FEATURING Baronsmead // ConceptONE // Cordium // Guernsey Finance // Hassans // Jersey Finance // Laven Partners // Macfarlanes // Maples and Calder // UBS AIFMD UPDATE 2013 WEEK HFM S P E C I A L R E P O R T REMUNERATION The requirements and challenges of setting up a remuneration committee REPORTING Analysis of the Directive’s reporting elements established in Annex IV TIMING The deadlines fund managers need to meet to become AIFM-compliant
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hen HFMWeek published its last AIFMD Report, regulators had just issued the Directive’s technical measures and were working towards
the 22 July 2013 implementation date. Four months on from its debut, the AIFMD is now in full swing and hedge fund managers are well into their plans to become compliant.
In the UK, the next step for fund managers is the completion of their authorisation application with the FCA in order to be approved as an AIFM in time for the 22 July 2014 deadline. However, the Directive has presented one of the biggest recent regulatory challenges to the European investment market, and there remain a number of challenges when it comes to creating a new AIFM.
Some of the most controversial aspects of the Directive concern the requirements around depositaries. The introduction of a ‘depositary light’ regime, however, has eased this burden
for certain firms by allowing other entities to perform the depositary function.
There is also an obligation for fund managers who are considered ‘significant’ either in terms of their size, structure or scope to set up a remuneration committee upon the firm’s authorisation as an AIFM or before 22 July 2014. Yet another area in which further clarity is required.
Reporting requirements are playing a big part in the AIFMD game, too. Esma only published its final guidelines on Annex IV – the Directive’s main reporting element – on 1 October, giving fund managers little time to prepare. The FCA is expected to push back the deadline for UK managers, at least.
Taking all of this into account, the HFMWeek AIFMD Report 2014 collates the views of several industry experts, offering an overview on the future of the Directive and some practical advice to help fund managers stay on top of developments.
Karolina KaminskaReport editor
WA I F M D I R E C T I V E U P D A T E 2 0 1 3 I N T R O D U C T I O N
4 H F M W E E K . CO M
A I F M D I R E C T I V E U P D A T E 2 0 1 3 C O N T E N T S
FUND SERVICESTHE TIME IS NOWBobby Johal of Cordium speaks to HFMWeek about the timeline AIFMs should be working under to become fully compliant under the AIFMD
TRADE BODYBROADER APPEAL IN A POST-AIFMD WORLDGeoff Cook of Jersey Finance discusses the advantages Jersey can offer as a ‘third country’ as the AIFMD comes into effect across the EU
INSURANCEPROFESSIONAL INDEMNITY INSURANCE AND THE AIFMDHFMWeek speaks to David Heathfield of Baronsmead about the new requirements for professional indemnity insurance under the AIFMD
LEGALAIFMD OPERATING CONDITIONS AND ORGANISATIONAL REQUIREMENTSStephen Carty of Maples and Calder discusses the key operational obligations affecting AIFMs and delegates
INVESTMENT CONSULTANCYSETTING UP A REMUNERATION COMMITTEE UNDER THE AIFMDJérôme Lussan and Petra Hollis, of Laven Partners, talk to HFMWeek about the challenges in setting up a remuneration committee under the AIFMD
LEGALLINING UP FOR THE CONVERSIONSimon Thomas and Samuel Brooks, of Macfarlanes, explain how to ensure that funds are AIFMD-compliant
LEGALIS GIBRALTAR THE NEW CAYMAN FOR EUROPEAN FUNDS?James Lasry, of Hassans International, tells HFMWeek why Gibraltar is one of the few jurisdictions to offer effective fund solutions since the implementation of the AIFMD
FUND SERVICESA MANDATE FOR REGULATORY ENTERPRISE RISK MANAGEMENTGary S. Kaminsky of ConceptONE, LLC explains what managers need to be doing for effective risk management under increased scrutiny from the AIFMD and Dodd Frank Act
FINANCIAL SERVICESGUERNSEY – OFFERING FLEXIBILITY AND SUBSTANCEWith Europe remaining a key market, Fiona le Poidevin explains how Guernsey is evolving its regime to fit with the AIFMD as well as the attractiveness of its third country position
As the time frame to become fully compli-ant becomes increasingly shorter, manag-ers should not be waiting any longer with preparations for the AIFMD. Bobby Johal of Cordium discusses what UK managers should be doing now and when they should
be applying to the FCA.
HFMWeek (HFM): What steps do managers still need to be taking to become fully compliant? What are some of the challenges of doing this within the re-maining time frame?Bobby Johal (BJ): Th e Directive presents profound challenges for AIFMs. We are strongly advocating that everyone has a plan of action at this time that covers all of the preparations that need to be in place prior to sub-mitt ing an authorisation application to the FCA. One of the major components in being prepared for compliance is under-standing the timing of when you actually need to apply. Th e transi-tional period is gett ing shorter and shorter and the clock is really run-ning out, so the time to act is now.
Th ere are many things manag-ers need to be doing at the mo-ment. Engaging with their advi-sors is a good place to start, as well as speaking with administrators, prime brokers and depositaries. If a manager has a range of funds /vehicles they will need to deter-mine which will be considered AIFs for the purposes of the Di-rective. Further, for more complicated structures, a key point will be deciding who the manager will be. Fund managers with a number of diff erent entities within their structure will need to be certain of which of those enti-ties is the AIFM and in which jurisdiction they will apply to be manager. I think many people are still scrambling around to clear up structural, legislative and regulatory uncertainties, so it is a rather frantic time for determining those key points.
Th ere are several important requirements and obliga-tions, for example in respect of proportionality around the remuneration rules and depositary solutions, that
still need to be resolved, but fi rms should be ready to state that they are defi nitively ready when they submit the application. Or at the very least have robust answers and rationale detailing why they are not ready at the giv-en time (for a particular obligation) and also have precise and detailed plans in place to ensure they will be ready for when they are authorised and in any event the 22 July 2014 deadline.
HFM: When will the FCA see the biggest wave of ap-plications and why? BJ: Earlier this year the FCA suggested that fi rms should apply no later than 22 January 2014, six months in ad-vance of the end of the transitional period or at the very latest April 2014, giving fi rms three months until the end of the transitional period. Th ere is some specula-tion as to why the FCA has taken this position. Statutory
requirements oblige the FCA to complete a review of an applica-tion within three months, but it can delay completion of that re-view by up to six months in cases where an application is deemed to be ‘incomplete’.
Th ere has been some confusion concerning the deadline for com-pliance with the Directive, and the City of London Law Society wrote to the FCA in late Septem-ber stating that it (the FCA) was gold plating the Directive in their opinion, positing that Article 61(1) states that a fi rm must have submitt ed an application within
one year of the transposition date, whereas the FCA po-sition implies that fi rms must be authorised before expi-ration of the transitional period. Given the number of ap-plications it is expecting, this could be a way of managing the expected workfl ow.
As a consequence of the FCA’s position, the biggest wave of applications will probably be in the early Q1 of next year, as I believe most fi rms will be sensible in trying to adhere to the FCA’s pronouncement. Th ere will most likely be a second big wave submitt ed just before the April deadline for those managers who are less prepared or perhaps do not heed the FCA’s advice so strictly. Right
I THINK MANY PEOPLE ARE STILL SCRAMBLING AROUND TO CLEAR UP STRUCTURAL,
LEGISLATIVE AND REGULATORY UNCERTAINTIES
”
BOBBY JOHAL OF CORDIUM SPEAKS TO HFMWEEK ABOUT THE TIMELINE AIFMS SHOULD BE WORKING UNDER TO BECOME FULLY COMPLIANT UNDER THE AIFMD
THE TIME IS NOW
Bobby Johal is managing consultant-technical, Cordium.At Cordium, Johal manages a portfolio of clients in the asset management and securities sector, including hedge fund managers, private equity, Ucits firms and wealth managers. Bobby also chairs the Cordium Technical Committee.
F U N D S E R V I C E S
H F M W E E K . CO M 7
now there is still the open question of what happens if managers are not authorised by the end of the transition period and what measures the FCA will take.
HFM: At what point should managers have appointed a depositary? Should any consideration be given now as to whether to appoint a boutique depositary or one at a bank?BJ: Appointing a depositary is one of the key challenges managers face in their preparations. Depositary solutions are still being developed and there have been a few solu-tions rolled out in the last few months. However the num-ber of depositaries such authorised under the Directive is still worryingly low. Firms need to be speaking to deposi-taries now and seeing what their offerings are, how much it will cost, and indeed whether or not the depositary is (in the case of on shore funds) willing to accept liability for the particular asset classes managed by a manager.
Whether to appoint a boutique depositary or a bank ultimately depends on your strategy, who is offering what and who is making themselves available to provide ser-vices for you. Many firms are looking to work with their current service providers; so, for example, if the current administrator of a manager’s funds is offering depositary services that will be a likely choice.
HFM: To what extent and how is Cordium assisting managers with the completion of AIFM authorisation applications? BJ: We are very well equipped in this sense and offer a complete service. We have a separate regulatory transac-tions team (RTT) that have been working with firms for a number of years with all manner of FCA applications. As a specialist team, they can work closely with firms from the initial stages of the completion of all forms right through
to the negotiations with the FCA and ultimately authori-sation. RTT has been established for many years and therefore has a very nuanced understanding of what the FCA expects and are able to assist firms in interpreting the regulator’s intentions for practical responses to Di-rective requirements.
We have been tracking the AIFMD for a number of years and are a one-stop shop for AIFMs seeking to es-tablish compliance structures, with updated compliance manuals, policies and procedures and risk management solutions. Once a variation of permission application is submitted, we can liaise with the FCA and answer any questions they come back with, truly managing the pro-cess from cradle to grave.
