Linklaters

A draft European Union Directive on alternative investment fund managers (“AIFMs”) was published on 30 April 2009 which has caused much controversy within the funds world. It remains to be seen whether some of the more radical elements of the proposal will survive, be toned down or even be strengthened, however the implications will be profound for the shape of the global alternative funds industry and for the operations and structure of those involved within this marketplace. A summary of the key consequences of the proposals on the insurance industry is set out below.

• EU-based AIFMs will require authorisation. There is an exemption aimed at insurance companies, but the scope is unclear. For example, the exemption may not cover standard intra-group arrangements (e.g. where an EU-based asset management entity forming part of an insurance group manages assets on behalf of other entities within the same group).
• The broad definition of AIFs covers all types of vehicles, and does not have exemptions for intra-group arrangements, joint ventures, closed ended or listed vehicles and other entities one might not intuitively consider to be a “fund”.
• EU-based AIFMs will need to comply with a regulatory capital requirement equal to €125k plus 0.02% of assets under management above €250m and will be subject to restrictions on the amount of leverage they can employ.
• All AIFs managed by EU-based AIFMs will be required to have an EUauthorised credit institution depositary with strict liability for the safekeeping of the underlying assets, the risk of which is likely to be passed on to the AIF (and hence investors) in the form of significantly higher fees.
• Additional disclosure requirements in relation to information relating to underlying investments, managing liquidity, risk management and shortselling will apply.
• Pre approval of AIF terms will be required by home regulators. AIFs will also need to be “pre-registered” in every EU country in which they are to be marketed before they can be marketed to investors - this seems particularly inappropriate for intra-group arrangements and joint venture arrangements.
• EU-based AIFMs will be unable to market AIFs established outside the EU, unless the relevant “offshore” jurisdiction has signed an agreement with the member state in which the investor is domiciled that fully complies with Article 26 of the OECD Model Tax Convention (ensuring effective exchange of tax information) - this may make offshore structures less attractive.
• Non-EU based AIFMs will be unable to market in Europe unless their jurisdiction passes stringent “equivalence” and tax disclosure tests. At present the US, for example, would not meet the proposed criteria.

Investors in fund products

EU-based insurance companies will no doubt be affected by the proposals in their capacity as investors in the global alternative funds industry. Key points are set out below:

• Reduced investment choice due to (i) marketing restrictions on non-EU managers, which could potentially create a huge divide between Europe and the rest of the world, notably the US, in the global alternative funds industry; (ii) marketing restrictions on EU managers marketing non-EU domiciled funds; and (iii) restrictions on leverage with the result that certain products, notably hedge funds adopting leverage driven strategies, will become inaccessible for EU based investors. One possible solution may be for EU-based investors to establish subsidiaries or branches in non-EU countries, in order to be able to receive information on, and invest in, non “EU compliant” fund products.
• Increased costs as a result of compliance with the proposals (in particular, the strict liability of depositaries discussed above).

If you or others within your organisation would like to talk to us about the implications of the Directive on your business, we would be happy to meet with you to discuss this further. Please contact Posy McGrane (posy.mcgrane@linklaters.com, (44 20) 7456 5520) to arrange this.