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AIMA Warns On FSA Rule Changes

Date: Wednesday, December 20, 2006
Author: Bill McIntosh, Financial Correspondent, Hedgeworld.com

LONDON (HedgeWorld.com)—The Alternative Investment Management Association has warned that rule changes by the Financial Services Authority concerning regulatory capital that come into effect on Jan. 1, 2007 are much more restrictive than the current regulations.

The new rules set out revised capital resources requirements that will apply to most FSA-regulated hedge fund managers. Among the changes is a new definition of the "capital resources" available to meet capital resources requirements.

According to the AIMA, for FSA purposes only items which are treated as "equity" may be included within FSA's Tier 1 capital resources. The key principle is that, in addition to other characteristics required by FSA, amounts may be treated as Tier 1 capital if they are repayable only at the discretion of the LLP. If the LLP does not have the right to withhold payment, the amount is debt under both accounting requirements and FSA requirements.

"AIMA envisages that many LLPs will need to change the terms of their LLP agreements in order to ensure they have sufficient capital resources to meet regulatory capital requirements from 1 January 2007," the association said in a press release issued Wednesday [Dec. 20]. AIMA advised firms to amend their LLP agreements during the next 10 days to take account of the FSA general prudential (GENPRU) sourcebook and the prudential sourcebook for banks, building societies and investment firms, both issued on Oct. 27, that define what counts as "capital resources."

Firms that have been unaware of the changes or that are unable to make the changes are advised to contact their relationship managers immediately. "It is essential that firms are able to demonstrate to the FSA that they are taking appropriate steps to correct their position," AIMA said.

A note published by AIMA summarized the key aspects of changes to the U.K. accounting framework and the rules at GENPRU. It focused on whether an LLP may include members' capital contributions, retained profits and other reserves as Tier 1 capital resources.