AIFM and the Depositary: Double Oversight? Opportunity for Standardisation?

Capital V #10 | Luxembourg Means Private Equity

Harald Thul

Director, Alternative Investment Services, Intertrust Luxembourg

One of the main objectives of the Alternative Investment Fund Managers Directive (AIFMD), adopted by the European Parliament and the Council in 2011, was investor protection. The Directive includes several specific tasks and oversight functions that have interdependencies between the different parties involved in an AIF structure.

The Depositary is well known as a party to fulfil an oversight function towards an AIFM and its AIF. Besides the safekeeping function, the Depositary must fulfil certain oversight tasks on operational functions and cash flows of the AIF.

The operational functions of the AIFM overseen by the Depositary comprise mainly of the valuation of the Fund, the compliance with legal, regulatory and contractual requirements (e.g. investment restrictions), investors’ activities and distributions as well as the cash flow movements of the Fund.

The AIFM performs at least one of the two core investment management functions of the AIFs (portfolio management and risk management) as well as additional management functions such as administration (NAV calculation, Registration and Transfer Agency), marketing and activities related to the assets of the AIFs. Any delegation of functions to third parties is subject to specific conditions including the obligation to perform initial and ongoing due diligence. As the Depositary is appointed by the AIFM or its AIF, the AIFM also needs to oversee the work of the Depositary.

Delegation of the Central Administration, Registration or Transfer Agency services will therefore result in service providers being subjected to due diligence by both the AIFM and the Depositary. A third and similar request could come from external auditors.

In the case where an AIFM acting as a Third Party Manco has to appoint separate depositaries for the different AIFs managed by them, the number of requesting parties increases accordingly. The same applies for depositaries and administrators cooperating with multiple counterparties.

Is there a way to simplify the process and avoid double work? The key question is how far the different parties would be in a position to rely on the work of other service providers. For the moment, there are no clear guidelines or regulations that would allow the use of a third party confirmation to rely on and reduce their own due diligence requirements for the AIFM or the Depositary.

Even though the administrative burden will be reduced by engaging a one-stop shop service provider who is able to provide the different services within its network, in the case there are multiple depositaries involved, that would not avoid similar requests for the same purposes.

It is not foreseeable that specific regulations will be implemented that would simplify this process, therefore the Luxembourgish fund industry is asked to develop commonly accepted industry guidelines and standards.