BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS CYPRUS DUBAI HONG KONG LONDON MAURITIUS MOSCOW SÃO PAULO SINGAPORE conyersdill.com The EU Alternative Investment Fund Managers Directive the offshore angle Introduction and Recent Chronology Since the first draft was published by the European Commission on 29 April 2009, the EU Directive to regulate Alternative Investment Fund Managers (the AIFMD ), has been one of the most widely discussed, debated and anticipated pieces of regulation in the investment funds industry. After months of intensive negotiation and lobbying, an agreement on the final version of the AIFMD was reached in a trialogue meeting on 26 October 2010 by representatives of the European Parliament, European Council and European Commission. On 3 November 2010, this text of the AIFMD was approved by the Committee of Permanent Representatives ( COREPER ), which consists of the Member Statesʹ ambassadors to the European Union. On 11 November 2010, the European Parliament approved the final text with EU finance ministers to formally approve the text on behalf of the European Council shortly thereafter. The AIFMD is expected to come into force in early 2011 with individual EU Member States required to implement it by early 2013. Notwithstanding the months and years the AIFMD will take to traverse the labyrinth of EU bureaucracy before it comes fully in to being, the AIFMD is nevertheless a reality. For Bermuda, as one of the leading international financial centres for alternative investment funds ( AIFs ), many of which have EU based managers, the AIFMD is something which the jurisdiction needs to understand and to work alongside in the interests of its industry constituents. Application of the AIFMD The scope of the AIFMD is extremely broad and covers all managers of funds which are not regulated as UCITS 1, regardless of whether the fund is open ended or closed ended, and, as such, will include managers of hedge, private equity, infrastructure, property and all other funds which raise capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors. 2 1 Undertakings for Collective Investment in Transferable Securities Directive 85/611/EEC 2 Recital (5) AIFMD agreed text 26 October 2010
Managers which manage AIFs with a cumulative value of assets under management of less than EUR100 million or manage only unleveraged AIFs with a five year lock in and cumulative assets under management of less than EUR500 million will be subject to a lighter regulatory regime of registration within the EU Member State of their domicile. Family office funds are not considered AIFs under the AIFMD nor does the AIFMD apply to holding companies, securitisation special purposes vehicles, the management of pension funds, employee participation or savings schemes, supranational institutions, national central banks or national, regional and local governments or bodies or institutions which manage funds supporting social security and pension systems. The Third Country Issue The effect of the AIFMD on countries with funds or managers domiciled outside the EU (such as Bermuda), who have European investors or who want to market their funds within the EU ( third countries ) has proved to be one of the most contentious issues in the development of the AIFMD. Its importance is reflected in the fact that around 20% of the body of the AIFMD is dedicated to specific rules relating to third countries. Despite earlier fears, the final version appears to offer a workable solution with existing private placement regimes for third countries importantly being permitted to remain in place for some time, subject to conditions. For an EU manager managing a non EU AIF, which is not marketed in the EU: the manager will be required to comply with all the requirements of the AIFMD except for Article 21 (Depositary) and Article 22 (Annual report); of the home Member State of the AIFM and the supervisory authorities of the third country where the non EU AIF is established; and the country in which the AIF is established must not be listed as a Non Cooperative Country and Territory by the Financial Action Task Force on anti money laundering and terrorist financing. For an EU manager managing a non EU AIF, which is marketed in the EU: national private placement regimes will be allowed to remain in place; the manager will be required to comply in full with the AIFMD apart from Article 21 (Depositary); of the home Member State of the manager and the supervisory authorities of the third country where the non EU AIF is established; and the country in which the non EU AIF is established must not be listed as a Non Cooperative Country and Territory by the Financial Action Task Force on anti money laundering and terrorist financing. For a non EU manager managing an EU AIF or a non EU AIF, which is marketed in the EU: national private placement regimes will be allowed to remain in place; the manager will be required to comply with the transparency requirements of the AIFMD (annual report, disclosure to investors, reporting obligations to competent authorities); of the Member State where the AIF is marketed, insofar as applicable, the competent authorities of the EU AIF concerned and the supervisory authorities of the third country Page 2 of 5
where the non EU manager is established and, insofar as applicable, the supervisory authorities of the third country where the non EU AIF is established; and the third country where the non EU manager/non EU AIF is established must not be listed as a Non Cooperative Country and Territory by the Financial Action Task Force on antimoney laundering and terrorist financing. In order to put some practical meaning to the above requirements and ensure uniform application, the newly formed European Securities and Markets Authority ( ESMA ) will develop guidelines regarding such cooperation arrangements. Bermuda, with its long history of compliance with international standards of financial regulation and international cooperation, is expected to be in a position to comply with such requirements. Some comfort can be taken from the fact that the AIFMD states that cooperation arrangements should not be used as a barrier to impede third country funds. As such, it appears that non EU jurisdictions should have a level playing field under the AIFMD. In respect of marketing, the