Pep Pods from Cummings Pepperdine
Pep Pods from Cummings Pepperdine
AIFMD Explored | Cummings Pepperdine’s Crypto Questions with Andrew Shrimpton, Chair, UK Regulatory & Compliance Solutions at IQEQ
In this edition of the Hugely Popular Cummings Pepperdine Crypto Questions, Claire Cummings is joined by Andrew Shrimpton, Chair, UK Regulatory & Compliance Solutions at IQEQ, and are talking about AIFMD which affects every kind of fund.
They discuss what AIFMD purpose is, how you can market under AIFMD, the differences between being inside and outside of the UK and new regulations that have been developed for post-Brexit Britain.
You can contact Andrew by email - andrew.shrimpton@iqeq.com
Andrew’s Blog - The FCA’s new ‘anti-greenwashing’ rule – are you ready? - IQ-EQ (iqeq.com)
UK asset managers – climate disclosure deadlines are fast approaching - IQ-EQ (iqeq.com)
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Visit www.cummingspepperdine.com
Well, thank you everybody for listening to our hugely popular Cummings Pepperdine podcast. I'm delighted today to say that we are going to broaden what we talk about, and instead of talking about something which is purely crypto related, we are going to talk about the A I F M D, which affects every kind of fund. It's in, it is a probably a good time to do this because we are coming up to the 10th anniversary of ai, F M D, and since Bres did, we've had one major impact, which has been on marketing, and that means we, we have seen ourselves an increase in people asking about reverse solicitation, but listening to me is only part of the story. The person I really want you to listen to is my guest here today, Andrew Shrimpton. Hi. Andrew was the head of supervision for hedge and PE funds at the sca, and he, uh, authored a really, a quite critical S C A P discussion paper on hedge fund regulation while he was there. Since 2007, Andrew has been within the industry doing consulting work. So now Andrew, let me pass over to you. Tell everybody exactly what you are doing at the moment. I know you are at iq. Eq. Tell us about your role there and all about iq. EQ as well. Yeah, I'm chair
Andrew Shrimpton:of the Reg and Compliance, uh, solutions, uh, business iq, eq, the, the UK business. So that has two parts. The first part is that we're the largest provider of AR services to, uh, you know, the alternative investment funds industry. Um, the second part is as an executive chair of the compliance, uh, company, which helps alternative investment fund manages get authorized with the F C A and then provides them with the ongoing compliance support.
Claire Cummings:So you are a fairly busy man, I would say. Yeah,
Andrew Shrimpton:we, we, it's fascinating times. Um, you know, there changes going on in European regulation and you know, we also have Brexit where the UK's going its own way, so that's creating the need for a lot of support and advice to alternative fund managers.
Claire Cummings:Yeah, very much. And that's also what we are finding as well, actually we're, you know, we're certainly finding that, um, since Brexit are, uh, well since the Onshoring really, then our hedge fund practice, the advice on there has certainly got a lot busier. But Andrew, let's go back to basics. We are talking here about the A I F M D with an emphasis on how you can market and whether rev reverse solicitation is safe in all circumstances or just some. So let's start off with the A I F M D, which, you know, I mentioned it as a 10th anniversary. I have to confess, you kindly reminded me of that when we were chatting earlier. Tell us all about the A I F M D.
Andrew Shrimpton:So its purpose was to provide a sort of regulatory and supervisory framework for alternative fund managers within the eu. We set standards for marketing, remuneration policies, risk monitoring, reporting. Overall accountability, you know, and the, the goal was to protect investors and reduce systemic risk from alternative funds. The interesting part was, uh, the, the marketing passport that was created. Um, yeah. Where you could, you know, be authorized in one member state. Yeah. And you could sell the fund across the eu and that, that's significant because the EU is the second largest pool of capital in the world. After the US, almost 120 billion euro were raised in 2021. You know, there's three members, uh, sorry, there's three non-member states in the EA area and 27 EU member states, so that makes, you know, 30 jurisdictions that Yeah. The passport gives you access to, and I was just gonna mention that Soland and the UK now, and not. Member states or, or within the ea but they are very important for management, uh, centers. Cause I know, uh, a lot of, kind of Asian and US managers are always clear about that when I speak to
Claire Cummings:them. Yeah. No, I think to me that, that that's it, it, I still find that sort of interesting that London remains the preeminent UK center. Um, for, you know, for coming and raising money and certainly the people that we talk to, whether they're coming from sort of, um, from the Middle East or from the us, they always start in London. And then think about whether they want to go to other countries. If they do go to other countries, it's always Switzerland. And you're absolutely right that you know neither is it within the eu. I think Switzerland's in the EA isn't one of the after countries, but, but you, we are, you know, Switzerland and London are the, you know, the important centers for asset management and asset raising as well. Yeah, yeah. But Gary so took, it's an in, that's an interesting point, which leads us on to Brexit and. How Brexit has affected the A I F M D, you know, particularly when we look at, you know, marketing in the point you raised, raised about the passport. So can you tell, tell, tell us a bit more about that. Yeah,
Andrew Shrimpton:I mean the big issue with Brexit for fundraising is that a UK a FIM is now, you know, considered a third country manager. Uh, so it no longer has access to the a, uh, marketing passport. Yeah. Which, as we said, you know, Facilitate quite streamlined and fast market access to all 30 jurisdictions.
