This briefing provides a summary of how the AIFMD will affect non-EU managers who wish to market their funds to UK investors from 22 July 2013.
The Alternative Investment Fund Managers Directive (the “AIFMD” or the “Directive”) was published in July 2011, but EU member states have until 22 July 2013 in which to “transpose” the Directive into their national laws.
European Commission Regulations
The European Commission (“Commission”) has adopted a Delegated Regulation (and two Implementing Regulations) which contain much of the detail of the new regime. These Commission Regulations will be directly applicable in each EU member state from 22 July 2013.
UK implementation of the Directive
In the UK, the Directive will be implemented by way of new and amended UK legislation and through amendments to the rulebook of the Financial Conduct Authority (“FCA”) (the successor body to the Financial Services Authority (“FSA”)).
The principal new UK legislation will be “The Alternative Investment Fund Managers Regulations 2013”, which will come into force on the Directive’s implementation date, 22 July 2013 (the latest draft of these Regulations was published in May 2013). The Commission Regulations will also be directly applicable in the UK on that date.
UK consultation papers
Before it was succeeded by the FCA on 1 April 2013, the FSA published two consultation papers on the new rules and guidance relating to the implementation of the AIFMD in the UK. The draft guidance published by the FSA illustrates how the UK will interpret various aspects of the AIFMD.
The UK Treasury has also published two consultation papers on the proposed changes to the UK legislation required in order to transpose the AIFMD into UK law.
Key concepts in the AIFMD and the UK implementing legislation
Alternative Investment Funds (“AIFs”)
The AIFMD establishes a framework for regulating the managers of Alternative Investment Funds. Essentially, these funds consist of those collective investment funds which are not EU-regulated “UCITS” funds. Therefore, private equity funds, hedge funds and real estate funds are all types of AIF.
Alternative Investment Fund Managers (“AIFMs”)
Under the Directive, each AIF has a single manager - the AIFM. If the fund’s legal form permits internal management, and if the fund’s governing body has decided not to appoint an external manager, the fund itself will be the AIFM under the Directive. This is in contrast with externally managed funds, where the AIFM is the entity responsible for “managing” the fund. In this context, “managing” means providing at least portfolio management or risk management services to the fund (where risk management involves managing risks relevant to the fund’s investment strategy).
EU AIFs and EU AIFMs
The AIFMD applies in different ways according to whether the AIFM and the AIF are established in the EU. An EU AIF is an AIF which is authorised or registered in an EU state under local law (or if not so authorised or registered, has its registered office and/or head office in an EU state). An EU AIFM is defined in the Directive as one which is established (i.e., has its registered office) in an EU state.
The EU and the EEA
The Directive itself refers to “EU” AIFs and AIFMs, whereas the UK legislation refers to “EEA” AIFs and AIFMs. The UK legislation has been drafted on the basis that the Directive will be extended to the rest of the EEA (i.e., the European Economic Area, which comprises the countries of the EU plus Iceland, Liechtenstein and Norway).
There is a significantly lighter regulatory regime applying to AIFMs managing small funds (i.e., those AIFMs managing AIFs with assets under management, which, in total across all such AIFs, do not exceed Euro 100 million, or do not exceed Euro 500 million where the funds are not leveraged and investors have no redemption rights for the first five years). These are termed “small AIFMs” in the UK implementing legislation.
The significance of the location of the manager
Authorisation of EU managers
The main aim of the AIFMD is to regulate EU-established managers of AIFs. From July 2013, EU AIFMs must, unless an exemption applies, be authorised by the relevant national regulator (although EU AIFMs operating before that date have a further year in which to apply for authorisation).
Impact of AIFMD on non-EU managers – authorisation requirements
The AIFMD will also affect managers established outside the EU. Under the current timetable, from 2015, non-EU managers of EU-established AIFs will need to be authorised under the Directive.
A non-EU AIFM of a non-EU AIF will not require authorisation (however, as discussed below, it is intended that it will be permitted to apply for authorisation from 2015, so as to obtain the “passport”).
Impact of AIFMD on non-EU managers – marketing
The AIFMD contains provisions which will apply to non-EU managers who market their AIFs into the EU. These will apply even if the funds are not EU funds, and even if the funds are marketed in reliance on the national private placement regimes applicable in the countries into which the funds are marketed. As a result, the AIFMD will, for example, affect US managers who market their funds to European investors.
What is “marketing”? How will the UK interpret the meaning of “marketing”?
The meaning of “marketing” in the Directive
“Marketing” is defined in the AIFMD as meaning “a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union”.
What is meant by "offering" and "placement"?
