On 10 January 2019, the European Commission released its Report on the Operation of the Alternative Investment Fund Managers Directive (AIFMD). In our separate Insight we discuss the overall findings of the Report. In this article, we discuss some specific findings, including certain weaknesses in the AIFMD regime identified in the Report.
Marketing Passport and NPPRs
Aspects of the marketing passport regime have been found to hinder cross-border distribution and two main concerns arise here:
- different marketing requirements exist across the Member States; and
- uncertainty exists over the scope of the definitions of "marketing" and "pre-marketing".
Differences in national approaches, as well as a lack of transparency around their rules and processes, were a "major obstacle for rolling out uniform marketing activities across the EU". Apart from undermining the effort to enhance the single market via the AIFMD passport, these concerns result in higher marketing costs in Member States with more restrictive rules as well as "quite a complex legal map".
The conclusion was that progress in harmonisation of a single market for AIFs was "patchy". Most respondents and interviewees were supportive of the continued operation of the national private placement regimes (NPPRs). Therefore, the Report concluded that the NPPRs should be permitted to continue since they clearly provide "EU added value".
Some key criticisms of the reporting regime were around: consistency, coherence, higher costs, and duplication with other regulatory regimes (EMIR, MIFID II, SFTR, and PRIIPs). The duplication in reporting requirements is an area that needs to be addressed and respondents called for the rationalisation of the AIFMD reporting requirements. However, due to the 'high sunk costs' already with the implementation of reporting systems the industry has called for reporting to be reviewed across all relevant regulation and for better coordination in approach between NCAs and ESMA, rather than piecemeal changes.
Interestingly, both ESMA and the NCAs were critical of the AIFMD reporting requirements because they do not provide all the data the regulators need to monitor and analyse the AIF market (for example, in relation to investment strategies).
The use of leverage is rare in AIFs. The Report found that it would be helpful to harmonise the calculation methodologies for leverage across AIFMD, UCITS and other relevant legislation. It was noted that these leverage issues have already been included on ESMA's Action Plan for 2019.
The effectiveness of the rules for some asset classes and in some Member States has been impaired by the valuation rules involving a choice between internal or external valuation, as well as differing legal interpretations of the liability of external valuers. "Considerable difficulties" exist in some Member States in connection with the external valuer rules due to the unlimited liability for negligence in the case of unlisted and real assets (because Article 19(12) does not provide a definition of negligence).
Due to these issues, there are now fewer available external valuers in some Member States, which lowers the level of competition and this could result in higher fees charged to AIFs and AIFMs.
Disclosure to Investors
One of the areas of the Report for which the findings and views were strongest was in relation to disclosures to investors. A key finding was that the Article 23 AIFMD requirements were considered "excessive in quantity and therefore are ignored or prevent investors from obtaining a clear understanding of the AIF's investment proposal".
Although a sizable proportion (40%) considered the current disclosure rules to be sufficient to inform and facilitate proper investment decisions, concerns were expressed on the inconsistent application of AIFMD. When national authorities add on their own requirements, it does "not help investors select the most relevant information for their own monitoring purposes". Concern was also expressed that experienced and well-informed investors have different reporting needs.
Institutional investors also raised concerns around fee disclosures, noting "insufficient or non-standardised disclosures of all fees, costs and charges (e.g. private equity investment)". This is despite the fact that Article 23 requires all fees and charges to be disclosed and that there is no national discretion. The problem arises because AIFMD does not mandate the calculation or format of these disclosures and this, in turn, impacts the effectiveness of the requirement.
Finally, the AIFMD investor disclosure rules were considered to be inconsistent with other EU investor disclosure regimes, which gives rise to duplicative disclosures. There is misalignment with newer client reporting in MIFID II and the PRIIPs KID.
Other Findings: How Influential?
84% of institutional investors asserted that AIFMD did not influence the decision to invest through AIFs and the same picture holds true for investment through EU/EEA AIFs rather than third country AIFs (or vice versa). The investors noted that there had already been regulation in the area prior to AIFMD. The directive had, however, provided some consistency (although professional investors conduct their own due diligence on investment in AIFs of any sort).
Osborne Clarke comment
A number of issues found in the AIFMD Review have been incorporated into ESMA's work plan for 2019, and there are already legislative proposals in the pipeline. Another possibility for the future is that some elements could be remedied by way of an 'AIFMD II' regime.
For the time being, at least, it is likely that the NPPR will remain in place.
One final point made in the AIFMD Review is worth bearing in mind: the regime has "yet to be fully tested" since the AIF sector has not been subject to major financial shocks since the directive was introduced.