This post was authored by Jacqui Hatfield, regulatory partner at Reed Smith LLP, London.
The AIFMD trigger date occurred on 22 July this year, with a 12-month transitional period (TP) in place in the UK for (i) existing UK managers of AIFs (UK AIFMs), and (ii) non-EU managers of AIFs (Non-EU AIFMs) actively marketed in the UK prior to the trigger date.
UK AIFMs The TP is currently in place for existing UK AIFMs, but those caught by the AIFMD should use this time to get ready for 22 July 2014. Amongst other things, a decision needs to be taken as to when the UK AIFM should apply for a variation of permission (VOP) to manage AIFs. The Financial Conduct Authority (FCA) wants applications from UK AIFMs to be submitted by January 2014. If a firm is not ready for full implementation of the AIFMD, or the passport is not required immediately, the VOP should make it clear that the variation is required to be effective on 22nd July 2014, because without this, technically the AIFMD will apply in full from the date the VOP is granted. The upside is that once the permission has been granted, the passport will be available in other member states. We can assist with the drafting of the VOP.
Sub-threshold UK AIFMs will need to apply for a VOP to manage AIFs, and will need to register as small registered UK AIFMs by 22 July 2014. They will need to comply with information requirements, but will not benefit from the passport unless they opt in to the full requirements of the AIFMD. However, sub-threshold managers of European venture capital funds may be able to use a passport under the European Venture Capital Funds Regulation (EuECVA Regulations), if they comply with the requirements in the Regulations, some of which mirror AIFMD requirements. We can assist firms with calculating their AUM to determine whether they are subthreshold firms, and with determining whether the EuECVA Regulations are a viable option.
To the extent that they aren’t aware already, firms should be aware that, whilst it is possible to be both a UCITs manager and an AIFM, an AIFMD manager cannot be both a MiFID firm and a manager of an AIFM (unlike a UCITs manager, which can be UCITs investment firms – managing third-party funds in addition to their own UCITs funds). Managers of third-party funds and portfolio managers are MiFID firms. There are additional services under the AIFMD that can be passported under the AIFMD. We can assist with the decision-making process – deciding whether and to what extent the passporting of additional services will be sufficient for a firm that wants to manage an AIF but is also currently a MiFID firm. Potential advantages of changing from being a MiFID firm may, for example, include a lower regulatory capital requirement and prevent the need for an ICAP. It may be necessary to set up a new subsidiary, which sits alongside the portfolio manager, to manage AIFMs. We can assist with decisions on this, including the potential to share employees and directors; and can also assist with the AIFM authorisation process.
Firms managing AIFs should be using the TP to carry out a road map for implementation, and a gap analysis. Changes are likely to be required to service agreements, outsourcing agreements and custody/ prime brokerage agreements. In addition remuneration packages need to be reviewed including, where relevant, carry schemes and claw backs. Likewise, procedures need to be in place/software ready, in order to comply with the transparency and reporting requirements. UK AIFMs should have started the implementation plan and gap analysis already. We can assist firms that have not initiated the process yet, as well as firms that are doing this internally and want to check that they have captured everything or are running into issues with their internal road map and gap analysis.
Non-EU AIFMs Existing funds that were actively marketed in the UK prior to the trigger date are subject to the TP in the UK. As registration requirements for non-EU AIFMs wishing to actively market in EU member states are set at the domestic level – by individual member states – a check is required of other member states, to see whether they have a similar TP and what their registration requirements are.
New launches of non-EU AIFs will not be able to rely on the TP in respect of the UK. Prior to the fund being actively marketed in member states, their private placement regimes (PPRs) need to be reviewed (to ensure they have not been amended), in addition to reviewing their registration and information requirements. A form of notification/registration will be required in each member state, including the UK, where the fund will be actively marketed within the EU, in order for the regulators to be able to receive the transparency and disclosure information they require. We have a network of recommended overseas lawyers that we use on fund issues, and can carry out the relevant due diligence required.
Existing funds will need to register with the FCA by the end of the TP, even if they are de minimis AIFMs (small AIFMs). Over-the-threshold AIFMs wishing to actively market into the UK need to register as Article 42 firms, and to comply with minimum transparency and disclosure requirements in the AIFMD required for Article 42 firms and the private equity provisions (where relevant). In addition, even sub-threshold firms need to provide some information to the FCA. We can advise on the requirements.
If a non-EU AIFM is intending to rely on reverse solicitations, it will need robust procedures in place to prove this, as it will be under scrutiny. We are awaiting further guidance but irrespective of this, we can assist with the drafting of these policies and/or review the strength of internal policies.
Firms, proposing to launch a fund Firms proposing to launch a fund will now, in addition to assessing whether the fund will be a collective investment scheme, need to determine whether the fund will be an AIF and if so, who will be the AIFM. It is important to know what the outcome of setting up an AIF in a particular jurisdiction, and of locating the AIFM in a particular jurisdiction, will be. Currently, the worst case scenario is an EU manager of a non-EU AIF that needs to comply with the full provisions of the AIFMD but cannot use a passport.
It is possible, subject to ensuring that the AIFM carries on at least risk management or portfolio management and is not a letter box, to structure the fund in a manner which is favourable from a regulatory and tax perspective.