www.cummingslaw.comA IntroductionOn 19 March 2013, the FSA published Part 2of its two-part consultation paper series on theimplementation of the AIFMD into UK law, thefirst part being published on 14 November 2012.CP2 does not cover all the remaining issues (setout in Annex 6 of CP1) as was originally intendedand there will in fact be a third consultationpaper dealing with these, but the FSA states thatthis will not interfere with full transposition ofthe AIFMD by 22 July 2013.CP2 should be read in conjunction with CP1 andthe two consultation papers published by HMTreasury, summaries of which can be found onour website.The FSA stated in CP1 that a new sourcebook,FUND, is intended to replace COLL, but CP2 doesnot consult on this, due to the amount of workrequired to accomplish this being greater thanexpected. COLL will therefore be retained in theshort term after 22 July 2013, alongside chaptersof FUND which are necessary to implement theAIFMD. The FSA will consult separately on this ata later date, which is expected to be no later thanthe third quarter of 2013. In the event of anyconflict between a rule implementing the AIFMDand another rule in COLL until such time as FUNDis fully operational, the AIFMD requirement shallprevail because of the primacy of European law.As regards private equity, CP2 does not, afterall, provide guidance relating to the AIFMD’sprovisions applicable to AIFMs of private equityfunds, but the FCA will consider issuing guidanceat a later stage if required, such as in respectof the scope and interpretation of the asset-stripping provisions in Article 30 of the AIFMD.B Summary of chapters of CP2Chapter 2A summary of the progress made on EUmeasures to implement the AIFMD and how theFSA proposes to give guidance about the scope ofthe AIFMD.Chapter 3A summary of operating requirements for full-scope AIFMs and sub-threshold AIFMs.Chapter 4Supplemental proposals for prudentialrequirements, including the prudential regime forsub-threshold AIFMs.Chapter 5A summary of the proposals for consumerredress and the scope of the FinancialOmbudsman Service (FOS) and the FinancialServices Compensation Scheme (FSCS).Chapter 6This sets out supplemental proposals for thedepositary regime.Chapter 7 The FSA’s approach to marketing, includingpassporting rights, recognised schemes and theprivate placement regime.Chapter 8The FSA’s proposals relating to fees to cover FCAcosts of regulation.AIFMD ImplementationA summary of FSA ConsultationPaper 13/9 (CP2)
www.cummingslaw.comC Key points by chapterThe key points set out in the chapters can bebroadly summarised as follows:Chapter 2: ImplementationThis chapter summarises EU developments sinceNovember 2012, with reference to:• the publication of the AIFMD Level 2Regulation• ESMA’s guidelines on remuneration andkey concepts of the AIFMD and its draftregulatory technical standards on types ofAIFMs• supervisory co-operation arrangementsbetween the FCA and regulatory authoritiesof non-EEA jurisdictions, taking the form of abilateral MoUThere is also a section on the proposedadditions and changes to PERG, includingguidance covering key elements of the definitionof an AIF and the interpretation of what typeof scheme or arrangement is an AIF. Specificmention is made of a variety of structures,including carried interest vehicles, family officevehicles and co-investment vehicles, and it willbe extremely useful to have guidance on theapplicability or otherwise of the AIF definition toall such structures.The FSA also sets out how it proposes toexercise its supervisory judgement on AIFMdelegation arrangements in determining towhat extent an AIFM could be considered a‘letterbox entity’ and its assessment will bemore qualitative than quantitative. Some ofthe elements of a qualitative assessment aredescribed in the chapter.Additionally, the FSA confirms its statement thatit will permit UK AIFMs managing AIFs in the UKto make full use of the 12-month transitionalperiod to 21 July 2014 and that all transitionalprovisions will be included in all relevantsourcebooks of the FCA Handbook to allow forthese transitional arrangements.Chapter 3: Operating requirements for full-scope and sub-threshold AIFMsThe FSA has reviewed existing requirements inSYSC and COBS against the Level 2 Regulationfor full-scope AIFMs and, where the existingrequirements are not compatible, the FSAproposes to modify them. Most of theorganisational requirements in SYSC (chapters4 – 10) will not apply to full-scope AIFMs, but theFSA proposes to retain certain parts for investorprotection purposes. With regard to COBS, theFSA proposes to modify the specialist regime forCIS operators (COBS 18.5) in respect of both full-scope and sub-threshold AIFMs.HM Treasury’s first consultation paper explainedthat a modified regime for sub-threshold AIFMswould be implemented. Three categories of ‘sub-threshold’ managers are proposed: (1) managersof authorised funds; (2) managers of UCIS andexternal managers appointed by AIFs that are notCIS; and (3) internally-managed closed-endedinvestment companies. Categories (1) and (2) willbe authorised persons under FSMA but (3) willnot, but all three will be regarded as ‘registered’which means that they are not subject to the fullrequirements of the Level 2 Regulation but cannotbenefit from the AIFMD passporting rights unlessthey become full-scope AIFMs.With regard to sub-threshold managers ofauthorised AIFs, the FSA intends to apply: (i) allrelevant AIFMD requirements, save in respect ofremuneration, transparency and the ‘letterboxentity’ assessment requirements as set out in theLevel 2 Regulation; (ii) the same modified SYSCand COBS rules, as described above; and (iii) thesame prudential requirements, including owncapital and own funds requirements, as full-scope AIFMs.With regard to sub-threshold managers ofunauthorised AIFs, the FSA proposes to bringthem under the UCIS rules, which means that: (i)SYSC rules applying to MiFID firms will apply tothem; and (ii) COBS rules will apply.
