Marketing Alternative Investment Funds in the United Kingdom under the New EU AIFMD Regime

New rules governing the alternative investment sector will come into force across the European Economic Area¹ (EEA) on July 22, 2013, in the form of the EU Alternative Investment Fund Managers Directive² (AIFMD). From this date, EEA-domiciled alternative investment funds (AIFs) with assets under management (AuM) above €100 million (U.S.$130.4 million) or, where there is no leverage and a lock-in period in excess of five years, AuM above €500 million (U.S.$652.1 million), will be subject to authorisation and ongoing requirements.

The AIFMD regime will, among other things, introduce a new passport system for the marketing of AIFs in the European Economic Area. From July 22, 2013, EEA-domiciled alternative investment fund managers (AIFMs) will be able to market EEA AIFs on a cross-border basis throughout the European Economic Area without first having to seek permission from each Member State and comply with different national laws. AIFMs that fall below the authorisation thresholds outlined above may voluntarily opt in to the regime should they wish to take advantage of the passport system.

Subject to the views of the European Securities and Markets Authority (ESMA), the pan-EEA passport may be extended in 2015 to non-EEA AIFMs and non-EEA AIFs. In the meantime, non-EEA AIFMs may, subject to meeting certain conditions and at Member States’ discretion, continue to market AIFs in the European Economic Area by virtue of national private placement regimes (PPRs). If the passporting regime is extended in 2015, the European Commission may extinguish the PPR EEA-wide in 2018, although Member States are free to discontinue the PPR at an earlier date. As a result, non-EEA AIFMs would only be able to market AIFs to EEA investors if they were authorised under the AIFMD.

Despite the recent publication of more detailed measures in the form of the AIFMD Regulation³ (see analysis by the author at WSLR, January 2013, page 35), confusion continues to surround the new regime, leaving many market participants unsure as to how the new rules are likely to affect them. This is especially the case for those based outside the European Economic Area wishing to market AIFs within the European Economic Area. It is important to stress that the AIFMD will not apply to non-EEA AIFMs managing non-EEA AIFs unless they wish to market those AIFs to investors within the European Economic Area.

The AIFMD must be transposed into the national law of every EEA Member State before July 22, 2013, although existing AIFMs will have a transitional period of 12 months (i.e., until July 22, 2014) to comply and apply for authorisation. This deadline is fast approaching, and much work still needs to be done by the Commission, ESMA, and all 30 EEA Member States to ensure clear and timely implementation.

The new rules will be implemented in the United Kingdom through a combination of secondary legislation drafted by HM Treasury and amendments to what was known, until April 1, 2013, as the Financial Services Authority (FSA) Handbook. The FSA has been superseded by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), and, as a result of this change, the FSA Handbook has been divided into two handbooks — one for the FCA, which will incorporate the relevant AIFMD marketing rules, and one for the PRA.

To ease confusion, and to help both EEA and non-EEA AIFMs prepare for implementation in a timely and coordinated fashion, HM Treasury and the FSA (together, the UK Authorities) have engaged in lengthy consultation with the industry since proposals to regulate the alternative investment sector were first published some four years ago. Most recently, in March 2013, the UK Authorities consulted, separately, on further policy decisions and draft regulation/Handbook text.⁴ These consultations shed further light on some of the ambiguities surrounding the AIFMD marketing provisions. Further consultations are expected imminently.

Reverse Solicitation

Marketing, under the AIFMD, is defined as a “direct or indirect offering or placement at the initiative of the AIF, 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 Union.”⁵

Reverse solicitation (i.e., where the investor approaches the AIFM on its own initiative), therefore, falls outside the scope of this definition, and, as such, non-EEA AIFMs marketing AIFs in the European Economic Area on a passive basis need not apply for AIFMD authorisation, and EEA-based investors remain free to approach non-EEA AIFMs about investing in their AIFs. However, the concept of investing on one’s own initiative is likely to be interpreted narrowly.

If a non-EEA AIFM fails to meet the criteria to use either the PPR or the passporting system (see below), reverse solicitation may be the only way in which it can access investors in the European Economic Area without resorting to restructuring. In these circumstances, it would be prudent to put in place robust policies and procedures to demonstrate that any investment derived from the European Economic Area arose out of a reverse solicitation. Such AIFMs must also ensure that all follow-up communications with EEA investors do not constitute active marketing. It is anticipated that ESMA will publish guidance on this point in the near future.

AIFMD Marketing Rules

EEA AIFMs Marketing EEA AIFs

From July 22, 2013, EEA AIFMs may market EEA AIFs to professional investors in other EEA Member States via the passporting regime, subject to authorisation and notification.⁶

EEA AIFMs Marketing Non-EEA AIFs

Authorised EEA AIFMs may market non-EEA AIFs to professional investors in another Member State under the PPR,⁷ probably until 2018. To be eligible, the AIFM must ensure that:

• appropriate cooperation arrangements for the purpose of systemic risk oversight are in place between the competent authorities of the AIFM’s home Member State and the supervisory authorities of the country where the non-EEA AIF is established (otherwise known as the “third country”); and

• the third country is not listed as a non-cooperative jurisdiction by the Financial Action Task Force⁸ (FATF).

