The Alternative Investment Fund Managers Directive (“AIFMD”) is due to come into force on 22 July 2013 and introduce new requirements for marketing funds to investors in the EU. One of the main conditions to allow Australian funds to continue to be marketed in the EU has now been satisfied.
Previously it was possible for an Australian fund manager to market an Australian fund to wholesale investors in certain EU Member States without the need for the manager or the fund to be registered or authorised in the EU.
The AIFMD will introduce certain new conditions for a non-EU manager of an Alternative Investment Fund (which includes most traditional forms of funds such as hedge funds, commodity funds, private equity funds, infrastructure funds and other entities) (“AIF”) to be able to continue to rely on any such private placement regime. Australian managers of an Australian AIF should be well placed to meet them. In the short term, EU Member States may keep their existing private placement regimes until at least July 2018. The UK, among others, will do so.
The new conditions include:
Under the AIFMD it is a pre-condition to any marketing that co-operation agreements are in place between the securities regulators in the EU Member States where it is intended to market the AIF and the regulators, in both the country where the relevant non-EU manager (“non-EU AIFM”) is established and, if different, the regulators of the country where the AIF is established.
ASIC now has co-operation agreements with 29 EU securities regulators and announced on 19 July 2013 that it had signed bilateral memorandums of understanding with those regulators.
Disclosure and transparency requirements
Unlike European based managers, while an Australian or other non-EU AIFM relies solely on the private placement regime of an EU Member State it will only have to comply with some of the requirements of the AIFMD. These largely comprise the disclosure and transparency requirements under which the AIFM must:
- prepare an annual report for each AIF it intends to market in the EU;
- make certain disclosures to investors before they invest;
- make various ongoing disclosures to investors; and
- report certain information to the regulators in each EU Member State in which it markets the AIF.
It must also comply with the requirements in the AIFMD relating to the acquisition of major holdings and control of non-listed companies.
The annual report obligation will require the most thought. Unless the AIF is newly established, this will be an existing document at the time of contemplating any marketing activities in the EU. The annual report must be audited and must include information about the remuneration received by the AIFM, namely:
“the total amount of remuneration for the financial year split into fixed and variable remuneration paid by the AIFM to its staff members, the number of beneficiaries and, where relevant, the carried interest paid by the AIF; and
the aggregate amount of remuneration broken down by senior management and members of staff of the fund manager whose actions have a material impact on the risk profile of the AIF”.
In certain EU Member States it will now be necessary to register with the relevant regulator in that country before relying on its private placement regime. An Australian or other non-EU AIFM need only notify the UK Financial Conduct Authority (“FCA”) and it may then market the relevant AIF in the UK. It will not be necessary to await approval from the FCA before marketing. Instead, the FCA may retrospectively suspend or revoke the non-EU AIFM's entitlement to market if, having examined the application, it does not think the relevant requirements of the AIFMD have been satisfied (eg if the FCA thinks that the non-EU AIFM is not complying with its disclosure and transparency obligations).
An Australian AIFM may be in a better position if it comes within any transitional provisions enacted by an EU Member State or the exemption for small AIFMs.
While EU Member States were required to implement the AIFMD by 22 July 2013, the AIFMD envisages a 12 month transitional period for existing AIFMs. How individual Member States decide to implement this transitional period may differ. For example, the UK extends it to non-EU AIFMs as well as European AIFMs. A third country AIFM which has marketed an existing fund in the EU and who continues to market in the UK will not have to register with the FCA and comply with the relevant requirements of the AIFMD until 22 July 2014 (or such earlier date as it chooses to register with the FCA).
A note of warning: Managing an EU AIF
The above points all focus on the marketing of a non-EU AIF into the EU. If an Australian AIFM manages an AIF established in the EU then it should be aware that the AIFMD contains provisions which allow the European Securities and Markets Authority and the European Commission to decide (based on how successful the initial operation of the AIFMD is) whether, from September 2015, the Australian AIFM will be required to:
- comply with the full scope of the AIFMD (eg as regards regulatory capital, remuneration, appointment of a depositary, delegation, liquidity management, risk management etc);
- designate an “EU Member State of reference”;
- appoint a legal representative in the Member State; and
- become authorised in that Member State.
Recent Australian tax changes
There are a number of recent changes to the Australian tax rules that make offshore investment in Australian managed funds more attractive.
Chief among these is the managed investment trust ("MIT") regime. Many Australian domiciled REITs and securities and equity investment funds are likely to qualify for concessional MIT treatment.
Under the MIT regime, foreign investors in certain jurisdictions – including a number of EU States such as France, Germany, the Netherlands and the UK – are able to access a concessional rate of taxation (15% or, in some cases, 10%) on distributions of rent and taxable Australian capital gains on real property from qualifying MITs.
MITs also obtain the benefit of a number of other current and proposed tax concessions that provide certainty regarding the tax treatment of MITs. For example, qualifying MITs can elect to have gains and losses on the disposal of certain securities taxed under the capital gains tax rules, which can provide foreign investors with an exemption from Australian tax on distributions of capital gains on assets that are not taxable Australian property.