Introduction
Private placement rules
Passporting
Passive marketing
Marketing outside the European Union
On November 11 2010, after a protracted period of negotiation, the Alternative Investment Fund Managers (AIFM) Directive was finally approved by the European Parliament. The directive is expected to be brought into force shortly and will regulate the activities of managers of alternative investment funds as follows:
- if the manager is based in the European Union, on its worldwide activities; and
- if the manager is based in a third country outside the European Union, only to the extent that it has activities within the European Union.
The position of third-country managers was initially contentious, but has now been resolved by creating a dual system, allowing the existing private placement rules to continue until at least 2018 while phasing in an option for third-country managers to qualify under an EU passporting regime.
Third-country managers will be able to continue to market third-country funds to professional investors in EU member states by using the existing private placement rules until at least 2018, subject to the following conditions.
Regulatory cooperation
A supervisory cooperation agreement must be in place between the regulator of the EU member state in which the fund is to be marketed and the third-country regulator of the manager. Jersey is a founding signatory to the International Organisation of Securities Commissions (IOSCO) multilateral memorandum of understanding and already has bilateral regulatory agreements with the United Kingdom and with 10 other EU member states.
Financial Action Task Force
The third country where the alternative investment fund manager and the fund is established must not be on the Financial Action Task Force (FATF) blacklist. The Channel Islands have extremely high anti-money laundering standards and Jersey is rated by the International Monetary Fund as being at the top of global standards and significantly ahead of a number of EU member states. It is not on the FATF blacklist.
Transparency and reporting
The third-country fund must comply with certain transparency and reporting requirements that are set out in the directive. In summary, the fund's annual report must disclose (as relevant):
- its principal counterparty exposures;
- liquidity arrangements;
- risk management arrangements;
- any controlling interests; and
- certain other matters prescribed under the directive.
Private placement has been the standard distribution model for the marketing of alternative investment funds both within and outside the European Union for a number of years. Jersey general partners of limited partnerships established in the Channel Islands and Jersey incorporated managers of corporate funds set up in the Channel Islands will continue to be able to rely on private placements for marketing of alternative investment funds in the European Union, until at least 2018, when the directive will be subject to review.
However, once the directive comes into effect, EU alternative investment fund managers will no longer be permitted to use the private placement rules for marketing EU alternative investment funds, even on a domestic EU distribution basis. Instead, such managers with EU funds will be required to comply with the more onerous requirements of the proposed passporting regime. This may lead arrangers to prefer to use a third-country manager or alternative investment fund formed in the Channel Islands.
Third-country funds which are based in jurisdictions whose regulatory regimes qualify as equivalent in effect to EU standards will be able to apply for a passport for the fund to be marketed throughout the European Union. Passporting for third-country funds is expected to become available within two years of the directive being implemented and will be subject to compliance with the directive and to the three conditions outlined below.
Regulatory cooperation
In addition to the requirement for supervisory cooperation agreements to be in place (similar to those provided above in relation to the private placement rules), the manager must appoint a representative in the EU member state with which it has the most substantive connection.
FATF
The third country must not be on the FATF blacklist (as provided above in relation to the private placement rules).
Tax information
A tax information exchange agreement must be in place between the third country where the fund is based and each EU member state where the fund is to be marketed. Jersey currently has tax information exchange agreements with the United Kingdom and with eight other EU member states.
On the basis of current regulatory policy in the Channel Islands, Jersey should comfortably satisfy the equivalence requirements, as its regulatory standards conform to international best practice and in many respects are more developed than those of a number of EU member states.
However, the costs of complying with the full requirements of the directive, in terms of capital adequacy, leverage restrictions, appointment of external valuation agents, depositary and other requirements, may impact adversely on a fund's total expense ratio. The benefits of passporting are likely to accrue principally to retail funds which are marketed on a pan-European basis. However, alternative investment funds have traditionally been marketed on a selective distribution basis to professional and institutional investors, and for such funds the benefits of passporting may prove to be illusory.
The directive does not apply to passive marketing or to reverse solicitation. This means, in effect, that EU investors may contact third-country alternative investment fund managers and invest in third-country funds even if the manager does not satisfy any of the provisions of the directive.
Marketing outside the European Union
EU alternative investment fund managers and EU alternative investment funds will become subject to significant additional requirements under the directive, including disclosure requirements, leverage limitations, concentration restrictions, reporting requirements and caps on remuneration for managers. As a result, it is expected that a number of arrangers will wish to establish third-country funds and/or feeder funds and associated managers for the purposes of marketing alternative investment funds to investors based in the United States or Asia.
For further information on this topic please contact Michael Lombardi, Tim Morgan or Daniel Richards at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected], [email protected] or [email protected]).