8 must-do activities for effective AIFMD preparation

As the Alternative Investment Fund Managers Directive (AIFMD) moves ever-closer, Jonathan Wilson, Director of Project Consulting at Cordium UK, addresses the personal position of managers leading up to the transposition into domestic legislation.

How can fund managers/firms prepare?

If you decide that you are in scope of AIFMD, then it should be recognised that this will be a significant project which will require proper governance and control within the organisation with steering from the top. A proper plan around all the areas considered in the checklist below needs to be established. This is not a simple compliance issue.  Firms should be asking themselves how their business model can change from being a manager of offshore funds to an EU-based AIFM with depositories and more formal responsibilities regarding risk.

I would encourage firms to appreciate that there is a lot of work that can be done now to prepare. The Financial Conduct Authority (FCA) has published its forms for authorisations, so drafting work can begin straight away--the forms explain clearly most of the steps that need to be taken at this stage. One thing I can guarantee is there will be some bottlenecking or clustering of applications--I saw this from the Dodd-Frank process. This might come from the delays at the FCA itself, and you don't want to be in that queue. My advice is to get preparing now so you control the timing of your application, rather than being forced into it by the deadline.

What needs to be done? What questions need to be asked? Here are 8 things to get going:

1.       Review whether you in the scope of AIFMD

• Look at funds you're managing:
  • Where are they based?
  • Are you going to be an AIFM at some point?

2.       Consider your timing for application

• Check whether the transitional provisions apply to you
• Managers who begin managing an AIF for the first time after 22 July 2013 need to have applied for authorisation to the FCA by this date
• There is a 'best efforts' statement applying to existing AIFMs which the UK has interpreted as permitting both EU and non-EU fund managers to continue to market a fund under the existing national private placement rules in the UK and don't need to file for authorisation until July 2014
• The UK is allowing firms operating in the UK a full 12 months to prepare

3.       Review your marketing and fundraising activity. Where are you marketing to? Where are you fundraising?

• If you are fundraising in the UK you have 12 months to comply with AIFMD
• If you are fundraising across Europe in different locations, then you will need to make a decision as to whether you continue to operate under the national private placement regimes if they exist in those locations; or you move funds onshore and go for EU status and thus fall under the AIFMD regime--focus closely on your investor base as to where to go to market

4.       Start discussions with depositories

• Who's going to start that dialogue in your firm?
• What will the relationship be between existing service providers and depositories?
• How will it work in practice in terms of arrangement of access to info they require?

5.       Assess your risk management and compliance functions

• AIFMs are required to establish and maintain a permanent risk management function
• Most managers should have policies and procedures around this already but probably not well-formalised and unlikely with the formality expected by the regulator
• The FCA will want confirmation in the variation of permission (that AIFs will need to supply) that capital and operational risk requirements have been addressed and risk arrangements are in place--eg are delegation arrangements are structured properly?

6.       Assess your reporting capabilities

• Systemic risk reporting is likely to be a huge task, especially for firms with significant assets
• Are our risks systems up to scratch?
• Would they survive inspection from review?
• Where is the data going to come from (eg valuers, depositaries)?
• Do you have sufficient resources (eg technology, personnel) to meet reporting deadlines?
• There are also annual reporting requirements within the annual accounts of the fund and for private equity disclosures--while most funds accounts if they follow accounting standards such as US GAAP are likely to meet the requirements, there is still a benchmarking exercise to undertake

7.       Consider delegation arrangements

• Are your current delegation arrangements sufficient?
• Do your delegates have sufficient resources, skills, experience etc?
• Can you delegate and supervise to the standard expected of the regulator?

8.       Benchmark client disclosures against what you currently provide in your prospectus against what the AIFMD requires

There are minor changes to operational procedures (eg best execution requirements) but these are still changes that need benchmarking.

Jonathan Wilson joined Cordium in 2006 and currently works with a range of investment management firms on project assignments covering s 166 reviews, client money requirements, investor due diligence, UCITS requirements, prudential regulation, ICAAP and operational and compliance infrastructure reviews. Jon represents Cordium on industry working groups and led the development of our UK response to Dodd Frank and our prudential and capital adequacy training.

Jonathan was interviewed by Duncan Wood of LexisNexis for a Legal Analysis News item on LexisPSL Financial Services. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor. )