What has happened?

In early July 2016, the UK Financial Conduct Authority (FCA) launched a consultation on a proposal to extend the scope of regulatory reporting (so called “Annex IV reporting”) by alternative investment fund managers (AIFMs), in order to close what they consider to be a “notable information gap”.

If implemented, the proposals will affect:

  • non-EEA AIFMs that market feeder alternative investment funds (AIFs) in the UK, but do not market the master AIF in the UK; and
  • UK AIFMs that manage non-EEA AIFs.

In each case, the proposals would require additional reporting to regulators.

For the avoidance of doubt, the proposals will not affect sub-threshold non-EEA AIFMs or sub-threshold UK AIFMs (that is, broadly, AIFMs with assets under management of less than €100m (or equivalent) for leveraged AIFs or €500m for unleveraged AIFs which do not permit redemptions for 5 years).

What is Annex IV reporting?

AIFMD imposes reporting obligations toward local regulators (such as the FCA). These reporting obligations are currently relevant not only for EEA AIFMs, but also non-EEA AIFMs marketing AIFs in the EEA under National Private Placement Regimes (NPPR).

The Directive and the accompanying Delegated Regulations are prescriptive about the content of these reports. Article 24 AIFMD specifies certain information that must be reported, and Annex IV of the Delegated Regulations provides a detailed, pro-forma template that must be used (posing no fewer than 41 highly detailed questions). The process for transmitting reports is somewhat fragmented, with local regulators requiring reports in different formats. It is therefore unsurprising that in many quarters, Annex IV reporting is seen as a painful exercise.

Implications for non-EEA AIFMs

Until now, non-EEA AIFMs that market feeder AIFs under the UK NPPR, but do not market the master AIF in the UK, have not been required to make Annex IV reports in respect of the master AIF. The reporting obligation has applied in respect of the feeder AIF alone.

The FCA’s proposals would change the position. The FCA would require Annex IV reports from non-EEA AIFMs with respect to non-EEA master AIFs which have at least one feeder AIF (whether EEA or non-EEA) marketed in the UK.

To be clear, Annex IV reporting at the level of the master AIF will apply in addition to (not in place of) reporting at the level of the feeder AIF.

The reporting obligation will apply in respect of master AIFs meeting the criteria above, whether they are managed by the same AIFM of the feeder AIF or by another legal entity in the same group. It will therefore not apply in the context of third-party feeder AIFs managed by third-party AIFMs.

Implications for UK AIFMs

Currently, UK AIFMs that manage non-EEA AIFs, but do not market them or an associated non-EEA feeder AIF (if any) in the EEA, are required to comply with very limited reporting obligations toward the FCA.

The FCA’s proposals would extend the level of reporting by certain of these UK AIFMs, requiring them to report Article 24(2) AIFMD data in respect of such non-EEA AIFs. The AIFMs to which this applies are those for whom reporting is required on a quarterly basis (the frequency of reporting being determined principally by their level of assets under management).

Analysis

For the eagle-eyed, the FCA’s proposed rules will not come as a surprise. The writing has been on the wall for some time now, since the rules draw on the European Securities and Markets Association (ESMA) Q&A on the application of AIFMD.

Given this provenance, it is likely that the FCA will implement its proposed changes, notwithstanding any negative feedback. If any of the changes are likely to be successfully challenged, it is the requirement to report where a feeder AIF and master AIF have different AIFMs in the same group, as this represents gold-plating by the FCA (which is rather uncharacteristic of the FCA’s current approach to AIFMD).

In terms of the practical implications for non-EEA managers, this will be of particular interest to US managers of Cayman master-feeder structures. In such structures, it is not uncommon for only the Cayman feeder fund to be marketed into Europe. Reporting on the master fund will therefore represent a significant change to existing practice, and is unlikely to be welcomed. Having said that, it is understood that such extended reporting already applies in Belgium, Luxembourg and the Republic of Ireland. Managers marketing across Europe may therefore already be accustomed to this extended style of reporting.

Additional reporting obviously comes at an expense. This proposal will no doubt play to the service providers that have flooded the market in the past two years offering to deal with AIFMD reporting and other requirements. Managers ought to consider whether their fund constitutional documents allow the cost of such reporting to be treated as a fund expense of the master AIF (given that the requirement is effectively caused by and flows down from the feeder AIF).

As regards timing, it is not certain when the proposed rules will take effect (assuming they do). The consultation closes in August 2016. It is therefore quite possible that the final rules will be published by the end of 2016, in time for the first round of quarterly Annex IV reports in 2017.