The Directive is close to finalisation 8 min read
Australian fund managers who market their funds to European wholesale investors are by now familiar with the Alternative Investment Fund Managers Directive (AIFMD or the Directive), which came into force over 10 years ago and fundamentally changed the funds management landscape in Europe. It was always anticipated that the Directive would be reviewed to ensure it is working as intended and the latest updates, dubbed 'AIFMD 2.0', are now close to being finalised.
While these updates largely impact EU Alternative Investment Fund Managers (AIFMs), there are some changes that Australian managers should be aware of. Those same managers may also be wondering if there is any update on extension of the EU marketing passport to non-EU AIFMs, as contemplated when AIFMD was first introduced.
In this Insight, we provide an overview of these updates and implications for Australian fund managers.
Key takeaways
- Australian AIFMs privately placing funds to European investors under Article 42 must comply with changes that are proposed to Articles 23 and 24 of the Directive, which include pre-investment and ongoing notifications and reporting to investors.
- These same AIFMs will also be caught by changes to Article 47, which empower the European Securities and Markets Authority (ESMA) to request that a regulator can require a non-EU AIFM marketing funds to EU investors to activate or deactivate suspension of redemptions and subscriptions, but it remains to be seen how this power would interact with duties the AIFM has under Australian law.
- While there is no update on extension of the EU marketing passport to non-EU AIFMs, it is not a forgone conclusion that—when the marketing passport is extended to non-EU AIFMs—an Australian AIFM could benefit due to tensions between ESMA's 2016 assessment of the suitability of Australia for the passport and the Australian Government's latest proposals to reform the foreign financial service providers (FFSPs) regime.
What are the 'AIFMD 2.0' updates of relevance to Australian AIFMs marketing to EU investors?
Currently, Australian AIFMs can only market funds to EU wholesale investors in reliance on private placement exemptions in specific EU Member States (under Article 42 of AIFMD, as implemented into national law), or in reliance on some other exemption, such as the narrowly construed concept of passive marketing (reverse solicitation).
Certain aspects of AIFMD 2.0 will be relevant for Australian AIFMs marketing their funds to EU investors, in particular:
Changes are proposed to Articles 23 and 24 of the Directive that deal (respectively) with pre-investment and ongoing notifications and reporting to investors, and with which an Australian AIFM privately placing under Article 42 must comply. These changes build on and modify the existing requirements—in the main, they do not reflect a wholesale change, but Australian managers will need to be mindful of the new rules and may need to consider (for example) updating the content of any AIFMD private placement memorandum wrapper provided to EU investors prior to their investment.
Article 47 will be amended to empower ESMA to request that a regulator can require a non-EU AIFM marketing funds to EU investors to activate or deactivate suspension of redemptions and subscriptions, and the Directive will be further amended so that an AIFM privately placing under Article 42 must comply with Article 47. Regulators will only be permitted to make such a request after consultation with the AIFM, where it is in the interests of investors, in exceptional circumstances and where there are investor protection or financial stability risks that, on a reasonable and balanced view, necessitate imposition of the requirement.
It remains to be seen how activation of this requirement in respect of a particular Australian AIFM or fund would interact with duties the AIFM has under Australian law, noting that there is some overlap, for example, between regulators only being able to make a request where it is in the interests of investors in the fund, on the one hand, and the duties trustees of Australian trusts owe to unitholders, on the other.
We can also envisage issues arising in respect of registered managed investment schemes marketed to wholesale investors, given the strict rules under Chapter 5C of the Corporations Act that apply in respect of withdrawals, and the fact that scheme constitutions, with which responsible entities must comply, typically include detailed withdrawal and liquidity provisions. In this regard, we note that an EU regulator will only be entitled to exercise this right in exceptional circumstances and that they must consult with the relevant AIFM before doing so.
Currently, non-EU AIFMs that wish to access the EU market (and the funds they are marketing) are required to be established in countries which are not Financial Action Task Force (FATF) non-cooperative countries or territories. This will be replaced with a requirement not to be established in countries which are identified as high-risk third countries under EU anti-money laundering legislation. Third countries where an AIFM and/or fund are established must have signed an agreement with each relevant EU Member State where marketing will take place that complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital, and that ensures an effective exchange of information in tax matters, including any multilateral agreements, and must not be on the EU’s Annex I list (ie, the 'blacklist') of non-cooperative jurisdictions for tax purposes.