adopted text of the AIFMD has narrowed its scope and passive marketing and reverse solicitation will remain outside of the scope of the AIFMD. As such a non EU AIF may retain existing EU investors and may admit new EU investors provided that neither the manager nor the AIF market in the EU. The Passport Much discussion has centered on passport provisions as they relate to non EU managers and non EU AIFs under the AIFMD. Whilst it is not certain when or if the passport regime will ever become a reality, under the current timetable, passports will be made available to EU Managers of EU AIFs in 2013. In 2015 passports will, if introduced, be made available to non EU managers and non EU AIFs of EU managers. A dual system of private placement regimes and passports would then exist until at least 2018 when ESMA will review the passport regime and the possible end of national private placement regimes. To be clear, if the passport is not switched on, then private placement regimes would not be switched off. Should private placement regimes be switched off sometime during 2018, a passport to market in the EU will be required in respect of all AIFs managed by a non EU manager and all non EU AIFs managed by an EU manager. For a non EU AIF with a non EU manager, the manager must comply with the requirements of the AIFMD. In addition the following conditions will apply: appropriate cooperation arrangements are in place between the competent authorities of the Member State of reference and the supervisory authority of the third country where the non EU AIF is established; the third country where the non EU AIF is established must not be listed as a Non Cooperative Country and Territory by the Financial Action Task Force on anti money laundering and terrorist financing; the third country where the non EU AIF is established must have signed a tax information exchange agreement with the Member State of reference and with each other Member State in which the shares or units of the non EU AIF are proposed to be marketed; have a legal representative established in its Member State of reference; regulation in the third country must not be incompatible with the AIFMD. Page 3 of 5
For a non EU AIF managed by an EU manager, the manager must comply with all the relevant requirements of the AIFMD. In addition the following conditions apply: appropriate cooperation arrangements are in place between the competent authorities of the home Member State of the manager and the supervisory authorities of the third country where the non EU AIF is established; the third country where the non EU AIF is established is not listed as Non Cooperative Country and Territory by the Financial Action Task Force on anti money laundering and terrorist financing; the third country where the non EU AIF is established must have signed a tax with the home Member State of the manager and with each other Member State in which the shares or units of the non EU AIF are proposed to be marketed; and have a Member State of reference as EU home supervisor. Bermuda, it should be noted, has been very proactive in signing. To date 26 have been signed, almost half of which are with EU Member States. Conclusion When the AIFMD was first unveiled in its draft form, it sent shockwaves through London, home to a large proportion of Europe s hedge fund and private equity groups. Many industry commentators predicated a rush of managers relocating to more benign jurisdictions such as Switzerland or UCITS funds replacing traditional fund structures, however, the reality has proved much different. Many mangers have instead adopted a wait and see approach or have continued to use quality jurisdictions, such as Bermuda, for their fund domicile, in anticipation that the final form of the AIFMD would be something practicable where investor protection and market stability can be maintained without stifling the successful industry model of using fund vehicles domiciled in well regulated jurisdictions. Whilst the AIFMD is now in its final form, in many respects the real work of implementing the AIFMD is only just beginning. The adopted legislation must now progress to the next levels of EU implementation, with secondary legislation to be drafted to allow practical implementation of the AIFMD, ensuring consistency of legislation at EU member state level and finally enforcement and compliance of the AIFMD. It will take a number of years before this is completed. In many respects, the devil may be in the detail, as the secondary legislation is implemented, however, the final text of the AIFMD is far cry from the original draft which was commonly seen as unworkable, being described by AIMA 3 as hastily prepared and without consultation and as containing many ill considered provisions, and by the Party of European Socialists as having more holes than a Swiss cheese. Although the manner of the passage of the AIFMD through to law was not ideal, the text that was finally adopted, which recognises the fact that The impact of AIFM on the markets in which they operate is largely beneficial 4 and the certainty a final text brings, is something the investment funds industry can coexist with and is something a well regulated and well respected jurisdictions, such as Bermuda, can thrive upon. 3 Alternative Investment Management Association 4 Recital (2) AIFMD agreed text 26 October 2010 Page 4 of 5
Kieran Loughran Director +44 (0)20 7374 2444 kieran.loughran@conyersdill.com Martin Lane Director +44 (0)20 7374 2444 martin.lane@conyersdill.com This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information. About Conyers Dill & Pearman Conyers Dill & Pearman advises on the laws of Bermuda, British Virgin Islands, Cayman Islands, Cyprus and Mauritius. Conyers lawyers specialise in company and commercial law, commercial litigation and private client matters. Conyers structure, culture and expertise enable responsive, timely and thorough service. Conyers provides clients with the highest quality legal advice from strategic global locations including offices in the world s leading financial centres in Europe, Asia, the Middle East and South America. Founded in 1928, Conyers comprises 600 staff including more than 150 lawyers. Affiliated companies (Codan) provide a range of trust, corporate secretarial, accounting and management services. Page 5 of 5