AIFM

AIFM - 18. Rules in respect of non-EU AIFM and non-EU AIF

EU AIF managing non-EU AIF

Article 34(1) imposes two conditions on authorised EU AIFM managing non-EU AIF. First, the AIFM must comply with the provisions of the Directive, except for the substantial majority those relating to depositaries in Article 21 and annual reports in Article 22 in respect of the non-EU AIF that it manages. Second, satisfactory cooperation agreements must be in place between the Competent Authority of the AIFM's home Member State and the supervisory authorities of the country of establishment of the non-EU AIF for exchange of information purposes.

The Commission is required, pursuant to Article 34(2), to put in place a framework within which the cooperation agreements with third countries can operate and ESMA is required, pursuant to Article 34(3), to develop guidelines for such a framework.

EU AIFM marketing non-EU AIF with a passport

Article 35(2) sets out the conditions under which an authorised EU AIFM may market non-EU AIF (and feeder EU AIF that invest primarily in non-EU AIF) that it manages. The conditions are that:

the AIFM complies with the Directive;
satisfactory cooperation agreements must be in place between the competent authorities of the AIFM's home Member State and the supervisory authorities of the country of establishment of the non-EU AIF;
the country of establishment of the non-EU AIF is not on the list of Non-Cooperative Countries and Territories by the Financial Action Task Force on anti-money laundering and terrorist financing;
the country of establishment of the non-EU AIF has signed a OECD compliant tax treaty with the relevant AIFM's home Member State and with any other Member State in which it is intended that the non-EU AIF will be marketed.

Article 35(3) requires the AIFM to submit a notification file to its home competent authorities with details of each non-EU AIF that it intends to market. Such details comprise:

a notification letter identifying the AIF it intends to market and information on that AIF's place of establishment;
the rules or instrument of incorporation of the AIF;
the name of the depositary of the AIF;a description of, or any information on, the AIF available to investors (e.g. an offering memorandum);
if a feeder AIF, information on the place of establishment of the master AIF;
any additional information required pursuant to Article 23 (Disclosure to investors); and
if relevant, information on the arrangements in place to prevent shares or units in the AIF from being marketed to retail investors.

Article 35(4) provides that within 20 working days of receipt of a complete notification file for a non-EU AIF that it intends to market, the competent authorities in the AIFM's home Member State must advise the AIFM whether or not it may start marketing that non-EU AIF if the relevant AIFM or the relevant AIFM's management of the AIF is not in accordance with this Directive. The competent authorities of the home Member State of the AIFM are required to advise ESMA that the AIFM may market shares or units in the home Member State of the AIFM.

Pursuant to Article 35(5), an AIFM may market shares or units in a non-EU AIF in Member States other than the AIFM's home Member State, subject to the AIFM and the relevant AIF meeting initial and ongoing notification requirements. In order to do so, it must include details of the Member States in which it intends to market the shares or units to professional investors in the notification file required pursuant to Article 35(6) to the competent authorities in its home Member State. Marketing activities will also be subject to any applicable domestic laws in the relevant Member States.

Pursuant to Article 35(6), the competent authorities of the AIFM's home Member State are required within 20 working days of receipt of a complete notification file to the competent authorities of the Member States where that non-EU AIF is intended to be marketed. The home competent authorities are also required to make an attestation to the competent authorities in the Member States where the non-EU AIF is to be marketed that the EU AIFM is appropriately authorised under the Directive.

Article 35(7) allows an EU AIFM to market that non-EU AIF in the intended host Member States once it has received confirmation from its home competent authorities that the notification to the competent authorities of the relevant host Member States has been transmitted. The competent authorities of the AIFM's home Member State are also required to inform ESMA that the AIFM may market the non-EU AIF in the intended host Member States.

An EU AIFM must give advance notice, pursuant to Article 35(10), of at least one month to its home competent authorities before effecting any planned material change that would affect the particulars contained in a notification under Article 35(3). If an unplanned event occurs resulting in a material change in the particulars contained in a notification, an AIFM must immediately notify its home competent authorities.

