US Fund Manager with Cayman Fund Registered in Germany

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During the transition period between 2013-2015 a non-EU alternative investment fund manager (AIFM) managing an AIF has access to EU for professional investors (under MiFID) subject to domestic private placement rules that vary from country to country with some countries such as Bulgaria, Croatia, Latvia and Malta providing no transition period after July 22, 2014, while countries such as France, Germany and the Netherlands are abolishing or severely restricting private placements of AIFs to investors.

Article 42 of the AIFMD permits non-EU managers to market to professional investors, if the manager complies with certain disclosure requirements for both investors and the regulatory authorities of the countries into which the fund is marketed. However, Certain EU countries have chosen to impose additional requirements to those set out in Article 42. Marketing requirements in addition to Article 42 for Germany by the German Financial Supervisory Authority (BaFin), which are set out in detail in the KAGB (Capital Investment Act or ‘Kapitalanlagegesetzbuch’), are appointment of a German depositary.

The AIFM Directive provides a one-year transitional period for ‘existing managers’, but only for ‘existing funds’ as of July 22, 2013. The deadline for phasing out or changing national private placement regimes (NPPRs) at the EU level is 2018. Foreign funds managed by an EU AIFM will not be eligible for EU passporting until after July 22, 2015 at the earliest. However, regardless of marketing activities, the foreign AIFM will need to be fully compliant with the Directive as it manages an AIF distributed to EU investors from July 22, 2014 onwards.

In this case, the US fund manager with the Cayman Islands fund has chosen Germany as its Member State of Reference (MSR). It must also appoint a legal representative in the MSR to interact with the BaFin. And the AIFM will need to adhere to AIFMD Minimum Requirements with regards to disclosure, reporting, and regulatory filing, both before and after placement of the fund. From a practical perspective the foreign fund manager is essentially availing themselves to European regulatory oversight by the BaFin, in addition to whatever regulatory reporting requirements they may have to their own competent authority at home.

Effective from July 22, 2013, Germany’s private placement regime no longer exists and the placement method (publicly placed or privately offered) will no longer be a relevant criterion in determining the regulatory obligations of AIFMs. Since July 2013, any placement of an AIF, whether public or private, requires prior notification of and authorization by the German authority. The BaFin requires an information package, the contents of which are set out in detail in the KAGB. And upon receipt of a complete information package the BaFin decides whether to authorize placement of an AIF. Registration of a fund with BaFin is required two months in advance for professional only funds. Until July 22, 2015, the AIF managed by the non-EU AIFM is not eligible for an EU-wide passport for marketing and it must ‘cherry-pick’ individual markets for distribution under NPPRs where they exist. Then, as of July 22, 2015, the EU Passport Regime will be the sole authorisation recognised by the KAGB for all AIFMs and AIFs, regardless of where they are domiciled.

Alternatively, the US Investment Firm could have appointed an EU AIFM for their non-EU fund, and been AIFMD compliant immediately, although the EU-wide marketing restrictions for new funds created after June 22, 2013, would have been the same. For a fund manager from a third country that is FATF-compliant, and that has signed an memorandum with regards to cooperation and tax agreements between the MSR where the fund is domiciled and the country where the fund manager is licensed, regulated or otherwise authorized, it then becomes possible for the EU AIFM to delegate back the duties of portfolio management to the fund manager, while fulfilling the regulatory requirements of risk management, reporting and compliance with the EU regulator. For many foreign fund managers looking for access to the EU market without having a physical presence in Europe this may be a more efficient and less costly option. It also has the advantage that the EU AIFM will already be known to and have a working relationship with their home regulator.

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