1. Investment funds play a key role in modern financial markets to give investors access to investments with the benefit of different layers of structural and regulatory protections. A large and efficient market for investment funds also serves to help sponsors of projects to get access to the large amounts of value that today’s investors seek to invest. This will in particular also apply for the exponentially growing need to invest in sustainable, forward looking projects.
2. Against this background, the European legislation has created a financial regulation framework for (a) the authorisation and supervision of alternative investment fund managers (AIFMs), (b) the oversight of AIFMs’ activities and services, in their home country as well as in other EU jurisdictions, and (c) the marketing of alternative investment funds (AIFs) (i.e. the distribution of securities issued by AIFs). AIFs are investment funds that are not regulated at EU level by the long established UCITS Directive[1], meaning they are not regulated at “product level” (structure, securities …). Only their management is regulated. AIFs include hedge funds, private equity funds, real estate funds, investment trusts, infrastructure funds and a wide range of other types of investment funds.
3. The key piece of legislation is the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (the AIFMD). It entered into application on 22 July 2013.
The AIFMD Review
4. In this post, we take a look at the recent consultation of the European Commission (the EC) on the review of the AIFMD (the AIFMD Consultation)[2].
5. The AIFMD required the EC to commence a review of the Directive by July 2017 (the AIFMD Review) to establish whether its objectives were being met and, if necessary, to propose appropriate amendments. The first stage of the AIFMD Review was completed last year with the publication, on 10 January 2019, by the EC of the report it had commissioned into the operation of the AIFMD, intended to “provide and assess evidence” for the EC’s review[3]. The EC released its own report on 10 June 2020 (the EC Report on AIFMD)[4] which concluded that while the AIFMD had contributed to the creation of the EU AIF market there were also a number of areas where the legal framework could be improved. The European Securities and Markets Authority (ESMA) has also written a letter to the EC on 18 August 2020to provide their own contribution to the AIFMD Review (the ESMA Letter)[5].
6. The next stage of the AIFMD Review was for the EC to seek the views of relevant stakeholders. We have set out below some of the AIFMD Consultation’s key areas of focus that may also be of particular relevance for the Belgian market.
EU passport and access to EU local markets.
7. The EC Report on AIFMD revealed that although the access to offer AIF into national markets had grown due to recognition organised under the AIFMD, in some cases, the time to actually bring funds to the market had increased. The AIFM passport was declared to have been an “important factor” in the growth of the EU AIF market, but its impact was also said to have been impaired by some countries choosing to impose additional requirements, divergences in the national marketing rules, varying interpretations of the AIFMD by national supervisors and its limited scope. Therefore, the AIFMD Consultation sought views from stakeholders on the scope of the AIFM passport, its potential extension to smaller AIFMs and level playing field concerns between investment firms and AIFMs providing competing services.
National Private Placement Regimes.
8. National Private Placement Regimes (NPPRs) allow AIFMs to market AIFs that are not allowed to be marketed under the AIFM passporting regime (such as third country (i.e., non-EU) AIFMs). Indeed, the role of NPPRs is acknowledged in the EC Report on AIFMD to have been an important factor in the development of the AIF market in the EU given the absence of the AIFM passport for third-country managers. As NPPRs differ among EU member states, it has created an unequal playing field within the EU as well as between EU and non-EU AIFMs. Therefore, the AIFMD Consultation sought views on how best to achieve the equitable treatment of (EU and non-EU) AIFMs and securing a wider choice of AIFs for EU investors while at the same time ensuring that EU AIFMs are not exposed to unfair competition or are otherwise disadvantaged.
Depositaries.
9. The EC Report on AIFMD noted the lack of a passport depositaries as being at odds with the EU’s single market approach. Because of the limited choice of service providers in smaller markets, such as Belgium, there are fears of concentration risk where a single a depositary could hold the assets of all or most of the AIFs established in a member state. Although the AIFMD Consultation stated that the introduction of the depositary passport is desirable from an internal market point of view, it also asked stakeholders to propose other potential legal solutions.
