The European Alternative Investment Fund Managers Directive (AIFMD) introduced the Alternative Investment Funds (AIF) marketing passport and is now recognized as a great success. However, this achievement is somewhat tainted by the passport being unavailable to all players. This paper aims to examine the current state of affairs, explain the limits of the marketing possibilities, and to provide a view as to whether the regulations will evolve in the right direction.
 

First, a reminder of the key principles of the so-called AIFMD.

The AIFMD (Directive 2011/61/EU) entered into force on 21 July 2011. Its main objective was to regulate, after the 2008 financial crisis, the managers (AIFMs) of AIFs. These funds are not Undertakings for the Collective Investment in Transferable Securities (UCITS) and are mainly designed for professional investors. The AIFMD was also intended to homogenize the rules across the European Union (EU) following the example of UCITS.  

Back in July 2013, after it was implemented by each Member State (MS), the AIFMD provided new opportunities to market AIFs within the EU:

1. A marketing passport for an EU AIF managed by an EU AIFM;
2. The possibility of marketing a non-EU AIF within the EU, known as the National Placement Regime (NPR); and
3. The possibility of marketing to retail investors.

At that time, the industry was very enthusiastic about the potential distribution opportunities and relief of burden.

The AIFMD marketing passport is now widely recognized as a success story.

The AIFMD was the first step in harmonizing the marketing of EU AIFs within the EU. At present, the Directive grants EU AIFMs that manage EU AIFs a marketing passport. This allows those AIFs to easily obtain a marketing authorization in each MS, thanks to a homogeneous and simplified notification process. Raising money from professional investors within the EU can be done fairly simply and quickly. The time-to-market is much faster (a maximum of 20 business days) and less costly (the abrogation of some local gold-plating requirements).
 

But is AIFMD a total success?

In actual fact, nine years later, there are still many hurdles to marketing AIFs that are non-EU or target retail investors. In these cases, the regulatory framework is not harmonized and different rules still exist across MS, despite the efforts of the European Commission and the European Securities and Markets Authority (ESMA) to overcome the discrepancies within the EU regulatory framework.
 

The European cacophony for marketing non-EU AIFs (via the so-called NPR): technically possible, but not really…

Despite the fact that, from a legal perspective, every MS can market non-EU AIFs via NPR, the reality and market practice is very different, mainly due to many MS setting technical barriers that make this process overly complex and tedious.

To illustrate: if an MS allows NPR, then a set of EU obligations defined by the AIFMD applies to the AIFM (e.g., specific cooperation agreement between the host and home regulators, depositary requirements, and some transparency requirements). And, in addition, each MS may impose certain local gold-plating requirements. This creates an uneven playing field between EU and non-EU AIFMs.

Here are a few examples, based on Deloitte market practice, to illustrate the discrepancies that investment managers face when defining their distribution strategy to raise money within the EU. 

There is not much confidence around the marketing of third-country AIFs…

It was expected that the AIFMD would evolve to extend the marketing passport to non-EU AIFMs and AIFs, as long as ESMA felt there were no significant obstacles regarding investor protection, market disruption, competition, or the monitoring of systemic risk.

However, for the time being, this project is on hold. So far, ESMA has only assessed twelve jurisdictions (Australia, Bermuda, Canada, the Cayman Islands, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Singapore, Switzerland and the United States of America). To date, it is not possible for ESMA to provide a definitive assessment; therefore, the third-country passport has not yet been activated.
 

And what about Brexit?

The United Kingdom (UK) has now left the EU and Brexit will certainly impact the marketing passports of AIFs and AIFMs, either from the UK to the EU or vice-versa.

As from 2021, unless the UK-EU bilateral negotiations conclude otherwise (which is very unlikely to happen), the UK will be treated as a third country, and UK-based AIFMs and AIFs will fall under the scope of the NPR. The UK will treat EU players the same way; luckily, the UK NPR is simple to implement and should not deter the marketing of EU AIFs in the UK.

At the end of the day, the current passport will be abandoned, which will inevitably cause inefficiencies and red tape.
 

The AIFMD did not facilitate the marketing of AIFs to nonprofessional investors and curbed the enthusiasm of fund promoters for the retail market.

