Many of you will already have received summaries of CP12/32, Part 1 of the FSA’s consultation on implanting the AIFMD in the UK. Clearly, much is contingent on the outcome of, as yet unpublished, EU Level 2 Implementing Regulations, HM Treasury’s draft Bill and ESMA’s Technical Standards and Level 3 Guidance. No doubt the FSA/FCA’s second, Part 2, consultation will clarify a number of these issues.
Who will this impact?
Any entity wishing to market Alternative Investment Funds, broadly any Collective Investment Undertaking which is not subject to UCITS, to EU Professional Investors. It may be possible to market AIFs to Retail Investors but that will depend upon each individual EU Member State implanting relevant legislation, in addition to the provisions of AIFMD and AIFMR applicable only in their jurisdiction.
When will this apply?
The provisions of the AIFMD and AIFMR will apply from 22 July 2013. There are aspects which are subject to Transitional Provisions and some other aspects, such as the much vaunted Third Country Passport, which may or may not come in to being.
Points of particular interest
We do not intend to summarise CP12/32 in this Regulatory Alert but simply draw attention to some of the more prominent questions which arise from the CP. Various trade bodies will be responding to this important consultation and many of you will be participating through that process as Members. However, it is also important that as many Firms and Investors in AIF as possible engage with this and feed back their own views. This is intended to raise a number of issues which have become apparent at this early stage.
Nominated AIFMs operating under the Transitional Provisions until late 2014, Authorised Firms which currently manage (we presume those which are MiFID Investment Firms) and/or market AIFs immediately prior to 22 July 2013, may act as AIFMs without formal authorisation under AIFMD so long as that Firm makes an application for AIFM Authorisation no later than 22 July 2014. In effect, these Firms may not be formally authorised as an AIFM for up to six months after that date.
Under Level 1, these unauthorised AIFMs (‘Proxy AIFM’), but currentlty Authorised under MiFID, must adhere to certain aspects of AIFMD, and probably AIFMR too, during this Transitional Period. Clarification is required as to what elements of AIFMD and possibly AIFMR the Proxy AIFM will need to adhere to.
Authorisation of AIFMs
The FSA/FCA have indicated it will not accept applications for Authorisation of AIFMs under the AIFMD until 23 July 2013, i.e. after the AIFMD becomes effective in the EEA. This delay may therefore prevent those Proxy AIFMs who are operating under the Transitional Provisions from obtaining the necessary authorisations to raise funds from EEA investors for new start business for up to six months after the first date applications can be made.
It is also not clear whether the FSA believe it is possible for Proxy AIFMs managing EEA AIFs (e.g. Private Equity funds) to Market these AIFs under the AIFMD Passport, which will exist from 22 July 2013 for EEA AIF. It seems clear that only AIFs Managed by fully Authorised AIFMs may market under the AIFMD Passport. Therefore, if existing Firms may not apply for formal AIFM Authorisation before 23 July 2013, so that its authorisation is in place by 22 July 2013, they will be put at considerable disadvantage for up to six months.
UK Depositaries of Non-Hedge Fund AIFs
The FSA/FCA are proposing to allow UK Depositaries of ‘non-hedge fund’ AIFs to be subject to a more reasonable Prudential regime than other forms of UK Depositary. These types of Depositary, called a PE Depositary, will be simply required to hold a Base Capital Requirement of €125k (as opposed to at least £4m for other Depositaries).
Clarification is required around the types of AIF Depositaries that are applicable to this lighter Prudential regime. It is thought these AIFs will include Private Equity AIFs, Real Estate Investment Fund AIFs and other forms of unleveraged AIFs, but clarification is required.
Single UK Depositary Requirement
The FSA/FCA have stated that for non-EEA AIFs they may only appoint one UK Depositary – FUND 3.11.30R(1). This appears to be an additional limitation beyond that of AIFMD Level 1. This causes considerable concern as many non-EEA AIFs will wish to appoint more than one Prime Broker which will almost certainly also act as Depositaries. It is in the best interests of AIFs and their investors to use more than one Prime Broker, therefore clarification from the FSA is extremely important on this issue.
Own Funds (i.e. the AIFMD’s Eligible Regulatory Capital) must meet the Liquid Asset Requirement. AIFMD Article 9(8) requires AIFMs to hold Own Funds in ‘assets which are readily convertible to cash’. The CP (5.33) states that ‘readily convertible’ means assets which can be redeemed for cash within a month. This requirement only applies to Own Funds held in respect of the Requirements of AIFs that the AIFMs manage (i.e. not in respect of any UCITS Requirement). This would appear to require the deduction of Illiquid Assets before the AIFM’s Eligible Regulatory Capital is determined – e.g. deduction of Fixed Assets, longstanding Debtors and ong standing intercompany loans (long standing being due in more than 90 days).
GABRIEL Reporting of AIFMs
The FSA/FCA propose to alter SUP 16.12 such that an AIFM will be classified as a RAG 4 Firm. These Firms will no longer be required to submit FSA041 (asset managers that use hedge fund techniques) but these will be replaced by one of two new Data Items:
- FSA066 – for AIFMs which only undertake Collective Portfolio Management (i.e. only for AIF or UCITS Funds) do not also undertake Individual Portfolio Management; and
- FSA067 – for AIFMs which do also undertake Individual Portfolio Management (e.g. for Managed Accounts).
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