There are now only six months remaining before EU Member States must implement national legislation transposing the Alternative Investment Fund Managers Directive (“AIFMD”) into national law.
The implementation date is 22 July 2013. With this deadline looming there have been a number of recent developments. Earlier this month HM Treasury published a draft of its proposed Alternative Investment Fund Managers Regulations 2013 for consultation (the “draft Regulations”)1. This consultation dovetails with the Consultation Paper published in November last year by the FSA2. However both HM Treasury and the FSA have seemingly been hampered by the delayed publication by the European Commission of its “Level 2” implementing measures.
The so called “Level 2” implementing measures set out the measures of application of the AIFMD and supplement the AIFMD in certain areas. They have been developed by the European Commission on the advice of the European Securities and Markets Authority (“ESMA”). The European Commission published its proposed final form of the “Level 2” implementing measures only just before Christmas3. As a result the HM Treasury and FSA consultations recognise that their proposals may need to be reviewed in light of the final “Level 2” implementing measures and both have committed to publish further consultation papers in the next couple of months on certain issues which they could not consult on until the “Level 2” implementing measures were published.
Alternative Investment Fund Managers whose registered offices are outside the EU (“third country AIFMs”) will need to continue to monitor progress to determine whether there may be any potential short term disruption to their marketing plans.
Marketing by third country AIFMs
As mentioned in previous updates, the AIFMD allows EU Member States to retain, at least in the short term, their own individual existing private placement laws which allow third country AIFMs to market a third country AIF in that Member State. The caveat is that from 22 July 2013 reliance on those laws must be subject to certain conditions including:
- The third country AIFM must comply with those provisions of the AIFMD relating to reporting, the publication of an annual report, disclosure to investors and control of non-listed companies
- Co-operation arrangements for the purpose of systemic risk oversight must be in place between the competent authorities of the Member States where the AIFs are marketed and the supervisory authorities of the third country where the AIFM (and, if applicable, the AIF) is established
- The third country where the AIFM is established must not be on the Financial Action Task Force (“FATF”) blacklist.
Certain aspects of how these conditions will be applied in the UK are now slightly clearer.
Article 42 Register
Under the draft Regulations it is proposed that a third country AIFM which is not a small third country AIFM (see below) can only market an AIF to:
- Professional investors in the UK if that AIF is registered on the so called “Article 42 register”
- Retail investors in the UK if (i) that AIF is registered on the so called “Article 42 register”; and (ii) it is able to promote that AIF to that investor in accordance with the UK’s existing financial promotion regime and restrictions on promoting collective investment schemes.
The Article 42 Register is a register which will be maintained by the Financial Conduct Authority (“FCA”)4 of AIFs which are managed by third country AIFMs (that are not small AIFMs) and are approved by the FCA for marketing in the UK. The FCA must approve an AIF for marketing in the UK if:
- The AIF has a single AIFM
- That AIFM is a legal person and complies with each of the conditions above i.e. it complies with the relevant provisions of the AIFMD relating to reporting, publication of annual report, disclosure to investors and control of non-listed companies; co-operation agreements are in place between the relevant competent authorities; and its place of establishment is not on the FATF blacklist.
Ability to market immediately following implementation
The FCA will only enter an AIF on the Article 42 register if a relevant application is made by the AIFM/AIF. The FCA must make a determination on the application within 20 working days of receiving it. As a result, if a third country AIFM wants to be able to market a third country AIF in the UK immediately following 22 July 2013 there appear to be at least three potential hurdles:
- The FCA will need to have finalised details of the proposed application process for registration on the Article 42 register and started accepting and processing applications
- The third country AIFM/AIF will need to make an application and be able to demonstrate as part of that application that it satisfies the relevant requirements of the AIFMD (i.e. regarding reporting, publication of annual report, control of non-listed companies etc.)
- Co-operation agreements will need to be in place between the relevant competent authorities.
Under the AIFMD and draft Regulations there are transitional provisions for UK AIFMs which are managing an AIF immediately before the 22 July 2013 implementation date. A UK AIFM will be subject to the full requirements of the AIFMD. Under the transitional provisions a UK AIFM has 12 months from 22 July 2013 to satisfy these requirements and apply to manage an AIF. It does not have to comply with the marketing provisions in the AIFMD until the earlier of the date on which its application is determined and 22 July 2014
Unfortunately there are no transitional provisions for third country AIFMs. It is not currently known when the FCA will start accepting and considering applications from third country AIFMs but obviously an AIFM cannot make a successful application until the FCA does and the AIFM satisfies each of the requirements for registration on the Article 42 register.
One of these requirements for registration on the Article 42 register is that appropriate co-operation agreements for the purpose of systemic oversight are in place between the FCA and the supervisory authorities of (i) the country where the third country AIFM is established; and (ii) if applicable, the third country AIF is established.