HFM: How would you urge managers to prepare for reporting rules?BJ: In addition to appointing a depositary, systematic reporting requirements is the other key operational challenge being faced by AIFMs. Firms should be aware that this is not just a compliance challenge but will span the front, middle and back office. There is a large amount of the information needed as the report-ing requirements are incredibly detailed. Businesses should be reviewing the Annex IV report (so called as this is where the template report is found in the regula-tions) for themselves in order to understand the data requirements and also seek out third party providers to assist with the compilation of the reports, which are just now starting to emerge. Firms also need to understand the frequency with which they shall have to report; in short, the obligations arise on a quarterly, bi-annual or annual basis depending on the AuM of an AIFM. The reporting obligations are effective from 1 January 2014 (in the UK).
Macfarlanes LLP 20 Cursitor Street London EC4A 1LT
T +44 (0)20 7831 9222 F +44 (0)20 7831 9607 DX 138 Chancery Lane
www.macfarlanes.com
Macfarlanes is a leading legal adviser to financial services firms,
asset managers and investment funds and is an active adviser
in the hedge fund space. We represent clients ranging from
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If you would like further information or specific advice please contact:
T R A D E B O D Y
H F M W E E K . CO M 9
A I F M D I R E C T I V E U P D A T E 2 0 1 3
With the long-awaited EU AIFMD – perhaps the most fundamental piece of international regulation to ever impact the funds industry – having finally been introduced this summer, countries and funds pro-
fessionals are now coming to terms with exactly what it all means to them.
At their varying paces, European Economic Area (EEA) countries are bringing the AIFMD into national law, while at industry level, preparing for the AIFMD is also happening at different speeds, with firms working within the parameters of the vari-ous ‘transitional periods’ differ-ent countries have put in place.
While there is certainly much work and preparation going on, the indications are that fund managers are still not entirely prepared for the AIFMD, par-ticularly the reporting elements. Indeed, only at the beginning of October did the European Securities and Markets Author-ity publish their final reporting requirements. So it is perhaps no surprise that, according to research from KNEIP ( June 2013), only 15% of alterna-tive investment fund manag-ers say they are ready to meet the AIFMD’s requirements for reporting.
Against this backdrop, our ex-perience is that, at a funds domicile level, hedge fund managers are looking for three key ingredients: cer-tainty about being able to market funds into Europe; confidence in a jurisdiction having the expertise to ef-fectively and appropriately service and support their funds; and flexibility in how their funds can be man-aged should they wish to target non-European growth markets.
As far as Jersey is concerned, the clear message is that it is very much business as usual for hedge fund manag-ers using the jurisdiction, whether they are targeting Eu-rope or further afield. In fact, due to its distinct position – being at the centre of Europe but not part of the EU – Jersey is arguably even better placed now as a result of the regulation.
COMPLIANTA well-established European alternative funds jurisdic-tion, but a ‘third country’ for the purposes of the AIFMD, the feeling is that the AIFMD could actually enhance Jer-sey’s appeal as a centre for structuring and servicing hedge funds in the long term.
Th is is important for Jersey, given its strength in the al-ternative investment funds market. Jersey has continued to demonstrate a signifi cant degree of resilience across its funds sector this year, with fi gures for the second quarter of 2013 showing that the value of assets under administra-tion in Jersey have risen above the £200bn barrier to stand
at £201.3bn. Alternative asset class-es continue to account for around 70% of that total.
Having signed 27 bilateral AIFMD co-operation agreements with EEA countries, including with the UK, Germany and France, Jersey is fi rmly focused on off ering the hedge fund community cer-tainty in a long-term, stable envi-ronment. With these agreements in place, Jersey’s regulator (the Jersey Financial Services Commis-sion) is already granting licences for fund managers, enabling them to continue to access EU markets through national private place-ment arrangements, seamlessly and without interruption.
Moreover, new regulations were introduced to Jersey’s funds regime earlier this year specifi cally to mir-
ror EU requirements. Th ese regulations allow for the crea-tion of an ‘opt-in regime’ for managers wishing to comply fully with AIFMD requirements in marketing to European investors. Th is essentially means that Jersey has not only achieved the capability to operate national private place-ment regimes under the AIFMD, but has also already im-plemented, ahead of time, the necessary mechanics to sup-port an EU-wide AIFMD marketing passport.
Th ese passports are anticipated to become available for non-EU fund managers in 2015, but having the infrastruc-ture in place should give hedge fund managers overwhelm-ing confi dence in Jersey. Th is is not something that can be said for many other International Finance Centres (IFCs).
To help clarify the status of Jersey’s AIFMD co-opera-tion agreements with EEA countries, an interactive online
ONLY 15% OF ALTERNATIVE INVESTMENT
FUND MANAGERS SAY THEY ARE READY TO MEET THE AIFMD’S REQUIREMENTS FOR
REPORTING
”
GEOFF COOK OF JERSEY FINANCE DISCUSSES THE ADVANTAGES JERSEY CAN OFFER AS A ‘THIRD COUNTRY’ AS THE AIFMD COMES INTO EFFECT ACROSS THE EU
BROADER APPEAL IN A POST-AIFMD WORLD
Geoff Cook joined Jersey Finance as CEO in January 2007 and is responsible for promoting the finance industry of Jersey around the world. Previous to his role at Jersey Finance, he was head of wealth management for HSBC Bank Plc, based in London.
T R A D E B O D Y
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A I F M D I R E C T I V E U P D A T E 2 0 1 3
tool has been launched at www.jerseyfinance.je/aifmd-map, explaining the private placement ar-rangements Jersey has in place and how they relate to the transitional provisions of EEA countries.
SUBSTANCEJersey’s expertise and deep knowledge of the hedge fund sector, including its experience in as-set servicing, its tax, accounting and filing capabili-ties, and its governance expertise, mean that it can more than satisfy the AIFMD’s criteria for man-agement substance.
In fact, in Jersey there is already a regulatory re-quirement for entities to demonstrate substance, and so-called ‘letterbox arrangements’ that might be found elsewhere are certainly not the model in Jersey regulated fund structures.
Having that level of specialist administration and servicing experience readily available should give hedge fund managers a great deal of reassurance, particularly given the apparent concerns managers have around AIFMD reporting – KNEIP research ( June 2013) indicated that 40% of managers viewed re-porting as the primary concern surrounding the AIFMD.
The role of the depositary is also a recurring area of concern – according to Multifonds research (‘The Im-pact of AIFMD and Convergence Survey’, June 2013), for instance, 64% of fund professionals said that deposi-tary liability is the most challenging aspect of the AIFMD. Again, Jersey can give confidence here, having in place a fully compliant depositary regime and infrastructure of in-stitutional and independent depositary service providers.
FLEXIBILITYIn the current climate, however, managers are adopting global strategies and seeking to raise capital in growth markets around the world. Using a non-EU but European time-zone jurisdiction that has expertise in handling non-European hedge fund business like Jersey will be attractive in such scenarios.
Jersey is offering a completely separate funds regime that lies outside the scope of the AIFMD, for managers who don’t want to market into the EU.
As well as offering a route that offers the same controls under the AIFMD that would be offered by an EEA country, at the same time Jersey is able to offer managers the ability to market their funds outside Europe without the need to consider the impact of the AIFMD at all. This flexibility puts Jersey in something of a unique position.
Managers can establish all their entities in Jer-sey and, from one location, meet all EU require-ments for EU-targeted funds, and serve the rest of the world in a non-AIFMD compliant envi-ronment - with potentially lower costs. Offering both will not be available to EU member states or all IFCs.
OFFSHORE APPEALThanks to its approach to the AIFMD, Jersey is in a very strong position as a centre for servicing
hedge funds, wherever the fund is marketed.With the vast majority of alternative fund managers
(88% according to Multifonds’ research, June 2013) indicating they will take advantage of the ‘grace period’ until July 2014, it’s clear that the coming twelve months will be crucial as the AIFMD brand beds down.
With the same research finding that 77% of EU manag-ers may choose to set up offshore structures as a result of the AIFMD – underlining the strong appeal of the kind of good value, flexible, robust option offered by Jersey – it is our expectation that parallel ‘offshore-onshore’ structures will become more common.
By offering a regime that offers a blend of certainty and flexibility, Jersey has taken the opportunity to broad-en its scope and appeal as a centre for hedge funds. Over the coming months, it is anticipated that a growing num-ber of managers with an international focus on both non-European and pan-European funds will turn to Jersey.
JERSEY IS OFFERING A COMPLETELY SEPARATE FUNDS REGIME THAT
LIES OUTSIDE THE SCOPE OF THE AIFMD, FOR
MANAGERS WHO DON’T WANT TO MARKET
INTO THE EU
”
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A I F M D D I R E C T I V E U P D A T E 2 0 1 3
The AIFMD has introduced new require-ments concerning professional indemnity coverage that AIFMs will need to address in the coming months as the deadline for compliance draws closer. David Heathfi eld of Baronsmead Partners LLP discusses the
requirements for insurance needed by AIFMs to stay com-pliant and how the Directive might be developed to make it more workable in practice.
HFMWeek: What does the AIFMD say about the professional indemnity (PI) insurance required by AIFMs?David Heathfi eld (DH): Articles 9, 12 and 15 of the Di-rective and the delegated regulation deal with insurance and state that AIFMs may carry professional indemnity in-surance in order to protect themselves from losses arising from professional liability risks resulting from their day-to-day activities. Article 12 sets out the types of risks that should be covered by an insurance policy and Article 15 deals with the structural requirements of a policy. At fi rst glance the wording of the Directive appears to be relatively straightforward but a closer inspection reveals that there are certain areas which require careful consideration in or-der to ensure compliance with the Directive.
