We have received a number of queries relating to depositary arrangements and the Variation of Permission form. To assist firms with this we have published a guidance note.
We have received a number of queries regarding how AIFMs can comply in a proportionate way with the AIFMD’s requirement, under Article 15, for hierarchical and functional segregation of a firm’s risk management function.
We will review compliance with this requirement in accordance with the principle of proportionality set out in Article 15(1) of the AIFMD and Article 42(3) of the AIFMD level 2 regulations (231/2013). It follows that there is scope for AIFMs to devise effective risk management functions that comply with the separation requirements of Article 15(1), subject to the principle of proportionality.
The principle of proportionality is intended to ensure that regulatory measures go no further than required to achieve a stated objective. The second paragraph of Article 15(1) suggests that the objective is to ensure an AIFM has specific safeguards against conflicts of interest, to allow for the independent performance of risk-management activities.
We understand that achieving functional and hierarchical separation may be disproportionate for some firms, taking into account their size, internal organisation and the nature, scale and complexity of their business (or possibly other factors – to the extent the firm regards such factors as relevant).
However, to satisfy the requirements of Article 15, an AIFM must be able to demonstrate that it has specific safeguards against conflicts of interest that allow for the independent performance of risk-management activities. Those safeguards must, as a minimum, comply with Article 43 of the AIFMD level 2 regulations. We will review and assess the safeguards implemented by the firm to ensure that conflicts of interest do not compromise that independence.
If an applicant firm wants to comply with Article 15(1) other than through functional and hierarchical separation, and on the basis of proportionality, then it should describe briefly in the notes to the application form the specific safeguards that achieve the desired objective. If necessary, we will follow up with a request for more information or assurances.
We have had a number of queries about a firm’s ability to request a specific timeframe for its authorisation or variation of permission. We would therefore, like to provide the following clarification.
Firms have a legal right to have their complete full-scope AIFM application determined within three months (or exceptionally six months), and we will try to process applications as quickly as possible.
As with other forms of FCA authorisation, where a firm has specific requirements in relation to the timing of that authorisation, we will, where possible, accommodate the firm’s request. However, firms should be aware that authorisation within a short timeframe is not always possible.
Where a firm’s desired authorisation date is more than three months after the date it intends to submit a complete application, it should request a deferral of determination beyond the normal three month statutory time limit. It is important that the application makes it clear a deferral is being requested and provides the reasons for this. Applicants seeking to defer determination beyond the 3 month statutory time limit may request an authorisation date as late as 21 July 2014 (even if that date is more than 6 months after the date of submitting a completed application). Firms are also reminded that AIFMs managing AIFs must hold the correct Part 4A permissions from and after 22 July 2014.
Firms wishing to defer should provide the preferred authorisation date, along with the reasons for requesting it, in section 1.2 in the VoP form (headed ‘Timings for this application’). Once we have reviewed the application, we will contact you to discuss whether the requested timescales are achievable.
We are aware that a number of firms are currently preparing applications for authorisation or variation of permission to carry out the function of acting as depositary or trustee of an Alternative Investment Fund (AIF). Some of those firms may be considering structures where services will be provided to the depositary by other operating units or entities in the same commercial group, or by unconnected persons under an arms’ length contract.
We would like to draw the attention of applicants to the rules on delegation by a depositary; it is vital these rules are followed in order for us to process an application effectively and efficiently.
FUND 3.11.26R specifies that a depositary must not delegate its functions to third parties, except for the safekeeping of assets which may be delegated under a number of conditions. We consider that a ‘third party’ should be understood to mean any party that is not part of the same legal entity as the applicant. The performance of any depositary functions detailed in the Directive itself, or in Articles 85 to 97 inclusive of the AIFMD Level 2 Regulation, is subject to this rule.
Applicants should also refer to Recital 42 of the Directive, which is not reproduced in our Handbook. It includes the statement that “Delegation of supporting tasks that are linked to [the] depositary tasks, such as administrative or technical functions performed by the depositary as a part of its depositary tasks, is not subject to the specific limitations and requirements set out in this Directive”.
However, if applicants intend to outsource any administrative or technical functions, they should take note of the provisions of SYSC 8 in our Handbook. Rules in SYSC 8 are binding on firms that are (or will be) common platform firms, but have the status of guidance for all other firms.
