EU Referendum – what can private equity funds do to hedge against sterling risk?

We have seen a dramatic increase in interest in hedging FX risk related to investments by private equity funds.

The precipitous decline in the value of sterling has caused complications for funds which are in the process of acquiring UK assets. For deals which are still going ahead, many sponsors are using or considering deal contingent FX hedges to protect them against further fluctuations. These products are offered by a small number of banks to funds which are buying or selling assets denominated in a different currency to their base currency.

They allow the fund to enter into an FX forward which will only settle if the sale goes ahead (for example, when the conditions precedent to completion such as competition clearance are satisfied). The forward agreement includes a schedule of settlement dates with FX rates which gradually move against the fund depending on when settlement actually occurs. They are, in a sense, options without a premium which are contingent on completion.

Brexit for asset managers and fund managers – don’t panic, it may not be as bad as it at first appears!

UK regulated fund managers and asset managers should bear in mind that, while the Brexit vote has occurred, this does not bind the UK Parliament. As of the date of writing (12 July 2016), the process of withdrawal under Article 50 of the Lisbon Treaty has not yet started. Although the timetable for withdrawal under Article 50 limits negotiations to two years, this may be extended by agreement. During this hiatus period, it will be business as usual because the UK will remain a member state of the EU.

There are three potential options for the future relationship between the UK and the EU. Please read our Client Alert on

SEC Office of Compliance Inspections and Examinations Releases 2016 Exam Priorities

The SEC Office of Compliance Inspections and Examinations (“OCIE” or the “Staff”) released its 2016 Exam Priorities recently, as applicable to examined registrants other than national securities exchanges.  

Exam Priorities are always a reflection of current trends and news and, in recent years, also reflected the SEC’s expanded capabilities for monitoring market activity through data analytics.  

The three key themes and many of the individual focus items for 2016 are much the same as last year.  For highlights of the differences in the 2016 Exam Priorities, please read our Client Alert on



New “Senior Managers Regime” to be introduced for all financial services firms, including the fund management sector

The Government has confirmed that it will be pushing forward with extending the Senior Managers and Certification Regime to all financial services firms (including investment firms and fund managers), following the Fair and Effective Markets Review (FEMR) report’s recommendation (and Mark Carney’s Mansion House speech indication) of the extension of the SMR to fixed income, commodity and currency markets.  The new regime (for insurers, the Senior Insurance Managers and Certification Regime, or SIMR) will come into force for banking and insurance sector firms from March 2016, leaving the discredited Approved Persons Regime (APR) in place for other financial sector firms.

The Government intends that implementation of the newly extended regime should come into operation during 2018, so there is much still to be finalised as the legislative and consultation process unfolds in the coming months. A key area will be the detail in the Government’s plans for how the ‘principle of proportionality’ will operate to take into account the diversity of firms in the sector – this will be a key area of interest for smaller financial services firms.  As the shape of any universal senior managers regime is likely to follow the SMR and SIMR very closely, we would expect to also see similar grandfathering provisions to ease the transition.  Continue Reading

AIFMD Passporting Update

EU regulated AIFMs promoting EU domiciled AIFs We have lived with AIFMD since the full implementation date of 22 July 2014 with the marketing passport being available from that date for EU regulated AIFMs promoting EU domiciled AIFs.

The ESMA Opinion – Use of the AIFMD Passport – ESMA published its Opinion on 30 July 2015 on the functioning of the AIFMD passport and national private placement regimes.

While the expectation was that there would  be substantial divergence in the approach taken by Member States to their private placement regimes (which is expressly permitted under AIFMD), passporting for EU AIFMs of EU AIFs should have been a simple affair involving notification by the home state regulator to the regulators of the Member States where the passport is intended to be used.

The Opinion highlighted a number of issues that EU AIFMs have encountered which reflect the fact that AIFMD has not “harmonised” the EU landscape:

  1. Fees – Some countries charge fees (Austria, Denmark, France, Germany, Italy, Latvia, Luxembourg, Malta and Spain) while others do not (the UK, Ireland and the Netherlands, for example). One of the respondents to the call for evidence reported to ESMA that if an AIF is marketed in all 28 Member States, the total fees would be circa €168,000 with the appointment of centralising agents (see immediately below) bringing the overall cost to €200,000.
  2. Centralising Agent – France requires the appointment of a local bank through which payments must be channelled (which is not envisaged by AIFMD and therefore could be considered unlawful).
  3. Pre-Marketing – A lack of homogeneous interpretation of when “marketing” occurs. In the UK and Germany final form documents are required before “marketing” occurs however France, for example, considers that “marketing” of an AIF may occur before it is formed. For PE funds, this is a real issue given that documents are negotiated substantially in advance of a fund being incorporated or registered.
  4. Time to Market – The UK, for example, will permit marketing on receipt of passport notification from other Member States without any additional requirements but that is not necessarily the case in other Member States which delays access to the local market (fees may need to be paid in advance while BaFIN and the AMF, for example, may make additional checks that are not permitted under Article 23 of AIFMD).
  5. Material Changes – There is no consensus amongst regulators on what a “material change” is and the timing for notifying the regulator of that change (in advance, promptly, etc).

