My thoughts on ESMA’s AIFMD announcement
As has been reported widely elsewhere, the European Securities and Markets Authority (ESMA) has recommended that the passport under the Alternative Investment Fund Managers Directive (AIFMD) should be extended to fund managers based in Switzerland (upon the adoption of certain pending legislation), Jersey and Guernsey.
The fact that the Cayman Islands and the British Virgin Islands were not included in this list has come as a shock to a number of commentators, but frankly we here at Harneys were anticipating this very approach being taken by ESMA for a wide variety of reasons.
I think it is very telling that as part of ESMA’s statement, they mentioned that the European Commission, Parliament and Council may wish to consider whether to wait until ESMA has delivered positive advice on a sufficient number of non-EU countries, before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries might have.
Last month, the BVI launched the incubator fund and the approved fund. These fast and low-cost options for managers wanting to set up a regulated fund are a great addition to the BVI funds industry. It is not surprising that everyone is talking about them. If you have missed this, have a read of my last post.
It is taking the internet a bit of time to catch up with the developments in the BVI and I have noticed that much of the general information available on BVI funds is out of date.
For anyone thinking of establishing a new fund in the BVI I have set out a brief guide to each of the BVI fund products below. I try to limit the use of acronyms but you will need to know that the funds industry in the BVI is governed by the Securities and Investment Business Act (SIBA) and regulated by the Financial Services Commission (FSC).
An incubator fund will be restricted to having a maximum of 20 investors, each investing no less than $20,000, and a cap on assets under management of the fund of $20,000,000. The incubator fund is aimed at the start-up manager looking to launch quickly (approval is given within two days of submitting a complete application) with low cost, minimal regulatory hurdles and no mandatory functionaries. It can operate as an incubator fund for up to three years. At that point, if the fund has proved to be viable, it will need to convert to a private, professional or approved fund. Alternatively, it can wind up its operations.
In an interesting turn of events, the Financial Stability Board has recently announced a change of direction in its post-crisis regulatory approach by confirming that it will no longer single out the world’s biggest fund managers as having the potential to pose a systemic risk to the global financial system.
Whilst this doesn’t create the opportunity that smaller managers thought it might — there were those who were hoping to take advantage of a more level playing field caused by bigger managers being tied-up with additional red tape — it is certainly good news for the fund management industry as a whole, providing the industry with a little breathing space whilst global regulators go back to their respective drawing boards in their pursuit to mitigate the greatest dangers to global economic stability.
The wider question is whether or not the investment fund industry as a whole poses a systemic threat to the world economy: a question that has divided both academics and commentators alike. A chief concern is that the fund management industry might amplify market disturbances, in the event that investors attempt to withdraw their capital at the same time. In my opinion, such a run on accounts would be highly unlikely to occur again; I would expect the majority of sophisticated managers to have already amended their funds’ offering documents to allow them to implement gates and broad suspension rights at such times of stress. Of course, this is only one piece of the regulator’s puzzle, but it serves to highlight a potential disconnect between theoretical implications based on an outmoded understanding of the fund management industry and reality.
As always, we’d be delighted to hear your thoughts.
Why we are celebrating Cayman’s new “opt-in” regime for funds
For those of us sitting on the Western side of the Atlantic Ocean, Europe tends to seem quite far away, somewhat off in the distance and (depending on whether you have to connect through certain airports on the East Coast) sometimes difficult to access.
However, some of you may actually be interested in providing access to your Cayman products for investors based in the European Union. After the financial crisis in 2008, the EU decided to introduce the Alternative Investment Fund Managers Directive (AIFMD). As is typical of EU legislation, this is a very dry piece of drafting but the effect is that Cayman funds have to meet certain regulatory requirements before EU investors are able to gain access to them.
As part of the Cayman Islands’ continual evolution of its regulatory environment, in 2014 the Directors Registration and Licensing Law introduced a requirement that all prospective directors of a Cayman Islands regulated corporate mutual fund must be registered or licensed with the Cayman Islands Monetary Authority (CIMA) before they are appointed as directors. This applies to individuals and corporate directors of mutual funds which are regulated by CIMA, whether they are resident in the Cayman Islands or elsewhere and also applies to directors of certain companies which are registered under an exemption to the Cayman Islands Securities Investment Business Law. If a director does not register or become licensed, the director could be exposed to heavy penalties, including fines and imprisonment.
Lending to Funds — Subscription Finance Part II
Part one of this topic covered what subscription finance is, (loans to a fund secured on the undrawn capital commitments of its investors), and how it can benefit funds and their investors (increased liquidity, returns and simplicity). This final instalment covers (briefly) the mechanics of this type of financing.
How does it work?
The subscription finance facility would work the same way as a standard loan facility. As security for the subscription finance facility, the lender will be granted a power of attorney from the fund’s general partner (the GP) to step into its shoes and make the capital call to the investors, and/or an assignment of the right to make the capital call and to receive the proceeds of the capital calls. Finally, there will be a charge over the bank account into which the capital commitments are paid into.