The Alternative Investment Fund Managers Directive ("AIFMD")
What is it?
The AIFMD is a European Union law that was introduced ostensibly to bring hedge funds and private equity funds under the supervision of an appropriate regulatory body. For the UK, this is the Financial Conduct Authority ("FCA").
The AIFMD was drafted very widely and, whether by intention or accident, the great majority of investment trusts have been caught by its scope, notwithstanding the existing regime that investment trusts already have to comply with – the Companies Act, UK Listing rules, UK Corporate Governance Code, etc.
The AIFMD requires affected companies to appoint an Alternative Investment Fund Manager ("AIFM"), which must be regulated by the FCA, and which must ensure that the ‘fund’ is set up and run so as to comply with the detailed prescriptions within the AIFMD.
Unlike most investment trusts, Law Debenture has the benefit of employing executive staff who, among other things, already provide a number of the administrative and back office services necessary to run the investment trust portfolio. The Corporation’s board has concluded therefore that the Corporation should be its own AIFM (as is permitted under the legislation) and is authorised and regulated by the FCA for this single purpose.
What does this mean for shareholders?
Apart from increasing the costs of running the investment trust (see below), which has a direct impact on the Corporation’s On-going charges and therefore shareholder return, the practical impact of AIFMD for shareholders will be minimal.
The investment portfolio continues to be managed on a discretionary basis by Henderson Global Investors.
The administration of the trust (company secretary, accountancy, valuation, compliance, etc.) continues to be provided by Law Debenture group employees.
An integral requirement of AIFMD compliance is that the Corporation has to have in place a depositary (and has appointed NatWest Bank plc for this purpose). This appointment is intended to increase investor (shareholder) protection by having in place an external, FCA regulated entity that – broadly – monitors and oversees the Corporation’s compliance with its AIFMD obligations primarily to ensure that the fund’s assets are properly safeguarded, cash flows monitored, appropriate valuations applied, portfolio management instructions carried out and that income is properly applied.
The depositary is the Corporation’s custodian. However, NatWest has appointed HSBC Bank plc (our previous custodian) under a sub-custody agreement, so that for custody purposes, the Corporation’s arrangements are effectively unchanged.
Costs of compliance
The Corporation has incurred (or will incur) additional costs in complying with AIFMD as follows:
- The need to have a depositary – this is the most significant cost and will add approximately £100,000 of annual costs;
- Regulatory costs – an application fee to the FCA of £5,000 and an annual fee likely to be in the region of £13,000.
- ‘Sunk’ costs of compliance, both in amending practices and procedures ahead of implementation of the AIFMD and in delivering robust compliance thereafter.
The Corporation’s regulatory status
Historically, the Corporation has not been authorised to engage in any activity that would constitute financial promotion or advice to deal in the Corporation’s shares. As a listed company, the Corporation’s shares are freely tradeable, but any shareholder or prospective shareholder who chooses to buy, hold or sell the Corporation’s shares does so either on the basis of his/her own decision (execution only) or following advice from a qualified advisor such as an independent financial advisor. Nothing contained on the Corporation’s website (or in any other literature published by the Corporation) has constituted a recommendation to deal in the Corporation’s shares, or an offer or inducement to do so.
IN BECOMING AN AIFM, AND THEREFORE SUBJECT TO FCA AUTHORISATION, NOTHING IN THE ABOVE STATEMENT HAS CHANGED OR WILL CHANGE.
Shareholders, prospective shareholders and any other interested parties must be aware that the Corporation’s status as an AIFM DOES NOT:
- Entitle the Corporation to engage in the active marketing of its shares;
- Give the Corporation any authority to offer advice to shareholders (or prospective shareholders) about whether they should buy, hold or sell the Corporation’s shares;
- Create any entitlement for shareholders (or others) to a claim against the Corporation via the Financial Ombudsmen Service or (in the event of the insolvent demise of the Corporation) any claim for compensation under the Financial Services Compensation Scheme.
Entitlement to information
Notwithstanding the preceding statements, AIFMD compliance requires that the Corporation should make certain information available to shareholders and prospective shareholders. Much of that information has, historically, always been available to shareholders (and others) via the Corporation’s website.
The link below is to an FCA form called FUND 3.2.2R Disclosures. The form sets out the material that the Corporation is obliged to make available to shareholders and potential shareholders. The form points out where on the Corporation’s website particular material is available and, if relevant, the particular page number of certain documents (usually, the annual report and accounts) where the prescribed information can be accessed.
This page of the website will be kept updated as required. Any shareholder or potential shareholder who wishes to discuss any aspect of the AIFMD should contact:
020 7696 5285