Tag: EU AIFM Directive

Looking to Europe

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A new regulatory regime is scheduled to impact fundraising in Europe starting this summer. The new regulatory structure known as the Alternative Investment Fund Managers Directive (AIFM) has a July 22 effective regulatory date. The effect will be felt if you are a EU-based fund manager or want to market to EU-based investors.

For U.S.-based managers falling under the AIFM there will be three main requirements:

  1. Disclosure to investors before they decide to invest
  2. Annual report to investors.
  3. Disclosure with regulators.

Even with the approaching deadline, there is still a lot of uncertainty. With EU Directives, it’s up to each member state to decide how to implement it. The UK has announced it will require a fund to register and the Financial Services Authority will have some oversight and will require Form PF-like data. Germany will likely implement a much stricter approach.

The main documents involved are the 2011/61 Directive (.pdf) and the Delegated Regulation (.pdf) that provides additional coverage of some aspects of the Directive. The third is the final report of Guidelines on sound remuneration policies under the AIFMD (.pdf).

If you have EU investors in your U.S.-domiciled fund but you don’t intend to market it anymore in Europe, you probably don’t have to worry about the AIFM directive. However, if you do intend to solicit European investors, you’re probably looking at a July 2014 compliance deadline.

There are some minimal thresholds. For hedge funds, an adviser must manage at least 100 million Euros in assets and for private equity funds the adviser must top a 500 million Euros threshold to fall under the directive. However, member states may reduce these thresholds even lower.

If you have European investors in your US fund or have European operation, the AIFM will start taking up a bunch of your time in the next few months.

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The EU Directive On Alternative Fund Managers Is in Effect

The chaos around the Swiss Franc may be a sign of a coming crisis in the European Union. For private fund managers, a different crisis may be the new European regulatory regimes for private funds. With all of the flux in the United States over the regulation of private funds, it’s been easy to forget that the EU has been trying to put a new regulatory regime in place.

Over the summer, the official text of the Alternative Investment Fund Managers Directive (2011/61/EU)(.pdf 73 pages) was published. The European Parliament adopted the Directive in November, 2010 and the Council of the European Union adopted it in May, 2011. The EU member states will have until July 22, 2013 to update their the national laws, regulations and administrative provisions to give effect to the AIFMD.

This new EU legislation will regulate managers of hedge, private equity
and real estate funds and other alternative investment funds. It covers almost any investment fund except funds regulated under EU legislation on Undertakings for Collective Investment in Transferable
Securities (UCITS).

There are still many moving parts. The EU regulatory regime will need to be in place and there will likely be variations from country to country in the EU.

If you have European investors or operations in Europe, you have more reading to do.

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Europe’s New Directive on Alternative Investment Fund Management

The European Parliament has approved the Directive on Alternative Investment Fund Managers. European countries will now be setting up a framework for regulating hedge funds and private equity funds. The AIRM Directive passed with 513 votes to 92 with 3 abstentions on November 10.

Under the Directive, an “alternative investment fund” is any collective investment undertaking which raises capital from a number of investors and is not registered under the EU’s Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). So along with hedge funds, the directive sweeps up private equity funds, real estate funds and commodity funds.

One key and contentious provision is the inclusion of a single EU passport for fund managers. An alternative investment fund manager can register under the legislation in one Member State that complies with the rules of the Directive. Then the manager can manage or market funds to professional investors throughout the EU after notification. It will also eventually allows US and other non-EU fund managers to get a passport. There will be a dual system for three years during which US and other non-EU hedge funds and fund managers will be governed by national private placement regimes under each jurisdiction, until the passport rules take effect.

The directive has some limitations on the use of leverage by the funds and fund managers will be required to notify regulators about their use of leverage.

Here is a rough timeline for the directive and its effects:

January 2011 Entry into force of the directive
January 2013
(2 years after entry into force)		 Deadline for transposing the directive’s rules into national law, including those on granting
passports to duly-registered, EU-based, AIFs and AIFMs.
January 2015
(2 years after transposition)		 ESMA reports on functioning of passport system for EU AIFs and AIFMs, national private
placement regimes, and possible extension of passport system to non-EU AIFs and AIFMs.
April 2015
(at the latest 3 months after ESMA report)		 Commission adopts a delegated act, based on ESMA advice, specifying date when passports
for non-EU AIFs and AIFMs will be available.
April 2018
(3 years after entry into force of delegated act)		 Second ESMA report on the functioning of the passport and the possible ending of national
private placement regimes.
July 2018
(at the latest 3 months after ESMA report)		 Commission adopts a second delegated act, based on ESMA advice, specifying date
when national private placement regimes must be terminated.

