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Sub-threshold AIFM exemption: transposition confirmedThe Policy Statement confirms that the UK will transpose the ‘sub-threshold’ AIFM exemption by introducing two categories of AIFM: a ‘small registered AIFM’ and a ‘small authorised AIFM’.

The Flowchart [page 2] sets out the questions that should be asked by a UK AIFM for it to determine whether it would be able to rely on the sub-threshold exemption and if so which category of sub-threshold AIFM it would fall into.

Two terms used in the AIFMD which are key to a AIFM in determining whether or not it falls within the sub-threshold exemption are: ‘leverage’ and ‘assets under management’.

LeverageThe AIFMD defines ‘leverage’ as ‘any method by which the AIFM increases the exposure of an AIF it manages whether through the borrowing of cash or securities, or leverage embedded in derivative positions or by any other means’.

This is a very broad definition and, as no de minimis leverage position is provided, means an AIF will often be deemed as ‘leveraged’ when exposed to any assets, liabilities, borrowings and derivative instruments. The methodology for calculating leverage is complex and AIFMs should take care to establish appropriate systems for carrying this out.

Assets under managementsIn order to qualify for the sub-threshold AIFM exemption an AIFM is required to follow the prescribed procedure for calculating AUM and this figure must be reported to the FCA at the time of registration, authorisation or variation of permission (whichever is applicable to the AIFM). The AIFMs AUM must be monitored by the AIFM on an ongoing basis (the latest asset valuation should be done no more than 12 months prior to the AUM calculation).

Next steps for AIFMs seeking be sub-threshold AIFMsUK firms which are already carrying on management of AIFs will have a one year transitional period before needing to register or become authorised as an AIFM. However, it is never too early for such firms to start the process of determining whether they will be able to take advantage of the sub-threshold exemption.

Firms which are unable to stay within the relevant AUM threshold test will find itself subject to a far more intensive compliance and regulatory capital regime than it is currently subject to (for example, the initial capital requirement of a full-scope AIFM is EUR125,000). It is therefore recommendable for firms managing AIFs to obtain the necessary advice sooner rather than later.

BackgroundWith less than 30 days to go before the Alternative Investment Fund Managers Directive (“AIFMD”) will be transposed in UK, the FCA published its much anticipated Policy Statement 13/5: “Implementation of the Alternative Investment Fund Managers Directive” on Friday 28 June.

The Policy Statement sets out the final form of the FCA rules and guidance which, in addition to the Alternative Investment Fund Managers Regulations 2013, will transpose the AIFMD into UK law on 22 July 2013.

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Sub-threshold AIFMs – a route map

Financial Regulation

Requirements• Will need Part 4A permission to carry out the activity of

‘managing an AIF’

• Will need to provide the same information as a small registered UK AIFMs would with respect to the AIFs that it manages

• As an authorised person it will be subject to applicable requirements under the FCA handbook, e.g. regulatory capital requirements, approved persons, etc.

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Do you manage (either directly or indirectly) portfolios of AIFs whose aggregate assets under management (“AUM”) is higher than EUR 500 million?

Full scope AIFMD provisions apply (unless another exemption exists)

Do investors have redemption rights within the first five years of their initial investment in any of the AIFs you manage?

Are the AIFs you manage leveraged (this is defined widely to include almost any increased exposure an AIF is subjected to)? Is your total AUM below

EUR 100 million? (including any assets acquired through the use of leverage)

Full scope AIFMD provisions apply (unless another exemption exists)

You will fall within the sub-threshold AIFM partial exemption (Unless you opt up to become a full scope UK AIFM – in which case you will be subject to the full requirements of the AIFMD).Sub-threshold AIFMs are still subject to some AIFMD requirements. In the UK there will be two categories of sub-threshold AIFMs: a ‘small registered UK AIFM’ or a ‘small authorised UK AIFM’.

Requirements• Will not need to be authorised to carry out the activity of managing

an AIF but will need to register with the FCA

• The registration process has not yet been confirmed by the FCA, but AIFMs will at the very least:

- identify themselves and the AIFs they manage

- provide information on the investment strategies of the AIFs they manage (including information on the main categories of assets in which the AIF may invest, the main market sectors which are the focus of their investment strategies and a description of the AIF’s borrowing policy)

- periodically report on the main instruments in which they trade, their principal exposures and the main concentrations of the AIFs that they manage

- establish procedures for ongoing monitoring of AUM and ensuring notification procedures are in place to notify the FCA if AUM move above the relevant threshold.

Small registered UK AIFMThis category is only available to:

• An AIFM that is an internal manager of a body corporate that is not a collective investment scheme

• External AIFM of certain real estate funds which are operated by an FCA authorised operator

• External AIFM that has applied for registration as a qualifying EU social entrepreneurship fund manager or as a qualifying EU venture capital fund manager.

Small authorised UK AIFMApplies to all sub-threshold AIFMs which are not ‘small registered UK AIFMs’, including:

• Managers of authorised funds whether in the form of an OEIC or unit trust (e.g. a NURS or a QIS)

• Managers of unregulated collective investment schemes.

Yes

Yes

Yes

No

YesNo

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Financial Regulation

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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP and affiliated entities that practise under the name ‘Pinsent Masons’ or a name that incorporates those words. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2013. For a full list of our locations around the globe please visit our website: www.pinsentmasons.com

Frank DoranPartnerFinancial Regulation T: +44 (0)141 567 8538M: +44 (0)7771 934961E: frank.doran@pinsentmasons.com

For more information, please contact:

Monica GognaPartnerFinancial Regulation T: +44 (0)20 7490 9695M: +44 (0)7500 760840E: monica.gogna@pinsentmasons.com

John VerweySenior AssociateFinancial Regulation T: +44 (0)20 7490 6612M: +44 (0)7747 860256E: john.verwey@pinsentmasons.com

Daniel GreenawayPartnerFunds T: +44 (0)20 7490 9331M: +44 (0)7585 996272E: daniel.greenaway@pinsentmasons.com

Ian WarnerPartnerFunds T: +44 (0)20 7418 9536M: +44 (0)7795 126912E: ian.warner@pinsentmasons.com

Sub-threshold AIFMs – a route map

Financial Regulation

You can find links to our previous briefings below:Parliamentary Commission on Banking Standards Report

FCA policy statement on Unregulated Collective Investments Schemes – product intervention in action June 2013

AIFMD briefing