UK adopts 'enlightened' attitude on AIFM

The UK’s financial watchdog, the Financial Services Authority (FSA), gave the UK private equity industry something to cheer when it released its first Alternative Investment Fund Managers Directive (AIFM) consultation paper last week.

Despite having to wait until at least February for many details important to private equity managers (which is when a second consultation paper is expected) the industry will be buoyed by the FSA permitting the use of non-bank depositories.

These depositories will be allowed to take on certain responsibilities without necessarily needing to hold assets in custody. It is also the intention of the FSA for non-bank depositories to have lower capital requirements than other depositories.

The industry argues extending the depository function to fund administrators for example would increase market competition and lower costs.

GPs are also welcoming the FSA’s stance on delegation, an area of of AIFM rulemaking that is believed to be holding up the release of the directive’s more detailed level II measures. The directive states a manager must remain in charge of its basic functions and not become a “letter-box entity”. This is when a manger delegates so many of their responsibilities that the delegated tasks substantially exceed the tasks remaining with the manager.

“What is positive to see is the FSA talking very firmly about the benefits of delegation. They talk about how they will look at everything on a case by case basis in a robust and flexible way,” said Andrew Henderson, counsel at law firm Ropes & Gray.

That is not to say that the FSA can deviate from the directive, and the delegation test will be detailed in the level II measures, but the directive will contain discretionary language. Market sources say the FSA is seeking to position itself as an “enlightened regulator”.

“They would like to see a qualitative test rather than a quantitative test, which I think is very sensible as a big fear has been that a regulator would judge any alternative investment manager’s business by a single standard,” said Henderson.

On rules related to transparency, Henderson noted that the consultation paper is essentially requiring disclosures already contained within a standard limited partnership agreement (LPA). But where the LPA doesn't “require information to be made available at least on request, those agreements may need to be amended”.