Canadian and EU regulators negotiating to allow Canadian fund managers to continue to market in the EU
Canadian managers of funds that are currently marketed into the European Union (EU) should be aware of the broad ambit of the Alternative Investment Fund Managers Directive (the AIFM Directive) and of the restrictions the AIFM Directive may impose as of July 22, 2013 on their activities in the EU. Significantly, Canadian managers of private equity, venture capital and other fund structures that may not be regulated as “investment funds” under Canadian securities laws may be subject to marketing and related restrictions imposed by the AIFM Directive which effectively regulates a much broader array of fund structures than conventional alternative investment funds.
We understand from unofficial consultations with staff of the Ontario Securities Commission and the Quebec Autorité des marchés financiers that they are currently negotiating a supervisory cooperation Memorandum of Understanding (the MOU) with the European Securities and Markets Authority (ESMA) with the intention of having co-operation agreements in place with individual EU member states prior to the July 22, 2013 deadline for EU member states to implement the AIFM Directive.
The AIFM Directive will introduce a harmonised regulatory framework in the EU for alternative investment fund managers (Fund Managers) and alternative funds that are managed or marketed by them in or into the EU. Fund Managers will be required to be approved and be subject to continuous regulation and supervision in relation to their activities. The AIFM Directive will directly impact both Canadian Fund Managers which manage funds in the EU as well as Canadian funds marketed in the EU by Canadian or EU-based Fund Managers.
As of July 22, 2013, before a Canadian Fund Manager can market a non-EU Fund into the EU, a cooperation agreement such as the MOU will provide for must be in place between the “supervisory authority” of the jurisdiction in which the Canadian Fund Manager has its registered office, the jurisdiction in which the Fund is authorised/registered (or, if not authorised and registered, has its registered office) and the competent authorities of the EU member states in which the Fund is marketed. A co-operation agreement must ensure an efficient exchange of information between regulatory authorities to enable the competent authorities of applicable EU member states to carry out their duties in accordance with the AIFM Directive. The MOU is currently being negotiated with ESMA only by the OSC, the AMF, the Alberta Securities Commission and the British Columbia Securities Commission in respect of their respective Provinces (the MOU Jurisdictions).
As a result, Canadian Fund Managers that do not have their registered office in one of the MOU Jurisdictions will not be covered by the co-operation agreements to be provided for by the MOU and therefore will not be able to market securities of Canadian Funds into EU member states after July 22, 2013 (until such time as similar cooperation agreements have been entered into by their applicable regulator(s) in Canada).
Scope of the AIFM Directive
For purposes of the AIFM Directive, a Fund Manager includes any legal or natural person whose regular business is to manage one or more Funds and a Fund is defined as a “collective investment undertaking that raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors”. A Fund thus includes a wide range of investment funds, such as hedge funds, private equity funds, venture capital funds, real estate funds, commodity funds, , investment trusts and other collective investment vehicles.
Significantly, the definition of Fund for purposes of the AIFM Directive is much broader and captures a broader array of fund structures than the definition of “investment fund” under Canadian securities laws.
As a result, Canadian managers of vehicles such as private equity, venture capital and real estate fund structures, which may not be regulated as “investment fund managers” in Canada depending on how these vehicles are managed and on their underlying investment portfolios, may nevertheless be regulated as Fund Managers and may be managing Funds for purposes of the AIFM Directive.
Funds such as mutual funds that are the subject of the UCITS Directive which regulates retail funds in the EU are outside the scope of the AIFM Directive.
Canadian Fund Managers Marketing in the EU
Until at least 2018, and as long as individual member states do not impose stricter rules, Canadian Fund Managers can market units or shares of Canadian Funds into member states under those individual member states’ private placement regimes provided that the Canadian Fund Manager meets the conditions set out in the AIFM Directive for private placements, including a co-operation agreement being in place.
In relation to the UK’s national private placement scheme, however, the UK Treasury has recently confirmed that a Fund Manager which is already marketing a Fund in the EU as at July 22, 2013 may continue to market the Fund in the UK up until July 22, 2014 without complying with the AIFM Directive’s private placement conditions. If this transitional provision is formally adopted in the UK, Canadian Fund Managers will be able to market Funds into the UK without a cooperation agreement such as those contemplated by the MOU being put in place until July 22, 2014. Marketing by Canadian Fund Managers into other EU Member States will not, however, be permitted unless it is undertaken in compliance with the private placement conditions, including being covered by a relevant co-operation agreement.
From 2015, a Canadian Fund Manager’s marketing and management activities may also be eligible for the pan-European passport enjoyed by qualifying Fund Managers, subject to satisfying certain criteria set out by the AIFM Directive. The passport system allows for Fund Managers to passport their services throughout the EU on the basis of a single authorisation, thereby helping market participants overcome barriers and inefficiencies created by the current patchwork of national regulation.
Canadian Fund Managers which are not located in the MOU Jurisdictions should be aware of the restrictions the AIFM Directive will impose as from July 22, 2013 on their marketing funds into the EU.