One of the more onerous requirements of the Alternative Investment Fund Managers Directive is the need to appoint a depositary — an independent third-party provider responsible for safekeeping of assets and other functions. The fund manager itself isn’t permitted to act as a depositary for its own funds.
”If a manager becomes authorized, one of its requirements is to appoint what's called a depositary,” said Dermot Mockler, group head of regulatory affairs, compliance & anti money laundering at TMF Custom House Global Fund Services. TMF is a global fund administration provider for hedge funds and other alternative investment funds.
The depositary carries out three functions: cash flow monitoring, safekeeping of assets and oversight of operations. The safekeeping function has an element of risk associated with it. “If any asset gets lost, then the depositary is fully liable for it. For this reason, only the biggest financial institutions-the HSBCs, BNPs, and Morgan Stanleys — have the ability to act as depositaries,” Mockler said.
However, there’s a bit of a silver lining in that for EU managers that manage non-EU funds and market them to EU countries, their depositary won’t have any liability associated with the safekeeping of assets, a setup known as 'Depo Lite'.
“For certain categories of funds such as an EU manager that manages a non-EU fund, they don't need to have a depositary but they have to have what's called a Depo Lite in place, which is the same three functions being carried out but they can be carried out without the strict liability attached,” Mockler said. “They can be carried out by one or more entities.”
Depo Lite can be offered by fund administrators, with the provision that they are appropriately regulated or supervised. “Depo Lite providers will still need to carry out all three required functions,” said KPMG partner Anne-Sophie Minaldo in a newsletter. “However, thanks to a lighter liability requirement and the fact they do not necessarily need to be a credit institution, this could result in a lower fee structure.”
AIFMD stipulates that if a fund manager was not registered by July 22 this year, that manager could no longer manage funds, but this has not been strictly enforced. “In effect the regulators in all jurisdictions are taking a much more lenient approach because a fair percentage of EU managers have yet to become authorized or registered,” Mockler said.
TMF Custom House Fund Services is now offering clients a Depo Lite platform to support alternative investment managers marketing their funds in Europe to fulfill their AIFMD requirements. “This Depo Lite service will conduct cash-flow monitoring and general oversight requirements to a manager and all relevant funds,” Mockler said.
Fund managers that are domiciled outside the EU but market fund shares or units into specified EU countries that have included a Depo Lite requirement, such as Germany and France, must also implement a Depo Lite.
“If there’s any nexus to the EU--be it fund-domicile, manager-domicile or marketing, then a certain part the directive will apply,” said Mockler.