EU rules: regulatory arbitrage?

AIFMD’s plans for alternative investment funds could create an unfair advantage in the market


The Alternative Investment Fund Managers Directive (AIFMD) will bring alternative investment funds under full EU regulatory supervision. Although the implementation date was on 22 July, a 12-month transition period provides a larger window for compliance, a grace period gladly welcomed in light of the extensive regulatory challenges AIFMD presents to the funds and managers that fall within its ambit.

Still, the clock is ticking for those EU alternative investment fund managers (AIFMs) who must be authorised in time, and non-EU AIFMs who must decide whether to continue to operate in Europe. Though the deadline is clear, whether the directive will achieve its intended objectives is anything but.

Chief among those objectives is to provide a ‘harmonised’ and stringent regulatory framework for all AIFMs within the EU. This, the theory goes, will support and build investors’ confidence at a time when the union is still healing from the financial crisis, and will level the playing field to improve competition and choice for investors.

But while harmony is the objective, disharmony may be the reality.

Working with clients who face the authorisation question highlights the differences between the requirements that apply to EU AIFMs and non-EU AIFMs. Those differences are, however, minimised by the egregious disparity that will result by delaying universal adoption of AIFMD supervision.

As EU law now stands, non-EU fund managers will not be able to sign up for full AIFMD authorisation until at least 2015 and must, instead, keep dealing with private placement regimes. For US, Asian and other non-EU incorporated managers, the need to market funds on a country-by-country basis won’t be scrapped until 2018 at the earliest, depending on a review conducted by the European Commission.

The delay in deciding if non-EU AIFMs can obtain an EU ‘passport’ for managing and marketing their funds in the union jeopardises the central harmonisation objective, and certainly undermines competition and choice for investors. 

The delay in passport access unfairly positions EU AIFMs to have a competitive advantage. They need only to go through the ‘pain’ of compliance with AIFMD once and can then apply a single set of policies, procedures and system changes to all their EU activities. 

So, a fair fight? Well not exactly. Although some jurisdictions may allow some non-EU AIFMs to market some products in that jurisdiction, the permission is narrow, circumscribed and local. The only way a non-EU AIFM could truly compete would be to comply with all the different requirements that each jurisdiction either has already or may still impose on them, assuming that all jurisdictions will open their doors to them in the first place. Not exactly a harmonised market. 

What we need is a level playing field from day one. A truly harmonised legal and regulatory framework is one that enables investors to benefit from the options and expertise created by natural competition and universal application of AIFMD to both EU and non-EU AIFMs. 

What we have is EU-endorsed regulatory arbitrage.