Funds should be acting now and making contingency plans to cover all potential Brexit outcomes, including a worst-case no-deal Brexit scenario, says law firm Proskauer Rose.
In a note, the firm said that the proposed transitional arrangement between the EU and UK, which would see EU laws – including the Alternative Investment Fund Managers Directive regime – stay in place until the end of 2020 cannot be relied upon: “There is no certainty at this time that the transitional arrangement will come into effect.”
As a result, Proskauer says fund managers utilizing the cross-border passport should put contingency plans in place now and should also consider their longer-term plans “on the basis that the passport would not be available after 2020.”
With the UK expected to become a third-country (a non-European Economic Area country), the firm says that alternative fund managers would not have access to the various passport regimes for private funds and could only market their funds in the EU under national private placement regimes (NPPR).
However, Proskauer warned that it is “not always feasible to obtain NPPR approval for marketing in certain member states” and cited Italy, where domestic law does not allow for the making of NPPR notifications. The only way of marketing in this jurisdiction would be via the AIFMD marketing passport, which won’t be available.
In tandem with the implications for UK funds, alternatives managers in the EU would not be permitted to market in the UK or manage alternatives funds there under the passport because the UK would be a third country. Such firms, Proskauer said, “would need to wait to see what regime the UK government would put in place for EU firms.”
The law firm set out a number of possible contingency plans depending on the scope of the manager. Full-scope alternatives managers could rely on the NPPR regime, and this should allow the fund “to market into some EU member states,” but it warned that the fund would “essentially be shut out” from certain countries, such as Italy.
Alternatively, a manager could establish an AIFM in an EU member state like Luxembourg and delegate portfolio management back to the UK, with the authorization process taking approximately six to nine months.
A UK manager could also choose to establish a fund in a member state and provide investment advice to this EU manager. At the same time, the EU fund manager would maintain responsibility for both risk and portfolio management and the UK fund would provide investment advice only.
Proskauer said that a UK manager could also appoint a third-party alternative manager in an EU country to manage its EU funds, which would allow for access to the marketing passport. The firm said a “key disadvantage” to this option is that the overall management and oversight would be carried out by the third party and there would be extra costs, including the third-party manager’s fees and other tax and VAT-related issues.