Australia is not currently on the blacklist and, as of now, Australia has tax treaties with 18 of the 27 EU Member States, all of which contain wording based on, or equivalent to, Article 26 of the OECD Model Tax Convention. Negotiations are currently underway with a further three EU Member States and there are plans to negotiate with the remaining six EU Member States. Of the EU Member States that have do not currently have a tax treaty with Australia, none of these are jurisdictions to which, in our experience, Australian wholesale fund managers generally seek to market their funds, and so in practice we do not expect this change to have a material impact.
What about the marketing passport?
One of the key benefits of AIFMD for fund managers is that it provides for a marketing passport, whereby an AIFM can take advantage of permissions in one EU Member State to market funds to investors in all Member States. While the marketing passport is currently only available to European AIFMs in respect of European funds, this is required to be reviewed periodically by ESMA.
Extension of the marketing passport to non-EU AIFMs may not be expected any time soon, due to the lag ahead of implementation of 'AIFMD 2.0' and the recent changes made by the cross-border distribution of funds package needing time to become established. It is also not a forgone conclusion that when the marketing passport is extended to non-EU AIFMs, an Australian AIFM could benefit due to tensions between ESMA's 2016 assessment of the suitability of Australia for the passport and the Australian Government's proposals to reform the FFSP regime, which we have summarised in a number of Insights (most recently: Another year, another FFSP update: what is the status of the FFSP reforms? (allens.com.au)).
When ESMA published its findings on a proposed extension of the marketing passport to non-EU AIFMs in 2016, it noted there were no significant obstacles to extending the passport to Australia, provided ASIC extended the 'class order relief' to all EU countries (at the time only UK (then in the EU) and German fund managers were able to benefit from this relief). Despite the ESMA report noting that ASIC had indicated a willingness to discuss extending the relief to EU AIFMs more generally on a reciprocal basis, under the FFSP bill currently before Parliament, only the following EU Member States are earmarked to benefit from the 'comparable regulator exemption' under s911A(2)(ep) of the Corporations Act: Germany, Luxembourg, Denmark, Sweden and France.
The Minister may, by legislative instrument, include additional regulators that administer broadly comparable regulatory regimes on the list, but if no additional regulators are added, and if ESMA holds firm on its 2016 position, then even if the marketing passport is extended to non-EU AIFMs, Australian managers may be unable to benefit from it. If that is indeed the case and if the private placement regime is subsequently abolished (noting that ESMA is expected to review the private placement regime three years after the marketing passport is extended to non-EU AIFMs), this could leave Australian managers without an avenue to market their products to EU investors in those Member States that currently allow for some form of private placement. Even before the private placement regime is abolished, some countries may decline to offer private placement as soon as the AIFMD marketing passport is extended to non-EU AIFMs.
It is worth noting that while the 'comparable regulator exemption' is intended to replace the 'class order relief' referred to in ESMA's 2016 report, additional exemptions from the need to hold an AFSL have been proposed, including a 'professional investor' exemption for FFSPs that provide financial services to professional investors from outside of Australia (except during limited marketing visits and except in relation to certain financial products tradeable on licensed markets). It is to be hoped that when ESMA revisits the suitability of each third country, it considers Australia's new FFSP regime in its totality and determines that it provides sufficient reciprocity between Australia and the EU Member States, rather than focusing on the Member States that have been excluded from the 'comparable regulator' list, but this remains to be seen.
What about the UK?
Following Brexit, there is no obligation for the UK (whose national law is currently materially in line with its implementation of the existing AIFMD) to implement AIFMD 2.0 into national law, and there is currently no indication the UK will follow any of these changes. The UK's Financial Conduct Authority (FCA) is considering what (if any) changes should be made to the UK rulebook. The FCA intends to open consultation on the way forward this calendar year.
What is next?
The current review process saw the November 2021 publication of the European Commission's proposal to amend AIFMD and, following consultation, the final text of the amending Directive was agreed in November 2023.
The text of the revised Directive is still subject to legal and linguistic review, with final agreement expected in Q1 2024. Once the amending Directive is in force, Member States have two years to implement the laws and associated materials into national law, so it may be some time before these changes come into force.
While there are no immediate action items, Australian fund managers should watch this space and consider these changes in the context of any planned capital raises and whether the content of any AIFMD private placement memorandum wrapper provided to EU investors may need to be updated.