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By Sarah Jane Mahmud, of Bloomberg Law, London.
With less than two months to go until the EU Alternative Investment Fund Managers Directive1 (AIFMD) comes into force on July 22, 2013, there is still much concern, on both the domestic level and the global level, as to the way in which the legislation will be transposed into UK law.
In a bid to calm this confusion, HM Treasury recently published a set of questions and answers2 (Q&As) on the implementation of the AIFMD, as well as a revised version of implementing legislation, the Alternative Investment Fund Managers Regulations 20133 (AIFM Regulations), the initial draft having been published in January 2013.4 The AIFMD will also be transposed into UK law through amendments to the Financial Conduct Authority (FCA) Handbook,5 about which the FCA is currently consulting.6
Despite the lack of publicity surrounding their publication, the Q&As represent a significant change in the government's approach to implementing the AIFMD. Contrary to its initial intention to implement the AIFMD by July 22, 2013, HM Treasury has now pushed back the start date for compliance with the AIFMD in the United Kingdom for existing alternative investment fund managers (AIFMs), wherever in the world they are based, to July 22, 2014. The government's change in direction at this late stage appears to have been prompted by negative feedback7 to its initial draft of the AIFM Regulations, consulted on earlier this year,8 which, according to several stakeholders, were too restrictive in scope.
As initially drafted, the AIFM Regulations explicitly gave existing UK AIFMs a one year grace period9 (i.e., until July 22, 2014) to apply for authorisation and comply with the new regime. They remained silent on this topic for non-UK AIFMs. By implication, therefore, existing AIFMs established elsewhere in the European Economic Area10 (EEA), or those based outside this area (i.e., non-EEA AIFMs or third country AIFMs), would be required to comply with the AIFMD in full by July 22, 2013.
Concern arose that this would create an uneven playing field for non-UK AIFMs wishing to market alternative investment funds (AIFs) in the United Kingdom, and that this would prove damaging for the UK market, at least initially. HM Treasury has consequently amended the AIFM Regulations to allow existing non-UK EEA AIFMs to make use of the transitional provision.11
Existing non-UK EEA AIFMs will be able to continue operating as usual until July 22, 2014, and will “not need to make any specific application or go through any procedure to benefit from the transitional provisions.”12 Existing non-EEA AIFMs will also be able to make use of the 12 month transitional period, so long as they are actively marketing an AIF anywhere in the EEA immediately before July 22, 2013.13
U.S. AIFMs that already market AIFs in an EU Member State will, therefore, be able to market funds in the United Kingdom until July 22, 2014, without needing to register with the FCA or comply with any of the AIFMD requirements. In other words, they will not need to worry about complying with the mandatory disclosure and reporting obligations until July 22, 2014, nor will they be subject to the AIFMD's private equity notification and anti-asset stripping provisions relating to investments in EEA companies until this date. They will, however, need to ensure continued compliance with the United Kingdom's existing marketing rules.14
Any AIFMs, established in the United Kingdom or elsewhere, that come into existence after July 22, 2013, will need to ensure compliance with the AIFMD from this date. U.S. AIFMs established after this time will, therefore, need to notify the FCA of their intention to market AIFs in the United Kingdom, confirming their compliance with the AIFMD's mandatory disclosure and reporting obligations.
Extending the transitional provisions to non-UK EEA and non-EEA AIFMs provides firms with a more realistic timetable in which to gear up to become compliant with the AIFMD, while at the same time helping to keep disruption to a minimum.
In view of the potential benefits that the transitional period offers, non-EEA AIFMs should consider, without undue delay, whether they will be marketing AIFs in the United Kingdom immediately before July 22, 2013. It should be borne in mind that the term “marketing” for these purposes excludes reverse solicitation/passive marketing.
It must be remembered, however, that the advantages attached to the transitional arrangements are confined to activities undertaken in the United Kingdom. A non-EEA AIFM wishing to market its funds in other EU Member States will still need to comply with the AIFMD requirements in those countries from July 22, 2013, unless they also implement similar transitional provisions for third country AIFMs.
The revised AIFM Regulations clarify that all AIFMs operating under the AIFMD transitional arrangements, wherever in the world they are based and despite their transitional status, may launch and market new AIFs in the United Kingdom.15
This is likely to pave the way for a potential wave of fund launches over the course of the next year, as existing AIFMs prepare for AIFMD compliance in 2014. Concern had previously arisen that AIFMs would be prohibited from launching new funds pending AIFMD clearance, which would have had a potentially damaging impact on the sector during a time of financial recovery. However, it again remains unclear as to whether other EU Member States will follow suit.
