Treasury consults on "key policy decisions" stemming from new fund manager rules

The Treasury has published draft regulations which will transpose the Alternative Investment Fund Managers Directive (AIFMD) into UK law. Under the current European timetable, this must be done by 22 July 2013. The Financial Services Authority (FSA) is currently carrying out its own consultation exercise on "operational" issues relating to the changes.

A second consultation will follow at a later date once further measures are adopted by the European Commission, the Treasury said.

The AIFMD aims to create a harmonised regulatory structure for AIFMs across the EU. It will apply to any person or company whose regular business is managing one or more alternative investment funds including hedge funds, private equity funds, real estate funds and a wide variety of other types of institutional fund.

It is intended to cover the management and administration of all 'collective investment undertakings' that are not subject to an existing collection of directives known as the Undertakings for Collective Investment in Transferable Securities (UCITS) regime. Under the AIFMD, a company cannot be authorised to act as an AIFM unless it also provides portfolio management and risk management functions.

Much of the detail of the AIFMD is set out in 50 so-called 'level 2 measures'. These were published at the end of last year by the European Commission, and are now subject to a three-month scrutiny period by the European Parliament and member states. The level 2 measures, published in the form of a directly-applicable Regulation (149-page / 552KB PDF), cover almost all areas of the new Directive with the exception of its scope and specific provisions for the managers of a certain type of fund. The Treasury will consult on issues arising from the Regulation, including the effect on the new rules on the FSA's 'approved persons regime' and how public compensation schemes will apply to AIFMs, at a later date.

According to the consultation paper, the Treasury intends to apply most AIFMD requirements to all firms which manage authorised funds, including those that fall below the optional 'de minimis' threshold set out in the Directive. It intends to do so in order to establish "a proportionate level of regulation while maintaining broadly consistent investor protection", particularly for retail investors.

The AIFMD prohibits the marketing of alternative investment funds to retail investors by default, but allows member states to permit selective marketing and impose greater restrictions on that advertising than those that apple to professional investors. The UK is not proposing changes to the current regime, which allows advisers to promote certain collective investment schemes that are authorised by the FSA as Non-UCITS Retail Schemes (NURS) to retail investors and exempts closed-ended investment companies from the regime. It will also continue to allow firms to market Qualified Investor Schemes (QIS) and UCIS to certain categories of investor who do not fall within the Directive's 'professional investor' category.

The UK will also take advantage of a provision within the AIFMD which will allow firms other than banks to act as "depositaries" for private equity AIFMs subject to a five-year 'lock-up period'. Non-bank depositaries must be subject to "mandatory professional registration recognised by law" and will be subject to other depositary requirements including the need to guarantee funds held on behalf of an AIFM.

Professional services firm Deloitte warned that the Treasury's draft regulations went "significantly beyond" those contained in the Directive, particularly in relation to the managers of small hedge funds.

"While the Treasury does not propose to apply the full Directive to managers of unregulated collective investment schemes, it does propose to apply similar rules to those that are currently applicable to operators of retail investment funds," investment expert Brian Forrester said. "This will include requiring those firms to appoint a depositary."

"A Deloitte survey indicated that small hedge fund managers would be hit hardest by the Directive, with the single biggest increase in ongoing costs caused by the requirement to appoint a depositary. Smaller hedge fund managers will be unhappy having to bear these costs, which the Directive itself requires only of larger fund managers," he said.