The 22 July deadline for transposition of the Alternative Investment Fund Manager’s Directive (“AIFMD”) into national law is now imminent. Each of the 28 member states of the European Union (EU), plus the three additional states of Iceland, Liechtenstein and Norway (together making up the European Economic Area (“EEA”)) should now be on the verge of finalizing their domestic implementing legislation. Market participants could be forgiven for assuming that they would face a consistent set of rules across each jurisdiction after 22 July.
Unfortunately, this will not be the case and the nature and progress of implementation differs significantly between jurisdictions. As a result of delays in finalising the EU AIFM Regulation (the “AIFM Regulation”) and the myriad of other legislative priorities facing EEA member states in recent months, it is now becoming clear that the AIFMD will not be fully implemented by all countries in the EEA by 22 July 2013. In addition, some jurisdictions have taken this opportunity to make the private placement regimes for the marketing of alternative investment funds (“AIFs”) in their jurisdiction more restrictive.
However, alternative investment fund managers (“AIFMs”) which plan to market AIFs under their management in the EEA cannot afford to ignore AIFMD. This alert will highlight some of the recent developments in key EEA jurisdictions which non-EEA AIFMs should be aware of over the coming months. In certain instances, local regulators have provided helpful further clarification as to how the broad AIFMD requirements will operate in practice. In other jurisdictions, additional local law requirements must be adhered to in addition to those set out in the AIFMD.
Transitional periods may offer relief
Several jurisdictions intend to implement a one-year transitional period which will delay the application of the new private placement marketing regime applicable to non-EEA managers under AIFMD by a year to 22 July 2014. Such jurisdictions include the United Kingdom (UK), Germany, France and the Netherlands.
There are still important legal hurdles to be surmounted, which differ between jurisdictions. For example, a pre-condition to availing of the transitional period in the UK is that marketing of an AIF has been conducted in the EEA by the AIFM prior to 22 July 2013. The equivalent pre-condition in the Netherlands is that prior marketing has been conducted in the Netherlands specifically. Also, in certain jurisdictions the prior marketing requirement is applied to the AIF itself rather than the AIFM, such that the transitional period will only be available in respect of the specific AIF that was marketed prior to 22 July 2013, which would prevent AIFMs marketing new AIFs from being able to rely on the transitional regime.
Delays in implementation will cause further confusion
Whilst certain jurisdictions plan to apply transitional periods as stated above, it appears that various other jurisdictions (including some of the Nordic countries and much of southern Europe) will fail to implement the necessary domestic legislation by the 22 July 2013 deadline. For many of these countries, completing the implementation process by the end of 2013 may still be optimistic.
This failure to implement the necessary domestic legislation, when coupled with the divergent transitional regimes that will be in place, mean that it will be essential for non-EEA AIFMs to separately consider the marketing requirements in each EEA state in which they intend to market after 22 July 2013.
Existing local requirements will often supplement the new AIFMD rules
It is also important to note that existing national marketing regimes in each EEA jurisdiction may continue to regulate the marketing of AIFs, regardless of the manner in which AIFMD is to be implemented in that jurisdiction. In the UK, for example, the existing UK financial promotions regime, which applies to wide range of promotional activities, will continue to operate alongside and in addition to AIFMD. In France, the marketing of units or shares of a non-French investment fund (other than a closed-ended fund or a UCITS) will continue to be subject to the prior authorization of the French Autorité des Marchés Financiers.
The meaning of “marketing” under AIFMD
How the concept of “marketing” is interpreted in each jurisdiction will be crucial in determining which types of activity are regulated under the AIFMD. The AIFMD itself defines marketing in broad terms as a “direct or indirect offering or placement at the initiative of the AIFM, of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union”. Subject to further guidance from the European Commission and/or the European Securities and Markets Authority (“ESMA”), this definition leaves member states with considerable flexibility in determining what types of marketing activity will be caught under AIFMD in practice.