Until the passporting regime is extended to include non-EEA AIFMs/AIFs, which may happen in 2015, the AIFMD provides that UK and EEA AIFMs may manage/market non-EEA AIFs, and that non-EEA AIFMs may market non-EEA AIFs, in the United Kingdom by virtue of the national private placement regime, subject to meeting certain conditions. Among other things, appropriate cooperation agreements for the purpose of systemic risk oversight must be in place between the FCA and the other relevant supervisory authorities.16
During the consultation phase, queries arose as to whether existing AIFMs relying on the transitional arrangements need to wait for cooperation arrangements to be in place before marketing AIFs to UK investors. HM Treasury has confirmed that existing non-EEA AIFMs making use of the transitional arrangements need not wait for the relevant cooperation arrangements to be put in place before marketing non-EEA AIFs in the United Kingdom. Similarly, existing UK and EEA AIFMs making use of the transitional period need not wait for the relevant cooperation arrangements to be put in place before marketing non-EEA AIFs in the jurisdiction. However, once these AIFMs obtain authorisation, the relevant cooperation agreement(s) must be in place in order for the AIFM to continue to market to UK investors, even if authorisation is obtained during the transitional period.
The FCA will maintain a register of funds that are being marketed in the United Kingdom under the private placement regime. It was envisaged that EEA AIFMs and non-EEA AIFMs wishing to market AIFs in the United Kingdom would need to apply to the FCA for approval to be placed on the register before any marketing can take place. Several stakeholders argued that this registration process would be too onerous, especially for AIFMs merely seeking to undertake exploratory work.17 HM Treasury has since amended the process so that AIFMs using the private placement regime need only notify the FCA, rather than register with the FCA, so that they may start marketing immediately thereafter.18
Initially, the AIFM Regulations sought to restrict any person marketing an AIF to investors in the United Kingdom without first having secured marketing approval from the FCA, subject to a limited number of exceptions.19 As this restriction would apply to existing investors seeking to sell their interests, as well as intermediaries acting on their behalf, it was considered too draconian. Moreover, it failed to fully reflect the AIFMD definition, which describes marketing as a “direct or indirect offering or placement at the initiative of the AIF, or on behalf of the AIFM, of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the [EEA]”20 (emphasis added).
HM Treasury has now amended the AIFM Regulations, and copied out the text of the AIFMD definition verbatim. The marketing restriction will now only apply to AIFs offered or placed at the initiative of, or on behalf of, the AIFM.21 Secondary market transactions that are not initiated by the AIFM, regardless of whether they are intermediated, will, therefore, fall outside the scope of the restriction. Specific provisions are included for investment firms marketing AIFs, but only if they offer or place units or shares of an AIF on the AIFM's behalf. It should be remembered that any AIFs marketed in a way that falls outside the scope of this definition will still be subject to the UK financial promotion regime.22
Finally, the AIFM Regulations initially required third country AIFMs seeking permission from the FCA to market AIFs in the United Kingdom to identify a “single AIFM.”23 HM Treasury has clarified that this requirement was merely intended to ensure that a single entity is identified to be responsible for complying with the requirements accompanying permission for the funds to be marketed. It confirms that there is no requirement that there be no other entity that could be considered the AIFM, and has amended the AIFM Regulations to reflect this.24
In the first version of the AIFM Regulations, the AIFMD depositary regime would start to apply when the AIFM managing the AIF that the depositary acts for becomes authorised. Yet, in view of the criticism sparked by this provision, and the lack of flexibility it would provide, HM Treasury has decided to allow depositaries to make full use of the 12 month transitional period.
Entities will, therefore, be able to act as an AIFM depositary prior to obtaining formal FCA authorisation, which they will have until July 22, 2014, to apply for.25 However, they will still need to comply with all other relevant AIFMD requirements as soon as the AIFM managing the AIF that it acts for becomes authorised. The only benefit, therefore, is having additional time to apply for authorisation.
This provision only applies to entities that already have FCA permission to carry out depositary activities (e.g., to act as the depositary of an open-ended investment company, or as the trustee of an authorised unit trust scheme). Would-be-depositaries must still secure FCA permission before they can start providing AIFMD depositary services.
Finally, HM Treasury has clarified some ambiguity in the initial AIFM Regulations. It was implied that only one depositary may be appointed in relation to third country AIFs managed by a UK AIFM (or a feeder AIF for a master AIF that is either a non-EEA AIF or managed by a non-EEA AIFM).26 HM Treasury confirms that more than one entity may act as a depositary for these AIFs, and has amended the AIFM Regulations to this effect.27
With the implementation deadline rapidly approaching, these recent changes have received a warm reception.28 The relaxation of the transitional provisions will help firms work towards a more manageable and realistic timetable for implementation, providing AIFMs across the globe with more time to get their own house in order while the AIFMD regime is being finalised.
