With the evaluation of the alternative investment fund (AIF) depositary in recent years, it is crucial to examine their key functional components.
We recently sat down with Eileen McCarroll, Head of Depositary Services, to explore the comprehensive role of an AIF depositary.
Introduction to AIFMD & depositary obligations
The Alternative Investment Fund Managers Directive (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.
The AIFMD was transposed into the Luxembourg Law of 12 July 2013 on AIFMs (AIFM Law). Its main objective is to enhance investor protection by increasing the depositary missions and responsibilities.
What is an AIF depositary?
A depositary is an independent third party that is responsible for the safekeeping of assets of the AIF, performing the cash flow monitoring and the oversight duties of the AIF. A depositary can be either a bank (DepoBank) or a professional depositary, and is required as part of the AIFMD.
Factors affecting an AIF depositary appointment:
The appointment of a DepoBank or professional depositary depends on several factors, including:
- Location of the AIFM
- AIFM's marketing strategy
- Geographical focus of the AIFM's marketing activity
- Location of the managed AIF(s)
- AIF investment strategy
- Redemption rights of the AIF
What are the duties & responsibilities of an AIF depositary?
The AIFMD has reinforced depositary obligations, including custody, record keeping, due diligence, oversight on third parties, cash flow monitoring, independence rules, and conflict of interest. Below are further details relating to the depositary duties:
1. Cash flow monitoring:
- Reviewing of the daily cash flows relating to the AIF
- Reviewing of significant cash flows to ensure the consistency with the constitutional documents
- Reviewing of the cash reconciliation performed by the administrator
- Following up of discrepancies
- Reviewing of the timely settlement of transactions
2. Safekeeping of assets:
- Performing the ownership and existence check of the assets at the time of purchase and sales
- Performing the ownership and existence check of the assets at least once a year
- Maintaining an up-to-date record keeping of the alternative investment funds
- Ensuring that the investments being made are in line with the constitutional documents
3. Oversight responsibility:
- Ongoing due diligence of the AIFM's organisation, procedures and controls
- Ongoing due diligence on the service providers of the AIF
- Oversight on the NAV as per the reporting cycle of the AIF
- Oversight of the investment restrictions performed by the AIFM
What is depositary-lite?
Since the introduction of AIFMD, the fund marketing environment in Europe has changed. Some EU countries, such as Denmark and Germany, have imposed additional conditions for marketing to investors in their respective country. These conditions require AIFMs to appoint entities to provide 'depositary-lite' services to non-EU AIFs. Depositary-lite requirements include cash flow monitoring, safekeeping of assets, and ongoing oversight responsibility.
While similar to full depositary arrangements, depositary-lite relieves appointed service providers of strict liability for loss of assets, alleviating balance sheet concerns.
A trusted provider of depositary services
Ocorian is authorised to act as a depositary to AIFs domiciled in Luxembourg and is licenced in the UK, Ireland 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.
To find out more about our depositary services, contact our funds team today.