www.cummingslaw.comChapter 4: Prudential RequirementsThe paper sets out:• the prudential regime for small authorisedUK AIFMs of authorised AIFs, which will bethe same as that for full-scope AIFMs• the consequential amendments to regulatedactivities (managing an AIF, managing a UCITS,acting as a depositary of an AIF, acting as adepositary of a UCITS and operating a CIS)There will be no change to the prudential regimefor small authorised UK AIFMs of unauthorised AIFs.Chapter 5: Consumer redress: the FOS andthe FSCSThe FOS and FSCS already cover the activities ofFSA-authorised fund managers managing AIFsthat are CISs, and will continue to do so. TheFSA proposes to consult on three areas and theappropriate scope of FOS and FSCS protection inrelation thereto, namely:• investment companies• fund depositaries• cross-border activitiesThe FSA does not propose to extend the scope ofFOS and FSCS protection in relation to investmentcompanies (i.e. investment trusts, venture capitaltrusts and unlisted investment companies), asinvestors in investment companies have the samerights as shareholders under the Companies Act2006. The FSA does not propose to extend thescope of FOS and FSCS protection in relationto fund depositaries for investors in UCIS andinvestment companies, because the requirementfor an AIFM to appoint an authorised depositaryalready increases protection for investors. Thiswill also apply to sub-threshold managers.However, it is proposed that investors in charityfunds (CIFs and CDFs) should be afforded thescope of FOS and FSCS protection.This chapter also sets out the FSA’s proposalsin respect of cross-border activities; the FOS’scompulsory jurisdiction will cover regulatedactivities which the AIFM carries on from anestablishment in the UK, but will not applyto non-EEA managers of AIFs marketed in theUK. The FSCS will cover only cross-border fundmanagement activities where the fund is anFCA-authorised fund i.e. it will cover an EEA AIFMmanaging a UK-authorised fund (which will berequired to pay the FOS levy) but will not cover(i) a UK AIFM managing a non-UK fund, or (ii) anEEA AIFM managing a UK-domiciled UCIS, or (iii)a non-EEA manager of an AIF marketed in the UK.Chapter 6: Depositaries and client assetsrequirementsThis chapter sets out how the FSA proposesto amend the rules in CASS 6, which apply totrustee firms and depositaries, to make themconsistent with the AIFMD and ensure thatthey differentiate between categories of AIFdepositaries in a logical way. Where the AIFMis a sub-threshold manager or is above thethreshold but is managing a non-EEA AIF notmarketed in the EEA, the AIFMD does not applyresponsibilities to depositaries. Provisions inthe remainder of CASS will continue to apply todepositaries as they do at present.Chapter 7: MarketingThis chapter explains the FSA’s approach tomarketing for the purposes of the AIFMDand how AIFMs may exercise single marketpassporting rights. A new section will be addedto Chapter 8 of PERG (Financial promotion andrelated activities) providing marketing guidanceand the interaction between marketing under theAIFMD and the current financial promotion rules.A new chapter 10 has been added to FUND,which contains guidance on the AIFM marketingpassport, the AIFM management passport, AIFMthird-country management and national privateplacement regimes. HM Treasury has confirmedthat the latter will be maintained in the UK, butone significant change to the existing regime isnotification to the FCA, which will maintain threeprivate placement regimes:• Article 36 Register – for full-scope UK or EEAAIFMs managing non-EEA AIFs• Article 42 Register – for non-EEA AIFMs thatare not small AIFMs managing AIFs
www.cummingslaw.com• Small third country AIFM Register – for non-EEA AIFMs that are small AIFMs managingAIFsChapter 8: FeesThe FSA is consulting as to how the FCA willcharge fees to AIFMs and AIF depositaries inorder to cover FCA costs in regulating them. Thisfollows the FSA’s consultation in October 2012on changes to the fee rules to support the newregulatory structure, the final version of whichwill be published at the end of March 2013. It isthe final version of these rules, rather than thecurrent FSA rules, which will apply to the FCA’sAIFMD regime. The fee proposals set out in CP2differentiate between:• Authorised AIFMs and AIF depositaries• Registered AIFMs• Discounts for UK branches of EEA AIFMs• AIFMs managing AIFs marketed in the UKunder national private placement• Recognised schemes under sections 270 and272 FSMA• FCSC levies• FSO levies• Money Advice Service leviesD Next StepsResponses to CP2 are invited by 10 May 2013.A further paper, CP3, will be issued by the FCAafter 1 April 2013 which will cover:(i) consequential changes to bring the FCAHandbook into line with the rules consultedin CP1 and CP2; and(ii) amendments to the FCA Handbooknecessary to provide for the marketing andmanagement passports for non-EEA AIFMsand non-EEA AIFs.The FCA plans to issue a full AIFMD policystatement in June 2013, although it will confirmsome final policy positions before that date togive affected firms as much time as possible tocontinue their AIFMD preparations.The FCA is working on being in a position toaccept applications for authorisation or avariation of permission (VoP) from prospectiveAIFMs before 22 July 2013 from firms that needto be able to exercise single market rights inorder to continue existing business withoutinterruption.This document is for general guidance only.It does not contain definitive advice.
42 Brook Street, London W1K 5DB +44 20 7585 1406 | Neuhofstrasse 3d, CH-6340 Baar +41 41 544 5549Regulated by the Solicitors Regulation AuthorityThis document is for general guidance only. It does not constitute adviceMarch 2013