The fact that the Directive captures every fund that is not regulated under the UCITS regime surprised some. There are exemptions of various kinds, but every manager active in Europe has had to respond in some way to the coming of the AIFMD.
The Alternative Investment Fund Managers Directive (AIFMD) affects all funds that are not regulated by the Undertakings for Collective Investments in Transferable Securities (UCITS) directives. All alternative investment fund managers (AIFMs) established in the European Union (EU), whether they manage funds domiciled in the EU or outside the EU, are subject to the Directive. The AIFMD also governs the marketing in the EU of AIFs managed by AIFMs established outside the EU. Only a non-EU AIFM marketing to investors outside of the EU does not come within the scope of the AIFMD.
Most obviously, a Directive which captures non-UCITS funds encompasses hedge fund, private equity and real estate managers. Less obviously, exchange-traded fund (ETFs), Luxembourg specialised investment fund and Irish qualifying investor funds (QIFs) are in scope, as are Dutch Fonds voor Gemene Rekening (FVR) and Luxembourg Société d’investissement à capital variables (SICAVs). In short, the AIFMD has wide scope in terms of the fund managers and funds that must comply with its provisions. “AIFMD affects hedge funds, private equity firms, retail non-UCITS funds, Irish QIFs, Luxembourg SICAVs, real-estate funds, close ended funds such as ETFs and commodity funds, although the latter are far and few between,” says Richard Frase, a partner at Dechert in London. Even securitised vehicles are liable to be ensnared. Frase warns that certain corporate entities which have investment fund characteristics could be classified as AIFs. The all-encompassing nature of the AIFMD prompted some managers to consider turning their AIFs into UCITS, but they soon abandoned the idea. The AIFMD already imposes less onerous restrictions in terms of investment strategies, liquidity and leverage than the UCITS regime, and UCITS V will bring European mutual funds into alignment with the AIFMD anyway (see “Aligning UCITS funds with AIFMD,” page 54). It is also a stated ambition of the European Securities and Markets Authority (ESMA) to reverse the liberalisation measures taken in UCITS III, and return UCITS funds to their retail roots.
Family offices, many of which now run AIFs, were fearful that they might be caught, though they eventually secured an exemption provided they did not run money for third party investors. “Investment undertakings, such as family office vehicles which invest the private wealth of investors without raising external capital, should not be considered to be AIFs in accordance with this Directive,” reads the text of the Directive.1 This does mean that some family offices will be caught by the AIFMD, with their status determined by judgements – which will not always be straightforward – about the relationship between the office and the family.Somewhat less subjective exemptions from AIFMD are set by size, though these are decided by national regulators rather than at EU level. Under Article 3 of the Directive, national regulators can exempt AIFMs that collectively manage AIFs with an AuM of less than €100 million leveraged or less than €500 million unleveraged and which do not grant investors do redemption rights for a period of five years following their initial investment. This still means that AIFMs have to prove to regulators that their AuM is beneath the threshold in accordance with a specified calculation methodology, which is a substantial effort in itself. Nor do the exemptions granted under Article 3 of the AIFMD liberate them from the obligation to register with the regulator in their home member-state, share details of the AIFs and the investment strategies they pursue, and report regularly to the regulator on the contents of portfolios and the risks they represent. Once they clear the AuM threshold, registration as an AIFM becomes mandatory.
One final group that is exempt from the full repercussions of the AIFMD are AIFMs that market AIFs to EU investors via national private placement regimes. Most of the managers that fall within this category are, by definition, based outside the EU. To be able to do this, a manager must comply with requirements set by national private placement regimes, which may vary. Under regulations 57, 58 and 59 of the AIFMD, the Financial Conduct Authority (FCA) in the United Kingdom, for example, requires managers using the national private placement regime to notify the FCA and demonstrate that the regime by which the AIF is regulated meets international standards.
In France and Germany, by contrast, regulators are less liberal. “If a hedge fund manager operates under the national private placement regime, then they will have to register in every country to which they are marketing into and be subject to disclosure requirements,” explains Richard Frase. The workings of the national private placement regimes will also be reviewed by the European Securities and Markets Authority (ESMA) in 2015, two years after the AIFMD came into effect. An EU marketing passport may be issued to non-EU managers as a result of that review, but it is far from certain. An opinion on the subject from ESMA will follow in 2016, including advice on the termination of national private placement regimes and their replacement by an EU-wide passport. Most observers expect national private placement regimes to be abolished in the full review of the AIFMD by ESMA, which is scheduled for 2018, four years after the 22 July 2014 deadline for transposition of the Directive into national regulations. The detailed exemptions and the long prelude to AIFMD mean that managers and funds affected by the Directive would have had to work extremely hard to be unaware of their obligations. Indeed, by the time the 22 July 2014 deadline became a reality, every manager affected had reached a final position on their response to the AIFMD. Whether they chose national private placement regimes, depositary “lite” (see “Depositary “lite” looks like a temporary fix,), reverse solicitation or full compliance, fund managers active in Europe have now accepted that the journey towards a fully regulated alternative investment management industry is now under way.