AIFMD: Taking Stock
The summer is over and alternative investment managers are back to work and adjusting to life post AIFMD. Many managers are taking stock of where things stand, starting to review how decisions they have taken are panning out in practice and considering their priorities for the months ahead.
As of 4 August 2014 (the most recent data published by the FCA) approximately 70% of the 1,130 AIFMD Variation of Permission applications submitted in the UK had been authorised or were ‘ready for imminent approval’ by the FCA. A larger than expected number of firms have sought authorisation (the FCA initially expected around 800 applications) and at least 150 managers are understood to have filed their applications in the last week before the 22 July deadline. The number of authorised managers will by now have increased but we expect it will be a while before all applications have been processed.
Investors are starting to show more interest in AIFMD – partly because they are only now starting to receive AIFMD updated offering documents and disclosures and they are also starting to undertake the next round of periodic manager due diligence visits. Managers are telling us they are starting to receive more questions about:
· Valuation and the role of the manager vs. the administrator and the appointment (or not, as is more often the case) of an External Valuer;
· Risk Management and leverage – how has AIFMD impacted the way in which managers assess and manage the wide range of risks required under the directive and can they explain their AIFMD leverage limits;
· Marketing - how do managers ensure compliance with the AIFMD marketing rules, and what controls do they have in place if they are not marketing and opting instead to rely on reverse solicitation; and
· Depositaries - what is the role of the depositary and what did the manager consider when selecting a provider.
We anticipate the level of investor focus will continue to grow over the coming months. This in turn will increasingly lead managers to explain and justify decisions taken. In areas such as the new depositary requirements, we hear managers plan to review the role performed by the depositary and whether, in practice, they are adding the value that managers and funds should expect to receive. From our own experience, having almost completed two months of AIFMD depositary activity for a range of hedge funds, we have already seen how the role of the depositary can add value. For example, we have provided managers some valuable feedback in areas such as the calculation of AIFMD leverage and in some cases we have brought a number of matters relating to the calculation of the fund net asset value to the manager’s attention.
Looking ahead, the biggest challenge many managers face is preparing for their first AIFMD ‘Annex IV’ regulatory filing. Whilst the first reporting date for most managers will not be until January 2015, the volume and complexity of the reporting requirements and the amount of data required to be aggregated and enriched means that managers should be formulating their plans now. Managers are being advised to undertake a dry-run filing to iron out wrinkles before they face a very real time pressure in January. Several managers are starting to recognise that it will be challenging to undertake the reporting in-house and are looking to specialist firms to provide the tools and support to implement a robust and repeatable process. A recent report issued by the SEC in the US highlighted that the SEC is using Form PF data to identify candidates for examination and we understand the FCA expects UK firms to take reporting seriously and implement a robust regulatory infrastructure to produce the returns.
About the author:
Bill Prew is the CEO of independent AIFMD depositary INDOS Financial. INDOS Financial was the first AIFMD depositary to be authorised by the FCA in January 2014 and is the only independent FCA authorised depositary specialising in hedge fund strategies. For more details visit www.indosgroup.com.