HFM: What practical implications does the delegated regulation have on standard professional indemnity policies available in the market?DH: Broadly speaking, the majority of the AIFMD insur-ance requirements will be met by most standard profes-sional indemnity policies available in the market. PI poli-cies are aft er all designed to provide cover for the negligent performance of professional services – exactly the type of risks that the Directive says that AIFMs should be cover-ing, that however does not mean that purchasing standard form wordings will be enough to achieve compliance. For example, it is important to ensure that the way in which wrongful act is defi ned in the PI policy refl ects very accu-rately the risk scenarios listed in Article 12 of the AIFMD. It is also important to ensure that what constitutes an in-sured person under a PI policy mirrors the ESMA guid-ance on who will be classed as a relevant person under the Directive. Consultants and individuals providing services to an AIFM under a delegated arrangement with a third party are not always covered by standard form PI policies but they will need to be going forward.
Th e AIFMD is not reinventing the wheel on PI insur-ance but certain elements of the standard cover off ered
under professional indemnity policies may need to be examined to make sure they meet the requirements of the Directive.
HFM: Do you consider that there will be a price im-plication on AIFMs obtaining compliant professional indemnity policies?DH: Th e general consensus from the insurers that we have spoken to is that providing an AIFMD-compliant policy will not automatically lead to price increases. Having said that, Article 15 sets out the level of cover that AIFMs need to buy in order to be considered compliant, therefore if an AIFM needs to increase its annual limits to meet the mini-mum requirements, this will inevitably lead to an increase in price. Th e coverage required for an individual claim is 0.7% of the value of the portfolio managed by the AIFM and 0.9% for claims in the aggregate.
HFM: Are exclusions permitt ed in so-called AIFMD compliant professional indemnity policies? DH: Th is is an interesting question. Initially, the literal wording of the Directive did not allow for any damage caused, for which the AIFM has legal responsibility, to be excluded from a PI policy and the position is still un-certain. Commercially however, it would be almost im-possible to buy a policy without at least some exclusions. Recent guidance from the FCA suggests that in addition to holding own funds to cover any defi ned excess, AIFMs must also hold suffi cient own funds to cover the risk that a loss arising from an AIFM’s professional liability may be excluded under their professional indemnity policy.
We understand that there will soon be guidance on what are considered to be ‘standard exclusions’ for which AIFMs will not have to hold own funds, but any additional exclusions included in a policy are likely to have a fi nancial implication on the AIFM in terms of holding own funds.
HFM: Can professional indemnity policies provide cover for non-AIFMD losses (such as crime losses) and still be considered compliant?DH: Th is is again a complex area and one which is caus-ing much debate in the market among lawyers, brokers and underwriters alike. Initial advice from the FCA sug-gests that in order to be considered compliant, a policy limit cannot be eroded by what are considered to be non-AIFMD losses such as crime or D&O losses. It is quite of-ten the case that PI policies provide cover beyond that of standard professional indemnity insurance risks, so this is a real issue.
HFMWEEK SPEAKS TO DAVID HEATHFIELD OF BARONSMEAD ABOUT THE NEW REQUIREMENTS FOR PROFESSIONAL INDEMNITY INSURANCE UNDER THE AIFMD
PROFESSIONAL INDEMNITY INSURANCE AND THE AIFMD
David Heathfield is General Counsel at Baronsmead Partners LLP.He is responsible for overseeing and developing the claims management process for Baronsmead’s clients, along with the improvement of existing wordings to ensure that Baronsmead continues to provide insurance programmes that deliver extensive coverage for investment management firms. Prior to his appointment, David worked in the Insurance Litigation department at a leading London law firm.
H F M W E E K . CO M 13
I N S U R A N C E
To address the point it is likely that it will be necessary for a policy to be structured in such a way that there will be a segregated limit which will respond only to ‘AIFMD losses’. Alternatively, a reinstate-ment provision in a policy that maintains the minimum level of cover required by the Directive could be an option, but this may have practical issues in the sense that the type of loss capable of triggering a reinstatement clause can be restrictive.
HFM: How could the Directive be improved to make it more workable for AIFMs in practice?DH: Our view is that AIFMs should be allowed to hold a combination of own funds and PI insurance to deal with their potential risk exposures. As the Directive stands, an AIFM can choose either to hold own funds to cover risks arising from professional negligence or they can elect to buy insurance, but they can’t mix and match. This is a rela-tively straightforward decision for smaller AIFMs because generally speaking the premium levels for a compliant policy are less than the cost of holding own funds at the required levels.
The decision however is less straightforward for larger institutional managers that may have several billion dol-lars’ worth of assets under management. Currently the Di-rective does not apply an upper cap to policy limits, which means that a manager with a portfolio value of £10bn would need to buy £90m worth of cover in order to be compliant, which may not be realistic. Allowing AIFMs to combine own funds held with PI cover would, we believe, offer a helpful solution to some AIFMs facing a difficult decision on how best to comply with the Directive.
As we move closer to the compliance deadline of 22 July 2014, these and many wider issues which are not related to insurance will come into focus for managers and will need to be dealt with. Among all the uncertainty there seems to be one certainty, which is that the countdown to AIFMD compliance has now firmly begun and AIFMs should be working hard with their brokers to ensure that the cover they are buying is fit for purpose and in compliance with the Directive.
AS WE MOVE CLOSER TO THE COMPLIANCE DEADLINE OF 22 JULY 2014, THESE AND MANY WIDER ISSUES WHICH ARE NOT RELATED TO INSURANCE WILL COME INTO FOCUS FOR
MANAGERS AND WILL NEED TO BE DEALT WITH
”
here.
If you wantAIFMD options for distribution intoboth EU and non-EU countries, you’ll find it...
guernseyfinance.com
Guernsey’s approach to the Alternative Investment Fund Managers Directive (AIFMD) is designed to give fund managers an attractive choice of options to meet the needs of their investor base. If there is a need to be AIFMD compliant we have a solution, while for those who don’t require it our existing independent regime offers an attractive choice. Used singly or in parallel, Guernsey’s approach puts fund managers in control.
Central to the various measures under the Alter-native Investment Fund Managers Directive (2011/61/EU) (AIFMD), is a framework requiring that each Alternative Investment Fund Manager (AIFM) meets certain organi-sational requirements and adopts a range of
operating policies and procedures. Th is article briefl y considers some of the key operation-
al obligations that will apply to a fi rm carrying out asset management activities as an AIFM or delegate on behalf of an AIFM for an Alternative Investment Fund (AIF).
Th e aim of this article is to serve as a tool in an AIFMD implementation project – essentially a starting point for a discussion on the operational implications of the AIFMD so that asset managers can start to adapt their business from a practical perspective in order to be aligned with the legal framework documents supporting an AIFMD authorisation.
A SHIFT FROM MIFID AND/OR UCITS IV?Some of the asset management re-lated conduct of business rules in the AIFMD correspond closely to provisions of the Markets in Finan-cial Instruments Directive (MiFID) regime. In addition, many AIFMD requirements are derived directly from, or closely correspond with, those applicable to Ucits manage-ment companies under the Ucits IV Management Company Directive (2010/43/EC). However, there are some specifi c (and key) amend-ments and additions that diff erenti-ate the rules from both Ucits and MiFID.
POLICIES AND PROCEDURES WHEN ENGAGING DELEGATESTh e AIFMD repeatedly refers to a requirement for the AIFM to “establish, implement and maintain” policies and procedures, in respect of various functions. Th ere is no scope for the AIFM to refrain from having such policies and procedures on the basis that its delegate(s) performs the relevant functions. While it is acknowledged in many AIF structures that the delegate investment manager (or fund administrator for certain functions) will execute the relevant functions in practice, the AIFMD eff ectively re-
quires that the necessary policies and procedures must be: (a) owned, controlled and supervised by the AIFM; and (b) fully AIFMD compliant. In many cases it will not be suffi cient that there are policies and procedures already in place that are compliant with Ucits or MiFID or any other industry standard the delegate already adheres to. Th is is particularly acute given the gaps between (i) AIFMD, on the one hand; and (ii) Ucits and MiFID respectively, on the other hand.
Th e AIFM must ensure that the delegate carries out the delegated functions eff ectively and in compliance with ap-plicable law and regulatory requirements. Accordingly, the AIFM needs to ensure that, for all of its policies and procedures that are executed in practice by a delegate, the day-to-day functions of such delegates must adhere to the specifi c terms of the AIFM’s policies and procedures.
Th e AIFMD organisational requirements can be divid-ed into three main sections: (i) investment-side operat-
ing conditions, (ii) organisational requirements, and (iii) risk man-agement requirements. Th ese are considered further below.
SUMMARY OF KEY AIFMD ORGANI-SATIONAL REQUIREMENTS(i) Investment-side operating conditionsAn AIFM or, where the AIFM delegates the day-to-day portfo-lio management functions to a delegate investment manager, the delegate investment manager will need to:
(a) Carry out due diligence dur-ing the selection and monitoring of
investments and have a process in place to ensure consist-ency with investment policy, restrictions, risk limits etc.
(b) Carry out a pre-investment analysis when investing in illiquid securities.
(c) Ensure any inducements or soft commissions en-hance the quality of the service and do not impair the AIFM’s ability to act in investors’ best interests.
(d) Execute promptly, accurately record and allocate all orders (aggregation is only permitt ed where it does not disadvantage the client).
(e) Obtain the “best possible result” for the AIF, tak-ing into account specifi c factors and with the relevance of
THE AIFMD REPEATEDLY REFERS TO A REQUIREMENT
FOR THE AIFM TO “ESTABLISH, IMPLEMENT AND MAINTAIN” POLICIES
AND PROCEDURES
”
STEPHEN CARTY OF MAPLES AND CALDER DISCUSSES THE KEY OPERATIONAL OBLIGATIONS AFFECTING AIFMS AND DELEGATES
AIFMD OPERATING CONDITIONS AND ORGANISATIONAL
REQUIREMENTS
Stephen Carty is a partner in the Investment Funds Group in Maples and Calder’s Dublin office. His primary areas of expertise are asset management and investment funds. He has strong expertise in Ucits and in the area of alternative investment funds.
