Thoughts on the AIFMD

The Alternative Investment Fund Managers Directive (AIFMD) sits amongst a plethora of financial services regulation facing a universally unenthusiastic alternative investment funds industry.

The directive, which was adopted by the European Commission last year, is intended to regulate the non-Ucits fund sector, including hedge funds, private equity funds and real estate funds.

The recent appearance of the European Commission’s so-called supplementing rules, which are intended to implement the AIFMD, created a firestorm. The draft rules jettisoned many of the hard fought political compromises reached last year and, unsurprisingly, received a hostile industry reception. Lobbying continues as the AIFMD timetable rumbles towards its scheduled transposition into domestic legislation by July 2013 with investment manager authorisation required by July 2014.

AIFMD will not only affect how alternative investment managers market and distribute their funds within the EU, but also how they operate their business and how managers are remunerated. To continue to market non-Ucits funds in the EU, managers will need to register with an EU-based regulator and comply with various disclosure-based obligations including the provision of investor information and reporting to a national regulator.

The recent supplementing rules u-turn means alternative fund managers have to reanalyse the consequences of the directive’s requirements and how this fits within existing organisational structures. Global players are likely to be affected the most, but all investment managers face tough choices. Some managers will conclude that they do not wish to comply with AIFMD, while for others the key issue will be what they need to do to conform. (blog continues below)

Particular areas of difficulty for many will centre around the suitability of existing operational structures and contractual arrangements, including the location of team members, the nature of depositary arrangements and the outsourcing and delegation of certain functions. Formulating an appropriate strategy and the effect its implementation will have on existing business models and operating structures, as well as costs, needs to be considered in conjunction with the wider regulatory environment and taxation landscape.

Whilst the directive will inevitably involve business challenges and additional costs, this need not be a wholly negative experience. For some, the exercise could represent an opportunity to strategically reassess the operational and tax efficiencies of their business, including the domicile of funds and location of management activities as well as operating and remuneration structures.

Angela Foyle is tax partner for financial services division at BDO.