While the implications of the Foreign Account Tax Compliance Act (FATCA) and US regulatory rules arising out of the Dodd-Frank Act have generally been considered by US based fund managers, the European Union's Alternative Investment Fund Managers Directive (AIFMD) also has the potential to raise regulatory issues that may not be well understood.
That is the key point made in a finance law update published by law firm Maples and Calder, which mainly deals with scenarios involving collateralised loan obligations (CLOs) being marketed to European investors where a US-based CLO manager is involved.
The report points out that while the AIFMD is aimed at hedge funds and private equity funds, the definition of an 'alternative investment fund' can be somewhat wider than some might expect. Thus, some types of deal could be unexpectedly caught up by the wording. The law firm notes that in particular CLOs have the potential to be caught by the definition.
“Although many market participants spotted this issue early on, unfortunately there has not been any clear guidance from the European Securities Markets Authority (ESMA), which is the pan-European regulator,” the report notes.
Until this changes, Maples and Calder suggests that market participants err on the side of caution and provide full disclosure to investors.
“MaplesFS, having had the benefit of our Irish office to guide them in relation to AIFMD and its potential applicability to the CLO market, reached out to managers and European and international counsel to seek their views on this issue.
“The general consensus is that, pending any further guidance from ESMA, CLOs do fall within the securitisation exemption and so are not AIFs. However, many market participants (including Maples and Calder), have expressed the view that it would be sensible to include appropriate risk factors in the offering document disclosure to highlight the point, especially where arrangers are offering securities of the CLO to EU investors or want the flexibility to do so.”
AIFMD only applies where there is an offering of securities on or after 22 July 2013. As such, existing Cayman CLOs which are no longer issuing securities are essentially grandfathered.