The EU Alternative Investment Fund Managers Directive (AIFMD) comes in to force on 22 July 2013. It will have a direct impact on all EU alternative investment fund managers (AIFMs) and non-EU AIFMs who manage EU alternative investment funds (AIFs) or who market non-EU AIFs into the EU.
This article looks at the way in which marketing AIFs will change once the Directive is in force and considers the ongoing availability of the Private Placement Rules (PPRs).
What is ‘marketing’ under the Directive?
“Marketing” under the Directive means “direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with [professional] investors domiciled in the EU.”
‘Professional investors’ is defined as any investor that is considered as, or may be treated as, a professional client under the EU Markets in Financial Instruments Directive (MiFID). “Passive” marketing or “reverse solicitation” would generally not be caught by the Directive (see below) although neither term is defined in the Directive. It should be noted that only marketing at the initiative of the AIFM or on behalf of the AIFM is caught. Independent marketing by third-party intermediaries, by the AIF itself (unless it is the AIFM) or at the initiative of the AIF is not caught. However, such marketing is subject to the PPRs which are likely to result in a more restricted ability to market.
What happens between now and 22 July 2013?
Marketing will continue to be undertaken in accordance with national PPRs until the Directive comes into force.
The EU AIFM Position
EU AIFM marketing an EU AIF: July 2013 onwards
Authorised EU AIFMs may, from 22 July 2013, take advantage of an ‘EU Passport’ to market EU AIFs, subject to certain notification requirements. Such EU AIFMs must comply with the Directive in full. Member states’ private placement regimes will no longer be available in this scenario. (UK AIFMs will have to go through the registration process with the new Financial Conduct Authority (FCA) which came into being on 1 April 2013).
EU AIFM marketing a non-EU AIF: July 2013 to 2015
Authorised EU AIFMs cannot use the EU passport in this scenario. They will be able to market non-EU AIFs to investors under member states’ private placement regimes as long as they comply with all of the provisions of the Directive save for the full depositary requirements (Article 21). That being noted, the EU AIFM will be responsible for ensuring that an entity is in place to perform the duties of a depositary as set out in the Directive. In addition to the foregoing:
Note that EU member states may impose stricter conditions on the EU AIFM if they deem fit. (Article 36(2)). Note also that member states are not obliged to have PPRs that permit private placement of non-EU AIFs even by an EU AIFM. The Directive merely acknowledges the existence of such PPRs and does not ban them before 2018. In practice several large and important member states currently effectively ban the private placement of non-EU AIFs (France, Spain and Italy for example) and other EU states have already indicated they are likely to further restrict their PPRs as compared to their current rules – e.g., Germany.
The non-EU AIFM position
Non-EU AIFM marketing an EU AIF or a non-EU AIF to EU investors: July 2013 to 2015
Non-EU AIFMs (which cannot be authorized and cannot use the EU passport) will be able to continue to market EU AIFs and non-EU AIFs (including new AIFs) in accordance with member states’ PPRs (that is, in accordance with local marketing rules – if any – in each EU member state) as long as:
Note that EU member states may impose stricter conditions on the EU AIFM if they deem fit. (Article 42(2)).
Non-EU AIFM managing a non-EU AIF not marketed to EU investors
In this case, the Directive does not apply.
What provisions of the Directive apply to non-EU AIFMs?
If an EU member state allows a non-EU AIFM to market either an EU AIF or a non-EU AIF under a PPR, then the following transparency provisions of the Directive will apply and the non-EU AIFM will be required to ensure it complies with them:
Potential extension of the EU passport in 2015 by ESMA
From July 2015, non-EU AIFMs and EU AIFMs managing non-EU AIFs may be able to market to EU professional investors via the EU passport. This is dependent on ESMA deciding to extend the EU passport after a review of the system which is to take place during 2014/15. In this scenario, the non- EU AIFM will have to comply with all the provisions of the Directive and in addition:
Consent of the non-EU AIFM’s reference country regulator will also be required. (Article 40(3) and (5)). Note that non-EU AIFMs and EU AIFMs managing non-EU AIFs can, in the alternative, continue to market under the PPRs set out above if they so wish until 2018.
What happens in 2018?
In 2018 ESMA will issue an opinion on the functioning of the EU passport and on the functioning of the PPRs and on the possible ending of the latter. If ESMA so advises, the Commission may adopt a delegated act specifying when the PPRs must be terminated and extending the EU passport regime to include non-EU AIFMs. Therefore the only way to market to professional investors from 2018 would be under the EU passport.
