The AIFMD and non-EU fund managers
By James Tinworth (pictured), partner in the hedge funds practice, Stephenson Harwood – The EU’s directive on Alternative Investment Fund Managers (AIFMD) is built upon a very polarised framework. In the EU:
- a fund will either be a UCITS (the EU fund vehicle for retail investors) or an Alternative Investment Fund (AIF)
- an AIF will either be an “EU AIF” (i.e. an AIF which is authorised or registered in an EU Member State under the applicable national law or an AIF, which is not authorised or registered in an EU Member State, but has its registered office and/or head office in an EU Member State) or a “non-EU AIF”
- an AIF will either be managed by an “EU AIFM” (i.e. a legal person whose regular business is managing one or more AIFs and whose registered office is in an EU Member State) or a “non-EU AIFM”
Subject to a few exemptions, the AIFMD applies to:
- non-EU AIFMs which manage one or more EU AIFs and
- non-EU AIFMs which market one or more AIFs in the EU irrespective of whether such AIFs are EU AIFs or non-EU AIFs
The AIFMD will also be relevant to a non-EU manager (also known as a third country manager) of an AIF where the EU AIFM of the relevant AIF has delegated portfolio management or risk management to it.
The AIFMD leaves a number of matters to the national laws of individual EU Member States and the hope is that it will be a case of business as usual after the implementation of the AIFMD. The concern, however, is that the polarised framework described above will prompt some EU Member States (and prompt some more than others) to modify their local laws in the same polarised way: UCITS (good) / AIFs (not so good) and EU (good) / non-EU (not so good).
The national laws of each of the relevant EU Member States therefore need to be monitored closely in order to determine whether an EU AIFM (or, later, an AIFMD authorised non-EU AIFM) and/or an EU AIF would be necessary or desirable.
The AIFMD is essentially scheduled to be implemented in three stages: July 2013, Q4 2015 (at the earliest) and Q4 2018 (at the earliest). There is a chance, however, that the second and third stages may never happen and it should be noted that the third stage is dependent on the second stage happening. The rest of this note assumes that each of the three stages will happen in 2013, 2015 and 2018.
An AIF can only have one AIFM
Each AIF managed within the scope of the AIFMD can only have a single AIFM. Identifying the AIFM in a fund structure could be quite complicated, particularly where there is delegation of portfolio management and/or risk management, and very different rules will apply depending on whether the AIFM is an “EU AIFM” or a “non-EU AIFM”.
Please refer to our briefing note on identifying the AIFM in a fund structure (titled Spot the AIFM) for more information.
Non-EU AIFMs managing EU AIFs and/or marketing AIFs in the EU (2013-2015)
Whether or not a non-EU AIFM will be permitted to manage an EU AIF will depend on the national law of the relevant EU Member State.
Where a non-EU AIFM wishes to market an EU AIF or a non-EU AIF to an investor in the EU, the national law of the investor’s EU Member State will need to be complied with. As a minimum, the EU Member State should require that:
- the non-EU AIFM complies with various requirements of the AIFMD relating to, primarily, annual reports of the AIF, disclosure to investors in the AIF and reporting obligations to the EU Member State’s competent authorities
- appropriate cooperation arrangements for the purpose of systemic risk oversight and in line with international standards are in place between the competent authorities of the investor’s EU Member State, the competent authorities of the AIF concerned and the supervisory authorities of the non-EU country where the non-EU AIFM is established in order to ensure an efficient exchange of information that allows competent authorities of the investor’s EU Member State to carry out its duties inaccordance with the AIFMD
- the non-EU country where the non-EU AIFM and, where applicable, the non-EU AIF is established is not listed as a Non-Cooperative Country and Territory by FATF
The AIFMD makes it clear, however, that EU Member States may impose stricter rules on the non-EU AIFM in respect of the marketing of units or shares of AIFs to investors in their territory.
Non-EU AIFMs managing EU AIFs and/or marketing AIFs in the EU (2015-2018)
Subject to a few exemptions, if the second stage of implementation of the AIFMD happens then a non-EU AIFM will need to be authorised under the AIFMD in order to manage an EU AIF.
When it comes to marketing AIFs in the EU, however, a non-EU AIFM has the choice of either not being authorised under the AIFMD (and thus relying on national law as described above in respect of 2013-2015 to market non-EU AIFs) or being authorised under the AIFMD.
If a non-EU AIFM chose the latter then it would be able to use the AIFMD’s “marketing passport” to market the AIFs that it manages to “professional investors” throughout the EU. The AIFMD’s “management passport” would also be available and a non-EU AIFM that is authorised under the AIFMD in one EU Member State would be able to manage EU AIFs established in other EU Member States.
