EU Alternative Investment Fund Directive

The European Union Alternative Investment Fund Managers Directive (AIFMD) and the Cayman Islands mutual funds (A review of the current status of Cayman Islands hedge funds managed by non-EU managers and changes required to permit the continued marketing to EU investors)

By Victor Murray, 17 January 2012

The impact of the AIFMD is wide reaching outwith the European Union (EU) including the way fund assets are managed, the use of leverage, compulsory depositories, and calculation of the net asset values and importantly the ability to market Cayman Islands funds to EU based investors. Provided the investment manager (the manager rather than the fund that will be regulated) can comply with the requirements of AIFMD applicable to non-EU managers they will be permitted to rely on existing private placement exemptions to allow them access to EU sophisticated investors in the short term. Thereafter, following the removal of the private placement exemptions (September 2015) then non-EU managers should be able to apply for an ‘EU passport’ to market to EU investors.

When is the AIFMD in force?

The AIFMD is already been enacted as a directive (1 July 2011) and each EU country must enact the AIFMD in their laws before 22 July 2013. The details of the AIFMD will be enacted by the European Commission (EU Commission) based on the advice (note the Commission is only ‘advised’) of the European Securities and Markets Authority (EMSA). EMSA submitted their final draft to the EU Commission on 16th November 2011 for their consideration1.

Developments in the final draft.

The final draft technical recommendations to the AIFMD submitted by EMSA2 no longer has the ‘equivalency’ régime that was envisaged for compliance by ‘third countries’. This was previously of great concern to non-EU funds that have or wish to target EU based sophisticated investors. The EMSA technical advice on implementing measures now focuses on the non-EU manager or non- EU funds regulation and compliance with the AIFMD in their own country and this allows jurisdictions such as the Cayman Islands to ascertain how they can comply with the requirements of AIFMD from a regulatory point of view.

1 http://www.esma.europa.eu/system/files/2011_379.pdf 2 http://www.esma.europa.eu/system/files/2011_379.pdf

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Requirements to continue to market Cayman Islands funds to EU investors from July 2013

In order to market to EU investors from 22 July 2013 an EU investment manager will require to be authorized by the regulator in their country in accordance with the AIFMD. EU member states will on the whole retain their current private placement regimes until 2015 (they are not obliged to do so) provided the non-EU manager meets certain requirements of the AIFMD. This is a crucial point for the non-EU managers managing Cayman Islands Funds.

Where such funds market to EU investors under that EU county’s private placement laws non-EU managers can continue to provide services and activities after the AIFMD comes into force3 subject to the following requirements:

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Requirements on non-EU Managers from 2013

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Current status

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The provision of detailed information to the potential EU investor including all fees and charges


This is normally provided in the Offering Document

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The provision of annual investor report detailing all remuneration of the manager and carried interest

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This will be a new requirement for the majority of non-EU managers

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Reporting to the EU state that the fund is marketed on the control acquired in other companies, as well as the types of assets and illiquidity of the fund

This will be a new requirement for the majority of non-EU managers

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Co-operation agreements between the home country of the manager /the fund and the EU state where the fund is marketed

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CIMA are aware of this requirement and propose amending the Cayman Islands laws to allow for this4

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Of course AIFMD registration is not required where the fund is not marketed to EU investors.

Requirements to market Cayman Islands funds to EU investors from September 2015

AIFMD registration will be required from 2015 when it is likely that the EU passport is extended to non-EU Managers. It is envisaged that when the EU passport is extended to non-EU managers then following a three year transitional period EMSA will determine (subject to the Commission adopting this) that the private placement laws will be repealed leaving the EU passport as the only route to access EU investors. Therefore it may not be possible for a non-EU manager to market to EU investors from 2018 without the EU passport.

