The AIFMD has introduced new rules for the authorization, operation and transparency of firms running alternative investment funds such as hedge funds and private equity. 

In some cases its detailed provisions will apply to managers based outside of the EU.

There are two basic scenarios where non-European Union fund managers will be affected, the first of which is where they are managing alternative investment funds (AIFs) in the EU. Where this is the case they will have to become authorized under the AIFMD and comply with all its various provisions in the same way that a manager based in the EU has to.

The second scenario is where they are marketing EU and non-EU AIFs to investors based in the European Union. For the time being these firms can continue to use the National Private Placement Regime (NPPR), although there have been some changes as a result of the AIFMD. Alternatively they may prefer to seek authorization under the Directive.

Non-EU fund managers that only run non-EU AIFs and that do not market them in the European Union will not be affected by the new legislation.

National Private Placement Regime

Non-EU fund managers that market AIFs in the EU can continue to seek authorization from the relevant member states via the NPPR. This will remain in operation at least until 2018.

The NPPR offers a lighter form of regulation, but unfortunately the rules differ from country to country and member states can impose additional requirements wherever necessary.

It is a far from satisfactory arrangement, which is why there is a plan is to introduce a pan-European passport system to run alongside or replace it. This is expected to come into force in 2015 and will allow non-EU firms to market their funds to investors throughout the European Union.

“Non-EU AIFMs seeking to market a non-EU AIF within Europe will need to rely on local private placement rules or the proposed EU passport once it is available to them in 2015,” confirms Ed Winters, Assistant General Counsel at Ruffer LLP.

The minimum requirements

Now that the AIFMD has been transposed into national law, a non-EU AIFM must comply with a minimum of 3 conditions to take advantage of the NPPR in a particular member state.

The first condition is that the manager has to meet certain disclosure requirements. These relate to: the content of the annual report, the nature of the information provided to people before they invest, and the detailed data that has to be sent to the regulators.

Secondly, there must be an information exchange agreement in place between: the regulator of the jurisdiction where the non-EU fund is domiciled, the regulator of the country where the non-EU manager is established, and the regulator in each EU state where the fund is to be marketed. This is to ensure that those responsible can carry out their supervisory duties as required by the AIFMD.

The third condition is that neither the non-EU fund nor the Non-EU manager should be authorized or registered in a country that is classed as a ‘non-cooperative country and territory’ by the Financial Actions Task Force.

The passporting regime

As things stand at the moment, the AIFMD passporting system only allows EU fund managers to market EU funds to professional investors across the European Union. If it is extended to non-EU managers and a firm decides to take advantage, it will have to obtain authorization under the Directive from its member state of reference.

This would entail full compliance with the detailed provisions of the AIFMD including: the limits on leverage, the minimum capital requirements, the remuneration policies, and the system requirements relating to the risk management.

Irrespective of this the manager would still need to comply with conditions two and three as described above.

There would also be an additional requirement that there is a tax information agreement in place between: the member state of reference for the manager, the non-EU country in which the fund is domiciled, and the non-EU country in which the manager is established.

Significant impact

Non-EU fund managers affected by the legislation will have to budget for the extra cost and plan ahead to deal with the significant impact on its operation, administration and governance.

Those opting to use the NPPR face the lighter burden, but have the added complexity of dealing with the different regulations in each of the jurisdictions in which they operate. There is also the risk that the regime could come to an end in 2018, at which point they would have to go for full compliance.

It might simply be easier for a firm to establish itself as an EU AIFM from the outset. Although this would require complete compliance with the Directive it would provide uniformity and certainty with regard to the legislation and could potentially open up additional markets for their products.

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