We do not propose to issue a comprehensive list of functions that would be considered purely administrative or technical. These will depend on context and the proposed structure of each depositary’s operations. In each case, the applicant must be able to satisfy the FCA that it will have the necessary technical and human resources to perform the core depositary functions of cash monitoring, safekeeping (if it is to be carried out by the depositary without delegation to any third party) and oversight.
An EEA firm that establishes a branch in another Member State, under rights conferred by a single market directive, is not carrying out delegation when providing the services permitted under that directive at or from the office of its branch. However, the points raised above in relation to SYSC 8 would apply to any such arrangement.
As part of the Quarterly Consultation Paper published today, we are consulting on guidance to the AIFM remuneration code (SYSC 19B).
The guidance is intended to cover certain issues in greater depth than the guidelines published by the European Securities and Markets Authority (ESMA), and to join these guidelines with our rules in SYSC 19B.
The main areas of focus in our guidance is the application of the principle of proportionality to the rules on the remuneration payment process (payment in instruments, deferral, vesting, etc) payments to partners or members of an AIFM established as a partnership or limited liability partnership.
The guidance will be open for consultation until 6 November 2013.
We expect to publish the final guidance, subject to comments from respondents, in early 2014 at the latest, with a view to helping firms develop an appropriate remuneration policy well before the end of the transitional period, ending on 22 July 2014.
Following the conclusion of the European Securities and Markets Authority (ESMA) negotiations with the relevant non-EEA authorities, the FCA has now signed supervisory co-operation agreements in the form of memoranda of understanding (MoUs) with a total of 42 non-EEA authorities as part of its implementation of the Alternative Investment Fund Managers Directive (AIFMD). These non-EEA authorities are detailed in the table below.
The MoUs are a pre-condition under the Directive to allowing certain cross-border activities to take place, and are designed to help EEA regulators supervise compliance with the AIFMD requirements when a non-EEA entity is involved in the management or marketing of an alternative investment fund within the EEA. They will facilitate the exchange of information between regulators, cross-border on-site visits and mutual assistance in law enforcement.
|Albanian Financial Supervisory Authority|
|Alberta Securities Commission|
|Australian Securities and Investments Commission|
|Autorité des marchés financiers, Québec|
|Bermuda Monetary Authority|
|Board of Governors of the Federal Reserve System, United States of America|
|British Columbia Securities Commission|
|British Virgin Islands Financial Services Commission|
|Capital Markets and Securities Authority of Tanzania|
|Capital Markets Authority of Kenya|
|Capital Markets Board of Turkey|
|Cayman Islands Monetary Authority|
|Comissão de Valores Mobiliários do Brasil|
|Commodity Futures Trading Commission, United States of America|
|Conseil Déontologique des Valeurs Mobilières of Morocco|
|Dubai Financial Services Authority|
|Financial Services Agency of Japan|
|Financial Services Commission of Mauritius|
|Financial Supervision Commission of the Isle of Man|
|Guernsey Financial Services Commission|
|Hong Kong Securities and Futures Commission|
|Israel Securities Authority|
|Jersey Financial Services Commission|
|Labuan Financial Services Authority|
|Ministry of Agriculture, Forestry and Fisheries of Japan|
|Ministry of Economy, Trade and Industry of Japan|
|Monetary Authority of Hong Kong|
|Monetary Authority of Singapore|
|National Banking and Securities Commission of the United Mexican States|
|Office of the Comptroller of the Currency, United States of America|
|Office of the Superintendent of Financial Institutions, Canada|
|Ontario Securities Commission|
|Republic of Srpska Securities Commission|
|Securities and Commodities Authority of the United Arab Emirates|
|Securities and Exchange Board of India|
|Securities and Exchange Commission, United States of America|
|Securities and Exchange Commission of Pakistan|
|Securities and Exchange Commission of the Republic of Macedonia, Former Yugoslav Republic of Macedonia|
|Securities and Exchange Commission Thailand|
|Securities Commission of Malaysia|
|Securities Commission of the Bahamas|
|Securities Commission of the Republic of Montenegro|
|Swiss Financial Market Supervisory Authority (FINMA)|
ESMA recently published an opinion that recognises the right of firms to be able to exercise passport rights in Member States that have not yet transposed the directive, assuming the firms’ own home Member State (e.g. the UK) has transposed the AIFMD.
