AIF Managers Directive – Implications for Non-EU Managers of Non-EU Funds

As 22 July 2013 looms ever closer, as part of our continuing legal update series on this topic, this Guidance Note seeks to consider the impact of the Alternative Investment Fund Managers Directive (the “Directive”) for non-EU Managers who manage Cayman Islands domiciled funds.

The Directive entered into force on July 21, 2011 with European Union Member States (“Member States”) having until July 22, 2013 to implement it into their domestic laws. The Directive broadly aims to create a single harmonized European Union (“EU”) regulatory framework for EU-domiciled investment managers (“Managers”) of alternative investment funds (“AIFs”). It also sets out a regime for the marketing in the EU of both EU AIFs and non-EU AIFs by non-EU Managers.

What is an AIF?

AIFs are defined as collective investment undertakings (including any related investment compartments) which “raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors.” EU AIFs are AIFs which are either (i) authorized or registered in a Member State or (ii) have their registered office and/or head office in a Member State. Any AIF that is not an EU AIF is a non-EU AIF. Family office vehicles would fall outside of the definition of an AIF. There is also a specific carve out for Undertakings for Collective Investment in Transferable Securities (UCITS).

Key Points

At this stage in the process, the main points for non-EU Managers seeking to market non-EU AIFs to EU investors are that:

• From July 22, 2013, non-EU Managers may continue to make use of Member States’ existing private placement regimes provided that:
  • they comply with certain disclosure and transparency requirements;
  • appropriate information sharing agreements are in place between the relevant Member State and the jurisdictions of establishment of both the non-EU AIF and the non-EU Manager; and
  • neither the non-EU AIF nor the non-EU Manager are established in a jurisdiction that is designated as non-cooperative by the Financial Action Task Force (“FATF”) (the “Three Conditions”).
• Between 2013 and 2015, non-EU Managers can market non-EU AIFs to professional investors in each EU Member State under the relevant Member State’s private placement regime.
• In 2015 (two years after the implementation of the Directive into the domestic laws of each EU Member State) non-EU Managers may, subject to advice from ESMA on the extension of the regime to non-EU Managers, take advantage of a pan-EU passport in respect of their marketing and management activities. They will be required to be authorised by the relevant EU competent authority (i.e. the supervising authority in the relevant EU Member State) and they will be required to comply with all the provisions in the Directive and certain other requirements as the AIF is established in a non-EU jurisdiction (e.g. the Cayman Islands) including: (i) cooperation arrangements, (ii) tax information sharing, and (iii) the non-EU AIF must not be established in a jurisdiction that is designated as non-cooperative by FATF.
• Member State private placement regimes may continue at the discretion of Member States but, following a review and the issue of technical advice by ESMA (anticipated to be in 2015), private placement regimes in Members States may be gradually phased out (anticipated in 2018).

The Three Conditions

Disclosure and transparency condition

In order to be able to continue marketing Cayman Islands funds throughout the EU, non-EU Managers will have to be in compliance with the following disclosure and transparency provisions of the Directive:

Annual report: non-EU Managers must make available to investors and to the appropriate securities regulatory authority in the relevant Member State, an annual report for each financial year. The annual report must contain, among other things, a balance sheet or a statement of assets and liabilities, an income and expenditure account for the financial year, the total remuneration for the financial year paid by the non-EU Manager to its staff members, the number of beneficiaries and, where relevant, carried interest paid by the non-EU AIF, and (i) the aggregate remuneration for senior management and (ii) the aggregate remuneration of staff whose actions have a material impact on the risk profile of the AIF.

Disclosure to investors: in respect of each AIF that it markets to investors in the EU, non-EU Managers must make available certain information to potential investors including details of the investment strategy, objectives of the AIF and techniques the non-EU Manager may employ and all associated risks, any applicable investment restrictions, the AIF’s valuation procedure and pricing methodology, the AIF’s liquidity risk management (including redemption rights), a description of all fees, charges and expenses (and the maximum amounts borne directly or indirectly by investors), and a description of any preferential treatment afforded to an investor (e.g. by way of a side letter). Investors must also be notified of any material changes to the information provided.

Reporting obligations to competent authorities: in respect of each non-EU AIF that they market to potential investors in the EU, non-EU Managers are required to make a number of disclosures to the relevant Member State’s competent authority, including disclosure of the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature, the risk profile of the AIF and risk management systems employed, and disclosure of the main categories of assets in which the AIF is invested. Non-EU Managers are also required, where they employ substantial leverage, to make available to the relevant competent authorities information about the overall level of leverage used by the relevant AIF.

Information sharing agreements condition

The European Securities and Markets Authority (“ESMA”), the pan-EU securities regulator, announced approval on 22 May 2013 of the necessary cooperation agreements under the Directive with 34 securities regulators outside of the EU. The Cayman Islands Monetary Authority (“CIMA”), being the securities regulator in the Cayman Islands, was included.

On 11 July 2013, CIMA confirmed in a press release that 25 EU securities regulators have now signed the required cooperation agreements with CIMA. A copy of the full text of the press release from CIMA can be found here:

 http://www.cimoney.com.ky/about_cima/about_feed.aspx?id=2147484023

The signature of these cooperation agreements was a condition under the Directive to permit the continued marketing of AIFs domiciled in the Cayman Islands (and generally outside the EU) under the relevant EU Member State private placement regimes. The Cayman Islands have therefore satisfied the second condition in respect of the EU Member States specified in the CIMA press release. This will enable the continued marketing of Cayman Islands funds throughout the EU.

FATF Compliance condition

This condition has been satisfied by the Cayman Islands which, by virtue of being, among other things, on the Organization for Economic Co-operation and Development (OECD) “white list” of jurisdictions that have substantially implemented the internationally agreed tax standard for effective exchange of information and transparency, is not listed as a Non-Cooperative Country and Territory by the FATF.

We will continue to provide legal updates on the Directive and its for non-EU Managers who manage Cayman Islands domiciled funds.

If you have any questions regarding the matters covered in this publication, please contact the Attorney below or your usual Loeb Smith & Brady contact:

Daniel Loeb
+44 207 183 7966
daniel.loeb@loebsmith.com