Claire Cummings:Yeah, I think I would, I I, I would just add there for people listening that it's always worth remembering with any European law that there are always two levels of imp uh, two levels to it. There's sort of the EU law in a, in a member state and domestic law in a member state, and the domestic law has always been different. And not everybody has applied just the A I F M D.
Andrew Shrimpton:Yeah. Um, but you can, you can still use the national private placement regimes. Um, so it's not all bad news. Not all much at all. Yeah. Doing them under, uh, sort of article 42, you know, as a third country manager, as a, as a US manager, would've done, um, pre.
Claire Cummings:So, no, I was gonna say, I, I have to say the number of US clients we worked, we've worked with and done the article two, um, M P P R, they've always been surprised at how easy it is actually. So I think, you know, cross-border marketing is still alive and well it across the eu, if that's the route you choose to take. And there are, and there are some drawbacks, aren't there?
Andrew Shrimpton:Yes. I mean, The main drawback is that, you know, you can't do it in every jurisdiction, and the requirements differ among countries. So you have a kind of spectrum of, you know, relatively open regimes and then quite restrictive ones. You get, yeah, you need to get a. Lot of advice on a country by country basis. The second drawback is that once you have got your notification, you have to do these periodic annex four reports, which are quite complicated and detail and you know, Cover funds, investment positions, and leverage. Uh, they're quite, uh, difficult to do. And the, and the, and the killer point is that you have to do it in each country that you, you do it, you, yeah. So the, the main, um, there, there are a few other disclosure you need to make, but that's the main kind of ongoing cost of, uh, going down the M P P R route, doing an annex for. Uh, you know, disclosure to, to every single regulator where you've, you've made a, an an M P P R notification.
Claire Cummings:I think that, I think that's where sort of the service providers come in, isn't it, to, because, you know, we are the ones who've done them for, for lots of people and know what's involved and, uh, And can get things working a bit more quickly. So it's, it is a bit of a drawback. Yeah, absolutely. I mean, we,
Andrew Shrimpton:but we're here to help big businesses. Yeah. It's one of our big businesses. So we, you know, we, we, we, uh, we, we can, um, do the, the service, uh, in a very streamlined, effective, uh, way. But obviously there, there's just a cost there that you wouldn't have with the passport.
Claire Cummings:Yeah. So if then you are somebody who wants to market under A I F M D, how do you do that when you are inside the uk and how do you do it from outside the uk? What are the possible route there?
Andrew Shrimpton:So really the, the, the only route is, is M P P R as we manage. So, uh, let, lemme give you an example. A US manager is launching an open-ended Cayman based hedge fund, quarterly liquidity. So, Plans to market to Danish, Swedish, and UK investors. Yeah, the, the, the, the, the US management need to make an N P P R notification to the German, Swedish, and UK regulators, you know, be subject to the disclosure requirements and, uh, the ongoing, um, reporting that we mentioned. Yeah, also to mention there. As, as they're marketing to German investors, they go play to the directive. So they'd need an phim, um, depository company to be appointed. Again, that's something that iq, eq, uh, you know, assist, uh, uh, managers with. And that's a,
Claire Cummings:that's a great help because I think, you know, from my experience, I'd say that. People wanted to get into Germany are often the PE funds who are in impacted by this because there is such a large PE market within, within Germany and Baffin hasn't made it terribly easy. So to have somebody who can help with that depository company requirement is, is, is quite a door opener, isn't it, into the German fundraising market.