10. Unless a depositary passport is going to become available in the short term, we believe that the Belgian legislator and Belgian regulatory authorities should make proper use of the possibility offered by art. 21(3) in fine of the AIFMD. This section of the AIFMD authorises member states to allow, for certain types of AIFs[6], to apply a “light depositary” regime. “Light depositaries” are entities which (i) carry out depositary functions as part of their professional or business activities, (ii) are subject to mandatory professional registration recognised by law or to legal or regulatory provisions or rules of professional conduct, and (iii) can provide sufficient financial and professional guarantees to enable it to perform effectively the relevant depositary functions. This would allow private funds, such as specialised real estate investment funds (FIIS / GVBF) or private equity funds (pricaf privée / private privak), which typically have a very limited number of assets qualify to be kept in custody, to work with flexible yet professional and reliable depositaries whilst reducing costs.
Valuation.
11. The EC Report on AIFMD noted that while AIFMD had brought some structure to the AIF asset valuation process, there were still some issues with the binary choice in the valuation rules between internal or external valuation, as well as uncertainty about the liability of external valuers. In practice the binary choice is typically made redundant for certain AIFs, such as Belgian specialised real estate investment funds (FIIS / GVBF), for which (almost) all assets are already subject to a yearly valuation exercise (by an independent external valuer) and where the AIFM has little discretion in terms of asset valuation and net asset value (NAV) calculation. The AIFMD Consultation sought stakeholders’ views on potential improvements to the AIFMD rules on valuation.
Supervisory reporting requirements.
12. The EC Report on AIFMD noted that some of the AIFMD reporting requirements may not be essential, and some may be insufficient or duplicative. It suggested further streamlining might be needed with regards to supervisory reporting requirements. This was also picked up on in the AIFMD Consultation which suggested more centralised supervisory reporting and improved information sharing among the relevant supervisors. It would be interesting and encouraging for the market to better understand how the data submitted to the local authorities has been used and how it has served to protect investors up to this point. Certain sub-threshold AIFMs (subject to a yearly reporting obligation) feel that the reports they are filing every year are only used to verify whether they are remaining under the EUR 100m / 500m threshold. Should this be the case, we believe that the reporting requirements for sub-threshold AIFMs should be adjusted.
Harmonisation of AIFMD and UCITS regimes.
13.The AIFMD Consultation also asked whether rules for AIFs and Undertakings for the Collective Investment in Transferable Securities (UCITS) should be merged into a single rulebook, including the creation of a single licence for AIF and UCITS managers, harmonised metrics for leverage calculation and harmonised reporting on the use of liquidity management tools. This is interesting as it also picks up on a point made by ESMA in the ESMA Letter, which also raised the possibility of greater harmonisation of the UCITS and AIFMD frameworks.
Centralised Supervision.
14. The AIFMD Consultation suggested the potential for more centralised supervision, including entrusting ESMA with the authorisation and supervision of all AIFMs and/or non-EU AIFMs and AIFs. Although contentious (as this would seem to override national competent authorities) and not clear about how it would work in practice it does fit a general theme in the AIFMD Consultation of centralising power and looking to reduce divergences between member states.
Outsourcing/delegation.
15. The AIFMD Consultation asked whether or not AIFMD rules on delegation[7] (a) are clear enough to “prevent the creation of letter-box entities in the EU”, (b) are consistently enforced across the EU and (c) ensure effective risk management. Again, this is also a theme that is raised in the ESMA Letter in which ESMA suggests that further legal clarifications on the maximum extent of delegation would be helpful to ensure supervisory convergence and ensure authorised AIFMs and UCITS management companies maintain sufficient substance in the EU.
Conclusion
16. The AIFMD Consultation period ended on 29 January 2021 and we hope that AIFMs have engaged in the process (alone, with other market players or with their local investment association).
17. We have not seen any answer from the Belgian asset management association (BeAMA) at this stage but we have already analysed the answers from AIMA (Alternative Investment Management Association), the Investment Association, INREV (European Association for Investors in Non-Listed Real Estate Vehicles) and Irish Funds (Irish Funds Industry Association). The Commission will now go into the analysis of responses. We now understand from the EC that the impact assessment will be finalised by this summer and that the legislative proposal would be expected to come by the end of the year.
