MARKETING FUNDS IN EUROPE - A PRACTICAL LOOK AT AIFMD AND OTHER REGULATORY REQUIREMENTS

MARKETING FUNDS IN EUROPE - A PRACTICAL LOOK AT AIFMD AND OTHER REGULATORY REQUIREMENTS

Foreword One of the original aims of AIFMD was to harmonise the management and marketing of AIFs in the so that a uniform set of rules will eventually apply to all those marketing AIFs and raising capital in the. This presents some benefits: more consistency throughout the industry, potential cost savings by streamlining business models and, in due course, a level playing field for fund raising in the. However, in the meantime, the laws and regulations relating to marketing are particularly complicated, with a wide range of different requirements that may apply depending on who you are and where you are marketing. The rules on marketing in AIFMD cannot be considered in isolation and other financial regulation may also impact on your fund raising activities Jacob Ghanty, Partner, Funds and Financial Services This series of questions and answers explore some of the principal issues to be aware of when raising a fund in the. AIFMD is the key focus, but we also examine other financial regulation in the UK that may apply alongside AIFMD, as well as cross-border implications of any marketing initiatives. We have included a table to help you understand how the AIFMD marketing regime may apply to you. We would be delighted to discuss any of the issues raised in this briefing, and how they may impact on your business. We have set out a glossary at the end of this briefing which contains definitions for words we have used in italics. JACOB GHANTY Partner Funds and Financial Services T: +44 (0)20 3400 4088 jacob.ghanty@blplaw.com JUSTIN CORNELIUS Partner Funds and Financial Services T: +44 (0)20 3400 3041 justin.cornelius@blplaw.com MATTHEW BAKER Senior Associate Funds and Financial Services T: +44 (0)20 3400 4902 matthew.baker@blplaw.com CHRIS ORMOND Knowledge Development Lawyer Funds and Financial Services T: +44 (0)20 3400 2370 chris.ormond@blplaw.com Renowned for real estate and infrastructure funds, Berwin Leighton Paisner LLP s excellent team is client focused, and appreciates the importance of responding quickly Legal 500, 2013 Ranked tier 1 for Real Estate Funds in Chambers and Partners UK 2014 www.blplaw.com Page 01 Berwin Leighton Paisner

1. I haven t worried too much about AIFMD yet, what do I need to do to be able to continue marketing my fund, and when? If you are an AIFM subject to AIFMD who was already managing an AIF in the before 22 July 2013, you benefit from a 12-month grandfathering period, during which your activities (including the launch of new AIFs) are able to continue as normal. Non- AIFMs also qualify for this grace period, provided they were both (i) managing an AIF and (ii) marketing that AIF in the, before 22 July 2013. However, the grandfathering period expires on 21 July 2014, and from then on AIFMs will need to have either become authorised to manage (and to market) an AIF in the or have taken the steps summarised below to be able to continue marketing in the 1. If you are an AIFM who was not managing an AIF prior to 22 July 2013 and who now wishes to do so, you cannot take advantage of the grandfathering period and must apply for authorisation from the FCA (or your relevant home member state if you are an AIFM) and comply with AIFMD immediately. It may be possible to commence activities as a start-up manager by first becoming a Small AIFM. Although authorisation or registration will still be required, this is a less onerous regime and may therefore take less time to get your AIF to market. 2. How can I market my fund once the grandfathering period has ended? AIFMD s rules on marketing apply differently depending on who is conducting the marketing and what type of fund is being offered. In order to work out how to market in the UK, you will first need to answer the following questions: Is the fund you are seeking to market an AIF? Note that AIF includes listed or unlisted, open-ended or closed-ended funds regardless of the types of assets in which they invest. If yes, is it an or a non- AIF? Who is the AIFM? Is it a UK AIFM, an AIFM, a non- AIFM or a Small AIFM? Where do you intend to market the AIF (and to whom)? We have set out a table on the next page to help you understand how the regime applies to you. For the purposes of this table, references to AIFs and AIFMs include those established in the UK. 1 In December 2013, HM Treasury announced that it intends to amend the Alternative Investment Fund Managers Regulations 2013 to provide that, in cases where the FCA has not determined an AIFM s application under AIFMD for authorisation or registration by 22 July 2014 (the end of the transitional year), that AIFM will be able to continue managing AIFs until the FCA has determined its application if: (i) the application was submitted by a transitional AIFM by 22 July 2014; and (ii) that AIFM complies with relevant AIFMD requirements from 22 July 2014. www.blplaw.com Page 02 Berwin Leighton Paisner

