The Alternative Investment Fund Managers Directive (AIFMD) is due to be transposed into law on 22 July 2013 and while some Alternative Investment Fund Managers (AIFMs) will want to make use of the transitional year to avoid implementing changes straight away, others (for instance those marketing outside the UK) will want to comply from day one. And on day one, they’ll need a Depositary.
The UK implementation of AIFMD allows for two types of Depositary (ignoring for the moment the ‘Depositary Lite’ model used for non-EU AIFs). These are the full blown Depositaries, the market for which is likely to be served by the established custodian banks, and the Private Equity AIF Depositary which is (albeit slowly) attracting some new entrants to the market.
Some prospective PE AIF Depositaries, generally existing, regulated fund administrators and third-party operators, are starting to put their head above the parapet and talk about their proposed services (and a little more reticently, their proposed pricing) but what does the Depositary role entail?
Cash Flow Monitoring
The Depositary is required to monitor all significant cash flows and quickly identify any that are inconsistent with the usual operations of the fund. They must also reconcile all cash flows on a daily basis, although they may do so less frequently where cash movements are infrequent.
The Depositary will receive information about subscription payments the same day they are received by the fund, the AIFM or a transfer agent. The Depositary is then responsible for ensuring that the payments are booked into accounts in the name of the fund, the AIFM or the Depositary.
Safekeeping (Verification and Record Keeping)
Other rules apply where a Depositary is holding custodial assets but for non-custodial assets (such as real estate) the Depositary must verify the ownership of the assets and keep appropriate records. What will create more complexity is the Depositary’s duty to ensure procedures are in place which prevent the assets being assigned, transferred, exchanged or delivered without the Depositary being informed, particularly as the Depositary’s responsibilities are on a ‘look through’ basis which limits the extent that these controls can be put in place in respect of structuring vehicles only.
AIFM Risk & Process Oversight
The most widely ranging responsibility of the Depositary, and the one which will require the most expertise and thought, is the duty to assess the risks of the fund’s strategy and the AIFM’s organisation and implement ongoing controls and verifications of the AIFM’s processes and procedures.
The oversight functions of the Depositary extend to verifying the instructions of the AIFM to ensure compliance with the fund’s rules, offering documents and applicable law.
The Depositary is required to ensure that procedures are in place for the valuation of the fund’s assets and that these are implemented effectively on an ongoing basis and reviewed periodically.
The Depositary must ensure that the fund’s net income is handled in accordance with its rules, including ensuring that auditors’ reserves are taken into account and that any distributions are correctly made.
Many of these processes will be familiar to (better or more risk averse) regulated fund administrators and third-party operators. STYPERSON POPE has assisted a number of these firms to create and implement operational procedures, ensure appropriate governance, and identify and manage the risks involved in providing these services.