31 May 2013

Monica Gogna: AIFMD will increase costs and create regulatory uncertainty

An EU Directive that will regulate fund managers in the wake of the financial crisis will create regulatory uncertainty and increase the costs of doing business, writes Gogna for Pinsent Masons' Out-Law.com. A failure to provide enough clarity and definition risks damaging the fund management sector.

[The AIFMD] creates onerous disclosure obligations for alternative investment funds managers (AIFMs), for example, which will require putting in place regular monitoring and reporting on each alternative investment fund (AIF) managed and extra reports on each fund's risk and liquidity profile and the main instruments it trades. This will increase management operational costs.

The rules will apply to many different kinds of funds. A real estate fund has a very different set of risks from a hedge fund, yet rules on how much capital each fund must retain are uniform, which will be onerous and will increase funding costs for some funds.

Both the capital and disclosure requirements will require thorough and independent asset-valuation procedures, which will add yet more cost.

The AIFMD contains rules designed to stop funds conducting asset stripping. These restrict the ability of funds to transfer value from a purchased non-listed company for a period of two years. This will prevent companies in some cases from realising the value of an investment when it would otherwise be allowed to do so.

More fundamentally, the AIFMD in its current form creates confusion about exactly which funds or companies it regulates and which it does not. If an AIF delegates the actual investment management function to another company then if that other company performs more of the investment management then it will be the one that is regulated by the Directive. The original fund management company will be deemed to be a 'letterbox entity'.

This means that the company listed in fund documentation as the 'manager' will not be the manager as far as the Directive goes, which will cause confusion.

There are also likely to be scenarios where an offshore manager is deemed to be a letterbox entity, meaning that a sub-manager becomes the AIFM. The sub-manager may not be in a position to fulfil the AIFM conditions such as those demanding the holding of certain amounts of capital.

Full article

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