Brussels, the ‘capital of Europe’, had seven city gates in the thirteenth century (of which the Halle Gate, a modern day museum and erstwhile prison, is the only one extant today). Those seeking to market funds in 21st century Europe should only have to navigate one set of rules, according to the principles of the Capital Market Union; but in practice they may have to grapple with as many as 28 gatekeepers – in the form of national regulators.
The European Commission has just released a consultation document entitled “Cross-Border Distribution of Funds”. The consultation includes all funds that can obtain EU Passports: UCITS and AIFs (as well as ELTIFs, EUVECAs, and EUSEFs). Herein may lie the first limitations: UCITS cannot accommodate all hedge fund strategies; it is not yet clear which domiciles ESMA will recommend extending third country AIFMD passports to, and anyway AIFMD may be too onerous for some managers to contemplate.
Nonetheless, the consultation includes some relevant concerns. It covers distribution costs and regulatory fees, where AIMA points out that the latter can add up to hundreds of thousands of euros for some managers or funds, depending on which entity bears the costs. It identifies administrative arrangements designed to facilitate easier dealing that can in practice impose barriers. Distribution requirements, notification processes and taxation are other areas discussed.
A crucial apparent omission is reverse solicitation regimes. These are thought to be a major European fundraising avenue for US managers. The disparate and complicated nature of local regimes, combined with the risk of sanctions (though we do not know of anyone in prison for breaching reverse solicitation rules) acts as a clear deterrent to marketing in Europe.
AIMA, whose Deputy CEO, Jiri Krol, has worked at the European Commission in Brussels, welcomes the consultation and Jack Inglis, CEO of AIMA, “asks the Commission to consider removing or minimising other administrative and regulatory restrictions on marketing, especially in the case of funds that are marketed solely to professional investors”.
AIMA is an industry association, but professional educational organisation, the CFA Institute, has expressed some similar concerns about “uneven application of UCITS and AIFMD rules” in a ‘Market Integrity Insights’ blog posting by Maiju Hamunen, who is a Capital Markets Policy Analyst for CFA Institute, based in Brussels. She cites “duplicative and additional rules, for example, on the requirement to appoint a local depository, and on authorisation of ancillary services between home and host supervisors when pass-porting services to another EU Member State”; “the requirement for UCITS to appoint a paying agent in each jurisdiction where a fund is marketed” and “administrative fees, such as registration costs, levied by some host authorities for cross-border fund notifications”.
Responses to the consultation can be posted online until October 2. The default option is for responses to be public, though confidential submissions can also be made.
Editor’s Letter – Issue 114
Originally published in the June 2016 issue