Reverse solicitation and passive marketing
Reverse solicitation and passive marketing in respect of an AIF continue to be permitted under the Directive – i.e., such activities are not considered ‘marketing’ under the Directive. For example, if an EU investor approaches a non-EU AIFM about investing in an AIF without prior solicitation, then neither the AIF nor the AIFM will be subject to the Directive’s marketing rules by virtue of this approach. Thus an AIFM/AIF can accept investors who on their own initiative contact the AIFM or the AIF or its administrator etc. So, a well known/high-profile non-EU AIFM with an established reputation or EU investor base may find that it can bypass the Directive by taking advantage of this exclusion.
Had the Directive removed or restricted unsolicited approaches, this would have substantially removed professional investors’ ability to choose the best or most suitable AIF for their investment needs. Note, however, that the Commission has retained the ability to review existing legislation and assess whether to impose tighter due diligence requirements on EU investors who invest in this manner. Where an AIFM seeks to rely on reverse solicitation, it will need to have policies and procedures in place to clearly demonstrate that a particular EU investor invested in its AIF on the basis of a reverse solicitation.
The words ‘…or on behalf of…’ in the definition of ‘marketing’, mean that if an AIFM utilises distribution or placement agents to market its AIFs, that AIFM would still be regarded as carrying on the “marketing” and thus be subject to the marketing provisions of the Directive to the extent applicable in any case. Such AIFMs are effectively held responsible for compliance with the Directive by such distribution and placement agents.
All EU AIFMs wishing to market funds in the EU after 22 July 2013 will need to comply with the Directive, meaning they will have to become authorised as an AIFM in their home member state even if marketing under the PPRs and not under the EU passport.
Existing EU AIFMs who do not intend to undertake active marketing during the period 22 July 2013 – 21 July 2014 can take advantage of a transitional period of one year which means that they will not need to comply with the Directive or become authorised as an AIFM until 22 July 2014, although it should be noted that different EU member states seem to be interpreting the meaning of this transitional period in different ways and ESMA has stated such AIFMs should use reasonable efforts to comply with the Directive even though not authorised as an AIFM. It is not clear what ESMA means by this or how different EU member states will interpret this guidance. The current UK position is set out below (although this is not yet final).
Certain closed-ended funds and their managers are exempt from the Directive:
As the Directive does not generally apply to non-EU AIFMs at the outset there are no transitional provisions which apply immediately to them. However, should ESMA, having concluded its review in 2015, extend the EU passport to include them, full compliance with the Directive may be needed at that time in order to take advantage of the same.
The current position in the UK on marketing
Whilst not yet settled the FCA’s approach is outlined in Consultation Paper CP13/09 which closed on 10 May 2013 and we thus await the result. The below should be read with this in mind.
AIFM marketing passport
Article 32 of the Directive governs the notification of cross-border marketing of EU AIFs managed by full-scope AIFMs. Section 10.3 of the draft Investment Funds sourcebook of the FSA Handbook (FUND) provides guidance on the AIFM marketing passport. The FCA has drafted the notification forms which provide the required details. They incorporate the information requirements needed to notify the relevant competent authority where the AIFM intends to use the cross-border marketing passport.
With respect to the cross-border marketing form, the Treasury’s draft Alternative Investment Fund Managers Regulations 2013 take the view that marketing is a ‘service’ and include it in Schedule 3 of FSMA and in the passporting regulations. So the relevant guidance will sit in SUP 13 and the form, SUP 13 Annex 8BR, will be included as an annex to SUP alongside other passporting forms.
UK private placement registers
The Directive permits EU member states to retain or put in place national marketing regimes for offerings to professional investors, subject to certain conditions. The Treasury has affirmed that these PPRs will be maintained in the UK, provided that the Directive requirements, for example on transparency, are complied with. One of the significant changes to the existing regime will be a notification to the FCA. The FCA has added FUND 10.5, which describes such notifications and other conditions of the UK’s private placement regime under the Directive. The FCA will maintain and make public the following three private placement registers:
General approach to transitional provisions
In line with the Treasury’s position on the interpretation of the Directive’s transitional provisions in article 61(1), the FCA confirms the statement it made in Consultation Paper 1 that it proposes to permit UK AIFMs currently managing and/or marketing AIFs in the UK to make full use of the 12-month transitional period to 21 July 2014. All firms within the scope of the Directive must comply fully with its requirements by that date, whether or not their application to the FCA for the relevant Part IV permission has been determined by then. The FCA proposes to include transitional provisions in all relevant sourcebooks of the FCA Handbook to allow for these arrangements.
