On 30 April 2009, the European Commission submitted a draft directive for managers of alternative investment funds (the “Draft Directive”) for preliminary review to the European Parliament and the Council. The European Commission intends to implement this directive in 2011. However, because of fierce opposition from the market as well as various EU member states, mainly because of the large reach and the ‘one size fits all’ approach, it is uncertain whether this will be feasible.
The Draft Directive will introduce a licence requirement as well as a European passport for alternative investment fund managers (“AIFMs”). Under certain conditions, licensed AIFMs may provide management services to alternative investment funds (“AIFs”) and/or offer participations in AIFs to professional investors. The term ‘alternative investment funds’ is very broad and includes, save for some exceptions, all non-UCITS investment institutions. One of the exempted categories is the ‘small’ AIFM. Generally speaking, small AIFMs (including managers of most hedge funds) with less than EUR 100 million of assets under management, will be exempt from the directive. For most private equity funds managers a maximum of EUR 500 million of assets under management applies in order to qualify for the exemption.
A manager of licensed AIFs will be subject to certain ongoing obligations (see the annex for a summary). Some consequences of the directive for various types of investment institutions are set forth below.
Current Dutch supervisory law allows participations in an investment institution, having its seat in a country designated by the Minister of Finance and which is adequately supervised in this country of origin, to be distributed in the Netherlands without a licence (often referred to as ‘adequate supervision funds’ or “ASFs”). ASFs from outside the EU often are Guernsey, Jersey or US based investment funds, many of which are listed at Euronext Amsterdam.
Under the Draft Directive these funds will be subject to a third country regime. Deviating from the current Dutch ASF regime, the European Community will then designate countries with adequate supervision. Where there is also an OESO Model tax treaty between the Netherlands and the third country where the manager of the ASF and/or the ASF itself is based, such managers may offer participations from the third country to professional investors in the Netherlands.
If the Draft Directive is adopted, the Dutch ASF regime cannot be continued. It is important that there will then be sound transitional arrangements for ASFs which have been admitted to the market in the Netherlands under the ASF regime. A possibility for this need yet be included in the Draft Directive.
Private equity funds, including buyout and venture capital funds, usually do not fall within the scope of present Dutch supervisory law because (i) they make use of an exemption, or (ii) their activities do not qualify as investment but as entrepreneurial activities. Although the Draft Directive does not make a clear distinction between private equity funds and ‘ordinary’ business enterprises (or e.g., a conglomerate of enterprises), the European Commission obviously intends to include private equity funds in the Draft Directive. In addition, present exemptions will most likely be revoked.
Cumbersome obligations for private equity funds will most likely be:
- the mandatory appointment of an independent valuation expert for the valuation of assets of and the participations rights in the private equity fund, and
- the mandatory appointment of a licensed EU credit institution as custodian (bewaarder) of the assets of the fund and for which separate liability provisions are included in the Draft Directive.
The Draft Directive also includes specific disclosure obligations which will be especially important for buyout funds. As soon as the fund has an interest in a company of 30 percent or more, the AIFM must provide information to the company (including its shareholders and representatives of employees) on the acquisition of control, the investment strategy and the investment objectives. This includes information on internal and external communications and the policy on avoiding and managing conflicts of interest. Where listed companies are concerned, the manager must also provide information as required in the event of a public takeover bid. A party acquiring 30% control in a listed company will generally speaking have to make a compulsory takeover bid, which requires such information to be made public for that reason already.
The disclosure obligations do not apply to participations in small or medium-sized companies where fewer than 250 people are employed and/or whose annual turnover does not exceed EUR 50 million and the balance sheet total does not exceed EUR 44 million.
AIFMs systematically applying leverage must – in addition to other new requirements – provide additional information to investors and the relevant authorities (in the Netherlands: the AFM), including the maximum leverage which they may use for the AIF as well as the total leverage used. These requirements will be especially relevant for hedge fund managers. Under exceptional circumstances the supervisor may impose limitations on the leverage to safeguard the stability and the integrity of the financial system.
Retail investment funds (non-UCITS)
The Draft Directive is aimed at managers of non- UCITS investment institutions, including AIFs aimed at retail investors. The national legislator may introduce additional rules for retail investment institutions. Although it is still unclear how the national legislators will amend the current supervisory law for retail investment institutions, standards from the Draft Directive (when adopted) will be seen as minimum standards. This may inter alia result in the requirement that retail investment funds must engage a licensed EU credit institution as custodian, including the corresponding liability provisions for custodians.
The Draft Directive does not relate to UCITS. It is, however, likely that, as a consequential effect of the Draft Directive, certain requirements will be copied in the UCITS directives. In any event, it seems illogical to subject managers offering participations to professional investors to provisions (in the case of AIFs) that are stricter than those applicable to managers offering participations to retail investors (in the case of UCITS). The European Commission has recently adopted a similar view in respect of the mandatory custodian (being a licensed EU credit institution) and the corresponding liability provisions for custodians.
The Draft Directive also includes a European passport. Upon completing a notification process, a licensed AIFM may provide management services to professional investors in another EU member state. This means that for these activities there will not be different rules and resulting selling restrictions for each member state.