Summary and implications
The Alternative Investment Fund Managers Directive (AIFMD) is transposed into UK law today. Unless alternative investment fund managers (AIFMs) are able to take advantage of the AIFMD's transitional provisions, AIFMs must comply with those parts of the AIFMD which apply to them from today.
On 28 June 2013, the Financial Conduct Authority (FCA) published Policy Statement 13/5: "Implementation of the Alternative Investment Fund Managers Directive" which was the final piece of the jigsaw in the FCA's AIFMD implementation. This briefing summarises the key points raised by the FCA in their policy statement.
1. Transitional provisions
The FCA has confirmed that the AIFMD's transitional provisions should allow an AIFM who:
- already manages Alternative Investment Funds (AIFs); or
- prior to 22 July 2013, markets an AIF in the European Economic Area,
to carry on its activities without needing to comply with the AIFMD's requirements until 22 July 2014.
Notwithstanding this confirmation, the FCA has emphasised that firms must be giving serious consideration to preparing for full compliance with the applicable AIFMD provisions when the transitional period comes to an end.
Firms should also be take note of how other EU member states have interpreted the transitional provisions and adapt their approach in each member state accordingly. The implementation of the AIFMD in some member states has not kept pace with the implementation in the UK and whilst it is useful to have the FCA's clarification, there is still much uncertainty across the EU. Firms are advised to tread carefully.
2. Delegation
In accordance with Recital 9 of the AIFMD, the FCA has clarified that it views the letter box entity provisions as a broad anti-avoidance measure and, as such, will apply the requirements accordingly.
Firms are reminded of the importance of being appropriately authorised when considering their structures and should consider carefully who the AIFM in a structure actually is so as to ensure that the correct entity is authorised as an AIFM.
3. Passive marketing/reverse solicitation
Passive marketing or reverse solicitation is outside the scope of the AIFMD. Building upon UK AIFMD regulation 47, the FCA's PERG guidance states that marketing restrictions do not apply to an offering or placement made at the initiative of the investor.
Moreover, the FCA has helpfully clarified that a confirmation from an investor should normally be sufficient to demonstrate that the investor took the initiative.
Firms are warned not to rely upon such a confirmation where it has been obtained in order to circumvent the rules. Firms should also ensure that they have policies and procedures in place to review and make a record of communications with their investors in order to demonstrate an audit trail.
4. Limited partnerships and joint ventures
Much of the uncertainty surrounding limited partnerships has been clarified by the FCA. Their Perimeter Guidance has been updated to acknowledge that joint ventures structured as limited partnerships can fall outside the scope of the AIFMD.
The FCA has acknowledged that it is quite common in England and Wales for joint ventures to be structured as limited partnerships under the Limited Partnerships Act 1907. To maintain the limited liability conferred by the limited partner status, the limited partners must not exercise control of the partnership in their capacity as a limited partner. The business of the partnership should be managed by the limited partnership's general partner which is controlled (through the exercise of voting rights) by the limited partner investors.
In such a structure, each investor has economic participation (through its limited partner) and strategic management control (through the general partner) but these two roles are separated and carried on through different entities. Notwithstanding the separation of these roles, the arrangement is able to remain outside the scope of the AIFMD on the basis that it is a joint venture.
It is reassuring that the FCA has clarified this key issue.
5. Limited partnerships – number of investors
The FCA has clarified that a limited partnership in which there is a single limited partner making a substantive contribution and a general partner making a nominal contribution will not be an AIF as it will not be raising capital from a number of investors.
However, it should be emphasised that if the constitutional documents of the limited partnership allow for more than one limited partner, the entity will be deemed to be raising capital from more than one investor, despite the fact that there may only, at a certain time, be one limited partner.
6. Prudential requirements
The FCA has confirmed that:
- group professional indemnity insurance will be acceptable so long as it provides adequate cover; and
- it would be proportionate for an AIFM to rely on a group-level approach to compliance, internal audit and remuneration provided that the specific circumstances of each AIFM within a group are given adequate focus.
7. Remuneration
The FCA has clarified that firms which comply with the AIFMD remuneration regime will be deemed to be in compliance with the Remuneration Code. Firms which undertake both MiFID and AIFMD activities may however choose to apply both regimes to their employees, depending on the work which each employee undertakes under each directive.
There are still uncertainties surrounding the application of the AIFMD remuneration issues under UK law as ESMA is yet to publish its official version of its remuneration guidelines. The FCA expects them to be published very shortly and once they have been published, the FCA will have two months to notify ESMA of whether it intends to comply with them.
Conclusion
The majority of the UK rules and guidance in respect of the AIFMD's transposition into UK law have been issued and firms should now be planning and preparing to be fully compliant over the next 12 months.
Firms should also exercise great caution when negotiating the AIFMD in other EU member states where the maximising harmonising directive is progressing at very different speeds.
We are able to assist our clients with AIFMD advice at every stage of the process and we would be happy to discuss any of the issues raised in this paper, or any other aspect of the AIFMD, with you in further detail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
