18.10.2018

Draft EU Exit Regulations for investment funds and their managers

The HM Treasury has published two draft statutory instruments, which will make amendments to retained EU law related to investment funds and their managers, to be laid under the European Union (Withdrawal) Act 2018.

The Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018

The draft Regulations set out the design and structure of a temporary permissions regime for Alternative Investment Funds (AIFs) and Alternative Investment Fund Managers (AIFMs) (including European Venture Capital Funds (EuVECAs), European Social Entrepreneurship Funds (EuSEFs), European Long-Term Investment Funds (ELTIFs) and Money Market Funds (MMFs) which use an AIF structure).

The explanatory memorandum to the draft Regulations explains that:
• temporary permissions will last for three years after Brexit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances;
• to enter the regime, an AIFM of an eligible AIF will need to inform the FCA prior to Brexit day that it wishes the relevant fund(s) to have temporary permission to be marketed in the UK. The FCA will provide further details to firms on how and when to do this. During this temporary permissions regime, the AIFM will be able to market the relevant fund in the UK on the same terms and subject to the same conditions as it could before Brexit day. To continue marketing the relevant AIF after the end of the temporary permissions regime, the AIFM must notify under the National Private Placement Regime (NPPR). The AIFM will be directed by the FCA to make the notification within two years from Brexit day;
• the AIFM will be required to continue to comply with the duties imposed on it in relation to a host Member State by specific provisions of the AIFMD, and which were previously implemented by the home Member State. This includes notifying the FCA of any changes to the documentation for a passporting AIF, and changes to the passporting AIFM’s programme of operations; and
• the FCA will have the same power to revoke or suspend an AIFM’s entitlement to market an AIF during the temporary permissions regime as it does to revoke or suspend the entitlement of an AIFM to market an AIF under the NPPR.

Other changes introduced by the draft Regulations include:
• amendments to the definition of an AIF: an AIF will be any investment fund that is not subject to the UK Collective Investment in Transferable Securities (UCITS) regime (see the draft Collective Investment Schemes (Amendment) (EU Exit) Regulations 2018). All non-UK funds, including EEA UCITS, will be defined as AIFs;
• the dis-application of the NPPR information and reporting requirements for funds that are recognised under section 272 of the Financial Services and Markets Act 2000 for marketing to retail investors;
• align the treatment of EEA AIFMs with that of other third country AIFs by requiring them to notify under regulation 59 of the AIFM Regulations (which implemented Article 42 of the AIFMD). The draft Regulations will enable an EEA AIFM to enter the temporary permissions regime, and market the relevant fund on the same terms and subject to the same conditions as it could have been before Brexit day, before notifying and becoming recognised under regulation 59;
• a UK AIFM will only be required to report on portfolio companies and comply with the restrictions on asset stripping when it acquires control of a UK company (as opposed to an EU company); and
• the removal of provisions requiring cooperation and information sharing. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.

The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018

As UK authorised schemes will no longer be established and authorised in the EEA post Brexit, they will lose their legal status as UCITS funds according to EU law. The draft Regulations introduce a UK UCITS regime for funds established and authorised in the UK, which will be distinguished by the label “UK UCITS”, and the relevant activity in the Regulated Activities Order will be “managing a UK UCITS”.

To ensure continuity for investors, the UCITS Directive’s investment rules will be maintained for UK UCITS. Also, to provide for continuity with the regime under the UCITS Directive, the draft Regulations allow the cash of a UK UCITS to be booked in accounts opened with any EEA credit institution. The intention here is to allow UK UCITS to continue to use settlement accounts in other Member States to give effect to their investment mandates.

Significantly, the draft Regulations set out the design and structure of a temporary permissions regime for EEA UCITS (including MMFs that use a UCITS structure). The explanatory memorandum to the draft Regulations explains that:
• the temporary permissions regime will last for three years from Brexit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances;
• to enter the temporary permissions regime, the operator of an EEA UCITS which markets into the UK before the UK leaves the EU will need to inform the FCA prior to Brexit day that it wishes the relevant fund(s) to have permission to be marketed in the UK. Funds with temporary permissions will be treated as a recognised scheme, and can continue to be marketed to retail investors in the UK;
• in relation to sub-funds, the temporary permissions regime will only be available to existing sub-funds of EEA UCITS which have been specified in that EEA UCITS’s notification to the FCA to enter into the temporary permissions regime before Brexit day. Such sub-funds will not be, nor will they form part of, recognised schemes under the temporary permissions regime;
• the operator of the EEA UCITS will be required to provide the following: (i) a notification if the authorisation of the scheme in the home state is varied or cancelled; (ii) information that they are currently required to provide to the FCA as the host state competent authority; and (iii) information that they would have previously had to notify to the home state competent authority, which would then have been shared with the FCA; and
• the operator of EEA UCITS with temporary permissions will be required to continue to comply with the duties imposed on it in relation to a host member state by specific provisions of the UCITS Directive, and which were previously implemented by the home member state.

In order to be marketed to UK retail investors, EEA UCITS that have not entered the temporary permissions regime will need to recognised under section 272 of the Financial Services and Markets Act 2000. In order to be marketed to institutional investors in the UK, the operator of the fund will need to notify the FCA under the national private placement regime and market the fund as a third country AIF. This process for marketing to UK investors is the same as the existing process for third country funds.

After Brexit day, the depositary, trustee, operator and/or manager of UK authorised funds will have to meet the following requirements, depending on the legal form the fund takes:
• authorised unit trust: the manager and trustee must each be a body corporate incorporated in the UK, the affairs of each must be administered in the UK and they must each have a place of business in the UK;
• authorised contractual scheme: the operator and depositary must each be a body corporate incorporated in the UK, the affairs of each must be administered in the UK and they must each have a place of business in the UK; and
• open-ended investment companies: the depositary must be a body corporate incorporated in the UK and have a place of business in the UK. The sole director must also be a body corporate incorporated in the UK;

After Brexit day cross-border mergers between UK UCITS and EEA UCITS will no longer be possible.

Provisions in UK legislation requiring cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.

Further information: