Many non-EU fund managers still view the impacts of the Alternative Investment Fund Managers Directive on their business with suspicion. The rules had to be transposed into national law by July 22, 2013, a deadline the majority of EU Member States met. In return for more regulation, authorized Alternative Investment Fund Managers benefit from a passport enabling them to offer their management services and to market their alternative investment funds, which are typically hedge funds, private equity funds or real estate funds, throughout the EU. This privilege has not yet been offered to non-EU managers but may soon become a reality.
Currently, fund managers in the U.S. or other third countries cannot or need not yet be authorized as an Aifm. However, if they wish to manage EU-Aif from July 2015, they may be required to be authorized by a member state of reference within the EU and to appoint a legal representative in this country, irrespective of whether the fund is marketed in or outside the EU. The Aifmd describes the notion of "member state of reference" in more detail, depending on where the fund is domiciled and to which countries the fund's units or shares are distributed. The authorization requirement would also apply to non-EU managers managing non-EU Aif, provided they wish and are allowed to market to investors in the EU with a passport. This is still subject to the EU legislator's decision to extend the passport regime to third countries, possibly in autumn 2015.
At least until October 2015, non-EU managers will have to meet national private placement rules if they wish to market units or shares in investment funds (without passport) in Europe. The Aifmd set a minimum standard in this regard, but EU member states are free to impose stricter rules and to permit or prohibit marketing to retail investors, provided certain conditions are met. Once U.S. or other third country managers have the choice between the passport and private placement regimes for marketing their funds in the EU, they would have to consider what more regulation means in return for a passport.
Under current private placement regimes, they have to respect possible domestic rules and the minimum requirements set by the Aifmd. The latter refer to the directive's transparency provisions and reporting obligations towards regulators. Furthermore, managers have to comply with the rules preventing asset stripping by private equity firms. Apart from existing cooperation arrangements between member states and third countries, the latter should not be listed as a non-cooperative country and territory by the Financial Action Task Force.
If non-EU managers were able to opt for the management and marketing passport, they would have to fully comply with the rules of the Aifmd. In addition to the requirements mentioned above, this would imply the authorization of the manager, which would have to meet the directive's operating and organizational conditions for Aifm that include in particular provisions on remuneration, conflicts of interest, risk and liquidity management, valuation, substance (personnel and technical resources), delegation and depositaries.
DELEGATION AS ALTERNATIVE
If all this was considered too far away, U.S. and other third country managers could already think of cooperating with an existing EU-Aifm. The latter is namely allowed to partially delegate the portfolio and/or risk management function to a non-EU manager, subject to certain conditions and as long as the EU-Aifm does not become a letter-box entity. In this case, the passport becomes indirectly immediately available for the non-EU manager whereas national private placement rules are not applicable. This might be a suitable compromise to benefit from the Aifmd.
The EU-Aifm must in this case be able to justify its entire delegation structure on objective reasons. Moreover, the delegation must not prevent the effectiveness of supervision of the EU-AIFM, and, in particular, must not prevent the latter from acting, or the Aif from being managed, in the best interests of its investors.
The non-EU manager must make use of sufficient resources to perform the respective tasks and the persons who effectively conduct the manager's business must be of sufficiently good repute and sufficiently experienced.
In addition, the EU-Aifm must be able to demonstrate that the non-EU manager is qualified and capable of undertaking the functions in question, that it was selected with all due care and that the EU-Aifm is in a position to monitor effectively at any time the delegated activity, to give at any time further instructions to the non-EU manager and to withdraw the delegation with immediate effect when this is in the interest of investors.
The impact of the Aifmd on U.S. asset managers finally depends on which structure they choose and it remains to be seen if the passport will be extended to third countries. The benefits of a passport regime would come in exchange for more regulation, and a lighter regime for managers of smaller Aif would also be available. This leads us to the conclusion that the Aifmdshould be considered as an opportunity, not as a threat, and this also from the perspective of non-EU managers.
Marc Saluzzi is ALFI chairman and Susanne Weism ller is ALFI senior legal adviser.