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The role of an AIF depositary

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The role of an AIF depositary

With the appointment, function, obligations, and liability of Alternative Investment Fund (AIF) depositaries having undergone somewhat of an evolution in recent years, Head of Depositary, Graham Dew examines their key functional components.

With the alternative assets industry continuing to increase in popularity and predicted to reach $14 trillion in assets by 2023, the implementation of the Alternative Investment Fund Managers Directive (AIFMD) on 22 July 2013 was fundamental in creating a set of harmonised regulatory standards for the management, oversight, and marketing of AIFs within the EU.

The AIFMD essentially laid down the regulations for the authorisation, ongoing operation, transparency and reporting of EU and non-EU Alternative Investment Fund Managers (AIFMs) that manage AIFs or market AIFs into the EU. Notably, one such requirement under the AIFMD is that each AIF must appoint a depositary.

What is a depositary?

A depositary is an independent third party that is responsible for the oversight of the activity of each AIF.

Prescribed in the AIFMD, the requirement to appoint a depositary is dependent on a number of factors:

  • the location of the AIFM;
  • the AIFM's marketing strategy;
  • the geographical focus of the AIFM's marketing activity; and
  • the location of the AIF(s) it manages.

What are the duties & responsibilities of the depositary?

Depositaries fulfil three functions with respect to each AIF it is appointed to. These are:

Cash flow monitoring:

  • Oversight of the AIF’s bank accounts
  • Reconciliation of all the cash movements/balances 
  • Monitoring reconciliation discrepancies and ensure prompt corrective measures
  • Monitoring significant transactions for consistency with the profile of the AIF
  • Ensuring all subscription amounts are received on the bank account of the fund and correctly applied on behalf of the investors
  • Check the completeness and accuracy of income distribution calculations and related payments
  • Ensuring timely settlement of transactions

Safekeeping of assets: 

  • Verifying the existence and the AIF's ownership of portfolio assets
  • Maintenance of an asset register and reconciliation to the records and reports of the fund
  • Due diligence and monitoring of all delegates providing services in the asset ownership structure

Oversight responsibility: 

  • Initial and ongoing risk assessment of the nature, scale and complexity of the AIFM's organisation and the AIF's strategy
  • Devise oversight procedures appropriate to the AIF to ensure subscriptions and redemptions are carried out in accordance with applicable national law and the fund rules/constitutional documents
  • Independent verification of the valuation process
  • Check investment and leverage limits are compliant with the policy of the fund

What is depositary-lite?

Following the introduction of AIFMD, the fund marketing environment in Europe changed. Whilst the market remains open under the National Private Placement Regime (NPPR), there are a number of EU countries, such as Denmark and Germany, that have 'gold-plated' the conditions of marketing to investors in their respective country.

These additional conditions include the requirement for AIFMs to appoint one or more entities to provide 'depositary-lite' services to each non-EU AIF they wish to market to investors in each of these countries. Depositary-lite requirements consist of cash flow monitoring, safekeeping of assets, and ongoing oversight responsibility. Broadly speaking, the obligations are similar to that of the full depositary arrangement however; the critical aspect of depositary-lite is that an appointed service provider would not face the strict liability for the loss of assets, thereby easing balance sheet concerns.

Ocorian is authorised to act as a depositary to AIFs domiciled in Luxembourg and is licenced in the UK and Jersey to offer depositary services to closed-ended structures holding non-financial instruments. We can also provide client-tailored depositary services as a stand-alone service or as an add-on to existing corporate and fund administration offerings. Learn more about our depositary offering here.

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