AIFMD: the rush to regulate
With its mid-year implementation deadline looming, Giuseppe Rumi and Giorgio Tosetti update us on the state of play for the Alternative Investment Fund Managers Directive
The 2011/61/EU Alternative Investment Fund Managers Directive (AIFMD) must be implemented by 22 July 2013, and at both EU and national level a rather hectic ‘implementation rush’ seems to have started to set up the appropriate introductory measures.
AIFMD aims to develop an internal market of alternative investment-fund managers (AIFMs) by means of a harmonised European regulatory framework, with the alternative investment funds (AIFs) themselves remaining, in principle, governed under national law.
This article provides a brief overview of the current ‘state of play’ on AIFMD by highlighting what it means for the fund management world and where we are in the timeline towards implementation.
It is worth remembering the most significant points of AIFMD’s harmonised regulatory framework:
• Authorisation. Valid in all EU and EEA member states, although centralised in the hands of the competent authorities of the AIFM’s home member state.
• Capital requirements. Internally managed AIFs must have an initial capital of at least €300,000, whereas external managers of AIFs must maintain capital of €125,000 or more should the value of the portfolio exceed €250m.
• Transparency. AIFMs must disclose information concerning the persons conducting their business, the identities of their shareholders, their programme of activity and organisational structure and their remuneration policies, the AIFs they intend to manage, their depositary, and more. In addition, the Directive requires annual financial reports and the information that it is necessary to provide to investors.
• Conduct of business. Prohibition for AIFMs entrusted with portfolio management to invest all or part of clients’ portfolios in units or shares of the AIFs they manage without prior approval, obligation to conduct stress tests and to implement procedures for monitoring liquidity risk, and so on.
• Valuation. Can be performed by an external valuer or by the AIFM itself, provided that conflicts of interest are mitigated.
• Leverage. Limits to be assessed in accordance with criteria or reasonableness, on top of specific rules for AIFMs managing AIFs which acquire control of non-listed companies and issuers.
• Marketing of units or shares of AIFs and European passport mechanism. By which the AIFMs authorised could create, manage and commercialise AIFs in EU and EEA member states. In addition, non-EU and non-EEA AIFMs will be allowed to apply for the passport from 2015 onwards. After that, the European passport mechanism would coexist with the national rules for three years until the full repeal of the national private placement regimes in 2018.
This set of rules can have a diverse impact across EU and EEA member states and throughout the patchwork pattern of the Europe’s non-UCITS asset management industry.
A first fundamental distinction must be made between EU jurisdictions where funds are already deeply regulated (France, Germany and Italy in the first place, that do not acknowledge ‘hedge funds’ in their systems, at least if ‘hedge funds’ is synonymous with ‘unregulated entities’), and those that offer a high degree of flexibility in structuring non-retail funds (the UK is the most notable, and Luxembourg continues to be the EU hub by presenting a deep but highly flexible degree of supervision).
The second thing to bear in mind is that, in principle, the Directive makes no distinction between private equity funds, hedge funds and other non-UCITS schemes, with the first two types of undertaking being those most heavily (although very differently) affected by the AIFMD. Pension funds are expressly excluded.
This ‘one-size-fits-all’ approach is probably the most debated aspect of AIFMD and also the one that level two Regulation and national implementing measures currently being discussed in each member state are trying to cope with.
Published recently by the European Commission, the level two AIFM Regulation aims to avoid different implementation across the EU (which could lead to a lower level of investor protection for AIF investors). This is subject to a three-month scrutiny period by the European Parliament and Council. Provided that neither co-legislator objects, at the end of this period and the day following publication in the Official Journal, it will be directly and immediately adopted by all member states.
To give a quick overview of where the implementation process is among different EU jurisdictions, it is worth considering the situation in the UK, Luxembourg, the Netherlands and Italy.
The UK is home to most EU-based hedge funds and opposed the Directive for fear of losing its position to non-EU jurisdictions like Switzerland or Singapore. On 13 March 2012 the UK Treasury launched a consultation on high-level policy options for transposing the AIFMD into UK law which closed in May. Nevertheless, the relative legislation has not yet been issued.
On 14 November 2012, the UK Financial Services Authority (FSA) published the first of two planned consultation papers on rules to implement AIFMD into the UK regulatory framework, with particular regard to the prudential regime for all types of AIFMs, the discipline for depositaries, organisational matters, duties in relation to management of funds and transparency obligations towards investors. The prudential regime for AIFMs and the discipline for depositaries are the areas where the FSA has had to make choices about the best way to implement AIFMD. Conversely, in transposing other parts of the Directive by ‘copy-out’, it has generally avoided imposing any new requirements.
Luxembourg is similarly keen to maintain its leadership as a European fund hub and is in search of new solutions to attract asset managers. On 24 August 2012, a project of law implementing AIFMD was submitted to parliament, which substantially reproduces AIFMD provisions without major deviation. This was expected to be approved before the end of 2012, but has not yet been issued.
The Netherlands does not hide its intention to speed up AIFMD implementation with the goal of becoming the new ‘fund first choice’ in Europe. On 2 October 2012, the lower house of parliament adopted a bill implementing AIFMD into the Act on Financial Supervision. The bill is currently with the upper house. Again, it should have been enacted before the end of 2012 to come into force by 22 July, but has yet to be issued.
In 2011, the Italian government seemed interested in exploiting the opportunity afforded by AIFMD to tidy up its fragmented alternative investments regulations. For example, a treasury department consultation document in March 2011 on reorganisation of the tax discipline for real estate funds proposed the concept of an ‘alternative fund’ for the Italian legal system even before adoption of AIFMD. The process has since lost momentum and the AIFMD debate is now mainly left in the hands of the Italian investment management industry association, Assogestioni. On 27 November 2012, Assogestioni announced the creation of an AIFMD task force to elaborate proposals for the harmonisation of the Italian legal and regulatory framework on AIFs in light of the Directive.
Despite the level two AIFM Regulation, which will be directly applicable in all the EU and EEA member states, the fragmented pattern of implementation measures described above will probably make the attainment of one unique ‘European fund playground’ with clear rules of access for non-EU fund managers quite time-consuming and complex. This is unlikely to be aided by the resistance shown by some member states and parts of the investment management industry.
AIFMD is often compared to the US Dodd-Frank Act, which was also part of the response to the global financial crisis declared at the G20 summit of April 2009. While Dodd-Frank affects almost every aspect of US financial services, the scope of AIFMD is much narrower. Nevertheless, its effectiveness is at risk of being weakened by its uneven field of application across the EU and EEA member states, which all come with different legal systems and investment management industries and, above of all, by regulatory arbitrage, the risk of which seems to arise behind the current implementation rush.
Giuseppe Rumi is a partner and Giorgio Tosetti a senior associate with the Milan-based international law firm Bonelli Erede Pappalardo