Some 10 months on from the July 2013 deadline for AIFMD, a third of EU member states still have not fully transposed and implemented the legislation at national level, says Bill Prew CEO of Indos Financial.
Valuation and the role of the Administrator
AIFMD places responsibility for valuation of the AIF squarely in the court of the AIFM. Given the independent administration model has worked well for many years and ensured independence between the investment manager and the valuation of the fund, few in the industry, not least investors, see the logic or agree with this. Whilst the legal responsibility for valuation has changed and there is still much debate about the relationship between the different parties in the post-AIFMD world, in practice the day-to-day role of the administrator, manager and board of directors of the AIF should not change as a result of AIFMD. Managers should expect to receive questions from investors about these changes (more on this later). Very few administrators or other firms are willing to act as External Valuer (EV) largely because of the liability an EV is required to take on and therefore, in many instances, an EV is simply not being appointed by an AIFM.
AIFMD requires managers to implement a clearly defined risk framework, including policies and procedures for managing and monitoring risk within an organisation. This covers all aspects of risk from traditional front office areas such as market and credit risk, to liquidity, counterparty and operational risk. The risk profile needs to be formalised for each AIF and communicated to investors and prospective investors, including the maximum level of leverage (under two prescribed methodologies known as the gross and commitment method) that may be employed. The risk management function should be functionally and hierarchically separate from the front office. The FCA has issued some guidance on the matter and has stated it will take a proportionate approach based on factors such as the size and complexity of a firm. Many managers will be used to risk management principles for their core market risks, but may find it more challenging to implement a limit framework across all aspects of risk required by AIFMD.
AIFMD’s Annex IV reporting is the European equivalent of Dodd Frank’s Form PF. All AIFM, regardless of size, will need to report to their regulator at least once a year but in most cases half-yearly, and for larger AIFMs and AIFs, quarterly. Given the first reporting date for most managers will not be until January 2015, it is probably not surprising few managers have reviewed and put in place arrangements to comply with the new reporting. Given the volume and complexity of the reporting requirements and the amount of data required to be aggregated and enriched, there is no room for complacency and managers ought to be starting to develop and implement a regulatory enterprise risk management infrastructure to comply.
One of the great ironies of AIFMD is that, for legislation designed to provide additional protection to investors, the end investors generally appear to have shown very little interest in AIFMD to date. This will change once managers start to distribute AIFMD compliant offering and other disclosure documents to investors. These documents will shine a spotlight on changes such as the changing roles in the valuation function and may well generate questions for managers.