If a planned change occurs that results in the AIFM no longer being compliant with the Directive, the home competent authorities may use any of its powers under Article 46 (Powers of competent authorities) including prohibiting the marketing of the relevant non-EU AIF.

The Commission is required, pursuant to Article 35(11), to put in place a framework within which the cooperation arrangements in Article 35(2) with third countries can operate and ESMA may, pursuant to Article 35(12), develop guidelines for such a framework.

Pursuant to Article 35(13) and Article 35(14), ESMA is required to prepare and the Commission may adopt standard minimum requirements and procedures to ensure that the relevant competent authorities receive sufficient information to exercise their supervisory powers.

Article 35(16) provides that ESMA's role in preparing specific requirements and procedures, and the Commission's role in adopting such requirements and procedures may include the development of:

a standard model notification letter as required by Article 35(3);
a standard model notification letter as required by Article 35(5);
a standard model of attestation as required by Article 35(6);
a form of transmission as required by Article 35(6); and
a form of written notice as required by Article 35(10).

Marketing non-EU AIF managed by EU AIFM without a passport

Individual Member States may, but are not required, to allow an authorised EU AIFM to market non-EU AIF (and feeder EU AIF investing primarily in non-EU AIF) outside of the passporting regime offered under Article 34. In this regard, Article 36(1) imposes three conditions on individual Member States an authorised AIFM marketing. The three conditions are that:

the AIFM complies with the requirements of the Directive, except for the significant majority of the depositary requirements in Article 21;
appropriate cooperation arrangements for the exchange of information for the purpose of systemic risk oversight are in place between the competent authorities of the AIFM's home Member State and the supervisory authorities of the country of establishment of the non-EU AIF; and
the country of establishment of the non-EU AIF is not contained on the list of Non-Cooperative Countries and Territories by the Financial Action Task Force on anti-money laundering and terrorist financing.

Article 36(2) confirms that individual Member States may impose stricter rules on the marketing of non-EU AIF without a passport.

The Commission is required, pursuant to Article 36(3), to put in place a framework within which the cooperation arrangements in Article 36(1) with third countries can operate and ESMA is required, pursuant to Article 36(4), to develop guidelines for such arrangements.

Managing and/or marketing AIF by a non-EU AIFM

Recital (65) envisages that non-EU AIFM will not be able to obtain authorisation under the Directive until the Commission has adopted additional legislation to facilitate this. It is anticipated that this additional legislation will be adopted in early-2015. In the period between the final transposition date in early-2013 and early-2015, non-EU AIFM will have to rely on the private placement regimes in individual Member States. It is at the discretion of individual Member States whether or not to permit AIF to be marketed by non-EU AIFM on this basis. Recital (70) envisages that the private placement route for marketing of AIF by non-EU AIFM will be terminated in 2018.

Detailed rules are contained in Article 37 for a non-EU AIFM intending to manage EU AIF or market AIF that it manages. Article 37(1) requires such non-EU AIFM to have prior authorisation to do so from their Member State of reference.

Pursuant to Article 37(2) a non-EU AIFM must comply with the Directive. However, if compliance with a provision of the Directive is not compatible with a law applicable to the non-EU AIFM and/or the non-EU AIF to be marketed, may request that the conflicting provision in the Directive does not apply. The AIFM must be able to demonstrate that:

it is not possible to combine compliance with a provision of the Directive and another applicable law;
the law to which the non-EU AIFM and/or the non-EU AIF is submitted provides for an equivalent rule having the same regulatory purpose and offering investors the same level of protection to investors; and
the non-EU AIFM and/or the non-EU AIF complies with that equivalent rule.

Pursuant to Article 37(3), any non-EU AIFM intending to obtain authorisation must have a legal representative established in its Member State of reference who will be the contact point of the AIFM in the EU. The legal representative will perform the compliance function for the management and marketing activities performed by the AIFM under the Directive.

