Improved Investor Protection Through Regulations For AIFM Depositaries

In July 2013 the Alternative Investment Fund Manager Directive 2011/61/EU (AIFMD) was implemented. After an almost two-year delay since its initial draft, the implementation of the directive set important standards for marketing, capital raising, valuation, risk monitoring and reporting, as well as compliance and accountability for alternative investment funds. The directive applied, among others, to hedge funds, real estate funds and private equity funds.

With its implementation just before the financial crisis, investor protection was at the heart of the AIFMD. Besides the previously existing key players, such as the fund manager and fund administrator, the depositary was introduced for providing a 'supervisory' role for funds that have to comply with the AIFMD or for marketing non-EU funds to EU investors (so-called 'Depo-light' regime).

Today, five years later, the AIFMD and the depositary are unavoidable names in the fund world. However, constant updates and improvements in regulations have already brought several significant specifications to the initial directive. The contribution of government bodies regulating the fund industry at the local level is especially pivotal in this matter. The Luxembourg regulator, Commission de Surveillance du Secteur Financier(CSSF), has published several Circulars in recent years to improve the regulations to which funds, fund and asset managers and any other parties involved, have to abide by.

Most notable of these for depositaries: in October 2016, Circular 16/644 to clarify the UCITs Depositary Regime. Almost two years later, on 23 August this year, Circular 18/697 further elucidates and complements the requirements applicable to depositaries of alternative investment funds (AIFs). The Circular does not only impact the depositary itself, but also the funds and fund managers it supervises.

The Circular applies to:

AIFs managed internally or by AIFMs; Part II UCIs, managed by authorized AIFMs, of which the offering documents expressly proscribe the marketing to retail investors established in Luxembourg; Part II UCIs managed by registered AIFMs, of which the offering documents expressly prohibit the marketing to retail investors established in Luxembourg; and SIFs/SICARs which are not AIFs and SIFs/SICARs managed by registered AIFMs. The Circular includes several clarification details for depositaries. Key specifications are:

Eligibility criteria

A (credit) institution desiring to act as an AIF...