Marketing to “professional investors” Both EU AIFMs using the AIFMD marketing passport and EU and non-EU AIFMs marketing funds under the national private placement regimes of Member States may only market to MiFID “professional investors” unless they have top up marketing permissions from each regulator (where permitted).

Unless a qualitative and quantitative analysis is carried out to opt up a natural person to “professional investor” status, the passport and AIFMD related national private placement regimes will not be able to be used when marketing to natural persons and therefore most family offices.

Marketing to non-professional investors is at the discretion of each Member State so separate registrations may be required or non-professional investor marketing may not be permitted altogether.

Managers should also note that MiFID II will be throwing another spanner in the works by reclassifying local government (and therefore local government pension schemes) as retail investors with each Member State having the ability to decide whether or not to permit an opt up to professional investor status.

 The Future – ESMA has taken on board the experiences highlighted by the respondents to the call for evidence and will now need to decide if it should issue guidance on unclear areas (such as when “marketing” is deemed to occur) and/or take action against those Member States who have adopted policies and procedures contrary to AIFMD that hamper the operation of the passport.

  Continue Reading

The European Securities and Markets Authority (ESMA) published advice on the extension of the Alternative Investment Fund Managers Directive (AIFMD) passport on 30 July 2015 (the Advice).

For Jersey and Guernsey, the ESMA Advice was positive: no obstacles exist to the extension of the AIFMD passport to these jurisdictions.  AIFMD Article 67 envisages that a delegated act will follow within three months to implement this advice.  However, the time-frame for this now appears to be uncertain.

The Advice notes that the Commission are obliged to adopt a delegated act extending the EU passport to non-EU AIFs and non-EU AIFMs within three months of receipt of positive advice from ESMA (although the date on which the rules will become applicable in all Member States will be specified within in the delegated legislation.  This date will be determined according to a number of listed criteria e.g. internal market, investor protection, risk monitoring). There are further provisions in AIFMD Article 58 that allow the European Parliament and Counsel to object to the delegated act within 3 months (increasing to 6 months if the European Parliament or Counsel request).

However, the press release issued by ESMA on publication of the Advice states that “the institutions may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries may have”.

A total of 22 non-EU jurisdictions were identified for detailed assessment by ESMA on a country-by-country basis.  The Advice issued on 30 July 2015 relates to only 6 of these 22.  Only Jersey and Guernsey were the subject of ‘positive’ advice from ESMA, although pending national legislation will remove remaining obstacles in Switzerland shortly.  ESMA did not reach a definitive view on Hong Kong (more time required for assessment), Singapore and USA (ESMA recommended the EU delay a decision on these 2 jurisdictions).

In its view, ESMA does not have sufficient information in relation to the remaining 16 identified non-EU jurisdictions in order to perform the substantive assessment necessary to underpin any advice it issues pursuant to AIFMD Article 67(1)(b).

ESMA aims to finalise the assessments of Hong Kong, Singapore and the USA as soon as practicable and to assess further groups of non-EU countries – until it has provided advice on all the non-EU countries that it considers should be included in the extension of the passport.

Freeman & Co. Reports Mixed Year for Financial Services M&A Activity as Stock Markets Continue to Rise

Very interesting report from deal advisor Freeman & Co this morning, reporting 50 asset manager acquisitions globally in 1H15. The advisory firm notes an increase in mid-size deals relative to last year.  “Deals involving firms with $1-10 billion in AUM, experienced a notable increase during 1H 2015 with 30 deals announced year-to-date, a 20% increase from 25 in 1H 2014.”  See attached news release from Freeman & Co. LLC for further trend analysis and let us know if we can help your firm prepare to participate in a future transaction.

SEC Announces 2015 Exam Priorities

The SEC Office of Compliance Inspections and Examinations (“OCIE” or the “Staff”) recently released its 2015 Exam Priorities. OCIE examines all types of SEC registrants, including investment advisers, broker-dealers, investment companies, municipal advisors and transfer agents. Each January, the release of the OCIE Exam Priorities provides a useful guide and reminder to registrants in connection with their individual compliance program and risk management reviews for the year ahead.

