PERG 16.3 Managing an AIF
Question 3.1: What does managing an AIF mean?
A person manages an AIF when the person performs:
(1) risk management; or
(2) portfolio management;
for the AIF.
Question 3.2: If a person performs only one of the activities listed in the answer to Question 3.1 does it manage an AIF?
Yes. However, an AIFM is not permitted to be authorised to manage an AIF on that basis (see FUND 1.4.4 R (4)). An undertaking that is seeking permission to manage an AIF will not be given permission to provide portfolio management without also providing risk management or vice versa.
Question 3.3: Are the activities mentioned in the answer to Question 3.1 the only activities included in managing an AIF?
No. If a person manages an AIF (within the meaning set out in the answer to Question 3.1), and also carries on:
(1) one or more of the additional activities listed in the answer to Question 3.4); or
(2) one or more other activities in connection with or for the purposes of the management of that AIF;
those activities are included in the regulated activity of managing an AIF.
Question 3.4: What are the additional activities referred to paragraph (1) of the answer to Question 3.3?
They are as follows:
(1) administration:
(a) legal and fund management accounting services;
(b) customer inquiries;
(c) valuation and pricing (including tax returns);
(d) regulatory compliance monitoring;
(e) maintenance of unit / share holder register;
(f) distribution of income;
(g) unit issues and redemptions;
(h) contract settlements (including certificate dispatch) and;
(i) record keeping;
(2) marketing; and
(3) activities related to the assets of AIFs, namely:
(a) services necessary to meet the fiduciary duties of the AIFM;
(b) facilities management;
(c) real estate administration activities;
(d) advice to undertakings on capital structure, industrial strategy and related matters;
(e) advice and services related to mergers and the purchase of undertakings; and
(f) other services connected to the management of the AIF and the companies and other assets in which it has invested.
Question 3.5: Does anyone carrying on only the activities listed in the answer to Question 3.4 carry on the regulated activity of managing an AIF?
No. Those activities only involve managing an AIF for a particular AIF if the person doing them is carrying on, for that AIF, the part of the regulated activity of managing an AIF described in the answer to Question 3.1. If an AIFM carries on the activities listed in the answer to Question 3.4 in relation to a fund of which it is the AIFM those activities are included in the regulated activity of managing an AIF. But, if the activities listed in the answer to Question 3.4 are carried on by a third party, that third party will not be carrying on the regulated activity of managing an AIF for that AIF, although that third party may be carrying on other regulated activities, such as arranging (bringing about) deals in investments or making arrangements with a view to transactions in investments.
Question 3.6: Can an AIF manage itself?
Yes. An AIFM may be:
(1) another person appointed by or on behalf of the AIF and which through that appointment is responsible for managing the AIF (an external AIFM); or
(2) where the legal form of the AIF permits internal management and where the AIF's governing body chooses not to appoint an external AIFM, the AIF itself (an internal AIFM).
Question 3.7: What effect does delegation have?
An AIFM is permitted to appoint a delegate to provide portfolio management and/or risk management services for the AIFM (see FUND 3.10 and regulation 26 of the AIFMD UK Regulation).
If the delegation relates to the additional services described in the answer to Question 3.4 (What are the additional activities referred to paragraph (1) of the answer to Question 3.3?) the delegate will not be managing an AIF, for the reason in the answer to Question 3.5 (Does anyone carrying on only the activities listed in the answer to Question 3.4 carry on the regulated activity of managing an AIF?).
In any case, under article 51ZC(3) of the RAO a person does not manage an AIF if the functions it performs for the AIF have been delegated to it by another person, provided that such other person is not an AIFM that has delegated such functions to the extent that it is a letter-box entity. So a person who has received a delegation of some of the AIFM's core functions (ie, the functions listed in the answer to Question 3.1 (What does managing an AIF mean?)) generally does not manage an AIF. Letter box entities are described in the answer to Question 3.8 (Does this mean that delegation can never affect who is doing the regulated activity of managing an AIF?).
This answer reflects AIFMD, which envisages that generally an AIFM may delegate functions without the delegate becoming the AIFM in place of the original manager, or the delegate becoming the AIFM alongside the original manager, in breach of the requirement that there be only one AIFM.
Question 3.8: Does this mean that delegation can never affect who is doing the regulated activity of managing an AIF?
Delegation can sometimes affect who is managing an AIF.
Article 82 of the AIFMD level 2 regulation says that an AIFM shall be deemed a letter-box entity and shall no longer be considered to be the manager of the AIF at least in any of the situations set out in that article, which is reproduced in FUND 3.10.9 EU.
