The Alternative Investment Fund Managers Directive (AIMFD) rules came into effect yesterday, prompting reaction from industry observers.
The end of a one-year transitional period for AIMFD means EU member states are now required to put the directive into law.
How they proceed could be a cause for concern.
EU companies managing funds and non-EU managers marketing to EU investors must comply with the terms of the far-reaching directive, intended to protect investors.
The directive has caused concern among those investing in alternative investment funds – as well as in fund-of-funds vehicles.
Many real estate managers – particularly those not part of larger, more diversified investment businesses – are coming at the issue from “further behind”, according to John Forbes, of John Forbes Consulting.
“Maybe for them it is more of a shock than for managers from other sectors,” he said.
There is a clear distinction between the impact the directive will have on European managers and their non-European counterparts, said Glynn Barwick, regulatory lawyer at Goodwin Procter, with many non-EU managers using the transitional period to “put off” considering the directive.
“They have struggled with the added complexity that comes from having to deal with the different private placement and registration regimes in each of the member states,” Barwick said.
“Failure to comply through registration will be a criminal offence in most EU countries with the potential for significant fines and even jail terms.”
Non-European managers have encountered contrasting obstacles during the 12-month transitional period that ended yesterday.
“A US manager wishing to market a fund to European investors during the transitional period found that existing funds may not have been covered by AIFMD – but that new funds were, depending on the EU member state,” Barwick said.
“Overall, managers will have to approach marketing in a more professional manner.”
More data will help regulators monitor the sector.
Jeff Rupp, director of public affairs at INREV, which has been in consultation on AIFMD since 2011, told IPE sister publication IP Real Estate the information would “hopefully help avoid future crises”.
Grant Lee, asset management director at PwC, said: “In the age of big data, questions remain on the industry’s lips around what will be done with all this colossal amount of new data and whether the regulators will be able to digest this amount of information in a timely manner.”
Rupp said the issue would be pulling all the data together and “putting it in the right format”.
The next significant obstacle, according to Lee, will be regulatory reporting.
“Even if this is outsourced to a service provider, the expectation is that managers have detailed oversight and an understanding of each field, any interpretations and calculations,” he said.
“For those managers who do not outsource this ongoing regulatory burden, a number of more difficult fields are being worked through.”
Detailed calculation of leverage – using the derivative calculation methodology under AIFMD – as well as liquidity management and stress testing, will increase requirements on fund managers, Lee added, with the first batch of reports due in late-January next year.
And AIFMD cannot be looked at in isolation.
“Other EU directives will also have a big impact,” Forbes said. “Solvency II will change the way life insurance companies look at investments, and IORP will do the same for defined benefit pension schemes.
“This will have a big knock-on effect on investment managers.”
The challenge for managers, Forbes added, is not “one thing on its own”, but the interaction of AIFMD, Solvency II and the revised IORP Directive, tax and the changing demands of investors, all together – a “particularly tangled bowl of spaghetti to unravel”.
AIFMD – which is a requirement to be registered, rather than regulated – has the potential, Barwick added, to be more of a hindrance than a help.
“The fact managers are not subject to regulatory control is akin to telling school children to attend morning assembly but not checking if they’re attending their lessons,” he said.
Rupp added: “It’s been expensive, it’s been time-consuming, and some points still need to be clarified.
“We need to make sure each member state does not come up with it’s own interpretation.”
Ultimately, he added, investors will be choosing to invest in authorised fund managers with a “stamp of assurance”.