AIFMD for Americans
What U.S. & non-EU managers need to do to comply
AIFMD can be confusing for those of us in Europe so it is not surprising that the regulation has caused plenty of head scratching across the Atlantic and around the world.
This white paper provides a clear guide to what U.S. (and Asian managers) need to do to comply with the AIFMD regulations. This is vital if they want to be able to continue marketing their funds into the huge European market.
AIFMD is new European legislation which covers all non-UCITS funds in Europe. In practice this definition is very wide and covers virtually all hedge funds, private equity, fund of hedge funds and real estate funds.
Under the legislation a fund manager is referred to as an Alternative Investment Fund Manager (“AIFM”). Investment funds are referred to as “Alternative Investment Funds (“AIFs”).
The AIFMD regulation came into force in the 28 countries of the European Union (EU) on July 22nd 2013.
Non-EU managers must comply with AIFMD if they want to try and raise capital in Europe after July 2014 (the end of a 1 year transition period granted in most EU countries).
New requirements for non-EU managers.
AIFMD allows US and other non-European managers to continue marketing their funds into the EU.
It does however impose 3 new requirements in order to do so.
1. Disclosure Reporting
AIFMD requires non-EU managers to disclose information about themselves and their funds to both their investors and to European regulators.
· Non-EU managers must complete an annual report which must be provided to investors. This must contain total of remuneration paid to staff and details of the management fees of the fund. The disclosure requirements regarding remuneration will be a shock for many US managers. Nonetheless they are absolutely non-negotiable.
· Before investors come into the fund the non-EU manager must make specific information available to them regarding both fees and special arrangements in place with other investors. This means under AIFMD a fund’s side letters must be fully disclosed to all potential investors. Investors must also be notified if there are any changes to fees or special arrangements (e.g. lockups, side-pockets etc.). Some fund documents may have to be amended to facilitate this disclosure.
· Regular reporting to the regulator in the EU country where the fund is marketed (most likely the FCA in the UK). The reporting template is quite similar to Form PF in the US (e.g. type of asset held, exposure, leverage etc.). There are however difference of emphasis. ESMA, the pan-European super regulator recently released guidelines governing the template reporting requirements. Unfortunately they run to over 100 pages and are quite prescriptive regarding answer formatting and the data required.
2. Inter-Governmental co-operation
For a non-European manager to market their funds in the EU there must be an information exchange agreement in place between the regulators of the relevant EU state and the country where the non-EU manager is domiciled.
This condition is in line with the global moves towards the automatic exchange of taxation and financial data, which has been spear-headed by the FATCA regulations in the US. It may pose a challenge to overcome for some Cayman domiciled managers.
Obviously there is not much a non-EU manager can do to ensure compliance. They are wholly dependent on their country of domiciliation to comply with this AIFMD requirement. This is outside their control and hardly seems fair.
3. FATF taskforce
Finally for a non-EU manager to market their fund into Europe, the country of domicile of the non-EU manager should not be on the Financial Action Task Force (FATF) list of “Non-cooperative Countries and Territories” regarding anti-money laundering and terrorist financing.
This list has been in existence for a number of years and historically has included offshore islands or states deemed recalcitrant in their provision of data to track potential money laundering and terrorist funding. The membership has waxed and waned over the years but currently, from a hedge fund perspective, it is fairly benign. The primary non-EU hedge fund domiciles have long since begun co-operating with the FATF and none are on the current list.
These are the 3 sets of requirements that non-EU managers will have to comply with. It is worth noting that unfortunately local regulators can also add their own. None have indicated yet that they will do this. That could change, particularly in relation to reporting.
The UK has confirmed that it intends to continue to allow non-EU AIFMs to market AIFs into the UK, in accordance with the UK’s existing private placement regime. Managers will need to be approved by the new Financial Conduct Authority (FCA) after which the fund will appear on the FCA’s register of compliant AIF’s. Applications for FCA authorisation will take 20 working days to complete. This must be in place before the fund can market to UK investors.
