AIFM escape clause comes with risk

Experts say non-EU fund managers that accept EU investor commitments may be able to avoid AIFM rules by relying on a reverse solicitation exemption, but warn doing so comes with its own legal complications.

Non-EU managers wanting to receive commitments from European investors, without becoming subject to the onerous EU Alternative Investment Fund Mangers (AIFM) directive, should be aware of “reverse solicitation” exemptions, according to AIFM experts. 

Reverse solicitation is when the investor (not the fund manager) is the one who initiates contact about a fund opportunity. However, in order for firms to successfully use this method of marketing they will need very strong procedures and controls that are policed diligently, warned Bill Prew of Indos Group, a specialist AIFM consultancy, during a recent webinar addressing the topic. 

The appeal of reverse solicitation is however limited, by far its biggest downfall being the inability to shake hands with new potential investors.

Prew advises GPs relying on reverse solicitation to monitor how each EU member state enforces its private placement regimes. Each regime determines how private securities can be sold to investors in that particular country, for instance what reporting or registration requirements a GP must complete before marketing can begin.

Adding a layer of complexity to the private placement option is the likelihood of EU sovereigns adopting a stricter attitude on reverse solicitation ahead of a 22 July go-live date for the AIFM directive, warn legal sources. The directive creates a pan-EU marketing regime for fund managers able to meet the law's various rules on reporting, remuneration and risk control measures. Some believe EU nations will enforce stricter private placement regimes in order to match the rigor of marketing rules applied to GPs subjective to the directive.

One example of this is the UK. In its latest AIFM consultation paper, the country’s financial watchdog, the Financial Services Authority (now the Financial Conduct Authority), said it would take a harder stance on reverse solicitation. 

Regulators are not the only legal risk for fund managers relying on reverse solicitation for commitments. One fund lawyer told PE Manager that unhappy investors could also present a legal challenge, making the case that they were sold securities from a GP who didn't have the proper approvals to accept commitments.

One example of this, outside of Europe however, is the case involving Kuwait's National Industries Group (NIG) and the Carlyle Group. NIG alleged that Carlyle sold it a fixed income fund in 2006 without the necessary license. The fund collapsed in 2008 after defaulting on its debt obligations.