How does the AIFMD marketing regime apply to you? Managing only (no marketing in ) Marketing in the under Private Placement Regimes 2 Marketing in the with a passport AIFM Full compliance with AIFMD (22 July 2013/22 July 2014, subject to any grandfathering provisions) Not applicable for full-scope AIFMs must have a passport to market (subject to any grandfathering provisions) Full compliance with AIFMD (22 July 2013/22 July 2014, subject to any grandfathering provisions) AIF Non- AIFM From 2015, full compliance with AIFMD Conditions: (i) co-operation agreements in place; (ii) compliance with FATF listings; (iii) OECD tax exchange agreement; and (iv) MSR LR appointed. AIFMD compliance only on annual report, disclosure to investors and reporting to regulators (and if applicable, on controlling interests and asset stripping) Minimum conditions: (i) co-operation agreements in place; and (ii) compliance with FATF listings. Member states may impose stricter rules Full compliance with AIFMD (late 2015 or 2018) Conditions: (i) co-operation agreements in place; (ii) compliance with FATF listings; (iii) OECD tax exchange agreement; and (iv) MSR LR appointed. Non- AIF AIFM Non- AIFM To comply with all of AIFMD, except for depositary and annual report requirements Co-operation agreement in place Outside scope Full AIFMD compliance, except on depositary 3 Minimum conditions: (i) co-operation agreements in place; and (ii) compliance with FATF listings. Member states may impose stricter rules AIFMD compliance only on annual report, disclosure to investors and reporting to regulators (and if applicable, on controlling interests and asset stripping) Minimum conditions: (i) co-operation agreements in place; and (ii) compliance with FATF listings. Member states may impose stricter rules Full compliance with AIFMD (late 2015 or 2018) Conditions: (i) co-operation agreements in place; (ii) compliance with FATF listings; and (iii) OECD tax exchange agreement. Full compliance with AIFMD (late 2015 or 2018) Conditions: (i) Co-operation agreements in place; (ii) compliance with FATF listings; (iii) OECD tax exchange agreement; and (iv) MSR LR appointed. Small AIFM Registration only 4 (with limited regulatory disclosure), or opt-in (full compliance) Member states to determine (e.g. UK-notification and submit information to the FCA) Not applicable unless AIFM opts-in to AIFMD (full compliance) Member states may impose stricter requirements 2 From 22 July 2013 both (i) non- AIFMs and (ii) AIFMs marketing non- AIFs can continue to market their funds in the using the PPRs, but with conditions attached and at the discretion of member states. In 2015, when the marketing passport becomes available for non- AIFMs (and for AIFMs in respect of non- AIFs), they can either become authorised to use the passport or continue to use the PPRs. PPRs may be compulsorily phased out in 2018, subject to ESMA s opinion on the functioning of a non- passport. 3 Although no depository is required, there must be an entity that complies with AIFMD in respect of monitoring cash flow, custody and general oversight tasks. 4 In the UK, as either a small registered AIFM (a small internal UK AIFM, a small property UK AIFM or a EuSEF manager) or a small authorised UK AIFM. www.blplaw.com Page 03 Berwin Leighton Paisner

