After five years of rulemaking the Alternative Investment Fund Managers Directive (AIFMD) went live last week – creating a pan-EU regulatory and marketing framework for private funds. Yet a number of gaps in rulemaking is making compliance difficult (if not impossible) to achieve.
A total of five EU member states – Italy, Romania, Bulgaria, Austria and Latvia – have written draft AIFMD bills awaiting parliamentary approval, and 10 more member states – Spain, Portugal, Poland, Lithuania, Estonia, Greece, Finland, Hungary, Slovenia, and Belgium – have not finished preparing their draft legislation or even begun.
While most member states are providing GPs a one-year grace period to comply with the directive, this transitional phase should not be considered a “wait and see” period, says Travers Smith partner Phil Bartram, who helped UK private equity firm Doughty Hanson become one of the first GPs to become authorized under the directive.
The UK was among the 12 European countries that successfully transposed the directive into law before the July 22 deadline, but there is still more rulemaking to be completed in these jurisdictions. For example:
• Questions around remuneration provisions within the directive have not been fully answered by the UK Financial Conduct Authority (FCA) and other national regulators during transposition. Nor is it entirely clear how regulators will interpret carried interest (either as variable or fixed remuneration), an issue that will impact compensation deferral periods. To gain authorization in the UK, firms can tick a box stating they meet the directive’s deferral requirements due to certain built-in features of carried interest, but it remains to be seen whether the FCA agrees.
• Reporting requirements are another area of uncertainty. It is not entirely clear what types of disclosures will need to be made to regulators and investors, meaning GPs still can’t completely update their reporting systems to reach full AIFMD compliance. A template reporting model under consideration by the FCA for instance asks GPs to name their five biggest exposures, but “exposure” is an all-encompassing term that can mean many different things in private equity. Bartram believes a firm’s five biggest deals are presumably its principal exposures, but isn’t able to say with any absolute certainty.
• A final example of uncertainty is the directive’s very definition of an alternative investment fund. According to SJ Berwin partner Simon Witney, EU regulators and policymakers are still debating what constitutes an open-ended fund. If this definition is not carefully crafted, it could mean that some private equity funds are labelled as open-ended vehicles, which would not be in line with the policy intent.
The end result of this uncertainty is ultimately more work for compliance officers. Unless they prefer to take a backseat approach until more clarity in any particular jurisdiction is offered, they must constantly consult lawyers and advisors – as well as swap notes with peers on best practice – to interpret the rules and make judgment calls along the way. It’s not quite the situation that was anticipated by regulators, who five years ago envisioned a harmonized EU private funds framework in place by now…