L E G A L
1 6 H F M W E E K . CO M
A I F M D I R E C T I V E U P D A T E 2 0 1 3
such factors determined by reference to prescribed criteria relevant to the AIF.
(f) Ensure pre-engagement and ongoing due diligence are carried out on counterparties and prime brokers re-garding regulatory status and financial position. Detailed daily reporting by prime brokers needs to be provided to the AIF’s depositary.
(g) Formulate a voting rights and corporate actions strategy.
(h) Set limits for the liquidity or illiquidity of each AIF consistent with its redemption policy and put in place a liquidity management system to monitor liquidity risk and profile.
(i) Maintain organisational arrangements and take reason-able steps to identify, prevent, manage and monitor conflicts.
In many cases, these functions should already be in place or should be easily achievable. Where requirements relate to third parties, early engagement is advisable to ensure that the obligations under the AIFMD can be met, for example, with delegate investment managers, in connection with the specific AIFMD conditions regarding best execution, order handling and order aggregation or with prime brokers, in connection with daily reporting requirements.
(ii) Organisational requirements(a) An AIFM’s senior management must be responsible
for: valuation policies; compliance function; investment policy; investment strategy; risk limits and investment decision-taking monitoring and receive regular written reports on these.
(b) An AIFM must establish an independently operat-ing compliance function and appoint a compliance officer who reports regularly.
(c) An AIFM must (subject to exceptions) maintain a separate and independent internal audit function.
(d) An AIFM must publish an annual report for each AIF which must contain specific information outlined in the AIFMD.
(e) An AIFM must establish a written valuation policy and procedures covering all material aspects of the valu-ation process and procedures and controls in respect of each AIF.
(f) Any delegation must be for objective reasons and there must be a written agreement between the AIFM and the delegate.
(iii) Risk management(a) The risk management function should be function-
ally and hierarchically separate from the operating units including the portfolio management function – although a proportionality principle applies.
(b) A risk management system must be implemented to identify measure, manage and monitor all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed.
(c) The risk profile disclosed to AIF investors must be consistent with the risk limits set for the AIF.
(d) A documented risk management policy must be implemented covering procedures designed to manage exposure of the AIF to market, liquidity, counterparty, op-erational and all other materially relevant risks.
(e) An AIFM must establish quantitative and qualita-tive risk limits for each AIF aligned with the risk profile disclosed to investors.
(f) An AIFM must set a maximum level of leverage and reuse of collateral limit appropriate for the AIF.
(g) An AIFM must have processes to identify, measure, manage and monitor risk and ensure compliance with set limits.
The risk infrastructure of each AIFM (and delegate, where appropriate) will need to be assessed in light of these requirements and enhanced, as required.
CONCLUSIONMany asset managers will already be aligned with certain AIFMD organisational requirements. However, some of the AIFMD organisational requirements are new or enhanced concepts and do not correspond with either existing MiFID or Ucits requirements. So, in many as-pects, changes will be required. Appreciating the need for these changes and ensuring that the operations side of the business addresses them early could be critical in project-managing AIFMD compliance within the prescribed timeframes.
1 8 H F M W E E K . CO M
A I F M D D I R E C T I V E U P D A T E 2 0 1 3
The requirement to appoint a remunera-tion committ ee is new for the alternative investment industry. Although some fund managers in the UK are already subject to the remuneration provisions of the Capital Requirements Directive, the remuneration
rules introduced by the AIFMD will present new chal-lenges for all AIFMs.
Th e remuneration committ ee’s appointment and op-erations are still somewhat murky for asset managers, even three months aft er the implementation of the AIFMD. Common challenges include not knowing if a remunera-tion committ ee is needed and not knowing how to estab-lish an eff ective remuneration committ ee. Luckily, AIFMs can benefi t from the experience of listed companies and fi nancial institutions that are already subject to a remu-neration committ ee requirement. We take a look at some of the possible solutions off ered by comparable regimes, as well as discuss the existing guidance on the AIFMD re-muneration requirements.
WHAT IS THE ROLE OF A REMUNERATION COMMITTEE?Th e main role of a remuneration committ ee is to be re-sponsible for giving recommendations on management and certain senior staff pay. Th e committ ee also plays a role in designing and overseeing the operation of the re-muneration policy of the AIFM.
WHEN DOES THE OBLIGATION ENTER INTO FORCE?Although the AIFMD came into force on 22 July 2013, thanks to its transitional provisions the requirement to have a remuneration committ ee only applies to fund man-agers either upon the fi rm’s authorisation as an AIFM or in any case before 22 July 2014.
Th e FCA has recently stated that AIFMs may postpone their authorisation if they request a deferral of determina-tion in its Variation of Permission application. Th erefore, a fi rm applying for authorisation now, which is wise and sensible, would be able to defer the requirements to set up a remuneration committ ee until 22 July 2014.
WHO DOES IT APPLY TO?Th e establishment of a remuneration committ ee is not a requirement for all AIFMs, only those considered ‘signifi -cant’ either in terms of their size, structure or scope. How-ever, sett ing up a remuneration committ ee is considered ‘good practice’ for AIFMs who are not required to do so.
Non-EU managers will also be happy to hear that they do not need to set up a remuneration committ ee if they
are marketing their non-EU funds in the EU, although this is subject to each member state’s rules which might be stricter than the AIFMD’s requirements.
To determine which AIFMs are considered ‘signifi -cant’, both Esma guidelines on sound remuneration poli-cies under the AIFMD and FCA guidance on the AIFM Remuneration Code, provide guidance. It is indeed up to the AIFM to determine whether it is ‘signifi cant’ and thus whether it has to appoint a remuneration committ ee.
From the Esma and FCA papers, we believe that an AIFM can be considered ‘signifi cant’ if it is signifi cant in:
Size: for example, assets under management are over €1.25bn (UK: leveraged: £500m-£1.5bn, or unlever-aged: £4-6bn) – amounts to be offi cially determined by the FCA aft er consultation – and if the number of employees is over 50;Internal organisational structure: for example, the AIFM being listed and traded on a regulated market, and a signifi cant portion of equity in the AIFM being held by investors not working in the business; Scope and complexity of its activities: AIFM managing a large number of AIFs with a range of diff erent strate-gies, and with a high level of risk (fi rms may refer to their FCA conduct and prudential categories, C1-4 and P1-4, for indication of their risk profi le).
Where just one or even two of these elements are pre-sent, the AIFM will not always require a remuneration committ ee, as their cumulative eff ect must be taken into consideration. However, where several of the conditions are satisfi ed, this provides a strong working presumption that the committ ee is required for the fi rm.
AIFMs must consider all of the above factors during their initial review in order to determine whether they re-
THE MAIN ROLE OF A REMUNERATION COMMITTEE IS TO BE RESPONSIBLE FOR
GIVING RECOMMENDATIONS ON MANAGEMENT AND CERTAIN SENIOR
STAFF PAY
”
JÉRÔME LUSSAN AND PETRA HOLLIS, OF LAVEN PARTNERS, TALK TO HFMWEEK ABOUT THE CHALLENGES IN SETTING UP A REMUNERATION COMMITTEE UNDER THE AIFMD
SETTING UP A REMUNERATION COMMITTEE UNDER THE AIFMD
Jérôme de Lavenere Lussan is the CEO and founder of Laven. He has a broad degree of expertise in the hedge fund and fund management industry and is an advisor to many international financial services firms specialising in operations, legal and regulatory matters.
Petra Hollis is managing director of Laven Partners. Petra heads the European compliance department, with a strong focus on AIFMD implementation. She advises on compliance services such as regulatory applications, regulatory reporting, passporting and compliance monitoring. Petra is also involved in complex hedge fund structuring projects.
H F M W E E K . CO M 19
I N V E S T M E N T C O N S U LTA N C Y
quire a remuneration committee. The initial review should be well documented as, upon request, the AIFM is expect-ed to be able to explain to the FCA their rationale for how they apply the AIFM remuneration proportionality rule; particularly where they have concluded that the disappli-cation of certain rules is appropriate.
Since the FCA final guidance can only be expected in early 2014, firms within the proposed AuM range will con-tinue to experience uncertainty about their compliance requirements. Criteria on internal organisation, scope and complexity are not specific and open to different inter-pretations. Peer comparison is likely to be an important component for firms determining their requirements but is not without its problems given the lack of publicly avail-able information and the level of confidentiality associated with remuneration.
AIFM REMUNERATION COMMITTEE REQUIREMENTS
Esma requires that the remuneration committee is made up of only non-executive members, at least the majority of whom qualify as independent.
This independence requirement may be difficult for many private equity and hedge fund managers since a typi-cal board includes mostly, if not only, members with execu-tive functions. Therefore, in order to solve this clear conflict of interest problem, AIFMs will likely have to bring in exter-nal consultants to act as remuneration committee members.
In order to find independent candidates, the use of nomination committees and remuneration consultants is typical for listed companies.
In listed companies, the use of a nomination commit-tee is considered best practice as it injects a level of inde-pendence into the process of appointing board members. The nomination committee puts forward proposals to the board of potential independent candidates who can, fol-lowing their appointment, be recommended to the remu-neration committee. This prevents the board from cherry picking their preferred candidates.
In terms of ensuring continued independence of the committee members, AIFMs may wish to consider ap-pointing the committee members for a fixed term and, where there is a possibility of re-election, subject the re-election to a careful review. Some corporate governance guidelines propose specific limits on how many times a member can be re-elected but no such specification exists in the AIFMD or its related guidance and given the diver-gence between firms qualifying as AIFMs, it is sensible for the individual AIFMs to determine the appropriate length of term and number of possible re-elections.
