As it stands, the AIFMD is far from delivering a single, standard experience for managers marketing to EU investors. Melville Rodrigues explains
The European Commission promoted passporting rights as one of the key benefits for real estate managers and alternative investment fund managers authorised under the Alterative Investment Fund Managers Directive (AIFMD). Passporting rights Are intended to facilitate managers marketing their funds – with minimal or limited fees and other restrictions – to institutional investors within the European Economic Area (EEA), and aimed at achieving the EU single-market policy goals.
Prior to the implementation of the AIFMD in 2013, real estate managers, regardless of whether they operated within the EU, needed to comply with a patchwork of different domestic rules in order to market funds in each member state. These rules were primarily contained within private placement regimes.
By contrast, managers within the EEA that operate UCITS benefit from straightforward notification processes to their domestic regulator (home) and the regulator of the member state in which marketing was proposed (the host). Nil or minimal fees for using the UCITS passport.
Under AIFMD, managers face different rules depending on whether they are based within the EEA or outside of it (assuming they are marketing funds established in their domestic jurisdiction).
The patchwork, alas, continues for non-EEA managers – at least for another two years. Until their own regulators enter into co-operation agreements with all member states and adopt AIFMD-equivalent legislation, non-EEA managers have to comply with different national rules. These are rules that are being revised, and a minimum prerequisite is that co-operation agreements need to be formalised between the relevant regulators – the home regulator of the non-EEA manager and the host regulator.
In the case of certain EEA countries, the rules have been severely tightened.
In Germany, under the 2013 German Capital Investment Code, there are stringent hurdles for non-EU funds or funds managed by non-EU managers. These include Investment Code compliant management of the AIF, certain depositary tasks and the provision of information to the German regulator, BaFin, and investors. In the case of France, funds need to obtain specific authorisation from the French regulator AMF.
Less restrictive rules apply within the Netherlands and the UK. Non-EEA managers can use local private placement regimes if they satisfy certain requirements and marketing rules. The Dutch regulator, AFM, has given the US, Jersey and Guernsey permission to market funds in the Netherlands if they comply with certain requirements.
The experience for EEA managers already authorised under AIFMD has been more straightforward, albeit the passport can include a ‘baggage element’ in the form of a diverse range of fees and other administrative requirements. Managers need to weigh these fees and other requirements against the prospects of attracting investor commitments in particular jurisdictions. This may be a more challenging judgement call for jurisdictions with a paucity of investors – and/or higher fees.
For each member state there is an equivalent notification process as to that under UCITS, and on a state-by-state basis there may be additional fees and requirements.
It is worth comparing the passporting rules in France, Germany, the Netherlands and the UK.
The French regulator requires the AIFM to submit a programme of its services, an organisational structure of any French branch and a French address, and pay periodic fees based on assets under management. It is also focused on preventing distribution to retail investors. Similarly, in Germany, BaFin has an approval role and is focused on preventing distribution to retail investors. A one-off fee is payable, the amount depending on the statutory seat of the AIFM and AIF.
The Dutch AFM has adopted ‘top-up’ rules in order to market to non-professional investors. The AFM does not charge one-off or periodic fees for AIFMD passport notifications, although a Dutch branch is liable to standard supervisory fees. The UK’s Financial Conduct Authority (FCA) has a similar approach and, in the event of the manager operating a UK branch, any persons carrying on a ‘controlled function’ must be approved. There are no fees for notifications, and fees for a branch are based on income and funds under management.
The marketing rules for both EEA and non-EEA managers need to be assessed on a state-by-state basis, and the rules in certain European states continue to evolve. Fund managers often face the conundrum of bearing the risk of marketing costs unless a fund is successfully launched. In addition, wherever they are based, reverse solicitation exemptions may apply, if the investment was made at the request of the investor. Fund managers need to regularly monitor the evolving landscape and balance their opportunities against the associated risks and costs when looking to market funds on a cross-jurisdictional European basis.
Melville Rodrigues is a partner at CMS Cameron McKenna