UK firms should be able to exercise passporting rights in all EEA states with the exception of Norway, Liechtenstein and Iceland. UK firms will be able to exercise AIFMD passporting rights in these jurisdictions when the EEA Agreement, to which Norway, Liechtenstein and Iceland are signatories, has been updated to include the AIFMD within its scope. Similarly, UK firms will be able to exercise passport rights in Norway, Liechtenstein and Iceland pursuant to the EuSEF and EuVECA regulations, when the EEA Agreement has been updated to include these regulations within its scope.
Firms that are able to take advantage of the transitional provisions set out in Regulation 72 of the AIFMD UK Regulation will need to be authorised or registered to continue the activity of managing an AIF from 22 July 2014.
Firms that were already managing AIFs before 22 July 2013 may be able to benefit from the transitional provisions set out in Regulation 72 of the AIFMD UK Regulation. Such firms may, until 21 July 2014, manage an AIF without being either authorised with the Part 4A permission of managing an AIF, or registered as a small registered UK AIFM.
If they intend to continue those activities after that date, they must submit an application to be authorised or registered before 22 July 2014. Similar provisions apply to firms requiring authorisation to act as trustee or depositary of an AIF.
The transitional period gives relevant firms sufficient time to ensure that their management or depositary activities comply with our rules, which includes holding the necessary authorisation or registration.
We advise firms seeking an authorisation or a variation of permission under AIFMD (including small authorised UK AIFMs and depositaries) to apply no later than 22 January 2014 in case we need a full six months to determine the application.
Firms that need to be authorised as full-scope UK AIFMs or need to be registered, should submit a complete application no later than 22 April 2014. We will normally determine an application for authorisation as a full-scope UK AIFM within three months, as provided for under Regulation 5(5) of the AIFMD UK Regulation. However, we strongly encourage firms to apply as soon as possible.
From 22 July 2014, the activity of managing an AIF may not be carried on by any person who is neither authorised to perform that activity nor registered. An authorised person, who carries on a regulated activity without the relevant Part 4A permission, will be in breach of section 20 of FSMA. If we receive applications after 22 April 2014, we would not be obliged to determine them before 22 July 2014.
If a firm believes that it will not be able to meet the deadlines/targets outlined above, please contact us as soon as possible.
On the 22 July 2013 UK law implementing the Alternative Investment Fund Managers Directive (AIFMD) came into force. It creates a tighter regulatory framework for alternative investment fund managers including managers of hedge funds, private equity firms and investment trusts.
On 28 June 2013 we published our Policy Statement setting out our rules for implementing the Alternative Investment Fund Managers Directive (AIFMD), and providing our response to the feedback to our Consultation Papers. The rules will take effect from 22 July 2013.
We have been asked by several stakeholders to clarify the position of a firm that wishes to be authorised as a full scope UK AIFM and to provide other services as permitted by Article 6(4) of the Directive. Those services are regulated in accordance with certain provisions of MiFID (Directive 2004/39/EC) and are referred to below as "MiFID services".
The particular issue concerns whether an AIFM will be permitted to provide MiFID services on a cross-border basis. UK investment firms that are currently authorised under MiFID and provide services in other EEA states (or intend to do so in future) are affected if they also intend to become full scope UK AIFMs without establishing a separate legal entity.
In its Q&A the European Commission indicated its opinion that MiFID services permitted under Article 6(4) cannot be passported by virtue of the AIFM management or marketing passports. It also stated that an AIFM cannot obtain separate authorisation under MiFID, leading to the position that an AIFM may passport its collective portfolio management services to other EEA States but cannot provide MiFID services anywhere in the EEA other than its Home State.
The position of the FCA, in accordance with the approach agreed with HM Treasury, is that an AIFM authorised to provide MiFID services should be able to exercise its single market rights by passporting those services to other EEA States. We consulted on this basis in CP13/09 and have prepared our draft application forms for AIFMs accordingly. We intend to carry out requests from authorised full scope UK AIFMs to notify the supervisory authority of another EEA State that the firm intends to provide services under Article 6(4) in that Host State. However, such firms should be aware of the risk that the Host State authority may refuse the notification, having regard to the Commission's opinion.
Accordingly, firms will need to take account of this risk when considering the most appropriate business model under AIFMD. We cannot say how these developments will impact individual firms, but firms should also consider all the possible solutions available to them to minimise the potential for there to be disruption to their business.
We will seek to engage with other EEA supervisory authorities and the Commission to try to reach a common understanding that reflects our views.
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