European Complexity Comes to America

Date: December 12, 2014

The first question that comes to mind when a new regulation comes out is what is It, quickly followed by what do I need to do about It. In the U.S., there are usually some reasonably clear answers to these questions – at least relatively speaking. Relative when comparing to Europe, that is, where things can be a whole lot murkier, as a look at AIFMD for non-EU advisers will show.

Prior to the AIFMD, there were a number of National Private Placement Regimes (NPPRs) in place, which meant a different set of rules in each country. One of the goals of AIFMD was to standardize the rules covering private funds and to replace all of the various NPPRs with a passport that could be used across Europe, which sort of happened in July of this year when the AIFMD transition period ended.

I say sort of happened for two reasons. First, the standardized rules and the passport are only available to EU asset managers. Secondly, “standards” in Europe typically still allow for differences between countries. For example, the schema and method for communicating Annex IV Transparency reports (the AIFMD version of Form PF), including the filing process and validation checks, are different in every country. I don’t want to be overly critical here so while not standardized down to every last detail, the AIFMD is a whole lot more standardized than the old NPPRs and is a huge improvement in that regard – at least for EU asset managers.

For non-EU AIFMs who want to actively market a private placement in Europe, things post transition are actually further away from standardization and more complicated than they were before the AIFMD.

For them, there won’t be registration or a passport until October 2015 at the earliest, and that is only if the EU so decides, which it might not. In the meantime, non-EU AIFMs not only have to follow the old country specific NPPRs, but must now also follow a sub-set of AIFMDs rules, called the Private Placement Overlay (PPO). Exactly which of the AIFMD rules that must be followed varies by country, so rather than standardizing the rules, in the near term the Directive has just added another layer of potential variability from one country to the next.

For example, the AIFMD has depositary rules. The PPO does not, unless the local country decides that it should, in which case a non-EU AIFM marketing funds in that country will need to follow some of the AIFMD depositary rules, but marketing funds in another country might necessitate following a different set of depositary rules, and still yet, another country might not require a non-EU AIFM to follow any new depositary rules.

And the variability can be even more fundamental, impacting the rules that determine whether or not you need to register as an AIFM. AIFMD has a de minimus AUM criteria, but for non-EU managers, those standards are set by each NPPR. As well, the definition of reverse solicitation can be, and often is, different country by country.

Once the non-EU AIFM registration and passport issue is decided in late 2015, these issues will likely go away, and in the long term, the AIFMD will make it easier for all asset managers to access European capital. In the near term, however, for U.S. asset managers, AIFMD will have the opposite effect.