Neil Simmonds and Isabella Roberts
Simmons & Simmons
Opportunities for asset managers under AIFMD and UCITS IV
With the Alternative Investment Fund Managers Directive (AIFMD) due to be implemented in July 2013 asset management firms affected by AIFMD need to consider how they will address AIFMD, and in particular identify which entity or entities will be designated as the alternative investment fund manager(s) (AIFM) of any alternative investment funds (AIFs) managed by them. Because AIFMD allows asset managers to set up management structures using a ‘passport’, it becomes possible to nominate one AIFM which can manage AIFs across the EU.
In deciding on the AIFM, asset management firms also have the opportunity to look at their existing group structures and, if they also manage UCITS, to consider whether they wish to take advantage of the UCITS IV passport regime, changing their existing management structures for UCITS funds to a passported single manager structure. This allows for operational efficiencies and simplification of governance arrangements within multi-jurisdictional asset management groups with the obvious potential for realising cost savings.
AIFMD is intended to create a harmonised and effective regulatory framework for the management and marketing of funds (other than UCITS) in the EU, many of which were previously unregulated or lightly regulated. It will come into effect in July 2013, subject to certain transitional provisions. Affected AIFMs will become subject to disclosure requirements and requirements in relation to internal organisation, leverage and custody of assets, and will require regulatory permission to manage AIFs.
The UCITS IV Directive represented an evolution of the regulatory framework for UCITS and significant change at a business level (rather than fund level) which was intended to benefit the asset management industry through cost savings and potential consolidation. The aim was to increase choice and flexibility and maximise cost efficiency for asset managers operating in the European funds market.
The principal amendments introduced to the UCITS regime by UCITS IV included:
The introduction of a full Management Company Passport
A new legal framework to facilitate cross-border UCITS mergers
The introduction of UCITS Master/Feeder structures
Replacement of the Simplified Prospectus with a Key Investor Information Document (KIID)
A new and more efficient regulator-to-regulator notification procedure for registration of UCITS in EU countries
Improved co-operation mechanisms between national supervisors to supervise cross-border business models.
AIFMD – The requirement for an AIFM and passporting
The AIFMD introduces a similar passporting regime to UCITS IV for managers of alternative investment funds (ie AIFs). This means asset managers can use a single entity as their AIFM (alternative investment fund manager) in the EU, and that entity can take advantage of AIFMD’s passporting regime to manage AIFs across a range of EU member states either through a local branch or using cross-border services. AIFMD requires the AIFM to retain sufficient substance in terms of portfolio management and/or risk management and to ensure it is not treated as a ‘letter-box entity’, for example by having delegated these core functions to an extent that exceeds by a substantial margin the part of those functions that it retains. It may in practice, therefore, be onerous to set up a compliant multi-AIFM structure in the EU, having AIFMs in each jurisdiction in which there are funds, unless each AIFM is able to show it has the required substance in respect of the AIFs that it manages. Much more likely is that a group which currently manages AIFs in multiple EEA jurisdictions will wish to centralise that activity in one location either where its main asset management function is carried out or where other (e.g. risk management) activities can be centred.
The positive actions which asset managers need to take in order to comply with AIFMD mean that asset managers must nominate an AIFM and will potentially need to make changes to existing corporate structures in order to comply, which gives asset managers the opportunity to look at corporate and regulatory structures and make changes which can deliver efficiencies.
UCITS IV – the Management Company passport
One of the key aims of the UCITS IV directive was to allow asset managers to passport their management services, i.e. to manage UCITS domiciled in one EU member state from another. This brought to an end the requirement for asset managers to have separate management entities in each jurisdiction in which they have UCITS funds, or alternatively to use a third party management company, and gives asset managers opportunities to maximise efficiencies, as it is now possible for them to operate with a single management company managing UCITS across all relevant member states.
For example, it is now possible to set up a structure using a UK based, FSA authorised UCITS Management Company to manage UCITS domiciled in the UK, Luxembourg and Ireland, using the Management Company passport under UCITS IV.
Similarly, a Luxembourg or Irish based Management Company can now become the UCITS management company (an ‘EEA UCITS Management Company’ in FSA-speak) to a UK OEIC or authorised unit trust.
For new UCITS managers, this means that they can take advantage of a simpler group structure, having fewer legal entities, one UCITS management authorisation and costs savings when compared to traditional structures involving a network of legal entities across all the member states in which the manager has UCITS funds.
For existing asset managers opportunities exist to move to this type of simplified structure.
Implementing Single ManCos and SuperManCos
In selecting an AIFM, or seeking to implement a new corporate structure involving a single ManCo to manage all of their UCITS funds, or a SuperManCo to manage both UCITS and AIFs, asset managers will need to consider a number of factors, including:
the location of Group HQ and the existing group structure, management company locations and distribution network
Where would the ManCo/SuperManCo ideally be located?
Current geographical presence of the group?
Operations currently carried out in each relevant jurisdiction?
infrastructure, expertise and personnel in the potential locations
What is the current presence?
Costs of staffing in the potential locations?
Ease of recruiting in the potential locations?
Availability of sufficient talented human capital in the potential location?
employment protection legislation in existing and potential locations (this is particularly relevant to implementing any intragroup reorganisation and the costs thereof)
Cost/timing of carrying out redundancies?
operational costs in the potential locations
Office and personnel costs?
tax considerations of any new corporate structure, including effective corporation and VAT tax rates, personal taxation for individuals involved, availability of tax rulings and/or preferential arrangements, impact on wider group taxation arrangements and any impact on the UCITS and/or AIFs to be managed, e.g. residence issues
preferred regulator – regulation of the ManCo/SuperManCo
costs and timing of implementing any group reorganisation including regulatory and tax consequences
cost savings of any reorganisation versus costs of implementing the reorganisation.