Although not a requirement, it is a suggestion in the Esma guidelines and corporate governance guidelines that the non-executive members, which includes the re-muneration committee, should receive only fixed remu-neration in order to avoid conflicts of interest and main-tain independence. Where this is not the case, a strictly tailored and transparent remuneration system reflecting the individual’s achievements should be in place.
Finally, in order to ensure that independence in fact and in appearance are preserved, independent reviews of the remuneration policy and its application must be per-formed on an annual basis.
The remuneration committee must consist of an appro-priate (but undefined) number of members with suffi-cient skill and experience in risk management and con-trol activities. What remains to be determined by each AIFM is the appropriate number of committee members who need to have risk management expertise. The appro-priate number itself will of course depend on the overall size of the committee. The minimum size of a remunera-tion committee under the UK Corporate Governance Code is three members or two for smaller companies. The Esma guidance does not specify a minimum num-ber for the committee but the UK Corporate Govern-ance Code minimums can certainly be used as indicative guidance of best practice.
The requirement to have expertise in risk management should not be read as duplication of the activities carried out by the AIFM’s risk management committee. In fact, the remuneration committee is expected to collaborate with the other sub-committees of the board, including the risk management committee. The AIFM might also assess whether it is appropriate for one or more of the members of the risk management committee to also be a member of the remuneration committee so as to facilitate the ex-change of information and ensuring appropriate expertise of the committee.
ACTION POINTSThe onus is on the AIFM to assess, justify and record each aspect of its decision-making process. AIFMs can use the results of peer reviews, where available, to better perform these tasks.
Setting out a clear term sheet for the remuneration committee, which includes the committee’s scope of work and details of selection and appointment of its members as well as their remuneration, will help AIFMs establish an efficient and structured committee which will satisfy regulators as well as institutional investors.
Jersey for FundsJersey is at the forefront of delivering fund services, with the emphasis today shifting towards
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Clients have access to legal support from Jersey law firms who work closely with counterparts in the world’s major centres, to deliver structured products and specialist vehicles that meet diverse
financial and investment objectives.
For further information, please visit www.jerseyfinance.je
L A W
H F M W E E K . CO M 21
A I F M D I R E C T I V E U P D A T E 2 0 1 3
It is over three months since the AIFMD came into force and many UK-based hedge fund managers are currently taking advantage of the transitional provisions and starting to consider their FCA Variation of Permission (‘VoP’) application, so as to be approved as an AIFM prior to 22 July 2014.
Th ere are a number of regulatory obligations that need to be met and, at fi rst sight, the process may appear quite daunting. In particular, since the AuM threshold for man-agers of leveraged funds is set at only €100m, even many smaller hedge fund managers will need to apply for au-thorisation as full scope UK AIFMs. With early and care-ful planning, however, converting to being an AIFM should be rela-tively painless.
Typically, a number of changes will be required to managers’ inter-nal procedures in order to comply with the new Investment Funds Sourcebook (FUND). However, as has frequently been noted, the regulatory ambit of the AIFMD extends beyond alternative invest-ment fund managers to encom-pass, indirectly, the funds that they manage. Th is note looks at some of the key requirements that man-agers need to address in relation to their funds, to ensure that this aspect of the conversion process runs smoothly.
DEPOSITARY FUNCTIONSTh e AIFMD has introduced a new character into the hedge fund cast list: the depositary. Th e requirement for funds to have a depositary – an en-tity with responsibility for cash monitoring, safekeeping of fi nancial instruments, safekeeping of other assets and oversight functions – was one of the most controversial aspects of the AIFMD. However, with the large majority of hedge funds domiciled in the Cayman Islands and other non-EEA jurisdictions, it is the so-called ‘depositary light’ regime (set out in FUND 3.11.33) which is proving more relevant.
Under ‘depositary light’, a single depositary need not be appointed. Instead, an AIFM wishing to market a fund in the EEA must procure that, in relation to that fund, the functions of a depositary are fulfi lled by one or more enti-ties which are either (i) established in the United Kingdom
and are authorised by the FCA to act as a depositary, or (ii) established outside the United Kingdom. Market practices in relation to the depositary light regime are still develop-ing, but trends are starting to emerge. Some managers are opting to appoint one fi rm, oft en an affi liate of the admin-istrator, to provide all three depositary functions. In turn, the depositary will delegate some or all of the functions to third parties. In the case of the ‘safekeeping of fi nancial as-sets’ function, this will oft en be the prime brokers.
Other managers, particularly those that have an inde-pendent administrator, are opting to split the depositary role. Generally, the administrator is being appointed to ful-
fi l the ‘cash monitoring’ function, as this fi ts closely with its existing responsibilities. Similarly, in rela-tion to non-custody assets admin-istrators may also be best placed to fulfi l the ‘safekeeping of other assets’ function, which primarily involves verifi cation of ownership and record keeping in relation to such assets. Finally, an independent fi rm or the administrator is being appointed to fulfi l the ‘oversight’ function. Th ese appointments may be eff ected by amending existing administration agreements and/or putt ing in place one or more new agreements with the relevant ser-vice providers.
Th e ‘safekeeping of fi nancial instruments’ function is proving somewhat less simple and market practices in relation to this remain
nascent. In general, each entity that provides custody ser-vices to a fund (typically, its prime broker), or an affi liate, will need to be appointed to fulfi l this function in relation to the portion of the fund’s assets which the relevant entity holds in custody at any given time. Certain prime brokers are happy to fulfi l this function internally but, if domiciled in the United Kingdom, will need to be authorised by the FCA to provide depositary services. Others, particularly those with existing custody businesses, prefer that their custodian affi liate be appointed. Still others have yet to de-termine their approach to this function.
VALUATIONPrior to the implementation of the AIFMD, while ad-ministrators may have contractually been responsible
THE REGULATORY AMBIT OF THE AIFMD
EXTENDS BEYOND ALTERNATIVE INVESTMENT
FUND MANAGERS TO ENCOMPASS, INDIRECTLY, THE FUNDS THAT THEY
MANAGE
”
SIMON THOMAS AND SAMUEL BROOKS, OF MACFARLANES, EXPLAIN HOW TO ENSURE THAT FUNDS ARE AIFMD-COMPLIANT
LINING UP FOR THE CONVERSION
Simon Thomas is a partner in the investment funds group, specialising in open-ended alternative investment funds. He advises start-up and institutional investment managers on all aspects of the structuring, establishment and operation of investment management companies and investment funds with a particular emphasis on the hedge fund industry.
Samuel Brooks is a senior solicitor in the investment funds group. He has a broad funds practice, focusing primarily on representing sponsors of both open-ended and closed-ended alternative investment funds across a range of asset classes.
L A W
2 2 H F M W E E K . CO M
A I F M D I R E C T I V E U P D A T E 2 0 1 3
for valuing a fund’s assets, ultimate responsibility for valuations lay with a fund’s directors. This was typically reflected in the administration agreement and the fund’s offering document. For purposes of Cayman Islands law, this position has not changed; however, for UK regulatory purposes (pursuant to FUND 3.9.2), a fund’s AIFM now has responsi-bility for the proper valuation of the fund’s assets. Nevertheless, in most cases, the administrator will retain a role as a valuation agent. We therefore ex-pect that an AIFM will become a party to the ad-ministration agreement in order to obtain contrac-tual remedies against the administrator in case of its gross negligence or similar misconduct.
AIFMs should also consider whether to ap-point an ‘external valuer’ in relation to their funds. Although an AIFM’s regulatory liability towards a fund and its investors will not be affected by the appointment of an external valuer, the external valuer will, in turn, be liable to the AIFM for any losses suffered by the AIFM as a result of the ex-ternal valuer’s negligence or intentional failure to perform its tasks. This liability standard may not be limited by contract. Administrators are, once more, the obvious candidates to function as ex-ternal valuers, and some have indicated that they will be happy to accept such an appointment; however, others have expressed reservations. If an administrator is to be appointed as an external valuer then this would need to be reflected in an amended administration agreement or a separate valuation services agreement.
INVESTMENT MANAGEMENT AGREEMENTInvestment management agreements are likely to require substantial amendments. The agreement should note that the AIFM is responsible both for portfolio management and risk management in respect of the relevant fund. Additionally, new conflicts of interest provisions applicable to AIFMs have been introduced (in SYSC 10.1), and changes in relation to valuation, best execution, reporting and the manager’s right to terminate the agreement should also be reflected.
OFFERING DOCUMENTSThe offering document of each fund managed by a UK AIFM is likely to require at least some amendments to re-flect the new regulatory status of the AIFM and the fund, and to enable future marketing in the EEA. In particular, for funds marketed in the EEA (or domiciled in the EEA), the most significant changes are likely to be required in order to comply with the new ‘investor information’ regulations specified by FUND 3.2. Many of these regulations closely accord with previous market practices, so offering docu-ments may already be partially compliant, but other regula-tions are less likely already to be reflected. For example, very specific disclosures are mandated in relation to leverage, risk management and preferential treatment of investors. Disclo-sures must also be made regarding how and when reports will be made to investors in relation to leverage and certain liquidity and risk management provisions. FUND 3.2 is highly prescriptive (following Article 23 of the AIFMD), so this is likely to be something of a ‘box ticking’ exercise, but it is nonetheless an important one.
SUMMARYThe FCA has advised that firms seeking a VoP to become a UK AIFM (including as a small au-thorised UK AIFM) should submit their initial application no later than 22 January 2014, and that completed VoP application forms should be received by the FCA no later than 22 April 2014. It has also confirmed that firms may request a deferred conversion date, so there is no need for a manager to become an AIFM before 22 July 2014, even if the FCA approves its VoP applica-tion in advance of that date.
