Bill Prew, CEO of independent AIFMD depositary INDOS Financial Limited, was recently interviewed by Albourne TV about the benefits of the AIFMD depositary function to investors in alternative investment funds.
Drawing on practical experience over the past 18 months since AIFMD was introduced and many funds appointed a depositary for the first time, Bill highlighted the broad range of issues which have been identified by the depositary. These issues highlight how the depositary has delivered a valuable additional layer of control and oversight over a fund’s operations.
Here is a summary of the interview performed for Albourne clients (www.albourne.com).
Could you recap the role performed by the depositary?
The depositary is an independent service provider that is appointed by the fund and has a fiduciary duty to act in the best interests of investors. The depositary’s duties fall into three main categories:
• safe keeping of the fund’s assets and ensuring the existence of, and title to, those assets;
• monitoring of the fund’s cash and cash flows; and
• a range of oversight duties to ensure the fund is being managed in compliance with its offering document, including oversight over the valuation of the fund and the fund’s compliance with its investment mandate.
What types of issues has your depositary oversight identified?
Issues have broadly fallen into two categories:
• Fund administration related issues; and
• Manager related issues.
Examples of fund administration issues include:
• Securities which are not priced in accordance with the pricing policy.
• Expenses not being accrued accurately, or outside the fund’s range of permitted expenses.
• Position reconciliation errors, such as duplicate trades processed and recorded in the NAV.
• Aged or material cash reconciliation items requiring further explanation.
• Incorrect P&L allocation between share classes.
• Anti-money laundering control weaknesses (around investor screening).
• Shareholder transactions not processed correctly.
• Cash control weaknesses (e.g. expenses paid out of the wrong fund bank account).
Examples of manager related issues include:
• Breaches of investment mandate restrictions.
• Breaches of AIFMD or other leverage restrictions.
• General compliance gaps around the AIFMD rules.
When issues do arise how are they dealt with?
AIFMD requires depositaries to put in place a clear escalation path to ensure that are issues are dealt with promptly and appropriately.
In the first instance an issue would typically be brought to the attention of the COO of the fund and there would be a discussion about any remedial action to be taken.
Depending on the nature of the issue, the issue may also be escalated and reported to the board of the fund.
Ultimately if the depositary felt appropriate action was not being taken the matter may be escalated to the FCA as the depositary’s regulator.
All issues are reported in writing in a monthly report to the manager, and a quarterly report to the board of the fund. Increasingly INDOS has found that the fund board expects to be promptly advised of any issues which arise, and not wait until the next quarterly board meeting, particularly where the issue highlights control weaknesses.