Therefore, UK AIFMs should be permitted to make full use of the 12-month transitional period which will enable them to continue to manage both existing and new funds and market them in the UK and non-EU countries during the period 22 July 2013 to 21 July 2014, subject to compliance with local PPRs. However, as stated on page one above, UK AIFMs which need to actively market their funds in the EU under the EU passport will need to be authorised under the Directive in order to do so.
Under regulation 73 of the AIFM Regulations, if a non-EU AIFM markets an AIF in an EU State immediately before 22 July 2013, it will not need to comply with any implementing provisions other than those imposed by the AIFM Regulations until the 22 July 2014 (or before this date if the AIFM notifies theFCA).
Consequently, non-EU AIFMs will not need to comply with the reporting, disclosure and transparency requirements or the need for an MoU to be in place between the domicile of the AIFM or its AIFs and the UK to market to UK investors until 22 July 2014. They will only need to comply with the UK PPRs to market AIFs until July 2014. (N.B., this follows the UK’s interpretation and implementation of the Directive transitional provisions. If other EU jurisdictions do not follow the same interpretation and or implementation route, non-EU AIFMs will need to comply with the Directive’s minimal requirements in relation to marketing to other EU jurisdictions from 22 July 2013 and their PPRs as set out above. Some countries have PPRs which currently preclude ‘marketing’ and others are amending their current PPRs to take account of the Directive/local policy decisions).
The Consultation Paper includes draft guidance concerning ‘marketing’ under the Directive (by adding a new section to Chapter 8 of the Perimeter Guidance Manual (PERG)). The definition of ‘marketing’ under the Directive is as mentioned above: “direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with [professional] investors domiciled in the EU.”
The FCA interprets the meaning of ‘offering’ and ‘placement’ in the AIFMD as where a person ‘offers or places … a unit or share of an AIF …for purchase by a potential investor’ (PERG 8.37G (1)) and states that while an offering includes situations where units or shares are made available to the general public, a placement includes situations where units or shares are only made available to certain investors.
The FCA considers that communications in relation to early drafts of documentation are not within the meaning of an offer or placement and, as there is no unit in an AIF made available for purchase, the AIFM cannot apply for (and does not need) permission to market the AIF at that stage (PERG 8.37.5.G.(1)).
The meaning of an indirect offering or placement should, per the FCA, be interpreted broadly to include distribution of units or shares through a chain of intermediaries (the example the FCA gives is the purchase of shares or units by an underwriter or placement agent). In relation to private placement, a new section in FUND (10.5) describes relevant notifications and other applicable conditions under the Directive.
“Passive Marketing” is construed tightly by the FCA – it is proposed that only communications which are solicited by the investor should be considered to have occurred at the initiative of the investor. Documentation available on a website is not considered to be sent at the initiative of the investors, but communications in response to an approach from a potential investor with prior knowledge of the AIF and with no previous involvement with the AIFM could be at the initiative of the investor. For example, a non-EU AIFM relying on passive marketing as a way to raise capital from EU investors should strongly consider password-protecting its website/that of its funds as the FCA has stated that documentation which is available on a publically accessible website should not be considered to be sent at the initiative of the investor. Open websites with free access to application forms and offering documents (of which there are currently many examples) may therefore prejudice reliance on the passive/reverse marketing exemption.
Action points for fund managers
EU managers commencing business after 22 July 2013 who fall within the definition of an AIFM and which either manage AIFs (whether EU or non-EU AIFs) or market EU or non-EU AIFs in theEU will need to become authorised in their home member state prior to commencement of business and comply in full with the Directive from the commencement of business.Existing UK-authorised managers who do not intend to actively market AIFs in the EU between 22 July 2013 and 21 July 2014 will have a transitional 12-month period within which to apply for authorisation in order to comply with the Directive, but must be so authorised by 22 July 2014. In practice they must therefore apply no later than April 2014. The position of other EU managers will depend on local interpretation and implementation rules.
