Articles Tagged with European Union

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Sam Pearse, a corporate and securities Partner from our London office and member of Pillsbury’s Investment Funds Group, will be visiting Pillsbury’s San Francisco office on April 3 and 4.

Sam has extensive experience advising asset managers on strategies regarding fund formation and fundraising in the UK and across the EU.  In particular, he has advised many US asset managers on how to navigate the complex fundraising regime within the European Union following the implementation of the Alternative Investment Fund Managers Directive, and the related investor and regulator disclosures.  As a member of Pillsbury’s Brexit team, Sam also has a good understanding of the likely landscape for asset managers in a post-Brexit world.

Sam also advises asset managers and investment advisors on the acquisition and divestment of assets, and the exercise of rights held by shareholders in UK listed companies.

If you would like to meet or speak with Sam whilst he is in San Francisco regarding your questions or concerns regarding any of the matters described above, please contact him at

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In the summer the European Securities and Markets Authority (ESMA) published its advice and opinion on the proposal to extend the marketing passport to non-EU alternative investment fund managers (AIFM) and non-EU funds.  The passport would enable non-EU AIFMs to market their funds across the EU under the single AIFMD regime, rather than seeking investors using the individual countries’ national private placement regimes (NPPR).

As part of the review, ESMA assessed six countries’ regulatory regimes in the context of investor protection, market disruption, competition and monitoring systemic risk.  The outcome of the investigations was mixed.  Whilst Guernsey, Jersey and Switzerland were identified as jurisdictions to which the passport could be extended, it was not such good news for Hong Kong, Singapore and the United States.

For the US, ESMA identified obstacles to the extension.  Chief among these are the absence of remuneration rules for US investment managers and the “unlevel playing field” of the restrictions on EU funds to access US retail investors.  At present, in order for the passport to be extended to the US substantive changes would need to be made to US federal securities laws and regulations regarding the marketing of private funds in the US.  Whilst the SEC does focus on inadequate disclosures of fees, costs and expenses (see our posts here and here), it is highly unlikely that the legislative changes necessary to satisfy ESMA will be forthcoming in the near future.  Consequently US managers will need to continue accessing European investors either by way of the NPPR or reverse solicitation for the foreseeable future.  Each of those approaches continue to bring their own challenges, especially in the absence of guidance regarding the reverse solicitation exemption.

And what of the Cayman Islands?  As you may have noted from the list above, the Cayman Islands was not included as part of ESMA’s first assessments.  This a further blow to US investment managers and the inclusion of the territory on ESMA’s list of relevant jurisdictions will offer little comfort given the time required to conduct an assessment.

All in all, not a great deal has changed for the US firms.

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Written by Michael Wu

Market regulators in France, Italy, Spain and Belgium, in coordination with the European Securities and Markets Authority (ESMA), have decided to extend their current short selling ban that was enacted on August 11, 2011.  A summary of the action taken by each regulator is summarized below.

France.  The Autorité Des Marchés Financiers (“AMF”) extended the ban until November 11, but will determine whether to lift the ban by the end of September.  The AMF press release can be found here.

Italy.  The Commissione Nazionale per le Società e la Borsa (“Consob”) extended the ban until September 30.  The Consob press release can be found here.

Spain.  The Comisión Nacional del Mercado de Valores (“CNMV”) also extended the ban until September 30.  The CNMV press release can be found here.

Belgium.  The Financial Services and Markets Authority (FSMA) is continuing its indefinite ban on short selling.

In addition, Greece’s Hellenic Capital Market Commission (“HCMC”) will reassess before the end of September its current short selling ban that is in effect until October 7.  The HCMC press release can be found here.

Other European countries have not implemented a short selling ban.

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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.

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Written by Michael Wu

On November 11, 2010, the European Parliament adopted the EU Directive on Alternative Investment Fund Managers (the “Directive”).  The Directive will affect a significant number of alternative investment fund managers (“AIFMs”) that manage and/or market alternative investment funds (“Funds”), including hedge funds, commodity funds, private equity funds and real estate funds, within the European Union (“EU”).  The text of the Directive is expected to be published in the Official Journal sometime in the first or second quarter of 2011.  The Directive will be effective 20 days after publication and the EU Member States will have two years from such date to implement the Directive.

Scope: The Directive regulates AIFMs, rather than the Funds that they manage.  Specifically, the Directive regulates (a) EU AIFMs and (b) non-EU AIFMs that either (i) manage a Fund that is domiciled in the EU or (ii) market a Fund to investors in the EU.  A “small fund manager” that is regulated by its home EU Member State will be exempt from the majority of the Directive’s provisions if the AIFM manages less than €100 million in assets (or €500 million in assets, if its Funds do not use leverage and have at least a 5-year lock-up).

