AIFMD: Implications For Non-EU Managers Of Cayman Funds - Financial Services

Directive 2011/61/EU on Alternative Investment Fund Managers (the AIFMD) comes into force on 22 July 2013, and aims to provide common requirements across all EU States for the management or sale of Alternative Investment Funds (AIFs) by Alternative Investment Fund Managers (AIFMs) within the EU. The majority of the AIFMD's provisions will affect EU AIFMs; those who have their registered office in a member state and manage or sell AIFs in the EU. However, Non-EU AIFMs which have their registered office in a third country selling non-EU Funds, including Cayman Funds, within the EU will also be required to comply with certain provisions of the AIFMD.

WHAT IS THE EFFECT OF AIFMD?

From July, a single marketplace within the EU will be created for the marketing of AIFs. This "passport", previously available in Europe only to Ucits funds, will also become available to non-Ucits funds managed by EU AIFMs. Non-EU AIFMs will not benefit from the passport but will be permitted, until at least 2018 and subject to the rules of each individual EU member state, to continue to market their funds within the EU on a private placement basis, providing that certain conditions are met.

Non-EU AIFMs of Cayman funds will need to be aware of these conditions, and ensure that they are in a position to implement them by July to guarantee that they are able to continue the private placement of their funds within the EU after that time.

THE PRE-REQUISITES TO CONTINUING PRIVATE PLACEMENT

Until at least October 2018, EU member states can continue to allow the private placement of Cayman funds to professional investors, although they are not obliged to do so, subject to their own national rules. Therefore, to the extent that the EU is currently made up of a patchwork of regulatory regimes in respect of private placement, the status quo will remain. However, in order for a Cayman fund to be marketed in the EU to professional investors from July 2013, the following conditions must also be met in addition to the existing national rules:

A co-operation arrangement must be in place for the purpose of systemic risk oversight between:
The regulators of the EU member states in which the Cayman fund is marketed
Those member states and the home jurisdiction of the non-EU AIFM
Those member states and the Cayman Islands
As is already the case, the Cayman Islands must not be listed as a non-co-operative country and territory by the OECD's Financial Action Task Force on anti-money laundering and terrorist financing
The Non-EU AIFM must comply with the transparency requirements of the AIFMD

The recently enacted Monetary Authority (Amendment) Law 2013 enables the Cayman Islands Monetary Authority (CIMA) to enter into memoranda of understanding (MoU) with its EU counterparts, using a model MoU developed by the European Securities Markets Authority (Esma). The Cayman Island Government will continue to implement measures to ensure that CIMA will have the relevant co-operation agreements in place by the July deadline.

The latter requirement is the most onerous as it falls on AIFMs and not regulators to comply. Affected non-EU AIFMs will therefore need to ensure that they are in a position to implement the Transparency Provisions to meet the deadline

THE TRANSPARENCY REQUIREMENTS

The AIFMD requires transparency in three areas; the annual reporting of funds, disclosure to investors, and the reporting obligations to EU-competent authorities.

ANNUAL REPORTS

An AIFM is required to produce annual reports for each of the Cayman funds it markets in the EU, within six months of year end. these must be provided to investors on request and made available to the regulators of the EU states in which the funds are marketed.

Although the information required by the AIFMD will be similar to that usually contained in annual reports, there are certain significant additional requirements. _ e annual report should contain at least the following:

(a) balance sheet/statement of assets and liabilities, both 'assets' and 'liabilities' must be sub-classified in accordance with the AIFMD,

(b) sub-classified income and expenditure account for financial year, both 'income' and 'expenditure';

(d) any material changes during the financial year (see disclosure to investors section below),

(e) total amount of remuneration paid to AIFM _ for the financial year (axed and variable), number of beneficiaries, and any carried interest. AIFMs must provide general information relating to the financial and non-financial criteria of the remuneration policies and practices for relevant categories of staff to enable investors to assess the incentives created; and

(f) the aggregate remuneration broken down by senior management and staff of the AIFM whose actions have a material impact on risk profile of the AIF.

INFORMATION TO BE MADE AVAILABLE TO INVESTORS

Managers of Cayman funds marketed within the EU will be required to ensure that a minimum level of information is made available to investors. Such information must be made available prior to any investment, and on an ongoing basis.

This includes the type of information managers will be used to seeing out in AIF offering memoranda, but the following information must additionally be made available:

(a) use of leverage (including types and sources of leverage permitted and maximum leverage permitted) and collateral and asset re-use arrangements;

(b) how the AIFM is complying with the requirement to cover professional liability risks;

(d) the AIF's liquidity risk management, including redemption rights in normal and exceptional circumstances;

(e) how fair treatment of investors is ensured by the AIFM, details of any preferential treatment, the type of investors who obtain such preferential treatment and their legal or economic links with the AIF or AIFM;

(f) the historical performance of AIF;

(g) the percentage of AIF assets which are subject to special arrangements due to their illiquid nature.

This should include overview of any special arrangements in place, including whether they relate to side pockets, gates or other similar arrangements, the valuation methodology applied to assets which are subject to such arrangements and how management and performance fees apply to these assets.

In addition to the above, the AIFM must inform investors before investment in the AIF of any arrangement made by a depositary to contractually discharge itself of liability. Any changes to depository liability must be given to investors without delay.

REPORTING OBLIGATIONS TO COMPETENT AUTHORITIES

Managers of Cayman funds marketed in the EU will be required to make regular _ lings to the regulators of the EU states in which the funds are marketed. _ is _ ling must be in the form set out in Annex IV of the EU Commission's Regulation implementing the AIFMD, and is likely to be the most onerous of all of the requirements applicable to Cayman funds.

Annex IV is a lengthy form which will need to be completed in full, either on a quarterly or semi-annual basis (or annually where a fund is not using leverage). _ e type of information required by Annex IV includes the following:

(a) _ e main instruments the fund is trading including a break-down of financial instruments and other assets, taking into account the AIF's investment strategies and their geographical and sector investment focus;

(b) the markets of which it is a member or where it actively trades;

(d) the diversification of the AIF's portfolio, including, but not limited to, its principal exposures and most important concentrations; and

(e) where substantial leverage is being employed, information on the overall level of leverage employed.

NEXT STEPS FOR NON-EU AIFM OF CAYMAN FUNDS

Non-EU AIFMs of Cayman funds will, in advance of July 2013, need to establish whether their Cayman funds are within the scope of the AIFMD, and whether they are being marketed within the EU. Where it is the case that their funds are both within the scope and being marketed within the EU, AIFMs will need to urgently review their systems to ensure that the required reporting can be put in place for the deadline if they wish to continue to sell their funds within the EU.

Previously published in HFMWEEK . COM

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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