Purpose of AIFMD
The AIFMD was introduced on 8 June 2011. The purpose of the AIFMD was to provide a comprehensive and secure framework for the supervision and oversight of alternative investment fund managers ("AIFMs") in the EU or marketing non-EU alternative investment funds (“AIFs”) in the EU.
The objectives of the AIFMD are to increase the transparency of AIFMs towards investors and supervisors, to equip national supervisors with the information they need to monitor and respond to risk, to introduce a common and robust approach to investor protection; and to increase competition and accountability.
Where are we at in the process of implementation?
The European Commission Level 2 regulations were issued on 19 December 2012. The Level 2 regulations are subject to a 3 month scrutiny period by the European Parliament and Council, but they are directly effective and automatically become law in the Member States of the EU. The AIFMD itself being a directive, must be transposed into the national laws of Member States by 22 July 2013. After this date different regimes of Private Placement and Passporting will apply to AIFMs as set out below.
During the first quarter of 2013, the European Commission is expected to issue regulations on the procedure for determining the Member State of reference of a non-EU AIFM. In addition the European Securities and Markets Authority ("ESMA") is expected to issue guidelines for sound remuneration policies under the AIFMD.
What is an AIF?
An alternative investment fund (not a UCITS) being a collective investment undertaking that raises capital from a number of investors to invest in accordance with a defined investment policy for the benefit of those investors.
What is an AIFM?
An alternative investment fund manager, being a person whose regular business is the managing of one or more AIFs. At a minimum, an EU AIFM will have to be authorised to perform the functions of portfolio management and risk management whether or not they are marketing an EU or non-EU AIF within the EU.
A non-EU AIFM marketing within the EU will need to consider private placement and the impact of the AIFMD on this.
Delegation by the AIFM (EU or non-EU) is permitted provided it does not result in the AIFM being considered to be a "letter-box entity" with the result that the delegate rather than the delegator would be considered to be the AIFM. The Level 2 regulations have provided further clarity on delegation. So that in determining whether an AIFM is a letter-box entity, there are now qualitative and quantitative tests to apply.
Delegation is an important consideration even for non-EU AIFMs to avoid a delegate (e.g. a trading adviser) within the EU or an EU entity within the fund structure (e.g. the operator of an Intermediate Fund) being considered the AIFM and therefore needing to be fully authorized under the AIFMD.
In relation to non-EU AIFs (e.g. Cayman Islands vehicles), the AIFMD only applies to non-EU AIFs which are marketed into the EU. Marketing constitutes the direct or indirect offering or placement at the initiative of the AIFM, or by another firm operating on behalf of the AIFM, of units or shares of an AIF it manages to or with investors domiciled in or with a registered office in the EU. Accordingly "reverse solicitation", irrespective of the number or size of EU investors in a non-EU AIF, is unaffected.
Survival of Private Placement
Non-EU AIFMs and EU AIFMs marketing non-EU AIFS in EU may rely on private placement regimes until 2018 (assuming they are retained by the Member States that you wish to market into). Passporting may be available from 2015.
The Private Placement that applies to Cayman Islands AIFs still requires that:
- The Cayman Islands must have cooperation agreements in place with the relevant Member States of the EU. The Cayman Islands Monetary Authority ("CIMA") is in the final stages of negotiating the template cooperation agreement with the European Securities and Markets Authority ("ESMA"). The cooperation agreements must have such mechanisms, instruments and procedures as are necessary for EU regulators to perform their duties. The legislation necessary in the Cayman Islands to provide CIMA with the required powers is imminent.
- The Cayman Islands must not be on the FATF blacklist. The Cayman Islands is not on such blacklist.
- The AIFM (EU or non-EU that is marketing the Cayman Islands AIF in the EU) must comply with certain other directive requirements - filing of data with the regulator in the Member State where the AIF is marketed, preparation of annual reports and making certain required disclosures to investors (including details on operational frameworks, financial reporting and remuneration).
The passporting system is currently not available for AIFMS marketing non-EU AIFs in the EU. It is likely that the passporting system will be extended to the marketing of non-EU AIFs from 2015 (with private placement nevertheless continuing until 2018). If the passporting system is extended, for a non-EU AIFM who wishes to be able to market in the EU and benefit from passporting, they will need to obtain authorisation under the AIFMD from the regulatory authority in its Member State of reference.
Under passporting, any such AIFM marketing in the EU would need to comply in full with all of the provisions of the AIFMD, including strict provisions in relation to the use of liquidity, limits on leverage, use of depositaries, delegation to service providers, valuation of assets, minimum capital requirements, remuneration policies and practices, use of risk management systems and more general reporting obligations. In addition Cayman and the domicile of the AIFM would need to have a Tax Information Exchange Agreement (“TIEA”) in place with the Member State of reference. The Cayman Islands has signed a total of 30 bilateral TIEAs including with many EU Member States. There are also four further TIEAs in the process of completion with Spain, Greece, Indonesia and South Korea. The Cayman Islands has also enacted the tax information exchange provisions of the EU Savings Directive.
Depositary Requirements - Cayman Funds
Depositary-lite requirements apply to private placement of non-EU AIFs by AIFMs. Under this regime, the AIFM that is marketing the non-EU AIF will have to ensure that one or more entities (as defined under the rules) are appointed to carry out cash monitoring, safe-keeping, verification and oversight duties.