Existing UK and other EU-authorised fund managers wishing to market under the EU passport between 22 July 2013 and 22 July 2014 will need to comply in full with the terms of the Directive. The UK FCA has now stated, somewhat belatedly, that it will accept applications for AIFM status prior to 22 July 2013 but applicants need to approach FCA on a case-by-case basis. UK AIFMs currently managing and/or marketing AIFs in the UK should be permitted to make full use of a proposed 12-month transitional period which will enable them to continue to manage funds and market them in the UK and non-EU countries during the period 22 July 2013 to 21 July 2014 subject to compliance with local PPRs.
From 22 July 2013 non-EU fund managers must comply with local PPRs and so they should check to see whether relevant EU member states are amending their regimes and in particular making them stricter as a result of a review of the Directive; e.g., as Germany has done. They may also have to comply with the Directive’s transparency provisions from 22 July 2013 and take steps to ensure that systems and controls are in place to enable this. But note the UK’s current position is that the transparency rules will not apply until 22 July 2014 and readers should check the position in other EU member states as appropriate.
Both EU managers and non-EU managers – co-operation agreements
Non-EU managers and EU managers wishing to market a non-EU AIF will need to check and ensure that co-operation agreements are in place between the authorities of each member state where they intend to market their AIFs and the regulator of the non-EU AIF and the regulator of any non-EU AIFM from 22 July 2013 (but note the UK’s current different position here on non-EU managers). As of 30 May 2013, ESMA has approved MoUs between securities regulators from the 27 EU member states, Croatia and the European Economic Area (Iceland, Liechtenstein and Norway) and the following third-country/non-EU regulators (selected notable hedge fund/alternatives jurisdictions highlighted):
Alberta Securities Commission (Canada)
Australian Securities and Investments Commission
Autorité des Marchés Financiers du Quebec (Canada)
Bermuda Monetary Authority
British Columbia Securities Commission (Canada)
British Virgin Islands Financial Services Commission
Capital Markets and Securities Authority of Tanzania
Capital Markets Authority of Kenya
Cayman Islands Monetary Authority
Comissão de Valores Mobiliários do Brasil
Conseil Déontologique des Valeurs Mobilières of Morocco
Dubai International Financial Centre Authority
Emirates Securities and Commodities Authority
Federal Reserve Board (US)
Financial Services Commission of Mauritius
Financial Supervision Commission of the Isle of Man
Financial Supervisory Authority of Albania
Guernsey Financial Services Commission
Hong Kong Monetary Authority
Hong Kong Securities and Futures Commission
Israel Securities Authority
Jersey Financial Services Commission
Labuan Financial Services Authority
Monetary Authority of Singapore
Office of the Comptroller of the Currency (US)
Office of the Superintendent of Financial Institutions (Canada)
Ontario Securities Commission (Canada)
Republic of Srpska Securities Commission
Securities and Exchange Board of India
Securities and Exchange Commission (US)
Securities and Exchange Commission of Montenegro
Securities and Exchange Commission of Pakistan
Securities and Exchange Commission Thailand
Swiss Financial Market Supervisory Authority (FINMA)
The MoUs between each member state and each non-EU jurisdiction must still be formally ratified by each member state. Also, this does not mean that non-EU AIFs/AIFMs will have “marketing passport” access to the EU. While ESMA has negotiated the MoUs centrally, they are bilateral agreements that must be signed between each EU securities regulator and the non-EU authorities. The actual supervision of AIFMs lies with the national securities regulators. Therefore each authority decides with which non-EU authorities it will sign an MoU. ESMA continues to negotiate MoUs with further non-EU countries in order to meet the 22 July deadline. In addition to the above, both sets of managers should check and confirm that the domicile of the non-EU AIF to be marketed is not on FATF’s non-co-operative list. Without these items in place, it will not be possible to market any non-EU AIF in the EU under relevant PPRs. They should also check and monitor whether the Directive is to be implemented in any target EU member state in such a way that goes beyond the minimum requirements of the same such as by restricting the existing PPRs (Germany for example).
For the purposes of the potential EU passport extension in 2015, both non-EU managers and EU managers marketing non-EU AIFs will also need to check and confirm that relevant tax information exchange agreements (TIEAs) are in place.
Finally, for all managers, marketing and constitutional documents for their relevant AIF will need to contain a number of additional Directive-driven disclosures so this re-papering exercise should be taken in hand as soon as possible. THFJ
For more information, please see FSA Consulation Paper 13/9. The paper can be found at www.fsa.gov.uk/static/pubs/cp/cp13-09.pdf.