Intertrust conducted a survey in March 2019 amongst alternative investment managers in private equity, real estate, hedge and infrastructure. Following the launch of the report, Audrey Behan, Head of AIFM services in Ireland and Robert Comyn, Senior Compliance Officer in Ireland, discuss the research findings which highlighted the concerns of global fund managers generated by the insufficiency of European cross border regulatory and legislative standardisation in the market.
Whilst the evidence shows that there’s a strong appetite from managers looking to launch into the European Economic Area (EEA), it’s significant that 60% of respondents indicated a desire for greater harmonisation to reduce variances of AIFMD interpretation and more than half (59%) of respondents predicted that there would be the prospect of ‘regulatory arbitrage’ created between European Union member states seeking to attract business.
These concerns are reflected in the data. As at the end of Q4 2018, EU regulated open-ended fund assets totalled €14.7 trillion. Of the total assets under management in the EU, 70% are held by investment funds authorised or registered for distribution only in their domestic market.
Whilst managers of Undertakings for Collective Investment in Transferable Securities (UCITS) already benefit from a fully-fledged management passport, which allows them to provide their services across the EU without a residence requirement, only 37% are currently registered for distribution in more than three member states.
EU managers of non-UCITs funds, i.e. alternative investment funds (AIFs) benefit from an EU-wide passport to manage and market AIFs to professional investors across borders. However, unlike UCITS, marketing AIFs to non-institutional investors is currently only possible at member state discretion. This has resulted in a desultory 3% of AIFs registered for distribution in more than three member states.
Thankfully, the European Commission has not been blind to these concerns.
On the 17 April 2019 the European Parliament plenary formally adopted the trilogue (the EU Parliament, Council and Commission) agreement on the Commission’s initiative (the Capital Markets Union Action Plan) to remove cross-border barriers to the distribution of investment funds.
This marks a decisive recognition of the need to postpone the application of the Packaged Retail Investment and Insurance Products (PRIIPs) disclosure regime for UCITS by two years, in light of the regime’s documented shortcomings. While the goal is to standardise pre-sale documents across all financial products, the Commission finally recognised that investors would not be able to compare the Key Information Documents for UCITs (KID) and AIFs (PRIIPs KID). The delay allows the European Commission more time to conduct a thorough review of the regime.
Also appreciated is the fact that existing AIFs may be ‘pre-marketed’ into new EU host jurisdictions, alongside not-yet-established AIFs, thereby broadening the range of funds available to prospective investors.
Until this initiative, member states had taken diverging approaches to the definition of ‘marketing’. In particular some member states regarded any initial contact with a potential investor as ‘marketing’ where others allowed a certain degree of pre-marketing contact before AIFMD was considered to be triggered. This uncertainty meant that an alternative investment fund manager, that wished to determine investor interest in an AIF before it came into existence, would be allowed do so without triggering AIFMD marketing requirements in some member states but not others.
A new definition of ‘pre-marketing’ is to be introduced, and means:
‘a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established.’
However, the initiative contains a requirement for an informal notification by the management company to the competent home authority announcing the start of the pre-marketing regime for AIFs which has created somewhat unnecessary ambiguity.
The amended directives will also remove numerical thresholds, initially governing the de-notification of UCITS or AIFs from host member state jurisdictions under the Commission’s original proposal. These thresholds would have introduced an additional barrier to the cross-border distribution of funds.
The new directives will permit a UCITS which has been marketing UCITS in a host member, or an EU AIFM which has been marketing an EU AIF in a host member state under an Article 32 AIFMD notification, to cease marketing any or all of these UCITS or AIFs, by sending a notice of de-notification to its home regulator provided:
1. it makes a blanket offer to repurchase or redeem (free of charge or deductions) all units or shares of the UCITS or AIF(s) being de-notified, which are held by investors in that member state. The offer must be:
- publicly available for at least 30 working days and
- addressed (directly or through intermediaries) individually to all investors in the host member state whose identity is known
(this condition doesn’t apply in the case of closed-ended AIFs and ELTIFs.)
2. it makes its intention to stop marketing in that member state public by means of a publicly available medium (including electronic) which is ‘customary for marketing’ UCITS or AIFs and suitable for a ‘typical’ UCITS or AIF investor
3. contractual arrangements with any financial intermediaries or delegates are modified or terminated with effect from the date of de-notification to prevent units or shares in any UCITS or AIF which is being de-notified from being offered or placed.
Yet, some doubts remain regarding the rationale to continue requiring the formal notification requirements between home and host competent authorities, despite the end of the marketing regime.
A further notable amendment to the directive is the removal of the requirement for asset management companies to establish a mandatory physical presence in a host jurisdiction as a condition for marketing their funds.
Finally, the initiative will establish a centralised and updated information database held by the European Securities and Markets Authority (ESMA). This database will benefit those fund management companies wishing to avail of the EU fund distribution passport by expediting the cross-border notification procedure.
Launched in September 2015, the Capital Markets Union Action Plan is reaching its conclusion. It’s hoped that the progress achieved will advance the cross-border market for investment funds and will, in some aspects, settle the concerns of alternative fund investment managers.
 Intertrust: Navigating a Shifting Regulatory Landscape May 2019
‘Worldwide Regulated Open-ended Fund Assets and Flows’, International Statistical Release, efama.
 ‘Communication from the Commission’ European Commission.
 ‘Communication from the Commission’ European Commission.