The Impact of AIFMD on Marketing Alternative Investment Funds in the EU

Marketing to the EU by US Fund Managers and Third-Party Marketing Under AIFMD

The EU Alternative Investment Fund Managers Directive (“AIFMD”) goes into effect on July 22, 2013.  AIFMD regulates the marketing of alternative investment funds (“AIFs”) in the EU, directly or through third-party marketers.

Summary of AIFMD

Under AIFMD, EU alternative investment fund managers (“EU AIFMs”) may obtain a passport to market EU funds throughout Europe.  The pan-EU passport limits marketing to “professional investors” and, therefore, precludes EU AIFMs from marketing to retail investors.  (Retail investors may be able to purchase so-called “UCITS funds” which are not considered to be AIFs and are subject to a separate EU regulatory regime.)  EU AIFMs can, subject to certain equivalency requirements, begin marketing their non-EU funds in Europe under the passport beginning in 2015.  However, non-EU alternative investment fund managers (“non-EU AIFMs”) will not be eligible to use the pan-EU passport until at least July 2015.  Accordingly, from 2013 to 2015, European managers will enjoy a large competitive advantage because they alone will be able to market EU alternative investment funds to European investors under AIFMD.

Non-EU AIFMs–Country Private Placement Regimes With AIFMD Overlay

Managers from the U.S. and other countries, however, are still able to market their funds to investors in each European country through each country’s private placement regime until 2018.  Current European private placement rules generally fall into five categories: (1) those that allow marketing only subject to a minimum investment amount (Belgium); (2) those that allow marketing subject to a maximum number of offerees (Denmark and Holland); (3) those that allow marketing only to certain types of investors (Finland, Germany, Holland, Switzerland and the UK); (4) those that ban all forms of active solicitation (France, Italy, Norway and Spain); and (5) those that have no marketing restrictions (Sweden).  Despite it being less than two months away from AIFMD’s July implementation date, there is still considerable uncertainty in many countries about what the new private placement rules will be.  The UK, Ireland and The Netherlands have confirmed that their rules will remain largely unchanged, while Germany has effectively closed the door to marketing.  Other countries such as France, Spain and Italy have yet to clarify their position.

AIFMD requires firms marketing through the private placement regime to comply with a number of its provisions, including annual reports to EU state regulators and, upon request, to investors, certain pre-investment disclosures to investors (generally what is normally included in an AIF offering memorandum plus NAV and historical performance information) and certain ongoing investor disclosures.  Where a non-EU AIF is being marketed, the marketing agents will also have to confirm that the AIF was established in a country which is not a non-cooperative country for FATF anti-money laundering purposes, that the regulator of that country has signed a cooperation agreement with the regulator of each country into which the AIF is being marketed (Cayman Islands is in the process of obtaining the required agreements; to date, only Switzerland and Brazil have entered into agreements with the EU) and that the AIF provides EU investors with the appropriate level of disclosure required by AIFMD.

Exclusions from AIFMD

Managed Accounts.  Managed accounts do not fall within the definition of a fund and thus are not covered by AIFMD.  Therefore, managed accounts can serve as an alternative path for U.S. managers looking to reach European investors.

Reverse Solicitation.  For hedge fund managers looking to market a hedge fund in a restrictive marketing environment, most jurisdictions employ the “reverse solicitation rule.”  Under this rule, it is permissible to respond to an investor inquiry even though direct solicitation is not allowed.  In other words, the crucial issue is whether the manager approaches the investor or vice versa. There are two options for managers looking to work around solicitation rules: (1) locating an intermediary with an existing client relationship with the potential investors who can approach the hedge fund manager on behalf of those investors (s)he knows have an interest in the hedge fund; or (2) initiating a two stage process by first gauging general interest in the hedge fund manager’s strategy without specifically referencing the hedge fund offering and, second, where appropriate, asking the investor to send an e-mail to the hedge fund manager stating his potential interest and desire to obtain more information.

Non-EU AIFMs that rely solely on reverse solicitation can remain outside of the scope of AIFMD in its entirety until at least until July 2015. This may be an attractive approach, given the alternative for many large non-EU managers is regulatory reporting to multiple EU regulators from September 2013 onwards.

Implications for Utilization of Third-Party Marketers

For those managers utilizing a third party marketer, it will become more important than ever to have a clear understanding of how, and to whom, the third party undertakes marketing. On the other hand, it seems reasonable that the introduction of investors by investment consultants should, in the absence of an arrangement with the AIFM, not be treated as marketing. However, depending on the information made available to the end investor (for example information about the AIFM on a consultant’s database), this could also constitute indirect marketing under the AIFMD.