In order to obtain the EU passport non-EU managers with non-EU funds (such as Cayman Islands funds managed by US managers) will require the following criteria to be met:

3 Art 99

4 Speech by Yolanda McCoy 18 November 2011 (http://www.cimoney.com.ky/about_cima/speeches.aspx?id=56&ekmensel=e2f22c9a_10_46_56_3)

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Passport requirements for non-EU manager

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Cayman Islands Status

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The non-EU manager is fully compliant with the AIFMD

(this is a matter for the non-EU manager to comply with and includes: depositories, leverage and independent valuation)

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There are cooperation agreements between the managers home country and the EU

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CIMA are aware of this requirement and are ready to are working on this5

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The jurisdiction where the manager/fund is based is not listed as non-cooperative by the FATF

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The Cayman Islands are recognised by the FATF as a cooperative jurisdiction

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There is a tax information exchange agreement between the fund jurisdiction, the manager’s jurisdiction and the EU country that the fund will be marketed

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The Cayman Islands currently have a number of tax information exchange agreements with the EU countries6

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Each EU State will authorize a non-EU manager and that particular EU State is dependent upon the location of the EU investors. ESMA will collate the EU state authorizations and publish them on their website. The Cayman Islands Monetary Authority (“CIMA”) have announced7 that they have had an ongoing dialog with, and provided comments to, ESMA with regards to two consultation papers8. This is important as the final AIFMD now envisages where portfolio management (or risk management) is carried out in a non-EU country such entity be:

“authorised or registered for the purpose of asset management based on local criteria and is effectively supervised by an independent competent authority”.

A competent authority will be one that is located in a country that is assessed as equivalent to the EU state by the IMF (such as the Cayman Islands).

The Cayman Islands Mutual Funds Law and Securities Investment Business Law (SIBL) may require amendments including the provision to provide the assets under management to the EU as follows:

  • -­‐  Managers with less than EURO100 million will report annually;
  • -­‐  Managers with more than EURO100 but less than EURO 1.5 billion will report every six

    months; and

  • -­‐  Managers with more than EURO 1.5 billion will report quarterly.

    5 Speech by Yolanda McCoy 18 November 2011 (http://www.cimoney.com.ky/about_cima/speeches.aspx?id=56&ekmensel=e2f22c9a_10_46_56_3)

    6 Speech by Yolanda McCoy 18 November 2011 (http://www.cimoney.com.ky/about_cima/speeches.aspx?id=56&ekmensel=e2f22c9a_10_46_56_3)

    7 Speech by Yolanda McCoy 18 November 2011 (http://www.cimoney.com.ky/about_cima/speeches.aspx?id=56&ekmensel=e2f22c9a_10_46_56_3)
    8 ‘Draft Technical Advice on Possible Implementing Measures on the Alternative Investment Fund Managers Directive’ issued on July 13, 2011; and ‘Draft Technical Advice on Possible Implementing Measures on the Alternative Investment Fund Managers Directive in relation to Supervision and Third Countries’ issued on August 23, 2011.

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Depositaries

The final version of AIFMD envisages that the depository will be located in the same jurisdiction as the fund (Cayman) and not the manager (which I often not the case for Cayman Islands funds). These depositaries these should be supervised by an independent and competent authority with a regulatory framework to the same effect as depositaries in the EU. This means that unless non-EU depositories in the Cayman Islands are fully compliant with the Principles Relating to the Regulator of the IOSCO Objectives and Principles for Securities Regulation and relevant Methodology, and the Basel Committee Core Principles and the relevant methodology, then they will not be able to have EU investors in their funds.9 The good news is that CIMA have confirmed that Cayman Islands banks currently meet this criteria with the exception of ongoing reporting to the EU which will be enacted in the Cayman Islands once the AIFMD has been finalized by the Commission on or before July 2013.

Managers located in the Cayman Islands

CIMA have stated in November 2011 that they fully expect managers registered under the Cayman Islands Securities Investment Business Law (“SIBL”) to be permitted to provide management services to EU investors post 2015. This will require amendments to the SIBL include the reporting on assets as outlined above and the inclusion of reporting on breaches of the AIFMD to the EU.

Conclusion

The details of the status of the Cayman Islands funds and non-EU managers in relation to the AIFMD are dependent on whether the Commission adopts the ESMA recommendations, provided these are adopted in the current form, then Cayman Islands funds with a non-EU manager will be permitted to continue to market to EU investors under the existing EU country specific legislation and this will continue to at least July 2015 for most EU countries. Thereafter a Cayman Islands fund with a non-EU manager would most likely have to apply for an EU passport. It is clear that CIMA are engaged in the process of assessing the effect of the AIFMD to ensure that when the current exemptions are no longer available funds formed in the Cayman Islands with a non-EU manager will continue to have access to EU investors.

17 January 2012

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9 Art21(3)/21(6)

www.mgcayman.com

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