The FSA has issued the first of two consultation papers on the AIFMD – CP12/32 “Implementation of the Alternative Investment Fund Managers Directive, Part 1” (Part 2 is expected in February 2013).
The consultation paper has not been driven by any major progress on the AIFMD in Europe, but rather because the FSA feels it will be of benefit to firms if the Regulator sets out its current thinking. It believes that the approach in publishing the CP in two parts is preferable to issuing one single – and larger – consultation in Q1 2013.
When reading CP12/32 it is important to bear in mind that the Level 2 Regulation (which will specify much of the detail with which AIFMs etc. will have to comply) has not been issued so the CP is based upon a combination of the original Directive published in July 2011 and subsequent technical input provided by ESMA. For the Level 2 Regulation to come into force, it needs to be adopted and agreed by the European Commission, European Parliament and European Council; on page 15 we are told “at the time of publication, this process has not yet begun”.
Note that the European Commission has decided that the Level 2 implementing measures should be adopted using EU regulations. As such, they will be directly applicable to firms and supervisory authorities and therefore will not be subject to FSA consultation.
Key is obviously identifying a ‘alternative investment fund’ (AIF) and the ‘alternative investment fund manager’ (AIFM).
Subject to some limited exceptions, AIFMs will fall within the scope of the AIFMD if they manage one or more AIFs whose assets under management exceed:
- €100m if leveraged; or
- €500m if unleveraged and investors do not have redemption rights for 5 years
The FSA will set out in Part 2 of the consultation the proposed rules to implement the Treasury’s proposals for sub-threshold AIFM regimes; this is not addressed in CP12/32.
Given what is said above, the AIFMD perimeter is not yet fully defined and s3.7 of the CP warns us that the FSA “cannot make definitive statements in this CP about which funds and managers are in scope”. Having said that, it is expected that the managers of most unregulated collective investment schemes that are managed or marketed in the UK will be subject to the AIFMD, as will the managers of offshore investment funds marketed in the UK.
Managing an AIF will comprise all the activities listed in Annex I of the AIFMD (see link), although these can be delegated – but not to the extent that it results in a ‘letter-box entity’. However the AIFM will always be responsible for the investment management functions – the AIFM is defined as the legal person whose regular business is performing AIFM investment management functions (which is either ‘portfolio management’ or ‘risk management’ – see Annex I, part 1) for one or more AIF.
The Regulated Activities Order will be amended to create new regulated activities, including ‘managing an AIF’ and ‘managing a UCITS’. Any firm authorised to carry on these activities will not need to hold the ‘operating a CIS’ permission in respect of that AIF or UCITS. Furthermore, an AIFM will not need to hold separate permissions for regulated activities such as ‘managing investments’ that is carried out in connection with managing the AIF or UCITS. The current activity of acting as a sole director of an OEIC will disappear.
By virtue of Article 6(4) an AIFM can also undertake the additional activities (i.e. not in connection with managing an AIF) of: management of individual portfolios; investment advice; reception and transmission of orders; and safe-keeping and administration. Other MiFID type activities will not be permitted e.g. execution of orders on behalf of clients. Firms that are undertaking the latter as well as currently performing AIFM functions will need to rethink their business model.
As will be known: (a) each AIF managed within the AIFMD scope must have a single AIFM; (b) each AIFM must be authorised in accordance with the AIFMD and (c) the AIFMD has to be implemented by 22 July 2013. However there is no need for potential AIFMs to rush for authorisation yet as we are informed in s4.13 of the CP that the FCA (cut over from the FSA is expected to be 1 April next year) “does not expect to begin accepting applications … from prospective AIFMs before 23 July 2013”.
Fortunately there is a transitional provision (12 months) which allows firms carrying on the activity of managing one or more AIFs as at 22 July 2013 to continue the activity, subject to the Handbook rules applying immediately before that date; however applications must be submitted by 22 July 2014. The transitional provision will not apply to firms that will be managing an AIF for the first time after 22 July 2013.
Firms that already have a Part IV permission and that consider that they should be authorised as an AIFM can request a variation of permission (VoP) rather than having to apply for full authorisation under the AIFMD.
The FCA will have a three-month period (which can be extended in certain circumstances) to determine a application for authorisation or a VoP.
The consultation period ends 1 February 2013.
As mentioned above, Part 2 of the consultation is expected next February. With a Policy Statement scheduled for June 2013 there is obviously a tight deadline for all impacted firms.
The AIFMD, particularly in the light of the contents of CP12/32, is fairly complex so it will be appreciated that the above comments are of a high level and do not attempt to capture all the aspects in either the Directive or the CP. Complyport will be working with its clients over the coming months to offer guidance in the run up to 22 July 2013.