On 14 November 2012, the FSA released CP12/32 – “Implementation of the Alternative Investment Fund Managers Directive – Part 1”.
The paper acknowledges that there is still much outstanding but it should prove a useful prompt for AIFMs to start preparing for the transition to the new rules. The main points to note relate to the FSA's confirmation of the AIFMD's transitional provisions, the FSA's proposal regarding "private equity (PE) AIF depositaries" and the surprising proposed depositary requirements for a UK AIFM marketing a non-EEA AIF in the UK.
What’s outstanding and what’s the timing?
The paper does not resolve many issues.
The EU Commission needs to publish the draft implementing measures under the AIFMD (the so-called Level 2 measures). These are expected in November/December 2012.
ESMA needs to publish the draft regulatory technical standards and related material on types of AIFMs. These are expected in November/December 2012.
ESMA needs to publish the final guidelines on remuneration policies and practices. These are expected in Q1 2013.
The UK Treasury needs to amend UK legislation and is expected to publish a consultation paper in January 2013.
The FSA (which will become the FCA in January 2013) will then publish “Implementation of the Alternative Investment Fund Managers Directive – Part 2” in February 20131.
The final FSA/FCA rules are expected to be published in June 2013.
Alert readers may note that final rules may only be available one month before the date by which the the AIFMD must be implemented.
Most of these alert readers should have no need to panic because of the UK’s transitional provisions.
Article 61(1) of the AIFMD provides, “AIFMs performing activities under this Directive before 22 July 2013 shall take all necessary measures to comply with national law stemming from this Directive and shall submit an application for authorisation within 1 year of that date”. It has not been clear whether the words “within 1 year of that date” applied to both requirements.
The FSA has confirmed, however, that the Treasury regulations propose that an FSA/FCA authorised person carrying on the activity of managing one or more AIFs as at 22 July 2013 will be permitted to continue its collective portfolio management activities, subject to the FSA/FCA rules applying immediately before that date (i.e. without having to get authorised as an AIFM). A firm which carries on business as an AIFM without needing FSA/FCA authorisation as at 22 July 2013 will also be able to benefit from this transitional period. All these firms must, however, be AIFMD-compliant and have submitted an application for authorisation or an application for a variation of permission (VoP) (as the case may be) before 22 July 2014.
A UK firm that wishes to begin managing an AIF for the first time after 22 July 2013 will not benefit from any transitional provision. It will first have to apply to the FCA for authorisation as an AIFM and be fully compliant with the AIFMD requirements before it can begin to manage an AIF. Any person who is considering establishing a firm in the UK to carry on business as an AIFM where no FSA authorisation is currently required (e.g. managing a non-UK fund that solely invests in real estate) is advised to do so before 22 July 2013.
Similarly, a UK firm that wishes to begin marketing AIFs for the first time after 22 July 2013 will not benefit from any transitional provision.
This is a potential elephant trap and care should be taken by any person who wishes to rely on the transitional provisions to ensure that their AIFs are marketed before 22 July 2013.
More clarity is needed in respect of the transitional provisions relating to marketing AIFs.
The paper provides that the FSA/FCA does not expect to begin accepting applications for authorisation or applications for a VoP from prospective AIFMs before 23 July 2013. This could cause timing issues for some AIFMs who market their funds into other EEA Member States if any of those Member States requires the UK AIFM to comply with certain AIFMD requirements or to be an authorised AIFM in the UK (even if this is not possible in practice).
In any event, given that the FSA/FCA may take 3-6 months to accept any application for authorisation or for a VoP, it is likely that a UK AIFM will only be able to obtain the EEA passports available to them in respect of EEA AIFs from late October 2013-January 2014.
