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AIFMD Compliance Healthcheck Service

Providing a benchmark against industry best practice

The Alternative Investment Fund Managers Directive (AIFMD) became effective in July 2013 giving firms with funds in scope until 22nd July 2014 to gain authorisation. These timeframes were very challenging for many impacted firms, as some had not previously been required to gain fund authorisation, whereas others had large or complex fund ranges. This meant updating fund documentation, processes and added transparency reporting. This all needed establishing in a very short period. Some of these processes would need to be continued regularly beyond initial authorisation, such as transparency reporting, which led to selection decisions following the route of least resistance.

Why Perform a Healthcheck?

Now that many of the reporting and review processes have undergone a number of iterations, it is prudent to reconsider the original decisions made. The market has matured with many of the European countries confirming their own specific requirements. There has been no information from either the European Securities and Markets Authority (esma), or any of the National Competent Authorities (NCA) as to the penalties for non-compliance or if any AIFMs are not complying. This lack of information is likely to lead to complacency as firms focus elsewhere, seeing AIFMD as a done deal with repercussions unknown. There have been regular “question and answers” updates from esma as to how some aspects of the regulation should be interpreted. However, these are not based on any of the operating models or data submitted, as these have not been reviewed as part of a themed visit. As with movies, so with regulations there is likely to be a sequel, so in preparation the ISC Healthcheck will ensure readiness for AIFMD II.

How can ISC Assist? ISC have been involved with major institutions in delivering all components of the regulations that covered both full and “lite” versions. These projects involved various structures:

  • European based with a single NCA
  • EEA based with a single NCA
  • Non-European based with 9 jurisdictions

This experience along with appreciation of the Depositary role and industry initiatives, makes ISC well placed to perform the review.

Review Process

The review process provides firms a benchmark against industry best practice to ensure continued compliance, with recommendations of areas to improve. The output provides a report giving firms the evidence, if challenged by the regulators, that they have considered their approach after undertaking a thorough and independent review. As well as looking for consistency, the report provides recommendations for possible time and costs savings. Data is also at the core of the regulatory processes, so a view on the usage and storage of data is a major part of the review.

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The components within the review are in the following sections:-

Annex IV Reporting

This is a review of the end-to-end Annex IV reporting operating model, from obtaining the data necessary to complete the submission, to each NCA assessing whether this would be better delegated to a third party administrator. Component parts of the reporting can be serviced by a variety of providers. Some are linked to administration services; others offer a full Annex IV service with some that convert excel files to XML for submission to the regulators.

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The report scope:

  • Checking for consistency of data sources
  • Review of assumptions and interpretation of question sets
  • Completion of optional and mandatory entries

The document includes recommendations for any changes to the operating model based on a review of the market options. These will be used to determine the best solutions for data collation, aggregation/calculation, review/authorisation and submission to NCAs.

Investor Disclosures

Within each annual or semi-annual report that is issued to investors there should be AIFMD related disclosures that mirror data reported via Annex IV to the regulators. These disclosures would have been agreed in line with fund documentation at the time of authorisation, but may either need refreshing or at the least checking for consistency in line with any updates in marketing documentation. Each AIFM should have an annual review of its status and evidence any changes that have occurred as part of this attestation, ensuring consistency with disclosures and policies.

Risk Governance

This section ensures the effectiveness of the Risk Management Systems that oversee the activities of the AIFs and the operations supporting them in line with the policy submitted to the regulators. This is seen by the regulators as fundamental to ensuring the correct oversight of the AIFs in order to minimise the risk of fund failure. Areas of risk considered are; market, credit, liquidity and operational, including the regular reporting of the monitoring programme to the AIFM board or delegated committee.

Depositary

The Depositary is a key role in ensuring fund protection for investors and needs to be effective in performing its oversight. The report ensures that the oversight of cashflows, valuation and asset verification are compliant with regulations as described in the Service Level Agreement. This piece also considers the AIFM’s oversight and service review governance of the Depositary, with recommendations for improvements and any possibilities of cost savings.

If you would like to benchmark your current AIFMD operation against best practice and future-proof against further change, please contact ISC.

ISC AIFMD Healthcheck