The Alternative Investment Fund Managers Directive (AIFMD) has been in force for just under one year now. Its introduction on 22 July 2014 subjected fund managers based in the EU or with marketing operations in the UK and which were not regulated under UCITS to a vast array of rules and restrictions.
Perhaps the most onerous requirement was that managers hoping to avail themselves of the pan-EU marketing passport, which permits firms to market to institutional allocators across the EU without impediment, was the appointment of a depositary bank. The depositary, usually a global custodian, is required to undertake safekeeping of assets, monitor cash-flows and provide oversight of the fund manager. It is subject to strict liability for loss or misappropriation of assets at the sub-custodian, although many have negotiated contractual discharges of liability or indemnifications excusing them from providing restitution of lost assets in many eventualities.
Non-EU managers which are marketing into EU countries are exempted from appointing a depositary-lite in the majority of EU member states bar Denmark and Germany. Other restrictions imposed by AIFMD include limits on remuneration, and the filing of an Annex IV regulatory report. AIFMs equipped with a passport are obliged to supply a single Annex IV whereas those marketing across multiple jurisdictions must supply Annex IVs in each of the jurisdictions in which they are soliciting capital. The Guernsey Financial Services Commission (GFSC) has adopted a pragmatic approach towards AIFMD. Guernsey has adopted a dual regulatory regime enabling managers of Guernsey-domiciled funds to distribute their investment vehicles into both EU and non-EU countries. This dual regime is straightforward. The first approach is for fund managers to maintain the status quo and not solicit EU capital and therefore excuse themselves from the onerous aspects of the Directive. The second approach permits managers to simply use the national private placement regime and continue marketing into EU jurisdictions where they have prospective investors. Guernsey has also implemented an opt-in AIFMD regime prior to the introduction of the pan-European passport regime.
This approach has worked very well for Guernsey funds. But there are going to be likely challenges to Guernsey's operating model. The European Securities and Markets Authority (ESMA) is consulting with the European Commission (EC) on AIFMD implementation, and the EC could potentially scrap the national private placement regimes. Scrapping private placement would have a material impact as it would force fund managers in Guernsey – at least in the short term –to refocus their efforts either exclusively on non-EU investors or to obtain the EU AIFM passport, or both. Likewise, it could maintain the existing system. An announcement is likely to be forthcoming later in 2015.
However, Guernsey has worked exceptionally hard to attain AIFMD equivalence. There is a strong possibility that if private placement is removed, passports will be extended to jurisdictions which the EU feels meets its equivalence standards under AIFMD. Guernsey should have no problem attaining this as it has cooperation agreements with the EU, has worked hard to obtain AIFMD compliance, adheres strictly to tax agreements laid out by the Organisation of Economic Cooperation and Development (OECD) and is not on a Financial Action Taskforce blacklist. Whatever the outcome of the EC's verdict, Guernsey is well positioned to meet the challenges and opportunities that AIFMD may bring.