On 10 June 2020, the European Commission (the Commission) published its long-awaited Report to the European Parliament and the Council assessing the scope and application of the EU Alternative Investment Fund Managers Directive (AIFMD).The Report was mandated under Article 69 of the AIFMD and follows KPMG’s report to the Commission on the AIFMD in January 2019.
The Report does not propose any amendments to the AIFMD at this stage but highlights certain areas that are likely to be the subject of further review. It is likely in our view that the Report will form the basis for the policy direction of what will ultimately be “AIFMD II.”
Marketing
The Report highlights a number of deficiencies in the current AIFMD marketing rules. The key takeaways are as follows:
- AIFMD marketing passport. The Report finds that the efficacy of the AIFMD marketing passport is impaired by national “gold-plating” and varying interpretations of key AIFMD concepts, such as “marketing” and “pre-marketing,” which is said to have led to a European market that is “partially fragmented rather than fully harmonised.” (In this regard, please see our Update EU AIFMD: New Rules on Pre-Marketing and Reverse Solicitation.)
- Semi-professional and retail investors. The Report notes that cross-border investment fund distribution in the EU is constrained by the fact that the AIFMD marketing passport is limited to professional investors; semi-professional and retail investors can be approached only under varying (and often restrictive) national rules.
- National private placement regimes (NPPRs). While the Report acknowledges the important role NPPRs have played in market development, it finds that NPPRs create an “un-level playing field” between EU and non-EU alternative investment fund managers (AIFMs), notably because NPPRs require non-EU AIFMs to implement only a very limited number of the AIFMD requirements, while EU AIFMs marketing non-EU AIFs remain subject to all the requirements of the AIFMD save for certain flexibility regarding the appointment of a depositary.
The Report also finds that some EU member states are in favour of harmonising the NPPRs, while others prefer activating the AIFMD passport for third-country entities, followed by a phasing-out of NPPRs, as contemplated in the AIFMD
Sidley Comment: This latter proposal would create significant difficulty for the hundreds, if not thousands, of U.S. and other non-EU AIFMs that currently rely on the NPPRs to market their funds into the EU. Non-EU AIFMs are unlikely to want to use the AIFMD passport if so activated because that entails the AIFM becoming fully authorised and regulated under the AIFMD, with its attendant obligations including regulatory capital, single depositary and remuneration rules, among others.
- Subthreshold AIFMs. The Report acknowledges that subthreshold AIFMs, and in particular certain private equity fund managers, encounter significant barriers as a result of not being able to use the AIFMD marketing passport.
Depositaries
The Report finds that the AIFMD depositary regime is functioning well. However, targeted clarifications may be necessary to address situations where AIFMs use triparty collateral management or when central securities depositories act as custodians.
The Report notes that the lack of a depositary passport is “at odds with the spirit of the single market” and the limited choice of service providers poses concentration risks, given that a single depositary could hold the assets of all AIFs established in a given member state.
Disclosure and Transparency
The Report finds that the AIFMD disclosure rules have largely achieved the objective of enabling investors to make informed investment decisions. Similarly, the provisions against asset-stripping, and the transparency requirements relating to the acquisition of controlling stakes in private companies, were found not to be overly burdensome. On the whole, the Report finds that the AIFMD increased transparency regarding the offered products and services.
Next Steps
Under Article 69(5) of the AIFMD, the Commission is entitled to make proposals, including legislative amendments to the scope and requirements of the AIFMD, on the basis of the Report’s findings.
We expect the Commission to open a consultation in due course on the various issues identified in the Report. The UK, being no longer in the EU, would not be subject to AIFMD II; it will be interesting to see what direction the UK takes in relation to the regulation of AIFMs in the future.
