Financial Services Quarterly Report - First Quarter 2013: The Regulation of Managers and Funds in France Following the Implementation of the AIFM Directive

by Dechert LLP
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The French financial regulator, the Autorité des Marchés Financiers (“AMF”), hosted a public presentation on 17 January 2013 for French asset management industry professionals, regarding the implementation of the Alternative Investment Fund Managers Directive (“AIFM Directive”) into French law – with a focus on the regulatory requirements introduced by the AIFM Directive. The key issues addressed were:

  • the introduction of a unified regime for the regulation of French management companies;
  • the definition of an alternative investment fund (“AIF”) from a French law perspective; and
  • the reorganization of French investment products.

French Management Companies

The implementation of the AIFM Directive presents an opportunity to revisit the different types of French management companies and consider whether the existing categorizations fully fit with the new regulatory framework introduced by the AIFM Directive.

Currently, French regulations provide for two types of French management companies (société de gestion de portefeuille):

  • “Type 1” management companies (regulated under the UCITS Directive1), which manage at least one UCITS fund; and

  • “Type 2” management companies (regulated under MiFID2), which manage, for instance, managed accounts and French non-UCITS funds.

In order to simplify the management company regime, the AMF has decided to establish a single type of French management company, while providing for a flexible scope of activities in order to reflect the different types of management activities undertaken. Practically speaking, each French management company will be subject to the same regulatory regime but will have to submit to the AMF a program of the contemplated activities to be performed by it (e.g., management of financial instruments (whether or not listed), foreign funds, UCITS, real estate), so that each management company actually receives a license tailored to the type of funds and assets it manages.

It is worth noting that the types of activity mirror the current EU regimes, namely:

  • The UCITS Directive (i.e., management of UCITS funds);
  • The AIFM Directive (i.e., management of funds that fall within the AIFM Directive); and
  • The MiFID Directive (i.e., portfolio management – managed accounts).

Regardless of the activities, the AMF noted that the relevant requirements to be complied with in order to receive the AMF license remain the same (e.g., need to have appropriate personnel, technical and financial resources, prudential regulation and certain organizational matters).

As a general comment, it is worth remembering that the requirements applicable to managers laid down by the AIFM Directive are broadly aligned with those set out in the UCITS and MiFID Directives. As a consequence, the implementation of the AIFM Directive should not result in substantial changes for French management companies that are already licensed by the AMF, but should lead to a smooth transition for managers wishing to be authorized as an AIF manager. In addition, management companies that fall below the de minimis thresholds set out in the AIFM Directive, but which decide to opt into the AIFM Directive in order to benefit from the pan-European marketing passport, should not need to substantially modify their internal structures.3

Definition of a French AIF

The AMF, within the framework of the implementation of the AIFM Directive, has decided to retain a definition of the AIF that includes:

(i) French funds that are already regulated and specified in the French Monetary and Financial Code – other than those funds that are subject to the UCITS Directive or which fall into the scope of the AIFM Directive (i.e., an AIF “by nature”); and

(ii) French unregulated funds that are within the scope of the AIFM Directive (i.e., an AIF “by object”), such as investment holding companies that do not fall within an exemption set out in the AIFM Directive (e.g., the “société de capital risque” – a venture capital investment company).

The accompanying flowchart, based upon the AMF’s presentation materials, shows a step-by-step analysis for determining whether or not a given structure (which requires at least two investors) constitutes an AIF, as well as the ongoing obligations4 for the AIF.

Reorganization of the French Range of Funds

The exercise of transposing the AIFM Directive into French law has provided an opportunity to modify the range of French funds that can be offered to investors.

With effect from 22 July 2013, there will only be three categories of funds: UCITS, AIFs and “other funds” (although no fund structures have yet been identified as falling within this third category).

As part of the transposition of the AIFM Directive, the existing French funds regime will be restructured by amending the French Monetary and Financial Code. French AIFs will, following the transposition, include the following structures:

 


AIFs by object


 Venture capital companies (SCR), SCI, groupings, etc. (i.e., investment
 vehicles, other than UCITS, AIFs by nature and “other funds”, that
 receive subscriptions from various investors with the aim of investing
 such funds in accordance with a defined investment policy in the
 interest of investors)

 
 

 

 

 

 

AIFs by nature

 

 


 Retail AIFs


  • General purpose investment funds
  • Private equity funds (FCPR/FIP/FCPI)
  • Real estate funds (OPCI, SCPI)
  • Investment companies with fixed capital (SICAF)
  • Funds of alternative funds

 

 

 Professional AIFs


  • Investment funds with AMF approval: OPCI (real estate), ARIA (hedge funds)
  • Investment funds without AFM approval: 
    (i) the new “professional investor funds” (PIF) and (ii) venture capital funds (FCPR allégé)

As part of the above reorganization, minimum investment thresholds will also be revised as follows:

(i) Funds targeted at retail investors (i.e., UCITS, retail AIFs): no minimum investment amount;

(ii) Funds targeted at “professional investors” within the meaning of MiFID: minimum investment amount of €100,000.5

This reorganization is also, of course, being taken as a key opportunity for the AMF to promote the French funds market, most notably through a proposal to create6 a “professional investor fund” (or PIF) as an alternative to the Irish Qualified Investment Fund and Luxembourg Specialized Investment Fund. The main characteristics of this new French AIF would include:

(i) the possibility of direct investment in non-financial instruments, such as commodities, real estate, art and trademarks;

(ii) the absence of any diversification requirements; 

(iii) a simplified notification procedure for launching the fund; and

(iv) the possibility to create the fund in the form of an FCP (contractual fund) or investment company (SICAV).

The AMF is clearly keen to use the arrival of the AIFM Directive, and its transposition into French law, to improve the visibility and the attractiveness of France in the alternative investment area. Since the French legal framework is already similar to AIFM requirements, the challenge for France is not in the implementation of the AIFM Directive from a purely legal standpoint but rather in the positioning and the competitiveness of the French alternative investment industry. 

*The author appreciates the assistance of Yann Le Garrec.

Footnotes

1 Directive 2009/65/EC relating to undertakings for collective investment in transferable securities concerning the European regulated funds.

2 Directive 2004/39/EC on markets in financial instruments.

3 Many principles implemented by the AIFM Directive already exist in the French regulations, especially concerning risk management, best execution, capital requirement and reporting to the authorities. However, technical adaptations will be necessary for some principles, including on remuneration policy, liquidity risk management and independent valuations.

4 The “full reporting” regime subjects an AIF to all of the reporting obligations set forth in the AIFM Directive, whereas “light reporting” refers to the application of the de minimis rules, which include the (i) registration of the manager with its regulatory authority, (ii) the identification of the AIF managed by the manager, (iii) the communication of information on the investment strategy of the AIF and (iv) communication of information concerning the financial instruments used by the AIF and its principal exposures.

5 The goal is also to simplify the minimum investment amount for funds reserved for professionals, since there are now several different minimum amounts, depending on the category of funds/assets and the category of professional investor.

6 This fund would have characteristics of two existing types of French funds for professional investors: the contractual OPCVM and the contractual FCPR.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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