The Alternative Investment Fund Managers Directive (AIFMD) is an European Union (EU) Directive which introduces a new regime to regulate alternative investment fund managers (AIFMs) with the aim of increasing investor protection while reducing systemic risk. It must be implemented into the national laws of EU Member States by 22 July 20131.
The fundamental changes introduced by the AIFMD include the requirement for the authorisation of certain AIFMs, and the imposition of certain organisational requirements and compliance obligations on AIFMs together with continuing reporting and disclosure obligations.
In addition, the AIFMD introduces an EU passport system for the marketing of alternative investment funds (AIFs) whereby an AIFM can market its funds to professional investors across the EU Member States on the back of authorisation in a single EU Member State. Although initially only applicable to EU AIFMs managing EU AIFs, from July 2015 the passport system may be extended to permit non-EU AIFMs authorised in accordance with the requirements of the AIFMD to market all AIFs to "professional investors" across the EU.
Here we consider five common questions that Hong Kong based managers have on AIFMD.
1. Does AIFMD apply to me?
2. What constitutes marketing2?
The AIFMD only applies if you actively market one or more AIFs under your management to investors in the EU. You will be considered to be marketing your AIFs if you make "a direct or indirect offering or placement of units or shares of the AIFs" to investors in the EU. For this, the Financial Conduct Authority (FCA) in the United Kingdom (UK) is of the view that in order for units or shares of an AIF to be available for purchase by potential investors, the prescribed documentation and information (e.g. private placement memorandum and subscription agreement) must, in all material respects, be in final form. Thus, draft documentation and any communications in connection thereto may not fall within the meaning of an offer or placement for the purposes of the AIFMD.
3. Does AIFMD apply if EU investors invest via reverse solicitation?
According to the definition, marketing is conducted "at the initiative of the AIFM or on behalf of the AIFM". Thus, reverse solicitation falls outside the scope of marketing under the AIFMD and can continue on or after 22 July 2013 where it is recognised and permitted by the local national law in the relevant EU Member State.
However, what is a reverse solicitation may be limited in practice. The onus will be on you to maintain records which clearly prove that the investment was not initiated by you.
4. Can I still rely on the private placement regime to market in the EU?
You will be able, until at least 2018, to continue marketing in an EU Member State under that EU Member State's private placement regime subject to compliance with certain AIFMD requirements. Key obligations will include:
In July 2018, and on the advice of the European Securities and Markets Authority (ESMA), a determination will be made as to whether the private placement regime should be abolished. If it is abolished, the only way to access EU investors would be to become a fully-compliant AIFM.
Note that in order to take advantage of the private placement regime, there must be in place co-operation agreements between (a) the competent authorities in each EU Member State where the non-EU AIF is to be marketed; (b) the supervisory authority of the domicile of the non-EU AIF; and (c) the supervisory authority of the country where the non-EU AIFM is established. On 22 May 2013, ESMA approved Memoranda of Understanding (MoUs) on co-operation with 34 regulators, including Hong Kong's Securities and Futures Commission. While ESMA has negotiated the MoUs centrally, they are bilateral agreements that must be signed between each EU securities regulator and the non-EU authorities. The actual supervision of AIFMs lies with the national securities regulators, therefore each authority decides with which non-EU authorities it will sign an MoU.
5. What should I do next if I intend to market in the EU under the private placement regime after the implementation of the AIFMD?
You should consider taking the following steps if you intend to market your AIF in the EU after the implementation of the AIFMD:-
1 The Financial Conduct Authority (FCA) and the Treasury in the United Kingdom (UK) have recently announced that a transitional period of one year will be available to non-UK AIFMs seeking to market funds to UK investors. Therefore, in the UK at least, AIFMs have until 21 July 2014 to comply with the provisions of the AIFMD in relation to its marketing to UK residents.
2 "Marketing" is defined under the AIFMD as any direct or indirect offering or placement, at the initiative of the AIFM, or on behalf of the AIFM, of units or shares of an AIF which it manages to or with investors domiciled or with an registered office in the EU.
3 Note that most of this information will already be set out in the private placing memorandum that we prepared for our clients. However, it is imperative to undertake a review of your private placing memorandum to ensure compliance with the AIFMD requirements prior to any marketing trip to Europe.