The working Committee set up under the auspices of the AMF has published its report on the transposition of the AIFM Directive.

The Report on the transposition into French law and practice of the AIFM Directive of July 21, 2011 (the “Directive”), by a committee chaired by two members of the AMF, Mme Monique Cohen and M. Jean-Luc Enguéhard, was published on June 15, 2012 (“Report”).

Consultation among the various parties concerned has been on-going since November 2011. The Report, while generally celebrating what is perceived asFrance’s very strong position in the fund management universe, puts forward a series of 25 recommendations concerning both the implementation of the Directive and other changes which it considers could usefully be implemented to accompany the specific changes mandated by the Directive.

Among the most significant of these recommendations are the following:

-that the requirements of Directive be faithfully transposed into French law. 

The Report insists on the requirement that the rules be applied throughout the EU without the introduction of additional State specific requirements. In other words, that the playing field be level.

-that a major marketing effort be made to promote the French regulator and the French environment as a congenial jurisdiction for alternative fund management activities.

The Report even goes so far as to suggest that there should be a dedicated English language web site for this purpose!

-that a single status be retained for fund management companies which could both manage UCITS and also alternative investments.

To add an alternative investment capability the management companies would be required to submit a corresponding activity programme for approval by the AMF.

-that the risk control function, mandated by the Directive, be subject to the proportionality principle.

The Report points out that this aspect is already addressed by existing French regulations and recommends that account be taken of the specificity and size of certain actors, such as capital development and real estate funds

-that companies authorised to manage both UCITS and Alternative Investments be allowed to receive and transmit orders (an activity not authorised at the present time for UCITS managers)

This corresponds to the recommendation in point 51 of the ESMA Consultation Paper of February 23, 2012.

-that the financial delegation rules be amended so that even investment service providers who do not have the status of management companies may be the sub-contractors of certain fund management activities.

This would be subject to the existence of safeguards for the investors.

-that fund managers’ remuneration be aligned so that the interests of investors and managers correspond.

Certain of the Directive’s requirements (that variable remuneration take account of the global and not just individual performances and that the variable portion must be paid over a period of time) are already applicable to French management companies.

-that there be a simplification of the range of Products subject to the Directive.

The Report’s suggestion is that there should be three categories: UCITS, alternative investments for the general public and alternative investments for professionals. This last category would include the “contractual” funds already existing in French law. Details of this proposal to split alternative investments between the general public and professionals are given in exhibit 2 to the Report. A general recommendation running throughout the report is that the French taxation rules be clarified and that frequent changes be avoided.

-that the current subscription thresholds be reduced to 0 € for the general public and 100,000 € for professionals.

At the present time the French thresholds vary from 0€ to 500,000 € depending on the nature of the fund. The Report recommends that upon implementation of the Directive the sole figure of 100,000 € be used in respect of “professional” investors.

-that the possibility of authorising new management techniques and new asset classes be analysed on an exploratory basis.

The themes addressed here relate to the issue of bonds and the use of swing pricing and anti-dilution levies (widely practised by foreign funds marketed inFrancebut not for French funds).

-that a category of French investment funds incorporated  as sociétés anonymes  (SAs)or sociétés par actions simplifiées  (SAS) be created.

The Committee felt that the creation of such incorporated funds, widely available abroad, would allow improved corporate governance and also permit the funds to participate in transactions not currently possible for the funds organised as fonds communs de placement (FCPs  which are undivided co-ownerships).

-that fund documentation destined for professionals be drafted in a language other than French.

The sponsor would however be obliged to provide a French translation on request.

-that France does not accept the possibility contained in article 21 (3) of the Directive which would allow certain regulated professions (lawyers, notaries etc.) to act as depositaries in certain circumstances or to elect to appoint depositaries in other EU States until 2017 under the interim regime (article 61-5).

The Report forcefully argues that the safeguards in place regarding investor protection regarding depositaries are as good as any in the EU and that accordingly the list of qualifying depositaries in France be restricted to that laid down in the decree of September 6, 1989.

that depositaries be allowed to develop connected activities, such as expert external valuation, prime brokerage, cash and collateralised assets management.

Any such extension of the depositary’s activity would be contingent on the implementation of a robust prevention of conflict of interest policy and the exclusivity of the fund manager as far as financial management is concerned.

Finally, so that a coherent interpretation is given throughout the EU the Committee asks the European Institutions for clarification on the following points:

-a clear definition of what is a collective investment undertaking (current French legislation simply provides a list, not a definition), and which structures are indeed subject to the Directive, notably regarding such French entities as non listed holding companies, listed real estate holding companies such as SIICS and other specialised entities such as agricultural groupings, venture capital (SCR) and innovation (SFI) companies etc.

-agreements with third party States. The Report considers that allowing third party States to have “passport” rights as of 2015 without reciprocity would present significant risks for investors. It encourages ESMA to ensure that the Member States interpret the implementation of the Directive in a consistent and homogeneous fashion to prevent certain States from allowing products running counter to the principles of the Directive to be marketed.

Charles Campbell