Andrew Shrimpton:Yeah, absolutely. And I was also gonna mention, which doesn't get so much coverage that they, the UK lost the, the ability to have a MiFID passport as well. And there are some member states that de marketing, uh, fund as a MiFID activity, reception and transmission of orders, even though the rule was actually designed for broker dealers executing trades. You know, on behalf of managers, they're applying it to the receiving and subscriptions from investors and transmitting, you know, orders when you're sort of marketing and closing a private fund. Yeah. Which seems quite restrictive really. But the point is, again, you need a bit of a on Yeah. It, yeah. Position, depending on which jurisdiction you are, you are going into not, not just on the N P P R side. Yeah,
Claire Cummings:but the local domestic rules, which, yeah, and certainly if you're marketing into the uk, you do have to consider whether or not you are giving investment advice, making arrangements, investment, and, and of course financial promotions as well, which, uh, Which are very much being tightened up and that, that, that might be a nice subject for a, you know, for another podcast another day. But, uh, but getting back, but getting back to the sort of the marketing, one thing that you and I were talking about earlier was reverse solicitation, and we were talking about. How safe it is. What are the roots, some of the conundrums that apply when you look at the, the wording in A I F M D? So perhaps you could start off and tell, tell everybody what rev reverse solicitation is and how, how, how it's intended to work.
Andrew Shrimpton:Yeah, the, the definition is when an investor requests information from an AFI about their fund at at their own initiative, which is one of the key phrases. Yeah. And it's under the assumption that there was no kind of prior contact. And the initiative is all coming from the investor. I mean, and that's the kind of idea, you know, an unsolicited, uh, request. Now, when A F M D came in, Mo most lawyers and consultants did advise that, uh, the use of reverse solicitation, you know, expose the manager to both the risk of regulatory sanction. And legal risk, cuz it wasn't really the intention, um, behind the, the, the legislation. Yeah. Uh, the legal risk comes from the, you know, it being used by an investor, uh, as, as a kind of putative breach of. A F m D in, in a court case, you know, where they're, where they're contesting some, some other issue. Um, yeah,
Claire Cummings:so an invest, invest and, and an investor's unhappy with something that's happened and they can, they can bring in breach of Ai f MD as a, as a sort of a, a bargaining tool or possible remedy or something.
Andrew Shrimpton:Yeah, and despite all that advice, a lot of us and Asian investors have continued to adopt kind of reverse solicitation. I mean, I have, I have an example here, uh, that I was just gonna talk through to sort, so, so a US manager is launching its second private equity fund. You know, the, the first one. Probably had mainly US investors, but it, you know Yeah. Could, it also had Danish, French and UK investors who had expressed an interest in coming into the second fund, you know, due to the first strong returns from the first fund. So you, the, the manager in that situation, the US manager would sort of argue that because they'd expressed an interest themselves on their own initiative of going into the second fund. That this was, uh, kind of under reverse. Yeah. I think
Claire Cummings:also it, it, it is worth saying as well that they have to be, um, professional investors. How was they're going to be because of the type of fund going into, but yeah, it's professional investors and you are Right. Is that word initiative that which is the key one in, in, within the legislation, isn't it?
Andrew Shrimpton:Yeah, absolutely. And the key practical consideration here is that you have to have written. Record that they approached you. Yeah. You know, you need an email or uh, a letter.
Claire Cummings:Uh, and the more detailed the better, isn't it? Yeah. Yeah. Absolutely. Yeah. Cause I think there's, there's, there's some sort of discussion over, if there was a letter saying, next time you launch a fund, please let me know. That may not be reverse solicitation. It's just too broad, but say, but a letter saying, I, I understand, I understand from independent sources or other sources that you are launching the X Fund with X strategy, please, would you send me, I'm now, you know, I'm writing on my own initiative to ask you to send me the offering document, a subscription agreement. Then you start to be able to get through that reverse solicitation door, don't you? Yeah,
Andrew Shrimpton:no, absolutely. And there's been a lot of legal discussion and many, many, many conversations go on between the managers and legal advisors. Um, yeah, what the risk level is really, it's a risk-based decision in a way. It is
Claire Cummings:risk-based. Yeah. And I think that, you know, as you know, as it's always the way with anything to do anything legal, it's very much turns on the exact detail of a situation and, um, Because the thing you need to be very careful about and um, is that there is some wording within the legislation itself or the A I F M D, the directive saying that you cannot use rev reverse elicitation to circumvent the A I F M D. So that itself, you know, would seem to restrict how you can use it because you, you also have to demonstrate that you are not using reverse solicitation to circumvent A I F N D. You're using it for another situation. So I think the one you've given about a US manager who is, is launching a second fund and its investors know and want to come back is probably the most likely. To be there because it isn't that often that managers actually get a sudden inquiry outta the blue, is it? No.
