In April 2017, the European Commission (EC) issued a tender for a one-year market study of the Alternative Investment Fund Managers Directive (AIFMD) to determine how well it has performed since it became effective. The Directorate General for Financial Stability, Financial Services and Capital Markets Union has since contracted professional services firm KPMG to perform the study.
This important review of the European Union's (EU) regulatory framework will examine how AIFMD has worked in practice over the past four years and to what extent its objectives have been met, and may be a key step towards the introduction of an AIFMD II. The study will also assess its impact on hedge funds, private equity and investment products operating outside the UCITS fund regime. Once the assessment is published, legislative changes to the regulatory framework may follow.
Considering the broad scope of AIFMD's influence on alternative investment funds (AIFs) and activities across the EU and around the world, the potential impact of changes to the regulatory framework could be significant.
Key insights
- A KPMG survey of AIFMD's effectiveness could lead to changes to the Directive or the way it is applied - essentially an AIMFD II - which would have a significant impact on AIFMs
- Opinions are being sought on pre-investment information disclosure, impact on retail investors and whether other legislation has helped or hindered AIFMD achieving its objectives
- Asset managers should prepare for the possibility of changes to AIFMD reporting, depositary requirements and marketing, among other things, following completion of the review
Broad scope for review
On February 8, 2018, KPMG published an online survey exploring the effects that AIFMD 's implementation has had on alternative funds, their managers and their investors.1 The survey, which ran until March 30, 2018, was designed to gather the views of stakeholders on AIFMD's requirements, their experiences of applying those requirements and AIFMD's market impact. KPMG has said it will use the survey responses to then analyze whether AIFMD has been effective, efficient, relevant and coherent, and whether it has created added value for the EU.
Marketing, private placements and reporting focus
The review is examining 12 areas in detail, including the role of the depositary, the current marketing options for EU and non-EU alternative investment fund managers (AIFMs), and national private placement regimes (NPPR). The review will also examine efforts to improve transparency as well as AIFMD's reporting requirements.
Third-party marketers and platforms will also come under review, as the EC is seeking information on how they operate. Particular scrutiny will be on how funds of hedge funds and other allocators into AIFs make decisions. The impact of the depositary rules, efforts to improve transparency and AIFMD's reporting requirements will also be examined.
The potential impact of changes to the regulatory framework could be significant
The survey seeks the views of stakeholders across three general areas of inquiry: AIFMD's impact on the information provided to investors before they invest; whether retail investors are affected by AIFMD; and whether other legislation, including tax legislation, has assisted or hindered the achievement of AIFMD's objectives. No results from the survey have yet been published, although any elements of the current regime could be subject to change.
Focus on depositary rules
The European Securities and Markets Authority (ESMA) has already made clear it wants increasingly robust asset segregation procedures in place throughout the custody chain as part of its efforts to push for a more consistent application of depositary rules across the EU.
A shift towards depositary independence could be under consideration.2 While this would address potential conflicts of interest for service providers that offer both depositary and fund administration to their clients, a number of major banks have already made significant efforts to implement ethical walls between their depositary and fund administration businesses to minimize the likelihood of such risks emerging.
Lack of standardized reporting requirements
A further potential outcome could see changes to some of the reporting obligations under AIFMD. Such revisions could affect any arbitrages contained in the contents of Annex IV, the EU's regulatory reporting template, and the disclosure requirements demanded under the second Markets in Financial Instruments Directive (MiFID II).
ESMA has already made clear it wants increasingly robust asset segregation procedures in place
There is also limited harmonization around Annex IV application across Member States, as some jurisdictions ask for much more detailed information from managers than others.3 For example, a handful of countries insist that non-EU managers distributing feeder funds provide data in Annex IV on the master fund even if it is not sold into the European Economic Area (EEA).
Third-country passporting issues
Non-EU asset managers are also hoping the EC clarifies its position on third-country passporting and regulatory equivalence approvals, something which has been delayed by the United Kingdom's withdrawal from the EU. A number of third countries remain in regulator purgatory,4 as they have not yet received passporting rights even though they have been advised by ESMA that the legislation relating to their domestic funds regime is aligned with AIFMD.
Fund managers relying on NPPR to market AIFs that would not otherwise be permitted under AIFMD's marketing and passporting regimes - mainly EU-based AIFs marketed by non-EEA managers and non-EU funds managed by EEA AIMFs - may also face uncertaintly. The NPPR may expire during 2018, and without any confirmation that passporting will be extended, it is uncertain whether the status quo will remain. Furthermore, the EC has proposed restrictive rules around pre-marketing under the Capital Markets Union (CMU), in what could be a precursor to tighter regulation of funds' marketing and distribution activities in Europe more broadly.
The outcomes and conclusions from the KPMG review could result in many revisions to AIFMD. Asset managers will anxiously await the published results and should be poised to make appropriate preparations as and when regulatory changes are introduced.