FSA has issued Discussion Paper on "Implementation of the Alternative Investment Fund Managers Directive"

Financial Services Authority (FSA), capital market regulator in United Kingdom published first discussion paper on "Implementation of the Alternative Investment Fund Managers Directive" in process to initiate coherent between EU directives and regulation of Alternative Investment Fund (AIF) industry in the country.

This Discussion paper (DP) to set out some provisional thinking in approach to implementing the European Union Alternative Investment Fund Managers Directive (the Directive or AIFMD) in the UK.

Objectives of the DP

This DP has two folds objective:

i) Development of well-informed, proportionate and effective regulatory policy on alternative investment fund managers (AIFMs); and

ii) Assisting stakeholders towards ‘AIFMD-readiness’,and establish regulatory changes in UK in line of the EU directive.

EU Directive on AIFM's

The European Union Directive on Alternative Investment Manager was published in the Official Journal of the European Union on 1 July 2011. EU Member States, such as the UK, are required to transpose the Directive by 22 July 2013.
The Directive is one of several pieces of EU and domestic regulation that firms, especially fund managers, will need to consider over the next 18 months. The EU Directive forms part of a legislative programme put forward by the Commission to ‘extend appropriate regulation and oversight to all actors and activities that embed significant risks’.

The goals for the Directive were to:
• establish a secure, harmonised EU framework for monitoring and supervising the risks that AIFMs pose to their investors, counterparties and other financial market participants and to financial stability; and
• permit, subject to compliance with strict requirements, AIFMs to provide services and market their funds across the internal market.

Meaning of Alternative Investment Fund (AIF)

There is no simple definition of an Alternative Investment Fund. In summary, Alternative Investment Funds are defined by their characteristics, including: a nontraditional strategy, a focus on risk rather than reward: reduced correlation to traditional markets and some form of performance based fee structure.

The EU Directive contains a fairly broad legal definition of an AIF which seeks to capture any investment fund which does not require authorisation under the UCITS Directive. The Directive also specifies a number of additional elements in the definition, including (i) the raising of capital from (ii) a number of investors (iii) with a view to investing that capital in accordance with a defined investment policy (iv) for the benefit of those investors.

Potential AIFs in UK

Present DP expects the AIF population to be diverse, which in turn would mean that there will be a diverse population of AIFMs. As an illustrative starting point, we expect that some, or all, of the following, may be considered UK AIFs:

• hedge funds, hedge funds of funds;
• private equity and venture capital funds;
• property funds;
• investment trusts;
• Real Estate Investment Trusts (REITs);
• FSA-authorised non-UCITS funds including Non-UCITS Retail Schemes (NURS), Funds of Alternative Investment Funds (FAIFs) and Qualified Investor Schemes (QIS);
• charity funds (these are distinct from social funds which are currently the subject of a Commission proposal for regulation);
• commodity funds; and
• infrastructure funds.

The Financial Services Authority invites comments on this Discussion Paper. Comments should reach us by 23 March 2012.
Comments may be sent by electronic submission using the form on the FSA’s website at: www.fsa.gov.uk/Pages/Library/Policy/DP/2012/dp12_01_response.shtml.