The document summarizes a UK Financial Services Authority (FSA) consultation paper on the implementation of the Alternative Investment Fund Managers Directive (AIFMD) into UK law. The consultation focuses on the prudential regime for fund managers, the depositary regime, and operating requirements for managers. It proposes new regulatory categories for managers with different capital requirements. It also addresses eligibility for depositaries, their capital standards, and oversight of non-EU funds. The consultation seeks responses by February 2013, with the FCA expected to finalize rules by June 2013 for compliance by managers starting in July 2014.

1. AIFMD
Implementation:
A Summary of
FSA Consultation
Paper 12/32 (CP1)
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A Introduction
On 14 November 2012, the FSA published Part
1 of its two-part consultation paper series on
the implementation of the AIFMD into UK law.
The requirements of the AIFMD will necessitate
changes to legislation (on which HM Treasury
will consult) and to the FSA Handbook.
CP1 contains FSA proposals on those areas
where the FSA considers there is sufficient
certainty to consult and transposition of
the final rules implementing the AIFMD is
intended to be located primarily in a new
sourcebook, FUND, which will replace COLL
and will have a wider scope to reflect the
range of fund managers, depositaries and
other firms affected by the AIFMD.
CP1 focusses on the following three issues:
(i) the prudential regime applicable to all
managers, including capital requirements,
professional negligence risks, the liquid
assets requirement and reporting
matters, as well as changes affecting
UCITS management companies;
(ii) the regime for depositaries, including the
eligibility of firms to be an AIF depositary,
the capital requirements and the
requirement to act independently; and
(iii) the operating requirements for managers
contained within the AIFMD (the Level 1
requirements), including organisational
matters, duties in relation to management
of funds and transparency obligations
towards investors and regulators.
B Summary of chapters
Chapter 2
The FSA’s approach to consultation
and transposition (both in the
European and UK context)
Chapter 3
The FSA’s understanding of the scope
and application of the AIFMD
Chapter 4
Authorisation under the AIFMD and
the changes HM Treasury will propose
to certain regulated activities
Chapter 5
Prudential regime and changes affecting
UCITS management companies
Chapters 6 – 8
Level 1 operating requirements
Chapter 9
Depositary regime
Chapter 10
Key marketing issues (to be continued in CP2)
C Key points by chapter
The key points set out in the chapters can
be broadly summarised as follows:
Chapter 3: Scope and application of the AIFMD
Although the FSA is unable to make a
definitive statement about which managers
and funds fall within the scope of the AIFMD,
it points out that the Directive is principally
targeted at managers of funds that only have
professional investors. It will also apply to
managers of authorised unit trusts which are
AIFMD Implementation:
A Summary of FSA Consultation Paper
12/32 (CP1)
www.cummingslaw.com

