© 2012 Dechert LLP

AIFMD Countdown: Breakfast Briefing No. 5

Level 2 - Le Nouveau Est Arrivé!

January 16, 2013

Doc No. 18948931

Agenda Today

• Level 2 Context and AIFMD Timetable

• Transitionals

• Calculation of AUM, Regulatory Capital and PII Cover

• Operating Conditions: General Principles

• Operating and Organisational Conditions: Conflicts, Risk and Liquidity Management, etc.

• Depositaries

• Transparency, Leverage and Delegation

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Today’s Panel Members

• Stuart Martin

• Abigail Bell

• Chris Gardner

• Richard Heffner

• Dick Frase

• Gus Black

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© 2012 Dechert LLP

Level 2 Context and AIFMD Timetable

Stuart Martin

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Level 2 Context (1)

• AIFMD Level 1 (Directive):– adopted July 2011

– Maximum Harmonising Directive

– Limited Scope for Member State discretion e.g. individual portfolio management, capital aspects, annual report aspects, private equity aspects, marketing to retail investors, depositary transitional provisions

• AIFMD Level 2– Regulation with “direct effect”

– Will apply in addition to FCA Rule Book

– Detailed “meat in the sandwich” provisions

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Level 2 Context (2)

• Regulatory Technical Standards. For example:-– ESMA Consultation on types of AIF Managed by AIFM

• Level 3 Guidelines. For example:-– ESMA Consultation and Guidelines on Remuneration Policies and

Practices

– ESMA Consultation and Guidelines on Key Concepts e.g. Definition of AIF

• Other ESMA Work Streams include:-– Co-operation Agreements with Third Countries

– Relevant to Article 36/42 Marketing and Permitted Delegations

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Timetable Note the date…

AIFM Directive adopted July 2011 Implementation on 22 July 2013

FSA Consultation (Part 1) November 2012 Responses due by 1 February 2013

Level 2 Regulations published December 2012

ESMA Consultations on RTS for types of AIF and Guidelines on meaning of AIF

December 2012 Responses due by 1 February 2013

HM Treasury Consultation and draft Implementing Regulations (Part 1)

January 2013 Responses due by 27 February 2013

FSA Consultation (Part 2) Due February 2013

ESMA Guidelines on Remuneration Policies

Due Q1 2013

FCA’s Policy Statement on Implementation

June 2013

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Transitionals

Richard Heffner

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Transitionals

• FSA Firm managing AIF “immediately before” 22 July 2013– Transitional Relief available until 22 July 2014

– Must submit VoP before 22 July 2014

– Full compliance by earlier of grant of VoP or 22 July 2014

• 22 July 2013: New applicants/applicants with outstanding applications/existing FSA Firms not eligible for Transitional Relief – must obtain AIFMD permission prior to managing AIF

– Full compliance

• Potential Issues:– Access to EU Marketing Passport and National Private Placements

– Cross Border Management of EU AIF under Transitional Relief?

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Calculation of AUM, Regulatory Capital and PII Cover

Richard Heffner

[Level 1: Article 3(2), Articles 9(7)/15]

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AUM/Regulatory Capital/PII Cover

• Calculation of total AUM for purposes of the small AIFM exemptions– Portfolios included / excluded

– Temporary limit breaches

• AIFM regulatory capital– Change from MiFID investment manager basis

• Additional own funds– Min 0.01% of AIF AUM

• PI insurance Cover– Min each claim 0.7% of AIF AUM

– Min all claims 0.9% of AIF AUM

• Dual-authorised UCITS ManCo / AIFM

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© 2012 Dechert LLP

Operating Conditions: General Principles

Abigail Bell

[Level 1: Article 12(1)]

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General Principles (1)

• What are “operating conditions”?

• Derived from operating conditions for MiFID and UCITS managers – so reflect compliance policies, such as best execution and personal account dealing

• So similar to FSA COBS handbook

• Some obligations relate to the AIF itself, and not the manager

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General Principles (2)

• Quality and commitment of governing body/personnel

• No “undue costs” charged to investors

• Fair treatment of investors

• Due diligence requirements

• Appointment of prime brokers and counterparties

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© 2012 Dechert LLP

Operating and Organisational Conditions: Conflicts, Risk and

Liquidity Management, etc.

Chris Gardner

[Level 1: Articles 12,14,15,16,18 and 19]

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Conflicts of Interest

• AIFM/MiFID investment managers/UCITS management companies convergence – business as usual?

• Key features of conflicts policy

• Disclosure and internal reporting

• Impact on personnel structures

• AIF voting rights

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Risk Management

• Tracks equivalent requirements for MiFID investment managers and UCITS management companies

• What does “functional and hierarchical separation” mean?

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Liquidity Management

•A new requirement under AIFMD

•Match portfolio liquidity to redemption profile and counterparty commitments

•Guidance on liquidity measurement arrangements, liquidity limits and use of redemption gates and other liquidity management

tools

•Guidance for funds of funds

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Internal Procedures and Valuation

• Internal Business Arrangements

• Data Processing

• Accounting Procedures

• Permanent Compliance/Internal Audit Functions

• Personal Transactions

• Record Keeping

• Policies and Procedures for Valuation/Calculation of NAV

• Use of Models/Frequency of Valuation/Professional Guarantees for External Valuers

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© 2012 Dechert LLP

Depositaries

Dick Frase

[Level 1: Article 21]

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Depositaries

• Emphasis on safekeeping and oversight function

• Prescribed contents of AIFM/AIF/depositary custody agreement

• Ongoing information to be provided between the parties (including prime broker reporting)

• Depositary to monitor cash accounts, cash flows, subscriptions and redemptions, monitor AIFM’s procedures, check book-keeping and reconciliations, appropriate valuation procedures, investment restrictions, leverage, transaction settlement, income distribution

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Depositary/Prime Broker Structures

Onshore AIF, onshore AIFM

EU depositary

Prime broker as sub-custodian

Prime broker’s sub-custody network

Offshore AIF, onshore AIFM (EU marketing)

“Depositary light” - prime broker (custodian) and administrator/depositary

Prime broker’s sub-custody network

Offshore AIF, onshore AIFM (no EU marketing)

Out of depositary scope

Offshore AIFM (EU marketing)

Out of depositary scope?

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Transparency, Leverage and Delegation

Gus Black

[Level 1: Articles 22 to 25, Article 20]

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Transparency and Leverage

• Regulations contain more detail on reporting and disclosure

• Leverage calculation methodologies and “substantial leverage”– Gross Method

– Commitment Method

– Comparison vs. UCITS

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Delegation (1)

FundPrimary Manager

Sub-manager

or

AIFM?

?

Delegation (2)

Article 82(1)(d):

• “The AIFM delegates the performance of investment management functions to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself…”

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Other Provisions

• Annual Reporting

• Material Changes

• Remuneration Disclosure

• Periodic Disclosure

• Reporting to Competent Authorities

• Restriction of Leverage

• Arrangements with Third Countries/Co-operation Agreements/Exchange of Information

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