AIFMD – Critical cliff or steady course?
By Dr Gerald Gonzenbach, Managing Partner, and Ulrich Kobelt, Partner, Enhanced Value Advisory Ltd
Published: 20 March 2014
AIFMD is probably the most complex regulatory framework for the alternative fund industry – comprehensive in terms of its scope and, at least at first sight, clear in terms of its implementation timeline. With the first published proposal in April 2009 and the final agreement by the EU legislator in October 2010, the Directive came into force in July 2011. And now, at the end of a two-year period reserved for the final transposition into national law, the Directive as well as the Delegated Regulation, the so called “Level 2 measures”, have finally come into full force and effect.
Effective introduction – deferred by another year
Many critical observers and players within the alternative fund management industry might wonder whether the passing by of July 2013 has yielded any major impact at all, particularly as they have not (yet) been really confronted with the expected fundamental changes.
The main reason for the discrepancy between expectations and felt effects has two main reasons: First, some member states are late in finalizing the transposition into national law and have not yet been able to implement the AIFMD. Second, and perhaps even more relevant in this context, several key member states introduced transitional arrangements, delaying the applicability of AIFMD rules. If applied at full length – and that seems to be the route to go in most states – the ultimately critical final date will now be July 22, 2014.
Offered such an additional time window, it is hardly surprising that most AIFMs would rather stand by the sidelines, waiting for the availability of the comprehensive passport providing the long awaited access to a fully unified EU market. Waiting also refers to the finalization of some details still outstanding, e.g. certain interpretations in the context of the (critical) remuneration policies.
Similarities in Switzerland
For Swiss AIFMs – positioned at the crossroads between the Swiss and the EU market – a similar picture evolves. Federal Council and Parliament have with the new Collective Investment Schemes Act (CISA) already on 1 March 2013 introduced a new legal framework following in broad lines the strategic goals as defined for the AIFMD. Although wider in scope – in particular due to its applicability to traditional as well as alternative AMs – both regulatory frameworks intend to enhance protection of institutional investors, introduce stricter rules for depository banks and implement tighter organizational rules and processes, i.e. with regard to risk management, and transparency requirements.
Similar at first sight to their EU counterparts, Swiss AIFMs can also benefit from a two-year transitory period (Art. 158 CISA). The individual transitional regimes, however, differ in many aspects considerably, and the general time window has for many specific requirements been replaced by different time scales; and last but not least, the basic 2 year period ends a year later in 2015.
Focusing in the following on the Swiss AIFMs situation two questions must be answered: First, do we see within the context of the AIFMD level playing fields for EU and Swiss AIFMs? And second, what conclusions have to be drawn for the mid-term strategic planning?
Are there any comfortable / convenient golden bridges?
By looking at the marketing and distribution rules, one of AIFMD’s key areas of regulation, the major differences become immediately evident.
The EU AIFM, on the one hand, can basically apply already now for the passport, valid for all EU AIFs – and mandatory for all EU AIFs as from July 2014.
The access criteria for the Swiss AIFM, on the other hand, are far less clear. In accordance with the present basic timetable, the authorization under AIFMD might – at the earliest – become available in 2015. Such an authorization will have to be applied for in the Member State of Reference, where the AIFMD needs to have a legal representative.
Ultimately more concerning for the Swiss AIFM , however, is the fact that the authorization is still subject to additional requirements on the bilateral political level, with explicit reference to the requirements of bilateral tax information exchange agreements, cooperation agreements and no negative listing by FATF (Art. 35 AIFMD). The final advice and opinion re passport availability, to be prepared by ESMA for the EU political authorities, is in other words ultimately depending on agreements clearly outside of the individual Swiss AIFM’s scope. Equally uncertain is the passport availability for non EU AIFs.
Accessibility to the EU markets for Swiss AIFMs is until final AIFMD authorization becomes available subject to the approval by and compliance with national private placement regimes (“PP Regimes”). And these PP regimes are not harmonized at EU level, and in many member states beginning to be radically phased out.
And does haste make waste?
A two-year period for the Swiss AIFMs seem at first glance to be rather generous. However, if not used sensibly, the Swiss AIFM will not only endanger his strategic positioning in his home country, he will also lose ground in the most relevant distribution markets of London, Frankfurt and Paris.
The analysis of the strategic implication leads to the following conclusions: First, it is necessary – but not sufficient anymore – to adjust to the complex web of organizational, structural and compliance requirements as defined by CISA – and even considering changes stemming from the expected future new regulation, in particular Switzerland’s response to the MIFID framework[i]. The consequences will almost certainly be higher costs to be absorbed by the AIFMs, ultimately leading to a further consolidation of the AIFM market.
And second, perhaps even more critical, Swiss AIFMs who want to optimize their future positioning are well advised to include in their strategic planning the option of a future presence within the EU. A fully regulated EU AIFM, most likely set up in Luxembourg, might in case of any further delays in the bilateral negotiations between EU and Switzerland become the most efficient and eventually the only viable entrance door to the critical markets referred to above.
[i] Refer to the initial draft of FIDLEG, the Swiss “Finanzdienstleistungsgesetz”