AIFMD1 & AIFMD2 March 29, 2017
Shining the torch in dark places
One of the consequences of the introduction of the AIFMD rules the first time and now the second time around has been to emphasise the role of the Board’s oversight role. With some very small action steps by the Board perhaps prodded by a Director who has seen it working elsewhere Governance of the Fund can be increased dramatically. It also but enhancing the review process by the Board demonstrates more forcibly where decisions and control of the Fund are made and may help in discussion on BEP’s and their effects.
As we all know a Fund structure needs to be as transparent as possible in order to give the Institutional Investor the utmost comfort that their representatives, the Board, are reviewing information to the standards that they would expect of their internally managed funds.
From the launch of AIFMD the Regulator in the UK has emphasised the role of the Independent Depository in the make up of the Fund oversight. Historically pre AIFMD this role was a separated function of the Fund’s Administrator. For this a fee was agreed by the Directors as part of the overhead of the Fund and the Custody/ Depository role saw separate oversight carried out from Fund Administration. In many cases historically this appeared to reactive to the Administrator and it was difficult some time to see who the Custodian/ Depository worked for- the Fund or protecting the Administrator.
Today post AIFM this role has been separated with a Light touch depository able to be appointed independent of the Administrator and the Fund Manager. In many cases this service may be offered at a reduced cost and enhanced level of service to the historic charge. Now however with specialist independent oversight the Board can at least count on a regular independent review on what is going on in the Fund. It will involve a review not only the securities in the Fund but where the cash is deployed. It may also in between meetings report exceptions to the Board which can trigger an independent investigation by Board members. When holding quarterly Board meetings 3 months can be a very long time.
We now approach the introduction of AIFM2. To me this seems to be shining the light in other areas of the Investment Manager and also in areas of the Fund. To me the big evolution to come will be in the overall management of risk in the Fund. In most cases this has historically been carried out by a separate team and the information provided to the Fund by the Fund Manager. In many cases most Fund Managers do not give a detailed independent report as this might point to weakness in their performance as a Manager. Therefore the evolution has to be toward an Independent Risk Monitoring system. As a specialist service it to is able to review all risks and report separately to the Board at its quarterly meeting. It is also able to report exceptions to the Board in between meetings and allow the Board to react. Again in many cases this is becoming driven by Fund Directors rather than the Fund Managers themselves.
The recent letter to Administrators by the Central Bank of Ireland has started a review of where Irish Administrators are outsourcing their work. It is suggesting independent reviews of these outsourcing arrangements which may well be made into outside group companies based in unregulated centres which may not even have in some cases a compliance function.. Again, this is a subject that should be reviewed by the Board of where the Administrator may actually carry out the work and what is the review process. Although limited in its review to Irish Administrators it is unlikely that the Irish model has not been used in other parts of the world. Maybe in due course this again might be carried out by an Independent service which is then formally reviewed by the Board rather than just the regulator.