On a scale of 1-5 how satisfied are you with AIFMD? Vote now!

The European Commission has instructed KPMG to launch a survey for stakeholders on AIFMD's requirements, the industry's experience in applying them and the market impacts of AIFMD. This is part of the European Commission's wider review of the functioning of AIFMD. The survey broadly covers the following topics:

• the cost of authorisation to fund managers;
• the level of direct supervision/oversight from the national competent authority;
• how Annex IV reporting has functioned;
• the extent to which approaches to remuneration, conflicts and disclosure have changed as a result of AIFMD;
• the depositary regime;
• the portfolio company transparency regime; and
• (in many ways most crucially) the functioning of the passport regime.

Unfortunately, it does not explicitly cover the material change regime that has been problematic for fund managers. Many of the questions ask for an answer on a scale of 1-5 unfortunately, which unfortunately means that complex areas of highly technical regulation are distilled into "strongly agree" to "strongly disagree". However, there are some opportunities to explain reasons behind responses and explain what has worked and what has not worked so well.

Despite the survey's flaws, this is an excellent opportunity for asset managers to feedback to the European Commission on the functioning of AIFMD and, in particular, raise areas of concern such as the functioning of passports. However, we have some concerns about the survey. Having advised a range of fund managers, it is clear that many aspects of AIFMD do not work or are fairly irrelevant to large parts of the asset management industry. One example (of many) of where this could lead to problems are the detailed questions on reporting and specifically whether "an NCA (national competent authority) has communicated with [the manager] about the contents of one or more of [their] AIFMD reports". Our experience with clients is that well-run fund managers investing in assets that pose little or no risk to the overall functioning of the markets do not hear from their NCA because there is no need. There is a danger that answers that state there has been little or no contact from regulators could be interpreted as the industry requiring more oversight rather than less.

Harmonisation – a double edged sword

This survey forms part of the wider part of the European Commission's intentions towards establishing a Capital Markets Union and as we have previously identified, there is a move to increasing harmonisation of European legislation. In some ways this is welcome – as any fund manager (in particular those outside the EU) will know dealing with the different (and sometimes contradictory) implementation of AIFMD in various jurisdictions can cause frustration and delays to marketing. However, our concern is that poor application of the harmonisation process can lead to making some of the more unworkable aspects of AIFMD even more so. In particular, any changes to harmonise the AIFMD regime with the more retail focussed UCITS regime would be unwelcome.

Be careful what you wish for

An example of this frustration is how "marketing" is defined by each jurisdiction. In an ideal world a consistent approach to what is "pre-marketing" and "marketing" would be in place across Europe. However, if the European Commission chooses to use a wide definition of what constitutes marketing (for instance including the provision of draft documents of any kind including PPMs and LPAs) it would make the negotiation process over documents such as the LPA in the private equity industry even more difficult. Fund managers would have to register a vehicle for marketing purposes at an even earlier stage and have to file material changes (particularly if the definition of material change is also widened). The industry needs to make it clear that more, not less, flexibility is required for heavily negotiated AIFs with predominately institutional investors that pose no systemic risk to the wider functioning of the financial system. It is also important to show that certain exemptions for employee vehicles and joint ventures are incredibly helpful to the industry without causing any investor detriment, and should be maintained or even widened. This is a case for be careful what you wish for.

Despite these concerns, this does raise a unique opportunity for asset managers to make points about issues under AIFMD that could be addressed under AIFMD II or better regulatory guidance. Key concerns we regularly come across are: fees being charged by other regulators that are far from transparent and arguably not allowed under AIFMD; the chicken and egg situation of whether to register funds prior to or after "marketing"; and the irrelevance of the material change regime to AIFs, whereby changes are requested by investors but trigger filings and delay closes. We would urge managers to provide examples of how investor choice and the ability to launch new vehicles could be hindered rather than harmed by changes to definitions of marketing and what an AIF is.

Non-EU Managers

The extension of the passport regime to third country (non-EEA) fund managers is still on ice due to Brexit but we also think it is important for non-EU managers to stress the importance of being able to access European investors and the benefits to those investors of being able to access non-European funds to diversify their holdings and therefore minimise risk of overconcentration in particular asset classes. Highly regulated and sophisticated non-EEA managers are essentially prohibited from accessing some European jurisdictions and find others too onerous or expensive to bother with. More regulation in this area will lead inevitably to fewer managers offering their funds to European investors.

Asset managers – not all heroes wear capes

AIFMD necessarily has an element of square pegs into round holes due to the fact that it attempts to regulate such a wide range of European and non-European managers, from high frequency algorithmic traders to property investors to private equity, managing a range of fund structures including listed/unlisted and closed ended/open ended. The message has to be that in general the regime does not require additional regulation, regulators are using their powers in a proportionate and risk based manner and that some sensible changes could increase the ability of creating an effective harmonised European regulation allowing for more cross border sales. The industry should use this opportunity to push for the changes it needs without accidentally shooting itself in the foot. The wider asset management industry has come under scrutiny at both a European level and by the FCA with Andrew Bailey focussing on the current asset management market survey and the potential outcomes for the industry. Care should be taken in responding to the questions to make sure the message that regulators hear is not "more regulation needed" but "better regulation needed". The importance of asset management industry, from providing income for pension funds to providing funding and expertise for some of the most exciting and dynamic small businesses, needs to be stressed.

Brexit

It is now impossible to write a briefing on the regulatory landscape without mention of Brexit. Recent European statements on the position of UK AIFMs post Brexit, whilst at a high level, show a lack of pragmatism about transitional arrangements. Cutting off access to UK AIFMs to European investors will have a harmful effect on the ability of these investors to have a diverse portfolio and in turn limit the ability of funds to raise money to provide debt, equity and expertise to European businesses. Calls for pragmatism in responses are strongly suggested.

Author: Greg Patton, Associate