3. Can you clarify what is marketing under AIFMD? AIFMD defines marketing as a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares in an AIF it manages. The FCA has provided guidance on when it considers an AIFM to be marketing in the UK. Under this guidance, there are two situations when an AIFM may not be regarded as marketing an AIF: (i) where it is conducting pre-marketing on the basis of draft documents; and (ii) where it is passive marketing on a reverse solicitation basis. Both of these are subject to anti-avoidance provisions which mean that you cannot use these routes to circumvent the AIFMD s requirements. The pre-marketing approach will apply in situations where the offer document or other information is not sufficiently detailed to enable the recipient to make an investment decision or submit a subscription request. The FCA acknowledges in its guidance that other member states may take a different approach on this point. An AIFM will be passive marketing where it receives an approach from a potential investor at the potential investor s own initiative. The FCA s guidance says that a confirmation from the investor that the approach was made at its own initiative should normally be sufficient to rely on this approach. However, the guidance also states that it must be received prior to making the offer or placement, so it will not be sufficient just to include a statement to this effect in the subscription agreement as it is likely to be too late. Marketing also does not include: general public statements (for instance, made on a website or at a meeting or conference); the issuance of capital calls in respect of existing binding capital commitments; or secondary trading. Alongside the marketing rules under AIFMD, AIFMs need to be mindful both of the cross-border implications of any general marketing initiatives (for example, for managers targeting US investors, the rules applicable to the safe harbours from registration with the US Securities and Exchange Commission (see the response to question 16)) and any additional local law restrictions. 4. I am an AIFM, how can I exercise my right to passport into the UK? Following expiry of the grandfathering period (or immediately for those AIFMs who are not able to take advantage of this), the only way an AIFM can market an AIF in the UK will be by having applied for a passport to do so and by being fully compliant with AIFMD. Under the passport mechanism, you must submit your passport notification to your home state regulator. It will then liaise with the FCA (and the other regulators listed on your notification) on your behalf. 5. What if I can t use the marketing passport I hear that I can carry on marketing as before, under the private placement regime? Neither AIFMs (including UK AIFMs for these purposes) marketing non- AIFs nor non- AIFMs marketing AIFs (specifics for each are given below) can take advantage of the marketing passport under AIFMD straight away and so must make individual applications to each member state into which they wish to market on a private placement basis. member states are not required by AIFMD to permit private placement (although the UK has chosen to do so). Although this is being described as a private placement regime, it is important to note that there are a number of requirements that will be imposed on AIFMs wishing to market funds into the UK: it is not simply a case of attaching the right disclaimers onto the offering document as, broadly, it has been to date for marketing into the UK. This therefore imposes a significant obligation on firms wishing to market into the UK under the private placement regime. www.blplaw.com Page 04 Berwin Leighton Paisner

Furthermore, because there is no passport for cross-border marketing under this route, a notification and filings will need to be made in each member state that the AIFM wishes to market into. Some member states may also impose requirements for documents to be submitted or available in translation into the local language. Even where it is possible to submit the same information to different regulators or prospective investors under the rules of the different regulators, this will impose a significant administrative burden. It is therefore anticipated that some non- AIFMs may either close their funds to investors, seek to rely on the passive marketing provisions (see the response to question 3) or seek to enter into arrangements with an existing AIFM in order to access European markets (for example, by establishing a dedicated sub-fund to which the non- AIFM can be appointed as portfolio manager or adviser). It is expected that a marketing passport similar to that described in response to question 4 will be available to all from 2015. Private placement is then due to be phased out in 2018. 6. What are the specifics on the private placement regime? (a) I am an AIFM, how can I market a non- AIF in the UK? An AIFM can only market a non- AIF in the UK if it has first notified the FCA of its intention to do so. This must be done under the UK s private placement regime, rather than through the AIFM s home state regulator (as would be the case if marketing an AIF via the passport route). The FCA website contains a link to the relevant form. Once submitted, the AIFM will receive an automated response confirming that the notification has been processed by the FCA. You can start to market as soon as the form has been submitted rather than waiting for the automated response, although it may be prudent to wait for it to be received, if the timetable allows, in case the FCA objects to the notification (see below). In addition to submitting the notification, you as AIFM must ensure that: (i) you comply with the requirements of AIFMD - in other words, you are authorised appropriately in your home member state and meet the relevant compliance requirements of that regulator. You do not have to appoint a depositary, although there must be one or more entities (not the AIFM) that complies with AIFMD in respect of monitoring cash flow, custody and general oversight tasks; (ii) there are appropriate co-operation agreements in place between the regulator of the AIFM s home state and the regulator in the jurisdiction of the non- AIF; and (iii) the third country in which the non- AIF is based is not listed as a Non-Cooperative Country and Territory by FATF 5. The FCA may revoke or suspend the ability of an AIFM to market into the UK under the private placement regime in a number of circumstances, including where it considers the marketing to be undesirable in the interests of investors or potential investors. (b) I am a non- AIFM, how can I market an AIF in the UK? As is the case for an AIFM marketing a non- AIF in the UK (described above), you will need to take advantage of the private placement regime. A non- AIFM must submit a notification to the FCA. Again, marketing can commence as soon as the notification is submitted. 5 At the time of writing, this list included the following: Iran; Democratic People's Republic of Korea; Algeria; Ecuador; Ethiopia; Indonesia; Kenya; Myanmar; Pakistan; Syria; Tanzania; Turkey; Yemena. www.blplaw.com Page 05 Berwin Leighton Paisner

