Gibraltar: The Key to Unlocking Europe
By James Lasry & Anthony Jimenez
Posted: 1st February 2013 09:04A New Era for European Funds
The global funds industry is currently in a state of transformation; world-wide regulatory and legislative changes are leading the global fund sector into a new era of increased regulation and enhanced investor protection. Gibraltar has emerged from the reshaped regulatory landscape as a serious option for fund businesses wishing to re-domicile into Europe, or as a domicile for firms re-positioning themselves within Europe. Industry experts suggest that in order to successfully continue to operate in a global industry committed to fuller regulation and oversight, non-EU domiciled funds which operate and raise capital within the EU will seriously need to consider moving at least some operations into an EU domicile. On one hand, Gibraltar’s unique position as a European fund hub means it will be one of only a handful of jurisdictions able to offer effective and efficient fund solutions to fund managers that wish to comply with the Alternative Fund Managers Directive (AIMFD) and access to its marketing passport provisions. On the other, it is unlikely Gibraltar will discriminate against fund managers that want remain outside the scope of AIFMD, but wish to domicile themselves or their fund products in a well regulated, tax efficient EU jurisdiction. For many fund managers, Gibraltar could indeed be the key to unlocking Europe’s markets.
The Alternative Investment Fund Managers Directive
AIFMD is causing sweeping changes throughout Europe’s fund sector to the way fund managers are regulated and how they distribute the funds they manage. The concept behind AIFMD is to create a harmonised regulatory regime across Europe for fund managers (termed “Alternative Investment Fund Managers” and/or “AIFMs”) that manage a group of non-retail fund products (termed “Alternative Investment Funds” and/or “AIFs”). AIFMD will operate alongside and create a separate European regulatory regime from UCITS IV and MiFID. All EU member states must implement AIFMD into their national laws by 22 July 2013 and existing fund managers which fall within the scope of AIFMD have until 22 July 2014 to bring their operations in-line with the directive.
Article 2 of AIFMD applies the scope of the provisions of AIFMD to all EU domiciled AIFMs which manage one or more EU domiciled AIFs, non-EU domiciled AIFMs which manage one or more EU domiciled AIFs, and non-EU domiciled AIFMs which market one or more AIFs in the EU irrespective of whether such AIFs are EU domiciled AIFs or non-EU domiciled AIFs. Article 2 applies irrespective of whether the AIF is considered “open-ended” or “close-ended” or whether the AIF is constituted under law of contract, under trust law, under statute or has any other legal form. Article 3 provides that AIFMs which manage AIFs with assets under management (AUM) which do not exceed a threshold EUR 100m (leveraged) or EUR 500m (unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment) will be exempt from the full provisions of AIFMD, and will only need to register with the competent authorities in their member state, identify the AIFs they manage and their subsequent investment strategies and regularly provide the competent authorities with information on the main instruments in which they are trading and the principle exposures. However, article 4 allows for these exempted AIFMs to “opt-in” and be regulated by the AIFMD in its entirety.
The AIFMD Delegated Regulations (the “Level 2 Measures”) were adopted on 19 December 2012 by the European Commission by way of regulation after six months of political debate and negotiation. The Level 2 Measures are directly effective and will not require local implementation by member states. The Level 2 Measures endeavour to provide guidance and clarity on AIFMD and issues such as the delegation arrangements and the prevention of an AIFM becoming a “letter box entity”; the issue of depositary liability for the loss of financial instruments held in custody; the requirements of the co-operation agreements between third-country regulators and regulators in EU member states; clarification on the method of calculating of assets under management with regards AIFMs coming under the €100m EUR or €500m EUR threshold exemptions, as mentioned previously in reference to article 2; the calculation of leverage limits for AIFs which employ leverage on a substantial basis and the additional reporting requirements; risk management procedures and policies and how they should be documented; liquidity management; and organisational requirements.
The Gibraltar Solution – Experienced Investor Fund Regime
The national laws of member states under which funds are established will continue to play an important part in the European fund industry in light of AIFMD. Gibraltar introduced the Financial Services (Experienced Investor Fund) Regulations 2012 (EIF Regs 2012) (an amended version of the Financial Services (Experienced Investor Fund) Regulations 2005) in order to keep up to date with current EU fund laws. It is accepted that an Experienced Investor Fund (EIF) is likely to be considered an AIF in all circumstances. Gibraltar’s EIF regime is a regulated yet flexible fund product for investment by “experienced investors”. Some significant features of the EIF Regs 2012 include permitted investment from a participant who has a current aggregate of EUR €100,000 invested in one or more EIFs, or a participant who invests a minimum of EUR €50,000 in an EIF and is advised by a professional adviser. One of the principle attractions of Gibraltar as a fund domicile is the fact that no regulatory approval is needed before an EIF can begin to raise capital and commence with its investment activity. In addition, an EIF can appoint a foreign non-Gibraltar based fund administrator in certain circumstances. A foreign depositary/banker would only need to be local to Gibraltar if the AIF is AIFMD compliant.
