Real estate regulation is not a new phenomenon. In fact, property laws have been present as far back as medieval Islamic law, and in more feudalist forms in the common law courts of Early Modern England.
But never has there been an environment when the regulatory goalposts have moved so quickly, and readily, as in the past five or six years. The aftermath of the global financial crisis has led to greater scrutiny of financial markets and an ever-ratcheting compliance burden on financial institutions.
Often the regulations are not intended to specifically impact the private real estate industry. This leaves the industry in an unenviable position. Firstly, fund managers are left wrestling with which of the myriad rules applies to them, secondly, how to handle any new compliance burden, and thirdly, lobbying for change when rules not designed to influence real estate unfairly affect how real estate firms.
These tasks are made even more difficult when fund managers and investors are active across the globe. Many regulations impacting the property industry are interpreted differently in different countries. The prime example of this is the oft-maligned Alternative Investment Fund Managers Directive (AIFMD). The EU directive gave individual countries the discretion to 'gold plate' their regimes, meaning the ability to add extra regulations and fees beyond those required. This has created a patchwork regulatory regime which has left many fund managers scratching their heads.
Not all new regulations are bad news for the industry of course. Although still in a nascent stage, India’s proposed Real Estate (Regulation and Development) Bill, 2015, looks set to encourage foreign direct investment into the sector. Recent changes to the Foreign Investment in Real Property Tax Act (FIRPTA) in the US are also intended to ease the tax burden of foreign institutions investing in US real estate.
Still, the challenge of working out which changes to individual regulations will be most impactful is still a high priority for property fund managers and investors across the globe.
US votes to expand ‘accredited investor’ definition
The US House of Representatives has passed a bipartisan bill broadening the definition of an 'accredited investor,' promising to expand the capital pool available for private real estate funds.
For investor protection purposes, fund managers cannot solicit commitments from investors who do not meet the US Securities and Exchange Commission’s (SEC’s) accredited investor definition.
Currently, an accredited investor is characterized in the Securities Act of 1933 as an individual whose net worth is at least $1 million (not including his or her house); an individual who has earned at least $200,000 per year in the past two years; or an individual whose household income has totaled at least $300,000 per year in the past two years.
The House’s Fair Investment Opportunities for Professional Experts Act (HR 2187) moves to expand eligibility beyond these financial parameters, adding anyone who is registered as a broker or investment adviser or who has “professional knowledge” of a particular investment based on their demonstrable education or experience.
ESMA AIFMD passport reviews due in June
The European Commission expects the European Securities and Markets Authority (ESMA) to complete its assessment of whether nine countries are eligible to seek a pan-EU marketing passport provided by the Alternative Investment Fund Managers Directive (AIFMD) by June 30.
This is sooner than the deadline originally proposed in ESMA’s 2016 Working Program, which stated that the decision on whether or not to extend a passport to third country managers would be due to the European Commission by Q4 2016.
The AIFMD passport will allow non-EU managers the ability to market their funds across the EU, rather than using the national private placement regime (NPPR) for each individual country.
ESMA began its country-by-country review of regulatory regimes in 2014 with six jurisdictions, and last July deemed Guernsey, Jersey and Switzerland (provided certain legislative changes passed) fit to receive AIFMD passports. The US, Hong Kong and Singapore were also included in that first wave of reviews, but, much to the dismay of fund managers, ESMA stated it needed more time to assess those regimes.
South Korea relaxes fundraising rules
The South Korean government amended its Financial Investment Services and Capital Markets Act (FSCMA) in order to make it easier for managers to raise funds in the region.
The act, which came into effect late last year, is expected to have a significant impact on the number of private fund investments made in South Korea, particularly impacting real estate investments that are made via private funds.
The reform introduced the 'private collective investment vehicles for professional investment,' which allows companies to invest in funds comprising of any type of asset.
Prior to the reforms, the FSCMA restricted fund managers’ investment strategies by classifying private fund types into separate areas, such as real estate, securities and special asset funds depending on the primary targeted investment asset. In the case of real estate funds, for example, the scope of items accepted as real estate investments was severely restricted.
India bill may boost investment
India’s government is set to complete comprehensive market reforms intended to facilitate real estate investment and provide formal channels for resolving real estate-related disputes.
The government’s executive branch approved the Real Estate (Regulation and Development) Bill 2015, which now goes to India’s Parliament for consideration.
The bill is a an initiative to promote fair play in the sector, protect consumer interests and accelerate the time it takes to strike real estate deals, according to a government statement.
The measure calls for the establishment of a real estate regulatory authority, the registration of real estate projects with that regulator; the establishment of a fast-track dispute resolution system; and the creation of a tribunal to look into real estate-related offenses and penalties.
City calls for coordinated cybersecurity regulation
The New York State Department of Financial Services issued a letter last December to the US Securities and Exchange Commission (SEC) and other key market regulators requesting coordinated efforts to create new cybersecurity regulations.
The letter provides a high-level framework regulators could use to draft bespoke cybersecurity rules, including the call for financial institutions to appoint a chief information security officer, maintain written cybersecurity policies and procedures and conduct quarterly audits.
Cybersecurity as of yet is a hazy concept within the existing US regulatory framework. The SEC recently began relying on its 'safeguards rule,' which requires fund managers to protect client data, in order to bring charges against a private equity firm for failing to adopt sufficient cybersecurity policies and procedures.
Treasury proposes anti-money laundering rules
The US Treasury proposed a long-awaited rule requiring firms registered with the Securities and Exchange Commission (SEC) to establish anti-money laundering (AML) policies and report suspicious activity to its Financial Crimes Enforcement Network (FinCEN).
The 86-page proposal seeks to capture registered investment advisers under the general definition of a “financial institution.” Doing so would subject registered fund managers to various requirements under the Bank Secrecy Act, including the requirement to file Currency Transaction Reports for any cash movements in excess of $10,000.
FinCEN is proposing to delegate its authority to monitor compliance with the new requirements to the SEC – likely as part of onsite inspections.
Among some of the proposal’s key requirements GPs must: designate an AML officer, such as the CCO; provide staff ongoing training on formal AML policies and procedures; and conduct independent testing, either by the compliance team or an outside consultant.