I’m going to spend some time reading the Directive in more detail to figure how it will affect me. One thing is clear: It’s going to be more time-consuming and more expensive to market and manage private funds in the EU.

Sources:

Update on the European Directive to Regulate Alternative Investment Fund Managers

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The draft Directive on Alternative Investment Fund Managers pdf-2 was published on April 30, 2009. The Proposed Directive has been subject to lots of criticism. Many of the provisions in the Proposed Directive misunderstood the characteristics of different types of alternative investment funds.

It now seems the Proposed Directive will be implemented in one form or another. (The EU’s focus on financial market reform has not been distracted by health care reform like happened here in the US.)

The first problem with the proposed directive is that it has broad definition of “alternative investment fund” so it can sweep up all hedge funds. It seems the the Presidency of the European Council has noticed that the existing definition would capture funds that clearly should not be the target of the Proposed Directive. [see AIFM Issues Note from the EU Presidency]

Unless non-EU managers comply with the rules within three years of the Directive coming into force (probably around 2015) they will be barred from offering their products in the EU. Britain, another center of hedge funds and private equity is campaigning to water down the directive. France, Spain and Germany seem to be very pro-directive and in favor of stiffer regulations.

Britain’s financial services minister, Paul Myners, told a conference: “Smell the coffee! There is going to be a directive.”

For more detail read a client alert from Shearman & Sterling: Update on the European Directive to Regulate Alternative Investment Fund Managers.

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AIMA Warns of Global Impact of EU AIFM Directive

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The Alternative Investment Management Association has warned that the European Commission’s draft directive on Alternative Investment Fund Managers would negatively affect fund managers and investors around the world if enacted into European law.

The Directive applies primarily to any Alternative Investment Fund Managers which is established in an EU Member State and which provides management and administration services to one or more alternative investment funds. However, it will also apply to the marketing of a fund within the EU by Alternative Investment Fund Managers which are established outside the EU.

Marketing Conditions

There are five conditions that a non EU registered fund manager must meet to be able to market the alternative investment fund in the EU:

  • Its home country must have prudential regulation and ongoing supervision which is “equivalent” to the Directive’s provisions
  • Its home country allows effective market access to EU fund managers which is comparable to that granted by the EU to fund managers from that country
  • Its home country has a cooperation agreement with EU regulators for monitoring the potential implications of the activities of the Third Country Fund Manager for the stability of systemically relevant financial institutions and the orderly functioning of markets
  • Its home country has signed an agreement with EU regulators to allow the sharing of  information on tax matters
  • The fund must provide EU regulators with the identities of significant owners

Satisfying the Conditions

Unfortunately for fund managers, four out of the five requirements require their home country to act. If the EU effectively locks out funds managed by non-EU fund managers, countries may reciprocate and lock out funds managed by EU managers from their markets.

If the Directive is adopted in its current form, fund managers may need to open an EU office and subject themselves to the EU and member state regulations.

Status

The Directive is merely at the start of the EU’s legislative process and it is likely to be revised before the Directive comes into force.

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EU Proposes Directive on Alternative Investment Fund Managers

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The European Commission published a draft Directive on Alternative Investment Fund Managers to establish a common regulatory and supervisory framework for all investment managers of funds promoted to investors in the European Union and not currently subject to European level regulation. Though the measure is directed at the hedge fund industry, the Directive would affect the operations of managers of all funds that are not registered as UCITS (Undertakings for Collective Investments in Transferable Securities), including private equity, real estate, infrastructure and venture capital funds.

The Directive is at an early stage of the legislative process and may be subject to significant change before it is adopted. Even in its current form it will not come into force before the end of 2011 and the proposals relating to the promotion of funds incorporated outside the EU will not come into force for a further three years after that. I expect there will intense lobbying from the financial services industry and the hedge fund industry.

The Directive is mainly driven by the European Commission’s aim to get control over what it perceives as systemic risks in unregulated fund markets. There is a set of regulations focused on managers domiciled in the EU and a second set on funds marketed in the EU.

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