The Central Bank of Ireland (CBI) has issued a Consultation Paper on the requirements for Irish firms undertaking the AIFMD Article 36 ‘Depositary-Lite’ duties.
Article 36 of the AIFMD applies where non-EU AIF are marketed to EU investors through private placement by EU AIFM (and in the case of certain countries such as Germany and Denmark, marketing by non-EU AIFM). One or more entities are required to perform the duties of cash flow monitoring (Article 21(7)), safe keeping of assets (Article 21(8)), and oversight (Article 21(9)). The AIFMD does not set out eligibility criteria for businesses performing these duties and various EU regulators are taking different positions with respect to the regulation of such firms.
In December 2013, the CBI issued an update to its AIFMD Q&A stating that where an entity is only providing one or both of the services referred to in Article 21(7) and Article 21(9), it will not issue an authorisation under the Irish Investment Intermediaries Act 1995 (IIA), but that if an Irish entity proposes to provide the safe-keeping duties set out in Article 21(8) it must have authorisation to provide “custodial operations involving the safe-keeping and administration of investment instruments” under the IIA. The CBI’s position contrasted most notably with the position taken by the UK Financial Conduct Authority (FCA), which requires any UK firm undertaking one or more of these duties to hold an ‘Article 36 Custodian’ authorisation.
A number of commentators have questioned whether it is appropriate that fiduciary duties such as depositary oversight are not regulated activities. Others have sought clarification whether performing the asset verification duties of Article 21(8)(b) should require a custody authorisation.
The CBI consultation paper confirms Article 21(8)(b) will require a custody authorisation. It also states that any Irish fund administrator seeking to provide one or both of the Article 21(7) and 21(9) duties will need to do so via a functionally and hierarchically separate subsidiary with strict Chinese Walls in place between the entity and its parent administrator. Whilst the paper does not amend the previous Q&A position and the duties will remain unregulated, the CBI acknowledges that “such conflicts will arise and we believe they may be substantial”.
Whilst some will welcome the consultation, this will be unlikely to include independent administrators seeking to provide depositary-lite services to their existing clients. Whilst administrators are authorised by the CBI under the IIA most do not hold a custody authorisation, so it will be a challenge to provide a complete and joined-up depositary-lite service which includes Article 21(8)(b) — of particular importance to hedge fund managers that will generally hold “other assets” such as derivatives. Short of establishing a separate regulated entity where only Article 21(8)(b) duties would be regulated, performance of the other two depositary-lite duties will need to be via a separate unregulated entity. Some managers and investors may question the appropriateness of such a solution.
The CBI consultation will close on 30 May 2014, less than three weeks before UK firms seeking to comply with the depositary-lite regime need to inform the FCA of their final depositary arrangements if they wish to market their funds to EU investors through private placement from 22 July – the end of the AIFMD transitional year.
Faced with the uncertainty, a number of administrators had already planned to establish depositary-lite businesses in the UK, for which they will seek FCA authorisation. There are doubts whether all such businesses will obtain regulatory authorisation and be in a position to on-board clients by July.