Detailed provisions are set out in Article 37(4) to determine a non-EU AIFM's Member State of reference under the Directive. In general terms, a non-EU AIFM's Member State of reference will be the Member State in which the largest part of its activities subject to the Directive are centred. However, it is possible that the detailed provisions could lead to differences in interpretation of a non-EU AIFM's Member State of reference.

Article 37(5) provides that a non-EU AIFM intending perform managing or marketing activities subject to the Directive, must apply to the competent authorities of its Member State of reference. The competent authorities of the proposed Member State of reference are required to consider whether it is the AIFM's Member State of reference having regard to the requirements in Article 37(4). If the competent authorities of the relevant Member State do not agree with the AIFM's determination as to its Member State of reference, it is required to refuse the application but must provide an explanation. If the competent authorities of the other Member States in which the AIFM intends to perform activities agree with the AIFM's determination as to its Member State of reference, they are required to notify ESMA. In turn, ESMA is required to assess and issue an advice on whether or not the determination of an AIFM's Member State of reference is the correct one.

There is an appeal process to ESMA for competent authorities if they disagree with ESMA's interpretation as to an AIFM's Member State of reference.

The conditions for authorisation for non-EU AIFM are set out in Article 37(7). These are that:

the AIFM's proposed Member State of reference is agreed by the relevant competent authorities and ESMA;
a legal representative has been appointed who will be the contact person, alongside the AIFM, for EU investors, ESMA and the relevant competent authorities;
appropriate cooperation arrangements for the exchange of information are in place between the relevant competent authorities and the supervisory authorities of the AIFM's country of establishment;
the AIFM's country of establishment is not on the list of Non-Cooperative Countries and Territories by the Financial Action Task Force;
the AIFM's country of establishment has signed an OECD compliant tax treaty with the AIFM's Member State of reference; and
the laws and regulations of the AIFM's country of establishment do not prevent the effective exercise of their functions under the Directive by the relevant competent authorities.

Pursuant to Article 37(8), if the competent authorities of another Member State disagrees with the assessment made by the competent authorities of the AIFM's Member State of reference, they may refer the market to ESMA for determination.

The competent authorities of an AIFM's Member State of reference may also ask ESMA to act if the competent authorities of the EU AIF do not enter into the required cooperation arrangement for exchange of information purposes.

In addition to the information required for authorisation pursuant to Article 7, a non-EU AIFM is required to provide:

a paper justifying its Member State of reference containing information on its marketing strategy;
a list of any provisions of the Directive which it is unable to comply due to incompatibility with local laws, together with written evidence, in accordance with ESMA's issued standards:
- that the relevant third country law provides for a rule equivalent to the provisions for which compliance is not possible which has the same regulatory purpose and offers investors the same level of protection; and
- that AIFM complies with the equivalent rule, supported by a legal opinion on the existence of the incompatible provision in the law of the third country and a description of its purpose; and
- of the identity and location of the AIFM's legal representative

Article 37(8) exempts a non-AIFM from certain provisions of the Directive, such as the requirement in Article 8(1)(e) to have its registered office in a Member State and amends other provisions to reflect the particular requirements of Article 37 such as the requirement for a Member State of reference as opposed to a home Member State.

Article 37(9) allows competent authorities in Member States to seek ESMA's intervention if they disagree with the authorisation to an AIFM given by the competent authorities of another Member State in respect of the exemptions from compliance with certain provisions of the Directive. In this regard the competent authorities of the AIFM's Member State of reference are required to inform ESMA of any exemptions which it considers that AIFM is entitled to rely on, together with supporting evidence.

ESMA is required under Article 37(10) to issue its opinion on the applicability of the compliance exemptions within one month of receipt of a notification by the competent authorities of the AIFM's Member State of reference. In the context of this role, it is intended that ESMA should develop a consistent approach between competent authorities in relation to the interpretation of the non-compatibility exemptions for non-EU AIFM. The three month period in which the competent authorities have to consider an application under Article 8(5) (Conditions for granting the authorisation) is suspended for the duration of any ESMA review.