The FSA, in its first consultation, published draft guidance which set out its views on the activities that fall within the scope of “marketing” under the AIFMD. In this draft guidance, the FSA considered that an "offering" includes situations where the units or shares of an AIF are made available to the general public and a "placement" includes situations where the units or shares of an AIF are only made available to certain investors by the AIFM or a financial intermediary. The FSA interpreted the reference to “indirect offering or placement” to include situations where an AIFM distributes units or shares of an AIF through a chain of intermediaries.
The AIFMD does not restrict professional investors in the EU who wish to invest in AIFs on their own initiative (“reverse solicitation”, or “passive marketing” as the FSA has called it). In the FSA's view, in determining whether the marketing is at the initiative of the investor, consideration needs to be given to the course of communication or relationship between the investor and those involved with, or connected to, the AIFM or the AIF. Only communications which are solicited by the investor should be considered to have occurred at the initiative of the investor. For example, the FSA considered that communications in response to an approach from a potential investor with prior knowledge of the AIF and no previous involvement with the AIFM could be at the initiative of the investor.
The interaction between “marketing” under the AIFMD and the UK financial promotion regime
The UK already has domestic rules concerning the solicitation of investors: those concerning “financial promotion”. The FSA has recognised that there may be occasions when a communication does not consist of “marketing” under the AIFMD, but nonetheless constitutes a “financial promotion”. The FSA gave the example of an AIFM making a communication in relation to draft documentation that would not be “marketing” under the AIFMD, but which could still be caught by the UK’s financial promotion rules.
The two routes for marketing – the AIFMD passport and national private placement
For five years from July 2013, there are due to be two parallel marketing routes under the AIFMD – that using the “passport” and that using the national private placement regimes. These are outlined below.
The AIFMD passport
The benefits of the passport
The passport will permit an AIFM authorised in one EU member state to market its AIFs to professional investors in other EU member states without the need for separate authorisation in those states (the term “professional investor” is defined by reference to that in the EU Markets in Financial Instruments Directive). It is hoped that the AIFMD passport will make it easier to market AIFs across Europe, since it will avoid the necessity of complying with the differing private placement regimes across the EU.
The passport and EU managers
From July 2013, EU AIFMs will be obliged to use the passport if they wish to market EU AIFs to “professional investors” in other EU countries (the passport is due to be available to EU AIFMs in respect of their non-EU AIFs from 2015).
The passport and non-EU managers – due to be available from 2015
Non-EU AIFMs will only be able to apply for the passport to market their AIFs from 2015 (under current plans). To qualify for the passport, they will need to become authorised under the AIFMD (there will also need to be cooperation arrangements in place between the relevant non-EU and EU regulators).
Private placement regimes
From July 2013 until the availability of the passport in 2015
From July 2013 until the availability of the passport in 2015 (under current plans), non-EU managers will need to rely on, and comply with, the relevant national private placement regimes in order to market their funds to professional investors in the EU.
Private placement regimes are only due to be available from July 2013 until 2018
The current intention is to phase out the national private placement regimes in 2018, and so this marketing option for non-EU managers is only expected to be available from 2013 to 2018.
Even during this period, there is likely to be a wide variation in the extent to which the private placement route can be used in each EU country, and member states are not obliged to maintain private placement regimes.
The provisions of the AIFMD that apply to non-EU managers when using private placement
Although non-EU AIFMs using private placement to market their funds into the EU will not be subject to the full AIFMD regime, they will be subject to certain aspects of the AIFMD, including those concerning annual reports, disclosure to investors, regular reporting to regulators, requirements on managers of funds that acquire substantial stakes in EU companies and anti-asset stripping provisions. These provisions are outlined below.
Co-operation arrangements required as a pre-condition for private placement
There will need to be co-operation arrangements in place between the relevant non-EU and EU regulators in order for the private placement route to be available. On 30 May 2013, the European Securities and Markets Authority (“ESMA”) announced that it had approved co-operation arrangements (in the form of memoranda of understanding) on behalf of all of the EU (and EEA) national regulators, with 34 of their global counterparts, including regulators in the USA (notably the SEC), Canada, Brazil, India, Switzerland, Australia, Hong Kong, the Cayman Islands, the Channel Islands and Singapore. These memoranda of understanding, which will apply from 22 July 2013, cover matters such as the exchange of information and cross-border on-site visits in order to allow EU regulators to ensure compliance with the AIFMD.
While ESMA has negotiated the memoranda of understanding centrally, there will need to be bilateral arrangements to be signed between each EU national regulator and the relevant non-EU regulator. The FCA has confirmed that it has signed such memoranda of understanding with the 34 non-EU regulators identified by ESMA.
The country of establishment of the AIFM and the AIF must not be an “NCCT”
For private placement to be available, the country in which the non-EU AIFM, or the non-EU AIF, is established must also not be designated as a “Non-Cooperative Country and Territory” by the Financial Action Task Force (i.e. the organisation set up to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system).
