The New City Initiative (NCI), a think tank representing the interests of asset managers, has made a series of recommendations to regulators, covering areas such as the Alternative Investment Fund Managers Directive (AIFMD) and incoming tax legislation.
The paper urges regulators to extend the pan-EU AIFMD marketing passport to third country managers in a timely fashion. This comes following the decision by the European Securities and Markets Authority (ESMA) to allow managers based in Switzerland, Guernsey and Jersey to utilize the AIFMD passport. However, ESMA has yet to confirm the status of the US, Hong Kong and Singapore, adding it needed more time to analyze whether these jurisdictions met EU regulatory equivalence to attain the passport. ESMA will review a number of other jurisdictions including the Cayman Islands although no firm time-line has been given yet.
“The pan-EU passport under AIFMD is a potential carrot for many non-EU managers and funds, and I sincerely hope it is extended to other countries in a timely fashion. However, it is critical that managers utilizing the passport do not face additional hoops and regulatory costs and obligations if they market across the EU. UCITS managers are often subjected to additional regulatory requirements in some member states. This may be additional taxation requirements, translation costs of documents or registration costs. I hope this will not happen to AIFMs using the passport,” said Dominic Johnson, chairman of the NCI and chief executive officer at Somerset Capital Management, an emerging markets focused asset manager.
The paper also recommended managers conduct thorough operational due diligence on their AIFMD management company platforms, which are outsourced providers carrying out the risk oversight obligations contained within the Directive. The paper acknowledged that while Mancos obviate the need for managers to invest in operational infrastructure within the EU to attain the passport, there are a number of risks.
“The Central Bank of Ireland (CBI) subjects Mancos to capital requirements of 0.03 per-cent of Assets under Management (AuM). Many of these organizations are not banks and do not have the capital reserves to turn to in the event of a crisis. Furthermore, a number of these Mancos have multiple business streams, and there is a risk of contagion between one business stream and the Manco,” it read. The paper added that were a Manco to fail, it could leave AIFMs unable to trade or market. Porting Mancos is a time-consuming process and would undoubtedly cause major issues for managers.
In terms of taxation, the NCI advised managers to prepare for the Organization of Economic Co-operation and Development’s (OECD) Common Reporting Standard (CRS) and Base Erosion and Profit Shifting (BEPS) initiatives. The former – also known as the Global Foreign Account Tax Compliance Act or “GATCA” will require financial institutions to disclose data on accountholders to the tax authorities at signatory governments as part of the global clampdown on tax avoidance. The NCI urged managers to leverage the expertise they acquired during FATCA implementation and apply it to the CRS.
Meanwhile, BEPS seeks to curb treaty shopping and toughen up the provisions around Permanent Establishment. BEPS will oblige financial institutions to demonstrate they have a substantive presence in jurisdictions where they have structured their businesses or funds. This could lead to re-domiciliation from offshore jurisdictions where a fund manager may have few substantive links to.
“Different types of fund vehicles are going to be afforded different tax treatment under BEPS. BEPS will give Collective Investment Vehicles (CIVs) or regulated entities such as UCITS better tax treatment than non-CIVs, which will include alternative asset managers. The OECD has yet to confirm whether AIFMs will be deemed CIVs or non-CIVs. Many argue that AIFM structures are indeed regulated under AIFMD and should be designated as CIVs when the rules come into play,” read the paper.
All of these rules and regulations are undoubtedly going to make it harder to run boutique asset management businesses. A small sample survey of NCI members found that 46% spent around 10% to 20% of management time dealing with regulatory compliance, while eight per-cent said they spent in excess of 20% of their time on compliance matters.
“Regulation must be sensible and it must be proportionate. Most importantly, it needs to serve the purpose for which it was intended; to protect all investors and guard against systemic risk. As currently proposed, this host of regulatory initiatives will likely prove detrimental to the former, and do nothing to mitigate against the latter,” said Johnson.