On the basis that the Alternative Investment Fund Managers Directive (the Directive) is, as expected, adopted in the first quarter of 2011, EU Member States will be required to transpose the Directive into national legislation within two years of that date. It seems likely that the deadline will be in the first quarter of 2013. Member States do not usually implement EU legislation simultaneously so there may be an ongoing implementation schedule between the various Member States.
Until such time as Member States implement the Directive, non-EU based fund managers ('non-EU Managers') can continue to manage EU funds, continue to market funds in the EU and continue to utilise private placement regimes, under existing national laws, without being subject to the requirements of the Directive.
Authorisation under the Directive
EU Managers will be required to seek authorisation with its Member State of reference in accordance with the Directive. The Member State of reference will be the Member State where the Manager has established an EU Fund or the Member State to which the Manager has the 'closest links'. Such authorisation requires the submission of extensive information relating to, among other things, remuneration, risk management and liquidity management (to name but a few) to the competent authority of the Member State of reference. Ongoing compliance with certain disclosure and reporting requirements must also be made to the relevant competent authorities.
In addition to the initial authorisation and ongoing compliance requirements, the Directive sets out the certain preconditions (which have become known as 'triple lock conditions') for non-EU Managers to satisfy in advance of seeking authorisation under the Directive: The triple lock conditions are as follows:
- appropriate cooperation arrangements for the exchange of information between the relevant competent authorities of the non-EU state and the Member State where the Fund is to be established;
- the Member State must not be listed as a 'Non Cooperative Territory' by the Financial Action Task Force on money laundering and terrorist financing;
- the appropriate tax agreements must be in place between the non-EU state, the non-EU Managers Member State of reference of the Non-EU Manager and importantly, each Member State in which the Fund will be marketed.
The Directive does allow for an exemption from certain authorisation and ongoing compliance requirements of the Directive in very exceptional circumstances where the non-EU Manager provides sufficient evidence that it is impossible for it to comply with a provision of the Directive and also comply with a mandatory rule of the non-EU Manager's or the Fund's home jurisdiction. The Directive provides that the equivalent home jurisdiction rule must have the same regulatory purpose and provide the same protection to investors of a Fund as the equivalent Directive rule.
EU Passport v Private Placement
The passport regime being introduced by the Directive and the private placement regime will co-exist for a period of three years (2015 -2018) after which time ESMA (European Securities and Markets Authority) will make a recommendation with regard to the retention or the abolition of the national private placement regimes. The Directive has however introduced minimum conditions which will affect the marketing of EU or non-EU funds within the EU by non-EU Managers.
Essentially, from 2015 a non-EU Manager wishing to manage EU Funds or market EU or non-EU funds within the EU must avail of one of the following:
- continue to utilise the private placement regime; or
- begin using a passport, within the meaning of the Directive.
There is a risk that non-EU Managers wishing to market their Funds within the EU may face a period of partial access to EU investors as a result of the delay in the implementation of the passport regime for non-EU Managers combined with the possible lack of similar private placement regimes within the EU. The two year period between 2013 and 2015 for non-EU Managers may represent a distinct advantage for EU Managers who will be able to utilise the new passport regime during this period, while their non-EU competitors will not have similar access until 2015.
One indirect consequence of the distinction between EU managers and non-EU managers is a possible division in the alternative investment fund industry between the EU and the rest of the alternative investment fund world. The Directive has established significant requirements for non-EU Managers to meet, particularly the so called triple lock conditions between Member States and their competent authorities.
Non-EU Managers may decide that it is not in their interest to meet the expense and go to the effort involved in meeting such requirements or that they may simply not be in a position to meet such requirements. Non-EU Managers will be faced with a number of possibilities such as focusing their business exclusively on EU (on indeed, non-EU) investment opportunities or relocating their operations to tax favourable jurisdictions such as Ireland or Luxembourg so that they may take advantage of the EU passport regime.
There are changes on the horizon for non-EU Managers who manage EU funds or wish to market non-EU funds within the EU. Details of, among other things, the precise authorisation requirements and marketing restrictions (if any) for non-EU Managers have yet to be revealed and an element of uncertainty will remain until the level 2 (legislation) and level 3 (ESMA guidance) measures are published. Depending on the particular circumstances of a non-EU Manager, the impact of the Directive on their business could be minimal. They may require authorisation based on the EU minimum conditions only and could possibly continue to market their product within the EU via the private placement regime up until 2018.
At this point non-EU Managers should assess their business and, if necessary, prepare themselves for authorisation under the Directive and should also look to assess the possible benefits to their business in utilising the EU passport regime being introduced by the Directive in 2015.
1. Will the Directive affect your business?
The location of the Manager and the Fund will determine the effect, if any, the Directive will have on Fund Managers.
Non-EU Manager managing EU Funds:
The Directive will have a significant impact as full authorisation will be required.
Non-EU Managers managing non-EU Funds:
- If the Manager intends to market the Fund within the EU, partial authorisation in accordance with EU minimum conditions will be required.
- Where the Manager and the Fund are both outside the EU, the only effect of the Directive will be the restrictions on marketing the Fund within the EU
2. When will the Directive affect you?
Non-EU Managers managing EU Funds
Authorisation is required regardless of whether the Fund is not marketed within the EU, marketed via national private placement or marketed with the EU passport, although this requirement will not apply until 2015.
Non-EU Managers managing non-EU Funds
- Authorisation is required where the Fund is marketed within the EU and where the Fund chooses to avail of the EU Passport.
- Authorisation will not be required where the Fund chooses to market the Fund via national private placement only.
3. Which Member State provides authorisation under the Directive?
Non-EU Managers will be required to seek authorisation in its Member State of reference namely:
- The Member State where the EU Fund is established; or
- The Member State to which the non-EU Manager has the closest links.
4. Key dates to remember.
2013. The Directive must be transposed into national law by each Member State. The Directive will be applicable to all EU Managers upon implementation. Non-EU Managers may continue to market via national private placement regimes with minimum EU conditions until 2015 and possibly 2018 (for non-EU Funds).
2014. The transitional period for EU Managers to get authorisation ends.
2015. Non EU Managers managing EU Funds must seek authorisation with a Member State of reference.
2017. ESMA to commence a review of the Directive, with a view to providing a recommendation to the European Commission to abolish or not to abolish the national private placement regimes.
2018. ESMA may recommend the abolition of the private placement regimes in which case all non-EU Managers who wish to manage and/or market funds within the EU will require authorisation under the Directive The material in this article is for general information only. Professional legal advice should be sought in relation to any specific matter.