Exam Priorities are always a reflection of current trends and news and, in recent years, also reflect the SEC’s expanded capabilities for monitoring market activity through data analytics. They are not exclusive—actual exams may, and will, cover other topics.

For highlights of the OCIE 2015 Exam Priorities (with Commentary) please read our Client Alert on

AIFMD Round 2: Call for Evidence on AIFMD Passport and Non-EU AIFMs

This post was written by Vicky Thatcher.

Pursuant to Article 67 of the Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD”), the European Securities and Markets Authority (“ESMA”) has until 22nd July 2015 to issue to the European Parliament, the Council and the Commission:

(a) an opinion on the functioning of the passport for EU Alternative Investment Fund Managers (“AIFMs”) pursuant to Article 32 and 33 of the AIFMD and on the functioning of the national private placement regimes set out in Article 36 and 42 of the AIFMD; and

(b) an advice on the application of the passport to non-EU AIFMs and Alternative Investment Funds (“AIFs”) in accordance with the rules set out in Article 35 and Articles 37 to 41 of the AIFMD.

In order to form its response, on 7 November 2014 ESMA issued a ‘call for evidence’ concerning:

(a) the functioning of the EU passport under the AIFMD; and

(b) the functioning of (i) the marketing of non-EU AIFs by EU AIFMs in the EU; and (ii) the management and/or marketing of AIFs by non-EU AIFMs in the EU.

In order to issue positive advice, ESMA should be convinced that “no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systematic risk” impede the application of the passport to the marketing of non-EU AIFs by EU AIFMs in the Member States and the management and/or marketing of AIFs by non-EU AIFMs in the Member States.

Should ESMA’s response be positive, the European Commission will then be required to set a date by which the extension of the EU passport to non-EU AIFs and non-EU AIFMs will become applicable in all Member States.

Currently only AIFMs with registered offices in EU Member States can be authorised as an AIFM and only EU authorised AIFMs can market EU AIFs to professional investors in any Member State in the European Economic Area under the EU “passport”. The marketing of non-EU AIFs by EU-AIFMs and the marketing of AIFs by non-EU AIFMs is currently subject to national private placement regimes, which may include additional rules imposed by any Member State where the AIF is marketed.

The deadline for responses is 8 January 2015.

The Call for Evidence can be found here.

AIFMD Reporting by non-EEA AIFMs

This post was authored by Winston Penhall, Editor of this blog and partner in the Investment Funds practice of Reed Smith LLP, London and Paul Moran, Reed Smith trainee, London. 


The Alternative Investment Fund Managers Directive and its implementing measures (“AIFMD”) introduced new reporting requirements for:

  • “EEA-AIFM”, managers established in the European Economic Area (“EEA”); and
  • “non-EEA AIFM”, managers not established in the EEA who market an alternative investment fund (or “AIF”) into the EEA

AIFM that are authorised by the UK Financial Conduct Authority (or “FCA”) are already subject to compulsory reporting, while non-EEA AIFM become subject to FCA reporting when they register with the FCA under the UK national private placement regime (the “UK NPPR”).

Non-EU AIFS – Calculating AUM

Small non-EEA AIFM under the UK NPPR report annually while above-threshold non-EEA AIFM determine their reporting frequency (the most regular being quarterly) by reference to their AUM calculated in accordance with the criteria set out at Chapter 16.18.4 of the FCA Supervision Manual.

For a non-EU AIFM managing non-EU AIFs, the AUM is the sum of the AUMs of all non-EU AIFs that the non-EEA AIFM is marketing in the EEA, as opposed to all of the non-EU AIFs managed by it.

Feeder Funds

In October, ESMA Guidance clarified that a non-EEA AIFM marketing a non-EEA feeder fund is required to report in respect of that feeder fund only where the non-EEA master fund is managed by the same AIFM and is not being marketed. Please note that the FCA reserves the right to contact the non-EEA AIFM to request additional information on the master fund.


AIFMD reporting is now live under the FCA Gabriel (Gathering Better Regulatory Information Electronically) reporting system.

Please note that most non-EEA AIFM will need to submit their initial report by 1 February 2015 and that, at the time of writing this blog, the FCA will only accept AIFMD reporting using XML v1.1.

Non-EEA AIFM who intend to register or have registered under the UK NPPR should therefore ensure that they have procedures in place to capture the data required to satisfy their AIFMD reporting obligations.

Please contact your usual Reed Smith Investment Funds or Regulatory Team contact if you wish to discuss this topic.