The AIFMD, or Alternative Investment Fund Managers Directive, is a proposed European Union regulation that would make all hedge funds and private equity funds subject to single EU regulatory body. This represents a departure from the current regulatory scheme under which each member nation promulgates its own laws with respect to Hedge and PE Funds, with bilateral and inconsistent reciprocity agreements between nations. The AIFMD would seek to unify all member nations under one regulatory scheme, facilitating the movement of capital already within the EU as well as capital coming into the EU from abroad.
Q. So this is the Alternative Investment Fund Managers Directive, the big regulatory push in the EU regarding alternative managers and funds. It’s very sweeping, way beyond the new Dodd-Frank requirements for fund managers?
A. Its extremely broad, and its critically important not just for EU-managed funds but also US funds that have EU investors: the rules apply to funds marketed in the EU. And most US funds won’t meet the requirements.
Q. Do the new rules apply across all kinds of alternative funds?
A. Pretty much — hedge funds, private equity, venture capital, and real estate funds are all picked up. So all these will have to comply with the rules, including registration, tax compliance, risk management, etc. There are some exceptions for smaller funds, and some transition rules that are important, but the basic answer is: “yes”.
Q. So give us some idea of the more important requirements…
A. One, that I think is really smart, is the idea that there must be a separate depository for the assets being managed. This is a key anti-fraud feature that investors should look for regardless of any legal requirements, btw: you don’t want the manager and the custodian to be the same entity, as any investor in the Madoff funds would now tell you.
Q. So separate custody of the assets is one… do the rules impact manager compensation?
A. Certainly do. The final rules on this were just announced, and they essentially make the manager take out a big chunk of the variable compensation– the carried interest– in equity of the fund rather than current cash, and also subjects those fees to some deferral and clawback provisions. So that’s one area where most current US funds will simply not qualify.
Q. Well, sounds like a lot of compliance requirements and restrictions, which might be good for investors… but are there any upsides for managers in all of this?
A. The big idea here is that the EU is creating a “passport” system that will allow funds to be marketed in the various countries without having to worry about the specific private placement rules of each one. Obviously, that will really help marketing once the funds are in compliance and all the countries have adopted the relevant legislation, which they’re required to do.