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Funds: Five by Five


United Kingdom

Welcome to the first edition of Five by Five. Five by Five is a short summary of the key developments that we have discussed with our fund clients over the last few months.

This edition covers: the European Commission's report on its assessment of the AIFMD (and what could be in AIFMD 2.0), a Brexit update, the HMT Consultation on the tax treatment of asset holding companies, the UK government's proposals for a new overseas funds regime, the HMT Consultation on a Regulatory Framework for Approval of Financial Promotions, the extension to SMCR deadlines, recent changes for open- and closed-ended funds in the Cayman Islands, IBORs and electronic signatures.

European Commission's report on its assessment of the AIFMD

On 10 June 2020, the European Commission published its report assessing the application and the scope of Alternative Investment Fund Managers Directive. As required by Article 69 of the AIFMD, the report reviews the impact of AIFMD on investors, AIFs and AIFMs, and assesses whether the objectives of the AIFMD have been met.

At 8-pages of body text, the report is an easy read but the following caught our eye:

On the impact of the AIFMD on AIFs and AIFMs, the report focusses on cross-border marketing and finds that the efficacy of the EU AIFM passport is impaired by national gold plating, divergences in the national marketing rules, varying interpretations of the AIFMD by national supervisors and its limited scope.

"Smaller AIFMs unable to comply with all the requirements of the AIFMD must forgo raising capital in other Member States or overcome significant barriers to market access. Moreover, the AIFM passport allows marketing only to professional investors, again restricting the cross-border activities of AIFMs as semi-professional and retail investors can only be approached under varying (and often restrictive) national rules."

The Commission does refer to the package on Cross-Border Fund Distribution of Investment Funds and the EuVECA designation. The hope is, however, that the Commission will take further action here and help smaller managers.

"…NPPRs differ among Member States and, more importantly, require AIFMs to implement only a very limited number of the AIFMD requirements. This creates an un-level playing field between EU and non-EU AIFMs. Some Member States have closed market access for third country entities entirely. Some Member States have suggested further harmonising the NPPRs, whereas others consider that activating the AIFMD passport for third country entities, followed by a phasing-out of NPPRs, would be a better solution to this issue. "

This is difficult to interpret but perhaps we will finally see the AIFMD passport be activated for certain third countries. This would also start the clock ticking towards the end of the NPPRs.

"the lack of a depositary passport is at odds with the spirit of the single market. Because of the limited choice of service providers in smaller markets, there are also fears of concentration risk where a single depositary could hold the assets of all AIFs established in a Member State."

A depositary passport could well be proposed. This could possibly improve the attractiveness of certain EEA fund domiciles like Malta and give investors and managers greater choice.

"[The Annex IV] reporting requirements are confirmed to be necessary for supervisors to monitor risks to the financial system across sectors and borders. However, a closer analysis points to the need to consider their streamlining, while being mindful of the sunk costs already incurred by the compliant AIFMs."

We can only hope that Annex IV reporting to multiple EEA regulators will be made easier.

Following the submission of the report to the EU co-legislators, the AIFMD requires the Commission, if deemed appropriate, to put forward proposals, including amendments to the AIFMD. The Commission is expected to publish a consultation paper in September 2020. 

Brexit update

As no extension was requested by the UK prior to 1 July 2020, the Brexit transitional period will end – unless there is some last minute political sleight of hand - on 31 December 2020.
The (new) Political Declaration, which together with the Withdrawal Agreement set out the future relationship between the UK and the EU) stated that the EU and the UK would endeavour to conclude financial services equivalence assessments for both sides before the end of June 2020. 
There were publications and speeches on this point by both the UK and the EU at the end of June and in early July.
The Commission Communication of 9 July summarises the current position with respect to the EU's assessment of the UK regime's equivalence. The Communication can easily be read as suggesting that there will be no MiFID equivalence assessment by 31 December or, indeed, "in the short or medium term".
As things stand, UK firms that were planning on relying on an equivalence assessment in order to continue to offer their MiFID services into the EU after 2020 will need to hope for individual states to take unilateral action but should be prepared to activate their Brexit-contingency plans.
HMT consultation on the tax treatment of asset holding companies​
On 11 March, HM Treasury published a consultation that seeks to gather evidence and explore the attractiveness of the UK as a location for the intermediate entities through which alternative funds hold fund assets (referred to as asset holding companies, "AHC").
The Consultation was due to close on 19 May 2020 but due to COVID-19 the closing date has been extended to 19 August 2020.  Alternative funds in this context generally mean closed-ended funds such as real estate, private equity and debt funds.
The Consultation is part of the review of the UK funds regime.
It remains to be seen whether an introduction of new UK tax rules would enable the UK to compete with jurisdictions such as Ireland and Luxembourg, but the Government hopes the consultation will provide it with a better understanding of the role AHCs within these fund structures and the commercial and tax drivers behind their location. It is a positive step.

UK government proposals for new overseas funds regime

Between March and May, HM Treasury consulted on proposals for a UK overseas funds regime allowing overseas funds, including EU UCITS and Money Market Funds, to be sold to UK retail investors.

The proposed Overseas Funds Regime ("OFR") would introduce two new routes into the UK based on a principle of equivalence: one for retail investment funds and one for money market funds.

Please get in contact if you would like receive a copy of our note that considers the proposals in more detail.

Regulatory Framework for Approval of Financial Promotions - HMT Consultation

On 20 July 2020, HM Treasury published a consultation paper on proposed reforms to the regulatory framework for the approval of financial promotions under the Financial Services and Markets Act 2000 (FSMA).

