As the first in a series of Kinetic Partners’ snap shots, we focus on the AIFMD’s prudential regime.
UK AIFM, when formally authorised under AIFMD, will be subject to the Prudential obligations laid down by AIFMD, AIFMR and, where necessary, the FCA’s Rules. It is worth noting that the AIFMD’s Prudential provisions do not apply to Non-EEA AIFMs until, and if, the Third Country Passport is in place. Once the Third Country Passport is in place, and the AIFM wants to make use of this Passport (i.e. not to market under the Private Placement Regulations (‘PPR’)) then, as a consequence of the Member State of Reference Regulations, Non-EU AIFMs will have to be Authorised and Supervised by a designated EU Competent Authority (e.g. the FCA) and subject to most, but not all, of the AIFMD/R provisions, including the Prudential obligations.
At this time the Prudential obligations of the AIFMD/R are laid down as follows:
- AIFMD; Article 9.
- AIFMR; Articles 12, 13, 14, 15 (which deal with the Professional Liability Risk Own Funds Requirement), 22 (Resources), Section 3, Recital 35 (Self Assessment of Risks impacting the AIFM (as well as Risk Management of the AIF it manages), Section 4 (Liquidity Management – including in terms of its own Capital) and Article 59 (Accounting Procedures).
- FSA CP12/32 – Chapter 5 (pages 32 to 39).
In summary, the Capital Resources Requirements of AIFMs are as follows (but subject to adjustment by the FCA’s Rules to take account of different types of AIFM the FCA will Authorise in order to undertake the new Regulated Activity of ‘Managing AIFs’);
Minimum Capital Requirement (equivalent to the CRD’s CRR) being the higher of:
- The Base Capital Requirement of €125k plus 0.02% of AUM Managed (i.e. of all the AIFs in scope which are Managed by the AIFM) above €250m with a maximum Capital Requirement of €10m; and the
- Fixed Overhead Requirement (being 25% of the AIFM’s Audited Fixed Annual Expenditure – identical to that as determined by reference to CRD).
Plus Professional Liability Risks Requirement:
- Which can be provided through either PII (as a Capital Substitute) or by additional Capital, which is calculated as follows. AIFMR does not permit a mixture of PII and Capital, an AIFM has to choose one or the other method:
- PII Capital Substitute = 0.9% of AUM in total within each claim level of at least 0.7% of AUM; or
- Capital = 0.01% of AUM.
- AIFMR Recital 35 implies that the AIFM has to determine whether Capital or PII it holds is sufficient to cover the actual Professional Liability Risks it is actually subject too – i.e. an ICAAP equivalent test.
Liquidity of Eligible Capital:
- A Liquid Asset Requirement will apply. This will require an AIFM to maintain its Capital Requirement, excluding the €125k requirement, through Eligible Capital which is in ‘liquid assets and/or assets readily convertible to cash in the short term and is not in speculative form’. Readily convertible has yet to be defined, but the FSA is suggesting that this would mean convertible to cash within no more than one month. In effect this is applying an Illiquid Asset deduction.
Points of note
AIFMs may come in three forms, as per the FSA’s CP:
- Collective Portfolio Management Firm (i.e. an AIFM which is not the AIF itself and which undertakes Core Functions for AIFs and/or UCITS but not separate MiFID Activities). These are designated as a ‘CPM Firm’ and the above basis of Regulatory Capital applies as stated;
- Internally Managed AIF (this is a form of AIF which appoints itself as AIFM, sometimes referred to as a Self Managed AIF). The Capital Requirements of this form of AIFM is that it is subject to:
– a Minimum Capital Requirement of €300,000; plus
– The Professional Liability Risks requirement (as noted above).
- Collective Portfolio Management Investment Firm (i.e. a CPM Firm which also undertakes MiFID Business (to the extent AIFMD permits) and is similar to the existing UCITS Investment Firm designation). Its Capital Requirements are the same as CPM Firms shown above except:
– there is no €10m limit when applying the 0.02% of AUM; and
– the 0.02% is applied only to AIFs and/or UCITS which the AIFM Manages
(e.g. excluding Individually Managed Accounts/Portfolios AUM).
- There is a requirement to hold sufficient Capital or PII to meet Professional Liability Risks which does not, currently, apply to BIPRU Investment Firms.
- There is a considerable hike in Requirement for Exempt MiFID and Exempt CAD Firms while the likely increase is not substantial for MiFID Investment Firms which convert to AIFM. In addition, there will be a considerable increase in Systems and Controls impact for Exempt MiFID/CAD Firms.
- There is, in effect, the imposition of an indirect Illiquid Asset Deduction since only Liquid Capital can be classified as Eligible Capital.
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