Alquity Investment Management Limited’s Pillar III Disclosure under the European Commission’s Capital Requirements Directive:

Introduction
There are three supervisory pillars set out in the revised Basel Accord, which have been written into European Law through the Capital Requirements Directive (‘CRD’). The third pillar requires companies to publicly disclose information in relation to the risks to the business, the risk management process and on the adequacy of capital held.

In accordance with the draft of the third pillar on disclosure, the FSA Handbook (section BIPRU 11.5) details the technical criteria required to implement the relevant articles of the Banking Consolidation Directive and the Capital Adequacy Directive necessary for Alquity Investment Management Limited as a BIPRU Investment Company (an investment company as defined by the FSA within the banks, building society and investment company prudential standards).

All disclosures are detailed below, omitting items only where they are considered immaterial, i.e. where omission does not influence the assessment or the economic decisions of readers. The disclosure
requirements cover four areas: (1) the scope of the requirements, (2) risk management, (3) the capital resources in the business and (4) the compliance with the Basel Accord’s Pillar 1 and Pillar 2 Capital Adequacy rules.

(1)Scope of Application of the Requirements of the Banking Consolidation Directive

Scope of Application of the Disclosures
The disclosures in this document are made in respect of Alquity Investment Management Limited, which is authorised and regulated by the Financial Services Authority. Alquity Investment Management Limited prepares its own unconsolidated financial statements that are consistent with its prudential accounts.

(2)Risk Management Objectives and Policies for Risk Mitigation

Risk
There is a clearly defined organisational structure and there are strict, documented processes in place to reduce risks to the business. Detailed management reports are used to monitor the financial strength and the various risks to which the business is exposed. This information is scrutinised by the Board and the control procedures are overseen and under constant review. Alquity’s staff members are aware of their individual responsibilities and actively participate in the monitoring of the business’s control arrangements.

Scope and Nature of Risk Reporting and Risk Measurement
Risks are reported internally by way of detailed management reports distributed to all appropriate individuals on a timely basis. There are extensive reports on performance including P&L breakdowns, the management accounts and budgeting analysis. The Board-approved ICAAP document is used to communicate Alquity’s Internal Capital Adequacy Assessment Process to the FSA, which is based primarily on risk analysis that is summarised in a risk matrix and again under the “Strategies and processes to manage risk” section below.

Policies for Mitigating and the Processes for Monitoring Risk
Alquity undertakes a formal annual review of the risk matrix to ensure that it is up to date and to determine whether the arrangements over its systems and controls remain effective and appropriate. However, risks to the business are under constant consideration by management and processes are re-assessed and revised as necessary. Additionally the business has regular compliance monitoring and annual audits of its financial information.

Strategies and Processes to Manage Each Risk
The business risk of a fall in assets under management is continually monitored to determine the impact a decline would have on financial viability. Different economic scenarios have been modelled to assess the impact of business or economic downturns on the financial performance as part of the formal Internal Capital Adequacy Assessment Process (ICAAP). Budgets are reviewed and adjusted regularly to reflect changes in circumstances.

The operational risk of losses caused by error, negligence, fraud or theft by internal staff or resulting from inadequate internal systems or the loss of key personnel is mitigated with the following controls. The business employs strict segregation of duties over the different functions and process stages. There is supervision, review, cross training as well as a signatory authorisation process for Fund payments and Director authorisation on company payments over specified limits. Internal arrangements are supported with appropriate disaster recovery and business continuity plans. The robust processes in place are continually re-evaluated and documented and have been effective to date.

The third party risk of damage to the business’s reputation by associating with service providers, such as administrators or custodians of the Funds that fail to meet the terms of agreements or to comply with industry best practice is mitigated by way of regular interaction with the service providers and review of all information provided by them. Anti-Money Laundering training is given to keep staff aware of the requirement to report all suspicions of wrong-doing. A conflicts policy and a register are circulated to reduce the likelihood of conflicts of interest and all personal account dealings are submitted for pre-approval.

The credit risk of counterparties failing to make payments as they fall due is considered to be very low as the main counterparties are the Funds. Common control between the Alquity entities reduces the risk of inter-Alquity debts and with regards to bank deposits, money is only deposited with approved counterparties on agreed terms.

The liquidity risk of not having sufficient financial resources available to meet obligations as they fall due or to secure such resources only at excessive cost is mitigated by the fact that the business is balance-sheet solvent (i.e. assets are greater than liabilities). Management accounts are reviewed on at least a monthly basis and the solvency position is monitored by projecting costs and budgeting for them.

The market risk of a fall in market values of securities held, i.e. poor performance of investments, would ultimately impact Alquity’s fee income. Alquity does not undertake dealing on its own account but has exposure to market conditions through the impact on the value of the assets under management as Alquity’s fees are based on a percentage of these funds.

(3)Capital Resources

Capital Resources
The value of share capital and audited reserves is £355 thousand as at 30th June 2011. The capital resources are comprised of core Tier 1 capital only.  There are no deductions and no Tier 2 or Tier 3 capital.

(4)Compliance with the Basel Accord’s Pillar I and Pillar II Capital Adequacy Rules

Assessing the Adequacy of Internal Capital (Pillar II)
In accordance with Pillar 2 of the Basel accord, the purpose of the Internal Capital Adequacy Assessment Process (ICAAP) document is to inform the company’s Board of the ongoing assessment of the company's risks, how the company intends to mitigate those risks and how much current and future capital is necessary having considered other mitigating factors. These risks and controls are summarised in the “Strategies and processes to manage risk” section above.

In addition to the risk assessment, the ICAAP documents a detailed scenario analysis that shows performance given different potential events that reduce income over a projected period. From these rigorous profit forecasts a judgment is made as to the need for more capital.

Following the internal risk and capital requirement analysis it has been concluded that no additional capital is required. The ICAAP document is the means by which companies communicate internally assessed capital adequacy to the FSA and is updated at least annually.

Capital Resource Requirement (Pillar I)
The Capital Resource Requirement (CRR) is the FSA-prescribed method of calculating a company’s capital in terms of its adequacy to cover the perceived risks. Alquity Investment Management Limited has an excess over the minimum regulatory capital requirements as stipulated under FSA Pillar 1 guidance: the liquid capital is greater than the CRR.

The CRR has been determined as the Fixed Overhead Requirement (FOR), which is equivalent to one quarter’s operating expenses.  The FOR is used for the CRR and not the sum of the ‘credit risk capital requirement’ and the ‘market risk capital requirement’ as the FOR is greater (under GENPRU 2.1.45R Calculation of the variable capital requirement for a BIPRU company).

The Pillar I FOR, based on the higher of audited expenses and the recent quarter’s expenses, has been calculated as £235 thousand. Liquid capital is £355 thousand (see “Capital Resources” section above) and therefore there is an excess of £120 thousand over the fixed overhead requirement.

Disclosure in relation to the ‘market risk capital requirement’ and the ‘credit risk capital requirement’ is considered immaterial (under BIPRU 11.3.5R Exemption from disclosure: Materiality) as the FOR is the greater capital requirement.