The Alternative Investment Fund Managers Directive is now more than a year old, and both European and non-European managers are becoming familiar with its requirements. However, managers still face a number of practical issues.
In the first few months after July 2013, many countries were still to implement the directive, but most major countries have now implemented AIFMD. The key exceptions are Spain and Italy, although the situation should soon be resolved.
In addition, while registration is now mandatory in France for a non-European manager promoting to French investors, it has not yet finalised the rules for such registration. It seems that promotion into France for non-European managers will be caught in this catch-22 for some time yet.
A frequent complaint from European managers is that the regulators suffer from a backlog of applications, notwithstanding regulators’ requests that managers submit their authorisation applications as early as possible. Figures released by the European regulatory authorities show that the FCA has granted the largest number of AIFMD applications by far, although even here a large number are still outstanding.
The remuneration rules, especially those concerning the potential restrictions on paying variable remuneration, greatly concerned European managers. For this reason, managers have welcomed the recent FCA interpretation of the ESMA guidance that permits managers to disapply these arrangements in circumstances when they manage portfolios worth less than £5bn (or less than £1bn if the assets are acquired through the use of leverage). We expect that other European regulators will also apply some form of flexibility, but it remains to be seen whether these moves prove as helpful as the FCA’s position.
Market practice
We have seen a general market practice develop in this area.
■ General acceptability. This will often depend on the country in which the discussions are taking place. Certain countries are more accommodating to reverse solicitation than others.
For example, the formal guidance issued by the FCA states: “A direct confirmation from the investor that the offering or placement of units or shares of the AIF was made at its initiative should normally be sufficient to demonstrate that this is the case, provided this is obtained before the offer or placement takes place.” In general, this means reverse solicitation should be acceptable.
At the other end of the spectrum, certain countries, including France, are known to be hostile to the idea of reverse solicitation. In this market, only a written request from an investor that specifically states the name of the new fund is likely to be sufficient.
■ The type of investors. Managers may be more willing to perform this type of reverse solicitation with institutional investors, who are able to make informed investment decisions, rather than individual investors. This is a practical risk-management issue, though: no distinction is drawn between different types of investors in the directive.
■ The number of investors. It is more plausible that a manager would have been requested by a small number of investors to keep them informed about new funds than by a large number of investors. For practical reasons, many managers keep this number down to five or so for each European jurisdiction.
■ Record keeping. This is the crux of the matter. The argument here is that the investor has specifically requested the manager keep him or her informed about new funds as they arise, so managers should have on file either a specific request from the investor or a note of a meeting with the investor during which the request was made.
■ Timing. There is no time expiry in the directive; the sole factor to consider is at whose initiative the investment was made. It would probably be sensible, however, for managers to approach investors who made the request a long time ago to confirm that they still wish to be kept informed of new possibilities. This is not the manager requesting a reverse solicitation from the investor, it is the manager refreshing an existing request from the investor.
Concern was expressed at the outset of the directive about whether there would be a supply of reasonably priced practical depositaries available for private investment funds, especially since most private investment funds invest in a small number of relatively illiquid assets that they hold for a long time. But we have seen a number of firms enter this market to act as real estate or private equity depositaries, so this appears to be less of a problem than it first seemed.
A similar point arises in relation to small funds that do not wish to take on the administrative and financial expense of becoming authorised as managers under the directive. Some are becoming authorised to operate as managers for hire, in which capacity they will act as the AIFM but delegate the operation of the portfolio management to their sponsor firms. This will need to be watched closely over time to see whether it works in practice.
Unfortunately, it seems the UK is the only main EU state that has implemented a lighter sub-threshold regime for the registration of non-European managers marketing funds to European investors. Indeed, only in the UK is a non-European manager able to benefit from exemptions from many of the information disclosure requirements that apply to larger managers.
Glynn Barwick is counsel at Goodwin Procter and a member of its Private Investment Funds and Financial Services Practices
Key points
• The remuneration rules greatly concerned European managers.
• General acceptability often depends on the country in question.
• Concern has been expressed at the outset of the directive about whether there would be a supply of reasonably priced practical depositaries available for private investment funds.
