Preparing for AIFMD: Practical Tips, Part II
Operations, Delegation and
Documentation
Sean Donovan-Smith - Partner
Alice Bell - Associate
© Copyright 2013 by K&L Gates LLP. All rights reserved.
Overview
 Recap
 Operating principles for AIFMs
 Organisational requirements and delegation
 Regulatory capital requirements
 Depositary and service provider documentation
 Key disclosure requirements for AIF offering
materials
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Preparing for AIFMD: Some Practical Tips, Part I
 A general round-up of key provisions in the AIFMD
level 2 implementing regulations (“Level 2”)
 Scope of the AIFMD
 Timetable and transitional relief
 Cross-border marketing
 Delegation and letter-box entities
 Enhanced disclosure and reporting requirements
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Operating principles: Section 1 – General (Arts
12-17)
 General principles (Art 12)
 Process and procedures (Arts 13-17): Policy
documents
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Operating principles: General principles (Art 12)
 Act honestly, with due skill, care and diligence
 Duty to act in best interests of AIF / investors, and the integrity
of the market
 Investments
 Counterparty selection
 Inducements, order-handling
 Have and employ effectively resources and procedures that are
necessary for the proper performance of the AIFM’s activities
 Take all reasonable steps to avoid conflicts of interest
 Comply with all regulatory requirements to promote best
interests of AIF / investors, and the integrity of the market
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Process and procedures (Arts 13-17): Policy
documents
 Remuneration (Art 13 and Annex II; ESMA
Guidelines)
 Conflicts of Interest (Art 14, Articles 30-37 Level 2)
 Risk Management (Art 15, Articles 38-45 Level 2)
 Liquidity Management (Art 16, Articles 46-49 Level 2)
 Investments in securitisations (Art 17)
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Organisational requirements: Section 2 (Arts
18-21)
 General (Art 18)
 Valuation (Art 19)
 Delegation (Art 20)
 Depositary (Art 21)
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Organisational requirements: General (Art 18)
 AIFM must use “at all times, adequate and
appropriate human and technical resources that are
necessary for the proper management of AIFs”
 Administrative and accounting procedures
 Electronic data processing controls
 Internal controls:
 PA Account Dealing policies
 All transactions documented (origin, parties, type, time
and place of execution)
 Ensure that AIF assets are invested in accordance with
the AIF’s investment policy and relevant rules
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Organisational requirements: Valuation (Art 19)
 Articles 67-74 Level 2
 AIFM must have written policies and procedures for
each AIF
 For valuation models, must be approved by senior
management and be included in the AIF’s policy
 AIFM must have written policies and procedures
explaining the methodology used for different types of
assets
 May use different methodologies for different AIF
 Can differ within asset base to cover alternative
scenarios
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Organisational requirements: Delegation (Art
20)
 AIFM “core” activities: portfolio management and risk
management
 If delegate’s interests may conflict, delegate needs to
functionally and hierarchically separate the performance
of the potentially conflicting tasks from the delegated
activities
 AIFM must have the expertise and resources to review
delegate “on an ongoing basis”
 AIFM loses AIFM status if it “delegates the performance of
investment management functions to an extent that
exceeds by a substantial margin the investment
management functions of the AIFM itself”
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Organisational requirements: Depositary (Art
21)
 AIFM must appoint a single independent depositary
in respect of each AIF it manages:
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Monitor cash flows
Hold financial instruments in custody
Verify ownership rights (non-financial instruments)
Oversee sale, issue, repurchase, redemption and
cancellation of units / shares and ensure that income is
applied in accordance with applicable law and regulations
 Ensure that NAV is calculated in accordance with
applicable law and regulations and the AIF's valuation
policy
 Maintain accurate records in respect of the above
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Regulatory capital requirements: Chapter II (Art
9)
 Articles 12 to 15 Level 2 Regulations
 Internally managed AIF is required to have an initial
capital of at least €300,000
 External AIFM is required to have an initial capital of:
 €125,000, plus
 0.02 per cent. of the value of the AIF portfolios of the
AIFs it manages in excess of €250 million (subject to a
cap of €10 million)
 AIFMs must either have:
 professional indemnity insurance, or
 additional own funds appropriate to cover risks arising
from professional negligence
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Delegation Agreements
 Article 75, Level 2
 Delegation only effective by written contract
 Required terms:
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Rights and obligations
Instruction and monitoring rights
Termination
Inspections and access
Sub-delegation only with AIFM’s consent
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Depositary Agreement
 Article 83, Level 2 – at least:
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Services
Safe-keeping and oversight function
Validity and termination
Confidentiality
Delegation of safe-keeping
AML
Cash accounts in AIF’s name
Notify if segregation of assets becomes insufficient to
protect from third party delegate’s insolvency
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Depositary Agreement
 Required terms – procedures:
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Each type of asset
Information exchange and quality checks
Amending documents
Escalation procedures in depositary group
Performance review
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Depositary Agreement
 Discharging liability
 Expressly transferred to third party in contract
 AIF/ AIFM must be able to bring claim against third
party for loss of financial instruments (or depositary on
their behalf)
 Contract between depositary and AIF/ AIFM to
expressly allow discharge and objective reason for
doing so
 Contract disclaimer: liability not affected by
delegation of custodial duties unless properly
discharged
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Disclosure to Investors
 Who?
 AIFM
 What?
 Each EU AIF managed
 Each EU/ non-EU AIF marketed into EU
 When?
 Pre-investment
 Material change
 On-going
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Disclosure to Investors: Pre-investment
 Investment strategy, objectives and restrictions
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Leverage
Risks
Type of assets
Procedure for changing strategy/ policy
 Main legal implications of contractual relationship
 Jurisdiction, governing law
 Directory
 AIFM, depositary, auditor & other service providers
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Disclosure to Investors: Pre-investment
 Location of AIF
 Master if feeder fund
 Underlying funds if FoF
 How the AIFM covers professional liability risk
 Own funds
 Professional indemnity insurance
 Delegation of AIFM functions
 Valuation procedure
 Pricing and methodology
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Disclosure to Investors: Pre-investment
 Liquidity risk management
 Redemption rights
 Fees, charges and expenses
 How AIFM ensures fair treatment of investors
 Preferential treatment (side letters)
 Latest annual report
 Procedure and conditions for issue/ sale of shares
 Latest NAV
 Historical performance of AIF (where available)
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Disclosure to Investors: Pre-investment
 Prime brokerage arrangements
 Sub-custody arrangements
 Any arrangements for depositary to transfer liability to
sub-custodian
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Disclosure to Investors: Ongoing Duties
 Material changes
 Change to depositary liability
 Periodically:
 Percentage of AIF’s illiquid assets subject to special
arrangements (e.g., side pockets)
 New liquidity management arrangements
 Current risk profile and risk management systems
 Leverage
 Changes to maximum level (re-hypothecation,
guarantees)
 Total amount of leverage
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Side Letters
 AIFM must treat investors fairly
 Preferential treatment must be disclosed in AIF’s
“rules or instruments of incorporation”
 Cannot cause “overall material disadvantage to other
investors”
 Disclose to new investors prior to subscription
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What’s next?
 Review the impact on your current operational
procedures
 Review offering materials
 Undertake a gap analysis of relevant documentation
and processes
 Ensure that required documents are in place
 Review, amend and/or prepare operational
procedures and policy documents
 Send updated information to existing investors, if
applicable
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Sean Donovan-Smith
Partner – K&L Gates
sean.donovan-smith@klgates.com
0207 360 8202
Alice Bell
Associate – K&L Gates
alice.bell@klgates.com
0207 360 8304
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