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.
Whilst not entirely new for EU funds, the AIFMD introduced new depositary requirements. The core duties of the depositary are to perform safekeeping of financial instruments, record keeping and ownership verification of ‘other assets’, cash-flow monitoring and a number of oversight duties. The depositary regime which applies depends on a combination of the domicile of the AIFM and the AIF:
– EU AIFM managing EU AIFs are required to appoint a single depositary. The depositary is generally required to be domiciled in the domicile of the AIF.
– EU AIFM managing non-EU AIFs are caught by the depositary requirements only if they market those funds to EU investors through private placement. The AIFM must ensure one or more entities are appointed to perform the depositary duties in what has become known as the ‘depositary-lite’ regime.
– Non-EU AIFM managing EU or non-EU AIFs are not subject to any depositary requirements, except if the AIFs are marketed through private placement in France, Germany, Denmark or Austria.
The main focus of the industry has been on the depositary model for EU AIFs since the depositary is required to take on the strict liability for loss of assets held in custody. In reality the majority of the industry is making use of a provision in the AIFMD which allows a depositary to discharge its liability to the entity performing the custody function on ‘objective reason’ grounds. This discharge, and other related matters, continues to be the subject of much debate. For a large number of non-EU AIFs, the depositary-lite requirements are entirely new and managers have been seeking to identify and on-board providers. This continues to be a challenge for some, particularly given many firms intending to provide these services have themselves yet to receive regulatory authorisation. Those managers that have yet to identify and commence the on-boarding process with depositaries should do so in the near future or run a very real risk that they will not be able to market their funds from 22 July.
It is probably fair to say that until more recently, AIFMD has not received as much attention as might be expected from managers outside of the EU, notably in the US and Asia. These managers are generally only caught by AIFMD if they market their funds to EU investors and would then be subject largely only to additional investor disclosure, regulatory reporting and registration obligations. A number of the EU countries which allow private placement extended the transitional provisions to non-EU managers. Now the transitional period is coming to an end, more US managers in particular are focussing on AIFMD to avoid a marketing blackout from 22 July. In some cases these managers are conducting a cost/ benefit analysis to assess whether the potential business opportunities outweigh the costs of AIFMD compliance.
AIFMD Compliance in general
As noted AIFMs need to be in full compliance with the Directive by 22 July 2014. Most managers have had to juggle AIFMD alongside other regulatory changes such as EMIR and FATCA and the general day-to-day running of their business. It is therefore perhaps not surprising so many managers have yet to submit their Variation of Permission (VoP) applications. For many managers, getting to the point of submitting a well documented VoP to their regulator has proven to be a time consuming and costly exercise in its own right. In many respects, the VoP is just the start and the biggest challenge lies ahead – ensuring full AIFMD compliance from 22 July 2014. With only two months to go, many firms are taking a pragmatic approach in the hope regulators will take a similar view, at least initially. It is clear the regulators will remain under a lot of resource pressure for a while to come. We expect the review and authorisation of AIFMD applications will continue well past 22 July and managers may have some breathing space to bed down new processes pending further clarification and guidance on best practices. For some, the world may not feel like it has changed dramatically on 23 July 2014 but managers should be under no illusion – AIFMD will change the way alternative investment management businesses will need to be run and the rules and regulatory expectations with which they will need to comply.
Bill Prew is the CEO of INDOS Financial, an independent AIFMD depositary business and the first fully regulated ‘Article 36 Custodian’ depositary-lite provider in the UK. For more information please contact Bill Prew at [email protected]