To anyone who wants to distribute funds to European investors, Petra Hollis of Laven Partners has a message: be pragmatic. Here she enumerates four different ways in which people can distribute funds in accordance with the AIFMD, along with the requirements of the various EEA states where the AIF might be marketed.

To anyone who wants to distribute funds to European investors, Petra Hollis of Laven Partners has a message: be pragmatic. Here she enumerates four different ways in which people can distribute funds in accordance with the European Union's Alternative Investment Fund Managers Directive and the requirements of the various states in the European Economic Area in which an Aternative Investment Fund might be marketed.

The AIFMD has fundamentally changed the game for fund managers who are either based in the EU or just thinking of marketing their funds to European investors. Matters have not been made any easier by the fact that different European countries have been bringing the AIFMD into force at different speeds, and regrettably, with wildly different results for managers. This has led to a very fragmented distribution regime for both EEA and non-EEA managers.

An EEA manager authorised as an AIFM and marketing an EEA fund can benefit from the passport mechanism to distribute its funds across Europe. However, if the EEA manager manages a non-EEA fund – say a Cayman Islands fund – then the passport mechanism does not yet apply and the manager must abide by the local private placement rules or their equivalent. In that regard, distribution solutions do not vary that much between EEA and non-EEA managers.

Four choices for the manager

In essence, there are four different scenarios in which people can distribute funds in accordance with the AIFMD.

1) EEA managers distributing an EEA AIF

As mentioned above, the AIFMD passport applies. The manager-firm, which must be authorised as an AIFM, has to notify its 'home state' regulator of its wish to distribute the AIFs in other EEA states. The 'home state' regulator must then transmit this notification, within 20 working days, to the relevant European regulators in the jurisdictions where the AIF is meant to be marketed. The managers can start marketing as soon as the 'home state' regulator gives the manager the green light.

2) EEA managers distributing a non-EEA AIF

As mentioned above, even if the manager is authorised as an EEA AIFM and located in the EU, it cannot yet benefit from the passport to distribute its non-EEA AIFs in other European countries. It will therefore have to abide by national private placement rules or registration requirements of each of the EEA jurisdictions where the AIF is meant to be marketed. Although the manager must be authorised as an AIFM and comply with the requirements of the AIFMD in full, there is one exception to this rule. The manager does not have to appoint a single depositary which is subject to full compliance under article 21 (including strict liability). Instead, the AIFMD requires the manager to appoint a so called ‘depo-lite’ for each of the non-EEA AIFs it wishes to market. There are fewer restrictions on where the depo-lite has to be based, fewer requirements for the depo-lite to meet and of course, no strict liability for the depo-lite – a fact that has ramifications for the costs of this service. Finally, the manager has to check that supervisory authority of the non-EEA AIF and the manager's supervisory authority have signed the necessary co-operative arrangements with each other and that the AIF does not hail from a jurisdiction which the Financial Action Task Force, the world's anti-money-laundering standard-setter, has listed as a 'high-risk and non-co-operative jurisdiction'. This 'red flag' tag is a resurrection of the old ‘non-co-operative country and territory’ label that the FATF abandoned around 2007 in the face of charges that its choices of jurisdiction to punish were too political.

3) Non-EEA managers distributing a non-EEA AIF

The manager will have to comply with the transparency-related requirements of the AIFMD, namely those that govern prescribed disclosures to investors and the reporting obligations to the European regulators in jurisdictions where the non-EEA AIF is marketed. Typically, this involves the making of amendments to the prospectus to comply with the 'investor transparency' rules and the sending of both an annual report on the AIF’s finances and a report on the trading exposures and principle markets of the AIF to the regulator(s). Similar requirements to do with co-operation agreements and prohibitions against jurisdictions listed as 'high-risk and non-co-operative jurisdictions' apply before the non-EEA manager can distribute a non-EEA AIF.

The EU divided into three

At Laven, we call the above the ‘first level of compliance’. On top of this come the various requirements of the EEA states where the AIF is to be marketed. In this regard, the EU seems to be divided into three.

(i) There are the flexible jurisdictions, which require only a notification from the manager without additional requirements (the UK and Holland are prominent among these countries).

(ii) Then there are the stricter jurisdictions, which impose additional requirements such as the need to appoint a depo-lite for the AIF. Here, the regulator may take a few months to review the manager’s request to market its AIF. Good examples of jurisdictions like this are Germany and Denmark.

(iii) Finally, there are the EEA states that take a very conservative approach to the AIFMD and non-EEA managers who want to market their AIFs. Countries such as France and Austria are subject to near-full compliance with the AIFMD, including limitations on remuneration, valuation and risk management.

4) Non-EEA managers distributing an EEA-AIF

If the manager is not domiciled in the EU and wishes to distribute its EU non-UCITS fund (SIF, QIF, whichever) then, as detailed above, the first level of compliance applies to the manager as well as the local private placement rules or registration, as opposed to the AIFMD passport.

To anyone who wants to distribute funds to European investors, my message is to be pragmatic. Decide where you wish to market your funds and understand in detail the requirements for entry. Perhaps, most importantly, determine a plan of action to gain entrance while not overly distracting you, or your team, from your day-to-day operations.

* Petra Hollis is the managing director of Laven Partners in London. She can be reached on +44 (0)207 594 4979 or at petra@lavenpartners.com