AIFMD provisions applying to non-EU managers marketing into the EU in reliance on private placement
Full Directive obligations do not apply
Non-EU AIFMs using private placement to market their funds to investors in the EU are not going to be subject to the full AIFMD regime, but will be subject to certain provisions of the AIFMD, further details of which are contained in the Commission Delegated Regulation which will apply directly in each EU state as from 22 July 2012.
An AIFM shall, for each of the AIFs it markets in the EU, make available (to the relevant EU national regulator and to investors on request) an annual report for each financial year, no later than 6 months following the end of the financial year. This needs to contain financial information on the fund, and disclosures regarding the total remuneration paid by the AIFM to its staff, split into fixed and variable remuneration.
Disclosure to investors
AIFMs shall, for each of the AIFs that they market in the EU, make available prescribed information to investors. These disclosures include: a description of the investment strategy and objectives of the AIF; any applicable investment restrictions; the circumstances in which the AIF may use leverage; the types and sources of leverage permitted; a description of any delegated management function; the AIF’s valuation procedure; the AIF’s liquidity risk management; all fees, charges and expenses; details of any preferential treatment (i.e., side letter) received by any investor; and any material arrangements of the AIF with its prime brokers.
Reporting obligations to regulators
A non-EU AIFM is required, for each of the AIFs it markets in the EU, regularly to report to the relevant EU national regulator prescribed information including: information relating to the liquidity of the AIF; systems used to manage the risk of the AIF; information on the main categories of assets in which the AIF is invested; and the results of stress tests on the AIF relating to risk and liquidity management. Reporting templates for the prescribed information are contained in an annex to the Commission Delegated Regulation.
AIFs which acquire control of EU companies
The AIFMD contains detailed disclosure obligations and “asset stripping” provisions (designed to restrict the level of distributions for two years following the acquisition of control of an EU company by the AIF) directed at managers of private equity funds with substantial stakes in EU companies.
The UK private placement regime
As noted above, although the Directive itself refers to “EU” AIFs and AIFMs, the UK legislation refers to “EEA” AIFs and AIFMs.
The UK does not intend to impose further private placement obligations beyond those in the AIFMD
The UK government has stated that in order to ensure continued UK investor access to non-EEA AIFs through national private placement, it does not intend to impose additional requirements for non-EEA managers of non-EEA AIFs above the minimum required by the Directive. In other words, it intends to maintain the UK’s relatively liberal private placement regime for marketing to professional investors during the five year transitional period.
Written notification to the FCA prior to marketing
A non-EEA AIFM must give written notification to the FCA before marketing an AIF it manages. It will, however, not be necessary to await approval from the FCA before marketing may take place.
The notification for such a non-EEA AIFM (save for a “small AIFM”, which is subject to lighter requirements) must include a statement confirming that the AIFM complies with the requirements of the AIFMD outlined above concerning the provision of an annual report, disclosure to investors and reporting to regulators, together with, where applicable, those concerning AIFs which acquire control of EEA companies. It should also confirm that cooperation arrangements are in place between the FCA and the regulator of the country in which the AIFM is established, and if applicable, that in the country in which the AIF is established.
UK’s wide interpretation of the transitional provisions - UK Treasury’s Questions and Answers
In May 2013, the UK Treasury published “Questions and Answers” in which it confirmed that the UK government will take a broad interpretation of the Directive’s transitional provisions as they apply to marketing by non-EEA managers.
Under the UK’s interpretation of the AIFMD’s transitional provisions, a non-EEA AIFM, both managing an AIF and marketing an AIF in the EEA before 22 July 2013, can take advantage of the transitional arrangements. The draft UK Alternative Investment Fund Managers Regulations 2013 contain a transitional period of one year before compliance with the requirements of the AIFMD regime in respect of such non-EEA AIFMs is required.
The Treasury has confirmed that an AIFM operating under the transitional arrangements can launch and market new AIFs, since the transitional arrangements attach to the AIFM itself. It has also confirmed that such firms do not need to make any specific application, or go through any procedure, in order to benefit from the transitional provisions. A non-EEA AIFM that is making use of the transitional provisions also does not need to wait for cooperation agreements to be in place between the FCA and the relevant non-EEA regulator before marketing to UK investors.
The effect of this is that non-EEA managers who fall within the transitional provisions will not have to comply with the AIFMD requirements regarding private placement until 22 July 2014. It should be noted, however, that other EEA states may take a more restrictive view of the AIFMD’s transitional provisions.
The AIFMD will affect managers from outside the EU who wish to market their funds to EU investors. The full impact of the regime will become apparent once all the EU countries have implemented the Directive into their domestic legislation. However, it is becoming apparent that the UK is taking an approach to the interpreting the Directive’s provisions that is designed to maintain, as far as possible, access to professional investors in the UK by non-EU managers of Alternative Investment Funds.