Welcome to the Laven Partners’ Update on the AIFM Directive. The final text of the Directive seeking to regulate hedge funds has been agreed in November 2010 and the Directive is now charging ahead to become law.
Laven Partners guided you throughout the whole legislative process which took 18 months by providing you with a monthly update on the status of this Directive. Our aim was to involve the financial community and notably to aggregate the representation of investors as our view was that the Directive could have severely reduced their access to investment opportunities. By informing some of you we hopefully met some of our objectives.
Now we are back! After taking a break of 7 months, as we approach being milestones in the development of the implementation of the Directive, we feel it is our duty to put pen to paper (or finger to keyboard) and keep you updated.
Catch up on the AIFM Directive – Where does it stand now?
The AIFM Directive is arguably one of the most discussed EU directives affecting the financial services industry. After 18 months of negotiations producing 17 compromise texts, an agreement by the EU Finance Ministers on the final Directive text was reached in October 2010. This was followed by the approval of the final text in the meeting of the European Commission, the Economic Financial Affairs Council and the European Parliament’s Committee for Economic and Monetary Affairs, the “trilogue”, later that month. The Directive was voted into European law during the plenary sitting of the European Parliament on 11 November 2010.
Seven months later, where are we?
The Council of the European Union adopted the final text of the Directive on 27 May 2011. The Directive is expected to be published in the Official Journal of the European Union soon. Once the Directive has been published, it will take 20 days for it to come into force. Member States will then have two years to implement the Directive into national law.
We shall quickly remind ourselves of some of the key impacts the Directive will have on the industry.
Third-country marketing
As of 2013, EU alternative fund managers will be able to apply for an EU passport. Passports will be made available to non-EU managers and non-EU funds in 2015. Before 2015, national private placement rules will continue to apply to EU managers marketing non-EU funds and non-EU Managers marketing an EU or a non-EU fund to EU persons. Until 2018, a “dual system period” will be in place whereby both national private placement and the AIFM Directive rules apply in respect of third country entities.
Capital requirements
The Directive will increase the initial capital requirement for asset managers – from EUR 50,000 to EUR 125,000.
Remuneration
The Directive will bring about another set of rules on remuneration. These should apply in addition to the Capital Requirements Directive. The Directive defines the staff to whom remuneration policy applies broadly, including in its scope not only risk takers and those responsible for control functions but also extending to any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. How the Directive’s remuneration policy will work in practice alongside the Capital Requirements Directive’s remuneration policies still remains to be seen.
Exemptions from the Directive
Smaller fund managers managing assets of less than EUR 100 million, or EUR 500 million where the funds managed are unleveraged and cannot be redeemed from within the first five years from investment, can be exempt from some of the Directive’s provisions. When opting out of the full scope of the Directive regime, the fund manager will not be able to benefit from the rights given by the Directive (such as the EU passport).
What are the current concerns relating to the Directive?
Many are worried about the potential increase of barriers to entry to the industry, limiting the ability of small fund managers to launch their businesses. This is due to increased capital requirements and potential regulatory burden combined with the difficulties in raising assets. Limiting access may possibly adversely affect innovation and development of the industry.
Fund managers operating under the scope of the Directive will also be required to have their registered office and their head office in the same EU Member State. This may lead to unprecedented tax consequences and it remains to be seen how fund managers will structure their businesses in the future and whether such structuring will be beneficial for investors.
The hotly discussed provisions on EU passports impose further barriers on third country funds wishing to market in the EU. Besides the required cooperation agreements between EU regulatory authorities and the national authorities of the third country fund’s home state, the third country must not be on the Non-Cooperative Countries list of the Financial Action Task Force. There must also be a tax treaty with the relevant jurisdictions. All these rules would potentially drive managers away from the attractive EU market.
Conclusion
The rules are set and the timeline is, for now, being adhered to. This Directive will impact you! With further controversial regulatory developments on their way (MiFID II, EU short selling regulations), the next few years are going to be challenging for the industry and the EU as a whole. Regulation of the alternative investment industry is necessary, however overregulation lacking any clear commercial purpose will generate a lot of herd. We just hope the industry will react to future consultations as its responses to the AIFM Directive were rather restrained. For now it is never too early to prepare for the worse. You can adopt a strategy of structuring today to prevent issues tomorrow. So keep monitoring and we will keep writing.
