AIFMD creates conundrums for Asian fund managers

Law firm Deacons gives its thoughts about how the ability of European investors to access Asian markets via its local buy-side managers will be affected by the Alternative Investment Fund Managers Directive.

The ability of European investors to access Asian markets via the Asian buy-side will be affected by the ‘Alternative Investment Fund Managers Directive’ (AIFMD).

It is a European Union regulation which introduces a new regime to regulate alternative investment fund managers, with the aim of increasing investor protection while reducing systemic risk. It must be implemented into the national laws of EU member states in July 2013.

The regulation introduces an EU passport system for the marketing of alternative investment funds whereby an AIFM can market its funds to professional investors across the EU member states on the back of authorisation in a single EU member State. At present the passport rule will not apply to all European countries, but from July 2015 the passport system may be extended to the entire EU.

Su Cheen Chuah at the Hong Kong law firm, Deacons, has issued a report which explains how Hong Kong-based managers are likely to be affected.

It will affect Hong Kong managers if they manage an EU alternative investment fund, or market non-EU funds, (such as funds set up under the commonly-held Cayman Islands’ structure).

A fund manager is considered to be marketing his fund if he makes “a direct or indirect offering or placement of units or shares” to EU investors.

However, if an investor puts money in at his own initiative, in a so-called ‘reverse solicitation, then compliance is not needed. However, given it is up to the fund manager to have clear evidence that these were the exact circumstances, this claim may be limited in practice. 

Until at least 2018, a Hong Kong alternative fund manager can continue marketing in an EU Member State under that country’s private placement regime, subject to compliance with certain AIFMD requirements. His obligations will include: annual reporting, pre-investment and ongoing disclosures to the investor, plus reporting obligations to the regulator of the EU state.

After 2018, a decision will be made, (on the recommendation of the European Securities and Markets Authority) whether the private placement regime should be abolished. If it is abolished, the only way for Asian alternative buy-side managers to access EU investors after that time would be to become fully-compliant.