Andrew Shrimpton:No. And you're right, EU regulators. Don't like it, they don't make any secret of it. So, but the problem is, and, and that recit I think is very much up to drove legal opinion and consultants' opinion. Uh, you know, 10 years ago. The problem is that there haven't been many regulatory sanctions in practice that the, there's only
Claire Cummings:one from, from the regulators. Yeah. Yeah, yeah, yeah.
Andrew Shrimpton:So I've become aware of one regulatory sanction in, uh, 2013, which was brought by the French regular regulator, the A M F, and that was against a manager that had retail clients subscribed to shares in a German based.
Claire Cummings:So if they were retail as well, they wouldn't have been professional, would they?
Andrew Shrimpton:No, no. Yeah. I mean, one of the noteworthy findings and reasons why they, they found against them was that they, they, they, the all, all the investors used the same templated reverse solicitation. That's a bit
Claire Cummings:giveaway. So,
Andrew Shrimpton:Well, and that, that's interesting because, you know, you see that a lot that's common industry practice. Um, so, you know, when, when we're reviewing, um, you know, our managers that we advise, we do, we do find often that they have the same, same email and the same, uh, reverse presentation letters. Don't,
Claire Cummings:don't. Yeah, I think it's
Andrew Shrimpton:also worth the positive side. It was retail investors and it was an eua. Whereas, you know, our clients would tend to be non EUAs and,
Claire Cummings:and they're not gonna be retail either. So
Andrew Shrimpton:you've got, so I don't scare people too much. But, uh, you know, they, that it is noteworthy that, uh, they did, they did find that the, the letters were very templated and they're all, if
Claire Cummings:you're gonna do it, get it right. Yeah. And I think take advice first, because it's not gonna work in all situations. It will in some, and I think that I, I, I think the other thing that we, that we, that should be considered is that, There's only, yes, there's only been in a one regulatory sanction brought by a regulator. What I suspect there have been more of than we are aware and probably the lawyers listening to this and, and the administrator I imagine will, will be nodding their heads would be aware there have been, um, unhappy investors. Who have, as you said, it, is gonna get back to our, our, you know, part of the discussion earlier. If they're not happy and they want to find a chink in your armor, one chink is, well actually it was rev reverse solicitation, so come on, let's chat and let's, and see what I can get back from you so that you, it is always, why is to take advice to get it right. The cost of the advice versus the risk of getting it wrong is a, is a no-brainer, isn't it? Yes.
Andrew Shrimpton:So you'd be able to use that advice in a, in a court case, if, if, if you ever found yourself in
Claire Cummings:that situation. Yeah. Hopefully it would stop you getting there. But if it, if it did, then yeah, exactly. Yeah. Now, what are the other, what are the other sort of findings from, from this, this, from this one enforcement case? What else? What else are they, did they say? They said
Andrew Shrimpton:it must be demonstrated that the client effectively initiated the solicitation without any prior solicitation, including through general advertising, emails, invitations to a conference, et cetera. And this is always a big issue, you know, have, have you done anything that's, uh, sort of nullifies the idea of, uh, reverse dissertation? Yeah. I mean, thing if you put your fund. On a website, then everyone can see it. So how can you, the
Claire Cummings:invested in, how can it be somebody else's initiative if you've made, if you've made the first move, it's not the, it's gotta be the investor making the first move. Cause it's not their initiative, it's a, if it's not the first move. Yeah.
Andrew Shrimpton:And then the other interesting one was it said, going to a point you made, it should designate a specific name, Dave. Uh, so it shouldn't be vague in this kind of email or reverse solicitation letter,
Claire Cummings:so, right. So nothing that anybody could foresee because not nothing has been done to preempt, uh, the solicitation. It's completely at. The initiative of the professional investor that couldn't have been foreseen by the manager. And the, the, the reverse solicitation letter isn't a template. It's quite, it's personal and it's also very detailed. It clearly identifies the, which particular a no,
Andrew Shrimpton:absolutely. Yeah. And the, the other point to make is that, You know, there is new regulation coming in, or, well, it's called, it took effect actually in August, 2021, the cross border distribution of funds directed. And this is,
Claire Cummings:yeah, this is EU legislation, isn't it? Yeah, absolutely. Yeah.
