Investment professionals in the United States who market alternative investments in the European Union, should be familiar with the Alternative Investment Fund Managers Directive, better known as AIFMD. AIFMD provides a new regulatory regime for private fund managers who seek to operate in the European Union. AIFMD generally went into effect across the European Union in 2014, when transitional “passport” relief for foreign managers expired in most jurisdictions.
Part and parcel of AIFMD are the first three elements of its nomenclature, or “Alternative Investment Fund” (AIF). An AIF is any collective investment marketed in one of the European Union jurisdictions and which: (a) has a defined investment policy and (b) is not an Undertakings for Collective Investments in Transferrable Securities (“UCITS”) fund. The definition of AIF thus covers most hedge funds, including master and feeder funds. The term “marketed,” as one may expect, is also quite broad and includes both direct and indirect marketing efforts.
In short, United States investment managers need to be aware of AIFMD even if a fund is domiciled somewhere other than the European Union but intend to market to customers there. Compliance with AIFMD should also be a concern for those United States-based funds that have pre-existing investors in the European Union. While there is some leeway under AIFMD for investor-initiated investments, the risk of non-compliance with AIFMD is substantial. For example, in the United Kingdom, an investor may be able to rescind an investment in an AIF at par and the fund manager be subjected to fines and other criminal penalties. While the extra-territorial reach of AIFMD to a non-compliant manager has yet to be tested, one can only surmise the legal morass that may ensue in a United States court where an aggrieved investor seeks to invoke AIFMD protections.
More importantly, AIFMD imposes increased disclosure requirements. One of the more interesting requirements of AIFMD is the required disclosures of (a) liability risk by third parties, including insurers, and (b) liquidity risk management. Also required are copies of “Annual Reports,” disclosure of the latest Net Asset Value (“NAV”) of the fund, and disclosures regarding the custody of assets. The “Annual Report” requirement is one that has caused quite a bit of discussion among those in the investment management arena, given that AIFMD requires that an annual report disclose not only a balance sheet, but an income/expenditure accounting and remuneration disclosures split into fixed and variable categories and a separate disclosure for total remuneration for senior management.
One might wonder to whom these disclosures are submitted, other than investors. The answer is that the European Union has its own equivalent of the SEC called the European Securities and Market Authority (“ESMA”). Regulators from each European Union jurisdiction require the filings, which are then sent by them to ESMA. U.S. fund managers will find that Form PF is in many ways similar to the Annex IV form to be submitted to ESMA. There are, however, differences in calculating assets under management and the frequency of reporting.
Given the complexity of AIFMD, fund managers in the United States may seek to align themselves with a pre-existing AIF structure in a European Union jurisdiction. As AIFMD compliance has become a concern, Malta has emerged as a tax-neutral jurisdiction which, being in the European Union, has spawned AIFMD-compliant fund “platforms.” Likewise, software solutions and service providers have sprung up in the United States for those managers who seek to handle their AIFMD compliance without being on a platform. Whatever the business case may be for one solution or another, United States fund managers who market alternative investment vehicles in the European Union need to be aware of the requirements of AIFMD, in addition to the laws of specific jurisdictions in which marketing efforts are undertaken.