Each piece of EU post-financial crisis regulation includes a review clause, each with a different scope and timeline. The Alternative Fund Managers Directive (AIFMD) is no exception: it specifies that the European Commission should have begun the review of the application and scope of the directive in July 2017. As part of that review, the Commission engaged KPMG1 to report on whether the AIFMD’s objectives have been met, by assessing a number of the AIFMD requirements against five principles: effectiveness, efficiency, coherence, relevance and EU added value. Key points in KPMG’s report to the Commission are summarised below.
The differing review timelines set by EU legislation give rise to the question whether there is scope to review EU post-crisis regulation in the round and thereby to understand its collective impact, on the industry, regulators or consumers. In its report to the President on insurance and assessment management, the US Treasury did just that - see last year’s Evolving Asset Management Regulation report (PDF 2.12MB).
The EU direction of travel may not become clear until after the new European Parliament and Commissioners are in place later this year. Meanwhile, in relation narrowly to the AIFMD and the UCITS Directive, the Commission is seeking to adopt a common approach to reviews and amendments. Last year it issued two proposals to amend and align both directives – one on removing remaining national barriers to the cross border distribution of funds; the other on the asset segregation provisions for fund depositaries. In contrast, the industry is contending with different and conflicting disclosure requirements under the PRIIP KID2, MiFID II3 and the IDD4.
The EU pre-AIFMD landscape was heterogeneous across all aspects: investor types, asset classes, investment and redemption strategies, legal and governance structures, form of manager regulation, depositary or custody requirements, valuation and accounting practices, and transparency. The general objective of AIFMD is to create an internal market for EU and non-EU AIFs, and a harmonised and stringent regulatory and supervisory framework for AIF Managers (AIFMs).
KPMG’s report covers 15 selected member states, but input was also received from other jurisdictions, including third countries. We are grateful to the national regulators for their support, as well as to all online survey participants and interviewees.
The report finds that the AIFMD has played a major role in helping to create an internal market for AIFs and a harmonised and stringent regulatory and supervisory framework for AIFMs. Most areas of the provisions are assessed as having contributed to achievement of the AIFMD’s objectives and to have done so in accordance with the five principles. There are, however, aspects that have not contributed, or may be counter to, the achievement of these aims – particularly, but not exclusively, in relation to the principles of effectiveness and efficiency.
Respondents identified a small number of areas where clarification or amendments would be beneficial (see below). There was, though, an over-riding concern that AIFMD implementation had been costly for both firms and regulators, with reportedly limited added value for investors. There was therefore a call for issues to be looked at in the round, rather than the AIFMD in isolation.
Another finding of note was that the large majority of institutional investors and their representative bodies said that the AIFMD had not influenced their decisions to invest (or not) through AIFs, or to invest through EU/EEA AIFs rather than third country AIFs (or vice versa).
Areas for potential clarification of amendment
The EU marketing passport suffers from different approaches by national regulators (NCAs). In relation to non-EU AIFs and AIFMs, developments vary markedly from one Member State to another. Therefore, it is clearly of EU added value that national private placement regimes (NPPRs) are permitted to continue to operate.
Large volumes of data are submitted by AIFMs to NCAs under the AIFMD reporting requirements, but not all the data may be essential, some may be insufficient and some are duplicative. There are also overlapping reporting obligations under other EU legislation.
Survey data indicate that the use of high leverage is rare in AIFs. It would be helpful to harmonise the calculation methodologies for leverage across the AIFMD, the UCITS Directive and other relevant legislation, taking into consideration the recent recommendations of IOSCO5 – see here.
The extent of the notifications to NCAs under the rules for investments in non-listed companies is viewed as not useful or essential, and overly burdensome (especially given that many private equity/venture capital AIFMs are smaller companies, for whom the administrative burdens may be proportionately greater). Also, the meaning of “non-listed company”, and the application of the rules to investments in unlisted special purpose investment vehicles and unlisted UCITS or AIFs, are unclear.
The binary choice in the valuation rules between internal or external valuation, and the differing national interpretations of the extent of the liability of external valuers, are assessed as having impaired the effectiveness of the rules for some asset classes and in some Member States.
What happens next?
The Commission describes KPMG’s report as the “first step” in the process of reviewing the directive. Given the Parliamentary elections in May and the push to get a number of outstanding proposals agreed (including the cross-border distribution proposal), it now seems unlikely that we will see anything further until later this year or early next.
We understand that the Commission may look at the reporting requirements and the calculation of leverage, but it is not clear what else will be on its agenda. Indeed, having already issued amendments on cross border marketing and asset segregation, it may not have an appetite for major change on other points. Pressure may come from other sources, however. For example, on page 35 of in its recent advice (PDF 882KB)on initial coin offerings and crypto-assets, the European Securities and Markets Authority notes that further analysis is required on whether some crypto-assets might qualify as units of AIFs.
As regards the non-EU marketing and managing passports, there remains no indication that the Commission will activate them soon. Tax considerations are mentioned as issues that are still being considered, but there is a common view among the industry that Brexit is more likely the main factor, given that the UK is a major domicile for both AIFs and AIFMs.
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