The government proposes to establish a regulatory gateway that authorised firms must pass through before they are able to approve the financial promotions of unauthorised firms. Any firm wishing to approve unauthorised firms' financial promotions would first need to obtain the FCA's consent.

It is seeking stakeholders' views on two policy options. The first would restrict the approval of unauthorised firms' financial promotions by imposing requirements on authorised firms. The second would specify the approval of financial promotions communicated by unauthorised persons as a regulated activity under FSMA. Both options would result in amendments needing to be made to section 21 and other sections of FSMA.

Treasury extension to SMCR deadlines  

On 30 June 2020, the Treasury agreed to delay, from 9 December 2020 until 31 March 2021, the deadline for solo-regulated firms to have undertaken the first assessment of the fitness and propriety of their Certified Persons. This is to assist firms significantly affected by the coronavirus pandemic giving them time to make the changes they need.

To ensure SM&CR deadlines remain consistent, and to provide extra time for firms that need it, on the same date the FCA announced that is proposing to extend the deadline for the following requirements from 9 December 2020 to 31 March 2021:

  • the date the Conduct Rules come into force, for staff who are not Senior Managers or Certified Persons;
  • the date by which relevant employees must have received training on the Conduct Rules; and
  • the deadline for submission of information about Directory Persons to the FS Register.

Firms are advised to comply with the requirements as soon as possible and not wait until the extended deadline date if possible.

Cayman Islands – recent changes for open- and closed-ended funds

The exemption from CIMA regulation for an open-ended fund with no more than fifteen investors, a majority of whom are capable of appointing or removing the governing body (a Section 4(4) Fund). Was removed on 7 February 2020. Section 4(4) Funds that were in existence on this date have until 7 August 2020 to comply.

The Section 4(4) Fund regime was attractive to start-up hedge fund managers. In a future note, we will look at the extent to which this makes the Cayman Islands less attractive as a fund domicile for start-up managers and whether other jurisdictions such as the BVI could increase their market share of the start-up fund market.

The exemption from CIMA regulation for closed-ended funds (Private Funds) was also removed on 7 February 2020. Private Funds that were in existence on this date have until 7 August 2020 to comply.

Furthermore, in July the law was amended to change the definition of a 'private fund'.

The new definition of "private fund" is as follows: 

a company, unit trust or partnership is defined as a 'private fund' where it offers or issues, or has issued, investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity's acquisition, holding, management or disposal of investments, where;

  • the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments and the investments; and
  • the investments are managed as a whole by or on behalf of the operator of the private fund directly or indirectly.

Certain vehicles that believed that they would not be Private Funds should re-assess the situation in light of this amended definition. It is important to note that the compliance deadline of 7 August 2020 has not changed.  

CIMA published new rules on the contents of offering documents and marketing materials. The new rules are relevant to regulated mutual funds and registered private funds. Generally, the requirements should largely be met by a reasonably documents, although certain aspects – particularly the valuation disclosures have raised a few questions. We understand that further guidance will be released shortly.


As you have probably seen, the pressure is on as far as new contracts being written on the IBOR replacement reference rates are concerned. It is clear that certain IBORs will not be available post-2021 (and that this will not be delayed due to the current COVID-19 pandemic) and regulators expect firms to transition legacy positions swiftly.

The FCA has already written to asset managers in a 'Dear CEO' letter to remind firms of their regulatory obligations to investors and the need to prepare and implement a transition plan. Being proactive is essential and firms cannot base their plans on regulatory relief or waiting for client instructions or sell-side counterparties to take the initiative.

The ISDA solutions – namely the upcoming supplements to the 2006 Definitions and the Benchmarks Supplement – may not be a panacea. They are an absolute last resort to ensure that IBOR-linked products are not defeated by the cessation of the IBOR but are not to be relied upon in 'business as usual' manner. They could lead to uncompensated transfers of value that are adverse to the fund and its investors. Swaptions have their own product-specific nuances that need to be considered as well.

Instead, asset managers should prioritise trading out of IBOR-linked cash and derivative products and into RFR-linked ones. The FCA, PRA and the Sterling WGRFR set targets of March 2020 for market makers to transition away from GBP LIBOR-linked derivatives and the end of Q1 2021 for the issuance of GBP LIBOR-linked cash products that mature after 2021 to cease. Asset managers should therefore be aiming to transition in line with these targets.

Addressing product-level deficiencies is only one piece of the puzzle. Transition plans will also need to address governance and senior managers issues, conduct of business risk, operational and accounting issues, disclosures and communications with investors and performance benchmarking, amongst other things.

You may be aware of our IBORs website but it's not just the technical intelligence that firms need to stay abreast of. No one wants to pioneer these changes but no one wants to be last either.

Our IBOR discontinuance team would be happy to arrange meetings with asset managers to check that they are at the appropriate stage of readiness given their size and positions. The team has been talking to firms for some time now and can quickly take the temperature on the level readiness.

Electronic Signatures Opinion Portal

Whilst in lockdown, like almost all businesses around the globe our lawyers and clients have been grappling with the technicalities and practicalities of signing documents remotely. Our lawyers have also been using their time to extract from the ISDA E-Contracts Opinions which methods of electronic or remote execution of documents are permitted for companies in around 37 jurisdictions.

We are delighted to be able to offer to ISDA members the output from that extraction exercise in the form of an Electronic Signatures Opinion Portal.
Whilst the ISDA Opinions specifically address the execution of various ISDA documents, the conclusions in most cases should be equally applicable to other documents governed by English and New York law, with a few caveats which we have sought to identify.
If you would like to make use of the Portal, please register. As long as you work for an ISDA member firm we will accept your registration.  The Portal is free of charge to users and with no obligation on you or your firm.

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