AIFMD: Compliance, Taxes And Risk Management

AIFMD: Compliance, Taxes And Risk Management

With the deadline for AIFMD compliance just passed last month, U.S. managers have several viable options to comply with the directive, notes DMS Offshore.

Conor MacGuinness of DMS Offshore Investment Service said in an article titled “AIFMD Compliance and its Tax implications for US managers” that as the AIFMD went live on July 22, market data indicates that some 80% of U.S. managers had been slow in getting AIFMD-registered.

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Options to comply with AIFMD

The Alternative Investment Fund Managers Directive (AIFMD) seeks to achieve the twin objective of (a) subjecting the industry to uniform regulatory standards and (b) to foster the cross-border marketing of funds across the various EU nations (a “passport” system) through deregulation and the creation of a level playing field. The directive brings within its fold entities such as hedge funds, private equity funds, real estate funds and other alternative investment vehicles that were previously not regulated (such as under the UCITS Directive).

MacGuinness explains that the path to AIFMD compliance lies in establishing an EU alternative investment fund (EU AIF), taking the route of the national private placement regime (NPPR) or opting to engage in an existing AIF platform. The fund managers may also even consider reverse solicitation, which requires waiting for potential investors to approach them directly, or they may forgo EU marketing efforts.

Providing a deep insight to these options, the author points out that the EU AIF provides a complete solution to the AIFMD and helps fund managers access the European passport. As far as the NPPR is concerned, there may be variations in how the directive is adopted from country to country, with some countries helping funds go through a registration and reporting process.

Risk management – the key

MacGuinness points out that whatever solution is opted for, AIFMD compliance broadly hovers around risk management, portfolio management, liquidity control, remuneration policies, and conflict of interest and delegation requirements. Interestingly, AIFMs will not be able to delegate both their portfolio management and risk management.

Providing an insight into the role for depositories under AIFMD, the article notes that depositories are required to serve as a hub in which all information related to the AIF’s cash flows is centralized, recorded and reconciled in order to ensure effective and proper monitoring of all cash flows.

Tax implications

Stressing the importance of the tax implications of AIFMD, the author notes the directive impacts on strategic and operational aspects of the AIFM. The author points out that for U.S. mangers who already have European-domiciled funds, the AIFMD mandates them to show substance for these entities, meaning these funds can’t simply be letterbox entities.

The author suggests that as funds generally tend to aim for tax neutrality and avoid double taxation, it would be to their advantage to consider setting up shop and receiving management and advisory fees in locations that help them to meet these objectives.

The author concludes that U.S. managers who have so far become AIFMD compliant and those that still intend to do so have a duty to consider the nature and structure of their business. For instance, they need to address fundamental questions, such as who will become their AIFM and where the AIFM will be located.

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