Natalia Martí, ROCA JUNYENT, Spain
As in other countries of the European Union, Spain is taking a long time to implement the transposition of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and to amend Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (the ‘AIFM Directive’).
According to the Directive itself, the initial deadline for its transposition into the domestic legal systems of the Member States expired on 22 July 2013, and therefore Spain, along with certain other countries, has failed to meet this transposition deadline.
Nevertheless, the Spanish Government already is working on the legislation for the transposition of the AIFM Directive. On 16 May 2013, the Ministry of the Economy and Competitiveness published two long-awaited draft bills, which represented the first drafts for the said transposition legislation.1
However, on 11 April 2014, the Ministry of the Economy and Competitiveness published a new bill consolidating the previous two draft bills into one, and it is this bill that has been submitted to the Council of State for approval and for subsequent submission to the Council of Ministers so that it may be put before the Spanish Parliament for approval and enactment. The said process, bearing in mind the parliamentary majority of the governing party (Popular Party) should a priori take around nine months before the Act that transpires from the said Bill becomes law and enters into force.
What is the current legislative situation of Investment Funds in Spain?
Spanish Law currently regulates two kinds of undertakings for collective investment (‘UCI’), the main difference between them being the length of time for which the investor commits to the investment: open-ended UCIs and closed-ended UCIs.
In open-ended UCIs, investors may seek to cash in their investment at any time against the assets of the UCI. This group includes harmonized UCIs under Directive 2009/65/EC (hereinafter the ‘UCITS Directive’), which are always open-ended, and others such as Free Undertakings for Collective Investment or Real-Estate Investment Institutions.
In closed-ended UCIs, investors subscribe an irrevocable undertaking pursuant to which they cannot withdraw until a certain period of time has elapsed. The only institutions that are subject to complete regulation within this category are private equity firms (‘PEF’), which are regulated by way of a specific Law, viz. Law 25/2005 on Private Equity Firms (‘PEFL’). All other closed-ended schemes are subject to the legislation governing securities in general, contained at Law 24/1988 on the Securities Market (‘SML’).
New legislative framework
The AIFM Directive establishes that both open-ended and closed-ended UCIs (provided that they are not UCITS, which are already regulated under Law 35/2003 on Undertakings for Collective Investment (‘UCIL’) and its implementing provisions) should have a common administrative framework, and that in certain cases they should be freely marketed in EU Member States. We refer to all of these as Alternative Investment Funds or AIF.
In principle, and as is provided by the latest draft of the legislative text, the AIFM Directive is to be transposed in Spain through one single piece of legislation covering both open-ended AIFs and their managers, which are to be regulated in the amended version of the UCIL, and closed-ended AIFs and their managers, which are to be the subject of the new Law governing Private Equity Firms and Other Investment Institutions through this new piece of legislation.
The AIFM Directive focuses on regulating the managers of the institutions, without addressing more general aspects such as investment policy. This is because these AIFs are aimed at professional investors, and as such the purpose of the regulation is not to protect investors as in the case where retail investors are involved and where the imbalance between the parties is more evident. However, it was considered appropriate to harmonize regulation of the managers of these Alternative Investment Funds given the implications that their activity may have on financial stability, which is currently an absolute must.
This means that it is necessary to incorporate the AIFM Directive into Spanish Law with regard to both private equity firms and undertakings for collective investment other than those regulated by the UCITS Directive, which, as we have said, are covered by Spanish legislation in the UCIL.
The Directive also has served to guide the regulation of a new concept: SME private equity firms. Furthermore, the AIFM Directive revises the legislation governing private equity in order to attract additional funds with which to finance a larger number of companies in their initial development and expansion stages, the reason being that in view of the level of development of those companies that have obtained funding through private equity in recent years, it has been shown that there is a clear preponderance of consolidated companies that have benefitted from private equity and leveraged transactions, to the detriment of those under venture capital aimed at companies in the very early stages of their development.
The law likewise will regulate the conditions for access to the activity and the conduct of the managers of closed-ended investment institutions domiciled in Spain, and it regulates the requirements that these managers will have to comply with where they seek to manage and market foreign investment institutions. Likewise it introduces the requirements that all foreign managers will have to comply with in order to market foreign investment institutions in Spain.
The innovations introduced by the Draft Bill compared to the previous Law are mainly as follows:
- More flexibility in the financial legislation governing private equity firms, allowing a wider range of financial instruments such as participating loans, with greater flexibility and the periodic distribution of earnings;
- SME venture capital firms are created, allowing them to invest 70% of their assets in SME stock. This aims to boost funding in the early stages of the development of companies;
- The scope of application of the Law is broadened, given that all closed-ended undertakings for collective investment with a pre-defined investment policy and which share out the returns among the investors will be subject to the Law;
- The system of administrative intervention by the CNMV (Spanish Securities Market Regulator) over private equity firms and closed-ended UCIs is almost entirely abolished. Authorization for managers is maintained, whilst investment funds and institutions that have delegated their administration to a manager will only require registration. Moreover, the rules governing related party transactions between the private equity firm and its partners have been rendered more flexible.
We hope the new legislative framework can be approved and rolled out as swiftly as required, not only to get back on track in terms of compliance with the established term for transposing the Directive, but also to provide welcome relief to financing activity by making it more stable and secure and giving it a much-needed kick-start in these trying times.
1 The first Draft Bill was entitled ‘Draft Bill for the amendment of Law 35/2003 of 4 November, on Undertakings for Collective Investment, with regard to the provisions applicable to managers of authorized Undertakings for Collective Investment pursuant to Directive 2011/61/EU’, and the second, ‘Draft Bill for the regulation of private equity firms and other investment institutions and their managers.
*Natalia Martí is a Partner at ROCA JUNYENT in their Corporate Department. She can be reached at email@example.com.