By Paul Govier (pictured) & Harjit Kaur – The European Alternative Investment Fund Managers Directive (“AIFMD”) introduces a new regime governing the management and marketing of alternative investment funds (“Funds”) in the EU. The transitional period for the implementation of the AIFMD expires on 22 July 2014, and from this date Cayman Islands Funds (“Cayman Funds”) may only be marketed in the member states of the EU in compliance with the requirements of the AIFMD, unless a relevant exemption applies. Different marketing regimes will apply from the end of the transitional period to 2018 and beyond.
End of transitional period to 2015
During this period only EU managers of EU Funds will be able to apply for a passport to market their EU Funds to professional investors on a cross border basis throughout the EU. However, managers of Funds established in jurisdictions outside the EU (“Third Countries”) will be able to continue marketing their Funds in the EU member states subject to each member state’s national private placement regimes (“NPPRs”) provided that certain minimum requirements of the AIFMD are satisfied, as follows:
• The relevant Third Country must not be listed by the Financial Action Task Force as a Non-Cooperative Country and Territory (“FATF blacklist”); and
• Appropriate co-operation arrangements must be in place between the regulators in the relevant EU member state and the relevant Third Country regulator(s). In the case of an EU manager of a Third Country Fund, the co-operation arrangements must be in place between the manager’s regulator and the Fund’s regulator, and in the case of a Third Country manager of a Third Country Fund, co-operation agreements must be in place between the manager’s regulator, the Fund’s regulator and the regulators in each EU member state in which the Fund is to be marketed.
The Cayman Islands is not on the FATF blacklist and to date the Cayman Islands Monetary Authority (CIMA) has signed Memoranda of Understanding (which satisfy the requirements for co-operations arrangements noted above) with 27 of its counterparts in EU member states.* As such, Cayman Funds satisfy the minimum requirements prescribed by the AIFMD in order for these to be marketed in the EU member states subject to each member state’s NPPRs.
Managers of Cayman Funds wishing to market their Funds using the NPPRs will need to comply with certain provisions of the AIFMD. These differ depending on whether the manager is established in the EU or in a Third Country. Third Country managers wishing to market Cayman Funds using the NPPRs will only need to comply with the ‘transparency’ requirements of the AIFMD (which comprise certain reporting and disclosure obligations to investors of the Fund and the relevant EU regulators), and the ‘asset stripping’ requirements of the AIFMD (which apply where the Fund seeks to acquire control of unlisted EU companies). Crucially, Third Country managers will not have to comply with any of the other provisions of the AIFMD, including remuneration and leverage restrictions or the depositary requirement.
EU managers wishing to market Cayman Funds using the NPPRs will need to comply with all of the requirements of the AIFMD other than the requirement to appoint a depositary in accordance with Article 21 of the AIFMD. Instead, EU managers of Cayman Funds will be required only to ensure that one or more entities are appointed to perform the cash management, safe-keeping/custody and oversight functions set out in Article 21(7)-21(9) of the AIFMD.
2015 to 2018
In 2015 the European Securities and Markets Authority (“ESMA”) must give an opinion as to whether the passport regime should be extended to Third Countries. If the passport regime is extended, in this period, managers of Cayman Funds will be able to choose whether to continue to market under the NPPRs (on the terms outlined above) or apply for a passport.
In order for an EU manager to obtain a passport to market a Third Country Fund in the EU, the following conditions would need to be satisfied:
a) The Third Country must not be on the FATF blacklist;
b) Appropriate co-operation arrangements must be in place between the manager’s regulator and the Fund’s regulator; and
c) Tax information exchange agreements (“TIEAs”) meeting the requirements of the OECD must be in place between the relevant Third Country and each EU member state in which the Fund will be marketed and the home member state of the manager.
Only the requirement in (c), above, is new. The Cayman Islands is on the OECD white list as a jurisdiction that is considered to have implemented the internationally agreed tax standard. To date the Cayman Islands has 35 TIEAs in place, including with the UK, France, Germany, Belgium, Czech Republic, Denmark, Finland, Iceland, Ireland, Italy, Netherlands, Norway, Poland, Portugal and Sweden. As such, it is expected that if the passport regime is extended to Third Countries, Cayman Funds should be eligible to access it.
