Very few of us have not heard by now of the European Commission's draft Directive on Alternative Investment Fund managers published on April 30, 2009. We have all heard that the directive as drafted may have serious repercussions on third country managers, be they based in the US, Canada, Switzerland or any other third country of repute.

Under the proposed directive, third country managers will be banned from marketing their funds - be they established in the EU or otherwise - in Europe for at least three years following the entry into force of the directive. As drafted the term 'marketing' seems to cover the private placement of a fund as well as responding to unsolicited requests for information from investors. Third country managers will thus be precluded from raising more funds directly from European investors.

Furthermore, following this proposed three-year gate, third country managers will be allowed to market their funds in the EU to professional investors (as defined in MiFID) if they obtain authorisation in any member state and provided that they satisfy various conditions.

These require that the country where the manager is based and regulated is deemed to have standards on prudential and ongoing regulation equivalent to those set out in the directive. We will have to wait for the relevant implementing measures setting out how to qualify as one of these 'reputable' third countries.

The third country must grant access to EU alternative fund managers in the same manner in which the EU is granting access to the third country manager. Here again, we will have to wait for the relevant implementing measures listing such third countries.

The third country manager must provide the competent authority of the member state in which it is seeking authorisation with prescribed information including its shareholders and the funds it intends to market in the EU.

There must be an exchange of information and co-operation agreement between the competent authority of the country where the manager is based and regulated and that of the EU member state in which the manager is seeking authorisation.

Finally, there must be an agreement on exchange of information in tax matters based on the OECD Model Tax Convention between the country where the manager is based and the EU member state.

The extent of regulatory supervision exercised by the competent authorities of the relevant member states on such third country managers is still unclear, considering that the managers will most likely not be expected to have an established place of business in the member state in question.

Once the third country manager secures authorisation in one EU member state it will be able to market its funds in other member states without the need to seek authorisation in those countries.

If the directive goes through as proposed, European investors requiring information on funds managed by third country managers will have to route such requests through non-EU intermediaries, while third country managers - if based in a 'reputable' jurisdiction - will have to go through the unnecessary trouble of seeking authorisation in a member state.

James Farrugia is a manager in the investment services and funds practice with Ganado & Associates Advocates


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