AIFMD II Proposal. The End of the NPPR as we Know it?
As part of the broader package of measures within the Capital Markets Union, the EU Commission finalised the AIFMD II Proposal before the end of 2021. Looking back at the October 2020 public consultation on the AIFMD review, we notice that the resulting AIFMD II proposal retains its emphasis on international and investor protections issues, but has some significant divergence from the original public consultation.
And where the lack of retail passport under the final AIFMD II Proposal, indeed contained in the original consultation, is not really that relevant given that the ELTIF regulation review will make up for that, the details of some of the additional provisions introduced in the AIFMD II Proposal suggest a likely end of the concept of NPPR as we have known it over the past decade or so.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with AIFMD NPPR.
AIFMD II Proposal and the New Moving Target within the NPPRs Ecosystem
Changes to the existing framework for NPPRs in the AIFMD II Proposal have been structured at different levels, with some of these changes having in principle the highest potential to disrupt access to European markets for non-European managers. Whilst it is clearly of no use continuing to fuel the debate around whether tighter requirements for international access to Europe are Brexit driven or not, it makes more sense instead to make space for a new reality. Access to European investors using non-EU AIFs becomes potentially more uncertain under the NPPR regime as redesigned by the AIFMD II Proposal.
Taking a look at the actual changes proposed, relevant from a cross border distribution perspective, we want to start with a new objective requirement introduced under the existing provisions governing NPPRs. These are AIFMD articles 36 and 42, respectively for EU and non-EU AIFMs marketing non-EU AIFs without a passport in Europe. The change pertains to a requirement applicable to the third country domicile where the non-EU AIF is established (i.e. objective) in order to have access to the NPPR regime.
The AIFMD II Proposal changes the current version of the above provisions by replacing the reference to the FATF list of Non-Cooperative Country and Territory with the reference to high-risk third country under article 9.2 of Directive 2015/849. Also, the AIFMD II Proposal also introduced a new objective requirement. Non-EU AIFs will also have to be established in a third country not listed under Annex I to the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions for tax purposes.
Of course, it is very fresh in the collective memory how, even though for a fleeting moment, in the recent past the Cayman Islands went on the list of non-cooperative jurisdictions for tax purposes. Whilst we can only speculate that this will be the case in the future again, we have nevertheless a precedent set.
However, there is something else to consider. For the time being – as agreed by the Council in its conclusion of March 2019 – updates to the EU list of non-cooperative jurisdictions for tax purposes should be done no more than twice a year. Accordingly, the new requirement under the AIFMD II Proposal introduces a moving target within the NPPR ecosystem, with potential implications at various levels. It is of course too early to say whether and how this will change, if at all, the perception that EU investors have of non-EU AIFs domiciled in certain third countries, which might potentially be blacklisted for EU tax transparency purposes. Also, we don’t know as of yet how potential administrative practices at local level in Europe might weight on distribution endeavours of certain non-EU AIFs from blacklisted third countries.
At the same time, however, looking at the entire framework of the Capital Markets Union, ELTIFs included, we can get a better picture of the bigger paradigm shift taking place in Europe, where European investment products become more suited also to accommodate global investment mandates.
Disclosures and Reporting under the AIFMD II Proposal
Non-EU AIFMs should have gotten used already by now to the increasing requirement for disclosures driven by recently introduced regulation in Europe. The AIFMD II Proposal adds to the existing set of disclosures to be made under AIFMD article 23.
In order, whilst under the current version of AIFMD it is required to disclose a description of all the fees, charges and expenses directly or indirectly borne by investors, the AIFMD II Proposal goes further, also adding a requirement for disclosure of a list of fees and charges applicable in connection with the operation of the AIFs and that will be borne by the AIFM or its affiliates. Some corresponding disclosures on costs, like all the direct and indirect fees and charges allocated – again directly or indirectly – to the AIFs or its investments are also proposed to be inserted in the section of the current AIFMD article 23 for what concerns the periodic reporting to investors.
Increasing disclosures are envisaged under the AIFMD II Proposal also for what concerns the so-called Annex IV reporting. In the proposed revised version of AIFMD article 24, the scope of the reporting will be expanded so as to include all the markets and instruments in which an AIFM trades on behalf of the AIFs under management and not only on main instruments, principal exposures and most important concentrations as in the current version. Here, we will also have to wait on ESMA to develop technical standards to specify the format of the reporting and the actual data required.
Conclusions
The takeaway from the AIFMD II Proposal, for what concerns the specific aspects discussed above on the front of the international issues, is that the general climate of heightened alert in Europe post Brexit persists, with European authorities adding new weapons to their arsenal.
Here is also helpful to be able to zoom out to the bigger picture of the current framework of the European regulation on financial services and look at the [too many] regulatory proposals on financial services together and not in a vacuum. A potential close of European markets for certain non-EU AIFs might have two potential consequences. On the one hand, it might force certain non-European managers, the ones willing to have a more continuative relation with European investors, to look at EU domiciled AIFs and rely on the expertise of third-party management companies in Europe. This would of course benefit the European fund industry and help achieve some of the goals of the Capital Markets Union. At the same time, we can also expect that there could be an increased reliance on practices of reverse solicitation for all the managers who are not yet ready to have a bigger commitment with Europe. Here, recent regulation from European authorities, combined with some authentic interpretation of certain rules by regulators in Europe, defines with higher certainty the boundaries of what is marketing – or premarketing – from what is not, giving a better guidance to all those managers who are willing to adapt the way they present themselves to investors going forward.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with AIFMD NPPR.