The Commission’s “Level 2” implementing measures set out various requirements as to the form and purpose of these co-operation agreements. These do not add anything over the previous advice published by ESMA. In fact the first co-operation agreement with the Swiss Financial Market Supervisory Authority FINMA was approved at the beginning of December before the “Level 2” implementing measures were published. ESMA negotiated the agreement with FINMA on behalf of all 27 EU national competent authorities for securities markets regulation (including the FSA/FCA). The agreement will take the form of a MoU between the EU securities supervisors and FINMA. The content of the MoU follows the IOSCO Principles on Cross Border Supervisory Co-operation of 2010.
Whether a relevant co-operation agreement is in place by July 2013 is obviously beyond the control of a third country AIFM and is something a third country AIFM will just have to monitor and plan accordingly. ESMA is currently in contact with other non-EU authorities that are members of IOSCO and hopefully the agreement with FINMA will provide a helpful template.
What a third country AIFM does have more control over (and what may therefore be a more productive point of focus) is its compliance with the relevant requirements of the AIFMD and its ability to demonstrate that compliance. The “Level 2” implementing measures now provide further detail on:
- Certain minimum requirements for the content of the annual report to be prepared by the third country AIFM in relation to the AIF
- The content and format of the periodic and regular disclosure required to be made by the third country AIFM to investors
- The content, format and frequency of information to be provided by the third country AIFM to the competent authorities.
Separately the draft Regulations set out the requirements a third country AIFM must comply with if it acquires control in a non-listed company or issuer (see Part 7 (“Private Equity”) of the draft Regulations).
Small third country AIFMs
The FCA must similarly maintain a register of AIFs which are managed by small third country AIFMs and are approved by the FCA for marketing in the UK. However a small third country AIFM is not required to satisfy the conditions above regarding compliance with the AIFMD (i.e. regarding reporting, publication of annual report, control of non-listed companies etc.) and co-operation agreements do not need to be in place between the relevant competent authorities.
A third country AIFM will be a small third country AIFM if directly or indirectly it manages portfolios of AIFs whose assets under management:
- Do not exceed 500 million Euros in total in cases where the portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF
- Do not exceed 100 million Euros in total in other cases, including any assets acquired through leverage.
The Level 2 “implementing measures” set out the basis on which the value of assets under management must be calculated. They also set out what is meant by “leverage” and the basis on which an AIFM must calculate leverage.
Who is the AIFM – “letter box” entities
Clearly a vital element of these requirements is who the AIFM of a particular AIF is. This issue has been complicated by one of the most controversial provisions of the “Level 2” implementing measures – Article 82 (“Letter-box entity and AIFM no longer considered to be managing an AIF”). The debate on this issue contributed to the delay in the agreement on the proposed final “Level 2” implementing measures. Bodies such as AIMA complained that earlier drafts of the “Level 2” implementing measures added new obligations to those proposed by ESMA in its advice to the Commission. The proposed final Article 82 is different again and lists four situations in which “an AIFM shall be deemed a letter-box entity and shall no longer be considered to be the manager of the AIF …”. It is the fourth of these which has caused the controversy:
“..the AIFM delegates the performance of investment management functions to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself. When assessing the extent of delegation, competent authorities shall assess the entire delegation structure taking into account not only the assets managed under delegation but also the following qualitative criteria ….”
The concern is that a “substantial” delegation of investment management and risk management functions may result in an AIFM being “deemed a letter-box entity” even where it retains the necessary expertise, resources, powers and rights to supervise who it has delegated those functions to. Ultimately if a third country AIFM wishes to apply to the FCA for registration of a third party AIF in order that it can then market that AIF in the UK it will need to retain and perform a significant degree of investment management itself in respect of the AIF without delegation.
Looking ahead, set out below is a quick reminder of the timetable for implementation of the new marketing regime under the AIFMD:
21 July 2011
Entry into force of the Directive
22 July 2013 (2 years after entry into force)
Deadline for transposing the Directive's rules into national law, including those on granting passports to duly-registered, EU-based, AIFs and AIFMs.
By 22 July 2015 (2 years after transposition)
ESMA reports on functioning of passport system for EU AIFs and AIFMs, national private placement regimes, and possible extension of passport system to third country EU AIFs and AIFMs.
October 2015 (at the latest 3 months after ESMA report)
Commission adopts a delegated act, based on ESMA advice, specifying date when passports for third country AIFs and AIFMs will be available.
October 2018 (3 years after entry into force of delegated act)
Second ESMA report on the functioning of the passport and the possible ending of national private placement regimes.
January 2019 (at the latest 3 months after ESMA report)
Commission adopts a second delegated act, based on ESMA advice, specifying date when national private placement regimes must be terminated.
4. The FCA is one of two successor bodies to the FSA which will be established in April this year by the Financial Services Act 2012. Under the Financial Services Act 2012 UK AIFMs will be subject to both conduct and prudential regulation by the FCA. This will also generally be the case for UK depositaries; however systemically important depositaries such as major banks will be prudentially regulated by the other successor to the FSA, the Prudential Regulatory Authority (“PRA”).