On 16 May 2013, the Ministry of Economy and Competitiveness published two long-expected preliminary draft bills, which constitute a first draft of the future Spanish implementation laws of Directive 2011/61/EU on Alternative Investment Funds Managers (“AIFMD”). The deadline for implementation is 22 July 2013, thus compliance by Spain in this regard remains uncertain and there may ultimately be some delay.
1.1 Current situation
Under Spanish law, there are two different types of collective investment schemes (“CIS”),
which differ depending on the temporary nature of the commitment assumed by the
(i) Open-ended CIS: they allow the investor to apply for the redemption of its investment against the assets of the CIS at any time, or with short notice. This category includes both harmonized CIS according to Directive 2009/65/EU (“UCITS Directive”), which are always open-ended by definition and other that are not UCITS (e.g., hedge funds, and real estate investment schemes).
(ii) Closed-ended CIS: the investor assumes an irrevocable commitment and may not apply for redemption until a certain deadline. The only entities currently regulated comprehensively under this category are the Venture Capital Entities (“VCE”), which are subject to a specific Spanish law (Law 25/2005 on venture capital entities, “Law 25/2005”). Other closed-ended entities are subject to the legal regime applicable to securities in general, which is contained in the Securities Market Law (“SML”).
AIFMD provides that both open-ended and closed-ended CIS, provided that they are not UCITS (already regulated in Law 35/2003 on collective investment schemes (“CIS Law”) and developing regulations), should have a common management framework, and in some cases, they may benefit from free marketing in all EU Member States. For this reason, we will refer to them collectively as “Alternative Investment Funds” or “AIFs”.
1.2 General outlook
AIFMD will be implemented in Spain by two different pieces of legislation. Open-ended AIFs and their management companies will be regulated by the amended version of the CIS Law, whereas closed-ended AIFs and their management companies will be subject to the new Law on venture capital and other investment companies (“VC Draft Bill”).
Management companies of closed-ended AIFs, which are subject to the specific regulation of the AIFMD, will undergo the most significant changes.
From a practical perspective, the main effects of the implementation of AIFMD for the market will be the possibility of freely marketing open-ended and closed-ended AIFs throughout the EU, through a straightforward passporting procedure carried out before the regulatory authorities of the home State.
This newsletter aims to provide a global overview of both draft bills, in order to ease the analysis and monitoring of the legislative process, which will conclude in the coming months with the approval of the final texts by the Spanish parliament.
1.3 The draft bills
1.3.1 Amendment of the CIS Law
The amendment of the CIS Law will not affect a large number of provisions, since the only changes introduced relate to the marketing of open-ended AIFs and the cross-border activity of CIS management companies (“SGIIC” in Spanish).
Therefore, the CIS Law will continue to regulate all open-ended CIS, whether they are UCITS or not. According to this draft bill, the CIS Law will remain in force for all matters regarding the UCITS Directive, but it will also incorporate the provisions of the AIFMD on the marketing of open-ended AIFs.
Likewise, SGIIC will be able to manage both types of CIS (UCITS and AIFs) by fulfilling certain requirements, and they may also opt for an EU passport in order to provide their services in any EU Member State.
1.3.2 The New VC Draft Bill
Notwithstanding the above, the scope of the AIFM Directive is not limited to open-ended entities, it will also apply to close-ended CIS. In this respect, the implementation project also proposes the approval of a new law to regulate closed-ended CIS and their managers. This new law will repeal current Law 25/2005 and will replace it with a broader one (venture capital and other investment companies).
The VCE regulated in the former law will continue to exist, but they will be adapted to the new provisions of the AIFMD. Conversely, the new VC Draft Bill creates a new type of entity, called Other Investment Companies or OIC, which are closed-ended entities that do not meet the definition of VCE because of their purpose, investment policy or other characteristics. In addition, legal recognition is granted to the new European Venture Capital Funds (EuVECA) and to the European Social Entrepreneurship Funds (EuSEF), created by EU Regulations 345/2013 and 346/2013.
As closed-ended entities will be comprehensively regulated, their marketing will no longer be regulated in the Securities Market Law, because the new VC Draft Bill contains specific provisions in this regard.
