AIFMD Review: Has AIFMD provided an internal market for EU and non-EU AIFMs?

On 10 January 2019, the European Commission released its Report on the Operation of the Alternative Investment Fund Managers Directive (AIFMD), which sets out the results of a review conducted into the effectiveness of the directive in practice against its original objectives. It provides and assesses evidence for the European Commission's mandatory review of the AIFMD under Article 69 of the Directive.

The survey was conducted by KPMG using quantitative data, semi-structured interviews, and an online survey. The rules were assessed against the five key principles (effectiveness, efficiency, coherence, relevance and EU added value), as well as the role of EU intervention. A selection of Member States covered by respective work streams were considered in order to capture the diverse level of development of AIF markets across the EU. This also helped to provide further information about the ways in which AIFMD has impacted funds, management companies and investors, and its benefits and costs.

In order to provide an overall assessment of the general objective (i.e. has AIFMD provided an internal market for EU and non-EU AIFMs and a harmonised and stringent framework for AIFMs), evidence was sought to address, in particular, the five questions below. For a discussion of some of the weaknesses that were identified with the AIFMD, see our separate article here.

Has AIFMD provided an effective legal framework for monitoring and managing the risks associated with the activities of AIFMs?

Broadly, yes.

The Report found, though, that the reporting regime could be improved and work should be undertaken on a common set of methodologies to calculate leverage.

Are the macro- and micro-prudential risks adequately addressed by the provisions of AIFMD?

Broadly, yes.

Points of concern raised relate to rules on valuation, remuneration, depositaries and disclosures to investors.

Is the information provided to investors and employees of non-listed companies sufficient to safeguard their interests?

Mixed response / no.

This outcome was due to the lack of verifiable information in connection with employees of non-listed companies. Also, certain requirements came under particular criticism. The extent of notifications to National Competent Authorities (NCAs) were said to be not "useful" or "essential" and some complained that it was not clear what use NCAs make of the information. There is also a lack of clarity as to what "non-listed company" means.

The overall conclusion was that AIFMD "is not regarded as having improved information provided by the AIF/AIFM to controlled companies or has having had a positive impact on the relationship between AIFs/AIFMs and target or investee enterprises".

Is the AIFMD passport working efficiently?

Yes, for the managing passport

No, for the marketing passport (discussed further below)

What changes has the AIFM and AIF market structure undergone since the adoption of AIFMD?

A number of interesting points arose here:

• Significant effect of AIFMD on AIF net assets: there is "no statistically significant effect" (however, the Report cautions that this should be interpreted as "the effects within countries, stripped of country-specific and time-specific unobserved variables").
• Attractiveness to professional investors: for the institutional investor, "the large majority" said that AIFMD had not influenced their decisions to invest (or not) through AIFs, or whether or not to do so through EU/EEA vs third country AIFs.
• Impact on retail investors / market: there were mixed responses in terms of the level of impact on retail clients' investment in EU/EEA or non EU/EEA AIFs, as well as whether or not the impact was positive or negative. Member States are reported to be making extensive use of the NPPR for the retail market and to be imposing additional requirements (in particular, product regulation). MIFID II and the suggestion that AIFs are "complex" has further impacted the retail AIF market.
• Competition between AIFMs: the evidence here (from survey respondents) indicates there has only been a slight increase since the implementation of AIFMD.
• Rationalisation of operational and set-up processes: there were mixed responses as to whether AIFMD had enabled AIFMs to rationalise their set-up. Over one-third of AIFMs disagreed that this was the outcome.
• AIF product ranges: again, there were mixed responses on this point. Approximately two-thirds of AIFMs said the directive had not caused them to rationalise or expand their product offerings. However, AIFMD has caused some Member States to introduce regimes for unauthorised, unlisted AIFs.

Has the AIFMD achieved its purpose?

Leverage reporting, remuneration, and investor disclosures provisions are viewed as excessive and often left investors less informed. Although the Report concluded that AIFMD has helped to create an internal market for AIFs, and a harmonised and stringent regulatory and supervisory framework for AIFMs, the results demonstrate that marketing passports remain a major problem area.