In a world where marketing of AIFs has become less casual in Europe as the time went by since 2008, with the advent of AIFMD first and the various proposals of the EU Commission to regulate premarketing in the recent months, it became apparent that compliance with AIFMD was possibly the solution for AIFMs that intended to be able to freely distribute their AIFs in Europe under the marketing passport.
But what are the options available to all those EU AIFMs that do not fit the size criteria under AIFMD? What are the EU marketing rules for sub-threshold AIFMs? This article will briefly describe the current situation of the so-called sub-threshold AIFMs and what are the options in terms of marketing in Europe.
What is a sub-threshold AIFM and why does it matter?
AIFMD contains an exemption from its scope of applicability for all AIFMs that manage portfolios of AIFs not meeting the AUM size criteria provided for under the directive. The exemption is generally called in jargon de minimis or sub-threshold.
So, the first thing to consider is the size threshold imposed by AIFMD. When the cumulative AUMs of the portfolio of AIFs managed by an AIFM does not hit the following sizes, the AIFMs will be considered to be sub-threshold.
- Euro 100mm, including any assets acquired through the use of leverage;
- Euro 500mm, where the portfolio of AIFs consists of not-leveraged, closed end funds with on redemption rights for the first five years
What happens then when an AIFM is considered to be sub-threshold? EU member states are required to make sure that these types of AIFMs i) are subject at least to a registration requirement with their respective national competent authorities; and ii) carry out some reporting towards their authorities, for instance on the main instruments traded and principal exposures. This requirement is imposed because the activities of these types of AIFMs, albeit small per se, can still pose systemic risk when combined with similar ones carried out by other AIFMs in the same conditions. The frequency of the reporting is stablished at a local level and can vary depending on the EU member state at issue.
The sub-threshold exemption also touches upon and interesting concept, which is the one of leverage. In fact, according to AIFMD, employing leverage may contribute to posing systemic risks or generate disorderly market behaviours and conditions. The definition of leverage is very wide so to encompasses any and all methods by which the exposure of an AIF is increased through borrowing of cash securities as well as leverage that is embedded in derivatives positions.
EU marketing rules for sub-threshold AIFMs
What are the options then left available to sub-threshold AIFMs and what are the EU marketing rules for sub-threshold AIFMs? If nothing else, AIFMD comes with opt-in provisions, allowing for these types of AIFMs to comply in full with the directive, even in situations when they do not hit the AUM size limits.
Of course, whilst the decision to embark into full compliance with AIFMD has implications in terms of heightened burden of compliance with the entire set of provisions of the AIFMD, sub-threshold managers opting for this route will, on the other hand, be able to enjoy the marketing passport throughout Europe for their EU AIFs.
But is full compliance with AIFMD then the only option for EU marketing left to sub-threshold AIFMs? Actually not. In fact, there are EU marketing rules for sub-threshold AIFMs. These rules however are per se not pan-European in nature and are contained in the local laws and regulation of each of the EU member state domiciles at issue, where marketing is contemplated to take place. In other words, these types of AIFMs can still avail themselves of the national private placement regime for marketing of their AIFs in the European member state they intend to target. With one caveat though. In fact, not all member states in Europe will allow for marketing of AIFs carried out by sub-threshold AIFMs according to their internal rules.
In a scenario where taking the national private placement route per se limits already the marketing possibilities across Europe, EU marketing rules for sub-threshold AIFMs might pose additional restrictions to these AIFMs in terms of domiciles where they can actually and successfully seek for a marketing authorisation for their AIFs.
The combination of historical and political events in the past ten years, spanning from the financial crisis in 2008 to the recent Brexit saga, has substantially – and apparently also irrevocably – altered the ecosystem for the marketing rules of AIFs in Europe. A very eloquent example is the one of the EU marketing rules for sub-threshold AIFMs. In these years, the EU rule book grew bigger, more intricate and with inherent contradictions.
Advanced planning and a clear road map of the European domiciles where marketing endeavours will be deployed remains the most powerful tool for AIMFs intending to succeed with European fund distribution.