Private equity (PE) AIF depositaries
The last paragraph of article 21(3) of the AIFMD provides that EEA Member States may allow that in relation to AIFs:
- which have no redemption rights exercisable during the period of 5 years from the date of the initial investments; and
which, in accordance with their core investment policy:
- generally do not invest in assets that must be held in custody in accordance with the AIFMD (e.g. real estate); or
- generally invest in issuers or non-listed companies in order to potentially acquire control over such companies in accordance with Article 26 of the AIFMD (e.g. private equity funds),
the depositary may be an entity (i) which carries out depositary functions as part of its professional or business activities in respect of which such entity is subject to mandatory professional registration recognised by law or to legal or regulatory provisions or rules of professional conduct and (ii) which can provide sufficient financial and professional guarantees to enable it to perform effectively the relevant depositary functions and meet the commitments inherent in those functions.
The FSA is proposing to implement this option through the “private equity (PE) AIF depositary” model. This term is quite confusing as it will not just be relevant to private equity AIFs and it won’t be available to every private equity AIF. Any UK firm that wishes to become a PE AIF depositary must be authorised by the FCA to perform the proposed regulated activity of “acting as an AIF depositary” but with a limitation to “PE AIFs”.
This limitation will result in the lower capital requirement of at least €125,000. A full scope UK AIF depositary would be required to have a minimum of €730,000.
AIFMs marketing a non-EEA AIF in the UK
The FSA's proposed rule FUND 3.11.30R is surprising.
FUND 3.11.30R will implement Article 36 of the AIFMD into the FSA/FCA rules. Article 36 provides that "...Member States may allow an authorised EU AIFM to market to professional investors, in their territory only, units or shares of non-EU AIFs it manages" without ensuring that a single depositary is appointed in accordance with Article 21 of the AIFMD, provided that the EU/EEA AIFM ensures that one or more entities (but not the AIFM itself) are appointed to carry out the duties of a depositary for the relevant non-EU/EEA AIFs.
The first point is that the proposed rule appears to be applicable only to "full scope UK AIFMs" even though Article 36 should be relevant to any "authorised EU AIFM" marketing a non-EEA AIF into the UK. Unless this will be addressed by the Treasury's amendments to UK legislation, this is surely a mistake.
The second point is that the proposed rule requires the UK AIFM to ensure that the depositary duties are carried out by either one or more entities which are not established in the UK or by a single authorised depositary in the UK (where any of the depositary duties are carried out in the UK).
Therefore, where any of the following duties are carried out in the UK, it is proposed that the UK AIFM must ensure that the depositary duties are carried out by a single authorised depositary in the UK: (1) Monitoring of cash flows, (2) Safekeeping of financial instruments that can be held in custody, (3) Safe-keeping of financial instruments that cannot be held in custody, (4) Monitoring of AIF share/unit dealing, (5) Monitoring of NAV calculation, (6) Monitoring remittance of transaction consideration, (7) Monitoring of application of AIF income.
The third point is that the non-EEA AIF can only appoint a "PE AIF depositary" where the non-EEA AIF is a "PE AIF".
Generally, FUND 3.11.30R, as proposed, appears to restrict the choice that was possible under the AIFMD.
It would also appear to prevent any non-depositary in the UK from offering one or more of the depositary duties in respect of non-EEA AIFs marketed by UK AIFMs in the UK as a new (or continued) line of business (e.g. monitoring of NAV calculation).
Furthermore, the proposal not to permit a UK "PE AIF depositary" to provide any of these services to non-EEA AIFs (whether or not they are "PE AIFs") marketed by UK AIFMs in the UK is overly restrictive.
Finally, if a UK entity wishes to carry out any of the depositary duties for non-EEA AIFs that are marketed by UK AIFMs in the UK (for example, hedge fund prime brokers often carry out the safekeeping duties described above in respect of non-EEA AIFs managed by UK AIFMs) then, depending on the FSA/FCA's final transitional provisions, in order for such AIFs to be marketed in the UK for the first time from 22 July 2013 or to continue to be marketed in the UK from 22 July 2014, the FSA's proposal may require such UK entities to be authorised as AIF depositaries in the UK. In addition, any such UK entity would also need to be appointed to carry out all the depositary duties, not only one or some.
This proposal could result in these depositary duties routinely being carried on outside the UK.