A month ago, the European Commission (EC) announced far-reaching proposals designed to curtail non-EU banks – including those based in the UK and Switzerland – from cross-selling their services into the Single Market. With an EC review of the AIFMD (Alternative Investment Fund Managers Directive) also looming, a number of UK asset managers were bracing themselves for the worst, namely the imposition of new limits further impeding their ability to access EU investors. In November, the EC finally published its proposed amendments to AIFMD – which are more measured than what many had anticipated.
Let’s begin with the good news. Despite a lot of noise emanating from certain member states about banning the practice entirely – delegation is likely to continue albeit subject to a few additional requirements. The EC has said that delegation by AIFMs and UCITs of portfolio management and risk management to third countries will not change, but managers must have substance in the EU. In effect, the EC has stated that AIFMs and UCITS need to employ at least two full-time EU residents so as to prevent the emergence of letterbox entities. A number of law firms have stressed that this provision is not especially burdensome and simply codifies existing rules.
However, “whilst there is no requirement for an AIFM to retain more risk or portfolio management than is delegated, there are more onerous reporting requirements where this is the case. The proposal is that competent authorities notify the European Securities and Markets Authority (ESMA) on an annual basis of delegation arrangements where more risk or portfolio management is delegated to third-country entities than is retained,” according to an article by law firm Dechert. ESMA will also assess how member states are applying the delegation rules and will conduct regular peer reviews to ensure letterbox entities are not being created and regulatory arbitrage is avoided.
Revisions to the AIFMD’s National Private Placement Regime (NPPR) – while not laborious or prohibitive – could potentially pose problems for some alternative asset managers – if political circumstances were to dramatically change. Right now, non-EU AIFMs and non-EU AIFs looking to leverage NPPRs cannot be based in a jurisdiction designated as being a “non-cooperative country or territory” by the Financial Action Task Force (FATF). Moving forward, the EC is now widening the goals posts and proposing that third country AIFs cannot be distributed into the EU if they are operating out of a market that is on the EU’s list of non-cooperative jurisdictions for tax purposes and AML (anti-money laundering) – i.e. a high-risk third country.
While this clause is unlikely to affect non-EU AIFMs in leading financial centres such as the UK, US, Hong Kong, Singapore or Switzerland, offshore fund hubs (i.e. the British Virgin Islands, Cayman Islands, Jersey, Guernsey) could find themselves under scrutiny. Although none of these offshore centres are currently deemed high risk by the EU from an AML or tax perspective, the Cayman Islands was on the EU Tax List between February 2020 and October 2020. If one (or more) of these offshore centres were to be added to an EU AML or Tax List, then it could prevent managers with funds domiciled in those jurisdictions from marketing into the EU.
The EC’s proposed revisions are not ground-breaking nor are they likely to disrupt IIMI members’ operations. Barring a few added requirements here and there, the EC’s amendments will come as a relief to IIMI members who had previously assumed that much tougher rules would be introduced.