If the competent authorities of an AIFM's Member State of reference propose granting authorisation contrary to ESMA advice, such competent authorities are required to inform ESMA and the competent authorities of any other Member State in which the AIFM intends to market any AIF that it manages for doing so. ESMA is required to publish the fact that competent authorities do not intend to comply. If the competent authorities of another Member State disagree with the assessment of the competent authorities of the AIFM's Member State of reference, the competent authorities of other Member State may inform ESMA accordingly.

Article 37(10) also provides that the competent authorities of an AIFM's Member State of reference are required to promptly inform ESMA of the outcome of each initial authorisation application, any changes to an authorisation and any withdrawal or authorisation.

Article 37(11) requires competent authorities to provide ESMA with information on any rejected applications. ESMA will maintain a register of rejected application which will be available on a confidential basis to competent authorities in the Member States. Article 37(11) also sets out the limited circumstances under which an AIFM's Member State of reference may change and the procedures relating to such a change. Such circumstances will include significant changes to an AIFM's market strategy within two years of authorisation.

Article 37(12) allows competent authorities in one Member State to request ESMA to consider whether the determination of an AIFM's Member State of reference by competent authorities in another Member State is incorrect.

Article 37(12) requires disputes between the competent authorities of the Member State of reference of an AIFM and that AIFM to be settled under the laws of the Member State of reference.

Article 37(13) provides that disputes between a non-EU AIFM or the AIF that it manages and EU investors of such AIF must be settled under the laws of a Member State. The Commission is required to set out procedures, for possible Member States of reference when determining an AIFM's Member State of reference.

Pursuant to Article 37(14) the Commission is required to adopt measures to regulate cooperation agreements and maintain consistency between Member States. In addition, ESMA may, pursuant to Article 37(15), issue guidelines to determine the application of measures adopted by the Commission on cooperation agreements, and, pursuant to Article 35d(16), is required to develop draft standards for the minimum content in such cooperation agreements.

Articles 37(17) to 37(22) give the commission power to adopt, and requires ESMA to draft, regulatory technical standards in respect of the procedures and notifications required in relation to the determination of Member States of reference for non-EU AIFM, applications for authorisation in respect of non-EU AIFM and related disputes.

With a view to ensuring consistency between Member States, Article 38 requires ESMA to conduct an annual review of the activities of the competent authorities in relation to the authorisation of and supervision of non-EU AIFM. ESMA may issue guidelines and recommendations based on their conclusions of the reviews which the competent authorities are required to make every effort to comply. If the competent authorities of a Member State do not comply or intend to comply with ESMA's guidelines or recommendations, such competent authorities are required to provide ESMA with its reasons for not doing so. ESMA will publish the fact that competent authorities do not comply or intend to comply and may publish the reasons why. Furthermore, ESMA is required to inform the European Parliament, the Council and the Commission of any of its guidelines or recommendations and which competent authorities have not complied with such guidelines and recommendations. ESMA must also advise the European Parliament, the Council and the Commission how it proposes to ensure that non-compliant competent authorities comply in future.

Marketing EU AIF managed by a non-EU AIFM with a passport

It is envisaged in Recital (65) that the Commission will implement legislation to facilitate the authorisation of non-EU AIFM under the Directive in early-2015. On the basis such legislation is implemented, Article 39 sets out the conditions under which a non-EU AIFM may market EU AIF with a passport.

If a non-EU AIFM authorised under the Directive intends to market an EU AIF in its Member State of reference, it must submit a notification to the competent authorities of its Member State of reference for each EU AIF that it intends to market. Such notification must comprise of:

a notification letter identifying the AIF it intends to market and information on that AIF's place of establishment;
the rules or instrument of incorporation of the AIF;
the name of the depositary of the AIF;
a description of, or any information on, the AIF available to investors (e.g. an offering memorandum);
if a feeder AIF, information on the place of establishment of the master AIF;
any additional information required pursuant to Article 23 (Disclosure to investors); and
if relevant, information on the arrangements in place to prevent shares or units in the AIF from being marketed to retail investors.

