www.cummingslaw.comA IntroductionOn 14 November 2012, the FSA published Part1 of its two-part consultation paper series onthe implementation of the AIFMD into UK law.The requirements of the AIFMD will necessitatechanges to legislation (on which HM Treasurywill consult) and to the FSA Handbook.CP1 contains FSA proposals on those areaswhere the FSA considers there is sufficientcertainty to consult and transposition ofthe final rules implementing the AIFMD isintended to be located primarily in a newsourcebook, FUND, which will replace COLLand will have a wider scope to reflect therange of fund managers, depositaries andother firms affected by the AIFMD.CP1 focusses on the following three issues:(i) the prudential regime applicable to allmanagers, including capital requirements,professional negligence risks, the liquidassets requirement and reportingmatters, as well as changes affectingUCITS management companies;(ii) the regime for depositaries, including theeligibility of firms to be an AIF depositary,the capital requirements and therequirement to act independently; and(iii) the operating requirements for managerscontained within the AIFMD (the Level 1requirements), including organisationalmatters, duties in relation to managementof funds and transparency obligationstowards investors and regulators.B Summary of chaptersChapter 2The FSA’s approach to consultationand transposition (both in theEuropean and UK context)Chapter 3The FSA’s understanding of the scopeand application of the AIFMDChapter 4Authorisation under the AIFMD andthe changes HM Treasury will proposeto certain regulated activitiesChapter 5Prudential regime and changes affectingUCITS management companiesChapters 6 – 8Level 1 operating requirements Chapter 9 Depositary regimeChapter 10Key marketing issues (to be continued in CP2)C Key points by chapterThe key points set out in the chapters canbe broadly summarised as follows:Chapter 3: Scope and application of the AIFMDAlthough the FSA is unable to make adefinitive statement about which managersand funds fall within the scope of the AIFMD,it points out that the Directive is principallytargeted at managers of funds that only haveprofessional investors. It will also apply tomanagers of authorised unit trusts which areAIFMD Implementation:A Summary of FSA Consultation Paper12/32 (CP1)www.cummingslaw.com
www.cummingslaw.comnot UCITS, namely NURS and QIS, but thesewill be discussed in more detail in CP2.Thus, the AIMFD will generally cover:• most unregulated CISs managedor marketed in the UK• funds structured in any ‘legal wrapper’,thus managers of investment companies• offshore investment funds marketed toretail or professional investors in the UKAsset managers structured as UK limitedpartnerships will not become AIFMsas such limited partnerships do nothave a separate legal personality.The following structures may need toconsider several factors before determiningwhether they are in fact AIFs and thereforewithin the scope of the AIFMD:• property investment firms• joint ventures• family office vehicles• internally managed fundsChapter 4: AuthorisationHM Treasury intends to change the categoriesof fund management under the RegulatedActivities Order such that the followingregulated activities will be created:• managing an AIF• managing a UCITS• acting as a depositary of an AIF• acting as a depositary of a UCITSManagers currently authorised by the FSA willhave a transitional period of up to one year toapply for authorisation as an AIFM, but this willnot be available to firms which are currentlynot authorised. Firms which currently carryon business as an AIFM without needing tobe authorised – such as internally managedinvestment companies - will also be permittedto benefit from the transitional period.Chapter 5: Prudential RequirementsThe FSA has proposed three new prudentialcategories to describe the capital requirementsapplicable to AIFMs, as follows:• collective portfolio managementfirm (no MiFID services) (CPMs)• internally managed AIF• collective portfolio management investmentfirm (provides MiFID services) (CPMIs)CPMs will have to meet an initial capitalrequirement of €125,000 and thenmaintain own funds on an ongoingbasis of at least the higher of:• €125,000 plus 0.02% of the portfoliosof UCITS and AIFs under managementover €250 million; and• one quarter of the firm’srelevant fixed expenditureInternally managed AIFs will need to meetinitial capital requirements of at least €300,000out of their own funds on an ongoing basis.CPMIs will need to hold the higher ofthe Directive’s own funds requirementsand the capital requirements currentlyset out for MiFID firms.Chapters 6 - 8: Operating RequirementsChapter 6 (Transparency) of CP1 coversthe AIFMD’s requirements for informationto be made available to investors,markets and regulators, to as to make iteasier for them to assess the risks thatfunds and managers might pose.Chapter 7 (Operating Requirements) outlinesthe requirements that are applicable to theoperation of managers, including fair treatmentof investors, conflicts of interest management,
www.cummingslaw.comorganisational requirements and risk,delegation and remuneration requirements.The operating requirements are designedto be broadly consistent with the principlesand requirements in the UCITS and MiFIDDirectives, while at the same time seeking totake into account the particular characteristicsof different types of funds and the diverseassets in which they may be invested.Chapter 8 (Management requirements) coversrequirements on managers relating to valuationof a fund’s assets, including the use of an externalvaluer, management of liquidity within the fund’sportfolio and use of leverage by managers.Much of the detail in respect of Chapters 6 – 8will be supplemented by the Level 2 measures.Chapter 9: Depositary regimeThe FSA sets out its proposals for depositaries,including who can be a depositary, what capitalrequirements should apply, how the regime for‘private equity AIF’ depositaries should work, theindependence requirement for depositaries, rulesfor carrying on depositary functions for non-EEAAIFs and the transitional provisions relating toEEA credit institutions acting as AIF depositaries.The FSA has proposed that firms other thanjust professional firms should be allowedto perform depositary functions, with alimitation to private equity AIFs. The FSAintends for these depositaries to have lowerregulatory capital requirements than otherdepositaries, recognising their more limitedrole, and these proposals could potentiallylead to new entrants in the custody markets.Much of the detail relating to these issueswill be determined by the Level 2 measures,but there is national discretion in some areas.However, it is expected that the two newdepositary regulated activities will replacethe current activities of acting as trusteeor depositary of an authorised fund.Chapter 10: MarketingThe UK transposition of the marketingrequirements will primarily be by Treasuryregulations and the FSA expects HM Treasuryto consult on these new requirements.The FSA notes that, despite the overlapbetween the concepts of ‘marketing’ underthe AIFMD and the FSMA definition of‘financial promotion’, there are a number ofdifferences. In particular, the prohibitions onfinancial promotions do not include the AIFMDconcept on the ‘placing of units or shares ofan AIF with investors’, while some activitiesof placement agents to promote new AIFsmay not be included in the AIFMD concept.Finally the consultation confirms theUK’s intention to maintain the currentprivate placement regime for so longas the EU legislation allows.D Next StepsResponses to CP1 are invited by 1 February2013. The FSA plans to publish CP2 in February2013 and the FCA is expected to publish apolicy statement to CP1 and CP2 in June 2013.The FCA is expected to accept applications forauthorisation or a variation of permission (VoP)from prospective AIFMs from 22 July 2013. HMTreasury is proposing to allow all firms managingone or more AIFs as at 22 July 2013 to continueto do so, provided that all these firms are AIFMDcompliant and have submitted an applicationfor authorisation or a VoP by 22 July 2014.
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