Unintended consequences: application of the Alternative Investment Fund Managers Directive (AIFMD) to SPVs
A perennial gripe of many Anglo-Saxon lawyers about European legislation is that it is often opaque, poorly drafted and has unintended consequences.
The AIFMD, which comes into effect on 22 July 2013, is a particular offender in this regard. While investment managers are generally clear that they are foursquare within the sights of the new regime, banks appear to be less attuned to its application – particularly to SPVs.
The AIFMD primarily captures EU managers of alternative investment funds (AIFs). The consequences of being a manager of an AIF are onerous: managers are subject to detailed requirements as to, inter alia, authorisation, capital, organisation, systems and controls, risk management, delegation, valuation, reporting, appointment of a depositary and marketing. (AIF status also results in financial counterparty status under EMIR, and has negative capital consequences for EU firms which are counterparties to derivatives with the SPV, as the exemption from the CVA, capital charge under CRD IV, does not apply to AIFs.) Where an AIF is self-managed (ie has no external manager) the AIF itself will be subject to the requirements. The marketing of AIFs in Member States will also be subject to a notification requirement and also potentially restricted under national private placement regimes. This raises two key questions – is an SPV an AIF, and if so, can it comply with, or work around, the requirements?
Scope – Is an SPV an AIF?
The definition of AIF captures any "collective investment undertaking" which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of the investors (other than a UCITS fund). Some securitisation, special-purpose entities are exempted from the definition. The European Securities Markets Authority (ESMA) has produced guidance on the various elements of the AIF definition, and the Commission has issued limited guidance on the definition in frequently asked questions. These collectively leave considerable uncertainty around what is in scope, particularly in respect of SPVs used for general financing purposes or for the issuance of ABC, P, loan participation notes, managed CDOs/CLOs, or Islamic finance instruments. The ESMA guidance also indicates that vehicles with multiple compartments will be AIFs if a single compartment satisfies the AIF definition: this "bad apple" risk poses particular challenges for multi-issuance vehicles.
As the AIFMD is a Directive, it falls to be implemented by individual Member States. Some of these have issued, or will issue, their own guidance as to the meaning of AIF, effectively providing different interpretations of the term across the EU. The UK and German authorities, for example, have produced helpful (but different) guidance seeking to exempt issuers of certain structured finance products. It seems likely that the authorities in Ireland and Luxembourg will also seek to be helpful in avoiding re-characterisation of SPVs as AIFs. Elsewhere, it is not clear. In short, confusion reigns: it is possible that the same product could be characterised as a non-AIF in its jurisdiction of incorporation, and an AIF in one or more jurisdictions in which it is marketed. Firms (and SPV directors) may need to take their own view on the scope of the definition, having regard to the policy behind the Directive, any guidance (or, in the absence of guidance, the likely regulatory response) in the jurisdictions in which they sponsor, manage or market securities and their own appetite for regulatory risk.
Can an SPV comply with, or avoid, the requirements?
Where an SPV is an AIF, how the requirements apply will vary depending on the location of the SPV, its manager (if any) and the jurisdiction(s) into which it is sold.
Assuming they are self-managed (or managed by a non-EU manager), non-EU SPVs which are AIFs are likely to be comparatively unaffected by the AIFMD other than as to their marketability. They will become subject to the private placement rules from 22 July 2013, which include certain disclosure and regulatory reporting requirements and may restrict distribution in certain Member States, but will not be subject to other obligations under the AIFMD until at least 2018.
EU SPVs which are AIFs will become subject to the requirement for authorisation under the AIFMD from 22 July 2013, subject to a transitional period of one year. This provides a one-year window to comply, to restructure the vehicle to avoid AIF characterisation, or to terminate it. A potential alternative avenue is to take advantage of a transitional provision under Article 61 which exempts from the requirement for authorisation AIFs which are closed ended and which do not make additional investments after 22 July 2013. Use of this exemption may prove valuable in enabling a line to be drawn under past issuance for firms which have multi-issuance platforms which are AIFs, but will require that the relevant vehicle does not undertake further investment after 22 July 2013: firms will have to move fast to take the benefit of the provision.
In relation to each SPV it sponsors which will not have run off by 22 July 2014, a firm should due diligence the vehicle to analyse whether it is an AIF (as the question of whether a vehicle amounts to an AIF varies from Member State to Member State, this may require advice in the Member State of incorporation), whether it is eligible for the transitional provision in Article 61 and plan what steps to take to comply with, or avoid, the application of the Directive. Given the transitional provision, that planning process should be far enough advanced to decide whether to rely on it before 22 July 2013. In addition, firms planning on marketing AIF SPV issuance in Europe after 22 July 2013 should ensure that they comply with the private placement rules. Given the problem of national approaches to interpretation of the AIF definition, that may not be a straightforward exercise.