Filling out the VoP application form is a ma-jor task, but it can be simplified by undertaking a thorough review of all of the service providers, material contracts and offering documents relat-ing to a manager’s funds to check that, to the ex-tent possible, all regulatory requirements in rela-tion to a manager’s funds are satisfied before the application is submitted. Accordingly, even those managers planning on submitting their VoP ap-plication close to the deadline would be well ad-vised to commence the review process as soon as possible.
FILLING OUT THE VOP APPLICATION FORM IS A MAJOR TASK, BUT
IT CAN BE SIMPLIFIED BY UNDERTAKING A THOROUGH REVIEW
TO CHECK THAT ALL REGULATORY
REQUIREMENTS ARE SATISFIED
”
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IN THIS ISSUE
AIFMD
5
AIFMD – UK
6
AIFMD – US
1/3/4
CFTC
5
CSD
6
DISCLOSURE – AUSTRALIA 4
FATCA
5
MIFID II
7
MAR
7
REHYPOTHECATION 3
RISK MANAGEMENT
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SEC
4/5/6/7
SHORT SELLING – EU 5
A fresh focus on reverse
solicitation under the AIFMD,
combined with co-operation
agreement rules that give EU
regulators heightened powers
over third-country managers,
could lead to more overseas visits
from European authorities,
market participants warn.
The extra-territorial nature of
regional regulation, particularly
the AIFMD, has been a chief
concern among managers of late,
with potential investigations
into non-EU firms or the
upholding of dubious claims by
investors key issues raised to
Hedge Compliance.
According to Article 4
of Esma’s standardised
co-operation agreement
document, “each Authority may
need to conduct, itself, or by a
third party commissioned by
it, on-site visits of the covered
entities subject to its supervisory
authority that are located in the
local authority’s territory”.
“ U n d e r c o - o p e r a t i o n
agreements, any jurisdiction
can inspect a foreign
manager,” said the
general counsel at a New
York-headquartered
firm with several billion
Fears grow over new
overseas regulatory
powers under AIFMD
BY MAIYA KEIDAN
YOUR DEF IN IT IVE HEDGE FUND REGULATION ROUND-UPH E D G E
C OM P L
I AN C
EISSUE 19 NOVEMBER 2013
PUBLISHED BY
s indd 1
11/10/2013 15
TURN TO PAGE
03
V IS IT HEDGE-COMPL IANCE .COM FOR MORE REGULATORY UPDATES
IN THIS ISSUEAIFMD
5
AIFMD – UK
6
AIFMD – US
1/3/4
CFTC
5
CSD
6
DISCLOSURE – AUSTRALIA 4
FATCA
5
MIFID II
7
MAR
7
REHYPOTHECATION 3
RISK MANAGEMENT 3
SEC
4/5/6/7
SHORT SELLING – EU 5
A fresh focus on reverse
solicitation under the AIFMD,
combined with co-operation
agreement rules that give EU
regulators heightened powers
over third-country managers,
could lead to more overseas visits
from European authorities,
market participants warn. The extra-territorial nature of
regional regulation, particularly
the AIFMD, has been a chief
concern among managers of late,
with potential investigations
into non-EU firms or the
upholding of dubious claims by
investors key issues raised to
Hedge Compliance. According to Article 4
of Esma’s standardised
co-operation agreement
document, “each Authority may
need to conduct, itself, or by a
third party commissioned by
it, on-site visits of the covered
entities subject to its supervisory
authority that are located in the
local authority’s territory”. “ U n d e r
c o - o p e r a t i o n
agreements, any jurisdiction
can inspect a foreign manager,” said the
general counsel at a New York-headquartered
firm with several billion
Fears grow over new
overseas regulatory
powers under AIFMDBY MAIYA KEIDAN
YOUR DEF IN IT IVE HEDGE FUND REGULATION ROUND-UP
H E D G E
C O M P L I A N C E
ISSUE 19 NOVEMBER 2013
PUBLISHED BY
001_008 HC18_news.indd 1
11/10/2
TURN
TO PAGE
03
V IS IT HEDGE-COMPL IANCE .COM FOR MORE REGULATORY UPDATES
IN THIS ISSUE
AIFMD
5
AIFMD – UK
6
AIFMD – US
1/3/4
CFTC
5
CSD
6
DISCLOSURE – AUSTRALIA 4
FATCA
5
MIFID II
7
MAR
7
REHYPOTHECATION 3
RISK MANAGEMENT 3
SEC
4/5/6/7
SHORT SELLING – EU 5
A fresh focus on reverse
solicitation under the AIFMD,
combined with co-operation
agreement rules that give EU
regulators heightened powers
over third-country managers,
could lead to more overseas visits
from European authorities,
market participants warn.
The extra-territorial nature of
regional regulation, particularly
the AIFMD, has been a chief
concern among managers of late,
with potential investigations
into non-EU firms or the
upholding of dubious claims by
investors key issues raised to
Hedge Compliance.
According to Article 4
of Esma’s standardised
co-operation agreement
document, “each Authority may
need to conduct, itself, or by a
third party commissioned by
it, on-site visits of the covered
entities subject to its supervisory
authority that are located in the
local authority’s territory”.
“ U n d e r c o - o p e r a t i o n
agreements, any jurisdiction
can inspect a foreign
manager,” said the
general counsel at a New
York-headquartered
firm with several billion
Fears grow over new
overseas regulatory
powers under AIFMD
BY MAIYA KEIDAN
YOUR DEF IN IT IVE HEDGE FUND REGULATION ROUND-UPH E D G E
C OM P L
I AN C
EISSUE 19 NOVEMBER 2013
PUBLISHED BY
11/10/2
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A I F M D D I R E C T I V E U P D A T E 2 0 1 3
The Alternative Investment Fund Managers Directive (AIFMD or the Directive) has di-chotomised the funds industry into EU and non-EU funds jurisdictions. Th is has put Gibraltar, which was one of a dozen such domiciles, into a category of one of four
European alternative fund domi-ciles. Th is is particularly signifi -cant because UK managers with AIFM licences will be looking for European vehicles for their funds in order to market to European investors.
Until now, these managers tend-ed to use Cayman vehicles, which they will probably continue to use for their non-EU business. For those that wish to use their newly earned passporting rights, it stands to reason that in their search for European vehicles for their funds, they should look to the jurisdic-tion which is closest legally, and in regulatory approach to what they
are used to in the Cayman Islands. Gibraltar is the only European jurisdiction that allows for the pre-authorisation launch of a fund, as Cayman does.
Furthermore Gibraltar being a common law jurisdic-tion with the Privy Council as the alternate Court of Ap-peal and with English as its primary language, is likely to
cause less of a culture shock for UK managers who have decided to use a European vehicle.
THE AIFMDTh e AIFMD will operate alongside and create a separate European regu-latory regime from Ucits IV and Mi-FID. Eff ectively, all European funds will fall under either the AIFMD or Ucits IV. All EU member states were supposed to implement the AIFMD into their national laws by 22 July 2013, but in fact only 13 jurisdictions did (including Gibraltar).
Since 22 July 2013, European AIFMs managing EU AIFs, such as Gibraltar AIFs, have been able
ALL EU MEMBER STATES WERE SUPPOSED TO
IMPLEMENT THE AIFMD INTO THEIR NATIONAL LAWS
BY 22 JULY 2013, BUT IN FACT ONLY 13 JURISDICTIONS DID (INCLUDING GIBRALTAR)
”
JAMES LASRY, OF HASSANS INTERNATIONAL, TELLS HFMWEEK WHY GIBRALTAR IS ONE OF THE FEW JURISDICTIONS TO OFFER EFFECTIVE FUND SOLUTIONS SINCE THE IMPLEMENTATION OF THE AIFMD
IS GIBRALTAR THE NEW CAYMAN FOR EUROPEAN FUNDS?
James Lasry is a partner and head of the funds team at Hassans International Law Firm in Gibraltar. He deals with funds and financial services law as well as tax. He advised the Government of Gibraltar on its funds legislation and was involved in the drafting of the Financial Services (Experienced Investor Funds) Regulations 2012. He is chairman of the Gibraltar Funds and Investments.
H F M W E E K . CO M 25
L E G A L
to obtain authorisation under the AIFMD and therefore benefit from the EU marketing passport provided for by the Directive. Such AIFMs will be able to market to professional investors freely within the EU. There is the possibility that managers from third jurisdictions such as those in the US, the Caribbean and the Channel Islands will be able to obtain authorisation and therefore access to the EU marketing passport under the AIFMD subject to certain conditions but only as from mid-2015 at the earli-est. There is some doubt in the industry which is probably justified as to the true willingness of the somewhat politi-cally motivated Esma to approve certain non-European jurisdictions, particularly some of those in the Caribbean as authorised third jurisdictions under the Directive. At least one politician who was involved in the drafting of the Directive has expressed such doubts.
The issue for offshore jurisdictions is less related to any failings as to their means of undertaking business. There will no doubt remain a place for the better offshore juris-dictions. The “if it ain’t broke, don’t fix it” attitude, how-ever, is simply less relevant in an investment industry that has changed almost beyond recognition from that which existed just a few years ago.
PERMISSIBLE DISTINCTIONS – GIBRALTAR’S ADVANTAGEThe national private placement regimes, which under the Directive are supposed to be phased out by 2018, have already begun to be tightened by some of the member states. In Germany for example, a market which is not in-significant, it is nearly impossible for a non-European fund to use their private placement regime, whereas a European fund can, even if it is out of scope of the Directive, sim-ply because of the fact it is domiciled in the EU. For this and other reasons, we are seeing UK managers setting up parallel or master AIFs (as opposed to feeder) in Gibraltar and other EU jurisdictions in order to assist with their Eu-ropean marketing efforts.
