AIFMs – Changes to Handbook

The FCA’s Quarterly Consultation Paper CP15/8 published this month will be of particular interest to AIFMs (and AIF depositaries) in that it contains various proposed rule changes that will be relevant to them.  In isolation none of them are major, but it would be as well to be aware of them. Some may have an element of déjà vu about them e.g. comments re FATF, value of AIFs, passporting etc.

Below is a summary of the more relevant changes but affected firms should make themselves familiar with revised rules and guidance (see Appendix 4 of CP15/8).

  • The regulated activity of ‘managing an AIF’ includes, of course, all other regulated activities e.g. ‘arranging’, ‘managing’ etc. needed to be “the AIFM” and the AIFM does not need to apply to the FCA to have these activities added to its permission.  As such, an AIFM’s Part 4A permission may only contain ‘managing an unauthorised/authorised AIF’.  Because of consumer protection concerns FUND 1.4 will require a UK AIFM to notify the FCA in writing two months in advance (the CP includes the notification form) of any regulated activities performed in connection with the management of an AIF.  Fortunately the rule will not apply if those activities are the usual suspects associated with managing an AIF e.g. ‘managing investments’ or ‘arranging’ – see FUND 1.4.8 (2) for the full list. For the avoidance of doubt, the proposed rule on notification will not apply to ‘insurance mediation’ either (as long as it relates to the management of an AIF) – which in any event, for a firm undertaking that activity, is not included in ‘managing an AIF’ and instead must be included on the said firm’s Part 4A permission.
  • When calculating the value of AIFs for the purposes of covering professional liability risks (” PII” – see (IPRU(INV) 11.3.11) one must also include any AIFs that the AIFM may be managing under delegation (e.g. as in ‘portfolio management’ as opposed to ‘managing an AIF’).‘  Note that this is a different approach to when calculating the  ‘funds under management requirement’ (IPRU(INV) 11.3.2) where the value excludes funds managed under delegation.
  • SUP 16.18 (‘AIFMD Reporting’) will be amended to confirm that non-EEA AIFMs and small registered UK AIFMs will also be subject to a £250 admin fee for not submitting Annex IV reporting (technically these types of entities do not fall within the definition of ‘firms’ and so fall outside the admin fee penalty as it is worded in SUP 16.3.14).
  • SUP 16.18 will be amended to clarify that UK AIFMs of non-EEA AIFs that are not marketed in the UK or EEA (table in SUP 16.18.4 only refers to EU AIFs managed or AIFs marketed in the Union) are subject to the same reporting periods and end dates as if it was marketed in the EEA.
  • As you know, an AIFM can also be authorised to undertake additional MiFID-type activities e.g. investment advice (a ‘non-core activity’ as is safe-keeping and Reception & Transmission of Orders) but if so then one of those activities for which it will be authorised must be portfolio management (a ‘core activity’ as is ‘managing an AIF’ or ‘managing a UCITS’).  It is the view of the FCA that provided a UK AIFM is carrying out (legally) any non-core activities in the UK then it is permitted to carry out those non-core activities in any other EEA State under the management passport without the need to also  passport out any core activities.  On the same basis the FCA will also accept passport applications from EEA AIFMs in respect of only non-core activities.  FUND 10.2 is amended accordingly.  However AIFMs should note that they are warned (FUND 10.2.2A(2)) that the relevant EEA Host State regulator may not share the FCA’s views and therefore firms should seek legal advice.
  • FUND 3 will have guidance, in the form of FAQs, added (‘3 Annex 3G’) on what constitutes the valuation function under the AIFMD – basically it is the person that makes the final determination on the value of the asset, so price providers or input from third-parties would not be performing the ‘valuation function’ (the definition is relevant in that external valuers need to be notified to the FCA whilst internal valuation requires segregation – see FUND 3.9).  Having said that, Q1.3 clarifies that e.g. the board of a corporate AIF that retains a contractual right to override a valuation figure does not mean that they are performing the ‘valuation function’, provided it only exercises this right on an exceptional basis.
  • One of the requirements for marketing non-EEA AIFs (or marketing by a non-EEA AIFM) under the AIFMD concerns the need to ensure that the non-EEA country does not appear on the ‘FATF Non-Cooperative Country’ list.  As has been pointed out previously, no such list of that name exists.  FUND 10.5 will clarify that this should be interpreted as a jurisdiction that appears in the ‘FATF Public Statement’.
  • FUND 10.5.14 will provide guidance on determining the place of establishment of an AIF, which will be relevant for applying the marketing requirements.

Comments on the proposed changes are invited by 5 May.