The deadline for compliance with the Alternative Investment Fund Managers Directive (AIFMD) is Tuesday, July 22. From this date listed financial assets in an Alternative Investment Fund (AIF) will be subject to a restitution obligation at the custodian, and other assets will be subject to much greater independent control than they were previously. AIFs will also need a depositary to perform additional oversight activities, including specific monitoring on cash, as a result of the regulation. Custodians have welcomed the new regulation, which brings greater investor protection and financial stability. BNP Paribas Securities Services’ Jean Devambez and Société Générale Securities Services’ Etienne Deniau comment on the work their firms have been doing in order to prepare their alternative investment fund manger (AIFM) clients and whether the fund management industry is ready for the deadline.
GC: How have preparations gone so far?
ED: We are doing everything we can to make life easier for our customers.
There are three different areas that require work to become AIFMD compliant: what we can do on our own, what we can do with the asset manager and what the asset manager must to do on their own (such as writing remuneration policies and separating risk from investment management—for which we can provide paralegal advice).
With our depository services, we help with issuing documentation, provide new pricing changes for asset managers and monitor their regulatory progress. In order to provide these services, we also have the legal resources necessary in order to answer any questions that may arise.
Last month we took on many new AIFs. These were collective investment schemes that were not previously regulated at all and include, for example, partnerships or investment companies, which have to become AIFs.
When you decide to take on these new AIFs, it can be a difficult task. There are lots of assets under record-keeping, and you need to verify their actual existence. For previously regulated funds, we have the cash on hand as we’re generally their bank, whereas new AIFs can have accounts with various other banks. We therefore need to obtain their cash statements, and this can be quite tricky to manage because the accounts may be with many different banks and the assets are everywhere. This process is very time consuming due to the complexities and intricacies involved.
For previously regulated funds that are just converting to AIF status, for which we are the depositary, we decided to carry out all of the necessary conversion tasks as a precautionary measure, which includes the segregation of securities and cash supervision, even if we may not yet have received all the necessary documentation from our clients. We are therefore already providing the required AIF depositary duties, as if we had already received the documentation from our clients, so that the funds are fully compliant from our perspective. Despite this, the asset manager still needs to sign a new contract with us and provide the necessary documentation to their regulator.
GC: Is the industry prepared for the July 22 deadline? Are different locations prepared to different degrees?
JD: While many AIFMs have yet to obtain their AIFMD license and appoint a depositary, we have been working with our clients to help them through the transition and are pleased with the proactive response of many of them. The majority of our clients are on track for being ready by the deadline, but whether they have their authorizations or not, all will have to comply by the 22nd of this month.
Some locations in Europe have the advantage of a strong history of depositary banking for UCITS and other non-AIFs. Others are certainly catching up, but the effort to prepare all stakeholders in these locations is necessarily greater. In some locations, Belgium and Italy for example, the directive was transposed only recently, leaving less time for the industry to adapt. However, we are helping our clients in these markets to catch up and are confident that the change will not be overly disruptive here.
GC: Exactly what criteria need to be met for the deadline? At what stage in their preparations should AIFMs be at this point?
JD: By now, AIFMs must be very far advanced in their AIFMD projects, having chosen their depositary, submitted their authorization file and often received approval by now.
Additionally they should have updated their risk, pricing and remuneration governance and procedures, organized the various flows for their agents to provide all necessary information to the depositaries, and be well advanced in designing the solutions for the first round of AIFMD reporting that will kick in later in 2014.
GC: What happens in the case of an AIFM not being prepared, or not having their license? What would their status be, come July 23?
JD: The alternative funds industry will not grind to a halt on July 22. That said, we have been encouraging and helping all our clients to be prepared so they can continue their activity with no delays.
AIFs will not be able to market any fund that has been set up in the last year and does not yet have a license. The funds can be “live” and managers can accept unsolicited enquiries but cannot actively promote them.
Managers that submitted their application 6-8 weeks ago and are awaiting the processing of their application have already begun complying. Some managers that needed to conduct a step-change to their business models to comply and are just now putting the finishing touches on their applications are likely still in the midst of this step-change in their day-to-day businesses. They may be able to evidence compliance, but all of the new standards may not have yet become “business as usual” in their organizations.
GC: How are you helping clients to prepare at this point?
JD: We are fully prepared for AIFMD and continue to assist our clients through the transition. We have expert knowledge of the regulation and can guide AIFMs through the whole process. Our experts in depositary control, private equity and real estate assets and in alternative funds administration are working together to advise and design relevant solutions for alternative fund manager clients of all varieties.
GC: Will there be an onboarding crunch?
JD: Many have anticipated an onboarding crunch around the July 22 deadline but we have prepared ourselves fully, our teams are working very hard currently in order to ensure a smooth implementation come the deadline. We do expect that there will be a certain level of reactivity we’ll be supporting for our clients during the week of 21st July, but we are well prepared for this.
ED: We are seeing a small acceleration, but it’s not enough. I think it highly improbable that all funds and all asset managers will have finished the process by the Tuesday deadline.
GC: What is your unique value proposition?
ED: Our AIFMD regulatory reporting services. In August last year we decided to provide complex regulatory reporting for each AIF. Each AIF must provide solid reporting each quarter, which is a real headache. We offer to do the reporting on behalf of the asset manager for their funds whether we are depositary or not. And this is quite unique. We then submit the reports to the different regulators in Europe on their behalf.
We also offer to handle any subsequent questions from the regulators as we want to offer a truly comprehensive service.
It’s our role to take these tasks off their hands so that they can focus on their core business of investment and risk management, as well as client relationships, [and] outsourcing the rest to us.
GC: How much interest have you seen in your depo-lite offering? How do you expect this to develop following the July deadline?
JD: Our depositary lite offering is aimed at asset managers distributing non-European AIFs into Europe. We offer safekeeping, oversight and cash monitoring of assets to a client base including managers of hedge funds, funds of hedge funds, private equity and real estate funds, on either a single or multi-provider basis as per the clients’ needs.
Those AIFMs that require a depo-lite service are generally U.K. or mainland Europe managers that are running non-EU funds. To continue selling these funds in Europe, a depo-lite provider is required by July 22.
GC Friday Interview: Custodians Brace for AIFMD Deadline
The deadline for compliance with the Alternative Investment Fund Managers Directive (AIFMD) is Tuesday, July 22. BNP Paribas Securities Services’ Jean Devambez and Société Générale Securities Services’ Etienne Deniau comment on the work their firms have been doing in order to prepare their alternative investment fund manger (AIFM) clients and whether the fund management industry is ready for the deadline.