Europe is undergoing a process of regulatory and operational harmonisation in relation with traditional and alternative funds investing. This landscape is being shaped by three Directives that will enable investment vehicles to operate freely within the borders of the old Continent:
- the Alternative Investment Fund Managers Directive (AIFMD) ;
- the Undertakings for Collective Investment in Transferable Securities (UCITS) directive;
- the Swiss Federal Act on Collective Investment Schemes (CISA) directive.
The AIFMD was published in the Official Journal of the European Union on the 1st of July 2011 and came into force in the UK on the 22nd of July of 2013, with a transitional period ended the 22nd of July 2014. Its aim is to create a comprehensive and effective regulatory and supervisory framework for alternative investment fund managers, specifically hedge funds and private equity, within the EU. At the moment, in order to comply with AIFMD, managers are enabled to choose two different paths:
- full AIFMD compliance, only for EU Alternative Investment Fund Managers (AIFMs) managing EU Alternative Investment Funds (AIFs), or
- National Private Placement Regime (NPPR), for any other possible combination of AIFMs and AIFs.
The introduction of a single market for the marketing of AIFs to professional investors in the EU is one of the main changes in the AIFMD. The new regime is based on a single authorisation in the AIFM Member State, or for a non-EU AIFM, country of reference, to market the AIFs to professional investors, with a subsequent regulator-to-regulator notification process.
The Marketing Passport has been available to EU AIFMs marketing EU AIFs since the 22nd of July 2013 and will be the only way for authorised EU AIFMs to market EU AIFs to professional investors in the EU. The Marketing Passport should be available to EU AIFMs marketing non-EU AIFs and to non-EU AIFMs marketing EU or non-EU AIFs in the EU from July 2015. It should be noted that this is dependant: on
- ESMA’s advice whether to extend the passport, this is due to be published on the 22nd July 2015
- The final decision of the European parliament and council
For an initial period following the transposition of the AIFMD, the marketing of non-EU AIFs managed by EU AIFMs, and EU and non-EU AIFs managed by non-EU AIFMs will continue to be permitted under NPPR. EU AIFMs managing non-EU AIFs marketed to professional investors in the EU via the NPPR will have to comply with the AIFMD from the 23rd of July 2013 onwards, except for the full depositary provisions. NPPRs may continue in parallel with the Passport regime from the 22nd of July 2015 until the 22nd July 2018. In 2018 the Commission may bring the NPPRs to an end, subject to ESMA’s opinion and replace it with the Passport regime.
A detailed chart explaining the application of provisions for any combination of AIFM and AIF is shown in our ‘Gateway to Europe’ White Paper.
The first UCITS Directive dates back to 1985 and was aimed at creating a legislative uniformity within the European region by capturing structural, organisational and marketing requirements for open-ended funds. The vision was to enable funds investing in transferable securities to be passported across Europe by being authorised in one of the Member States. Updates, in the form of UCITS III and IV, have since been implemented. These aimed to combat the proliferation of new marketing rules springing up in each jurisdiction, as they were seen to be impeding the harmonisation aim of UCITS; i.e. to create a common regulatory framework and European market. The recent UCITS IV Directive aims at dealing with the propagation of funds of sub-optimal size and the lack of flexibility imposed by the pre-existing rules. The Directive introduced a set of tools that permitted fund managers, domiciled and authorised in one Member State, to establish and manage a fund in another Member State, to remove administrative barriers by allowing cross-border distribution and to ease the consolidation of the UCITS vehicles in EU by allowing mergers via absorption, formation or amalgamation. On the 23rd July 2014 the European Union adopted Directive 2014/91/EU. This directive introduces new rules on UCITS depositaries, such as the entities eligible to assume this role, their tasks, delegation arrangements and the depositaries’ liability as well as general remuneration principles that apply to fund managers.
As a non-EU jurisdiction, Switzerland is not obliged to implement the AIFMD. Nevertheless, Switzerland amended its legal framework to take into account the AIFMD provisions on third countries. The revised CISA, which has been in effect from March 2013, removes the private placement regime and embodies a general obligation for managers of funds to obtain a license from the Swiss regulatory authority, FINMA. Furthermore, the revised CISA provides for de minimis rules according to which the managers of funds, whose investors are “qualified investors”, do not need to be regulated. This allows a foreign manager to operate in Switzerland as a branch. The authorisation of a branch by the FINMA is subject to the following requirements: the foreign manager is subject to an “adequate” supervision by its home regulator; the foreign manager has an adequate organisation, sufficient financial resources, as well as competent staff in order to operate a branch in Switzerland; and there is a Cooperation Agreement in place between FINMA and the foreign manager home regulator. This will enable foreign managers exclusively targeting foreign investors to avoid any registration and still market their funds by appointing a Swiss regulated fund representative, a paying agent (a Swiss bank). Hyde Park has agreements in place with two such Swiss representatives.