04.29.2013
By Terry Flanagan

U.S. Alternative Investment Fund Managers Should Already Be Planning For New European Regulations: July 22 Deadline Is Right Around The Corner

With the compliance deadline for one of the most significant regulatory reform agendas introduced into the asset management industry only a few months away, many U.S. investment managers are still taking a “wait and see” approach to the upcoming regulatory changes that will occur under the European Union (EU) Alternative Investment Fund Managers Directive (AIFMD) and the impact it will have on their businesses and operations.

The AIFMD is not just for European investment managers:  Every alternative investment manager worldwide who raises capital in the EU will be required to assess the impact and timing associated with complying with AIFMD, including managers based in the U.S. Yet based on preliminary discussions, many firms have not taken significant action, with the July 22, 2013 deadline fast approaching.

The time to prepare is now. Delaying preparations any longer may have significant negative impacts on their operations, fundraising activities and long-term profitability.

The AIFMD will significantly change the regulatory framework for a wide spectrum of funds including hedge funds, private equity funds, real estate funds and infrastructure funds.  It also changes the landscape for how alternative investment managers will attract and manage capital in Europe.

All U.S. investment advisers who raise capital for alternative investment (AI) funds from EU resident investors, sponsor AI funds domiciled in EU countries, or have investment advisory functions in EU countries, will be required to assess the impact of complying with the Directive’s provisions.

The AIFMD will significantly change the regulatory framework for a wide spectrum of funds including hedge funds, private equity funds, real estate funds and infrastructure funds.

Some of the key impacts of the AIFMD include:

• Changes the way alternative investment business is conducted in Europe
• Creates the concept of a new type of regulated investment advisor for management and marketing of non-UCITS funds across the EU
• Provides a single mechanism for authorized investment advisors to manage and market alternative investment funds across the EU
• Phases out private placement of funds: A significant impact on US managers and offshore funds
• Puts in place an extensive new framework of regulations for authorized investment advisors to follow, including:
• Independent Risk Management, Compliance and Internal Audit functions
• Comprehensive Valuation, Risk and Liquidity Management policies and procedures
• Capital and Remuneration Policy requirements
• Depositary independent of Prime Brokerage with strict responsibilities and liability
• Systemic Risk Reporting to EU Regulators and additional Investor Disclosure obligations

The AIFMD may have long-term implications for investment managers in the US and globally, who are looking to raise capital in Europe.

Despite the impending deadline to comply with the Directive, a KPMG International survey of 70 investment advisors conducted last Fall found that just 52 percent of AIFMs surveyed had conducted an impact analysis that took into account the advice from the European Securities and Markets Authority (ESMA). In addition, 63 percent of those same AIFMs had not appointed a depositary, which is a key requirement of the legislation.

The KPMG survey also found that nearly half (45 percent) of AIFMs surveyed said they had not yet considered how the Directive’s remuneration requirements will affect their businesses.

AIFMs that continue to delay preparations for the AIFMD could be faced with operational problems, higher costs and the potential loss of clients. The larger the firm, the more pronounced these implications are likely to be, given their higher risk profiles, higher flows and the challenges they may have adopting their operations, technology and even business strategy under AIFMD.

The negative impact facing AIFMs that continue to delay their preparations for the Directive includes, but is not limited to, fundraising activities, operations and business models.

Fundraising activities
AIFMs that fail to achieve compliance with the Directive by the July 22 deadline may be prevented from raising new funds in Europe. If non-EU managers choose to follow those private placement regimes which remain in effect, investment managers need to be aware that these regimes may be phased out before the 2015 timeframe established by  AIFMD.  Based on discussions with clients, many non-EU firms are not aware that the private placement regimes are changing along with the implementation of AIFMD.  Firms that choose to wait to conduct their assessments and to embark upon their implementation plans late are likely to find themselves racing against the clock and paying higher costs.

Operations
The Directive will require AIFMs to introduce a host of operational changes to their businesses. The process of implementing these sweeping changes to areas such as leverage calculation, remuneration, reporting and others promises to be much more costly and complex for those AIFMs that continue to delay their preparation activities.

Business Models
AIFMD may also bring about significant changes to AIFMs’ business models. An important consideration that managers will need to evaluate when contemplating changes to their business model is the tax implications.  KPMG’s survey revealed 28 percent of respondents feel the Directive will have tax implications on some of their fund structures, while 8 percent said it will have a significant tax impact.

The AIFMD may have long-term implications for investment managers in the US and globally, who are looking to raise capital in Europe.

Firms should undertake an analysis of the impact of AIFMD and develop a strategy for near-term and long-term compliance.  When analyzing the impact, it will be important to evaluate tax considerations and current compliance requirements so that they can be leveraged appropriately.  Having a strategy in place will allow firms to move quickly to capture opportunities that may arise as a result of AIFMD.

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