The German Ministry of Finance recently released a discussion draft of legislation to implement the EU’s Alternative Investment Funds Managers (AIFM) Directive in Germany. The proposed legislation would eliminate the existing German private placement regime under which foreign private equity, hedge fund and other alternative investment firms currently market their funds to professional investors in Germany. The proposed legislation would replace the current marketing rules with a new set of rules that include conditions on non-EU alternative asset managers that extend far beyond the uniform provisions in the AIFM Directive. We are working with private equity industry trade associations and clients to urge the German Ministry of Finance to retain the current private placement regime—or at a minimum to eliminate the most draconian and onerous of the newly-proposed rules. This effort has included drafting letters to the German Ministry of Finance and to U.S. regulators.
Of greatest concern to many U.S., Asian and other non-EU alternative investment firms, the legislation as currently drafted prohibits them from marketing their private equity, hedge and other alternative investment funds to professional investors in Germany unless (1) the alternative investment firm (the fund manager) and the funds that it manages are subject to public supervision (regulation/registration) in the same jurisdiction, and (2) the private equity firm and the funds that it manages are located in the same country. However, in the United States, for example, only the firm, and not its funds, are registered under the Investment Advisers Act of 1940, so most U.S. firms could not satisfy condition (1) above. Also, many funds are organized in jurisdictions (e.g., the Cayman Islands) other than the jurisdiction (such as the U.S., Hong Kong or Singapore) where the firm (the fund manager) is organized, so many firms could not satisfy condition (2) above either. As a result, the draft legislation would effectively ban U.S. and many other non-EU alternative investment firms from marketing their funds to investors in Germany.
As noted above, we have helped trade associations and individual firms raise these concerns with the appropriate regulators. While it is too early to predict how the draft German legislation will evolve, early signs are promising and we are hopeful that the most onerous provisions will be revised. If the legislation is not substantially changed, it will pose serious market access and compliance problems for our U.S. and other non-EU clients, as well as for German investors wishing to invest in funds managed by those firms. We will continue to monitor the situation.