18. On the last day of the AIFMD Consultation period, the European Systemic Risk Board (ESRB) submitted its response. Unsurprisingly it advocates a more comprehensive macroprudential framework for AIFs. Given the vulnerabilities it had identified last year as a result of the COVID-19 pandemic, the ESRB now outlines three main priorities to progress implementation of a macroprudential framework within the EU:
(i) Improving the reporting framework and access to data for monitoring systemic risk;
(ii) Operationalising of the existing macroprudential instruments to address the contribution of AIFs to systemic risk;
(iii) Developing of a macroprudential policy framework for investment funds.
19. On this basis as well as on the basis of the EC Report on AIFMD, it seems unlikely that the AIFMD regime will be significantly recast in the months and years to come. Certain adjustments – some of them being discussed in this post – would, however, certainly be warmly received by the market, especially on more contentious topics like delegation (see paragraph 15 above) and supervision (see paragraphs 12 to 14 above).
20. We therefore expect that most of the key provisions of the AIFMD will not be, or will only be slightly, amended. For instance, the definition of AIF, the scope of application of the AIFMD and the threshold of the de minimis regime (EUR 100m / 500m) should largely remain unchanged.
21. This relative stability of the AIFMD regime is good news for the Belgian market. First of all it would mean that existing specific fund structures like REITs (GVV / SIR), institutional REITs (iGVV / SIRI), specialised real estate investment funds (GVBF / FIIS), non-AIF SPV structures (like securitisation vehicles or non-AIF GVBF/FIIS) do not need to be reorganised to ensure they are caught by, or excluded from, the AIFMD. The same goes for ad hoc structures currently relying on the de minimis regime. Second, that stability will allow sponsors and financiers to continue to design dedicated Belgian fund structures in the most efficient way.
22. This stability should in addition be seen as an opportunity for the Belgian legislator, the Belgian tax authorities and the Belgian regulatory authorities to take legal, tax and regulatory initiatives in order to enhance (the success of) certain existing AIF regimes and to create new regimes to create a commercial level playing field (i.e. allow for real competition) with what is possible in neighbouring EU countries. In terms of possible improvements that could ‘easily’ be adopted and that would offer a real competitive advantage to the Belgian investment market, we are thinking, for instance, about the following features:
- allow all Belgian entities that qualify as AIF (such as unregulated AIFs[8], FIIS / GVBF, European Long-Term Investment Funds (ELTIFs), to create sub-funds (compartimenten / compartiments);
- allow Belgian AIF regimes to broaden the scope of their investments taking, as reference point, our Luxembourg colleagues;
- characterise, from a corporate income tax perspective, all Belgian entities that qualify as unregulated AIFs or as ELTIFs as investment companies for the purposes of art. 185bis of the Belgian Income Tax Code (WIB / CIR);
- remove certain gold plating rules included in the Belgian regulatory landscape.
We hope and trust that such initiatives can shortly be (successfully) adopted and that this will provide important leverage for the Belgian economic recovery plan.
Ivan Peeters and Charles-Henri Bernard
Lawyers at PwC Legal
[1] Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (as amended from time to time).
[2] https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/2020-aifmd-review-consultation-document_en.pdf
[3] https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190110-aifmd-operation-report_en.pdf
[4] https://ec.europa.eu/transparency/regdoc/rep/1/2020/EN/COM-2020-232-F1-EN-MAIN-PART-1.PDF
[5] https://www.esma.europa.eu/sites/default/files/library/esma34-32-551_esma_letter_on_aifmd_review.pdf
[6] AIFs which have no redemption rights exercisable during the period of 5 years from the date of the initial investments and which, in accordance with their core investment policy, generally do not invest in assets that must be held in custody or generally invest in issuers or non-listed companies in order to potentially acquire control over such companies.
[7] i.e. when AIFMs are delegating the carrying out of some of their management functions on their behalf to third parties so as to increase the efficiency of the conduct of their business.
[8] i.e. vehicles qualifying as AIF and being managed by a registered or authorised AIFM but without having opted for a specific Belgian AIF status.
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