Update on Non-EU Fund Managers' Access to the EU Market from July 2013
The Alternative Investment Fund Manager Directive (Directive 2011/61/EU) (the "Directive") is due to be transposed into the national laws of all Member States of the European Union ("EU") by 22 July 2013 (the "Transposition Date"). This means that the investment funds community has a scant 10 months to finalise its preparations for the changes required of fund managers under the Directive.
The Directive seeks to regulate the activities of alternative investment fund managers ("Managers") in relation to the alternative investment funds ("Funds") they manage or market to professional investors in the EU. The Directive recognises that many Funds marketed in the EU are managed by Managers ("non-EU Managers") established outside the EU (i.e. in a "Third Country") and many of the Funds that are marketed by Managers in the EU are established in a Third Country ("non-EU Funds").
Managers based in the EU ("EU AIFM") are likely to be familiar with the challenges and opportunities presented by the Directive, since the Directive has been one of the main talking points for the EU alternative funds industry since the proposals for the Directive were first mooted in 2009. These include preparing for the EU-wide marketing passport (the "Passport") for their Funds based in the EU ("EU AIF"). alongside compliance with the existing national private placement regimes (the "Private Placement Regime") in each Member State in which they market their non-EU Funds.
However, many non-EU Managers have yet to fully come to terms with the implications of the Directive and, in particular, how it may affect their ability to market their Funds in the EU once the Transposition Date passes.
Implications for non-EU Managers
Assuming the non-EU Manager is not providing portfolio, risk management or similar services in the EU, the Directive only applies to non-EU Managers where they are directly or indirectly offering or placing units or shares of Funds they manage to or with investors domiciled or having a registered office in the EU. As such, passive marketing does not bring a non-EU Manager within the scope of the Directive. In addition, the pre-amble to the Directive also explicitly clarifies that an EU investor can approach a Manager regarding investment in a Fund without causing the Manager to have to comply with the Directive.
Where a non-EU Manager is looking to actively market its Funds in the EU they will, for at least the first two years following the Transposition Date, only be able to market their Funds under the Private Placement Regimes of the EU Member States in which they market their Funds, provided they meet certain conditions. The conditions are imposed on both the non-EU Manager and the jurisdiction in which the non-EU Manager and their non-EU Funds are established. Non-EU Managers will not have an ability to opt in to the Passport until at least 2015.
Conditions imposed on the Manager
The non-EU Manager will be required to comply with the transparency provisions (Articles 22, 23 and 24) in the Directive. In summary, these relate to the Manager procuring that all Funds they market in the EU:
(a) circulate an annual report containing certain prescribed information to investors and make this report available to the regulators;
(b) have an offering document or other disclosure statement which contains the matters set out in the transparency provisions and makes disclosure to investors when certain material changes affect the Fund; and
(c) report to the regulator periodically regarding the principal markets and instruments traded by the Fund.
In addition, the non-EU Manager will be subject to the regulations relating to the takeover of large non-listed companies and anti-asset stripping provisions of articles 26-30 of the Directive.
Many non-EU Managers should not find the transparency conditions overly burdensome, since they either follow best practice or are similar to current or imminent reporting obligations in any event.
Conditions imposed on the Jurisdiction of the non-EU Manager and non-EU Fund
In addition to the obligations imposed on the non-EU Manager, the regulators and governments of each of the non-EU Manager and the non-EU Fund will be required to undertake certain steps, as follows:
1. The regulator of the non-EU Manager must have entered into a cooperation arrangement with the competent authorities in each EU Member State in which the non-EU Manager is marketing its Funds. In the case of a US Manager, this would require the SEC or other regulator of the US Manager to enter into cooperation arrangements with the competent authorities of each EU Member State in which the US Manager markets its Funds.
2. The regulator of a non-EU Fund that is being marketed in the EU must have entered into a cooperation arrangement with the competent authorities in each EU Member State in which the non-EU Fund is being marketed. In the case of a British Virgin Islands ("BVI") fund, the Financial Services Commission will need to enter into cooperation arrangements with the competent authorities of each EU Member State in which the BVI fund is marketed.
3. The jurisdictions in which each of the non-EU Manager and the non-EU Funds are established must not be on the list of non-cooperative countries and territories maintained by FATF.
Progress to date
Following the Directive coming into force on 21 July 2011, the European Securities and Markets Authority ("ESMA") consulted widely with the EU alternative funds industry and issued its technical advice on the detail for the implementing provisions of the Directive (the "Level 2 Advice") in November 2011.
The Level 2 Advice is expected to constitute much of the detail of the final form of the implementing provisions (the "Level 2 Regulations") that are due to be published by the EU Commission, although there were indications earlier in the year that the Level 2 Regulations may deviate from the Level 2 Advice in some key areas, including those relating to Third Country co-operation and reporting. At the time of writing, the Level 2 Regulations have yet to be published.
In addition, ESMA was tasked to come up with a form of cooperation arrangement for use between EU and Third Country regulators. At the time of writing, the form of this agreement was yet to be finalised.
The lack of clarity in relation to both these areas is leading to some difficulty in determining the extent to which amendments to existing regulatory powers are needed (if at all) in order to be able to sign and implement the cooperation arrangements. Even so, we understand that the Financial Services Commission of the BVI is committed to ensuring that they have arrangements in place to allow Funds and Managers that are established in the BVI to continue to have access to the EU market after the Transposition Date.