AIFMD / UCITS and the Impact on Distribution Sanjiv Sawhney Global Head of Fund Services Global Transaction Services, Citi Catherine Brady EMEA Head of Fund Services Global Transaction Services, Citi
1. AIFMD Current Status
AIFMD Impacts on the Value Chain (1/2) AIFMD will impact each step in the asset management value chain. How precisely it will impact cannot be determined. Expected Manager Rules Any AIFM domiciled in the EC should Be authorised (2-month process in initial draft) Comply with conduct of business rules (MIFiD/UCITS) Employ risk and liquidity management systems Minimum capital requirements of 125k Euros Additional capital may be required on the basis of AUM or fund structure (self-managed or not) Compulsory professional liability insurance may be introduced AIFMs shall introduce remuneration policies and practices, which Are consistent with sound and effective risk management Do not encourage risk-taking in a manner non-consistent with the risk profile of the AIF May be transposed into UCITS (via UCITS V) Possible Product Rules (Distribution Side) AIFs authorised in the EU can be freely sold (EU passport) to EU professional investors Notification process in line with UCITS IV provisions Retail sale allowed but no passport rights apply Current Drafts: Non-EU-domiciled funds can be sold in the EU EP s View: On a EU passport basis, as long as they are domiciled in a qualifying country Which meets EU AML and tax transparency standards Institutional investors cannot invest in a non-eu fund, unless it meets the EU marketing criteria Council s View: With no passporting rights A non-eu fund must obtain separate approval for each EU jurisdiction where it is sold The fund manager must be subject or self-comply with the AIFMD Most likely outcome Some grandfathering rules for funds already sold in the EU A combination of EP and Council approaches, but what about private placement or reverse solicitation?
AIFMD Impacts on the Value Chain (2/2) Possible Product Rules (Investment Side) Leverage Highly leveraged AIFs subject to enhanced disclosure, reporting risk assessment obligations EU Domiciled AIF Private Equity Disclosure requirements when acquiring controlling influence over non-listed companies Capital adequacy requirements on target companies imposed Securitisation Qualitative requirements on AIFMs, and investment subject to originator retaining no less than 5% economic interest in the instrument invested Valuation, Risk and Portfolio Management Valuation Initial Requirement: Appointment of an external independent valuator Latest Draft: AIFM fully responsible for the NAV production (function can be outsourced or retained in-house) Latest Draft: Independence can be functional (Chinese walls between portfolio management and valuation) Limitations to the appointment of non-eu domiciled valuators (EP ECON only) Portfolio Management No delegation to conflicted service providers (e.g. depositary or valuator) EP ECON: Portfolio management can be delegated only to another AIFM ECOFIN: Portfolio management can be delegated only to authorised, registered and supervised entities Risk Management Function must be segregated from portfolio management EP ECON: Risk management can be delegated only to another AIFM ECOFIN: Risk management can be delegated only to authorised, registered and supervised entities
Depository Liability and Timeline Depository liability will bring significant shifts to the service provider space. Citi is well positioned due to our organisational scale and unmatched proprietary network. Depository Liability Responsible for the safekeeping of any financial instrument held by the fund Responsible for ensuring ownership of any other asset belonging to the fund Responsible for any losses of assets in safekeeping Asset restitution as a primary obligation, without undue delay Responsible for failure to perform its obligations Material differences between EP and Council s text Liability may be discharged contractually Subject to adequate disclosures Subject to correct procedure in selection and oversight of the delegate Burden of proof on the depositary Must prove it has complied with its obligations No clarity on the liability regime in case of direct custodian appointment or counterparty selection by the fund AIFMD Timeline So far Draft AIFM directive (April 2009) still the reference text One European Parliament s rapporteur s report (November 2009) Multiple Swedish and Spanish Council Presidency compromise proposals More than 1,600 amendments tabled by MEPs AIFMD discussions taken off the 16 March 2010 Council s ECOFIN agenda due to lack of consensus Where are we now? 17 May 2010: Amendments voted by EP ECON Committee 18 May 2010: Council s ECOFIN approved Council text Next steps Now: Trialogue between EP, EC and Council to reconcile respective texts July 2010 (more likely, September): EP vote in plenary, and following that Council approval Live date: sometimes in 2012?
Conclusions Given the debate that has already taken place, our view is to prepare for the worst, it may yet come true. Positives Establishment of EU product and management passports Possibility to create an alter-ucits global brand for sophisticated investors Creation of an EU harmonised framework Negatives Debate initiated, and influenced, by political agenda Too poorly drafted at the origin, the regulatory initiative has been left to the EP Difficult lawmaking process so far, no space for thought discussions Potentially disruptive legislation, also from a systemic point of view What Can We Expect in The Future? Prepare for the worst If you are a EU manager, review own internal organisation in line with CESR s MCP advice If you are a non-eu promoter, consider onshoring your funds, and establishing EU regulated subsidiary
2. UCITS IV Features and Opportunities
UCITS IV Key Principles Implementation Schedule Level 1 Framework Directive published 27 November 2009. Level 2 Implementing Directive due to be published by 1 July 2010 Mgt Co. Supervision and Regulatory Co-Operation Key Investor Document (KID) Transposition due 1 July 2011 Grandfathering provisions KID to July 2012 Cross-Border Distribution Management Company Passport Master Feeder Fund Mergers Investor Communication December 2013 Summary of Mandatory Requirements Management Company Supervision Minimum Regulatory requirements for all Management Companies Organisational requirements and conflicts of interest Rules of Conduct Risk management MiFID Alignment Compliance and Internal Audit Functions Duty to act in the best interests of investors Performing due-diligence when delegating activities to a third-party Competent Supervisory Authorities Co-operation between supervisory authorities is key Provision for strengthening this co-operation is included Key Investor Document Fair, clear, understandable, brief Sub Fund and Share Class level Strategy and objectives simple and easily understandable Past Performance Bar chart Percentages Up to 10 years Charges Risk and Reward Disclosure Synthetic Narrative Length is limited 12-month grandfathering period
UCITS IV Where are the Opportunities? Requirements Opportunities Issues to be Considered Fund Mergers FundMerger Document Regulatory Approval Shareholder Voting Post Approval Mergers Consolidation Reduction in TERs Potential Tax benefits Larger asset pools, e.g. White Labelling Revenue opportunity, e.g. Securities Finance Costs Tax Investors and Management Company Investor right to redeem/exchange Investor Voting National investor preference considerations Independent auditor/custodian must validate the criteria for valuation Costs Master Feeders Feeder investment provisions Feeder approval Master/feeder detailed agreements Regulatory notifications Fund conversions Enhanced distribution channels Overcoming cultural preferences Potential reduction in TERs Potential tax benefits/tax treaties Larger asset pools Tax Investors and Management Company Investor right to redeem/exchange Investor Voting National investor preference considerations Independent auditor/custodian must validate the criteria for valuation Tax Management Company Passport Home/Host Regulator notification Home/Host Regulator management UCITS/Depositary agreement Significant opportunity for cost reduction Potential reductions in capital requirements Potential tax benefits Transfer pricing arrangements Compliance with UCITS Home member state Reporting to UCITS Home Regulator Information flow with the UCITS depositary Risk management and compliance services Local paying agent/correspondent bank reqmts New avenues for distribution Cross-Border Distribution Simplified notification procedure competent authority KID translation Growth in AUM Reduced cost Reduced time to market (10 days) Less red tape regulator-to-regulator notification Website Local marketing requirements Translation