In the Winter 2014 issue of the Private Funds Practice Newswire, 2  we reminded readers that, starting on July  22, 2014, fund managers that are not domiciled in the European Economic Area3  and that market or intend to  market to European Union (EU) investors (Private Fund Managers) will have to comply with certain requirements  of the Alternative Investment Fund Managers Directive (AIFMD) promulgated by the European Commission,  because certain transitional arrangements established by the AIFMD relieving Private Fund Managers from  compliance expire on July 21, 2014.

This note provides practical considerations for Private Fund Managers planning to rely on the United Kingdom (UK) na- tional private placement regime4 in order to market securities in an alternative investment fund (AIF) to investors domiciled in or with a registered office in the UK.

Required Filings

In order to rely on the UK national private placement regime, Private Fund Managers will have to complete either:

  • an Article 42 form,5 if either (a) all of their AIFs are unlev- eraged, their aggregate assets under management exceed €500 million, and their investors have no redemption rights exercisable within five years of their initial investment, or (b) any of their AIFs are leveraged and their aggregate assets under management exceed €100 million (i.e., in each case, an “above-threshold non-EEA AIFM”); or
  • a Small Third Country form,6 if they do not meet either of the threshold tests described above (i.e., a “small non-EEA AIFM”).

Both forms require that the Private Fund Manager provide certain identifying information about itself and  about its AIFs to be marketed in the UK, as well as information about whether the AIFs are structured as a master-feeder arrange- ment, as well as the AIFs’ custodial, prime broker and auditing arrangements and investment strategies. These forms must be emailed to the UK Financial Conduct Authority (FCA) prior to the commencement of marketing activities. The FCA has published a guidance note7 to assist Private Fund Managers with the completion of these forms.

Also, in order to rely on the UK national private placement regime, a supervisory cooperation arrangement must be in place between the FCA and the securities regulator of the Private Fund Manager’s home jurisdiction.8 The US Securities and Exchange Commission, among others, is party to such an arrangement.

Reporting Obligations

As a consequence of marketing an AIF under the UK national private placement regime, the Private Fund Manager will be subject to certain ongoing reporting obligations:

  • A “small non-EEA AIFM” will have to comply with a reduced reporting regime that requires it to file an annual form with the FCA disclosing the main instruments in which it trades, its principal exposures (designed to measure risk) and in- vestment concentrations of the AIFs it manages; and
  • An “above-threshold non-EEA AIFM” will have more exten- sive ongoing reporting obligations. Generally, it will have the same reporting obligations as an AIFM that has been authorized by the FCA and is subject to the full require- ments of AIFMD (full-scope UK AIFM) in respect of informa- tion to be provided to investors and to the FCA, as well as annual reporting by the AIFs under its management. 9

In particular, an above-threshold non-EEA AIFM is subject to the following reporting requirements.

  • It must report to investors as follows:
    • before an investor subscribes to the AIF, the Private Fund Manager must provide comprehensive up-front information on the AIF that is similar in scope and manner to the disclosure one would generally expect in a prospectus or offering memorandum for a fund;10 and
    • on an ongoing basis it must report (i) changes in the liquidity position of the AIF, (ii) its risk management, (iii) changes in its leverage and (iv) the total leverage of the AIF.
  • It must prepare an annual report for the AIF it markets and provide it to the FCA and any investor who requests the report. The report, which is similar in scope to the Form PF, must be prepared no later than six months after the AIF’s fiscal year end and must contain: (i) financial statements (balance sheet, income and expenditure statement), (ii) an activities report, (iii) information on any changes to the in- formation previously made available and (iv) certain infor- mation on the aggregate remuneration paid by the Private Fund Manager to its staff.

Note that the AIFM Remuneration Code will only apply to full- scope UK AIFMs.11

  • It must make regular disclosure to the FCA of certain key information regarding its activities in the financial markets, its liquidity and risk positions, and (if applicable) leverage.12

In addition, for so long as the securities of an AIF marketed by or on behalf of a Private Fund Manager in the UK pursuant to the UK private placement regime are held by UK investors, and where an AIF managed by the Private Fund Manager (or a combination of AIFs acting jointly) acquires, disposes of or holds interests in a company with its registered office in the EU whose securities are not listed on a regulated market (a Non-Listed Company), the Private Fund Manager must notify the FCA of the proportion of voting rights of the Non-Listed Company held by the AIF whenever the proportion reaches, exceeds or falls below the thresholds of 10%, 20%, 30%, 50% or 75%. In addition, if the AIF acquires control of a Non-Listed Company or a company whose securities are listed on a regu- lated market, the Private Fund Manager must send a notice to the target company,  the  company’s  other  shareholders (to the extent identifiable by the Private Fund Manager) and the FCA that describes the AIF’s voting rights in the target company and the conditions subject to which, and the date on which, control was acquired. The FCA has published a form of such notice.13

Private Fund Managers seeking to raise capital in the UK should keep these notification requirements and the result- ing ongoing obligations in mind not only during marketing but during the term of the marketed AIF, so as not to run afoul of the FCA’s regulations. Because of the existence of the su- pervisory cooperation arrangements, failure to comply with FCA regulations could result in sanctions and other penalties from the Private Fund Manager’s home country regulator.