The relevant competent authorities are required, within 20 working days of receipt of a complete notification file for an EU AIF, to inform the AIFM whether it may start marketing the AIF in its territory.

The competent authorities may only prevent the marketing of the AIF if the AIFM's management of the AIF will not be in accordance with the Directive.

The competent authorities must also inform ESMA and the competent authorities of the AIF that the AIFM may start marketing. If the AIFM intends to market the AIF in other Member States, it must also inform the competent authorities of its Member State of reference in this regard. The notification requirements and procedures are broadly in line with those required for a non-EU AIFM marketing an EU AIF in its Member State of reference (as set out earlier here).

Marketing non-EU AIF managed by a non-EU AIFM

If the Commission implements legislation to facilitate the authorisation of non-EU AIFM under the Directive (envisaged by Recital (65) take place in early-2015), Article 40(2) sets out the conditions under which a non-EU AIFM may market non-EU AIF with a passport. The conditions are that:

the AIFM complies with the Directive;
satisfactory cooperation agreements must be in place between the competent authorities of the AIFM's Member State of reference and the supervisory authorities of the country of establishment of the non-EU AIF;
the country of establishment of the non-EU AIF is not on the list of Non-Cooperative Countries and Territories by the Financial Action Task Force on anti-money laundering and terrorist financing;
the country of establishment of the non-EU AIF has signed a OECD compliant tax treaty with the relevant AIFM's home Member State and with any other Member State in which it is intended that the non-EU AIF will be marketed.

Article 40(3) provides that if other competent authorities disagree with the assessment of the competent authorities of the AIFM's Member State of reference, they may refer the matter to ESMA.

Article 40(4) requires the AIFM to submit a notification file to the competent authorities of its Member State of reference with details of each non-EU AIF that it intends to market. Such details comprise:

a notification letter identifying the AIF it intends to market and information on that AIF's place of establishment;
the rules or instrument of incorporation of the AIF;
the name of the depositary of the AIF;
a description of, or any information on, the AIF available to investors (e.g. an offering memorandum);
if a feeder AIF, information on the place of establishment of the master AIF;
any additional information required pursuant to Article 23 (Disclosure to investors); and
if relevant, information on the arrangements in place to prevent shares or units in the AIF from being marketed to retail investors.

Article 40(4) provides that within 20 working days of receipt of a complete notification file for a non-EU AIF, the competent authorities in the AIFM's home Member State must advise the AIFM whether or not it may start marketing that non-EU AIF if the relevant AIFM or the relevant AIFM's management of the AIF is not in accordance with this Directive. The competent authorities of the Member State of reference of the AIFM are required to advise ESMA that the AIFM may market shares or units in the Member State of reference of the AIFM.

Pursuant to Article 40(5), an AIFM may market shares or units in a non-EU AIF in Member States other than the AIFM's Member State of reference, subject to the AIFM and the relevant AIF meeting initial and ongoing notification requirements. In order to do so, it must include details of the Member States in which it intends to market the shares or units to professional investors in the notification file to the competent authorities in its Member State of reference. Marketing activities will also be subject to any applicable domestic laws in the relevant Member States.

Pursuant to Article 40(6), the competent authorities of the AIFM's Member State of reference are required within 20 working days of receipt of a complete notification file to the competent authorities of the Member States where that non-EU AIF is intended to be marketed. The competent authorities of the AIFM's Member State of reference are also required to make an attestation to the competent authorities in the Member States where the non-EU AIF is to be marketed that the EU AIFM is appropriately authorised under the Directive.

Article 40(7) allows an EU AIFM to market that non-EU AIF in the intended host Member States once it has received confirmation from the competent authorities of its Member State of reference that the notification to the competent authorities of the relevant host Member States has been transmitted. The competent authorities of the AIFM's Member State of reference are also required to inform ESMA that the AIFM may market the non-EU AIF in the intended host Member States.

