By Andrew Bryan and Owen Lysak, Clifford Chance
Published: 12 October 2018
The Securitisation Regulation has been in development in one form or another for almost five years and, on 1 January 2019, it will finally begin to apply. Among other things, the Securitisation Regulation will introduce onerous due diligence obligations on "institutional investors", including obligations to check compliance of other parties to the securitisation transaction with their obligations, and refrain from investing if e.g. the sell side does not have appropriate risk retention or disclosure arrangements in place to comply with new Securitisation Regulation rules. There is a serious risk that this will include non-EU AIFMs who market in the EU on a private placement basis under Article 42 of AIFMD.
Historically, in the funds space, the scope of EU regulation relating to securitisation has been fairly clear – and arguably produced quite a sensible result. Broadly speaking, the current securitisation rules under the AIFM regime apply to AIFMs set up in the EU or that have a full AIFMD passport to market in the EU. Where AIFMs register to market on a private placement basis in particular EU Member States under Article 42 of AIFMD, they are not subject to the securitisation rules under Article 17 of AIFMD and the corresponding articles of the AIFM Regulation.
Now, it is looking like the definition of "institutional investor" (the category of people with regulatory obligations to conduct due diligence) in the Securitisation Regulation may change all that. The definition includes "an alternative investment fund manager as defined in point (b) of Article 4(1) of [AIFMD] that manages and/or markets alternative investment funds in the Union". Unhelpfully, the Securitisation Regulation does not include a more general provision restricting its geographic scope, so prima facie a non-EU manager marketing a fund in the EU would be caught, even if it is marketing that fund only in one EU Member State and doing so under a private placement regime.
At first blush, a number of other types of non-EU (or "third country" in the EU jargon) institutional investors would be caught as well. For example, "credit institutions" (essentially, any deposit-taker) also fall within the definition of "institutional investor", regardless of where they are established. Surely the EU is not purporting to police how Old National Bancorp in the US or the National Bank of Canada can invest their money? Correct. Although they are deposit-takers, Canadian and US banks will not generally have an EU regulator who could enforce the Securitisation Regulation rules. While it may be slightly clumsy, third country credit institutions are effectively taken out of the rules because there is no regulator to enforce the Securitisation Regulation against them. Not so fund managers registered under Article 42. Having voluntarily submitted to some form of regulation in the EU in order to be allowed to market here, managers with an Article 42 registration have an EU national competent authority charged with ensuring they comply with EU rules. That national competent authority is charged by the Securitisation Regulation with enforcing the due diligence obligations on those managers.
This, of course, would significantly expand the universe of entities required to comply with EU securitisation rules and it is not clear that this expansion was intentional. There are, for example, questions around what sanctions the EU AIFM regulatory regime would apply to an Article 42-registered AIFM to deal with a breach of the Securitisation Regulation. As a result, efforts are ongoing with regulators and policymakers to clarify this question.
Although it is still possible that guidance might be issued to clarify that Article 42-registered AIFMs are not intended to be caught by the Securitisation Regulation, the application date of 1 January 2019 is fast approaching and most fund managers need to begin making preparations sooner rather than later if they are to be able to comply in a timely fashion. Accordingly, most fund managers with Article 42 registrations appear to be preparing on the basis they will be subject to the due diligence rules under the Securitisation Regulation and preparing accordingly.