In the event of a hard Brexit, or no agreement being
reached on the cross-border selling of investment funds under the EU passport
regimes, funds in the UK will have to become non-EU (third country) Alternative
Investment Funds (AIFs) under the Alternative Investment Funds Managers
Directive (AIFMD). Similarly, UCITS Managers and Alternative Investment Fund
Managers (AIFMs) in the UK will become non-EU (third country) AIFMs under
This brief note sets out the key points of the non-EU
(third country) retime under AIFMD.
It should be noted that any references to UK AIFMs or UK
AIFs could also be applied to AIFMs and AIFs established in Gibraltar. It
should be further noted that any reference to the EU can also be extended to
Iceland, Liechtenstein and Norway, which whilst not in the EU are part of the
European Economic Area and subject to AIFMD.
EU AIFMs selling UK AIFs to professional investors in
This is covered under Article 36 of AIFMD and is one form
of the National Private Placement Regime (NPPR).
Article 36 requires that the non-EU fund (AIF) is managed
by an EU-based AIFM. There are two main requirements:
- The non-EU AIF cannot be established in a third
country that is listed as a Non-Cooperative Country/Territory by the Financial
Action Task Force (FATF)
- Appropriate cooperation arrangements must be in
place between the EU country where the AIFM is established and the third
country where the AIF is established – it is expected that the UK will sign
such cooperation arrangements with most EU member states
It should be noted that unlike the AIFMD EU passport
(under Article 32) the access to a host EU state for marketing under Article 32
of AIFMD is not automatic and is certainly not harmonised. Each EU member state
can put in place their own requirements for registration or notification. There
may also be a higher cost to Article 32 registrations than there would be to
utilising the AIFMD passport in the same country.
UK AIFMs selling EU or non-EU AIFs to professional
investors in the EU
This is covered under Article 42 of AIFMD and is the
other form of NPPR.
Article 42 has three main requirements:
- The non-EU AIFM (and where appropriate the
non-EU AIF) cannot be established in a third country that is listed as a
Non-Cooperative Country/Territory by the Financial Action Task Force (FATF)
- Appropriate cooperation arrangements must be in
place between the EU country where the AIFs are to be marketed and the third
country where the AIFM (and where applicable the AIF) is established – it is
expected that the UK will sign such cooperation arrangements with most EU
- The non-EU AIFM must comply with Articles 22 to
24 (and where appropriate Articles 26 to 30) of AIFMD
As noted under the previous section, NPPR is not
automatic and not harmonised. Not only can each EU member state put in place
their own requirements for registration or notification but some EU member
states (such as Latvia, Greece and Italy) have not implemented Article 42 and
therefore NPPR under Article 42 is not possible in these jurisdictions.
Sales to semi-professional investors in the EU
Again, sales to high net worth investors, sophisticated
investors and other forms of semi-professional investors is not harmonised
throughout the EU and each country will have its own method of dealing (or not
dealing) with these investors.
Some EU countries (e.g. Netherlands, Denmark, France)
allow funds registered for NPPR under Article 36 and Article 42 to be sold to
semi-professional investors. Each jurisdiction will set a minimum investment
level. In some EU member states there will be a requirement for a separate
document or letter to be signed by the investor confirming their status. This
is similar to the Financial Conduct Authority Regime for Non-Mainstream Pooled
Other EU countries (e.g. Austria, Germany, Sweden) may
require a separate registration for semi-professional investors that is beyond
the requirements for an Article 36 or Article 42 registration.
Some EU countries may not make provision for
semi-professional investors. Each country in the EU should be looked at on a
Regardless of the method for enabling sale to these
investors, it should be noted that a Key Investor Information Document (KIID)
will normally be required under the Packaged Retail Investment & Insurance
Products (PRIIPs) Directive.
Sales to retail investors in the EU
An area for least harmonisation, only certain EU
countries allow for AIFs (whether EU or non-EU) to be sold to retail investors.
Where this is permitted it will be subject to the highest level of restrictions
Article 43 of AIFMD allows for each EU jurisdiction to
determine (1) whether they want to allow for AIFs to sell to retail investors
in their country and (2) what authorisation/registration requirements are in
place for such access.
In cases where retail registration is allowed it should
be expected that the forms will be long and invasive and any fee will be
dramatically more than similar UCITS registration.
Going forwards any access to the EU for UK fund managers
and UK funds will require significantly more work that is currently required.
Furthermore, easy access routes may not be found to all EU jurisdictions. The
expectation that UK-based fund managers will be more selective in their EU
Midshore Consulting specialise in the cross-border
distribution of funds, and have extensive experience with non-EU funds. Please
contact us for assistance.