One of the most popular myths now circulating about AIFMD is that it’s only a problem for EU managers. Those outside of the EU – or so the story goes – can always avail themselves of a number of ‘work-arounds’ that could essentially allow non-EU managers to continue marketing to EU-based investors without all of the hassle and bother of AIFMD compliance.
But nothing could be further from the truth. The reality is that AIFMD is a major issue for any alternative investment fund manager that either markets funds or markets to investors within the European Union. The EU is looking at protecting European investors and increasing transparency through regulation. Moreover, many of the proposed work-arounds may actually create more risk and complexity for non-EU fund managers than AIFMD itself.
For many non-EU-based fund managers, the biggest question today is whether or not they want to continue to operate within the EU. For some closed-ended funds or those with only a handful of individual investors, the answer may be simple (particularly where the cost of compliance clearly outweighs the value of investors within a certain market).
Those with significant European institutional investors, or for whom the EU represents an important market, will grapple with far more complex challenges and questions. Some will be looking to leverage the private placement regimes or reverse solicitation processes to circumvent the requirements of AIFMD. Others will commit completely to the regime by starting the process of registering in each of the EU markets in which they plan to operate. Also a growing number of European institutional investors are requesting more compliance to regulation due to increasing regulatory demands made by their home state regulators with regard to their investments in funds.
Part of the challenge for non-EU managers operating in the EU is that some of the national regimes are changing. The use of private placement regimes, in particular, may create significant confusion for non-EU managers seeking to continue operations in the EU. Indeed, many private placement regimes (which are set at the member state level) have undergone significant change since AIFMD was first announced. The result has essentially been to force non-EU managers to comply with the regulation.
Reverse solicitation has also come under the regulator’s microscope as national competent authorities start to make clearer definitions between what constitutes marketing and what can be deemed as reverse solicitation. With private placement regimes and reverse solicitation approaches becoming more complex and – in many cases – much more risky, a growing number of non-EU fund managers are now considering how they might achieve compliance through registration.
Unfortunately, time has almost run out for any non-EU managers who have yet to start formulating their plan for AIFMD compliance. The reality is that reporting will be required on a market-by-market level and – while there are some common elements between markets and even Form PF in the US – it will take considerable effort to ensure that all elements required by each market are ready for reporting.
To make matters even more urgent, some of the more prominent markets (such as Germany) advise that it could take up to four months to work through the notifications, meaning that – for some – the first reports will be due within weeks of receiving registration. And reporting must done in each and every country where marketing is conducted.
The message for non-EU managers and funds is clear and blunt: nothing can be assumed or taken for granted. Indeed, the time for a ‘wait and see’ approach has passed; developing a strategy for managing AIFMD is now a critical business imperative.