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