Andrew Shrimpton:So, It, it is trying to make it hard and the purpose is to make it harder and make it more riskier for, uh, reverse solicitation and give the, you know, the, the EU regulators more, more, more ways of kind of ton of closing down, which they, they, they've been trying to do all along really. So they, they have more. Legislative cloud in, in the regulation now. And just to note, actually, this is, uh, again, the U the, the UK didn't adopt this post. Uh, Brexit. Brexit, Brexit. So that's an example again where the risk, I would say the risk must have gone up to some extent. As a result of this, um, legislation when you are, uh, if you're using reverse solicitation with EU investors, but it's probably about the same in the uk. Yeah.
Claire Cummings:So that's a, that, so that is one sort of post Brexit divergence. We were talking earlier about another post Bret divergence, the S fdr.
Andrew Shrimpton:Yeah. So this is the huge new piece of sort of, uh, But you know, sustainability, E s G regulation, um, that was introduced in, um, 2018, but a lot, lot of the requirements, um, Only kind of kicked in at the beginning of this year. Yeah, and, and it's huge. I mean, it's in, in many ways, it's bigger than A F M D in terms of its scope and, and consequence. Um, I would say now the EU regulators have got a lot of deserved praise for being first and for leading the way on, um, this kind of regulation, which, which many. Feel is, is necessary. But on the other hand, you know, there's been a lot of industry concern about clarity of definitions. The practicality of the regulation. Yes.
Claire Cummings:Library green. Yeah. Yeah. That's
Andrew Shrimpton:been the, yeah. And then there's a data, I mean, the data requirements to do these disclosures are huge, you know, and the, these, these, these disclosures are a whole new level of, uh, the kind of portfolio level. Quantitative portfolio level disclosures or a
Claire Cummings:hold, they're, they're, they're, they're big beasts, aren't they?
Andrew Shrimpton:Yeah, they're, they're even much bigger than, you know, annex four, which I guess was, was oh, much bigger than Yes. Seen as a great new, uh, level of, uh, disclosure quite so, it, it is gone to a whole new level of, of funds regulation. And, you know, I'd say to a level we, we've never really seen before in the, in the history of funds regulation. And now the other interesting thing about this is, again, This came in after BRE Brexit, after, after 2021. So the UK did not adopt this, uh, S F D R regulation and you know, it's consulting on its own S D r, which, and the policy statements due at the end of the third quarter of 2023. Yeah. So you're only caught by this. If you make an M P P R notification, so if you make that notification again, you come into S F D R, you come into
Claire Cummings:scope because you're, you're, you're stepping outta the UK into the eu. Yeah. Yeah. No,
Andrew Shrimpton:absolutely.
Claire Cummings:Yeah. Well, Andrew, I have found all of this extremely interesting. I think probably I, we could probably sum this up by saying A I F M D is alive and well. You may have to think about the EU sustainable finance disclosure regulation and don't worry about it because you can take, you can, you can come to Cummings, Pepperdine for the legal advice. And you can go to I Q E Q for the implementation of all the reporting, so we can make it, we, you know, we've, we've, together, we've got some nice to easy solutions for anybody who's listening, who's concerned about marketing under A I F M D, and in particular, the little quirks of reverse solicitation. Well, Andrew, thank you very much. What my, the only thing I'd just like to, to ask you is if you could just give everybody a means of contacting you or contacting iq eq. So anybody, if anybody wants to get in touch with you, they can do.
Andrew Shrimpton:Yeah, my, um, email's on the website's probably the best place. It's andrew dot shrimpton iq eq.com and the
Claire Cummings:websites iq eq do com as well. Absolutely. Yeah. Yeah. And for any new listeners, the Cummings pep website is cummings pepperdine.com. Andrew, thank you very much. All the listeners. Thank you very much. And Andrew, let's come back and do an another podcast soon on some, some more sort of critical fund, uh, issues.
Andrew Shrimpton:Absolutely. Thank you very much. My pleasure.
