An American in AIFMD land
The Alternative Investment Fund Managers Directive (AIFMD), which collectively consists of a directive, a regulation and guidelines, took effect on 22 July 2013.
The AIFMD includes greater reporting and compliance burdens than Securities and Exchange Commission rules, thus requiring US investment managers operating in the EU to respond accordingly.
US investment managers can achieve AIFMD compliance in one of three ways:
- Establish an EU manager and EU fund for full AIFMD compliance
- Rely on national private placement regimes
- Implement reverse solicitation, and consequently abandon EU marketing efforts
Each choice has different implications for fund-raising, compliance, reporting, compensation and tax structures.
Full AIFMD compliance
Many US managers already have offices in the EU that are soliciting clients and managing money as a normal course of business. Their only realistic option is to comply fully with the AIFMD.
Compliance involves several key areas:
- Compensation policies, including lockup periods
- Enhanced risk and liquidity management policies
- Regulatory reporting similar to Form PF
- Enhanced investor disclosures
National private placement regimes (NPPRs)
NPPRs trade compliance burdens for reporting burdens. Non-AIFMD-compliant firms can continue to sell their funds in the EU, provided they report certain information to the national financial security regulator in each country in which the funds market. This can amount to as many as 27 different regulators.
Unfortunately, many countries with existing NPPRs may force full AIFMD compliance by making their NPPRs increasingly restrictive and burdensome. The map below illustrates the current status of NPPRs across the EU. Managers should consult local counsel before marketing in any given country.
Managers who choose reverse solicitation relieve themselves of AIFMD burdens in exchange for a cessation of marketing in the EU. Under this option, non-AIFMD-compliant firms can accept investors only if the initial inquiry comes from the investor and is not part of communications initiated by the manager.
Proving that reverse solicitation has occurred places a large burden on a fund's compliance procedures. Managers must document that investor inquiries arose without previous contacts. In the end, policing reverse solicitation imposes its own set of challenges.
How US investment managers can approach the AIFMD
Our suggested approach incorporates a five-step process:
Managers should identify the status of their current EU investor base as well as marketing plans. A firm with aggressive EU marketing plans will have different AIFMD requirements than a firm confining its activities to a select group of countries and funds.
Fund managers must vet each viable AIFMD solution in a consistent manner. They should consider conducting cost-benefit analyses to weigh the pros and cons of each alternative.
An orderly implementation road map is crucial. Any potential AIFMD solution, even a total EU abandonment, will require redeployment of resources. A gap analysis can identify the differences between current resources and future requirements.
It's time to put the four previous steps into action, monitoring progress and addressing unexpected consequences.