By Tim Clipstone (pictured) & Jill Shaw, Maples & Calder – It has been almost a year since the Alternative Investment Fund Managers Directive (“AIFMD”) was due to be implemented by the member states of the European Union (the “Member States”) on 22 July 2013 and a number of Member States have yet to enact legislation to transpose AIFMD while others, including the United Kingdom, Ireland and Luxembourg, enacted transitional provisions which gave managers of alternative investment funds one year, until 22 July 2014, to determine what steps, if any, need to be taken to ensure compliance with the provisions of AIMFD.
Who does AIFMD affect?
AIFMD seeks to regulate fund managers rather than funds themselves. An AIFM is defined as a legal person whose regular business is the managing of one or more alternative investment funds (“AIFs”). While an AIF is defined as any non-UCITS collective investment undertaking which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. Careful consideration should be given to whether any of the entities managed fall within the definition of an AIF and also which entity would be considered the AIFM for those AIFs in order to determine whether the AIFM will be required to seek authorisation under AIFMD, either before 22 July 2014 or at a future date.
AIFMD does not apply to the following entities: holding companies; institutions for occupational provision; supranational institutions; national central banks; national, regional and local governments and bodies or other institutions which manage funds supporting social security and pension systems; employee participation schemes or employee savings schemes; and securitisation special purpose entities.
In addition, the following entities may be granted exemptions from the full scope of AIFMD:
• AIFMs which manage AIFs whose only investors are the AIFM or parent undertakings or subsidiaries of the AIFM or other subsidiaries of those parent undertakings, provided that none of those investors is itself an AIF.
• Sub-threshold AIFMs managing AIFs with assets under management not exceeding EUR100m (including any assets acquired through the use of leverage) or managing AIFs with assets under management of EUR500m where the AIFs are unleveraged and with no investor redemption rights for five years. These thresholds are calculated at the level of the AIFM rather than at the level of the AIF. Such AIFMs are required to be registered rather than fully authorised under AIFMD.
Managing AIFs in the context of AIFMD means performing at least portfolio management and/or risk management for one or more AIFs. It is particularly important to determine who is actually performing these functions as it is not permitted to delegate these functions to such an extent that the entity identified as the AIFM is nothing more than a “letter-box entity” which does not exercise the control and responsibility of these functions required by AIFMD. An unintended consequence of such delegation arrangements may be that the entity to which certain of the risk management or portfolio management functions have been delegated will be considered the AIFM. In order to avoid the AIFM being considered a “letter-box entity”, it would be advisable to ensure that the risk management and/or portfolio management functions retained by the AIFM exceed the risk management and/or portfolio management activities which have been delegated. It would also be advisable to show that the AIFM retains the necessary expertise and resources to effectively supervise the delegated activities and to manage the risks associated with the delegation of such activities. It should also be ensured that the AIFM retains the power to take decisions in key areas. Delegation structures should be considered on a case by case basis.
How are British Virgin Islands entities affected?
There are three scenarios in which a British Virgin Islands (“BVI”) entity may fall within the scope of AIFMD.
A non-EU AIFM (i.e. a BVI entity) managing a non-EU AIF (i.e. a BVI fund)
A BVI AIFM which proposes to market its BVI fund(s) in one or more Member States may rely on the private placement regime(s) in the relevant Member State(s) until at least 2018 without having to seek authorisation under AIFMD. However the AIFM will have to ensure that:
• it complies with the disclosure and reporting requirements set out in AIMFD, discussed in more detail below;
• there is a cooperation agreement in place between the competent authority in the jurisdiction of the non-EU AIFM, i.e. between the BVI Financial Services Commission, and the financial regulator in the Member State(s) in which it is proposed to market the AIF; and
• the jurisdiction of the non-EU AIFM is not listed as a Non-Cooperative Country and Territory by FATF.
Additional notification and disclosure requirements in relation to the prevention of asset-stripping may also apply if an AIFM engages in the takeover of unlisted EU companies.
It is proposed that a review of the functioning of AIFMD will take place in 2018 and at that stage private placement regimes may be abolished and the only route to marketing to Member States will be to seek authorisation under AIFMD and be fully compliant with the provisions of AIFMD.
If a BVI AIFM does not propose to market its BVI AIF(s) in any Member State, it may fall outside the scope of AIFMD.
An EU AIFM managing a non-EU AIF (i.e. a BVI fund)
Once it has been determined that the AIFM is domiciled in a Member State and that the AIF is domiciled outside the EU, for example, in the BVI, then it will be necessary to consider whether or not the AIFM has to comply with AIFMD in its entirety and the AIFM should seek advice from legal counsel in the relevant Member State.
However, the marketing passport will not be available in respect of any non-EU AIFs proposed to be marketed in the EU and it will be necessary to rely on the private placement regime(s) in the Member State(s) in which it is proposed to market. It will also be necessary to ensure that the requirements set out in the first scenario have also been complied with. There is currently no requirement to appoint a single depositary in respect of a non-EU AIF, although some of the private placement regimes of Member States have been amended to require this in any event.
A non-EU AIFM (i.e. a BVI entity) managing an EU AIF
If a BVI AIFM is managing an EU AIF but not marketing that AIF within the EU then that AIFM will not currently fall within the scope of AIFMD. However if the BVI AIFM is marketing or plans to market the EU AIF in one or more Member States then it will be necessary to comply with the requirements of the private placement regime(s) in the Member State(s) in which it is proposed to market and to ensure that the requirements set out in the first scenario have also been complied with.
As with non-EU AIFMs managing non-EU AIFs, if the AIFM engages in the takeover of unlisted EU companies, additional notification and disclosure requirements relating to the prevention of asset-stripping may apply.
This will be the only direct marketing option available to non-EU AIFMs seeking to market an EU AIF until at least 2015. At that stage the European Securities and Markets Authority will review the current rules in relation to marketing and a non-EU AIFM may be permitted to apply for authorisation under AIFMD in order to avail of the marketing passport which will permit the AIFM to market its AIFs throughout the EU subject to the notification requirements set out in AIFMD.
Disclosure and reporting obligations
As set out above, non-EU AIFMs seeking to market EU AIFs or non-EU AIFs in any Member State will be required to comply with disclosure and reporting requirements contained in AIFMD.
The AIFM must make available, for each AIF that it markets in any Member State, an annual report for each financial year no later than six months from the end of the AIF’s financial year.
Pre-investment (offering document) disclosure to investors
The AIFM must ensure that certain information contained in Article 23 of AIFMD is made available prior to an investor making an investment in an AIF, which includes, but is not limited to: descriptions of the investment strategy and objectives of the AIF; the types of assets in which the AIF may invest; all associated risks; the circumstances in which the AIF may use leverage and details relating to the use of leverage; the identity of the service providers; the fees and expenses which may be borne directly or indirectly by the investors; how fair treatment of investors is ensured and whenever an investor obtains preferential treatment or the right to obtain preferential treatment; a description of that preferential treatment and the type of investors who obtain such preferential treatment (i.e. the terms of any side letters in place). Where a depositary contractually delegates its liability to a third party this also needs to be disclosed.
The AIFM must provide reports to the regulator in any Member State(s) where its AIF(s) are marketed, which include the following information: the main instruments in which the AIF is trading; on which markets the AIF is a member or where it actively trades; the principal exposures and most important concentrations of the AIF; the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature; any new arrangements for managing the liquidity of the AIF; the current risk profile of the AIF and the risk management systems employed by the AIFM to manage market risk, liquidity risk, counterparty risk and other risks including operational risk; information of the main categories of assets in which the AIF invests; and the results of any stress tests required to be conducted. The frequency of this reporting may be quarterly, semi-annually or annually depending on the type of AIFs managed.
Passive marketing and reverse solicitation
Marketing is defined under AIFMD as a 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 it manages to or with investors domiciled or with a registered office in the EU. This would suggest that where investment is made at the initiative of an investor from a Member State the investment would not be caught by the requirements of AIFMD. However, caution should be exercised in relying on this assumption as there is currently no certainty as to what constitutes “passive marketing” or “reverse solicitation” and there is no consistency between the Member States in relation to these definitions. Care should be taken when dealing with approaches from investors based in Member States where the AIF has not taken steps to comply with the relevant marketing requirements and advice from local counsel should be sought in such circumstances.
The BVI, FATF and cooperation agreements
Prior to being permitted to market AIFs in any Member State, a non-EU AIFM must ensure that:
• Its country of domicile is not listed as a Non-Cooperative Country and Territory by FATF. The BVI is not listed as a Non-Cooperative Country and Territory by FATF. In addition, the BVI is a member of the Caribbean FATF.
• Cooperation agreements have been put in place between the Member States in which the AIFM wishes to market and its country of domicile. Cooperation agreements have currently been signed by the BVI Financial Services Commission and 26 European regulators, including Luxembourg’s Commission de Surveillance du Secteur Financier, the United Kingdom’s Financial Conduct Authority, France’s Autorité des marchés financiers and Ireland’s Central Bank of Ireland.
At a minimum, prior to 22 July 2014, BVI entities should undertake an exercise to determine whether any of the provisions of AIFMD will apply to their business.
If it is intended to rely on passive marketing and/or reverse solicitation rather than active marketing in any Member State, we would recommend that the AIFM take advice from counsel in the relevant jurisdiction as to what does and does not constitute “passive marketing” and/or “reverse solicitation” and to have procedures in place setting out how approaches from potential investors domiciled in any Member State should be dealt with. Maples and Calder can assist with any Irish law related advice through our Irish law offering.
In the case of AIFs, it may be prudent to examine whether any amendments to the offering or subscription documentation need to be made to include references to AIFMD.
Tim Clipstone is a partner in the BVI office of Maples and Calder. He advises on all aspects of BVI and Cayman Islands securities, corporate and partnership law, including the formation, sale, purchase, listing, licensing and restructuring of regulated and unregulated vehicles, joint venture arrangements and corporate governance issues. He has particular expertise in advising managers and institutional investors on all aspects of investment funds.
Jill Shaw is an associate in the BVI office of Maples and Calder. She specialises in investment funds, providing advice on the structuring and formation of regulated and unregulated funds and to the service providers of such funds including promoters, custodians, administrators and investment managers. Jill also has experience advising on general corporate legal matters.
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