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not UCITS, namely NURS and QIS, but these
will be discussed in more detail in CP2.
Thus, the AIMFD will generally cover:
• most unregulated CISs managed
or marketed in the UK
• funds structured in any ‘legal wrapper’,
thus managers of investment companies
• offshore investment funds marketed to
retail or professional investors in the UK
Asset managers structured as UK limited
partnerships will not become AIFMs
as such limited partnerships do not
have a separate legal personality.
The following structures may need to
consider several factors before determining
whether they are in fact AIFs and therefore
within the scope of the AIFMD:
• property investment firms
• joint ventures
• family office vehicles
• internally managed funds
Chapter 4: Authorisation
HM Treasury intends to change the categories
of fund management under the Regulated
Activities Order such that the following
regulated activities will be created:
• managing an AIF
• managing a UCITS
• acting as a depositary of an AIF
• acting as a depositary of a UCITS
Managers currently authorised by the FSA will
have a transitional period of up to one year to
apply for authorisation as an AIFM, but this will
not be available to firms which are currently
not authorised. Firms which currently carry
on business as an AIFM without needing to
be authorised – such as internally managed
investment companies - will also be permitted
to benefit from the transitional period.
Chapter 5: Prudential Requirements
The FSA has proposed three new prudential
categories to describe the capital requirements
applicable to AIFMs, as follows:
• collective portfolio management
firm (no MiFID services) (CPMs)
• internally managed AIF
• collective portfolio management investment
firm (provides MiFID services) (CPMIs)
CPMs will have to meet an initial capital
requirement of €125,000 and then
maintain own funds on an ongoing
basis of at least the higher of:
• €125,000 plus 0.02% of the portfolios
of UCITS and AIFs under management
over €250 million; and
• one quarter of the firm’s
relevant fixed expenditure
Internally managed AIFs will need to meet
initial capital requirements of at least €300,000
out of their own funds on an ongoing basis.
CPMIs will need to hold the higher of
the Directive’s own funds requirements
and the capital requirements currently
set out for MiFID firms.
Chapters 6 - 8: Operating Requirements
Chapter 6 (Transparency) of CP1 covers
the AIFMD’s requirements for information
to be made available to investors,
markets and regulators, to as to make it
easier for them to assess the risks that
funds and managers might pose.
Chapter 7 (Operating Requirements) outlines
the requirements that are applicable to the
operation of managers, including fair treatment
of investors, conflicts of interest management,

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organisational requirements and risk,
delegation and remuneration requirements.
The operating requirements are designed
to be broadly consistent with the principles
and requirements in the UCITS and MiFID
Directives, while at the same time seeking to
take into account the particular characteristics
of different types of funds and the diverse
assets in which they may be invested.
Chapter 8 (Management requirements) covers
requirements on managers relating to valuation
of a fund’s assets, including the use of an external
valuer, management of liquidity within the fund’s
portfolio and use of leverage by managers.
Much of the detail in respect of Chapters 6 – 8
will be supplemented by the Level 2 measures.
Chapter 9: Depositary regime
The FSA sets out its proposals for depositaries,
including who can be a depositary, what capital
requirements should apply, how the regime for
‘private equity AIF’ depositaries should work, the
independence requirement for depositaries, rules
for carrying on depositary functions for non-EEA
AIFs and the transitional provisions relating to
EEA credit institutions acting as AIF depositaries.
The FSA has proposed that firms other than
just professional firms should be allowed
to perform depositary functions, with a
limitation to private equity AIFs. The FSA
intends for these depositaries to have lower
regulatory capital requirements than other
depositaries, recognising their more limited
role, and these proposals could potentially
lead to new entrants in the custody markets.
Much of the detail relating to these issues
will be determined by the Level 2 measures,
but there is national discretion in some areas.
However, it is expected that the two new
depositary regulated activities will replace
the current activities of acting as trustee
or depositary of an authorised fund.
Chapter 10: Marketing
The UK transposition of the marketing
requirements will primarily be by Treasury
regulations and the FSA expects HM Treasury
to consult on these new requirements.
The FSA notes that, despite the overlap
between the concepts of ‘marketing’ under
the AIFMD and the FSMA definition of
‘financial promotion’, there are a number of
differences. In particular, the prohibitions on
financial promotions do not include the AIFMD
concept on the ‘placing of units or shares of
an AIF with investors’, while some activities
of placement agents to promote new AIFs
may not be included in the AIFMD concept.
Finally the consultation confirms the
UK’s intention to maintain the current
private placement regime for so long
as the EU legislation allows.
D Next Steps
Responses to CP1 are invited by 1 February
2013. The FSA plans to publish CP2 in February
2013 and the FCA is expected to publish a
policy statement to CP1 and CP2 in June 2013.
The FCA is expected to accept applications for
authorisation or a variation of permission (VoP)
from prospective AIFMs from 22 July 2013. HM
Treasury is proposing to allow all firms managing
one or more AIFs as at 22 July 2013 to continue
to do so, provided that all these firms are AIFMD
compliant and have submitted an application
for authorisation or a VoP by 22 July 2014.

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