The UK’s interpretation of “offering or placement”
The UK Financial Conduct Authority (“FCA”) published its final rules and guidelines on 19 March 2013 (the “FCA Rules”), which clarify that an “offering or placement” for the purposes of the AIFMD means:
“When a person seeks to raise capital by making a unit of share of an AIF available for purchase by a potential investor. This includes situations which constitute a contractual offer that can be accepted by a potential investor in order to make the investment and form a binding contract, and situations which constitute an invitation to the investor to make an offer to subscribe for the investment”.
The FCA has indicated that it will be permissible in some circumstances to issue draft documentation to prospective investors without being deemed to have made an offer or placement for the purposes of AIFMD:
“For example, a promotional presentation or a pathfinder version of the private placement memorandum would not constitute an offer or placement, provided such documents cannot be used by a potential investor to make an investment in the AIF. However, a unit or share of the AIF should not be made available for purchase as part of the capital raising of the AIF on the basis of draft documentation in order to circumvent the marketing restriction”.
The above indicates that the FCA is proposing to construe the term “marketing” relatively narrowly, thus limiting the impact of AIFMD on certain types of promotional activities. In part, this reflects the continued reliance upon the existing UK financial promotions regime as a means of investor protection. AIFMs should bear in mind that the term “marketing” is likely to be construed more broadly in many other EEA jurisdictions, which may cause promotional activities to be subject to AIFMD at an earlier stage of the marketing process.
Reverse solicitation - guidance from the UK FCA
The AIFMD provides that its marketing restrictions do not apply to “marketing at the initiative of” an investor, commonly referred to as “reverse solicitation”. In the absence of any further guidance on this concept from the European authorities, the FCA has indicated that investor confirmation letters may be used to demonstrate that marketing was at the initiative of an investor:
“A confirmation from the investor that the offering or placement of units of shares of the AIF was made at its initiative, should normally be sufficient to demonstrate that this is the case, provided this is obtained before the offer or placement takes place. However, AIFMs and investment firms should not be able to rely upon such confirmation if this has been obtained to circumvent the requirements of AIFMD”.
This is a helpful improvement on the previous draft guidance issued by the FCA, but determining what constitutes reverse solicitation in practice will continue to be a precarious exercise, heavily dependent on the overall context and facts.
Importance of identifying who the investor is
The concept of marketing in the AIFMD is defined by reference to investors “domiciled or with a registered office in the Union”. Determining which party in a transaction constitutes an “investor” for the purpose of the AIFMD will be important since this will determine whether the AIFMD applies and which jurisdiction’s laws should be adhered to. The answer will not always be immediately apparent however, and the AIFMD leaves ample scope for divergent interpretation amongst EEA member states which may lead to erroneous outcomes.
Firstly, it may not be clear whether marketing activities which are directed at natural persons who are domiciled in an EEA state but not physically present in that EEA state (e.g. during meetings with a European high net worth investor travelling through Hong Kong) will be caught by AIFMD. In the UK, the Draft Alternative Investment Fund Managers Regulation 2013 (which constitutes the final UK legislation which is to be laid before Parliament, the “UK Regulation”) makes it clear that the AIFMD marketing regime is limited to marketing activities undertaken “in the United Kingdom”, but there is no guarantee that other jurisdictions will take the same approach.
Second, if a marketing communication is directed at an investment manager that holds discretionary authority over its client’s assets, will the investment manager or the client be the “investor” for the purpose of AIFMD? The UK FCA’s guidance clarifies that the reference to “investor” for AIFMD purposes should be regarded as a reference to the person who will make the decision to invest in the AIF. However, unless other EEA jurisdictions adopt an approach that is consistent with the FCA’s guidance, an AIFM may find itself subject to conflicting requirements. If other EEA jurisdictions identify the “investor” on the basis of, for example, beneficial ownership, an AIFM marketing to an investment manager in one jurisdiction relying on the “deciding mind” criterion in identifying the investor could be required to treat the investment manager as the investor in that jurisdiction, and, nevertheless, be required to ascertain the domicile of the underlying client and, if relevant, to consider also the underlying client as the investor, requiring it to comply with the relevant AIFMD rules in both jurisdictions.
Local approval and notification procedures for private placement
Differing legislative approaches appear to be emerging in relation to the notification and/or approval requirements to be imposed by each jurisdiction on a non-EEA AIFM seeking to market an AIF on a private placement basis in that jurisdiction. The original draft of the UK statutory regulations provided for an approval process pursuant to which fund documents would be submitted to the FCA for review, which is similar to the approval process in Germany under the KAGB.