In their implementation of the Directive, member states were free to decide how they exercise the deroga-tions provided for in the AIFMD. They also needed to decide whether they wished to “gold plate” the Directive by adding provisions to their national fund regimes that were not required by the Directive. Critical distinctions in implementation may exist in such topics as regulation of the national fund regimes for funds and managers that are below the de minimis thresholds of the Directive (i.e. €100m for open-ended funds and €500m for close-ended funds), including application of the depositary regime in the Directive to funds that are out of scope of the Directive and applicability of any private placement regimes.
The Gibraltar approach to the above issues, following an in-depth consultation involving a collaboration of gov-ernment, the regulator, the Financial Services Commis-sion (FSC), and the Gibraltar Funds and Investments As-sociation (GFIA), the representative body of Gibraltar’s funds and investment industries, retains as much flexibility as possible as is offered by the Directive. Accordingly Gi-braltar has kept its EIF regime for those funds and manag-ers that are out of scope of the Directive while allowing those that wish to, in order to avail themselves of the EU wide marketing passport, to opt in to the AIFM regime even if they are below the de minimis thresholds. Obvi-
ously those that opt in will have to abide by all the terms of the AIFM regime as if they had been “in scope”.
Experienced Investor Funds (EIFs) will therefore form the basis for the regulatory regime to be used as the “in scope” AIF. As they have to comply with the terms of the Directive, they will essentially be “Super EIFs”. This is very significant because, as mentioned below, this is likely to dra-matically reduce the licensing time of “in scope” AIFs thus retaining Gibraltar’s place as the European jurisdiction with the quickest potential for time to market for new funds.
AIFMs wishing to set up Gibraltar funds will be able to do so by establishing “Super EIFs” utilising the existing pre-authorisation launch process available to out of scope EIFs. In other EU jurisdictions, AIFMs wishing to estab-lish in scope AIFs will have to undergo an authorisation process for those AIFs (which can take anywhere between a few weeks and several months depending on the fund and the jurisdiction). The Gibraltar process, however, is simply to establish and commence trading the EIF on the basis of the pre-authorisation launch process. This en-tails the submission of the EIF documentation to the FSC along with an opinion from Gibraltar Counsel stating that the fund has been properly established. At the same time, the passporting notices can be submitted to the FSC. The FSC will then have up to 20 business days to consider the AIF documentation and the passporting notices.
The FSC is in the process of completing its approach to many of the key issues that are raised by the Direc-tive such as remuneration, delegation and depositaries. Although these are yet to be finalised, the approaches seem to be that Gibraltar will follow the UK/FCA’s pro-portionality approach in respect of remuneration. Fur-thermore, delegation will be permitted so long as overall supervision and responsibility remains within the juris-diction. Depositary requirements are probably the most difficult of the three issues, with many operational ques-tions remaining open among all of the European jurisdic-tions. In any case, the depositary provisions have been deferred until 2017 so that any European depositaries may be used until that time.
CONCLUSIONGiven that Gibraltar is the jurisdiction which is closest le-gally and in regulatory approach to the Cayman Islands, UK investment managers should seriously consider Gi-braltar as a centre in which to domicile their funds.
THE FSC IS IN THE PROCESS OF COMPLETING ITS APPROACH TO
MANY OF THE KEY ISSUES THAT ARE RAISED BY THE DIRECTIVE SUCH AS REMUNERATION, DELEGATION AND
DEPOSITARIES
”
2 6 H F M W E E K . CO M
A I F M D I R E C T I V E U P D A T E 2 0 1 3
The AIFMD (or the Directive) entered into force on 22 July 2013. Similar to its US equivalent, the Dodd-Frank Act (Dodd-Frank), the Directive has the stated aims of providing regulators with a closer look at sys-temic risk in the alternative investment fund
industry and improving investor protection. Th e AIFMD presents new challenges to AIFMs that can only be met with signifi cant allocations of resources and a new empha-sis on internal infrastructure. In order to comply with the AIFMD and the other global regulatory initiatives, AIFMs must develop, implement, and maintain robust regula-tory enterprise risk management systems (RegERM™). While the Directive’s primary goal may be monitoring systemic risk, for the AIFM it is a mandate to be pre-pared for greater regulatory scru-tiny and broader transparency of their operations.
GLOBAL REGULATORY INITIATIVES Th e AIFMD continues the trend towards enhanced regulatory scrutiny of the industry that be-gan with Dodd-Frank. Both are extreme legislative reactions to the fi nancial crisis that roiled world markets in 2007 and 2008 and the seemingly perpetual string of major scandals and internal breakdowns ex-perienced by some of the largest fi nancial fi rms in the world. Whether it has been insuffi cient trade reconcili-ation, ineff ective monitoring of counterparty exposures, rogue trading operations or outright fraudulent conduct, all of these issues were in some way caused by lapses in the fi rms’ enterprise risk management systems. As a re-sult, global regulators have imposed new obligations on AIFMs to enhance their regulatory enterprise risk man-agement infrastructure.
REGULATORY AND RISK REPORTING Nowhere is the need for regulatory enterprise risk man-agement more imperative than in the area of regulatory reporting. Both Dodd-Frank and the AIFMD have created new reporting regimes that require comprehensive trans-parency of AIFM fi rm accounts, positions, counterparties and exposures. Th rough Form PF and Annex IV, AIFMs must report information contained in thousands of data
sets describing the details of their businesses and the funds they manage.
Form PF and Annex IV are forcing material changes in the ways AIFMs approach their businesses. Managers that have gone through a Form PF fi ling cycle can att est to the fact that marshalling the resources to meet the reporting challenges is formidable. Th e volume of eff ort required to support this new level of transparency requirements is sig-nifi cantly more demanding than initially anticipated.
Managers need to be proactive in their eff orts to eff ec-tively meet these new regulatory challenges. Th e experi-ence of Form PF indicates it is a three to six month process
from commencement to fi ling. We have also learned that it is a ‘Mur-phy’s Law’ exercise - what can go wrong does. When faced with ag-gregating voluminous data from multiple sources for the purposes of enriching the data to be popu-lated into a thirty to fi ft y page form, managers must take a deliberative approach and allow themselves enough time to eff ectively comply. In recent statements, the Financial Conduct Authority (FCA) and the Central Bank of Ireland (CBI) have stressed the need for AIFMs to begin the process to ensure their timely compliance. While they both granted the industry a one-
year ‘transition’ period to become compliant, they had not expected fi rms would wait the full 12 months to begin the process. Regulatory infrastructure takes time to put in place and the time for AIFMs to begin is now.
WHAT CAN AIFMS BE DOING NOW? Th e fi rst step is to determine resource allocation both in-ternally and externally. Regulatory reporting involves mul-tiple disciplines including, legal, regulatory, operations, IT, fi nance and risk and portfolio management. Internally, this may require input from the COO, CFO, GC and CCO as well as contributions from the PMs, CTO and CRO. Additionally, it is critical that someone from within the fi rm ‘own’ the project; in essence a dedicated ‘regulatory reporting offi cer’. Regulatory reporting is a complex and sensitive undertaking and, one in which the AIFM needs a senior person to oversee the process. Even if the fi rm opts to outsource a signifi cant portion of the work, there should still be a chief regulatory reporting offi cer that liaises with
MANAGERS NEED TO BE PROACTIVE IN THEIR EFFORTS TO EFFECTIVELY
MEET THESE NEW REGULATORY CHALLENGES
”
GARY S. KAMINSKY OF CONCEPTONE, LLC EXPLAINS WHAT MANAGERS NEED TO BE DOING FOR EFFECTIVE RISK MANAGEMENT UNDER INCREASED SCRUTINY FROM THE AIFMD AND DODD FRANK ACT
A MANDATE FOR REGULATORY ENTERPRISE RISK MANAGEMENT
Gary S. Kaminsky is managing director, Global Regulatory & Compliance, ConceptONE, LLC. A former SEC Enforcement attorney, he has over 27 years of experience in the securities industry, particularly with regard to issues relating the development, implementation and maintenance of regulatory enterprise risk management infrastructure of asset management companies.
F U N D S E R V I C E S
H F M W E E K . CO M 27
service providers. Externally, the firm’s administra-tor, prime broker, auditor, compliance consultant and legal counsel may have some involvement as well. As highlighted below, the right technol-ogy solution is the key component of any effective RegERM™ system.
The next step is to determine the scope of the reporting exercise. What funds are covered; what parts of the forms will the AIFM be required to populate? An analysis of the type of data required and the sources of that data must also be con-ducted. Once this scoping analysis is complete, it is time to develop and implement a RegERM™ system.
AIFMs that are required to file PF and Annex IV have a substantial added burden. The different nomenclature and definitions between the two forms makes alignment of disclosures even more challenging. The easiest invitation for unwarranted regulatory scrutiny is disparate reporting between similar queries on PF and Annex IV.
The best method of aligning third-party report-ing is through the development, implementation and maintenance of regulatory enterprise risk man-agement systems. AIFMs must implement a RegERM™ sys-tem to achieve three main goals; (1) ensure the filing is not incorrect (while there are no correct answers, there can be incorrect responses, i.e. inconsistent data across the multiple reporting protocols, PF, Annex IV, DDQs, Open Protocol); (2) develop a repeatable process (multiple monthly report-ing protocols require a mechanised approach to be success-ful); and (3) create a detailed audit trail (given the regulato-ry scrutiny and in order to maintain the repeatable process).
