For AIFs and AIFMs managed or marketed in the EEA
By Justin Partington, Commercial Director, Ipes , October 2014
Regulators are fond of recalling former Chairman of the SEC William O. Douglas’ pithy comment that, “sunlight is the best disinfectant” in the context of regulators’ view on transparency. Private Fund Managers did not cause the financial crisis nor did they heighten systemic risk. The Alternative Investment Fund Manager s Directive (AIFMD) reporting will help to substantiate that.
As deadline for the first round of AIFMD reporting approaches, the European Securities and Markets Authority (ESMA) and the Financial Conduct Authority (FCA) have clarified the process.
In our last client briefing on Alternative Investment Fund Managers (AIFM) reporting, we covered who needs to report and how often based upon the type of assets held and the total value of assets under management (AUM).
In this briefing, we address the further guidance issued by the FCA on 29 September 2014. This guidance helps AIFs and AIFMs managed or marketed in the EEA to work out what to report and by when to the FCA.
Which entities do I report for?
Article 24 of the AIFMD requires reporting on both AIFMs and AIFs if managed or marketed in the EEA.
The categories of AIFM in the UK are as follows:
- Full Scope UK AIFMs
- Small Authorised UK AIFMs
- Small Registered UK AIFMs Non EEA AIFMs marketing into the UK must apply similar reporting requirements to their UK counterparts.What details do AIFMs need to report?AIFMs in all three categories listed above need to report the following:
- the main instruments in which it is trading, including a break-down of financial instruments and other assets, including the AIF's investment strategies and their geographical and sectoral investment focus;
- the markets of which it is a member or where it actively trades;
- the diversification of the AIF's portfolio, including, but not limited to, its principal exposures and most important concentrations. (source: SUP 16.8.4EU para 1 and 2)
Further, Full Scope UK AIFMs have to also report additional information as defined in FUND 3.4.2R, 3.4.3R, 3.4.5R and 3.4.6AR(1) and summarised as follows:
- principal exposures and key concentrations;
- investments by geographical focus (in percent);
- identify short positions that are hedges;
- the Value at Risk (VaR), if calculated for any other purpose (optional);
- the portfolio's sensitivity to a change in foreign exchange rates and commodity prices, if available.In addition, if a Full Scope UK AIFM manages a Feeder AIF registered or marketed in the EEA and the master AIF is non-EEA, it needs to report information of the non EEA Master AIF.
What details do AIFs need to report?
For each AIF that is EEA domiciled or marketed in the EEA, the following needs to be reported:
- the percentage of the AIF’s assets which are illiquid;
- any new arrangements for managing the liquidity of the AIF;
- the risk management systems employed by the AIFM to manage the market risk, liquidity risk, counterparty risk and other risks including operational risk;
- the current risk profile of the AIF, including:
- the market risk profile of the investments of the AIF, including the expected return and volatility of the AIF in normal market conditions;
- the liquidity profile of the investments of the AIF, including the liquidity profile of the AIF's assets, the profile of redemption terms and the terms of financing provided by counterparties to the AIF;
- total leverage;
- breakdown leverage from cash and securities and derivatives;
- extent of reuse of AIF assets;
- the 5 largest sources of leverage and the amounts.(source: FUND 3.4.5R)
How do I submit the reporting?
AIFMs are to report through form AIF001 and through form AIF002 for their AIFs. While the sample forms contain nearly 600 rows of data points, the forms are straightforward and written clearly. For Private Equity many of the sections are not applicable.
How often do I need to report?
Most Private Equity Funds (AIFs) will be required to report on an annual basis. If the AIF is leveraged, holds listed securities, or cannot meet the criteria for annual reporting then the reporting reverts to AUM to define the frequency. The table below sets this out: One issue for larger Private Equity buyout firms is whether small or short-term holdings of listed securities, if retaining a partial holding of an IPO for example, trigger quarterly reporting.The AIFMD Level 2 Regulations state that an AIFM is only required to submit annual reports for the AIF if it is unleveraged and the AIF’s core investment policy is to invest in non-listed companies and issuers in order to acquire control.If the AIF’s formation documents clearly state that its core investment policy does not include investment in listed securities, then holding such securities from time-to-time will not trigger quarterly reporting and the AIF can report annually.
When does the reporting period start?
For AIFs that have commenced, the reporting period starts from the first day of the calendar quarter following authorisation or registration. For example, if an AIF was registered on 22 July 2014, the reporting period would start from 1 October 2014. Please note that AIFs that have not commenced still need to report a nil return.
What is the reporting deadline?
One month after the respective calendar quarter or year end. Funds of Funds have a further extension of 15 days. For example, if an AIF was registered on 22 July 2014, the reporting period would start from 1 October 2014 and end on 31 December 2014, and therefore the reporting deadline is 31 January 2015. For Funds of Funds it would be 15 February 2015.The FCA's GABRIEL system will show a reporting schedule for each AIFM. We strongly urge all of our clients to access GABRIEL when the module comes online to check the accuracy of their reporting schedule. The FCA takes no responsibility for the accuracy of the schedule and all Fund Managers are responsible for checking.
What if I miss a report or file late?
An administrative fee of £250 may apply, and the FCA may issue a reminder.The FCA note that enforcement options include possible cancellation of authorisation or registration.
If you would like to discuss this in greater detail, please give me a call – I would happy to discuss further.
Commercial Director, Ipes
Specific issues by AIF type
Funds of Funds (FoF)
- Do not need to look-through the underlying Funds holdings
- If managers have a mix of FoF and non FoF, file the AIFM and non FoF reporting within a month of deadline. Within a month plus 15 days, file the FoF reporting PLUS the revised AIFM reporting to reflect the latter updates
- Remember that Fund of Funds have an extra 15 days to report Feeder Fund
- Do not aggregate Feeder Funds reporting. Report each Feeder separately
- No look through to Master holdings Umbrella / compartmentalised Funds With compartments common in Luxembourg Fund structures, report AIF information separately on each compartment.Specific reporting points for Private Equity Funds
- The reporting of share class will not apply for many PE Funds that are organised in partnership rather than corporate form
- The Strategies section is by alternative strategy by AIF. For many PE managers, this will be a straightforward 100% PE response
- With no Prime Brokers, master AIFs, or financial instruments with counterparties held by most PE Funds, much of the reporting is a nil return
- Concentration of the investments by value and geography is to be reported, as is the concentration of the investors along with the split between professional and retail investors
- Gross and net IRRs on a monthly basis may present a challenge given quarterly accounts and semi-annual valuations by most Private Equity Managers
Sourcebook ('SUP') 16.18