2. AMENDMENT of the Cis law
The CIS Law was and will continue to be the Spanish law implementing the UCITS Directive, even though it also regulates the few non-harmonized open-ended collective investment schemes. According to the draft bill under consideration, the part of the AIFMD relating to the marketing and management of open-ended AIFs would be included in this law.
Spanish open-ended AIFs are CIS that do not meet the definition of UCITS and can take the form of an investment fund or company, including Hedge Funds and Real Estate Investment Companies. The management of AIFs is entrusted to the entities authorised as SGIIC, which must adapt to their new obligations by 22 July 2014.
2.1 Marketing in Spain of open-ended AIFs
AIFs managed according to the AIFMD will benefit from a cross-border
marketing regime that is very similar to that of UCITS. Nonetheless, there are
some differences depending on the origin of the fund and the type of investor
they are aimed at, which may be classified into three categories:
2.1.1 EU AIFs managed by EU managers and geared towards professional investors
This type of entities would be subject to the standard passporting procedure,
which consists of the supervisory body of the home Member State issuing a
notification to the CNMV with the following information:
- The marketing methods of the different classes or series of shares to be offered in Spain.
- The AIF’s management rules or instruments of incorporation.
- The prospectus or equivalent document and the last annual report.
- The identity of the depositary.
- A description of the AIFs or other information about them available to investors.
- In the case of a feeder fund, the place where the master fund was created.
- Actions taken to avoid marketing among retail investors.
- Certification of the regulator of the home Member State stating that the manager of the AIFs is regulated according to the AIFMD.
The latter document, as well as the notification letter may be submitted in English. Once the CNMV has received all the information, it will include the entity in its records and may not impose any other requirement for its marketing in Spain.
2.1.2 AIFs authorized outside the EU (managed by EU managers or otherwise), geared towards professional investors.
This type of entities will need to follow a more complex authorization procedure. The CNMV will verify that Spanish law has the same category of AIFs as that intended to be marketed, and that it applies specific regulations regarding investor protection similar to those of Spain. It must also be subject to an adequate level of prudential supervision (including a favourable report from its supervisory authorities). Furthermore, the home State must have treaties in place for the cooperation with Spain in tax-related matters, and not be included in the FATF blacklist of non-cooperative countries and territories.
The authorization is not automatic as in the previous case. It will depend on the CNMV, which may reject the application on prudential grounds. Once the authorization is obtained, the same information outlined in section 2.1.1 above will have to be submitted (optionally in English).
2.1.3 Marketing geared towards retail investors.
Regardless of their origin, all non-UCITS schemes geared towards retail investors in Spain will need to undergo an authorization procedure similar to that explained above. In addition, the following documents, duly translated into Spanish, will have to be provided to CNMV:
- Documents certifying the applicability of the relevant national legislation.
- Audited financial statements, drawn up according to its home legislation.
- Informative prospectus and key investor information document, or similar.
2.2 Cross-border activities of management companies.
2.2.1 Management of AIFs in other EU Member States by Spanish managers.
Spanish CIS management companies (“SGIIC” in Spanish), if authorized in accordance with the AIFMD, may benefit from the “EU passport” and provide services freely in any EU Member State (with or without a branch), and manage any AIFs they may be authorized to. For this purpose, they will need to initiate the passporting procedure before the CNMV and indicate the Member States in which they intend to render services, together with an activity report reflecting the services to be provided and the individual AIFs to be managed.
Within one month (or two if it involves the opening of a branch), the CNMV will convey this information to the supervising authorities of the Member States affected, together with a certificate stating that the SGIIC is regulated in accordance with the AIFMD.
2.2.2 EU managers wishing to manage Spanish AIF.
In parallel to the above, AIFMD-compliant management companies of other EU Member States may request the free provision of services in Spain (with or without a branch) before the supervising authority of their home State. Once the CNMV receives the relevant communication, they will be authorized to start operating in Spain, without being subject to any other requirements.
Managers acting on a cross-border basis in Spain will need to appoint a Spanish resident representative to comply with any tax obligations that may arise.