An EU AIFM must give advance notice, pursuant to Article 40(10), of at least one month to the competent authorities of its Member State of reference before effecting any planned material change that would affect the particulars contained in a notification. If an unplanned event occurs resulting in a material change in the particulars contained in a notification, an AIFM must immediately notify the competent authorities of its Member State of reference.

If a planned change occurs that results in the AIFM no longer being compliant with the Directive, the competent authorities of its Member State of reference may use any of its powers under Article 46 (Powers of competent authorities) including prohibiting the marketing of the relevant non-EU AIF.

The Commission is required to put in place a framework within which the cooperation arrangements with third countries can operate and ESMA may develop guidelines for such a framework.

Pursuant to Article 34(13) and Article 34(14), ESMA is required to prepare and the Commission may adopt standard minimum requirements and procedures to ensure that the relevant competent authorities receive sufficient information to exercise their supervisory powers.

Article 40(16) provides that ESMA's role in preparing specific requirements and procedures, and the Commission's role in adopting such requirements and procedures may include the development of:

a standard model notification letter as required by Article 40(3);
a standard model notification letter as required by Article 40(5);
a standard model of attestation as required by Article 40(6);
a form of transmission as required by Article 40(6); and
a form of written notice as required by Article 40(10).

Management of AIF established in Member States other than the Member State of reference by non-EU AIFM

Article 41(1) requires Member States to ensure that an authorised non-EU AIFM is allowed to manage EU AIF established in Member States other than that AIFM's Member State of reference.

Article 41(2) provides that any AIFM intending to manage an EU AIF established in Member States other than its Member State of reference should, in the first instance, advise its Member State of reference as to whether it intend to manage that EU AIF directly or establish a branch to do so. In this regard, it is required to provide its Member State of reference with details of:

the Member State in which it intends to manage AIF directly or establish a branch;
a programme of its intended operations including details of the AIFM that it intends to manage.

Additional details are required, pursuant to Article 41(3) if it intends to establish a branch.

Pursuant to Article 4(14), the competent authorities of the Member State of reference are required to transmit a compete set of documents to the competent authorities of the host Member State within one month or two months, if it is intended that a branch will be established of receipt of a complete set of documents. Article 41(5) requires the Member State of reference to include an attestation that the relevant AIFM is authorised. The competent authorities of the Member State of reference must notify the AIFM when the transmission has been made. Once the transmission notification has been received by the AIFM, it may provide management services in the host Member State. The competent authorities of the Member State of the reference must also inform ESMA that the AIFM is authorised to perform management services in the relevant host Member States. The host Member State may impose any additional requirements on the AIFM.

Private placement of AIF by non-EU AIFM

It is envisaged in Recital (70) that for a transitional period, which is likely to end in early–2018, individual Member States may allow non-EU AIFM to market AIF in their territories outside of the scope of the Directive on a private placement basis. This is the way in which many fund managers presently market funds that they manage.

Accordingly, Article 42(1) provides that Member States may, but are not required to, permit non-EU AIFM to market shares or units in AIF that they manage to professional investors, subject to certain minimum requirements:

any AIF marketed under Article 42(1) must comply with the provisions in the Directive relating to the issue within six months of its year end of annual financial statements (Article 22), disclosures to investors (Article 23) and reporting to the competent authorities of the Member States in which the AIF is marketed (analogous to the reporting requirements in Article 24);
cooperation arrangements for the purposes of systematic risk oversight are in place between the competent authorities of the relevant Member State(s) and the supervisory authorities of the AIFM's country of establishment to ensure sufficient exchange of information;
the country of establishment of the AIFM (and AIF, if it is a non-EU AIF) is not on the list of Non-Cooperative Countries and Territories by the Financial Action Task Force on anti-money laundering and terrorist financing.

Pursuant to Article 42(2), if the competent authorities of an EU AIF do not enter into the cooperation arrangements required by Article 42(1), the competent authorities of the Member State in which it is intended to market the AIF may refer the matter to ESMA.

It is important to note that a Member State may impose stricter rules on, or indeed, prohibit non-EU AIFM in relation to marketing on a private placement basis under this Article.

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