In the UK, the UK Regulation and revised FCA Rules now dispense with an approval procedure in place of a simpler streamlined notification procedure, which is consistent with the approach proposed to be taken in France under the revised Monetary and Financial Code. It should be noted that each jurisdiction may have its own specific requirements in relation to the types of information that must be included in the prescribed form of notification however.
Status of international cooperation agreements
On 30 May 2013, ESMA announced that it had approved co-operation arrangements in the form of memoranda of understanding (“MoUs”) between EU securities regulators and 34 of their global counterparts, including jurisdictions such as the USA, Canada, Brazil, India, Switzerland, Australia, Hong Kong, Singapore, the Cayman Islands and the British Virgin Islands.
ESMA negotiated the agreements on behalf of all EU Member State securities regulators as well as the authorities from Croatia, Iceland, Liechtenstein and Norway in order to enable European securities regulators to supervise the compliance of non-EEA AIFMs and non-EEA AIFs with the AIFMD. Entry into such agreements is a pre-condition to various activities being permitted under AIFMD, including allowing (i) non-EEA AIFMs to market their AIFs in the EEA and (ii) non-EEA AIFs to be marketed in the EEA.
While ESMA has negotiated MoUs centrally, they are bilateral agreements that must be subsequently signed between each EU securities regulator and the non-EU authorities. This formality has already been completed by various EU jurisdictions, with the UK FCA and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) each announcing that they have signed the relevant MoUs with each of the 34 non-EU regulators.
Regulatory reporting templates
The AIFMD requires that non-EEA AIFMs marketing AIFs in an EEA jurisdiction must provide various types of information to the local regulator in that jurisdiction for the purpose of monitoring leverage and systemic risk, on either a quarterly, half-yearly or annual basis depending on the size and nature of the AIFs managed. Following publication of a detailed reporting template in the AIFM Regulation, on 24 March 2013 ESMA published a consultation paper containing draft guidelines which will supplement and provide further detail on how the reporting regime will work in practice. The draft guidelines are aimed at providing clarification on the information that AIFMs should report to NCAs, the timing of such reporting, together with the procedures to be followed when AIFMs move from one reporting regime to another.
Remuneration restrictions on AIFM delegates
Following an extensive consultation process, ESMA published a final version of its “Guidelines on remuneration practices under the AIFMD” (the “Remuneration Guidelines”) on 11 February 2013. One aspect of these will potentially impact non-EEA AIFMs that act as a delegate in providing portfolio management or risk management services to an AIFM authorized under AIFMD. Guideline 18 requires that an AIFM must ensure that such delegates are subject to regulatory requirements on remuneration that are equally as effective as those applicable under the Remuneration Guidelines, or must alternatively put in place appropriate contractual arrangements in order to ensure that there is no circumvention of the remuneration rules set out in the Remuneration Guidelines.
The Alternative Investment Management Association has submitted a detailed letter to the UK government requesting that it not implement Guideline 18, on the grounds that such requirement (i) exceeds the Level 1 remuneration requirements set out in AIFMD and is therefore not capable of being introduced via ESMA guidance, (ii) is arbitrary in that only one set of rules is being contemplated to be extended to delegates and (iii) is harmful from a competitiveness perspective as it will render delegation of portfolio or risk management to non-EU entities impracticable. Other regulators are likely to be watching closely to see how the UK deals with this controversial aspect of the Remuneration Guidelines.
How can Bingham help?
Bingham lawyers in Europe, Asia and the US are currently advising investment managers and other service providers on the impact of the Directive from a variety of different angles. In particular, we are assisting non-EEA AIFMs to update their offering documents and distribution agreements and to comply with local notification and approval procedures in order to prevent any interruption to their marketing activities in Europe. Bingham can help clients prepare for implementation of AIFMD and to take their businesses forward in the new environment. Should you require assistance relating to AIFMD please contact any of the lawyers listed on this alert or your usual Bingham contact.
This article was originally published by Bingham McCutchen LLP.