FCA Opens the Door to Early UK AIFM Applications

Getting a head-start on the new regulatory regime

STEPHEN BURKE, CORDIUM

On 31 May 2013 the FCA announced that it has established a dedicated ‘AIFMD Early Authorisations’ team to consider draft applications for full-scope UK alternative investment fund managers (AIFMs) ahead of transposition of the AIFMD on 22 July 2013 to process the applications of those firms that have told the FCA they may need to be authorised from 22 July 2013. Each of these firms have been provided with an application pack which is not yet publicly available on the FCA website.

Back in March 2013, some 200 UK asset managers (the “200 Group”) responded to an FSA AIFMD survey, indicating that they may need to be authorised under the directive from 22 July 2013 to continue their management activities and marketing their AIFs using the AIFMD passports, and/or to access national private placement regimes for marketing their non-EEA AIFs. (Sub-threshold AIFMs actively seeking authorisation to become a Small Authorised UK AIFM and firms that are intending to become a Small Registered UK AIFM are excluded from this process).

Off the back of this survey, the FCA has established special submission arrangements for these pre-transposition applications which should ensure that the 200 Group jumps the queue for business as usual FCA applications. It is unclear whether these arrangements will be open to other firms after 22 July 2013.

In parallel the FCA will seek public feedback on the Variation of Permission (VoP) form in early June ahead of publishing the final forms, which will be available from 22 July 2013.

Ahead of the FCA issuing the final forms the FCA will be accepting draft applications from the 200 Group based on the current versions of the application pack, enabling the FCA to begin to process applications and helping to ensure that authorisation under AIFMD can be granted on or close to 22 July 2013.

Variation of Permission
200 Group firms that are seeking to turn an existing authorised entity into an AIFM will need to complete the full-scope UK AIFM Variation of Permission form and provide details for each AIF it intends to manage on the “Schedule of AIFs”. This schedule includes a request to market UK/EEA AIFs in the UK.

In addition firms can apply for EU passports to provide management services on a cross-border basis, establish a management branch or a cross-border marketing passport. Any new or altered approved persons should be submitted via the FCA’s Online Notifications and Applications (ONA) system and the ONA reference included on the VoP form, together with the signed paper copy of the VoP form and of course the FCA fees in addition, which have to be paid before they accept the application.

The FCA has requested encrypted or password-protected electronic versions of all forms and supporting documentation to be sent to a specific FCA email address as one complete application.

The VoP requires firms to identify if they want permission to manage an AIF and additionally to hold client money). The VoP also requires applicants to provide the timing requirements for the application and the reason for variation.

To complete the VoP the firm has to provide a regulatory business plan, calculations of its financial resources and to demonstrate that it meets the conditions for authorisation. Finally, the firm needs to give details of their approved persons and other relevant individuals, the AIFs they manage and the related depositary arrangements.

The business plan is a central part of the VoP. It is a free-form document and asks for substantial detail about the 200 Group firm including:

  • Proposed business and operating model;
  • Organisational structure of the AIFM including organisation chart and headcounts;
  • Long-term business strategy and expansion plans for the business;
  • Appropriateness and scalability of non-financial resources;
  • Governance and culture – including the role of the board and senior committees in setting and overseeing the tone of culture and behaviours required for the firm to act honestly, fairly, professionally, independently and in the interest of each AIF and its investors;
  • Management information to be produced and how its governance and culture will be monitored by senior staff to ensure that the AIFs and their respective investors are being treated fairly;
  • Systems and controls – in particular those relating to: disclosure to investors and competent authorities, liquidity management, risk management, leverage, prime brokerage, valuation and delegation. This should include a description of investment, risk management and asset valuation policies, including the use of leverage, portfolio management procedures and an explanation of the procedures for changes to investment strategy and policy, considering both the first-line controls of the business and the interaction of the second and third-line controls; and
  • A description of the risks to the AIFs and how these will be monitored and mitigated.

In addition to the business plan the 200 Group firms will need to demonstrate how they meet Operating Requirements relating to:

  • Investor and regulator disclosures;
  • Liquidity management;
  • Risk management;
  • Leverage;
  • Prime brokerage relationships;
  • Valuation;
  • Any private equity investment;
  • Marketing, managing and cross-border activity; and
  • Delegation and in particular portfolio management and risk management.

The FCA also wants significant information about each AIF; they provide spreadsheets to collect information for each one. The information that is required includes:

  • NAV valuation date (within one week of application date);
  • Legal status, inception date, or proposed launch date;
  • Predominant type of AIF and investment strategy;
  • The AIF’s risk profile expressed as Target Annual Volatility (%);
  • UK authorisation status and regulatory status of the AIF;
  • The AIF’s capital structure;
  • Whether the AIF is a master/feeder/umbrella/sub-fund;
  • List the internal or external identifier codes of all funds;
  • Whether the AIF employs financial/synthetic leverage and typical and maximum levels employed;
  • A copy of the rules or instruments of incorporation;
  • Prospectus directive approval date or intended submission date (where applicable);
  • Competent authority that approved the prospectus (where applicable);
  • Whether the AIFM is seeking FCA approval to market AIF in UK;
  • Information on arrangements established to prevent units or shares from being marketed to retail investors; and
  • If another person is doing the marketing on your behalf; the name of that person.

In respect of depositaries, applicants must provide the FCA with a summary of the due diligence that has been performed on each depositary in order to be satisfied that the depositary arrangements will comply with the requirements of the AIFMD. If they have not yet completed due diligence then they need to describe the steps that will be take prior to the appointment of the depositary.

New entity application
If a 200 Group firm is seeking to establish a new entity to be the UK AIFM then they will need to complete the wholesale investment forms application as well as the full-scope UK VoP form, with the schedule of AIFs and the passporting forms as required.

Making the application
The FCA opens their doors to start processing draft applications from 7 June 2013. They note that the amount of time it will take to process will depend on the completeness and complexity of the draft application, as well as the volume of concurrent work. Therefore, early submission will be important, indicating your requirement to be authorised, detailing any critical dependencies and the associated timelines. The FCA will challenge the reasons for early authorisation in an attempt to help manage its workload.

Once the final application pack is issued and the UK legislation implementing AIFMD has come into force, the FCA will ask the 200 Group to confirm they want it to determine the application based on the information provided in the draft application. Only then will the FCA consider that a 200 Group firm has formally applied. The FCA have said that they will endeavour to grant authorisation under AIFMD as close to 22 July 2013 as possible. However, they note that the formal three-month period (or six months in specific circumstances) that the FCA has under the Directive for determining applications will not officially commence until 22 July 2013.

Cordium (the new name for The IMS Group and HedgeOp Compliance) is a global provider of regulatory compliance consulting services and software to the asset management and securities industry. It has offices in London, New York, Boston, San Francisco and Hong Kong, and employs more than 100 experienced professionals who support more than 800 investment businesses. Its clients range from start-ups to large firms with well established track records and utilise a broad array of investment strategies and styles such as: long only, long/short equities, global macro, credit, distressed, bank debt, fixed income, private equity, venture capital, real estate-related and fund of funds strategies. The founding ethos of Cordium has always been to build long-term relationships with its clients. Cordium believe that the process of meeting regulatory demands can make a positive contribution in the drive towards business excellence.