Monument Group Regulatory Update – Tackling the AIFMD
Regulatory Update – August 5, 2014, Issue 101
Although compliance with the recently implemented AIFMD appears quite daunting, this update should provide some clarity on the Directive’s requirements, as well as some comfort that Directive compliance is not nearly as murky or burdensome as it might first appear.
The AIFMD – Background
The AIFMD is intended to create a centralized framework in the European Economic Area (EEA) for monitoring and supervising risks of alternative investment funds (AIFs) and their managers. The Directive also strives to strengthen the internal market in alternative funds through improved investor protection (new depositary standards), and enhanced transparency (new investor disclosure rules and mandatory reporting). The AIFMD also promotes efficiency and cross‐border competition with the introduction of consistent rules for managers operating on an EEA‐wide passport.
Though broad in nature, the AIFMD focuses on the management, administration and marketing of AIFs by Alternative Investment Fund Managers (AIFMs). It also includes new requirements for firms acting as a depositary for an AIF. All other EEA‐based regulations aside, the Directive alone affects managers of hedge funds, private equity funds, retail investment funds, investment companies and real estate funds, among others.
The AIFMD was implemented by most EEA Member States in July 2013. Following a one‐year transitional period adopted by a number of countries, July 22, 2014, marked the start of Article 42 compliance in those countries, while, for a handful of others, implementation remains in process. The Directive’s Article 42 – or “registration light” – provisions require specific disclosure and regulatory filings for non‐ EEA managers, and/or pre‐approval requirements in certain EEA member states (as further addressed below). Beginning in 2015, non‐EEA‐based managers may also choose to become a fully compliant AIFM, causing them to incur one‐time overhead costs, but allowing them to take advantage of the full passport and to market their funds freely throughout the EEA.
By 2018, as the Directive now stands, all non‐EEA managers must be fully registered and prepared to use either the Directive’s passport or reverse solicitation for European distribution.
Initial Uncertainty
Raising money from European investors has become a “black box” of uncertainty for virtually all managers based outside of the EEA, with many firms hesitant to dive into the untested regulatory requirements of the newly implemented AIFMD.
This new regulatory environment is complex for non‐EEA managers, with guidance slow to develop in some countries, leading to a perceived lack of clarity around the rules. In addition, some countries have “goldplated” the Directive by adopting stricter rules or more burdensome compliance requirements, such as the appointment of a depositary. As a result, some non‐EEA managers have stopped moving forward with any European marketing as they wait for clarity across all Member States.
However, fundraising is manageable for those who are willing to:
- Proceed with attention to the guidelines that do exist;
- Incur some overhead costs (likely to be very small relative to the return to a manager ‐ under a typical fee structure ‐ on any commitment of reasonable scale from an investor in each state);
- Make annual filings with state regulators (in reality, much of the information the AIFMD requires to be collected and filed annually with EEA state regulators is already filed with local authorities in the manager’s home jurisdiction, such as the Form PF that US managers file with the SEC).
AIFMD Compliance Made Easier with Preparation
Several steps can be taken to become market‐ready. Start by determining what type of presence you’ll use in order to market to European investors. Managers can choose between three options:
- Article 42 compliance – using National Private Placement Rules until they expire in 2018 or later
- Reverse solicitation
- Become fully AIFM‐authorized (marketing through the passport regime)
The passport regime is not available to non‐EEA managers until mid‐2015, but plans can be put in motion today and will set a non‐EEA‐based manager up for seamless distribution in connection with all future fundraises.
Navigating the Implementation Process
As the Directive now stands, until 2018, non‐EEA managers can continue to market to European investors without full registration as an AIFM. Rather, during this interim period, they can continue to market under local private placement regimes with just a few Directive compliance requirements on top. In particular, non‐EEA managers generally need to follow five steps:
- Register under Article 42, also known as “registration light,” with each relevant Member State in which a manager markets its funds.
- Some states require simple notification filings, while others require pre‐approval before marketing.
- Some EEA states require the manager to appoint a depositary for the fund.
- Provide specific information about the fund to investors – a “wrapper” – prior to their making an investment.
- Disclose information to local regulators on an annual basis.
- Provide an annual disclosure to investors, which can be included in the annual reporting that fund managers normally otherwise provide to their investors.
- Comply with AIFMD “asset stripping” rules.
It is important to consult with your own counsel for purposes of monitoring developments in AIFMD regulation and implementation continually – a step made easier with the help of Monument Group’s in‐ house experience and practical expertise. Certain states, for example, may allow for pre‐marketing of funds without triggering AIFMD compliance. Our team can help you and your counsel identify those countries, as well as the investors in those countries that may be interested in your fund. This approach may save a manager the cost and effort of compliance with “registration light” in many states until investors are serious about your fund.
Monument Group can also help you and your counsel identify those EEA states where Article 42 compliance may be more burdensome or triggered by any form of marketing – even pre‐marketing. In addition, Monument Group’s familiarity with the institutional investors in those states can help you decide whether or not to take the step to proceed with Article 42 compliance. Monument Group has a real time view of current market practice with respect to AIFMD compliance and our team’s on‐the‐ ground experience in Europe can provide fund managers with valuable and practical insight.
Moving Ahead
- Request the Monument Group AIFMD client guide: Monument Group’s client guide is intended to provide more clarity around the regulation, and to help identify the questions to discuss with your own legal counsel. The guide should demonstrate that the process is not as complicated as it might seem from a non‐EEA vantage point. In fact, a one‐time expenditure of a relatively minimal amount of time and effort can open up access to investment capital that could make this one‐time effort well worth the expenditures from a cost‐benefit perspective.
- Determine how the AIFMD will affect your investment strategy and pathway into Europe: Building upon Monument Group’s initial input on the Directive, you and your own legal counsel can create a plan to become market‐ready.
- Anticipate the future: Keep in mind that different aspects of the Directive will continue to be implemented over the next several years. Anticipating these additional requirements – including the potential for full AIFM registration for all non‐EEA managers beginning in 2018 – may influence your current decision from a cost/benefit perspective.
It is important to keep in mind that, although the Directive may be challenging, it ultimately opens the door for easy access to European‐based limited partners going forward. It is also important to keep in mind that you – with the advice of your own legal counsel – must ultimately make the determination as to how to interpret and approach the AIFMD (or any other applicable regulation). However, Monument Group is able to provide GPs with input on – and practical reaction to – the AIFMD and other regulatory changes affecting alternative fund distribution on a global basis.
For further reference, the Financial Conduct Authority (the UK regulator) has provided a helpful summary of AIFMD compliance requirements at the following link: http://www.fca.org.uk/firms/markets/international‐markets/aifmd
About Monument Group
Monument Group is a leading, independent private fund placement agent managed by a senior team with significant buy‐side investment heritage. Since its inception in 1994, Monument Group has assisted clients around the world in raising 68 funds with 38 repeat clients, totaling $78 billion of equity against an aggregate target of $75 billion. These clients represent a broad range of investment strategies including buyouts, debt, distressed, energy and natural resources, growth, infrastructure and real estate.
Monument Group, Inc., is a member of the Financial Industry Regulatory Authority (FINRA); Monument Group Europe LLP is authorised and regulated by the Financial Conduct Authority; Monument Group, L.P. is licensed as a Type II Financial Instruments Dealer in Japan; Monument Group (HK) Limited is licensed to conduct Type 1 regulated activities in Hong Kong.
