2022 regulatory outlook for fund managers
We enter 2022 with the effects of the global pandemic still lingering, with restrictions continuing in pockets around the world. However, most countries find themselves in a far better position now than they were at the start of the pandemic, and the year ahead is much brighter.
For our industry, alternative assets have proved resilient throughout the past two years, with a significant proportion of institutional investors looking to increase their allocations to private markets amidst record levels of fundraising during 2021. Looking to the next 12 months, we believe there remains a great opportunity for managers of private funds, but this will not be without challenges. Increased regulatory scrutiny, greater tax complexity, inflationary fears and enhanced competition for capital will all play their part. Below we set out some key regulatory events that managers should be aware of for 2022.
The Sustainable Finance Disclosure Regulation (‘SFDR’) came into force on 10 March 2021, requiring managers of AIFs being marketed in Europe to make pre-contractual disclosures regarding how sustainability risks are integrated into their investment decisions.
The next part of the SFDR is the implementation of the Regulatory Technical Standards (‘RTS’) rules. Originally planned to come into force on 1 January 2022, the RTS deadline was pushed back six months and will now come into force on 1 July 2022. This deadline will apply to managers of Article 8 or Article 9 products (i.e. not Article 6 products, nor those that do not promote ESG characteristics), and will only apply to those that promote two of the six environmental objectives outlined in the Taxonomy Regulation: climate change mitigation and climate change adaptation. The rules will apply to the remaining four objectives from 2023.
For funds that meet these criteria, there are additional pre-contractual disclosures required, as highlighted by the relevant annexes of the RTS, as well as new disclosures in periodic reports. Broadly, these disclosures aim to provide transparency as to the success of the product in meeting its sustainability objectives. Clearly this is a complex piece of legislation that we are carefully considering on behalf of our clients.
On 25 November 2021, the European Commission published its proposal for amendments to the existing AIFMD. Notable proposed amendments include:
- Changes to the National Private Placement Regime (‘NPPR’) framework
- Changes to delegation arrangements for authorised AIFMs
- New substance requirements for EU AIFMs
- Increased disclosures under Annex IV reporting
- Changes to the depositary framework
These proposed changes are yet to go through the standard EU legislative process, and we do not expect to see AIFMD II implemented until 2024 at the earliest, although managers should be aware of responses being issued by industry bodies as well as how these proposals might affect their business planning in the medium term.
FCA consultation on Appointed Representatives in the UK
The Appointed Representative (‘AR’) regime has been used by fund managers since the turn of the millennium, to assist those starting up a new regulated business in the UK. Recently, there have been a handful of appointed representatives that have been deemed by the FCA to have done “harm” to the regime, and it points to a lack of due diligence, or inadequate oversight by the principal as the cause of this.
In response, the FCA has launched consultation CP21/34 in which it proposes changes to the regime, including requiring principals to provide more information on their ARs, as well as strengthening the responsibilities and expectations of principals. The FCA has requested feedback on these proposals by 3 March 2022 and we expect to see any proposed changes implemented subsequently. We will be publishing our own response to the consultation shortly.
Following several consultations throughout 2021, the new Investment Fund Prudential Regime (‘IFPR’) rules came into play on 1 January 2022. The IFPR rules aim to streamline and simplify prudential requirements for firms regulated in the UK under MiFID, and the final rules can be found in FCA 2021/38 and FCA 2021/39. Key points to note include the increased regulatory capital requirements, new reporting and remuneration rules, and increased disclosure requirements.
Annex IV Reporting for UK Funds
A year on from the end of the Brexit transition period, some managers of UK funds now find themselves having to file multiple Annex IV reports in Europe. Whereas previously a single report was filed to the FCA, now managers that have raised capital under the AIFMD passport from a UK structure are required to file an Annex IV report in each country from which they have accepted subscriptions. 31 January 2022 will be the first reporting period for many of these managers, and you can read our update on this here.
US Private Fund cybersecurity rules
From 9 December 2022, private funds in the US that are excluded from the definition of “investment company” will face increased cybersecurity requirements under the Federal Trade Commission’s Safeguards Rule. This will include a requirement for multifactor authentication to access customer data, encryption of data when sending and storing, and updates to record retention procedures. Private Fund managers should consider how the rules may affect them well in advance of the December deadline.
Clearly there are, as ever, several new regulatory developments for fund managers to keep abreast of. We are keeping a close eye on all these developments and are happy to discuss how we may be able to help in each case.