Since the introduction of the Alternative Investment Fund Managers Directive (AIFMD), marketing a private equity or venture capital fund in the EU has either got somewhat easier, or considerably harder – depending on whether the fund's manager has access to a marketing passport. Non-EU alternative investment funds (AIFs), or any AIF managed from outside the EU, have not (yet) been given access to the passport, and nor have EU funds below the threshold for AIFMD compliance, unless they have voluntarily opted in to full AIFMD compliance or qualify for EuVECA (the lighter touch and voluntary regulatory regime for venture capital funds, whose entry criteria are currently under review).
But the situation is not quite so binary as may have been expected. It is in fact possible to get by without the passport, as many US and Channel Islands based funds have demonstrated in recent years, while the passport has not operated quite so seamlessly as many hoped. It was intended that it would allow a fund manager, once authorised in their home state, to market their fund across all of the EU's 28 member states (plus Iceland, Liechtenstein and Norway, as members of the EEA) without any further approvals or obstacles. But additional barriers – in the form of filing requirements and requests for fees – have been introduced for passport-holders by certain member states. While in isolation the fees are not exorbitant, for a fund being marketed in several jurisdictions the administration and cost soon adds up. Such barriers are quite clearly incompatible with the EU’s mission to create a single market, contrary to the spirit of the AIFMD and EuVECA, a barrier to achievement of a full Capital Markets Union, and may even be illegal.
Many fund managers and their representative bodies – particularly the pan-European association, Invest Europe – have appealed to ESMA, the European regulator, to take action against the member states in question, or at least to confirm that these barriers are not permitted and to clarify the law if necessary. It seems that they have taken heed, because ESMA has told Invest Europe that, at least so far as EuVECA is concerned, no member states are charging these fees any more. Invest Europe has, in turn, asked EuVECA managers who receive fee demands from a "host" country (that is, any EU member state other than its home country) to let them know, so they can take it up with ESMA. ESMA is also pushing for legislation to be amended in member states where fees are permitted by domestic law. And, as part of the current review of the EuVECA regime, one proposed change is to specifically prohibit host fees, which, if approved by the Council and the European Parliament, would put the matter completely beyond doubt.
That is indeed progress, and sets a helpful precedent because there is no good reason for ESMA or the Commission to take a different view in relation to AIFMD fees. While no change on that is expected imminently, the review of AIFMD scheduled for 2017 is a perfect chance for legislators to ensure that this practice is ended for all fund managers. That would be a small but significant step in the move towards a truly integrated market for alternative investment funds.