Nadia Bonnet | Avocat à la Cour | Arendt & Medernach
The Alternative Investment Fund Managers Directive (“AIFMD”) is aimed at increasing investor protection, creating a common set of rules for the authorization, organization, operation and supervision of asset managers, improving risk management by asset managers and creating a single market for alternative investment funds within the European Union (“EU”). Due to its extraterritorial reach; to date the AIFMD is the most significant piece of regulation affecting the private funds industry worldwide.
Globalization of financial markets
Globalization is constantly expanding global interconnectedness. Such interconnectivity and interdependencies of economies around the world have created new opportunities for market players, but have also increased the level of risks, which legislators around the globe monitor and mitigate by establishing financial regulations.
Over the past decade, a number of governments enacted several new regulations to address inter alia the contributing factors of the 2008 financial crisis.
Private equity fund managers aiming to expand their business by raising money globally are facing those regulations with the EU and the US seemingly seeking tougher rules and pursuing enforcement.
The EU response to the 2008 financial crisis
The AIFMD was the EU answer to the 2008 global financial crisis, which saw the collapse of Lehman Brothers on September 15th, 2008.
The AIFMD introduced a common set of rules across the EU to regulate private fund managers acting within the EU, regardless of whether they manage EU or non-EU investment funds. It is worth noting that the AIFMD regulates the managers and not the investment funds they manage though the regulations do provide some rules impacting product design.
What is AIFMD about and who is concerned?
Since the late 80’s the Undertakings for Collective Investments in Transferable Securities Directive (“UCITS Directive”) provides a single regulatory framework across the EU for open-ended funds investing in transferable liquid securities (i.e. the equivalent of US mutual funds).
The AIFMD was established to regulate segments of the investment funds sector not subject to the UCITS Directive which were only lightly regulated – the so-called alternative investment funds (“AIFs”) (i.e. hedge funds, private equity funds, venture capital funds, real estate funds, infrastructure funds and debt funds etc).
Any fund manager established within the EU and managing AIFs is thus subject to the AIFMD, regardless of whether it is managing EU-AIFs or non-EU AIFs. Furthermore any manager established in a third country (i.e. outside of the EU) and marketing AIFs within the EU is also subject to the AIFMD.
The AIFMD does not regulate managers established outside of the EU and marketing non-EU AIFs outside of the EU even if such AIFs are investing in the EU.
The AIFMD subjects those falling under its scope to obtain authorisation for the “pass-porting” of their services throughout the EU. Those authorized AIFMs must comply with the EU common set of rules governing (i) their internal organisation (i.e. remuneration, governance, conflict of interests processes, risk management, capital adequacy), (ii) the management of AIFs (leverage, liquidity, evaluation) and (iii) imposing new requirements in terms of (x) information to be provided to investors and regulators and (y) safekeeping of assets .
In exchange for complying with the AIFMD, AIFMs benefit from a European passport allowing them to manage and market their AIFs across EU borders.
How does AIFMD impact global finance?
Before the AIFMD, investors had a wide variety of choices as they could access first-class investment funds from all over the globe without restrictions. The AIFMD has profoundly changed the distribution landscape as it applies to AIFs. It impacted the access by introducing an EU passport allowing AIFMs to market shares of AIFs they manage to professional investors  subject to compliance with the AIFMD.
Retail investors can only be accessed by managers through the national private placement regimes (“NPPRs”) which vary from one EU country to another.
While the AIFMD aims at introducing a passport to third country AIFMs, Brexit negotiations with the United Kingdom have delayed the entry into force of such third-country passport regimes.
What to expect from the current review of the AIFMD?
The European Commission (“Commission”) is currently conducting a review of the AIFMD consisting in analysing the impacts which the AIFMD had on investors, AIFs and/or AIFMs, both in the EU and in third countries, as well as determining whether the objectives of the AIFMD have been achieved.
On March 12th, 2018, the Commission published legislative proposals for new rules on marketing AIFs and UCITS comprising a directive on the cross-border distribution of collective investment funds amending the UCITS Directive and the AIFMD (the “Amending Directive”) and a Regulation on facilitating cross-border distribution of collective investment funds.
It is intended that the Amending Directive introduces a single definition of “pre-marketing”.
While the Commission’s announced intention is to establish conditions under which an EU AIFM can engage in pre-marketing activities in order to address the confusion and hurdles created by the divergent treatment of pre-marketing activities in the different EU member states, the Commission’s proposed definition is an overly prudent approach towards pre-marketing activities. Since it would limit the pre-marketing only to AIFs that have not yet been established. This would however run counter the wide spread practice of forming limited partnerships early in the process with a short form LPA. The Commission’s proposal has thus quickly been countered with a more pragmatic proposal from the Council. It will now be upon the EU Parliament and the trilogue process between the three institutions in order to determine whether outcome will create the additional level of pragmatism or not. The hopes are high and the voices of the industry are being heard in Brussels and elsewhere. The process may likely close in Q1 2019 thus creating very welcome harmonisation for a process that most will welcome.
New challenges will have to be faced in light of the “America First” strategy and the decision of the UK to depart the EU. The fragile international market consistency sought this past decade will undoubtedly be affected.
It is important that the EU succeeds in implementing a common supervisory framework to achieve a real level playing field which is the basis of the single market. It is therefore important that these new legislative proposals are instilled with much needed pragmatism.
One of the other major EU regulations, which is still too recent to show its full impact on globalization is the General Data Protection Regulation entered into force on May 25th, 2018 and which, similarly to the US Foreign Account Tax Compliance Act (FATCA), has an extra territorial application.
While some commentators take the view that these regulations (AIFMD and GDPR) may adversely impact the EU’s economy by discouraging investment fund managers to do business within the EU, the opposite view is that these regulations need to be seen as a long term investment into a sound market infrastructure with a view to establishing long-lasting business relationships and legal certainty.
 Managing and marketing an AIF across the EU under the AIFMD
 an investor which is considered to be a professional client or may, on request, be treated as a professional client within the meaning of Annex II to Directive 2004/39/EC
 “a direct or indirect provision of information on investment strategies or investment ideas by an AIFM [… ] to professional investors in order to test their interest in an AIF which is not yet established.”
Compliments of Arendt & Medernach, a member of the EACCNY