Alternatively, from July 22, 2015, authorised EEA AIFMs may be able to market non-EEA AIFs to professional investors across the European Economic Area using the AIFMD passport.⁹ This is dependent on whether, during its review of the EEA-centric passport regime available from 2013, ESMA considers it appropriate to extend the regime to non-EEA AIFs/AIFMs. To be able to use the passport regime, AIFMs would need to ensure that:

• appropriate agreements are in place between the competent authorities of the AIFM’s home Member State and the supervisory authorities of the third country where the non-EEA AIF is established;

• the FATF has not listed the third country as non-cooperative;¹⁰ and

• the third country has signed an agreement with the home Member State of the authorised AIFM, and with each other Member State in which the non-EEA AIF is to be marketed, which complies with Article 26 of the Organization for Economic Cooperation and Development’s Model Tax Convention on Income and on Capital¹¹ (“Model Tax Convention”).

Non-EEA AIFMs Marketing EEA AIFs

Non-EEA AIFMs may market EEA AIFs to professional investors in any Member State under the PPR.¹² To be eligible, the non-EEA AIFM must:

• comply with the transparency requirements of the AIFMD;¹³

• if it manages an AIF that acquires control of a non-listed company, comply with AIFMD provisions relating to major holdings;¹⁴

• ensure that appropriate cooperation arrangements for the purpose of systemic risk oversight are in place between the competent authorities of the Member States where the AIFs are marketed, the competent authorities of the EEA AIFs in question, and the supervisory authorities of the third country where the AIFM is established; and

• make sure that the FATF has not listed the third country where the non-EEA AIFM is established as non-cooperative.¹⁵

If the Commission extends the passport regime in 2015, the PPR may be withdrawn in 2018. As a result, non-EEA AIFMs would only be able to market AIFs to EEA investors using the passport system, for which authorisation would be mandatory.

To avail of the passport, non-EEA AIFMs would need to:¹⁶

• secure authorisation from the competent authority of the Member State where the non-EEA AIFM intends to develop effective marketing for most of its AIFMs (the “Member State of Reference”);

• ensure ongoing compliance with all AIFMD provisions;

• have a legal representative established in the Member State of Reference to be the official point of contact;

• make sure that 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 the EEA AIFs concerned, and the supervisory authorities of the third country where the non-EEA AIFM is established;

• ensure that the third country where the non-EEA AIFM is established has signed an agreement with the Member State of Reference which complies with Article 26 of the Model Tax Convention;¹⁷ and

• make sure that the third country where the AIFM is established is not listed as non-cooperative by the FATF.¹⁸

Non-EEA AIFMs are not required to apply for authorisation if they would rather use the PPR until its demise. If a non-EEA AIFM considers that authorisation would be disproportionately costly or burdensome, it may continue to market AIFs to professional investors in the European Economic Area via the PPR for as long as possible.

Non-EEA AIFMs Marketing Non-EEA AIFs

Non-EEA AIFMs may continue to market non-EEA AIFs to professional investors across the European Economic Area under the PPR regime,¹⁹ in all likelihood until 2018. To use the PPR, the non-EEA AIFM must:

• comply with the transparency requirements of the AIFMD;²⁰

• if it manages an AIF that acquires control of a non-listed company, comply with the provisions of the AIFMD relating to major holdings;²¹

• ensure that appropriate cooperation arrangements for the purpose of systemic risk oversight are in place between the competent authorities of the Member States where the AIFs are marketed, the competent authorities of the EEA AIFs in question, and the supervisory authorities of the third country where the AIFM is established; and

• make sure that the third country where the AIFM is established and the third country where the AIF is established are not listed as non-cooperative by the FATF.²²

If the Commission extends the AIFMD passport to non-EEA AIFMs in 2015, third country fund managers may still market non-EEA AIFs to professional investors within the European Economic Area via the PPR until its demise. Alternatively, they may apply for authorisation to market these funds under the passport regime.²³ To use the passport, they must:

• secure authorisation from the competent authority of the Member State of Reference;

• ensure ongoing compliance with all AIFMD provisions;

• make sure that appropriate cooperation arrangements are in place between the competent authority of the Member State of Reference and the supervisory authorities of the third country where the non-EEA AIFM is established;

• ensure that appropriate cooperation arrangements are in place between the competent authority of the Member State of Reference and the supervisory authorities of the third country where the non-EEA AIF is established; and

• make sure that the third country where the AIFM is established and the third country where the AIF is established are not listed as non-cooperative by the FATF.²⁴

Implementing the AIFMD in the United Kingdom

Transitional Period

Firms already managing AIFs before July 22, 2013, will have a transitional period of 12 months (i.e., until July 22, 2014) to apply for AIFMD authorisation. UK AIFMs that manage or market AIFs in the United Kingdom, irrespective of whether the AIFs in question are EEA or non-EEA AIFs, may rely on their pre-existing FSA authorisation to continue to market AIFs within the United Kingdom. However, it is not yet clear if all Member States will adopt the same approach, and whether other EEA jurisdictions will allow EEA AIFMs to market AIFs in their territory without the AIFMD passport, and access to their national PPRs, prior to authorisation during the transitional period. Germany, for example, has proposed withdrawing its PPR later this year. The FCA is aware of this disharmony, and is currently liaising with its EU counterparts in a bid to resolve the issue before July 2013.