In order to market, a non- AIFM must comply with three areas of AIFMD: (i) disclosing information to investors in advance of their subscriptions; (ii) preparing and providing an annual report to investors; and (iii) making reports to the FCA. In relation to the provision of initial information, it is not necessary for this to be included in the offering document (although this would be preferable from a best practice perspective). Additionally, as with the private placement marketing of non- AIFs by AIFMs, there must be cooperation agreements in place between regulators and also, the third country where the non-eu AIFM or the non-eu AIF is established must not be listed as a Non-Cooperative Country and Territory by FATF. Unlike for AIFMs, there is no distinction for marketing purposes between an AIF and a non- AIF. As above, the FCA can revoke or suspend the ability to market under the private placement regime. 7. I am a UK AIFM, how can I market my AIF? Marketing in the UK: If you are managing a UK AIF or an AIF, you will be permitted to market it to professional investors in the UK as part of your FCA authorisation. You will, however, only be permitted to market a non- AIF once you have completed the private placement notification procedure outlined in response to questions 5 and 6 above and submitted a notification to the FCA. Marketing a UK AIF or AIF into other member states: If you are managing a UK AIF or an AIF, you must use the passporting procedure described in response to question 4 above by submitting a passport notification to the FCA. This will enable you to market your UK AIF or AIF into other member states listed in your notification. The FCA has 20 working days to notify the regulators in the relevant member states of the passport application and must then notify the UK AIFM that it has done so. The UK AIFM can then commence marketing the AIF. Marketing non- AIFs into other member states: The marketing of non- AIFs in other member states by a UK AIFM will depend on whether the relevant member state has permitted private placement. member states are not, however, obliged to provide for private placement (see question 5). Furthermore, notifications will need to be made on a jurisdiction by jurisdiction basis and the FCA will not coordinate this process. 8. I am a Small AIFM, how can I market my fund? AIFMD provides for a lighter-touch regime for AIFMs of funds with only a limited amount of assets under management which meet the definition of being a Small AIFM. A disadvantage for firms taking advantage of this regime is that they will not be able to obtain a passport to market on a cross-border basis under AIFMD and will instead have to rely on individual private placement where permitted by the relevant member state(s). For Small Third Country AIFMs the UK has provided for a separate notification regime under which they can market any AIF (whether or non-) into the UK. There is a separate form that a Small Third Country AIFM will need to complete, and they will also have to provide information to the FCA on the main instruments in which the AIFM trades and the principal exposures and most important concentrations of the AIFs that it manages. They will not, however, need to comply with the more detailed disclosure requirements (on investment, annual reporting and reporting to the FCA) as are required for a full-scope third country AIFM as described in response to question 6(b). 9. Do the rules above permit me to market to retail investors? Not automatically. The procedures set out above only relate to marketing to professional investors in the (which will include professional investors, pension schemes, financial institutions and large corporates). The UK has also permitted marketing of AIFs to retail investors provided that the relevant AIFM conducting www.blplaw.com Page 06 Berwin Leighton Paisner

the marketing can comply with the UK s restrictions on financial promotion. See the response to question 10 below on financial promotion. 10. What about financial promotion in the UK is this still relevant? The UK s financial promotion rules continue to apply in relation to the promotion of an AIF either: (i) where the marketing is made to a retail investor; or (ii) where it does not constitute marketing (for example, for the reasons discussed in response to question 3). In these circumstances, you will separately and additionally need to comply with the requirements of the UK financial promotion regime. For example, if the AIFM is not an authorised person (e.g. a small registered UK AIFM), it is likely to be restricted in the types of retail investor to whom it can promote the AIF in addition to potentially needing to include appropriate marketing disclaimers. In addition, if the AIF constitutes a collective investment scheme (which is likely to be the case for many AIFs) and is promoted by an authorised person to retail investors, the AIFM will be subject to restrictions on promoting unregulated collective investment schemes. Other UK laws and regulations, such as the restriction on the public offer of securities without an approved prospectus and the prohibition on misleading statements and practices, will continue to apply. Firms subject to the FCA rules will also still need to comply with the requirement for communications to be clear, fair and not misleading. 11. Will I have to review my compliance procedures? Very probably. As discussed in questions 4 to 6, full-scope AIFMs are likely to face significant disclosure and reporting requirements. If you are an AIFM, you are likely already to be required to comply with similar obligations but, if you are marketing a non- AIF on the private placement basis, you should confirm whether the UK requirements are different from those imposed upon you in your home state. In addition, for AIFs that conduct private equity activities, AIFMD also imposes requirements relating to the acquisition of controlling interests and asset-stripping. These may result in additional reporting and notification obligations for the AIFM. 12. What about my offering document do I need to make any changes to my standard form disclosures etc? Since the UK financial promotion regime continues to exist alongside AIFMD, much of your UK disclosure language will continue to be relevant. However, you should also include language about AIFMD. Additionally, as discussed above, AIFMD imposes detailed requirements on information that must be provided to potential investors before they invest. Whilst this information does not have to be included in the offering document itself, you will need to ensure that it is provided and that your systems and controls can enable you to confirm that it has been provided to anyone who receives marketing. 13. Can I appoint a placement agent to do my marketing and avoid the need to comply with AIFMD? No. Placement agents are likely to be investment firms under UK regulation. Whilst such firms are permitted to market AIFs, they can only do so in circumstances where the AIFM of the AIF is itself permitted to market them in the UK. This means, for example, that the relevant notification will need to have been made and all required disclosures and compliance procedures complied with as described above. www.blplaw.com Page 07 Berwin Leighton Paisner

