Industry Comment

James Bermingham

James Bermingham, Industry Comment

The depository artifice

Monday, February 18, 2013

The AIFM Directive changes the nature of fund administration much less than many are suggesting. This is because many private equity funds already operate within an IOSCO compliant framework without seemingly knowing it.

For over 12 years, the Aztec Group has been providing fund administration services to private equity fund managers. Irrespective of the office, our services have always been split between two core functions: 

1. Hosting the manager: looking after a general partner company (or AIFM) in a third country context, essentially means supporting the operations of a stand-alone investment management company; and

2. Platform management: operating a fund (or AIF) platform essentially means providing the following key services:

(a) investor related services;
(b) accounting services;
(c) operating systems;
(d) safekeeping services;
(e) company secretarial/domiciliation (or administrative) services; and
(f) regulatory compliance services.

These will not change with the Directive.

The requirement to appoint a depositary will not change matters either, where platform management is already outsourced. This is because safekeeping already forms part of the key controls required in IOSCO compliant jurisdictions such as the Channel Islands.

Safekeeping, like depositary controls, requires regular cash reconciliations, safekeeping of client assets and fiduciary oversight of fund processes. These are already embedded in our ISAE 3402 accredited internal controls and only minimal changes are now required to bring them into line with the Directive. Audit standards and regulation have been evolving in tandem with the result that the creation of a separate depositary role will have much less impact than clients expect.

As there will be few substantive changes to our processes once the new rules are embedded, we shall not be amending our approach to pricing and will continue managing risk, rather than pricing it. After all, we will not normally be providing custody services in a private equity context.

The Aztec Group is committed to supporting the private equity industry through difficult times and, as a fiduciary business, will not be looking to exploit new regulation at the expense of our clients. We are committed to maintaining business as normal in all our jurisdictions.