This raises four questions. First, whether an AIFM that delegates in such a way as to make itself into a letter-box entity is still carrying on the regulated activity of managing an AIF. This is dealt with in Question 3.9. Secondly, whether the delegate is carrying on the regulated activity of managing an AIF. This is dealt with in Question 3.10. The third question is whether this only applies when article 20 of AIFMD (which contains the letter-box entity provisions elaborated by article 82) applies. This is dealt with by Question 3.12. The fourth question is what the test for a letter-box entity is. This is dealt with in Question 3.13.
Question 3.9: Does delegation by the manager mean that it is no longer carrying on the regulated activity of managing an AIF?
The fact that article 82 of the AIFMD level 2 regulation says that a letter-box entity shall no longer be considered to be the manager of the AIF would appear to mean that an AIFM that delegates in this way is no longer managing an AIF. However, in our view, an AIFM that delegates in such a way as to make itself into a letter-box entity is still carrying on the regulated activity of managing an AIF. The following points support this:
(1) Article 82 of the AIFMD level 2 regulation describes who is acting as the manager. The regulated activity does not refer to acting as an AIFM; it simply refers to managing an AIF. The regulated activity does not expressly incorporate article 82 as part of the definition.
(2) The RAO does not include the requirement in the AIFM definition that the AIFM be a legal person, which shows that the definition of AIFM is not fully aligned with the definition of managing an AIF.
(3) Regulation 4(3) of the AIFMD UK Regulation envisages that the AIFM will be appointed by or on behalf of the AIF or by its governing body. This is not reflected in the RAO either.
(4) Article 20 of AIFMD (which contains the letter-box entity provisions elaborated by article 82) deals with regulating how an AIFM should manage its AIF.
(5) There is a good reason why an AIFM that has delegated its functions in a way that means it has become a letter-box entity should still be carrying on the regulated activity of managing an AIF. It is necessary to avoid the risk that a manager that delegates to this degree falls out of regulation, because it stops carrying on a regulated activity. One of the purposes of regulation is to stop a manager doing this and effective implementation of AIFMD requires us to be able to do so.
Question 3.10: Does delegation by the manager mean that the delegate is carrying on the regulated activity of managing an AIF?
The factors listed in the answer to Question 3.9 (Does delegation by the manager mean that it is no longer carrying on the regulated activity of managing an AIF?) support the view that a delegate of a letter-box entity does not manage an AIF. However, despite this, we believe that a delegation by the AIFM to a delegate can result in the delegate managing an AIF if the delegation results in the AIFM becoming a letter-box entity.
(1) Recital (9) of AIFMD confirms that the letter-box entity provision is an anti-avoidance provision preventing circumvention of AIFMD by means of turning the AIFM into a letter-box entity. A provision of this kind reflects a more general principle that rights given by European law (such as the right of a manager to delegate or the right of a delegate to carry on its business without being authorised as an AIFM) should not be abused. It is important to know who the real manager of an AIF is, so as to know whether an EEA State is responsible for its supervision or whether the AIF is managed from outside the EEA. If the real manager is not managing an AIF, it may not be carrying on any regulated activity and may not fall under any EEA financial services regulation, even though effective implementation of AIFMD would require the situation to be regularised.
(2) Article 51ZC(3) of the RAO implies that a person that has accepted a delegation from a manager that results in the manager becoming a letter-box entity, can be managing an AIF.
(3) It is not unreasonable to say that, if the delegate is in practice carrying out the management activities described in the answer to Question 3.1 (What does managing an AIF mean?), it should be treated as carrying on the regulated activity.
Question 3.11: Does this mean that delegation that results in the manager being a letter-box entity always means that the delegate will be carrying on the regulated activity of managing an AIF?
No. In each case it is necessary to apply the tests set out in PERG 16.3. If all the functions that have been delegated by the letter-box entity manager have been delegated to the same delegate, it is likely that that delegate is managing an AIF. However, if the delegation is to a number of delegates, it may be that none of those delegates is managing an AIF.
Question 3.12: Do the answers to Questions 3.7 to 3.11 apply just to delegation by a full-scope UK AIFM?
No. For example, they would be relevant to whether a delegate in the UK is managing an AIF if it accepts a delegation from an overseas manager. We take this approach for the following reasons.
(1) The arguments in Question 3.10 (Does delegation by the manager mean that the delegate is carrying on the regulated activity of managing an AIF?) are also in favour of the view that the effect of delegation on a delegate should not be confined to delegation by an authorised AIFM. In any case, it would be anomalous for delegation to affect who is managing an AIF only when article 20 of AIFMD applies, particularly given that article 82 is, in our view, an anti-avoidance provision (see the answer to Question 3.10).