Private Placement regimes & Passporting options
Currently in Europe there are national private placement regimes which allow non-EU managers to access European investors. These regimes are expected to remain in place until 2018, after which they may be disbanded (no decision can be expected for a couple of years yet).
If the EU decides to scrap the private placement regime (perfectly likely), then the “passporting” option under AIFMD would be the only way that non-EU managers could target capital from European investors.
At the moment the existing passporting system allows EU managers to become authorised in one country and market their funds across all 28 EU states. This is not open to non-EU managers.
ESMA is expected to make a recommendation in mid-2015 regarding whether this passporting system should be extended to non-EU managers. This will be an important decision for US and Asian managers hoping to target investors in Europe.
However if this goes ahead non-European managers will have to comply with the provisions of AIFMD in full if they want to access this Passport. The scale of compliance is not to be underestimated (just ask any European hedge fund manager!).
The full AIFMD regulation contain dozens of requirements ranging from mandatory leverage calculations, fund manager authorisation, remuneration policies, potential manager liability, illiquid investments provisions, risk management systems and minimum capital requirements, amongst many others.
Additionally, to access the passport regime from 2015 the fund will have to appoint a depositary. For European managers currently going through the process this has likely been the most significant change under AIFMD. This entity will act in an extensive oversight capacity and ensure the assets are safe, the cash is carefully monitored and the operations of the fund executed correctly. This will be a big change for many non-EU managers. Appointing a depositary will require detailed preparation, selection and operational change.
Also, there have been recent indications in the market that regulators in a number of important EU jurisdictions (Germany, Austria, Denmark and France) are considering imposing “depositary lite” requirements on non-EU managers seeking to market their funds to their investors. This is a development we are watching closely.
“Gold-plating” their non-EU manager requirements would mean a US or Asian manager would have to appoint a depositary or prime broker to provide the same oversight and monitoring function as an EU manager. The key difference under depositary-lite is that the depositary does not have the same extensive liability as under the full depositary rules.
On a small but positive note “reverse solicitation” is still allowed under the regulations. This means European investors can seek and contact non-EU managers about subscribing to their funds. In the future this may become the only way that some non-EU managers can receive capital from European investors (if they feel they cannot comply with the private placement or potential passport regimes).
What non-EU managers should be doing right now
If you are a US or other non-European manager you should be analysing your fund universe carefully to accurately determine which funds for which you are actually the investment manager (the AIFM), as opposed to a delegate.
For those funds which you are the AIFM you will need to consider carefully whether you will be targeting the 28 countries of the European Union in future as a source of investor capital.
If targeting Europe is likely (for example bringing your road show to London) then you will need to consider the changes required to your organisation in order to comply with AIFMD as outlined above.
These could include reporting, disclosure, internal processes and changes to operational controls.
The tentacles of AIFMD are long, far-reaching and complex. The legislation seeks to gain non-EU manager compliance by establishing a set of regulatory requirements with which they must comply to access the enormous EU market.
Currently the non-EU manager has to comply with the disclosure and reporting requirements, but going forward if the Private Placement regime is scrapped, then the Passporting option becomes the only way to target EU investors.
This would mean US and Asian managers would have to comply in full with the 116 articles of AIFMD and its myriad of regulatory requirements.
Over the next couple of years many US and Asian managers will need assistance understanding AIFMD and how it will change their businesses. As a premier provider of AIFMD advisory services, Global Perspectives is in a strong position to provide your support in analysing and implementing the regulations.
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“The AIFMD Cheat Sheet”
By Shane Brett
“The Alternative Investment Fund Managers Directive (AIFMD) is a hugely important piece of new European regulation which will change the global alternative investment industry forever.
AIFMD has been the source of much commentary and discussion in the industry. Unfortunately a lot of it has been hard to follow, especially for those in the industry based outside Europe.
The aim of this concise book is to outline the main points and requirements of AIFMD in a way that is logical and easy to digest.
It also includes a Cheat Sheet providing a simplified overview of each AIFMD requirement”.
The AIFMD Cheat Sheet is available in paperback and for Kindle here:-
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