[ U P D AT E ]
Cross-border
conflicts remain
over AIFMD
enforcement
A REPORT CONDUCTED BY
KPMG HIGHLIGHTS AREAS
WHERE EU MEMBER STATES
REMAIN CONFLICTED IN THE
IMPLEMENTATION OF THE
DIRECTIVE.
U
pon reading the first draft of the AIFMD
(Alternative Investment Fund Managers
Directive) nearly a decade ago, a number
of European asset managers spoke openly
about absconding to Switzerland in order to
escape the regulation’s clutches. This mass
exodus did not happen in the end, partly
because subsequent rewrites of AIFMD
erased or moderated some of the text’s
more hostile provisions, placating the funds’
industry and convincing firms to stay put.
While AIFMD was designed to bring more
oversight into what had historically been an
under-regulated area of financial services,
the rules were also intended to promote
greater cross-border distribution of AIFMs.
On the latter point, AIFMD has failed,
evidenced by European Commission (EC)
data, showing 70% of investment firms are
authorised to distribute in just their home
market, and only 3% of alternative invest-
ment funds (AIF) are registered to distribute
in more than three countries.
In 2017, consultancy KPMG was commis-
sioned by the EC to produce a review of AIF-
MD. Its findings – which were published in
January 2019 – do not contain any startling
revelations.
The report is perfectly diplomatic and
heaps a lot of praise on AIFMD for creat-
ing a harmonised regulatory structure for
investment funds, but it simultaneously
apportions blame to member states for
gold-plating the rules, a net result of which
has been a reluctance by asset managers to
market beyond a handful of countries inside
the EU.
A lot of member states are demanding ad-
ditional reporting from asset managers over
and above what is expected under AIFMD.
Others have imposed tougher authorisation
processes on asset managers irrespective
of whether they meet the AIFMD’S AUM
threshold for registration.
The definition of what qualifies as
marketing vis-a-vis pre-marketing is still
unclear in many local jurisdictions, as are
the approaches adopted by depositaries in
certain countries towards their cash-flow
monitoring and look-thru duties.
“The KPMG report is very detailed and
outlines to the EC what elements of AIFMD
are working and which ones are not. Based
on this report, the EC will pick and choose
what it does next in terms of making chang-
es to AIFMD. I do not expect there to be a
revolution on AIFMD nor do I believe there
will be a fully-fledged AIFMD II. Instead, the
EC will most likely digest what KPMG has
said and attempt to make the regulation
better,” explained Marc-Andre Bechet, legal
and tax director at ALFI (Association of the
Luxembourg Fund Industry).
In essence, KPMG’s findings indicate that
AIFMD needs further standardisation if
a cross-border distribution market is to
properly flourish. To the EC’s credit, it has
recognised some of these weaknesses exist
but its response has been poor to date.
In March 2018, the EC said it would ho-
mogenise authorisation processes across
member states although critics say its
measures do not go far enough. The EC has
also said it will create a standard taxonomy
for pre-marketing, but its definition has
been derided as being excessively strict,
and is likely to deter smaller managers from
reaching out to investors in new European
markets.
Bechet, however, accepted that while the
pre-marketing requirements had frustrated
some asset managers in the UK – where the
regime is quite liberal – clarity was needed
in other markets. “There was a lot of legal
uncertainty in some markets about what
pre-marketing exactly was, so the provisions
announced by the EC are welcome,” he said.
Firms are hoping AIFMD will undergo
meaningful reform, either through the pas-
sage of a second iteration of the Directive or
via the ambitious – albeit slightly dormant
– Capital Markets Union (CMU) programme.
Bechet said further standardisation of
AIFMD was possible, as are adjustments
to the rule’s existing, under-fire leverage
calculation methodologies. However, asset
managers have been advised not to hold
their breath for any wholesale changes in
some of the other more contentious areas,
chiefly remuneration limits.
Spring 2019
globalcustodian.com
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