THE ROLE OF TECHNOLOGY The most effective and efficient way to maintain a RegERM™ system is through the implementation of a
technology-driven solution designed specifically for third-party reporting. Reporting alignment can only be achieved through the aggregation of the requisite data into a centralised repository or ware-house. The data must then be enriched and tagged to the nomenclature of each form. This includes specific categorisations of items such as portfolio holdings and also includes many derived calcu-lations such as derivative notional values. Once completed, the technology engine will conduct calculations of the necessary metrics for popula-tion into the form. The populated answers are then transcribed into XML protocol and electronically transmitted to the appropriate reporting platform.
CONCLUSION A robust regulatory enterprise risk management system has become a prerequisite to running an effective AIFM. The legislative initiatives creating the AIFMD and Dodd-Frank have placed strong new powers into the hands of regulators on both sides of the Atlantic. Form PF, Annex IV and other third-party reporting mandates that AIFMs align their front, middle and back offices, and maintain
systems for consistent reporting. While this mandate has created significant additional costs to running an alterna-tive management business, the potential costs of not im-plementing these systems is much higher.
The lack of effective enterprise risk management led to some of the most significant recent business losses and regulatory failures. Balancing the risk of a costly regula-tory examination, protracted investigation or an enforce-ment action against the cost of running your business more effectively is not a difficult choice. Regulatory ar-bitrage is an unprofitable trade with substantial negative expectancy. Regulatory enterprise risk management is good business.
BALANCING THE RISK OF A COSTLY REGULATORY
EXAMINATION, PROTRACTED INVESTIGATION OR AN ENFORCEMENT ACTION AGAINST THE COST OF
RUNNING YOUR BUSINESS MORE EFFECTIVELY IS NOT
A DIFFICULT CHOICE
”
F I N A N C I A L S E R V I C E S
H F M W E E K . CO M 29
A I F M D I R E C T I V E U P D A T E 2 0 1 3
There is no escaping from the fact that the EU’s AIFMD presents one of the biggest regulatory challenges the European orien-tated investment management community has seen in recent times.
Indeed, the upcoming 12 to 18 months will prove pivotal in determining the implementation of the AIFMD and the implications for investment houses and their client bases, particularly as European Economic Area (EEA) member states begin to interpret the Directive’s many provisions.
From a Guernsey perspective we have been gearing up for the AIFMD for some time, consistently engaging with the Eu-ropean authorities as the Directive was constructed over the past few years. Of course, Guernsey is not in the EU and therefore, is not re-quired to implement the AIFMD. However, with Europe still one of our biggest markets and a large proportion of our business relating to the EU in some form, ensuring that Guernsey continues to eff ec-tively service EU business, as well as that of non-EU business, is of paramount importance.
DUAL REGIMETh erefore, Guernsey evolved its re-gime to ensure that we can contin-ue to service both EU and non-EU business. Managers and funds with no connection to the EU continue to be able to use the existing regulatory regime in Guern-sey which is completely free from the requirements associ-ated with the AIFMD, which will have signifi cant opera-tional and cost benefi ts. Secondly, Guernsey’s position as a third country means that we have not immediately had to introduce a fully equivalent AIFMD regime to maintain access to EU markets.
Back in July, the Guernsey Financial Services Commis-sion (GFSC) signed bilateral co-operation agreements with 27 securities regulators from the EU and EEA, in-cluding the UK, Germany and France. Th e agreements meant Guernsey funds would continue – as had always been the case – to be able to market to appropriately quali-fi ed investors in these European countries through their National Private Placement (NPP) regimes.
It is anticipated that a full passporting regime for non-EU managers will be implemented from July 2015 and Guernsey intends to ensure that managers will be ideally placed to take advantage of being able to market alternative investment funds (AIFs) on a pan-European basis with a single authorisation.
Indeed, the GFSC has issued a domestic consultation on a full AIFMD equivalent opt-in regime, which will be-come fully operational from 1 January 2014 – well ahead of the anticipated July 2015 date for the implementation of a passporting regime for third countries.
Th e point I made earlier in relation to how member states will begin to interpret the Di-rective’s many provisions was in fact highlighted in an October survey conducted by the Alternative In-vestment Management Association (AIMA) and EY. Entitled ‘AIFMD: Th e Road to Implementation’, the survey sought to develop an un-derstanding of EU member states’ actual readiness to implement the AIFMD. It found that some key European markets are ‘gold-plating’ the marketing requirements for NPP regimes over and above those required by the AIFMD.
It will obviously take some time to establish how certain countries will choose to impose additional re-quirements, if at all, on non-domes-tic fund managers – particularly in relation to the issue of ’substance’, but Guernsey managers are well
placed to continue marketing their funds into EU markets. Having signed 27 co-operation agreements, our regulator the GFSC, has continued bilateral discussions with all its regulatory counterparts in the EU to clarify the process that managers will need to go through to ensure that they can market into those countries.
AN ATTRACTIVE OPTIONIt could be argued that our position as a ‘third country’ even adds to our att ractiveness as a domicile for the struc-turing and establishment of funds. A June 2013 survey of European asset managers by fund soft ware provider Mul-tifonds showed 77% of respondents were considering es-tablishing funds for their non-EU investors off shore to put them outside the scope of the Directive.
THE UPCOMING 12 TO 18 MONTHS WILL PROVE PIVOTAL IN DETERMINING
THE IMPLEMENTATION OF THE AIFMD AND
THE IMPLICATIONS FOR INVESTMENT HOUSES AND
THEIR CLIENT BASES
”
WITH EUROPE REMAINING A KEY MARKET, FIONA LE POIDEVIN EXPLAINS HOW GUERNSEY IS EVOLVING ITS REGIME TO FIT WITH THE AIFMD AS WELL AS THE ATTRACTIVENESS OF ITS THIRD COUNTRY POSITION
GUERNSEY – OFFERING FLEXIBILITY AND SUBSTANCE
Fiona Le Poidevin is chief executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry. Her role includes business development and the promotion of Guernsey’s finance industry in the Island’s target markets including Europe, the US and the emerging markets, providing technical support to industry and liaising with industry associations.
F I N A N C I A L S E R V I C E S
3 0 H F M W E E K . CO M
A I F M D I R E C T I V E U P D A T E 2 0 1 3
However, this can only be achieved if there is sufficient substance in the non-EU jurisdiction to demonstrate that not just the fund but also the manager can be genuinely considered to be based outside the EU and therefore out of the scope of the AIFMD. This would also apply to managers of AIFs for EU investors who are looking to avail of the continuing NPP regimes. One option might be for a non-EU AIF to opt to be self-managed and therefore itself become a non-EU AIFM but this will be subject to proving sufficient substance to the arrangements.
So called ‘letter box’ entities cannot claim to be managers and substance will be required where a manager is claiming to be domiciled. Similarly, the extent to which activities such as portfolio and risk management can be outsourced must be considered and care must be taken to ensure that the real decision-making powers lie with the en-tity that is claiming to be the manager. This might, in certain circumstances, encourage investment houses to build their presence offshore and take back in-house some of the previously outsourced functions.
Guernsey has a huge advantage as a fund domicile in the existing standards regarding oversight and due to the substance already present in existing Guernsey-domiciled structures. Guernsey already plays host to major managers, such as Apax, BC Partners, BlueCrest, Man Group, Mid Europa, Permira and Terra Firma which all have offices and staff in the Island.
SUPPORT SERVICESThere are also fund administrators, ranging from major international names to boutique, independent operations, coupled with a significant pool of qualified non-executive directors who not only provide support to in-house teams but also third-party services. Quality of service is evi-denced by the fact that Guernsey providers now manage or administer nearly £100bn worth of assets from open-ended funds which are domiciled in other jurisdictions.
The AIFMD not only requires depositaries to provide extra oversight to structures but it also introduces the con-cept of a depositary for the first time for many asset classes, such as private equity and real estate.
Unlike many competitor jurisdictions, Guernsey already has well-established custody providers. They provide deal-ing and settlement and also offer services over and above
traditional custody services to encompass robust support for corporate governance, often perform-ing a fiduciary role.
Much of Guernsey’s core business of closed-ended private equity and real estate funds will be able to access the AIFMD’s lighter touch regime for non-financial assets that permits a wider range of entities, such as lawyers and registrars, to carry out custody functions, thus benefitting from cost and operational advantages of not requiring a for-mal custodian.
We are also seeing Guernsey-based adminis-trators setting up depositary functions. They are targeted at the likes of private equity and real es-tate clients who are new to the requirement for a depositary and may be most likely to favour a bespoke ‘one-stop shop’ for third-party adminis-tration and depositary services. Having said that, there is also a need to consider the fact that there are also established custodians who already pro-vide a specialist service, including independent oversight.
It is clear that Guernsey has an existing operat-ing model which means it can provide sufficient substance and oversight in terms of management, administration and depositary functions so that investment houses have a choice of providers to meet their specific needs and can be comfortable that they will meet both regulatory obliga-tions and tax requirements.
OPTIONALITYGuernsey’s pedigree as a leading funds domicile relies on its ability to continually meet the demands of fund man-agers and their investor base. The AIFMD is just another of the many challenges that our industry has adapted and responded to. Our ability to do so is evidenced by the growth of our funds industry in recent years. Figures to the end of June 2013 show that the value of funds under man-agement and administration in Guernsey reached £286bn – an increase of 5.6% on a year previous, and an increase of more than 25% on the same time three years ago.
To conclude, Guernsey’s position as a third country, its regulatory regime and its infrastructure and expertise mean that as a domicile it ultimately offers optionality for the international fund community. The way in which it has dealt with the AIFMD demonstrates that Guernsey has recognised not only the importance of the EU market but also the truly global nature of its investor base.
GUERNSEY’S PEDIGREE AS A LEADING FUNDS
DOMICILE RELIES ON ITS ABILITY TO CONTINUALLY MEET THE DEMANDS OF FUND MANAGERS AND THEIR INVESTOR BASE
”
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