The European Union’s (“EU”) Investment Fund Managers' Directive (“AIFMD” or the “Directive”) was put into effect July 22, 2013 and has been coined by many to be the equivalent of an EU Dodd-Frank Act style legislation, due to its sweeping business impact to entities in the financial services arena.
AIFMD affects hedge funds, private equity funds, real estate funds, retail non-UCITS, non-EU funds distributed and managed in the EU, and non-EU managers marketing, distributing and managing funds in the EU. The Directive is the European Commission’s response in the wake of the global financial crisis to combat systemic risk within the financial service industry. Some regulators and investors believe that the lack of regulation that existed within the alternative investment arena contributed to the 2008 financial crisis. In December of 2012 the European Commission published long-awaited rules that provided regulation requirements for implementation of the AIFMD. The effective date was July 22, 2013 for the first cycle of reporting by Alternative Investment Fund Managers (“AIFMs”) under AIFMD.
Preqin, a leading data and information provider in the alternative asset industry, published a survey in July 2013 of 220 hedge fund managers and noted that many managers express uncertainty surrounding AIFMD, “yet 40% of such managers who will actually be impacted by the AIFMD are waiting for finalizations of regulations and further guidance from their local regulations before taking formal action”. Further, Preqin’s survey “revealed that North American managers that will be affected by AIFMD are less prepared than their European counterparts, with only 51% of North American-based respondent’s looking to market their funds to European investors already compliant or will be compliant by July 2014 as compared to 64% of respondents based in Europe that will be impacted by the regulation.”
What are the Requirements?
AIFMD requires AIFMs to develop, implement and maintain robust risk management systems. It sets forth a code of conduct for alternative investment managers as well as depository requirements. In addition, transparency and reporting requirements to EU regulators and investors, similar to the SEC’s Form PF and the CFTC’s Form CPO-PQR, have been instituted. Some of the key regulatory reporting requirements are the following:
- First cycle of reporting – All existing AIFMs as of July 23, 2013 and any AIFMs authorized or registered after this date must file their first report (known as the Annex 1V) by January 31, 2014. This first phase of reporting needs to cover the period of July 23, 2013 through December 31, 2013.
- After the first cycle of reporting – Existing AIFMs or newly-authorized or registered AIFMs must report according to the frequency required of them under AIFMD (see below).
- Reporting periods (after the first cycle of reporting) – AIFMs will need to report annually, semi-annually or quarterly depending on assets under management. For example, assets under management of less than 100 million Euros report annually, with the filing deadline being the last day of January of the subsequent year. Assets under management exceeding 100 million Euros to one billion Euros must report on a semi-annual basis (January through June and then July through December), with the filing deadlines being the last day of July of the same year and the last day of January of the following year, respectively. Assets under management exceeding one billion, must report on a quarterly basis, with a similar filing regime to semi-annual reporting.
- Fund of funds – An additional 15 days is provided for reporting.
- Data to be reported – AIFMs are required to report information as outlined in AIFMD on all Alternative Investment Funds (“AIFs”) they manage. This includes those AIFs that are not marketed in the EU.
Impact to U.S. Managers
AIFMD affects U.S. funds and U.S. managers because AIFMD encompasses both non-EU funds distributed and managed in the EU, and non-EU managers distributing and managing funds in the EU. More simply stated, if fund managers are actively marketing their funds to EU investors, they most likely will be considered AIFMs under the AIFMD, thus, they must follow the regulatory regime of AIFMD. However, existing European investors are grandfathered in, such that a U.S. manager that stops fund raising in Europe will not be subject to the Directive and still be permitted to keep those existing European investors within their fund. In addition, passive marketing in certain situations is permitted. Reverse solicitation whereby European investors approach non AIF-US Managers to invest in their vehicles may be acceptable, but U.S. Managers must be careful to document the scenario. According to Serge Weyland, Head of Regional Coverage, UK and North America of Caceis, an international asset servicing provider and custodian, “The FCA (UK’s Financial Conduct Authority) has accepted the idea of managers relying on confirmation from investors that they have approached the manager from their own initiation, however, the FCA has indicated that they will carefully scrutinize this area to identify any signs of circumvention of the Directive”. Regardless, such U.S. managers who accept European investors will have to comply with relevant private placement rules within the given EU member states.
It should also be noted that EU-domiciled AIFMs will be able to take advantage of marketing their EU AIFs through a “passport” regime set forth by AIFMD. The passport system is a system for the marketing of AIFs throughout the EU to professional investors. U.S. based AIFMs who actively offer their funds to EU investors, for example via a Cayman-based fund or an EU-based fund, will not have access to such marketing passport until 2015, most likely. Therefore, non-EU AIFMs will need to consider how they can continue to market in the EU until an equivalent passport is made available to such non-EU AIFMs.
Action Steps for U.S. Managers
Key considerations and immediate action steps for U.S. managers include understanding AIFMD and its affects; how the private placement rules will work under AIFMD in each of the 28 member states that the manager will consider marketing in and accepting investors from; the manner by which non-EU managers will be able to continue to market after July 22, 2013 to EU investors; and robust review of reporting systems in order to determine whether they will need updating for AIFMD compliance.
Further complicating matters, the U.S. Securities and Exchange Commission (“SEC”) recently lifted the long-time ban on general solicitation for U.S. hedge fund managers through the U.S. JOBS Act, as to how they can advertise and market their funds. With the lifting of such ban in the U.S., it is less clear cut whether managers who take advantage of the JOBS Act could find themselves in breach of the AIFMD’s private placement rules in certain EU member states. At a minimum, AIFMs should check all individual 28 EU member states’ guidelines and rules on private placements to ensure any marketing or advertising does not violate such rules.
There are different options for U.S. managers to become compliant with AIFMD. One option is joining a platform run by an investment bank that employs a European operator who will handle AIMFD compliance. A U.S Manager can lose some control of their operations and decision making, as it involves being “hired” by a foreign board of directors. Another option is setting up your own office in Europe to handle risk management, regulatory reporting and compliance. This can be a very costly solution. A third option is working with a service provider who will provide operational support including regulatory reporting and risk management for a basis point based fee.AIFMD is sweeping regulation that affects EU and Non-EU investment managers and is here to stay. If not already taken, immediate action steps should be taken by fund managers that actively market their funds to EU investors or have plans to do so. If unsure where to begin, the first place to start is by contacting a reputable law firm and other service providers to assist in your navigation of AIFMD, and its applicability and requirements to your fund. Alternatively, contact a Marcum LLP Alternative Investment Group partner in your state or region and we will put you in contact with the right service providers to assist. Just follow this link for help: http://www.marcumllp.com/industries/hedge-funds.