30 april seminar

7/28/2019 30 April Seminar

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Copyright 2013 by K&L Gates LLP. All rights reserved.

Operations, Delegation and

Documentation

Preparing for AIFMD: Practical Tips, Part II

Sean Donovan-Smith - Partner

Alice Bell - Associate


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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 (Arts12-17)

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 integrityof the market

Investments

Counterparty selection

Inducements, order-handling

Have and employ effectively resources and procedures that are

necessary for the proper performance of the AIFMs 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): Policydocuments

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 (Arts18-21)

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 arenecessary 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, timeand place of execution)

Ensure that AIF assets are invested in accordance with

the AIFs 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 foreach AIF

For valuation models, must be approved by senior

management and be included in the AIFs 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 (Art20) AIFM core activities: portfolio management and risk

management If delegates 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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Delegation Agreements

Article 75, Level 2

Delegation only effective by written contract Required terms:

Rights and obligations

Instruction and monitoring rights

Termination

Inspections and access

Sub-delegation only with AIFMs consent


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Depositary Agreement

Article 83, Level 2 at least:

Services Safe-keeping and oversight function

Validity and termination

Confidentiality

Delegation of safe-keeping

AML

Cash accounts in AIFs name

Notify if segregation of assets becomes insufficient to

protect from third party delegates insolvency


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Required terms procedures:

Each type of asset Information exchange and quality checks

Amending documents

Escalation procedures in depositary group

Performance review


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Discharging liability

Expressly transferred to third party in contractAIF/ 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

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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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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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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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 AIFs 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 AIFsrules or instruments of incorporation

Cannot cause overall material disadvantage to other

investors Disclose to new investors prior to subscription


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Whats 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

[email protected]

0207 360 8202

klgates.com

Alice BellAssociate K&L Gates

[email protected]

0207 360 8304


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30 april seminar

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