COO Connect Editorial: Interview with Philip Morgan, partner at K&L Gates on AIFMD
COO Connect Editorial speaks to Philip Morgan, partner at K&L Gates’ investment management practice group about the implications of the European Union’s (EU’s) Alternative Investment Fund Management Directive (AIFMD) on non-EU managers.
COO: Should non-EU hedge funds be preparing for AIFMD implications and how many are actually bothering with it so far?
PM: Non EU hedge fund managers should be preparing if they intend to market into Europe after 22 July 2013, or if they manage, or propose in the future to manage EU funds. Even the continuation of "private placement" has a number of strings attached and these may not all be easy to comply with, particularly where the manager is located in a highly regulated jurisdiction such as the US.
COO: How will non-EU funds be disadvantaged and do you anticipate regulators will make amendments?
PM: I don't foresee any material changes to the so-called "third country provisions". They have the effect that the "European passport" - ie the ability to market freely across the European Union to professional investors - is not available to non-EU funds for at least the first two years of the Directive being in force - ie July 2013 to late 2015. Some non-EU funds will see this as a very material disadvantage depending on how extensively they wish to market into Europe.
COO: Do you believe offshore jurisdictions like Cayman and BVI will meet the regulatory requirements of the EU?
PM: On the whole, yes, because in both cases this will be critical to the future success of the local economy. The burden on them in relation to the agreement of international cooperation agreements for the exchange of systemically important information may be considerable and they, of course, have limited staff in their regulatory bodies. Another area where they may have difficulty is in connection with depositaries. A Cayman fund passporting into the EU after 2015 can have a Cayman depositary but only if in Cayman there is prudential regulation and supervision, to the same effect as that under EU law, and which is effectively enforced. Although appropriate local laws can no doubt be introduced, one might question whether such rules can be "effectively enforced" given the limited resources of the local regulators.
COO: Do you anticipate more funds will enter into Ucits because of these rules?
PM: This trend has been happening for some time, in anticipation of AIFMD. Once AIFMD is in force, the trend may slow as a fund whose manager is subject to AIFMD will be subject to quite a high level of regulation and may offer an attractive alternative to some investors looking for products which are subject to enhanced regulatory requirements, when compared with a typical offshore fund in the pre-AIFMD world.