The CNMV will inform the authorities of the home Member State of any irregularity detected in the course of the manager’s cross-border activity in Spain. In this regard, the home State supervisor may carry out any investigation necessary, even within the Spanish territory, notifying the CNMV in advance.
3. the new VC draft bill
This new piece of legislation is not just the implementation of the AIFMD in Spain, but also an update of the legislative framework of Spanish venture capital entities and their management companies. Conversely, a new category of closed-ended investment companies is created: the OICs, which will become part of the financial entities in the Spanish system.
3.1 Changes for management companies
Currently known in Spanish as SGECR (managing companies of venture capital entities), they will automatically become VCE and OIC managers and will thus be called SGEIC (Spanish acronym for closed-ended investment management companies). The SGEIC have until 22 July 2014 to adapt to the new legislation.
The new VC Draft Bill sets out a much more thorough regulation of the functions of SGEIC, in accordance with the AIFMD. There are two main management activities: portfolio management and risk management. Moreover, external management companies will be allowed to carry out the following activities:
(a) Administration of VCE and OIC (including legal and accounting services, client relations, calculation of NAV, compliance, registry of unit-holders, allocation of profits, subscription and redemption of units).
(b) Marketing of VCE and OIC.
(c) Related activities with the assets of VCE and OIC (e.g., advice to investee companies).
As ancillary and non-exclusive activities, they may also render the following services:
(a) Discretional investment portfolio management, including portfolios of pension funds and employment funds.
(b) Investment advice.
(c) Custody and administration of VCE or OIC shares.
(d) Receipt and transmission of orders.
The minimum share capital of a SGEIC will continue to be EUR 300,000, but there will be a new obligation to maintain additional own resources for an amount of 0.02% of the part of their managed portfolios exceeding EUR 250 million, up to a maximum of EUR 10 million. This obligation may be reduced by half if an express guarantee of a banking or insurance company is obtained.
A new obligation to approve and implement remuneration and incentives policies is detailed. Similarly, conflicts of interest and risk management policies will be required, including a hierarchical and functional separation of risk management and operative units. In this regard, appropriate diligence mechanisms to analyse investment risks must be established, as well as a maximum leverage level, all of this bearing in mind the entity’s investment strategy, objectives and risk level.
Furthermore, other rules regarding asset valuation and NAV calculation are established. These functions may be carried out by an external valuator or the SGEIC itself, provided that this activity is functionally independent of the portfolio management and the remuneration policy avoids any conflict of interest for the valuators. The depositary may not carry out the valuation.
SGEICs will need to publish an informative prospectus and an annual report for every VCE or OIC they manage, which will in turn need to approve their annual accounts and have them audited within the first four months of their fiscal year, including staff and senior officer remuneration. The CNMV may request any other information to supervise these entities.
The prospectus of and VCE/OIC must contain at least:
(a) A description of the investment strategy and objectives, its location and the location of the underlying in the case of investment in other CIS, a description of the types of assets in which they may invest, the techniques it may use and related risks, as well as any investment restrictions applicable, if any.
(b) A description of the procedures to modify its strategy and investment policy.
(c) A description of the main legal effects of the investment contractual relation (jurisdiction and governing law, and potential enforcement of foreign judgments, if applicable).
(d) Identity of the depositary of the SGEIC, its auditor and all other service providers, and a description of their obligations and the rights of investors.
(e) A description of the manner in which the SGEIC hedges the potential risk of professional liability.
(f) A description of the management functions that have been delegated by the manager, or the deposit functions delegated by the depositary, identity of the delegates and conflicts of interest that may arise from such delegation.
(g) A description of the valuation procedure.
(h) A description of the liquidity risk management.
(i) A description of all fees and costs charged directly to investors, and their maximum amounts.
(j) A description of the manner in which the management company guarantees that all investors are treated fairly, and information regarding any possible preferential treatment.
(k) Procedure and conditions for the issuance and sale of shares.
(l) Historical results, if available.
(m) Identity of the main intermediary and a description of the agreements with main intermediaries and related conflict of interest resolution procedures. If applicable, any contractual provisions with the depositary in relation to the transfer and re-use of assets and information about any assignment of responsibilities to the main intermediary.