14. Once I am compliant with the UK rules, am I clear to market across the whole of the? No. There are likely to be many differences between the way in which AIFMD is interpreted and implemented across different member states. Different jurisdictions are likely to interpret the definition of an AIF differently so even if you have concluded that your fund is not an AIF for the purposes of UK regulation, you may still find that it is considered to be within the definition in other member states. member states can choose whether or not to permit private placement and can also impose stricter requirements on an AIFM seeking to market a non- AIF into their jurisdiction. Furthermore, some member states have not yet even implemented AIFMD. 15. What happens if I get this wrong? If you are not an authorised person, you may be committing a criminal offence by marketing an AIF without appropriate permissions or having made the appropriate notification as outlined above. If you are an authorised person, you may still be in breach of requirements and could be the subject of FCA sanctions. In addition, the AIFM may be required to rescind the contract with the investor and return all subscription monies paid as a result of any unlawful marketing. 16. I also want to market to US investors is this okay? New rules came into effect on 23 September 2013 under the US Jumpstart Our Business Startups (JOBS) Act which mean that if you are marketing funds to US investors under the private placement regime, you can now engage in general solicitation without prejudicing your safe harbour from the requirement to register with the US Securities and Exchange Commission (the SEC) under US securities law. General solicitation includes using websites and social media to advertise, talking to the press and soliciting investors during fund raising. This can be done on the condition that all the investors are accredited (or reasonably believed to be so) and that you, as the fund manager, can verify this. However, further rule making is being formulated by the SEC which will potentially increase disclosure requirements and impose new consequences for failure to follow the new rules. We expect that many fund managers will choose to continue to operate as before when conducting US marketing, using the safe harbour with no general solicitation but fewer regulatory controls. Those who wish to embrace the new rules should seek advice to ensure that their other marketing initiatives are not affected and also in respect any SEC additional rules. www.blplaw.com Page 08 Berwin Leighton Paisner

GLOSSARY The terms used in this note are primarily as defined in the UK s Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773). For ease of reference we summarise those definitions below: AIF means an alternative investment fund as defined in AIFMD. The definition of an AIF in AIFMD is (in summary) a collective investment undertaking (other than a UCITS) that raises capital from a number of investors with a view to investing it in accordance with a defined policy for the benefit of those investors. AIFM means an alternative investment fund manager. AIFMD means the Alternative Investment Fund Managers Directive 2011/61/EU. AIF means an AIF which is either authorised in an member state outside the UK or which has its registered office or head office in an member state other than the UK. AIFM means an AIFM which is not a UK AIFM and has its registered office in the. FATF means the Financial Action Task Force. FCA means the UK Financial Conduct Authority. full-scope AIFM means an AIFM that is not a Small AIFM. In this note, any reference to an AIFM will mean a full-scope AIFM unless otherwise stated. MSR LR means a legal representative established in the non- AIFM s member state of reference. To act as a contact point of the AIFM in the, including between regulators and any investors. It also performs a compliance function under AIFMD for management and marketing activities. Non- AIF means an AIF which is neither a UK AIF nor an AIF. Non- AIFM means an AIFM which has its registered office in a third country outside the. PPRs means private placement regimes. Small AIFM means an AIFM which has less than 500 million of assets under management (if there is no leverage and no redemption rights within the first five years) or less than 100 million of assets under management otherwise. In each case, these amounts are to be calculated across all AIFs managed by the AIFM. Small Third Country AIFMs means non- AIFMs who meet the definition of a Small AIFM. UK AIF means an AIF which is either authorised in the UK by the FCA or which has its registered office or head office in the UK. UK AIFM means an AIFM which has its registered office in the UK. This document provides a general summary only and is not intended to be comprehensive. Specific legal advice should always be sought in relation to the particular facts of a given situation. www.blplaw.com Page 09 Berwin Leighton Paisner