On October 4, 2018, ESMA (the European Securities and Markets Authority) updated its view on the applicability Directive 2011/61/EU on alternative investment fund managers (AIFMs). The update provides guidance with respect to the cross-border management of alternative investment funds (AIFs), which have an umbrella structure with multiple compartments, or sub-funds, via the EU passport regime.
Henceforth, AIFMs that wish to engage in cross-border management of AIFs must notify their respective national competent authority regarding the general umbrella fund as well as the names and investment strategies of the various associated sub-funds.
What’s an umbrella fund?
An umbrella fund is an attractive structuring option for fund sponsors because it allows the creation of separate sub-funds under the roof of a single legal entity. Each sub-fund can be individually constructed to meet the needs of specific investors (e.g., different investment policy, reference currency, etc.) without the need to create a new standalone investment fund.
Additional utility revolves around ring-fencing of each sub-fund such that assets and liabilities are separated (both legally and in terms of booking).
What do the changes do?
In 2014, ESMA clarified that an AIFM must notify its respective national competent authority with respect to each sub-fund that it wishes to market in another member state. In addition, each sub-fund was to be treated separately for the purposes of reporting obligations.
The new ESMA guidance requires expanded notification with respect to cross-border management (as opposed to marketing) of umbrella AIFs by an AIFM. The principle motivator is investor protection. The may necessitate additional regulatory burden upon fund managers, especially given the fact that the ESMA guidance stipulates notification in regards to “any change in the composition of an umbrella AIF”.
An ESMA guidance is non-binding in nature. Nevertheless, national authorities with the European Union rarely divert from it.
CySEC on AIFs
AIFs are governed in Cyprus by the Cyprus Securities and Exchange Commission or CySEC. The Cypriot regulator has a reputation of keeping in step with its sister regulators across the European Union and generally adopts ESMA guidances. In the alternative investment universe, Cyprus is much more commercial and presents less of a regulatory burden when it comes to AIF creation. CySEC allows for the possibility to establish multiple AIF sub-funds across all categories of fund creation.