To open up this 12 page special report on compliance, we want to turn our attention to the behemoth set of regulations known as the Alternative Investment Fund Managers Directive – a new pan-EU marketing regime that was five years in the making and finally just took effect over the summer.
So what, if anything, changed since the directive’s July 22 go-live date?
GPs have had quite a while to brace themselves for the onset of AIFMD; so for the most part, the realities of operating under the new regime have had plenty of time to bed in. But in some areas, the directive’s implementation is resulting in a few sudden surprises.
In Europe, firms still look pretty much the same. But there are now new requirements for dealmakers: for instance, they will need to start informing a target company’s management about the possibility of job losses before a takeover is sealed. It will be interesting to see how GPs go about writing these disclosures – and whether it will create tension in the acquisition process if lay-offs are expected (particularly given the likelihood of extra media scrutiny).
New rules around pay may also convince LPs to push harder on lower management fees, or to ask tougher questions about talent retention. The AIFMD requires GPs to disclose annually how much they pay their staff, broken down by fixed and variable remuneration. This annual report must also state how much of that pay went to senior management, and how much to everyone else. If the report reveals that the proportion of fixed pay is too high (i.e. there’s too much salary and not enough carry), or that too big a share of the reward pot is going to the top brass, it is likely to raise red flags.
Outside the EU, fund advisers will begin putting their post-AIFMD marketing plans into action (see p. 24). For those GPs who decided not to write Europe off altogether, this has involved a jurisdiction-by-jurisdiction analysis of marketing rules. But despite all the planning, advisers are encountering a few unanticipated obstacles. In France, for example, managers are being warned not to meet French investors on their home soil, in order to satisfy regulators’ (rather odd) interpretation of reverse solicitation rules. And in Denmark, it appears regulators want non-EU managers to provide a note from their home regulator, saying that an equivalent Danish fund would have equal access to investors from the manager’s home country (something the US Securities and Exchange Commission isn’t willing to do, we hear).
Generally speaking, GPs have been able to enhance or tweak their existing practices in order to comply with AIFMD: reporting systems are being upgraded, depositaries are being hired to safe-keep assets and new risk committees are being formed to satisfy the regulators’ whims.
However, these changes are not insignificant; all require extensive thought and ongoing review. That’s why we examine the impact of the directive in more detail in the following pages (see magazine and/or website archice). And elsewhere we take a look at other major compliance issues like registration with the US Securities and Exchange Commission, and what it means exactly to create a culture of compliance.