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TECHNIC AL


Investors into AIFs have historically been high-net- worth individuals and professional investors. These kinds of investor are, from a global perspective, generally considered to have the knowledge and/ or resources to evaluate the risks associated with an investment and the financial wherewithal to withstand losses should their assessment prove incorrect. They are also well placed to identify what information they need regarding the proposed investment in light of their particular circumstances and to request it from the investment manager. A uniform set of specific disclosures designed to apply across a wide variety of fund strategies and structures, while providing a base line, will not necessarily meet these investors’ needs.


Moreover, as a result of the increased regulatory burdens (from a transparency perspective this is particularly true of the remuneration disclosure requirements which are particularly distasteful to non-European-based AIFMs) and the limitations on marketing, professional investors in the EEA are likely to have access to fewer investment opportunities in the future. In the view of various European continental institutional investors, the obligations imposed by AIFMD are likely to lead to a reduction in their investment returns, an increase in costs and greater volatility of returns as it will become harder to access a variety of non-correlated investment portfolios.


The push for greater transparency in the alternative investment space arose following the financial crisis, driven in part by the increased allocation to alternative investment managers by institutional investors, but even more by the ideal that the state could control risk for its citizens. The industry as a whole also sought to meet concerns regarding transparency, with industry associations publishing guidelines on corporate governance, investor relations and disclosure. This emphasis on greater transparency has for some time been espoused by many European managers who sought to attract investors with more detailed disclosure in offering documents, responses to due diligence questionnaires and periodic investor reporting in the form of monthly newsletters and investor conference calls.


By the time AIFMD came into play a strong body of industry best practice had been developed, including the comprehensive Hedge Fund Standards issued by the Hedge Funds Standards Board and work undertaken by other trade bodies such as the Alternative Investment Management Association.


In certain respects, these guidelines are more comprehensive in terms of transparency than AIFMD. Certain types of disclosure required by AIFMD are of limited value – for example, the requirement


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to disclose whether the AIFM has chosen to obtain liability insurance or retain capital in order to meet potential negligence claims. Certain methods of disclosure are also unduly restrictive – for example, the requirement that annual accounts be prepared in accordance with the standards of the AIF’s home member state or jurisdiction of establishment. This requirement limits the flexibility of an AIF to make use of another more appropriate set of accounting standards: for example, US GAAP where a European AIF targets US investors.


The minimum standard provided by AIFMD has also come with a cost, not only for the AIFM in complying with AIFMD, but also costs to the AIFs themselves and, accordingly, to investors. Fund documentation has had to be updated for AIFMD; the offering document must have been amended to ensure all the required disclosures are included and the investment management agreements must be revised due to the change of applicable regulation and allocation of responsibility between an AIF’s governing body and the AIFM. There are also costs associated with the periodic and regular disclosure and the increased requirements of the annual report, including the fees and costs of service providers engaged in the preparation and distribution of those documents. Some or all of these costs will be borne by the AIFs and so, indirectly, the end investors.


AIFMD does provide a legally mandated minimum and, to a degree, a uniform level of investor disclosure for EEA-established or marketed funds. These requirements generally are in line with the disclosure previously provided by managers complying with best practice prior to the implementation of AIFMD. They do not provide prospective investors with all the information they will require given their individual circumstances and are therefore not a substitute for the due diligence that will continue to be undertaken by investors in the space. They also come with a cost to the investor as the costs of required amendments to the AIF documents and periodic and regular disclosure are likely to be borne by the AIF.


There are clearly benefits from sharks and charlatans being discouraged from the industry. The question that remains is, will the costs justify the benefit (both in terms of investor transparency requirements in AIFMD and also the totality of AIFMD)? Those who have watched the brand of UCITS emerge and the confidence and trust they have inspired across the (non-US) world will hope for a similar result for European AIFMs. Meanwhile, the teams of lawyers, accountants, compliance consultants and regulators will swell with little doubt that this will be at the partial or total expense of investors. THFJ


FOOTNOTES


1. It is expected that the Directive, as a text with EEA relevance, will be formally adopted into the European Economic Area Agreement and thereby be extended beyond the European Union to the additional Member States of the EEA: Iceland, Norway and Liechtenstein. This adoption process is not yet complete.


2. This article is concerned with investor protection through investor transparency. The Directive also includes significant requirements relating to regulatory reporting and disclosure, which are directed both at investor protection and systemic stability.


ABOUT THE AUTHORS


PETER ASTLEFORD A partner in the London office of Dechert LLP, Peter Astleford has more than 25 years’ experience in providing advice to fund managers, banks, brokers and corporates with regard to financial services regulatory work and onshore and offshore funds. He is co-chair of the firm’s global financial services group and heads the group in Europe.


MIKHAELLE SCHIAPPACASSE Mikhaelle Schiappacasse is an associate in the London office of Dechert LLP and advises on the establishment, listing, management, marketing, and restructuring of investment funds, with an emphasis on hedge funds.


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