(2) Article 51ZC(3) of the RAO is not specifically limited to circumstances in which article 20 applies. It applies in any situation in which it is necessary to decide whether a person is managing an AIF for the purpose of the general prohibition.
Question 3.13: What is the test for a letter-box entity?
In our view, the test of whether delegation results in the delegate managing an AIF is decided by article 82 of the AIFMD level 2 regulation in circumstances when article 82 and article 20 of AIFMD apply to the delegating AIFM.
When article 20 does not apply we look at whether the delegation is to such a degree that the manager can no longer be considered to be carrying out the activities in the answer to Question 3.1 (What does managing an AIF mean?). We take the various factors elaborated in article 82 into account but they will not necessarily decide the matter because article 82 is, on its face, linked to article 20 and article 51ZC(3) of the RAO does not specifically refer to article 20 or 82.
If a manager to which article 82 does not apply can nevertheless satisfy all the conditions set out in that article to demonstrate that it has not become a letter-box entity, any delegation by it will not result in the delegate managing an AIF.
However, we do not necessarily require that delegate to demonstrate to us that every condition of article 82 is satisfied, to conclude that the manager is not a letter-box entity and that the delegate is not managing an AIF. The importance of the tasks carried out by the manager is a key consideration, taking particular account of the right and ability of the manager to exercise oversight and control and the degree to which these rights are exercised. In our view, these factors reflect the fact that we are applying a broad anti-avoidance approach to a letter-box entity rather than the detailed requirements of article 82.
Question 3.14: Is the material in PERG 16.3 about delegation relevant to delegation between branches of the same firm?
No. Please see Question 8.4 (Is the material in PERG 16.3 about delegation of management functions from one firm to another relevant to delegation from one branch to another?).
Question 3.15: If a person is not eligible to be appointed as an AIFM because it is not a legal person but is appointed to manage an AIF, does that mean that it cannot carry on the regulated activity of managing an AIF?
No. The fact that it is not eligible to be appointed as an AIFM does not mean that it is not managing an AIF. That means that an unauthorised person may breach the general prohibition by carrying on the regulated activity of managing an AIF, even though the person does not qualify for a Part 4A permission because that person is not a legal person.
Article 6(1) of AIFMD provides that no AIFMs should manage AIFs unless they are authorised in accordance with that Directive. An AIFM must be a legal person. So it appears that the regulated activity of managing an AIF cannot apply to someone who is not a legal person. However, in our view, this is not the case. As explained in the answer to Question 3.9 (Does delegation by the manager mean that it is no longer carrying on the regulated activity of managing an AIF?), the definition of an AIFM is not fully aligned with the definition of managing an AIF. In particular, the regulated activity does not refer to acting as an AIFM (the definition of AIFM in the AIFMD UK Regulation includes the legal person requirement), it simply refers to managing an AIF. There is a good policy reason for this. It is not the intention of the legislation to allow someone who is not a legal person to manage an AIF without being authorised, but to stop an AIF being managed by someone who is not a legal person.
Question 3.16: Can an AIF in the form of a limited partnership under the Limited Partnerships Act 1907 appoint its general partner as the AIFM?
Yes. If the general partner is the AIFM it will be an external AIFM.
Strictly speaking this question is not relevant to the definition of managing an AIF but this is a convenient place to discuss the point.
On the face of it the answer should be No. The starting position is that if an AIF is managed by the body that has responsibility for governing it under the legislation under which the AIF is formed, the AIF is internally managed, particularly if there is no governing body that appoints and supervises the manager and the manager is a member of that AIF. A general partner is a partner and there will usually be no governing body separate from the general partner. Under this approach, a limited partnership would be internally managed, which would be contrary to AIFMD, as an AIFM must be a legal person and an English and Welsh limited partnership is not a legal person.
However, in our view, the roles of the limited and general partners are sufficiently distinct for one to be able to say that the limited partnership does not manage itself. The distinction between the two roles does not stem from the fact that the general partner manages the partnership, but from the facts that:
(1) the roles of general and limited partner are provided for by the legislation under which limited partnerships are formed; and
(2) the legislation, in practice, prevents the limited partners from managing the partnership (because for as long as a limited partner takes part in the management of the partnership business, it is liable for the partnership's debts as though it were a general partner).
In principle, the same should apply for jurisdictions outside England and Wales with legislation drafted in the same way. We understand that this is the case with a Scottish limited partnership (which has legal personality) and so if its general partner is appointed as its AIFM it will also be an external AIFM.