In contrast to the position when marketing under the NPPRs, a manager applying for a passport would need to comply with all of the requirements of the AIFMD. Where the manager is itself established in a Third Country, it would have to opt in to comply with the AIFMD. Such manager would be required to apply to the regulator in the ‘member state of reference’ (which is determined in accordance with the AIFMD) for authorisation and submit to that regulator’s supervision in respect of its compliance with the AIFMD. In addition, the Third Country in which such Third Country Manager is established would also need to satisfy the conditions set out above.
2018 and beyond
If the passport regime is extended to Third Countries, then the NPPRs will be discontinued and Cayman Funds will only be able to be marketed in the EU with a passport, on the terms outlined above. If the passport regime is not extended, then the NPPRs will continue indefinitely and Cayman Funds may continue to be marketed in the EU member states under the NPPRs.
Scope of AIFMD/exemptions
There are some circumstances where the AIFMD does not apply. The following three appear to be of the most relevance to Cayman Funds.
Passive placement/Reverse solicitation
The definition of ‘marketing’ in the AIFMD contemplates active marketing, in that it refers to an offering or placement at the initiative of the manager or on its behalf. As such, capital raising that is at the initiative of the investor falls outside of the scope of the AIFMD. This exemption is of particular relevance to Third Country managers, because it means that they may be able to raise capital from EU investors without having to comply with the AIFMD provided that they do not initiate the offering or placement. Likewise, such managers can accept additional capital from existing EU investors in their existing Funds provided there has been no further marketing to such investors. However, care will need to be taken by managers intending to rely on this exemption with respect to their Cayman Funds as the scope of the exemption is not entirely clear and different member states may have different interpretations of the scope and limits of the exemption.
Single investor funds
The definition of “alternative investment fund” in the AIFMD contemplates an investment undertaking which raises capital from a number of investors. Single investor funds are therefore outside the scope of the AIFMD. As with reverse solicitation noted above, this exemption is of particular relevance to Third Country managers as it means they may be able to raise capital from EU investors without having to comply with the AIFMD if such capital is invested only in single investor funds. This is a narrow exemption as ESMA has indicated that the exemption will only be available where there is an enforceable legal obligation preventing capital raising from more than one investor. ESMA has also indicated that the test for the exemption will be applied on a look through basis so that it will not be available in the case of nominee arrangements, fund of funds and master/feeder structures.
Managers with open-ended Funds having aggregate assets under management (“AUM”) of EUR100m (including assets acquired through the use of leverage), or EUR500m (not including leverage) in the case of closed-ended Funds are exempt from the AIFMD. It is important to note that the calculation of AUM in respect of open-ended Funds includes leverage. Nevertheless, this exemption might be useful to some small start-up managers.
The Cayman Islands is the jurisdiction of choice for offshore alternative investment funds, and has taken steps over the last few years to ensure that it is well placed to navigate the new regulatory landscape in Europe following the implementation of the AIFMD. What this means in practical terms is that managers of Cayman Funds will be able to continue marketing their Funds in the EU member states under the NPPRs until at least 2018. As noted above, managers marketing under the NPPRs will not need to comply with all of the requirements of the AIFMD. This can be seen as an advantage (particularly for Third Country managers) as they will be able to avoid some of the compliance burden and associated costs. In addition to this, if the passport is extended to Third Countries (which will be in 2015, at the earliest), it is expected that Cayman Funds should be eligible to access it, although this will entail the manager complying with all of the requirements of the AIFMD. The existence of a number of exemptions also means that it will be possible for certain managers to accept EU investors in their Cayman Funds without having to comply with the AIFMD. It is expected, therefore, that Cayman Funds will maintain their competitiveness in the European market now and in the future.
Paul Govier is the Managing Partner and head of the Investment Funds group in Maples and Calder’s London office. He specialises in the establishment and maintenance of all kinds of investment funds, in particular private equity funds and hedge funds, advising a range of investment managers, intermediaries and financial institutions. He is a regular speaker at industry conferences and contributor to journals.
Harjit Kaur is an associate in the London office of Maples and Calder. She specialises in the area of investment funds, in particular the establishment and maintenance of funds in the Cayman Islands. She has also advised on the regulatory aspects, restructuring and voluntary liquidation/dissolution of different types of Cayman Islands investment vehicles.
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