At the time this article was written, much remained to be finalised. The European Commission, for example, has still to adopt the regulatory technical standards and guidelines that underpin the regime, and the FCA is still in the process of consulting on the detail of the amendments to its Handbook.
While the extension of the 12 month transitional period provides firms with further time to adapt to the new regime, time is still of the essence. AIFMs that make full use of the transitional arrangements only have 15 months to review and revise their systems and controls to ensure that they are fully AIFMD compliant by July 22, 2014. In view of the volume of new rules being introduced, there is no time to waste.
The sting in the tail is that it still remains uncertain as to whether other EEA Member States will follow suit. If they do not provide a transitional period for foreign firms wishing to market AIFs in their jurisdictions, these firms will need to be fully AIFMD compliant by July 22, 2013, in any event. Yet, given that the vast majority of Member States seem to be struggling to implement the AIFMD on time, there is a fair chance that similar transitional arrangements may soon also be put in place elsewhere.
1 Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers and Amending Directives 2003/41/EC and 2009/65/EC and Regulations 1060/2009 and 1095/2010, 2011 O.J. (L 174)1 [hereinafter AIFMD], available athttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:01:EN:PDF.
2 HM Treasury, Transposition of the Alternative Investment Fund Managers Directive: Questions and Answers, April 29, 2013 [hereinafter Q&As], available athttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/193490/aifmd_questions_and_answers_010513.pdf. The changes announced in the Q&As are likely to be reflected in the Financial Conduct Authority's final guidance, which is anticipated to be published before the end of May 2013.
3 Draft Alternative Investment Fund Managers Regulations 2013 [hereinafter Revised AIFM Regulations], available athttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/198218/aifm_regulations_090513.pdf.
4 HM Treasury, Transposition of the Alternative Investment Fund Managers Directive, January 2013, Consultation Paper [hereinafter HMT Initial Consultation Paper], available athttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/193488/consult_transposition_of_the_alternative_investment_fund_managers_directive_220113.pdf, at Annex A [hereinafter Initial AIFM Regulations].
7 HM Treasury, Transposition of the Alternative Investment Fund Managers Directive: Response to Consultation, May 2013, Response Paper [hereinafter HMT Response Paper], available athttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/198212/transposition_of_the_alternative_investment_fund_managers_directive_response_to_consultation_130513.pdf, at 1112.
8 HMT Initial Consultation Paper, supranote 4.
9 Initial AIFM Regulations, supranote 4, reg. 68.
10 The European Economic Area comprises all 27 EU Member States (Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Sweden, and the United Kingdom) as well as Liechtenstein, Iceland, and Norway.
11 Revised AIFM Regulations, supranote 3, reg. 73.
12 HMT Response Paper, supranote 7, at 13.
13 Revised AIFM Regulations, supranote 3, reg. 73.
14 These include the provisions of the Financial Conduct Authority, Conduct of Business Sourcebook (COBS) at COBS, available athttp://fshandbook.info/FS/html/handbook/COBS/4.
15 Q&As, supranote 2, at 1.
16 AIFMD, supranote 1, arts. 36(1)(b), 42(1)(b).
17 HMT Response Paper, supranote 7, at 12.
18 Revised AIFM Regulations, supranote 3, regs. 57(3), 58(1), 59(1).
19 Initial AIFM Regulations, supranote 4, regs. 45, 46.
20 AIFMD, supranote 1, art. 4(1)(x).
21 Revised AIFM Regulations, supranote 3, regs. 45, 46.
22 Supranote 14.
23 Initial AIFM Regulations, supranote 4, regs. 59(2)(b)(a), 60(3).
24 Revised AIFM Regulations, supranote 3, regs. 58(2)(a), 59(2)(a).
25 Id., reg. 77.
26 Initial AIFM Regulations, supranote 4, reg. 58(6).
27 Revised AIFM Regulations, supra note 4, reg. 57(5)(a).
28 See, e.g., Press Release, Inv. Mgmt. Ass'n., HMT Rules Enable Marketing of New Alternative Investment Funds (May 13, 2013), available athttp://www.investmentfunds.org.uk/press-centre/press-releases/press-release-2013-05-13/.
The latest draft of the UK Alternative Investment Fund Managers Regulations can be accessed at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/198218/aifm_regulations_090513.pdf.
Sarah Jane Mahmud, a Solicitor, is a Legal Analyst with Bloomberg Law, London.
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