Taking stock of the Alternative Investment Fund Managers Directive nine years later: will the marketing of AIFs improve?
The European Alternative Investment Fund Managers Directive (AIFMD) entered into force on 21 July 2011. Its objective was to create a solid and harmonized legislative framework for the alternative investment fund (AIF) industry. Has AIFMD been a total success?
François Kim Huge - [Sponsoring] Partner - Consulting - Financial Industry Solutions - Deloitte
Guillaume Scaffe - Director - Consulting - Financial Industry Solutions - Deloitte
Marie-Anne Mandroux - Senior Manager - Consulting - Financial Industry Solutions - Deloitte
Published on 8 October 2020
The European Alternative Investment Fund Managers Directive (AIFMD) introduced the alternative investment fund (AIF) marketing passport and is now recognized as a great success. However, this achievement is somewhat tainted by the passport being unavailable to all industry players. This article aims to examine the current state of affairs, explain the limits of the marketing possibilities, and to provide a view as to whether the regulation will evolve in the right direction.
THE AIFMD MARKETING PASSPORT IS NOW WIDELY RECOGNIZED AS A SUCCESS STORY.
The AIFMD was the first step in harmonizing the marketing of EU AIFs within the EU. At present, the Directive grants a marketing passport to EU AIFMs that manage EU AIFs. This allows these AIFs to easily obtain a marketing authorization in each Member State (MS), thanks to a homogeneous and simplified notification process. Raising money from professional investors within the EU can be done relatively simply and quickly. The time-to-market is much faster (a maximum of 20 business days) and less costly (the abrogation of some local gold-plating requirements).
BUT IS AIFMD A TOTAL SUCCESS?
In fact, nine years later, many hurdles remain when marketing AIFs that are non-EU or target retail investors. In these cases, the regulatory framework is not harmonized and different rules still exist across MS, despite the efforts of the European Commission and the European Securities and Markets Authority (ESMA) to overcome discrepancies in the EU regulatory framework.
The European cacophony when marketing non-EU AIFs via the so-called NPR: technically possible, but in reality…
Even though every MS can market non-EU AIFs via the NPR from a legal perspective, the reality and market practice is very different, due to many MS setting up technical barriers that make this process overly complex and tedious.
For example, if an MS allows NPR, then a set of EU obligations defined by the AIFMD applies to the AIFM (e.g., a specific cooperation agreement between the host and home regulators, depositary requirements, and some transparency requirements). And, in addition, each MS may impose certain local gold-plating requirements. This creates an uneven playing field between EU and non-EU AIFMs.
THERE IS NOT MUCH CONFIDENCE AROUND THE MARKETING OF THIRD-COUNTRY AIFS.
It was expected that the AIFMD would evolve to extend the marketing passport to non-EU AIFMs and AIFs, as long as ESMA felt there were no significant obstacles regarding investor protection, market disruption, competition, or the monitoring of systemic risk.
However, for the time being, this project is on hold. So far, ESMA has only assessed 12 jurisdictions (Australia, Bermuda, Canada, the Cayman Islands, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Singapore, Switzerland and the United States of America). To date, ESMA is unable to provide a definitive assessment; therefore, the third-country passport is not in effect.
The AIFMD did not facilitate the marketing of AIFs to nonprofessional investors and curbed fund promoters’ enthusiasm for the retail market.
The AIFM passport and the NPR are avenues for targeting professional investors only. In other words, the possibility of targeting retail investors depends on each MS. These requirements are normally extremely complex and restrictive; and, in some MS, it is not even possible to target retail investors.
Back in 2011, fund promoters were enthusiastic about the possibility of marketing their AIFs to retail investors within the EU, but as the AIFMD maintained the status quo on this matter, these issues remained. In fact, before the AIFMD was implemented, only a few MS allowed the marketing of non-UCITS funds to retail investors locally. Even if the AIFMD’s main objective was to homogenize marketing rules across the EU, the AIFMD provisions for marketing to retail investors did not have much impact and this possibility was left to the discretion of each MS. Nine years later, the position of each MS has not really evolved. Only a few jurisdictions allow the marketing of AIFs to retail investors in their territory (mainly the same ones as before).
BUT THE EU INTENDS TO IMPROVE THE CURRENT STATUS AND ADDRESS THE LACK OF EFFICACY.
The European Commission is aware that it must review the Directive’s application and scope. In this respect, the European Commission issued an AIFMD assessment report to the European Parliament and the Council on 10 June 2020. In this report, the European Commission identified various inefficiencies, notably regarding the cross-border distribution of AIFs. It recognized that this inefficacy is caused by local gold-plating requirements (for example, regarding the NPR), divergences in the national marketing rules (the definition of marketing activities) and nonharmonized interpretations of the AIFMD.
Regarding the latter, the lack of agreement on the definition of a professional investor impairs the marketing passport’s efficacy. In some countries, it is possible to use the marketing passport to target sophisticated retail investors with a high net-worth and experience in financial markets. The definition and the level of wealth required to qualify as a sophisticated retail investor differs significantly from one MS to another.
The need for greater convergence regarding the definition of a professional investor was also identified by ESMA in its letter to the European Commission on 18 August 2020, which highlighted areas of the AIFMD where improvements could be made.
And, ESMA also stressed the importance of clarifying the reverse solicitation definition. A harmonized interpretation by each MS should be considered to protect investors.
In the end, are perfectly homogenized rules across the EU a utopia? The AIFMD’s objective was to create a solid legislative framework. Nine years later, there are still many local practices, interpretations and even gold-plating requirements regarding the marketing of AIFs within the EU. But let us not conclude on a negative note:
- Even if we still face a long journey ahead, we believe that the standardization of distribution matters accomplished so far is already a great achievement. The figures speak for themselves: the total net assets of AIFs increased by more than 250 percent from 2011 to 2019. Indeed, the marketing passport has successfully streamlined the distribution of EU AIFs managed by EU AIFMs, following the example of UCITS.
- Some other improvements are already on their way: a “new” Directive (2019/1160/EU) was put in place in July last year, going one step further in the harmonization of practices at the EU level. While it has addressed some issues, such as the question of premarketing, many others have remained unanswered; for example, the passport extension to third countries, the possibility of marketing to retail, investor classification, reverse solicitation, etc. However, the European institutions are aware of these weaknesses and consultations are being held to reach a more level playing field across all MS.
- Regarding the initial enthusiasm in 2011, we believe that there was a gap in expectations between the investment management industry and the AIFMD’s goals. European bodies wanted to impose more governance; their intention was not to revolutionize the industry by providing marketing passport options to retail or non-EU markets at first.
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