The AIFM passport and NPR are paths for targeting professional investors only. In other words, the possibility of targeting retail investors depends on each MS. These requirements are normally extremely complex and restrictive and, in some MS, it is not even possible to target retail investors.

Back in 2011, fund promoters were enthusiastic about the possibility of marketing their AIFs to retail investors within the EU, but as the AIFMD maintained the status quo on this matter, these issues remained.

In fact, before the AIFMD was implemented, only a few MS allowed the marketing of non-UCITS funds to retail investors locally. Even if the AIFMD’s main objective was to homogenize marketing rules across the EU, the AIFMD provisions for marketing to retail investors did not really have any impact and this possibility was left to the discretion of each MS.

Nine years later, the position of each MS has not really evolved. Only a few jurisdictions allow the marketing of AIFs to retail investors in their territory (mainly the same as before). Here is Deloitte’s view:

But the EU intends to improve the current status and address the lack of efficacy.

The European Commission is aware that it must review the Directive’s application and scope. In that respect, the European Commission issued an AIFMD assessment report to the European Parliament and the Council on 10 June 2020. In this report, the European Commission identified various inefficiencies, notably regarding the cross-border distribution of AIFs. It recognized that this lack of efficacy is caused by local gold-plating requirements (for instance, in the case of NPR), divergences in the national marketing rules (definition of marketing activities) and non-harmonized interpretations of the AIFMD.

Regarding the latter, the lack of agreement on the definition of a professional investor impairs the efficacy of the marketing passport. In some countries (Austria, Germany, Italy and Sweden), it is possible to use the marketing passport to target sophisticated retail investors who have a high net-worth and experience in financial markets (e.g., the so-called “semi-professional” investors in Germany). The definition and the level of wealth required to qualify as sophisticated retail investors differs significantly from one MS to another.

The need for greater convergence regarding the definition of a professional investor was also identified by ESMA in its letter to the European Commission on 18 August 2020 highlighting areas of the AIFMD where improvements could be made. ESMA called for more precision regarding what the European Commission has said. For example, if any new investor category is introduced under the AIFMD (such as “semi-professional” investors), ESMA recommends that the appropriate investor protection rules are also put in place. Moreover, the AIFMD passport should be restricted to marketing to professional investors only, and not extended to semi-professional investors which could currently be the case in some MS.

In addition, ESMA also stressed the importance of clarifying the reverse solicitation definition. It cannot be considered as a marketing route, but this notion is currently subject to different market practices amongst the MS. A harmonized interpretation by each MS should be considered to protect investors.
 

In the end, are perfectly homogenized rules across the EU a utopia?

The AIFMD’s objective was to create a solid legislative framework. Nine years later, there are still many local practices, interpretations and even gold-plating requirements regarding the marketing of AIFs within the EU. That being said, some improvements are already on their way.

A “new” Directive (2019/1160/EU) was put in place in July last year, going one step further in the harmonization of practices at EU level. While it has addressed some issues, such as the question of pre-marketing, many others have remained unanswered, for example, passport extension to third-countries, the possibility of marketing to retail, investor classification, reverse solicitation, etc. However, the European institutions are aware of these weaknesses and consultations are being held to reach a more level playing field across all MS.

In the end, (i) AIFs are not products that are designed for retail customers; and (ii) based on Deloitte’s discussions with EU regulators, they are not ready to provide access to third-party players who do not respect the EU’s rules.

Regarding the initial enthusiasm of 2011, we believe that there was a gap in expectations between the investment management industry and the goals of the AIFMD. European bodies wanted to impose more governance and their intention was not to revolutionize the industry by providing marketing passport options to retail or non-EU markets at first.

But let us not conclude on a negative note. Even if we still face a long journey ahead, we believe that the standardization of distribution matters accomplished so far is already a great achievement. The figures speak for themselves: the total net assets of AIFs increased by more than 250 percent from 2011 to 2019. Indeed, the marketing passport has successfully streamlined the distribution of EU AIFs managed by EU AIFMs, following the example of UCITS. Moreover, the Directive has also addressed inconsistencies related to private placement of non-UCITS amongst MS in abrogating these regimes and forcing MS to at least clarify the conditions of retail marketing.