UK: Real Estate Fund Managers And The Alternative Investment Fund Managers Directive

Last Updated: 5 February 2014
Article by Edward Craft and Marlies Braun

The Alternative Investment Fund Managers' Directive (AIFMD) came into force on 21 July 2011 and was implemented in the UK on 22 July 2013 (through HM Treasury regulations and rules issued by the Financial Conduct Authority (FCA)).

As discussed in our July and February 2013 updates, AIFMD impacts on many firms managing assets across a diverse range of sectors, including real estate and investments which raise income from real estate.  Where you are investing in or managing alternative investment funds, whether through EU or non-EU vehicles, you will have been exercising your mind in relation to these issues. 

AIFMD: If I only learn four things, what should they be?

The four most important things to understand are that:

  1. the AIFMD brings the fund manager within the scope of financial services regulation, not the fund itself, requiring the fund manager to be authorised by the FCA (note, however, that if the fund is internally managed the fund itself needs to be authorised);
  2. the fund assets must be held through a single depositary who will be (effectively) strictly liable for loss of the assets;
  3. it restricts the manner in which a fund may be promoted within the EU, particularly in the period to 2017 (these provisions are in addition to the financial promotion regime in the UK and elsewhere); and
  4. the deadline for compliance with the AIFMD requirements by fund managers who were already managing an alternative investment fund before 22 July 2013 is 22 July 2014

What is an "alternative investment fund"?

An alternative investment fund (AIF) is a collective investment undertaking that is not subject to the UCITS regime, including hedge funds, private equity funds, retail investment funds, investment companies, green energy funds, and real estate funds. The AIFMD brings a wider class of, previously unregulated, assets within the scope of investor protective regulation, essentially (subject to certain exemptions) anything other than a retail equity collective investment scheme (such as a unit trust, OEIC or UCITS fund, being the kind of equity investment products in which you might hold investments through an ISA etc.; such vehicles have been the subject of detailed regulation since 1986).

Shares in a public company (other than an investment fund) remain outside of the scope of AIFMD.

Who is the regulator?

The FCA is the UK national regulator and ESMA is the European level regulator, plus national regulators in all other EEA states and those countries which have signed MoUs with the EU (about 42 at present) (including all of the major relevant offshore jurisdictions).

Why is this relevant to real estate fund managers?

The broad scope of the AIFMD affects the management, administration and marketing of real estate funds as these may fall within the scope of an AIF.

What are the opportunities?

AIFMD establishes an EU-wide harmonised framework for monitoring and supervising risks posed by mangers of alternative investment funds, and for strengthening the internal market in alternative funds. This will make it easier for funds to be passported across European borders, allowing fund promoters to  access funds from a wider pool of available capital and contributing to the completion of the internal market.  A higher level of investor protection is seen to be desirable in a post-financial crisis environment.

When do I need to apply for AIFMD authorisation or a variation of my existing authorisation?

UK fund managers who intend to begin managing an AIF for the first time after 22 July 2013 have to apply to the FCA for an AIFM authorisation and fully comply with the requirements of the Directive before they can begin to manage an AIF.

Fund managers who, prior to 22 July 2013, were already managing or marketing AIFs (existing fund managers) may continue to do so subject to the relevant FCA rules applying immediately before that date without needing an AIFM authorisation. They have until 22 July 2014 to fully comply with the requirements of the Directive and apply for an AIFM authorisation (or a variation of their existing permission (VoP)).

On the basis that it may take the FCA a full six months to determine an application for AIFMD authorisation or a VoP, the FCA advised existing fund managers that they needed to submit their applications by 22 January 2014.

Small fund managers (sub-threshold fund managers) which fall below the prescribed thresholds requiring full AIFMD authorisation, and certain other (real estate) fund managers which are not currently FCA authorised must be authorised or registered with the FCA or alternatively, if they wish to take advantage of the EEA marketing passport, they can opt in to be authorised as full-scope UK AIFMs. The FCA advised fund managers who need to be authorised as full-scope UK AIFMs or registered to submit a complete application by 22 April 2014 as they expect to determine such applications within three months. However, note that, if incomplete, this process may take up to six months.

What if I miss a deadline?

The FCA  recommended deadline of 22 January 2014 for existing fund managers to submit an application for AIFMD authorisation or a VoP has now passed, and the deadline of 22 April 2014 for applying to be authorised or registered is approaching fast. So what happens if you miss the deadline?

HM Treasury recently announced that they are planning to amend the AIFM Regulations 2013 (which transpose the AIFMD into UK law) to the effect that existing fund managers who submitted their application without sufficient time for the FCA to determine the application by 22 July 2014 will be able to continue managing AIFs until the FCA has determined the application. Therefore, subject to the details of the proposed amendment which have not yet been published, as long as such fund managers submit an application with the FCA before the end of the transitional period on 22 July 2014, they will not need to cease their operations come 22 July 2014 even if they are not AIFM authorised then provided they comply with all relevant AIFMD requirements at that time.

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.

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