Small Non-EEA AIFMs

The UK Authorities have proposed that a lighter regime should apply to small non-EEA AIFMs that market AIFs in the United Kingdom under the PPR. This exception would apply to firms that fall under the AIFMD AuM thresholds.²⁵ These AIFMs would be required to be registered in the United Kingdom and provide certain details to the FCA regarding the AIFs they manage. The other provisions of the AIFMD relevant to non-EEA AIFMs would not apply.

Continuation of the PPR

Member States are free to choose whether to continue with their PPR after July 22, 2013, and/or amend the regime to take into account the AIFMD provisions.

HM Treasury has confirmed that the PPR will be maintained in the United Kingdom for the time being. However, there is one significant change. To facilitate regulatory reporting and, as a result, enhanced transparency, the FCA will be required to maintain a register of funds that are being marketed in the United Kingdom under the regime. The FSA has proposed maintaining, and making public, three separate PPR registers:

• an Article 36 Register, for UK or EEA AIFMs managing non-EEA AIFs;

• an Article 42 Register, for non-EEA AIFMs (that are not considered to be small) managing AIFs; and

• a Small Third Country AIFM Register, for non-EEA small AIFMs managing AIFs.

Both EEA and non-EEA AIFMs marketing AIFs in the European Economic Area would, therefore, need to apply to the FCA for approval to be placed on a register, and details of this process are outlined in the proposed new FUND sourcebook, at FUND 10.²⁶ The FCA will provide further detail before July 22, 2013.

PPR Cooperation Agreements

Non-EEA AIFMs may only market to EEA professional investors using the PPR if appropriate cooperation arrangements to facilitate systemic risk oversight are in place between each EEA Member State where the AIFs are to be marketed and the supervisory authorities of the third country where the non-EEA AIFM is established. ESMA is currently in the process of negotiating these arrangements on behalf of all EEA Member States, with a view to reaching agreement before July 2013.

Non-EEA AIFMs from a country whose securities regulator does not have such a cooperation agreement in place before July 22, 2013, will not be allowed to market AIFs in the European Economic Area after this time. While ESMA recently approved cooperation arrangements with the Swiss Financial Market Supervisory Authority and the Brazilian Comissão de Valores Mobiliários, the extent to which other regulators, such as the U.S. Securities and Exchange Commission and the Monetary Authority of Singapore, will agree remains unclear at present. However, it is anticipated that most, if not all, of the major offshore fund centres will partake. At present, the Cayman Islands Monetary Authority and the Bermuda Monetary Authority are in negotiations with ESMA on this very subject.

In the absence of a relevant cooperation agreement by the due date, non-EEA AIFMs may need to consider some form of group restructuring (e.g., redomiciling the managing entity into another non-EEA country or the European Economic Area) if they wish to secure continued access to professional investors within the European Economic Area.

Countdown

Much criticism was levelled at the FSA for proposing that applications for authorisation would only be accepted from July 22, 2013, meaning that UK-based firms would, in all likelihood, need to wait until at least October 2013 to use the AIFMD passport.

In an effort to ensure that UK AIFMs are able to continue doing business with minimal disruption, the FSA recently published an online survey,²⁷ which all firms whose business may be disrupted as a result of not being authorised by July 22, 2013, must complete. The survey seeks to clarify the likely timings of application submission, and to identify all firms that may require early authorisation in order to continue their operations in other EEA jurisdictions immediately after this date.

It seems that the FCA may, after all, accept applications for authorisation before July 22, 2013.

The FCA plans to consult further in April 2013 on consequential changes to the FCA Handbook. It will publish a full policy statement in June 2013, although it intends to confirm several final policy provisions before then in order to give affected firms as much time as possible to continue their preparations for AIFMD Day in a methodical and targeted manner.

With less than four months to go until the AIFMD takes effect, concern has arisen that the FSA published too little, too late. In view of the volume of new rules due to come into force, many argue that there is a distinct lack of official guidance available for affected firms.

It is hoped that the FCA, with its new powers, will embrace the challenge ahead and act without further delay to protect the UK alternative investment sector from losing its competitive edge on the global stage.

Sarah Jane Mahmud, a Solicitor, is a Legal Analyst with Bloomberg Law, London.