This may have been the vision but the reality is quite different to best made plans of mice and men. The EU and wider Europe remains a layer cake of legislative disparity and delayed transposition. Out of the 28 EU states 22 have transposed the directive with 6 EU states remaining still in the wings with draft proposals in most cases waiting to pass through parliament and regulators alike.
Wider Europe and the case for the EEA(European Economic Area) also has wider challenges. As it currently stands AIFMD is not part of the EEA agreement and not likely to become so until late into 2015.
This has hampered some of the non-EU but EEA states eager to embrace AIFMD and avail of the rubber stamping that it might bring, Liechtenstein being a prime example. Having been one of the early adopters of AIFMD and transposed the directive into it’s local laws it now needs to wait until the EEA catches up before it can avail of the passporting.
This puts EEA members at a temporary disadvantage in terms of the beauty parade of AIFMD compliant states but our sense from our client base across the Apex Group is that the deep impact that was expected with AIFMD has not yet been felt.
From a jurisprudence perspective the AIFMD directive, irrespective of adoption timeframe of the EU state, will in principal be applicable so member states such as Portugal or Spain that have yet to adopt are still working off of the existing frameworks in the regulatory legislation. The impact of this in these countries and indeed the rest of Europe, not just the EU, is relatively played down.
The Nordic states still market mostly internally within those markets. Germany, France and the UK predominantly look inward to their own industry when looking to raise capital so the passport whilst in place is only being applied by the very biggest of investment managers that have multi asset and market approaches.
The bigger area of focus lies with the area of depositary liability and ironing out the multiple agreements that depositaries are building up with the multiple prime brokerage (PB) relationships. The general approach seems to be that those PBs that depositaries worked with in the past, they will more than likely still work with in the future.
The threat of additional liability is in some, but not all, cases bringing additional fees and the question of discharge of the liability is one that is adding to the quagmire of legislative hurdles to address when selecting your provider. Whilst the despositary can seek to discharge the depositary liability to a delegate the fundamental underlying reason for the discharge must be laid out and clearly detailed in the contract.
This brings the spotlight more onto the PBs and narrows the universe of PBs that depositaries are willing to work with. The AIFM must at all times seek to act in the best interests of the fund and therefore must be satisfied that if liability is discharged to the PB that the credit rating of the PB is equivalent to that of the depositary. Making such decisions lightly could result in litigation directly back to the AIFM for failing to deliver upon their obligations.
Close attention to these contracts must be given and in particular where indemnities are being given by the delegated party back to the depositary. Bear in mind that PBs being left off of the list of brokers that the depositaries are willing to do business with could be extremely detrimental to their success and growth in the new Europe.
One can only assume that there is a level of duress on the smaller brokers to fall in line with whatever terms and conditions are being proposed in these circumstances. It very much becomes an unfair negotiation process between the parties.
From our group’s perspective it raises the case once again for true independent administration and not just the legal Chinese walls that exist between combined offering banks.
Can true independence be achieved when administrator, depositary and PB selection and contract negotiation all fall within the same head and body? Ultimately managers may be accepting service offerings and compromising there duty to the fund and investors in order to secure a provider that merely meets the standard requirements but liability remains a grey area or one that would not best serve the interests of the investors.