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How does the AIFM Directive Impact Fund Raising in the EU by Non-EU Managers?

Written by Michael Wu

The Alternative Investment Fund Managers Directive (the “Directive”) establishes a regulatory regime for all alternative fund managers, such as private equity and hedge fund managers, that are based in the European Union (the “EU”), manage funds based in the EU and market non-EU fund interests in the EU.  A general summary of the Directive is available here.

Although the majority of the Directive’s rules are likely to become effective by January 2013, some of the rules affecting non-EU funds and non-EU fund managers will be deferred until 2015 or later.  Thus, non-EU managers may still actively raise funds in the EU, but will have to comply with a number of additional regulatory requirements beginning in January 2013.

Beginning in January 2013, non-EU managers may actively fund raise in the EU provided that:

  • A regulatory cooperation agreement is in place between all of the relevant regulators (i.e., the regulator in the non-EU manager’s home jurisdiction and the EU country where the fund raising occurs) under which the regulators agree to cooperate on monitoring and managing systemic risk.  In addition, the home jurisdiction must not be designated by the Financial Action Task Force as a non-cooperative country or territory.
  • Non-EU managers comply with the following provisions of the Directive:
    • Transparency and Disclosure: the non-EU manager must prepare an annual fund report for investors in a prescribed format and disclose certain other prescribed information to investors and will be subject to regulatory reporting requirements aimed at monitoring systemic risk.  The European Commission will publish measures specifying the format and content of the reports.
    • Portfolio Company Disclosures: if a private equity fund acquires or disposes of a substantial stake in an EU company, the manager must formally notify the target company, the shareholders and the regulators.  Additional disclosures are required if a controlling stake is acquired.
    • “Asset-Stripping” Restrictions: the Directive restricts certain shareholder distributions for a period of 24 months after acquisition of an EU company (to prevent dividend recapitalizations during the period).
  • Non-EU manager is aware of the securities laws of each EU country in which it intends to raise funds, which may impose more onerous rules.

Beginning in early-2015, non-EU managers may be able to participate in the “passport” regime (i.e., they can fund raise in every EU country without obtaining separate regulatory authorization in each country) if the European Securities and Markets (“ESMA”) Authority decides to make the passport regime available to non-EU managers.  If the passport regime becomes available to non-EU managers, they would become authorized and regulated on the same basis as EU managers with respect to the passporting rights.  However, because the passport regime’s compliance obligations are onerous, non-EU managers may want to forgo the passporting rights and fund raise subject to country-by-country private placement regimes and the minimum directive requirements described above.

Beginning in mid-2018, non-EU managers may be required to operate under the passport regime in order to fund raise in the EU.  The Directive contains provisions that would ultimately terminate the national private placement regimes, leaving full authorization as the only option for non-EU firms that wish to fund raise in the EU.

ESMA and the European Commission have been tasked with issuing extensive implementing measures and guidance.  However, the details of these rules will not become clear for some time.