The Alternative Investment Fund Managers Directive ( or AIFMD) regulates US managers of private equity funds, hedge funds and other alternative investment funds that are marketed in the European Economic Area (the EEA). The deadline for implementation of the AIFMD into the laws of the Member States of the EEA (or Member States) was July 22, 2013, but some Member States did not meet this deadline.
A US manager that markets a non-EEA fund to professional investors in one or more Member States, and that is not eligible for the benefits of a grandfathering regime in a particular Member State, will need to (1) comply with AIFMD disclosure rules and ‘no asset stripping’ requirements and (2) market the fund in compliance with the national private placement regimes then effective in the relevant Member States. The impact of the AIFMD on US managers is the focus of these FAQs.
It’s worth noting these FAQs only deal with the first stage of AIFMD implementation. Stage two (beginning, at the earliest, in the fourth quarter of 2015) provides the option for a US manager to obtain an AIFMD ‘marketing passport’, which would bring the benefit of allowing the marketing of funds to professional investors in the EEA without relying on the national private placement regimes. The burden of a marketing passport is full AIFMD compliance. Stage three (beginning, at the earliest, in the fourth quarter of 2018) means that the national private placement regimes will no longer be available, so that a US manager will only be able to market its funds to professional investors in the EEA if it holds an AIFMD marketing passport.
What are the key steps that a US manager must take now?
There are five key steps:
1. Identify the funds that may be marketed in the EEA.
2. Identify the Member States in which the US manager wishes to market its funds.
3. Determine the requirements of the private placement regime in each relevant Member State.
4. Monitor how the AIFMD is implemented in the relevant Member States.
5. Implement compliance procedures to ensure adherence to the new disclosure obligations and new ‘no asset stripping’ rules.
Will consistent marketing rules apply across the EEA?
No, because Member States are taking different approaches to AIFMD implementation.
Although the AIFMD sets out principles intended to result in uniformity, AIFMD implementation is left to Member States. Not all Member States have yet adopted implementing legislation. For example, the AIFMD has not yet been implemented in Belgium, Finland, Greece, Italy and Norway.
The following fundamental AIFMD issues are not addressed in the same manner in all Member States, leading to inconsistent results across the EEA:
1. What constitutes AIFMD ‘marketing’.
2. Whether AIFMD requirements apply if marketing takes place outside the relevant Member State.
3. Whether AIFMD requirements apply in a Member State where marketing efforts have taken place but no prospective investor from that Member State actually makes an investment.
Will marketing post-July 22, 2013 be the same as marketing pre-July 22, 2013?
Certain Member States have adopted AIFMD grandfathering regimes. Where a US manager satisfied the requirements of a Member State’s grandfathering regime prior to July 22, 2013 (or the date of AIFMD implementation, if later), it is able to market its non-EEA fund in that jurisdiction until July 21, 2014 based on the private placement regime in place pre-July 22, 2013 and without having to satisfy the AIFMD requirements. Generally, to be eligible for the benefits of a grandfathering regime, a US manager needed to have taken particular actions (with such actions depending on the individual Member State) prior to July 22, 2013.
The AIFMD permits Member States to keep in place national private placement regimes until at least the fourth quarter of 2018. As part of the AIFMD implementation process, however, some Member States have added new and more onerous requirements to their national private placement regimes. For example, this approach has been taken in Germany and France.
In addition, for a US manager to market a fund in a Member State, the AIFMD requires that cooperation agreements, intended to help regulators oversee potential systemic risk, be in placebetween the regulator in the relevant Member State and regulators in the jurisdictions in which the fund and the manager are established. To date, the SEC has not entered into cooperation agreements with Croatia, France or Slovenia.
A US manager will be subject to new disclosure rules and to new ‘no asset stripping’ requirements applicable to control investments in EEA portfolio companies.
1. The US manager must prepare an annual report for the fund. The annual report must contain disclosure of the following compensation information:
(a) the total remuneration, split into fixed and variable remuneration, paid by the US manager to (i) its staff and the number of staff who received such remuneration and (ii) senior management and members of staff of the US manager whose actions have a material impact on the risk profile of the fund. Note this would not require disclosure of individual compensation information,
(b) any carried interest distributed by the fund; and
(c) a general description of the US manager’s compensation policies and practices. Until such time as it obtains an AIFMD marketing passport, a US manager is not required to have any particular compensation policies or procedures in place. This is in contrast to an EEA manager that, in addition to complying with the disclosure obligations described above, is required to adopt remuneration policies that satisfy the AIFMD guidelines,
2. The US manager must provide specified information (including on side letter arrangements) to prospective investors prior to their investing in the fund.
3. The US manager must regularly report certain matters, such as information on aggregate assets under management, to the regulators in the relevant Member States.
4. Where the fund acquires control of an EEA portfolio company – which for unlisted companies generally means holding more than 50 percent of the voting rights – the US manager must disclose certain matters (such as information on the financing of the acquisition of the portfolio company) to the regulators in the relevant Member States and to the EEA portfolio company (with the request that certain information be passed on to the company’s shareholders).
No asset stripping
For two years following the acquisition of control by its fund of an EEA portfolio company, a US manager will be subject to restrictions on ‘asset stripping’. Generally, the US manager must not facilitate, support or instruct, must not vote in favor of, and must use its best efforts to prevent, any distribution to shareholders, capital reduction, share redemption or share buy-back by the portfolio company where its net assets would fall short of its subscribed capital and non-distributable reserves or profits.
The answer is likely to depend on the attitude that European investors have toward the AIFMD and this attitude may change over time.
It is possible that some European investors may show a bias against investing with non-EEA managers on the basis that they are not subject to full AIFMD compliance (much the same way that some European investors raise concerns about investing in Cayman Islands and Channel Islands funds). If this pattern emerges, a US manager ultimately may decide to incorporate an EEA manager into its structure – voluntarily submitting to full AIFMD compliance for the purpose of enhancing marketing efforts. At the moment, however, most US managers appear not to be rushing into the world of full AIFMD compliance.
Michael Harrell and Rebecca Silberstein are partners in the New York office of Debevoise & Plimpton LLP. Sally Gibson is an international counsel in the firm’s London office. A version of this article originally appeared in the spring 2013 issue of the Debevoise & Plimpton Private Equity Report.