AIFMD New Regulation New Game

8-30-12-AIFMD

For Alternate Investment Fund Managers (AIFMs) across Europe, this is a defining period. With Alternate Investment Fund Manager’s Directive (AIFMD) soon becoming a reality, European alternate investment fund (AIF) industry is entering a new phase. From marketing to management, governance and administration, the directive is changing every aspect of the AIF industry. While AIFMD is expected to open up new horizons to AIFMs, it will also widen the legal and regulatory requirements. But are the fund managers ready? How are the member states implementing the directive? How is the market responding to the regulated environment?

Any new change brings with it a period of confusion and dilemma. Similarly, in the case of AIFMD too, uncertainties and uneven progress mar the European alternate investment fund industry today. AIFMD is a complex piece of legislation. For European member states as well as for AIFMs, getting a grip of the regulation seems to be a tough task. Though almost all EU member states have transposed AIFMD into national law by 22 July 2013, only 12 member states have completed full legislation process. Member states have revised, improved or scrapped their existing law to accommodate the Europe wide directive, which aims to harmonise and regulate the industry.

For a EU AIFM, the directive will enable them to market their AIFs to EU professional investors in their home state and in other European member states, post authorisation.  However, for non-EU AIFMs who will have to opt for private placement regimes in order to market their funds in EU member states, the situation is a bit more complex. Some member states have imposed additional requirements above the rules laid by the directive. For example, in Germany, the fund management regulation was scrapped and Capital Investment Act was introduced with new rules unique to Germany apart from the AIFMD requirements. They have also introduced new tax provisions along with it. Private placement regime is abolished and AIFMs will need to take approval from the German regulator to market or distribute any kind of AIFs.

While Germany may seem to be very rigid, some countries like Malta offer flexibility and cost advantage. AIFMs who wish to establish their funds in Malta will have 2 fund structures to choose from – alternate investment funds and professional investment funds. They also claim to process the authorisation application faster compared to other countries. Other countries like UK, Ireland, Sweden and Luxembourg also offer comparatively lighter regimes and require AIFMs to comply only with minimum rules laid out by AIFMD.

Ambiguity also prevails in the case of depositary regime. Depositary requirements are driven by a combination of factors like domicile of the AIFM and AIFs and their marketing practices. AIFMD requires all authorized EU AIFMs to appoint an independent depositary for the AIFs it manages. However, for non-EU AIFMs though AIFMD does not mandate appointment of depositary, countries like Germany, France and Denmark are making depositary regime mandatory. There are also variations in rules over appointment of domestic or cross-border depositary.

With such disparities and variations in implementation prevailing, the aim of creating a single market for non-UCITS funds still look distant. The impact of such an environment has created conundrums for AIFMs who will now be burdened with AIFMD as well as regulations of multiple jurisdictions. In the case of non-EU AIFMs there are apprehensions prevailing the proposed abolition of private placements once the passport regime becomes a reality.

According to a recent study by BNY Mellon, only fewer than 20 percent of AIFMs have submitted an application for AIFMD authorisation to their local regulator. The surveys also brought to light the fact that many AIFMs are still unclear or are yet to finalise their plans towards compliance. This slow rate of progress also highlights both the uncertainties and practical challenges the industry is facing while trying to get grips with AIFMD.

After the economic crisis, fund managers are already seeing a huge dip in their revenue. Now with AIFMD becoming a reality, they will also have to bear the cost of compliance. New systems and processes will need to be introduced to comply with risk and compliance requirements. The BNY Mellon survey points that firms expect a cost of around £1,50,000 per institution as a one-off set up cost of compliance. The final cost of compliance may far exceed the number.  With such an impact on the cost structure, fund managers are in a dilemma whether to increase the cost of funds or to absorb the cost to gain market advantage.

The EU AIF market today is at a transitional stage in which confusion and dilemma prevails among AIFMs, regulators and to some extent among investors too. Both EU and non-EU AIFMs are closely monitoring the developments around AIFMD to take appropriate decisions. Market may bear brunt of this state of affairs now but once the directive becomes a reality and obtain more clarity, it will bounce back with vigour. The proposed passport regime, which is expected to become a reality in 2018, will also boost the market and bring back its lost glory.

Note about this guest post:

This is a complicated subject and this further information from Wikipedia explains why this legislation was passed in many countries in Europe

EU fund managers that manage alternative investment funds (essentially hedge funds and private equity funds) (“AIFs”) have not been subject to the same rules to protect the investing public as mutual (including UCITS) and pension funds and their managers. In general, the lack of financial regulation is seen by some to have contributed to the severity of the global financial crisis.

Mike

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