(n) Description of how and when the annual report is to be published.
3.3 Changes to the legal regime of venture capital entities
Without being exhaustive, we refer below to some of the intended changes to the current rules on venture capital, which do not result necessarily from the implementation of the AIFMD but rather from the intention to adapt such rules to the needs of the industry:
- The VC Draft Bill will not apply to entities that restrict the raising of capital to a single investor.
- There is no longer a distinction between the simplified regime and the general regime: all entities will now have to issue a prospectus.
- The 30% limit of investment in profit sharing loans within the mandatory ratio is removed.
- A new category of “SME-venture capital entities” is created, which will have to invest at least 70% of their eligible assets in undertakings which (i) are not listed, (ii) have less than 250 employees, (iii) annual assets do not exceed EUR 34 million or their annual business turnover does not exceed EUR 50 million, (iv) are not CIS, (v) are not financial or real estate companies and (vi) are located in the EU or in other non-EU countries not appearing in the FATF blacklist. In addition, these entities will have to render advice to their investee companies but will not be allowed to take control of any of them.
- Marketing to non-professional investors will only be possible if their investment amounts to at least EUR 100,000 and they acknowledge in a separate document that they are aware of the risks resulting from these investments. In addition, they must receive a copy of the prospectus and management rules or articles of association.
They will have to appoint a depositary whenever the total assets managed by their management company do not exceed EUR 100 million, or EUR 500 million if the vehicles under management are unleveraged and there are no redemption rights in the first five years.
3.4 The new OIC
OIC are entities incorporated as companies, managed in accordance with the AIFMD and which corporate purpose is the raising of capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, provided that they do not fall within the scope of the CIS Law or qualify as VCE in accordance with the VC Draft Bill. Their capital must be represented by shares, whether as registered shares or as book entries.
OIC will be mainly regulated by the Corporate Enterprises Law, although their investment policy and ability to delegate the management of their portfolio to a SGEIC (or SGIIC, as the case may be) must be included in their articles of association. The rules governing the management of the OIC and the information to be provided to investors will be, in general, those of the VC Draft Bill, which will apply in the same way as for the VCE.
OIC are not further regulated under the VC Draft Bill and, therefore, constitute a residual category comprising those entities that do not fall within the standard VCE categories. The reason for creating this residual category is to enable the marketing of those closed-ended EU AIFs that did not originally have an equivalent category under Spanish law. Further legal and practical developments in this regard can be expected to contribute to the thriving development of this new entity in the Spanish market.
3.5 Cross-border marketing of VCE and OIC
In the same terms as those applicable to Spanish VCE and OIC, retail investors may only purchase shares of these entities if their investment amounts to at least EUR 100,000 and they acknowledge in a separate document that they are aware of the risks resulting from these investments. For all other matters, the provisions of the VC Draft Bill are the same as those explained in section 2.1. above for LCIS.
3.6 EuVECA and EuSEF
In addition, the VC Draft Bill expressly acknowledges the existence of the European Venture Capital Funds (EuVECA) and Social Entrepreneurship funds (EuSEF), and refers expressly to their rules in EU regulations 345/2013 and 346/2013 of 17 April, respectively. These types of entities were addressed in a previous newsletter available under
the following link.
4. The future of private placement
To date, shares in closed-ended AIFs were not given special consideration for marketing purposes in comparison with other securities regulated in the SML. Therefore, they could be offered on a private placement basis if the requirements of article 30 bis of the SML were met (offer exclusively aimed at qualified investors, or to less than 150 people, for a minimum of EUR 100,000 per investor or face value of at least EUR 100,000, or with a total offering of less than EUR 5 million in the whole EU).
With the VC Draft Bill, the marketing of this type of entities will be specifically regulated, and the most reasonable interpretation is that the SML will no longer be applicable pursuant to the lex specialis principle.
Nevertheless, the VC Draft Bill does not regulate any private placement regime (nor does the CIS Law). Both laws require the entity’s registration whenever it is to be marketed in Spain.