Barriers to implementation
The two key issues/barriers which asset managers with existing corporate structures are likely to face in effecting a group reorganisation to create a ManCo to manage all their UCITS funds or a SuperManCo managing UCITS and AIFs are:
tax effects of the reorganisation – taxes are not generally harmonised across the EU, and there are potential significant corporation tax, VAT, personal tax and fund taxation implications, each of which need to be analysed on a case by case basis;
existing group structures and costs of change – for example, costs of changing the existing structure to the desired new structure, in particular, costs of redundancies, costs of closure, costs of restructuring versus the expected costs savings. This may impact on the ultimate decisions taken for example – deciding to move to a structure with a single manager and local branches meaning no real change in staffing, but some streamlining of regulatory costs, as opposed to eliminating all ‘local’ operations.
Effecting the implementation plan
Once a decision has been taken to implement a ManCo or SuperManCo structure, an implementation plan should be prepared covering all of the steps required to implement the structure. Although the regulatory aspects will drive the plan these will often be relatively straightforward, but time critical. For example, the chosen ManCo/SuperManCo will usually need to apply for and obtain additional regulatory permissions, and other regulators will need to be informed of the changes (and, in some jurisdictions, even approve them before implementation – e.g. in Italy).
The more complex aspects of implementation usually relate to tax, moving fund-related and commercial contracts from existing management companies to the ManCo/SuperManCo, employment aspects such as managing employee consultation obligations (which vary tremendously between EU jurisdictions), transfer of staff (whether under the Acquired Rights Directive (ARD) or the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) in the UK or otherwise) and redundancy.
Where an existing multi-manager structure is in place, there are a number of structures available to effect implementation of the ManCo/SuperManCo. These include:
Replacing the existing multi-manager structure with a single ManCo having branches in each member state where there was previously a management entity.
This structure would leave many existing day-to-day operations in place but potentially permit cost savings in the middle and senior management, administration and compliance areas.
Replacing the existing multi-manager structure with a single ManCo and moving all management operations to the jurisdiction of that ManCo.
This would potentially involve moving all day-to-day operations (except distribution) and potentially involve redundancies, vacation of premises and termination of contracts.
In addition to the points above, making the ManCo a Super ManCo, nominating it as the AIFM and moving AIF management operations into it.
The chosen structure will depend on the factors listed above and organisational preference but in any event, we can assist you with putting together an implementation plan.
There are a number of potential options for implementation of these structures, which include:
Cross Border Mergers: The existing management companies can be absorbed into ManCo by carrying out a cross border merger, with the unwanted legal entities being eliminated as a result of their absorption by operation of law. All of the assets, contracts etc of the entity being absorbed automatically become assets, contracts etc of the surviving entity. Restructuring of operations, including in particular the number/categories of staff or physical relocation, will be subject to local requirements, which may vary significantly between jurisdictions in terms of time, process and cost. Cross border mergers are time consuming and costly, but have the advantage of moving all contracts and assets automatically, and of no separate liquidation being required.
Asset & Business Sales: The businesses or assets of the existing management companies can be transferred to the ManCo/SuperManCo. By the operation of the ARD/TUPE, relevant staff may in principle transfer to the ManCo/SuperManCo. However, relocating staff to a different jurisdiction is likely to give rise to further people issues and redundancies will be subject to local legal requirements. Variations in these requirements should be taken into account at the planning stage. Though it will need to be given to any third party consents, the consideration for the transfer and the fate of the former entities, for example liquidating them. A business transfer is likely to be simpler and quicker than a cross border merger although may give rise to additional considerations, such as a more limited ability to effect any restructuring on a tax neutral basis.
To effect A cross border mergers could be carried out between Lux HoldCo and each of the ManCos, resulting in the absorption of each of the ManCos into the Lux HoldCo. Lux HoldCo would also establish branches in each relevant jurisdiction. The Lux HoldCo would need to obtain UCITS and AIFM permissions prior to the mergers becoming effective.
A could also be implemented by virtue of business transfers, leaving the UK, German, Italian and Dutch entities dormant and then eventually liquidating them. B could be effected by cross border merger or business transfer in the same way as A, but without the establishment of branches. C could be effected by cross border merger into the UK ManCo, and by business transfers followed by liquidation.
However, if the business to be transferred comprises large numbers of complex contracts or assets, then a cross border merger may be simpler as it results in contracts transferring by operation of law and there is no need for a separate liquidation process, which can be time consuming in itself.
Implementing UCITS consolidation
The asset management industry has been slow to implement the operational and organisational efficiencies offered by the UCITS IV ManCo passport as it has with certain of the other opportunities offered by that directive (eg master/feeder funds and cross-border mergers). Whilst the reason for the latter may well be the implementation challenges not least in relation to fund and investor local taxes, it does now seem that the ManCo passport is being taken up more actively and, with AIFMD implementation around the corner, the industry now seems ready to realise and simplify management and governance structures and achieve organisational cost efficiencies.
Isabella Roberts is a partner in the Corporate group at Simmons & Simmons. She has experience of a wide range of corporate transactions in particular mergers and acquisitions and joint ventures, and she focuses on work involving funds.
Neil Simmonds is a partner in Simmons & Simmons' Financial Services group who specialises in advising institutional managers.
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