which acquires control of a non-listed company, the provisions of the AIFMD relating to major holdings and control must be complied with;
- appropriate co-operation arrangements must be in place between the competent authorities of the member state where the AIF is marketed and the competent authorities of the home state of the manager;
- appropriate co-operation arrangements must be in place between the competent authorities of the member state where the AIF is marketed and the country where the non-EU AIF is established; and
- the home state of the manager must not be listed as a Non-Cooperative Country and Territory by the Financial Action Task Force.
The European Securities and Markets Authority (ESMA) has entered into Memoranda of Understanding (MoUs) with regulators in the most significant markets in North America, South America, Asia, Africa and elsewhere, allowing managers in those countries to be eligible for the NPPR regime. Individual member states must enter into bi-lateral agreements with the relevant regulators. Ireland has indicated it will sign up to agreements with all regulators who have signed the MoU with ESMA.
Between 2015 and 2018, NPPRs and the European passport could coexist. However, in 2018 ESMA will decide whether to terminate NPPRs, in which case authorisation under the AIFMD will be the only option for marketing non-EU AIF to EU investors.
The AIFMD passport
It is possible that a non-EU manager may be able to apply for authorisation to market AIFs under the passport system from 2015 onwards. However, it should be noted that the availability of the passport is subject to a positive decision to extend the passport to non-EU AIFM by the ESMA (which is not certain at this time).
If the passport is extended, non-EU managers of EU AIF will be required to apply for authorisation, whereas non-EU managers of non-EU AIF will have a discretion whether to opt-in to the AIFMD passport and may continue to use NPPRs until 2018 should they wish to do so.
Additional conditions will apply for non-EU managers seeking an EU passport post-2015:
- the manager must comply with all of the provisions of the AIFMD;
- the manager must seek authorisation as an AIFM from its member state of reference (MSR) which is the EU member state where the AIFM intends to “develop effective marketing” for most of its AIFs. It must also have a “legal representative” established in its MSR which is to be the official point of contact for the MSR regulator and will be responsible for “the compliance function relating to the management and marketing activities performed by the AIFM under the Directive together with the AIFM”;
- appropriate co-operation arrangements must be in place between the competent authorities of the MSR and the competent authorities of the countries where each of the non-EU AIF and the manager are established;
- neither the country where the manager nor the non-EU AIF are established must be listed as a Non-Cooperative Country and Territory by the Financial Action Task Force; and
- the countries where the manager and the non-EU AIF are established must each have signed a tax information sharing agreement with the MSR which complies with the OECD Model Tax Convention.
The immediate advantage of the passport will be the ability to market to professional investors throughout Europe, on the basis of a regulator to regulator notification system. This notification regime will largely mirror that implemented under the UCITS Directive, which has proven to be an unqualified success in opening up a pan-European market for retail investor funds. When combined with the minimum investor protection standards which flow from AIFMD authorisation, there is undoubted potential for the AIFMD brand to follow the success of UCITS by becoming a globally recognised standard. In particular, it is likely that investors, whether in Europe or elsewhere, have regard to AIFMD authorisation as a factor in making an investment decision and completing their own due diligence on target investments.
The self-managed alternative
The AIFMD provides that an AIF may be either externally or internally managed. It will therefore be possible to establish a self-managed qualifying investor AIF (QIAIF) in Ireland which may itself be the authorised AIFM.
The QIAIF may then delegate some of its management functions to an investment manager, who need not be located in the EU. This investment manager need not be the AIFM and therefore would not be required to comply with some of the substantive requirements necessary to comply with AIFMD. However, it would have the significant advantage of an AIFMD product and the EU passport.
The self-managed investment company is a self-managed fund structure which is already firmly embedded within the Irish regulatory framework and offers an effective solution to those non-EU investment managers contemplating the challenges of ensuring compliance with AIFMD requirements, while allowing for maximum flexibility in marketing to European investors.
Shay Lydon is a partner in the Asset Management and Investment Funds Group in Matheson.
This article was published in Issue 242, January 2014 of Offshore Investment Magazine.