The Gibraltar Funds and Investment Association (GFIA), the representative body of Gibraltar’s fund industry, have made recommendations to the Gibraltar Government regarding the implementation of AIFMD into Gibraltar law, and most importantly how it should maintain the benefits of the EIF regime. For example, the industry feels it is important to retain the possibility of having pre-authorisation launch provisions, even for those AIFs which are AIFMD compliant, and also for self-managed AIFs (which would be considered as AIFMs). GFIA also wish to avoid any “gold-plating” of AIFMD with regards its implementation into local Gibraltar law; for example, AIFMD makes provisions for member states to permit AIFMs, at their discretion, to carry out portfolio management services so long as it is incidental to their AIF management business. However, some member states, including the United Kingdom, have resolved not to allow this when adopting AIFMD into their national law. However, GFIA have put forward their desire for Gibraltar’s transposition of AIFMD to be as permissive as possible, and as such would allow AIFMs, who occasionally do portfolio management for individual clients, not to require further licencing under the Markets in Financial Instruments Directive (MiFID) to carry out this service.
Passporting vs. Private Placement
One major benefit for a fund manager complying with AIFMD will be the pan-EU marketing passport bestowed on them under article 31-32. The passport allows authorised AIFMs, which include Gibraltar AIFMs, to offer their AIFs freely throughout EU member states to professional investors. If AIFMD is able to establish itself as a “brand product”, the same way UCITS has been able to do in the retail market, smaller fund managers may have an additional incentive to opt-in and become part of a gold-standard product which will be more attractive in terms of capital raising. The AIFMD passport could effectively open up some EU markets, such as Spain and France, for the first time.
Fund managers outside the ambit of AIFMD and who do not wish to opt-in, will be able to continue to be domiciled in an EU member state if the national laws of that jurisdiction allow. An additional GFIA recommendation is that all Gibraltar non-AIFMD regimes should be preserved. Non-AIFM compliant managers will be able continue to offer their funds throughout the EU under the national marketing laws of each member state (normally under private placement regimes). Fund managers will find that being established in Gibraltar is a tactical advantage since the decision to opt-in to AIFMD can be delayed until a later date once the passporting provisions have been tested, and other member states reveal their cards as to how their national laws will deal with non-AIFMD fund offerings and private placements. Although it was initially thought that the AIFMD passport and national private placement regimes would operate together during implementation, the future of national placement regimes remains unknown. For example, Germany has recently issued its draft act transposing AIFMD into German national law; the Kapitalanlagegesetzbuch (“Company Investment Act”) has banned private placements in Germany along with implementing other strong restrictions on fund promotions. Therefore, fund managers wishing to raise capital in Germany, will either need to register their fund products with the German regulator, BaFin, or comply with AIFMD in order to sell their product in Germany.
As mentioned earlier, AIFMD does provide that after 2015, non-EU fund managers managing non-EU funds will also be able to take advantage of the AIMFD passport; however this is on condition that the regulatory regime of the non-EU domicile is on level with the one provided under AIFMD and there are co-operation agreements between the respective jurisdictions. There is still much uncertainty surrounding this “third country passport” at the moment and fund managers are taking the more careful approach of domiciling their funds within EU jurisdictions. The Level 2 Measures clarify the scope, form and objectives of the co-operation agreements and provide that “mechanisms, instruments and procedures as are necessary” should be in place in the agreements for EU regulators to be able to perform their duties under AIFMD.
James Lasry is a partner and the head of the funds team at Hassans International Law Firm in Gibraltar. He currently serves as Chairman of the Gibraltar Funds & Investments Association. James advised the Government of Gibraltar on its funds legislation and was involved in the drafting of the Financial Services (Experienced Investor Funds) Regulations 2005 and their subsequent amendments in 2012.
He is fluent in English, French, Spanish and Hebrew and he read literature, music and law at John Hopkins and Bar-Ilan Universities. James is a member of the Israel Bar Association, the Law Society of England & Wales and the Gibraltar Bar. James also serves as chairman of the Gibraltar Philharmonic Society.
Anthony Jimenez is a senior associate of the Hassans funds department and focuses on the establishment of both private funds and professional funds in Gibraltar. Anthony has advised on and structured a variety of funds including hedge funds, property funds, private equity funds, funds of funds, venture capital funds and alternative investment funds.
He is an active member of the Gibraltar Funds and Investment Association (GFIA) and helps promote Gibraltar as a fund domicile through his involvement in Gibraltar Fund’s and Investments Association, the representative body of the Gibraltar funds industry. Anthony is licenced by the Gibraltar Financial Services Commission (FSC) to provide directorships to Gibraltar Experienced Investor Funds. Anthony was also elected by the legal community to serve on the FSC’s fund panel for a two year period.
Anthony was educated in England and completed a four-year double honours degree in Law and Chemistry (BSc) at the University of Exeter before completing the Bar Vocational Course at the Inns of Court School of Law. Anthony is a member of the Honourable Society of Middle Temple and was called to the Bar of England and Wales in July 2007. He was called to the Bar in Gibraltar in 2009.