Marketing of Funds: The Directive defines “marketing” to mean “any direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares in a [Fund] it manages to or with investors domiciled in the [EU].”  Under this definition, passive marketing (i.e., responding to inquiries from investors) would not be considered “marketing” under the Directive.  However, an AIFM’s use of a marketing or placement agent to conduct marketing activity in the EU would be considered “marketing” under the Directive.  The Directive implements a dual regime for marketing Funds in the EU.  An AIFM may market its Funds either (a) into an EU Member State if the EU Member State’s securities regulator expressly allows it, or (b) into all EU Member States under the EU “passport” regime.  However, the availability, applicable starting date and possible ending date will depend on whether the AIFM and/or the Fund is based in the EU or based outside of the EU.

Capital Requirements: If an AIFM only manages its own Funds, it must have initial capital of at least €300,000.  If an AIFM manages third party Funds, it must have initial capital of the higher of (a) ¼ of its annual expenditures and (b) €125,000.  In addition, if the Fund(s) managed by the AIFM have over €250 million in assets, the AIFM must have additional capital equal to 0.02% of the Fund(s) assets over €250 million.  However, in no event is the AIFM required to hold initial capital of more than €10 million.

Conduct of Business: The Directive will require AIFMs to meet certain conduct of business requirements, including the following:

  • No investor may obtain preferential treatment unless such treatment is disclosed in the Fund’s documentation.  Thus, side letter provisions would need to be disclosed to all investors in the Fund.
  • Conflicts of interest between the AIFM and the Fund or its investors must be disclosed and managed by the AIFM.
  • Risk management and portfolio management must be kept separate.
  • AIFMs must conduct stress tests and monitor the liquidity risk of open-ended Funds regularly.  The investment strategy, liquidity profile and redemption policy of each Fund managed by the AIFM must be consistent with each other.
  • In order to invest the Fund’s assets in any securitization positions, the originator of the securitization must retain at least a 5% net economic interest in the securitization.

Remuneration: AIFMs must have remuneration policies and practices that are consistent with and promote sound and effective risk management and do not encourage excessive risk taking.  For example, AIFMs may not guarantee multi-year bonuses, 50% of bonuses must be paid in the form of interests/shares of the Fund and 40-60% of bonuses must be deferred at least 3 to 5 years.  The remuneration policies and practices must apply to senior managers, but also to “control staff.”

Valuation: If an AIFM performs valuations internally, it must ensure that the valuation process is independent of the portfolio management and remuneration policies of the Fund and that measures are in place to identify and resolve conflicts of interest.  However, EU Member States have the authority to require an AIFM to subject its valuations to verification by external valuation agents or auditors.

Depositary: An AIFM must appoint a single depositary, such as an EU regulated bank or an EU securities firm, for each of its Funds.  If an AIFM manages a private equity fund, the depositary may be an “entity” that carries out depositary functions as part of its business activities.  For a non-EU Fund, generally, the depositary must be established in the jurisdiction where the non-EU Fund was formed or the jurisdiction of the AIFM’s principal place of business.

Delegation of AIFM Responsibilities: An AIFM must notify its regulator prior to delegating any of its responsibilities.  AIFMs may only delegate portfolio and/or risk management functions to regulated entities or with prior authorization from the AIFM’s regulator.  However, regardless of any delegation of functions, the AIFM will remain liable to the Fund and its investors as though no delegation was made.

Disclosure: Among other things an AIFM must satisfy the following disclosure requirements:

  • If the AIFM’s publicly available annual financial report does not satisfy the disclosure requirements of the Directive, each of its Funds must be audited annually.  The annually audited report must be made available to investors and the relevant regulatory agencies.  The report must provide details of remuneration.
  • An AIFM must provide its investors with information about the Fund, including its strategy (which may not work for “black box” hedge funds), what assets it may invest in, its valuation procedures, any descriptions of preferential treatment, the percentage of assets that are illiquid and subject to side pockets, changes in managing liquidity and its risk profile.  The AIFM must also regulatory disclose the amount of leverage the Fund employs.
  • An AIFM must report to its home EU Member State regulator(s) matters relating to the Fund, including those disclosed to its investors.  In addition, if the Fund uses leverage on a “substantial basis,” the AIFM must report the specifics regarding the Fund’s use of leverage.
  • If a Fund acquires 50% or more of the voting rights of a private company, the AIFM would have to provide information of its holding (a) to the company, (b) to all other shareholders of the company and (c) to its home EU Member State regulator.  The AIFM would need to disclose, among other things, the future development of the private company either in the company’s annual report or in the AIFM’s annual report.

Leverage: An AIFM must set and comply with reasonable leverage limits for each Fund that it manages.  EU Member States will have the authority to impose restrictions on the use of leverage.

The Directive will become effective in January 2011.  The EU Member States will then have two years to transpose the Directive into their respective national laws.  Over the next four years, the European Commission will pass further legislation to ensure consistent interpretation and effective implementation of the rules by the EU Member States.  The European Commission will also review the application and scope of the Directive four years after the Directive’s effective date, including its impact on private equity and venture capital funds.