Regulatory "bottleneck" looming as survey shows slow compliance with AIFMD

Out-Law News | 28 Jan 2014 | 2:25 pm | 2 min. read

Over 80% of alternative investment fund managers (AIFMs) have not yet applied for authorisation under new EU rules with only six months to go until the regime must be fully implemented, according to a new survey.

Investment management firm BNY Mellon said that only 19% of the firms it surveyed submitted requests for authorisation to the relevant regulator, leaving 81% still to do so. It questioned more than 50 firms across Europe, the US, Asia and Latin America that either currently operate or are considering operating a fund that would be subject to the Alternative Investment Fund Managers Directive (AIFMD) once fully in force.

Hani Kablawi, head of asset servicing for Europe, the Middle East and Africa at BNY Mellon, said that regulatory "bottlenecks and delays" were likely to develop over the next few months, given the length of time needed for firms to secure authorisation.

"Allowing for the time required by regulators to review applications, and for depositary and administrative service providers to make the relevant arrangements, there is a risk that funds will miss the application deadline," he said.

"The slow progress we see around applications highlights both the uncertainties and practical challenges the industry is facing getting to grips with AIFMD. Certainly, those who have so far delayed their submissions cannot kick the can down the road any longer. Prompt action is required if managers are not to fall foul of the consequences of non-compliance, both in respect of their regulators and their investors," he said.

In a similar survey conducted by the firm six months ago, 26% of respondents had said that they planned to submit their application before the end of 2013, it said.

The AIFMD is intended to cover the management and administration of all 'collective investment undertakings' domiciled in the EU or managed by an EU-based AIFM that are not already subject to regulation through the Undertakings for Collective Investment in Transferrable Securities (UCITS) regime. It will apply to any person or company whose regular business is managing one or more alternative investment funds including hedge funds, private equity funds, real estate funds and wide variety of other types of institutional fund.

The regime was due to be implemented into national laws by 22 July 2013, but existing fund managers have been given a 12 month 'grace period' before the rules apply. Once regulated, AIFMs will have to comply with certain conduct rules, capitalisation and professional indemnity insurance requirements, and rules governing the safekeeping of investments via the mandatory appointment of depositaries and custodians. The AIFMD also includes new requirements for those depositaries.

Nearly 60% of the respondents to BNY Mellon's survey have either appointed, or are in the process of appointing, an AIFMD-compliant depositary service, while 17% said that they planned to use a 'depositary lite' service which would give them the flexibility to distribute non-EU domiciled funds within the EU. The firm found that 41% of respondents planned to submit their application before the end of March, while a further 20% would do so closer to the deadline.

Respondents now expect the mean cost of AIFMD compliance to be $300,000, with one-off risk and compliance costs expected to reach at least $100,000. Although 46% of respondents are still assessing how to absorb these additional costs, 26% intend to pass some of them onto the fund. Nearly half of the respondents said that the need for additional technology would cause the biggest increase in ongoing compliance costs.