Third country compromise proposed for AIFM directive

The Belgian presidency of the EU Council has issued a follow-up compromise text on the pending Alternative Investment Fund Management Directive, proposing a dual approach solution on third country rules.

The Belgian presidency, which is the fourth EU presidency in rotation to oversee the process, originally amalgamated the bulk of the competing parliament and council draft AIFM proposals in late August.

However, the original compromise text left out a few key sticking points which have caused the most heated debate between the Council and Parliament, most notably third-country rules – which would apply to foreign managers and funds wishing to raise money and operate within the European Union.

Under Chapter VII of the new proposal, managers would be able to market third country funds in the EU using either a passport – which allows EU market access with the approval of one member state – or through the private placement system of an EU member state.

For EU managers wanting to market a fund established in a third country via a passport, the proposal would allow marketing under the condition the third country has in place sufficient tax, regulatory, anti-money laundering and supervisory information exchange agreements with the manager’s EU home member state and any other member state the fund will be marketed in. Furthermore, the manager would no longer need equivalent market access to the third country jurisdiction the fund is domiciled in.

Likewise, under the proposed dual approach system, EU managers would be permitted to market third country funds provided they meet the directive’s requirements and also have in place sufficient cooperation agreements with the relevant EU member state relating to systemic risk oversight and other information exchange agreements.

Allowing national private placement regimes will be welcomed by large parts of the industry, noted a legal update from London-based law firm CMS Cameron McKenna, but the proposal will also find criticism by GPs as private placement regimes must still, as noted, adhere to all of the directive’s requirements. This includes provisions on authorisation procedures, capital requirements and international cooperation agreements, all of which will limit the possibilities for private placement marketing.

For non-EU fund managers wanting to market or manage funds in the EU under the passport system, the proposal calls for different requirements depending on whether or not the fund is EU domiciled. In both instances however, upon gaining passport approval from a member state, GPs will need to meet all the directive’s requirements and disclose the fund’s marketing strategy, as well as meet the aforementioned tax and regulatory information exchange agreements, among other rules.

Likewise, non-EU fund managers are permitted to market both non-EU and EU funds under each member state’s domestic private placement rules under the condition the GP complies with transparency and other private equity fund provisions, as well as having in place sufficient cooperation arrangements “relating to systemic risk oversight and information exchange” between the manager’s home state, and any member state in which the fund is marketed in.

The dual system has been proposed for a five-year period following the directive’s implementation, after which the EU Commission would launch a review of the directive which includes consultation with the private equity industry. Should the Commission determine the passporting framework has no negative effects, such as on “investor protection, market disruption, competition and monitoring of systemic risk“, the passporting framework would then apply exclusively, the proposal stated.

The allowance of a private placement regime is important given that the passport framework's near-impossible to meet-conditions, said Simon Morris, partner at CMS Cameron McKenna, in an interview with PERE's sister publication PEM. Morris explained very few countries can meet the AIFM’s requirements for a passport, “not even the US can tick all the boxes on equal access, exchange of information agreements and cooperation between tax authorities for example”, he said.

“This is being driven by the government of France, and by a lesser extent the government of Germany,” said Morris, adding “any harm that can be done to the dominant position of the UK is to the benefit of those two countries”.

This past week US Treasury Secretary Tim Geithner reportedly sent a letter to French Finance Minister Christine Lagarde arguing the country’s position on third country rules was too burdensome.

Speaking on the new proposal’s likelihood of making it in the final language of the directive, Morris said the French government, a strong advocate of strict third country rules, would likely be content with the new dual approach.

“Every time a new compromise proposal comes out, we’re eliminating some of the areas of ongoing arguments,” he said.

Other sources, however, remain sceptical the dual approach set out in this week’s compromise proposal will be accepted by certain member states.

“There is a strong lobby resisting combining … a passport and national private placement regimes,” said Norton Rose partner and AIFM specialist, Michael Newell. He added this would probably result in further delay in agreement on the directive’s final text.  

The EU parliament is scheduled for a plenary vote on the directive later this month, however further negotiations are likely to push it back later into the year.