U.S. Investors in Europe Bone Up on New Rules

Panelists at Luxembourg: Europe’s Global Fund Centre event discussed the details

Regulations going into effect in July in Europe called the Alternative Investment Fund Manager Directive will result in more oversight for Europe-based fund managers, according to panelists at the Association of the Luxembourg Fund Industry's March 6 conference in New York.

The rules, which will affect Europe-based alternative investment fund managers, including managers of private equity funds, were created in an effort to manage risk and increase transparency after the 2008 economic crisis.

The directive establishes regulations for fund managers, as well an indirect regulations for alternative investment funds, their service providers and investors, says Jacques Elvinger, partner at Elvinger Hoss & Prussen, a law firm based in Luxembourg.

Elvinger was on a panel at the fund industry association's New York event. The panel was designed to give U.S. funds a heads-up about the rules.

The directive will affect any fund with a Europe-based manager, as well as companies looking to market funds in Europe.

Private placement regimes (PPR), the individual regulations of countries in Europe that govern sales of securities to investors, will remain in place until July 2018, so some fund managers can get around the directive until then.

Italy doesn't have a PPR, and Germany is getting rid of its PPR, meaning that to market to investors in those two countries, fund managers need to become authorized.

The new rules come with the option for managers to get "passports," which would allow them to market their funds in European countries other than the one they are based in.

The Alternative Investment Fund Manager Directive requires managers to verify that funds comply with pre-determined risk limits, says Valerie Tixier, a partner at PricewaterhouseCoopers.

Companies considering a fund management operation in Europe need to look at the product ranges in each country, as well as regulatory structures and economic and political stability, says Tixier. Countries that aren't economically or politically stable have the potential for tax changes.

They should also go through an impact assessment and talk to their legal counsel about how their funds may be affected, says Kamran Anwar, the head of private equity services for Citigroup in London.

The panel discussion comes as Luxembourg attempts to lure more private equity funds to the country.

Luxembourg has $3.2 trillion in assets under management, 13,000 funds and sub-funds and 400 fund managers, says Marc Saluzzi (pictured), the chairman of the ALFI, and head of investment management and real estate for PricewaterhouseCoopers in Luxembourg.

Right now, the country does a lot of business with the special purpose vehicles of private equity firms, says Saluzzi.

The country, as of the end of first quarter or the beginning of the second quarter, will likely begin regarding carried interest as income tax, and will tax carried interest at 10 percent. That decision could provide some certainty to private equity fund managers as the carried interest debate continues in the U.S., Saluzzi says.

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