Depositary Requirements Hit Fund Managers


The need to appoint a depositary holds implications for fund managers who are domiciled in Europe or who market their funds in Europe.

Both the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS V require that managers appoint a depositary to perform cash flow monitoring, safekeeping of assets and oversight of operations.

Dan Lambeth, head of regulatory affairs at JP Morgan Asset Management in London, describes the role of the depositary as that of a “super custodian.”

“As a depositary, you now have responsibility for all assets of the fund,” Lambeth said last week at a panel discussion presented by the Association of the Luxembourg Fund Industry. “Even if you don’t hold the specific assets of the fund in your custody, you still are responsible for oversight of those assets. There are lots of new responsibilities for the depositary that you didn’t have before. This has been a quiet world for 25 years with clearly defined responsibilities.”

The depositary has responsibility for safekeeping of assets of the fund, but it has other responsibilities as well, Lambeth noted at the ALFI New York event. These can be associated with the fiduciary obligations of fund directors, or the role of the chief compliance officer, such as pricing of units of the fund, and overseeing subscriptions and redemptions.

“It’s important to be aware that a lot of these issues occur on a daily basis,” said Lambeth. “Mispricing, for example, comes up quite often and the depositary is very much involved in those discussions.”

He added, “I think it’s actually very rare that the depositary will find itself in a position of a quasi-regulator or having to, so to speak, alert the regulators. Its job is to protect the interest of the investors and to resolve these issues.”

The UCITS V depositary regime applies to UCITS established in EU member states, which have 18 months to transpose UCITS V into national law, according to a briefing by international law firm Clifford Chance. The new rules must therefore be applied March 18, 2016. Meanwhile, this year and next, Esma, the European Securities and Markets Authority, is developing technical standards and guidelines.

On the whole, UCITS V will align with AIFMD documentation and compliance procedures; UCITS template documents will have to be amended to align with UCITS V; marketing procedures and internal educational material will be updated; and ‘re-papering’ and negotiations with clients will also be impacted by UCITS V.

“The UCITS V depository requirements in many ways mirror AIFMD. It should be noted, however, that UCITS V goes beyond AIFMD in some important respects,” said Clifford Chance.

The depositary requirements in UCITS V strengthen or adds to those present in UCITS IV, covering appointment of a single depositary, more detailed depositary eligibility criteria, cash monitoring, and insolvency of a depositary.

Esma has issued a consultation paper on depositary requirements under UCITS V, comments to which are due by November 30, about measures to be taken by a depositary or a third-party appointed by the depositary becomes insolvent, and avoiding conflicts of interest between the management company/investment company and a depositary.

“All of this is in force for AIFMD, and it comes into force for UCITS V in March 2016,” Lambeth said. The Esma consulation addresses “how do you protect the assets of the fund in the event of the default of the depositary, and also the thorny question of whether you can have the manager and the depositary in the same group. There are some managers who think, ‘It’s a problem for the depositary.’ But you have to think about it because it impacts your agreements with the depositary.”

Featured image via Andrus/Dollar Photo Club

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