The downside is that the non-EU AIFM would have to comply with all the provisions of the AIFMD (e.g. its depositary requirements) unless (and to the extent that) compliance with an AIFMD provision is incompatible with compliance with the law to which the non-EU AIFM and/or the non-EU AIF marketed in the EU is subject, if the non-EU AIFM can demonstrate in accordance with the AIFMD that:
- it is impossible to combine such compliance with compliance with a mandatory provision in the law to which the non-EU AIFM and/or the non-EU AIF marketed in the EU is subject;
- the law to which the non-EU AIFM and/or the non-EU AIF is subject provides for an equivalent rule having the same regulatory purpose and offering the same level of protection to the investors of the relevant AIF; and
- the non-EU AIFM and/or the non-EU AIF complies with the equivalent rule referred to in point (b).
Because the non-EU AIFM would not have a presence in the EU, it would also be required to:
- determine, in accordance with the detailed provisions of the AIFMD, its "Member State of reference" (the appropriate regulatory body of which would authorise and supervise the non-EU AIFM).
- appoint a “legal representative”, which can be a natural person domiciled in, or a legal person with its registered office in, the “Member State of reference”. The legal representative shall
(a) be the contact point of the AIFM in the EU and any official correspondence between the competent EU authorities and the AIFM and between the EU investors of the relevant AIF and the AIFM as set out in the AIFMD shall take place through that legal representative;
(b) perform the “compliance function” relating to the management and marketing activities performed by the AIFM under the AIFMD together with the AIFM;
(c) generally act on behalf of the non-EU AIFM in relation to the authorities, clients, bodies and counterparties to the non-EU AIFM in the EU with regard to the non-EU AIFM’s obligations under the AIFMD.
Finally, a non-EU AIFM cannot be authorised under the AIFMD unless (amongst other things):
- appropriate cooperation arrangements are in place between the competent authorities of the Member State of reference, the competent authorities of the home Member State of any EU AIFs concerned and the supervisory authorities of the non-EU country where the non-EU AIFM is established in order to ensure at least an efficient exchange of information that allows the competent authorities to carry out their duties in accordance with the AIFMD.
- the non-EU country where the non-EU AIFM is established is not listed as a Non-Cooperative Country and Territory by FATF.
- the non-EU country where the non-EU AIFM is established has signed an agreement with the Member State of reference, which fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters, including any multilateral tax agreements.
- the effective exercise by the competent authorities of their supervisory functions under the AIFMD is neither prevented by the laws, regulations or administrative provisions of a non-EU country governing the AIFM, nor by limitations in the supervisory and investigatory powers of that non-EU country’s supervisory authorities.
Non-EU AIFMs managing EU AIFs and/or marketing AIFs in the EU (2018 and onwards)
Subject to a few exemptions, a non-EU AIFM will need to be authorised under the AIFMD in order to manage an EU AIF, as described above. When it comes to marketing AIFs in the EU, a non-EU AIFM will not be able to market the AIFs that it manages in any EU Member State unless it is authorised under the AIFMD.
Delegation by an EU AIFM of portfolio management or risk management to a non-EU undertaking
Where an EU-AIFM delegates portfolio management or risk management, the AIFMD requires, amongst other things, that:
- the delegation must be conferred:
(a) only on undertakings which are authorised or registered for the purpose of asset management and subject to supervision or
(b) (where that condition cannot be met) only subject to prior approval by the competent authorities of the home Member State of the AIFM
- where the delegation is conferred on a non-EU undertaking, cooperation between the EU AIFM’s regulator and the supervisory authority of the non-EU undertaking must be ensured.
The EU Commission will specify the conditions for fulfilling these requirements in its Level 2 measures. In the leaked draft of these measures, the requirement for a non-EU delegate to be authorised or registered for the purpose of asset management based on local criteria which are "equivalent" to those established under EU legislation seemed to have gone, although the Commission will still require there to be a co-operation agreement between the regulators of the EU AIFM and the non-EU delegate.
The form and content of these co-operation agreements is becoming a real issue and, even if the Commission can deliver a workable solution, the concern is that it may not be possible to get the required agreements in place in time for the AIFMD.
Additionally, if the EU manager of an AIF were to delegate too much to an non-EU undertaking then that non-EU undertaking would be the AIFM of the AIF and not the non-EU manager.
Please refer to our separate note (titled Spot the AIFM) on identifying the AIFM in a fund structure for more information.
Delegation by a non-EU AIFM of portfolio management or risk management to an EU undertaking
A non-EU AIFM, which is not authorised under the AIFMD, will not be subject to the delegation provisions of the AIFMD.
The point to make here, however, is that, if a non-EU manager of an AIF were to delegate too much to an EU undertaking then that EU undertaking would be the AIFM of the AIF and not the non-EU manager.
James Tinworth is a partner in the hedge funds practice, Stephenson Harwood.