In 2017, the European Commission (EC) commenced an extensive review of the Alternative Investment Fund Managers Directive (AIFMD) entrusting KPMG with soliciting feedback from stakeholders who had been most impacted by the regulation including AIFMs (alternative investment fund managers), depositaries and investors.
The results of the review – which were published in January 2019 – concluded that AIFMD had played a major role in creating an internal market for alternative investment funds (AIFs) along with a stringent regulatory and supervisory framework for AIFMs. However, the report also noted several areas in need of improvement, which could potentially be weaved into future AIFMD iterations.
Distribution under AIFMD
The industry response towards the pan-EU marketing passport, which is currently only available to EU AIFMs marketing EU AIFs, has been mixed, principally because of inconsistencies in member states’ application of the AIFMD itself. Respondents identified the divergences in marketing requirements between EU member states, as well as different interpretations of what constitutes marketing versus pre-marketing as being major impediments.
Private placement should be maintained
While the pan-EU marketing passport’s effectiveness is certainly open to debate, respondents called for the EC to retain the national private placement regimes (NPPRs) currently available to non-EU AIFs managed by EU AIFMs and non-EU AIFMs, highlighting that this structure provides added value to the EU. Such a move would help preserve competitiveness and uphold investor choice in the EU in the absence of an extension of the marketing passport to third countries.
Making authorisation easier
Despite the best efforts of the AIFMD – and more recently the Capital Markets Union (CMU) – to homogenise the authorisation processes for AIFMs looking to distribute cross-border, more work is necessitated. The findings conceded a number of member states had applied additional authorisation provisions on sub-threshold AIFMs which could impede the ability of smaller fund managers to market their products cross-border.
No singular approach taken by depositaries
AIFMD’s depositary requirements were identified as another area of potential focus. The report highlighted some of the depositary duties – namely look-through provisions and cash flow monitoring responsibilities – had been applied differently across member states. However, the report said it was hard to gauge whether this disjointedness had adversely impacted AIFMD’s operating model, although it accepted the current one size fits all approach towards depositary “does not accommodate for different asset classes or geographies.”
A new reporting model on the cards
AIFMD’s approach towards regulatory reporting has come under scrutiny, with the KPMG study pointing out that while large volumes of data are being supplied by AIFMs to national competent authorities (NCAs), questions are being asked about the usefulness of a lot of this information. Some AIFMD disclosures are, for example, duplicating regulatory submissions elsewhere, while a handful of regulators have gold-plated Annex IV and adopted their own bespoke filing processes, creating additional costs for the funds’ industry.
Valuation: Room for change
The provisions around valuation have also been queried, most notably the liability standard that is applied to external valuers which has resulted in few firms willing to take on this role. As a result, many AIFMs are themselves taking responsibility for valuation instead.
Tinkering with leverage
The report concluded that AIFMD had no noticeable impact on the level of leverage employed by AIFMs and that high levels of leverage – based on respondents to the survey – were rare. The measurement of leverage under AIFMD has always been a contentious issue, especially as there are divergences in calculation approaches between AIFs and UCITS and many argue the calculation methodologies are too crude and misleading. It is possible that revisions to the existing methodologies could be made once IOSCO (International Organisation of Securities Commissions) publishes its own findings on leverage.
Where next for AIFMD?
Even prior to the KPMG report, AIFMD had been subject to some revisions, with a tightening up of the rules on pre-marketing and imposition of new asset segregation requirements in the custody chain. While very few – if any – of the report’s findings have come as a major surprise to the industry, it is still hard to assess which suggestions will be onboarded by the EC, who now need to issue a report on the functioning of the AIFMD to the European Parliament (EP). The EP may in turn propose its own amendments in due course.