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01 September 2016
The EU Alternative Investment Fund Managers Directive (AFIMD) (2011/61/EC) was implemented in July 2013 and prescribed new rules with respect to the authorisation, operation and transparency of managers of alternative investment funds (AIFs), which are marketed to professional investors in the European Union and European Economic Area. It has been described as the most fundamental piece of international regulation ever to affect the funds industry and has had a profound effect on how managers of funds located in or marketing into the European Union operate their business.
The fundamental changes introduced by the AIFMD include those relating to:
In addition, the AIFMD provides for continuing obligations, such as reporting and disclosure. It also provides for a marketing passport, which can be used by AIFMs to market funds across the European Union through a regulator-to-regulator prior notification procedure. At the moment, only EU-domiciled AIFMs marketing EU AIFs can use the marketing passport. The timing of the proposed extension of the marketing passport to non-EU AIFMs and AIFs is still unclear.
This update looks, from a Jersey perspective, at the two methods for marketing to professional investors based in Europe under the AIFMD which, depending on the jurisdiction of the AIFM and AIF, are through:
Under the AIFMD, unless both the AIF and AIFM are based within the European Union, AIFMs must continue to market AIFs to professional investors in EU member states by complying with applicable NPPRs, the AIFMD's disclosure and reporting requirements and certain other conditions.
Jersey has satisfied these conditions by:
Further, Jersey was the first third country to implement, through domestic legislation, the full scope of the AIFMD and Level 2 regulations issued by the European Commission on an opt-in basis. As a result, all Jersey AIFs and AIFMs to which the AIFMD applies require prior approval or must comply with exemption conditions before marketing into Europe. These additional requirements are not believed to impose a significantly greater burden on Jersey AIFMs or AIFs compared to those that would apply by virtue of the European requirements resulting from marketing into Europe.
It is expected that the private placement route will be available until at least 2018, at which time it will be reviewed by ESMA.
Should an AIFM wish to market its fund into the European Union, the AIFM must first determine whether it is a sub-threshold manager, in which case lighter touch provisions from a Jersey legal perspective (and also under the AIFMD) will apply. Managers which either manage leveraged assets valued at less than €100 million or unleveraged and closed-ended assets valued at less than €500 million are subject only to a simple JFSC registration process under the Alternative Investment Funds (Jersey) Order 2013 (if the relevant AIF is a very private, Control of Borrowing (Jersey) Order (COBO) only or private placement fund). For these purposes, such managers are considered 'sub-threshold AIFMs'. In these cases, lighter touch reporting and disclosure requirements apply under the AIFMD and the Jersey AIF codes (subject to the requirements of the relevant states' NPPRs).
The marketing passporting system is currently available only for EU managers of EU funds. The result is a more onerous regulatory regime; however, in exchange, EU managers have the right to passport their:
As mentioned above, Jersey was the first third country to offer AIFMs a fully compliant AIFMD option, meaning that Jersey has an opt-in regime for managers wishing to comply fully with the AIFMD requirements when marketing to European investors. Jersey has not only achieved the capability to operate NPPRs under the AIFMD, but has also already implemented the necessary mechanics to support an EU-wide AIFMD marketing passport.
Following its assessment, on July 30 2015 ESMA recommended that Jersey (and Guernsey) be included in the first wave of third countries whose managers can seek authorisation for the marketing passport, provided that they comply with all of the requirements of the AIFMD. Subject to approval by the European Commission, Parliament and Council, this should enable Jersey AIFMs to market their Jersey AIFs freely throughout the European Union.
Pursuant to the AIFMD, any marketing into the European Union will affect AIFMs and AIFs as follows.
Very private, COBO-only and private placement funds
These funds must apply to the JFSC for an AIF certificate under Jersey's Alternative Investment Funds (Jersey) Regulations (the AIF Regulations) and adhere to the applicable sections of the AIF codes (ie, in relation to disclosure, reporting and asset stripping, together with notification to the JFSC in advance of marketing). Jersey-based AIFMs must comply with the relevant sections of the AIF codes, and either be licensed by the JFSC under the Financial Services (Jersey) Law 1998 as providers of an AIF services business or, if the AIFM is 'sub-threshold' (as defined in the directive and AIF codes), be approved as a sub-threshold AIFM service provider under the Alternative Investment Funds (Jersey) Order 2013.
There are less onerous requirements for sub-threshold AIFMs from a Jersey perspective and under the directive; however, certain member states have enhanced requirements under their NPPRs and, for example, the same level of disclosure may be required regardless of whether the AIFM is considered a sub-threshold.
Expert, listed, eligible investor, unclassified and recognised funds
These funds must already be regulated under the Collective Investment Funds (Jersey) Law 1988 and their service providers must be regulated under the Financial Services (Jersey) Law. The only additional regulatory requirements pursuant to the Jersey AIF Regulations are compliance with applicable sections of the AIF codes and notification to the JFSC in advance of marketing into the European Union and European Economic Area.
These funds must be converted into another form of fund (eg, an eligible investor, listed or expert fund) before they can be marketed into the European Union and European Economic Area.
Once the marketing passport becomes available, Jersey will be able to offer a broad range of marketing and organisational options to managers, whether they are targeting European or global investors.
In the meantime, Jersey AIFMs can and are successfully able to market their Jersey AIFs using NPPRs. In light of ESMA's positive assessment, Jersey now benefits from an increased level of certainty and the ability to market in the European Union in the long term.
The future looks bright for the Jersey investment funds industry, which will have the ability to offer fund promoters the best of both worlds.
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