The AIFM Directive and implications for Non-Eu Funds

The Alternative Investment Fund Directive

Much has been published on the newly proposed Alternative Investment Fund Directive (‘AIFM’) which if materialises in its proposed form would affect all fund managers in Europe who manage or market a fund which is not regulated in Europe as suitable for retail sales (effectively, any non-UCITS fund). This would include not only funds in their purest form, but any arrangement that can be characterised as a ‘collective investment undertaking’ that is either managed in Europe or is seeking investors in Europe.

The burdens of the AIFM are weighty and include among other things, rules relating to suitable qualification, risk management, liquidity management, the management of conflicts, and prescriptive disclosure to potential investors while the benefit on the flip side would be easier marketing to professional investors (as defined by MiFID) but this is of little comfort to most managers.

The Commission’s justification for the directive is the management of risk arising from Alternative Investment Funds (AIF’s) based on recent market events and to address issues raised in previous consultations. This seems strange given that the detailed analysis of these same events (such as the Larosiere report, the Turner Review and the work produced from the G20 summit) has laid no blame for market events on hedge funds or other private pools of capital involved in the financial markets. It is unclear why all non-UCITS funds should be affected by the directive in such a broad way and although the Commission has maintained that this is not a one size fits all approach it is difficult to envisage a scenario where those AIF’s which present very limited risks (other than to the investors in them) would not be unintentionally ‘caught’ by the Directive.

The potential effects of the Directive are already being felt in the industry with several of London’s largest hedge funds poised to launch onshore funds in order to avoid any uncertainty. The Financial Times recently reported that Cheyne Capital, the £3.6bn hedge fund manager, was set to become the latest high profile London name to launch a UCITS III fund. This would allow the fund to operate within the existing European regulatory framework for an investment vehicle that can be marketed across the EU, but this might not be an option for most smaller managers currently operating within the EU who will face a different set of implications and potential restrictions.

Marketing Non-European Funds in Europe

The classic scenario might be of a smaller manager managing a Cayman Island hedge fund, or a Jersey limited partnership property fund (Non-EU). If the Directive were to come into force in 2011 as proposed, rules on non-European funds and non-European managers would come into effect three years later in 2014. Until then, existing rules will continue to apply, for example, marketing on the basis of the private placement regime (if one exists) in the relevant country where the fund is being marketed. However, there is also the clear possibility that some European countries could restrict their private placement regimes in the meantime which could result in managers finding it even more difficult to market offshore funds in Europe.

After 2014 the Directive (Article 35) provides clear limitations on the distribution of Non-EU funds. No fund domiciled outside of Europe can be marketed to any professional investor unless the country in which that fund is domiciled has signed an agreement with the relevant member state in which the marketing will take place. This agreement must comply with the standards set in Article 26 of the OECD Model Tax Convention and ensure effective exchange of information in tax matters. This is a significant burden and ultimately, European-domiciled funds, such as Gibraltar funds, could be placed at a significant advantage to their offshore counterparts.

Furthermore, Non-EU managers will not be able to rely on the private placement regime and will also need to be authorised but this deals with a separate issue.

Gibraltar is a member of the European Union by virtue of Article 229(4) of the Treaty establishing the European Economic Community. All EU Directives and Regulations are fully transposed into Gibraltar law. For further information on how your fund or business may be affected by the AIFM, or on re-domiciliation procedures, contact Joey Garcia – joey.garcia@isolas.gi.

G20 Summit and the Gibraltar Perspective

The international clampdown on ‘offshore tax havens’ has been a well reported feature across the press in the last few months, and indeed, one of the main talking points following the recent G20 summit. But where does Gibraltar sit within this international whirlwind of public opinion, and what are our views on the current developments?

Following on from the London meeting of G20 leaders, the Organisation for Economic Cooperation and Development (OECD) published a report on 82 financial centres assessing their progress towards the ‘internationally agreed tax standard’ which effectively requires exchange of information on request in all tax matters for the purposes of administering and enforcing domestic tax law. The report created three separate categories into which the 82 jurisdictions in question were classified. A white list (jurisdictions which have substantially implemented internationally agreed tax standards) which contains most of the larger economic powers, a grey list of jurisdictions that have committed to the international tax standard but have not yet substantially implemented it (i.e., that have not yet signed at least twelve Tax Information Exchange Agreements (TIEAs)), and a black list of non-compliant jurisdictions that have not committed to the standard. The obvious advantage of such a system is that the G20 leaders have noted the OECD standard of exchange of information on request as a legitimate criterion on which to judge all finance centres, whether they exist onshore or offshore. Gibraltar currently sits on the grey list but has already signed its first agreement with the United States (the largest OECD member). This agreement has allowed, in the words of Chief Minister Peter Caruana to “signal at the highest level that we (Gibraltar) are a mainstream quality finance centre”. The recent agreement also shows clear support of measurements to increase global standard to a level that we are already operating, by virtue of our EU membership. Chief Minister Peter Caruana also said: “We look forward to co-operating with the United States under this agreement. As part of the European Union, Gibraltar already complies with EU standards of financial regulation and exchange of information.”

Gibraltar should be well positioned to be among the first category of countries that have issued the required twelve agreements by November 2009 which is when the next progress report should be issued by the OECD. This should enable Gibraltar to become a fully white listed compliant jurisdiction, operating within the EU, to EU standards but still offering the flexibility of a smaller jurisdiction able to enact its laws independently of the United Kingdom, and maintain an independent tax status. This is essential for Gibraltar to be able to continue to develop as an international finance centre, particularly in relation to Funds and as a jurisdiction for Funds business. 

The jurisdiction is well placed on the international scene from both a regulatory and compliance point of view. People who read the headline articles of today’s press could be forgiven for thinking that AIG and Lehman Brothers were companies located in the Cayman Islands or the BVI while the truth of the matter is that the gravest international fiscal issues have arisen in the most ‘regulated’ jurisdictions. While President Obama leads the fight to combat tax evasion, and jurisdictions such as Gibraltar are more than happy to fully co-operate perhaps we will also see similar requirements imposed closer to home. A recent investigation by Jason Sharman, a professor of the centre for governance and public policy at Griffith University, Australia, attempted to set up shall companies in 22 countries finding that the easiest place to retain secrecy was the US and Britain. Sharman attempted to set up anonymous shell companies on 45 separate occasions. In 17 cases there was no information provided on the ultimate beneficial owner. Seven of these were provided in Great Britain, four in the US, one in Spain, and one in Canada.