On 11 November 2010, after nearly two
years of lobbying and debate, the European Parliament adopted the final text of
the Alternative Investment Fund Managers Directive (AIFMD).
The AIFMD will regulate alternative
asset managers, regardless of where they are located, that seek to raise
capital from European investors (subject to certain de-minimis exemptions) or
which manage EU resident funds.
One of the most controversial aspects of
AIFMD during the drafting and lobbying process was whether or not EU resident
investors would be permitted to invest in non-EU domiciled funds. With the
Cayman Islands being home to approximately 70 per cent, or 10,000, of the
world’s offshore hedge funds, progress of the AIFMD through the European
political process has been keenly watched. Naturally, therefore, it was a
welcome outcome that the agreed text of the AIFMD was found to represent a
generally workable solution on this and other key issues.
That is not to say that the AIFMD will
not have any near-term impact. In addition, whilst agreement has been reached,
2011 sees the process of Level 2 implementing measures being developed, which
will flesh out much of the important detail that will be contained in the
AIFMD. This article seeks to summarise the
outcome as well as explore some of the main impacts and recommend some areas of
near-term focus, from the perspective of a Cayman-domiciled hedge fund.
Third country summary
The extent to which EU investors would
be able to access non-EU (eg Cayman-domiciled) funds became known as the “third
country issue”, and was the battle ground for some of the most significant
debate. In the final outcome, we now know that Cayman-domiciled funds will not
be prohibited from distribution to EU investors.
The AIFMD will become effective starting
in 2013, although from an offshore fund perspective many of the more material
impacts will not be until much later. The “Third Country Measures” can be
summarised as follows:
Until at least 2018, existing country by
country private placement rules governing distribution of non-EU funds
throughout the EU will remain in place (ie the status quo) subject to (from
with certain disclosure and reporting requirements pertaining to the activities
of the non-EU domiciled fund
managed by EU asset managers appointing a ‘depository’
being in place regulatory cooperation agreements between the non-EU domicile of
the fund (eg The Cayman Islands Monetary Authority or “CIMA”) and the EU
jurisdiction into which the fund is to be sold.
With regard to the point on appointment
of a depository, if a non-EU depository is to be appointed by an EU manager of,
for example, a Cayman fund, the depository will have to be subject to
prudential regulation substantially equivalent to the EU regulation of
depositories, tax information exchange agreements will need to be in place in
the EU member states where the fund is sold, and the depository must have
agreed to accept liability on the same terms as if it were in the EU.
From 2015, introduction of a parallel
passport regime, provided certain criteria are met, which will permit non-EU
funds to be distributed on a pan-EU basis.
In 2017, ESMA, the new European
Securities Markets Authority, will review the operation of the private
placement regime and recommend whether it be continued or terminated.
The criteria or conditions that third
country domiciles such as Cayman will be required to meet under a passport
regime will be established in the Level 2 implementing measures, and are
expected to broadly include:
- existence of appropriate regulator to
regulator cooperation agreements
- appropriate anti-money laundering and
anti-terrorist financing laws and regulations
- a network of OECD model tax information
exchange agreements (TIEAs) with EU member countries.
Main impacts and recommended actions
Given the relative state of relief
surrounding the AIFMD outcome, much of the public debate appears to have died
down. However, there are still important impacts that need to be understood and
evaluated. In addition, stakeholders (including regulators such as CIMA) will
need to continue to contribute to the development of the AIFMD, particularly as
the Level 2 implementing measures are fleshed out during 2011.
From a non-EU asset manager’s
perspective, it will be important to assess whether one falls within the scope
of the AIFMD, which applies only to asset managers that actively market their
non-EU funds within the EU. Provided therefore that there is no solicitation by
the fund manager, EU investors are still able to invest in non-EU funds at
their own initiative, outside the scope of the AIFMD.
Non-EU managers that are within scope
should assess the impact of the transparency and disclosure provisions that
will begin to apply from 2013. For EU managers there will be additional
impacts, including the need to structure custodial arrangements in accordance
with the AIFMD requirements.
From a jurisdictional perspective,
Cayman Islands fund structures will almost certainly satisfy the criteria
established under both the continuation of the private placement regimes (until
at least 2018) and looking further ahead under the passport criteria for non-EU
funds being proposed (in parallel from 2015).
As noted above, under both private
placement and passport regimes, an important feature of AIFMD is the regulator
to regulator cooperation agreements. The form of these agreements is an area
that will be determined in the Level 2 implementing measures developed through
2011. In this regard, the EU Committee of European Securities Regulators
(CESR), and its successor ESMA, issued a Call for Evidence in December 2010
seeking stakeholders input on the implementing measures.
In its response of January 2011, CIMA
submitted that the IOSCO multilateral memorandum of understanding should
constitute the cooperation arrangements referred to in the AIFMD. Contributing
to the process of determining the form of these cooperation agreements will
continue to be an important area of focus for CIMA through the course of 2011.
In addition, the CIMA response addressed the criteria for assessing equivalency
of the prudential regulation and supervision of a third country depository, and
submitted that, amongst other things, the Basel II international capital
adequacy standard should form part of such framework.
Looking ahead and conclusion
The AIFMD outcome has been generally
welcomed, and has removed a potential uncertainty for non-EU funds being
marketed to EU investors.
The retention of existing private
placement rules governing distribution of non-EU funds until at least 2018 (and
possibly thereafter), represents substantially a continuation of the status
quo, particularly for non-EU managers.
There are however operational impacts
for alternative asset managers that market their funds into the EU, which will
begin in 2013. Additional disclosure and reporting at the fund level are
examples of this, whilst custodial arrangements for EU domiciled managers may
need to be rearranged. From a jurisdictional perspective, the primary area of
focus for the next year at least is likely to be contributing to the debate
surrounding the form of cooperation agreements that CIMA will be required to
enter into, as well as continuing to expand the network of TIEA’s Cayman is a
party to, with a focus on EU member countries.
In addition, and importantly, towards
the end of 2011 the Level 2 implementing measures are expected to be developed.
When this happens, a more detailed impact analysis will need to be carried out
by alternative asset managers and other stakeholders. It is important that
asset managers, regulators and other stakeholders contribute to and seek to
influence the outcome of the Level 2 rule making process during the course of