THE BLOG

20
Jan

AIFMD – Depositary Services

At North Star, we have a deep understanding of the EU’s Alternative Investment Fund Managers Directive  (or AIFMD) and its implementation in the UK, which was effective from July 2014.

North Star has advised fund managers on the implementation of the Directive (and the associated UK regulation) but also ensured an eligible funds (known as “alternative investment funds” or “AIF”) are also revised to ensure compliance. An excellent resource covering many AIFMD topics and guidance can be found on the FCA’s website:

http://www.fca.org.uk/firms/markets/international-markets/aifmd

One of the key challenges for new or existing funds is the requirement (assuming certain conditions are met – please contact us for more information or guidance) for a depository and understanding the role of the depositary and the variant options available.

A full depositary must be one of the following types of entity:

  1. An EEA credit institution;
  2. An authorised MiFID investment firm which provides the services of safe-keeping and administration of financial instruments and which has own funds of not less than €730,000 under Article 28 of the CRD (2013/36/EU) (for a UK firm this would be a IFPRU 730k firm with permission to safeguard and administer investments).
  3. A firm which on 21 July 2011 had a Part 4A permission of acting as trustee of an authorised unit trust scheme or depositary of an open-ended investment company that in either case is a UCITS scheme.
  4. Another type of authorised person or an unauthorised person which will, if authorised as a depositary of AIF, only:
    1.  act as trustee or depositary for AIFs of the kind defined in FUND 3.11.12R (a PE AIF depositary); and / or
    2. provide one or more depositary services to non-EEA AIFs.

In essence (assuming an AIF requires a depositary), the FCA permits “two levels” of depositary services in the UK – depending on the profile of the AIF. Specifically the FCA state:

An AIFM that manages a UK AIF which:
(1) has no redemption rights exercisable during the period of five years from the date of the initial investments; and
(2) in accordance with its core investment policy:
(a) does not generally invest in AIF custodial assets; or
(b) generally invests in issuers or non-listed companies in order to potentially acquire control over such companies in accordance with regulation 35 of the AIFMD UK regulation

then the AIFM may appoint a depository with lower regulatory requirements and generally create greater value for shareholders given the services are generally priced accordingly. There is also a brand new and burgeoning market in these services  – which have of course only been required in this context since July 2014 – creating real market tension (and therefore better value). Traditional depositaries – as already required under COLL for instance – remain limited by number, more expensive but provide more detailed and deep services, with requisite benefits. Many pre-AIFMD depositary services are unable to adopt their operating models for those funds requiring FUND compliance only. For more information on how to select a depositary, please contact us.

We shall blog shortly on the key typical issues and tactics to deploy when negotiating a depositary agreement, for AIFMD purposes.