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The High Costs of AIFMD Compliance

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The AIFM Law of 2013 hopes to do for alternative investment funds (AIFs) what the UCITS Law of 2010 achieved for undertakings for collective investments (UCITS), which is namely the creation of a pan-EU, uniform market that is well-regulated, protects investor rights and sets a global best in its class standard for the management and distribution of AIFs. Rather than supervise individual funds the new law seeks to authorise and regulate investment managers (AIFMs) to hold them to a higher standard in terms of transparency, disclosure, good governance, risk management and accountability.

Under the EU AIFM Directive (AIFMD) transposed into national laws in 2013 authorized EU AIFMs will be able to offer EU and non-EU AIFs to professional or well-informed investors throughout the EU with a single EU-wide passport as opposed to the old rules of national private placement regimes (NPPR) that differed by country and national regulator.

This will immediately affect all regulated and non-regulated collective investment schemes in the EU that are not UCITS, including private equity, real estate and hedge funds as well as fund of funds regardless of their size, number of investors or assets under management. It may also impact banks, investment firms and asset managers that manage discretionary portfolios on behalf of investors. Under AIFMD all such firms are required to do a self-assessment to determine whether they need to be registered or authorized by their national regulator by July 22, 2014.

Now that AIFMD has been transposed into national law, some EU countries are restricting or banning private placements, or planning to before the planned phase out of NPPRs in 2018. Some like Germany as early as July 2014. Especially for non-EU AIFs that do not fully comply with AIFMD, such as is the case in France that has basically closed the door on open-ended investment funds by private placement. More nations are expected to follow suit as regulators tighten up investor protection rules and seek to better supervise what gets sold to who by whom. Whereas EU and non-EU AIFs managed by an authorized EU AIFM will enjoy EU-wide access through a single home regulator.
The cost of compliance with the AIFMD is expected to be high in terms of time, money and manpower. A survey of some of the largest investment fund managers puts the cost of compliance at close 250.000 euros per firm in terms of project and one-off costs of fulfilling AIFMD risk and compliance needs, plus ongoing costs associated with enhanced reporting requirements. These fixed costs will fall more heavily on small and medium sized firms, AIFs that choose to self-manage, and firms that choose to build this capacity in-house as opposed to appointing an external AIFM.

It will also cost more for non-EU AIFs that lack a physical presence in the EU that must then be licensed or registered with their home regulator and apply for a Member State of Reference (MSR) to be their EU regulator for distribution to EU investors. Being regulated and compliant both at home and abroad may cost up to 500.000 euros including license and approval costs, appointing additional external board members and organizational changes to delineate portfolio and risk management. For small or medium sized asset managers it may be less-expensive and time consuming to appoint an external EU AIFM who is already AIFMD compliant who can then delegate back portfolio or risk management to the asset management company.