The still-controversial Alternative Investment Fund Managers Directive (AIFMD) regulates private equity and hedge fund managers that operate within the EU, and offers one significant advantage to anyone who becomes fully authorised and complies with its demanding rulebook: a "passport" to manage and (more importantly) market funds to professional investors across the EU's 28 member states. This passport is not without its difficulties – for example, many countries require managers to register and pay fees before they can use it to market in their territory – but there is no doubt that it makes fundraising easier for managers targeting investors from different countries across the region.
But that, of course, begs a very important question: what about those who don't have to comply with the AIFMD, either because they are regulated outside the EU, or because they operate in the EU but are too small to be within its scope? The answer, for the time being, is that managers actively fundraising need to comply with national rules in each of the countries that they want to market their fund (unless they are managing the fund within the EU and either qualify for the venture capital passport under regulations known as EuVECA, or voluntarily “opt-in” to full compliance with the AIFMD).
These national private placement rules (NPPRs) are not easy to navigate – and compliance burdens range from relatively light to almost impossible – but they have proved to be manageable for many funds. However, at least as regards funds managed from outside the EU, these country-by-country rules might only be a temporary solution. The AIFMD contemplates that a “third country passport” will be made available to qualifying non-EU managers who opt in to full compliance with the AIFMD and submit to the jurisdiction of one of the EU's regulators. The timetable for introducing this passport has already slipped, but it is expected to be made available to managers in some countries (including the Channel Islands, Switzerland and, possibly, the US) quite soon – that is, if politics doesn’t get in the way.
Following a positive opinion from ESMA, the pan-European regulator, issued earlier this year (and which we reported on in July), the Commission is now required by the terms of the AIFMD to draft a "delegated act" (essentially secondary legislation) to give effect to a passport whose main features were themselves established by the 2011 Directive. But the process is not as straightforward as it sounds.
First, many of the Directive's third country passport provisions are complex and may even be unworkable. For example, managers will not get to choose which EU regulator will oversee them; instead, this will be determined by a variety of factors, including their fund marketing strategy – which gives rise to uncertainties and anomalies. It is also not clear what presence they will need to have on the ground in the EU, but there clearly will need to be a local representative with whom their EU regulator can communicate.
Second, the interaction of the new passport with the NPPRs is far from clear or satisfactory. The AIFMD contemplates that NPPRs could be switched off on a pan-EU basis three years after the passport is made available, but it remains unclear whether that will happen and, if it does, whether they will be switched off for all countries, or just those who have had the benefit of the passport. In any case, some countries will switch off NPPRs earlier, as EU rules permit them to do, or make them very hard to comply with, as France has already done. Germany is the most important country to have announced that it will switch off its NPPRs as soon as the passport is available, but it will, at least for now, only switch off its NPPRs for managers from countries that have a passport available. That means that access to German investors for managers from passport-eligible third countries (who previously could have relied on the NPPR, albeit after complying with Germany's detailed requirements) will be more difficult, unless and until they opt in to full compliance with the Directive.
And finally, there is politics. The Commission’s delegated act will need to be approved by the Council (made up by the member states) and the Parliament. Giving EU-based institutional investors access to alternative funds managed outside the EU is, of course, absolutely essential. But, in a post-Brexit world, there is a risk that the EU turns inwards and adopts a more protectionist stance – especially as it contemplates what future access to give the UK. It is to be strongly hoped that it resists that temptation, and that the transition to a level playing field for properly regulated funds elsewhere in the world can be dealt with in a coherent and level-headed way.