Agenda• Introduction • Who’s watching who? Who’s watching what? An introduction to AIFMD

oversight, roles, responsibilities and possible • Process compliance – how does AIFMD extends what needs monitoring –

Risk Management, Valuation, Disclosures and Marketing• Notifications compliance – What the regulator wants to know and when? • An AIFM’s risk and compliance governance – a Depositary view• Q & A

Compliance Monitoring as an AIFM

AIFMD The AIFMD TeamWho’s watching who? Who’s watching what? An introduction to AIFMD oversight, roles, responsibilities and possible duplication

Jonathan WilsonProjects Director, EMEA

The AIFMD teamPortfolio Manager

RiskManager

Prime BrokerMarketing

ComplianceAdministrator

Depositary

FCAAuditor Fund Board

INVESTORS

Investors

Cordium regulatory forum February 2014:

Which term best describes how you think investors feel about AIFMD?

8% It is viewed as a positive

33% They are worried about increased costs

31% They are not interested

21% It is just starting to appear in their due diligence

6% Something else

Will investors continue to undertake their own detailed due diligence?

What reliance will they place on the AIFM brand?

Will they have confidence in the team in-front?

1

INVESTORS

FCA

“To avoid any potential disruption to your business plans…”….Helpful warning or active threat?

Of an estimated 800 firms needing authorisation, 37 Full Scope UK AIFMs and 147 Small AIFMs approved to May 2014. 2 depositaries authorised

Known unknowns:-How will they respond to late-applications?-Post implementation thematic reviews?

Significant notification and reporting requirements, particularly Annex IV. These will be covered later

CHAPTER

IX

Auditor

Article 22: The accounting information given in the annual report shall be audited

Article 23 : Disclosed to investors

Article 19: Where the valuation function is not performed by an independent external valuer, the competent authorities …may require the AIFM to have its valuation procedures and/or valuations verified by an external valuer or…an auditor.

ARTICLE

22

Fund Board

What is the role of the fund board? AIFMD assumes none.

A (Cayman) director is in a fiduciary relationship to the company - loyalty, honesty and good faith owed to the company.

The directors must act in what they consider to be in the best interests of the company.

The duties of care and skill determined by what is reasonable in those circumstances.

The duties of a director are generally owed to the company. Delegation by the directors of their powers does not relieve directors of their duties to the company and the directors still retain ultimate responsibility for exercising supervision and control over the acts of any such delegates.

FUND BOARD

Marketing

EU marketing passport : limited take up?

FCA marketing notifications

National private placement regimes may continue. FCA focus on promotion of unregulated collective investment schemes

Focus marketing activities on target countries

FCA guidance on marketing / pre-marketing and financial promotions

EU timeline for non-EU AIFM passport?

ARTICLES

30 - 43

Prime Broker

Recital 43: prime brokers act as counterparties to AIFs and (cannot) at the same time act in (their) best interest.

Article 23: Disclosure of material arrangements, conflicts of interest, the transfer and reuse of AIF assets and any transfer of depositary liability to the PB;

Regulation 91(3) - reporting to the Depositary where safekeeping functions are delegated.

Regulation 20(1): AIFMs will exercise due skill, care and diligence before appointment.

Regulation 20 (4) The list of PBs shall be approved by the AIFM’s senior management.

RECITAL

43

Administrator

Article 18: …the AIFM has sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing and adequate internal control mechanisms

ANNEX I – Non core AIFM services – includes fund accounting, customer inquiries, shareholder register maintenance, issues and redemptions, contract settlements, record-keeping

Regulation 92 – give access to the Depositary

ARTICLE

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Depositary

Article 21 (5) : The depositary shall be established in the home Member State of the AIF or a non-home state EU state if permitted by the regulator (Article 59 - until 22 July 2017)

Article 21 (7) Cash flow monitoring, consideration for transactions is remitted within usual time;Article 21 (8): Safe-keeping; liability for loss of instruments;Article (9) : Compliance with AIF rules, instruments of incorporation and national law covering: - sale, issue, re-purchase, redemption and cancellation, valuation, income application

Accountable to the FCA - Article 21 (16):

ARTICLE

21

Compliance

Regulation 60 (2) permanent and effective (independent) compliance function

Regulation 61:….adequate policies and procedures…to detect any risk of compliance failure, minimise such risk and to enable the regulator to exercise its powers. Monitoring and evaluating the adequacy and effectiveness of these and advising the Firm.

(3) …has the necessary authority, resources, expertise and access , senior management reporting, at least annually, to the senior management on matters of compliance, indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies;

REGULATION

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Compliance software

o Interactive Compliance Calendaro Interactive compliance task schedulingo Risk-based monitoring frameworkoWork-flow Featureso Reporting Features

Portfolio Manager

Article 12 (2) (a) - cannot invest in AIFs it manages without prior client approval;

Article 15 (1) – separate from risk management;

Article 19 (4) (b) - separate from valuation;

Regulation 33 – independence of portfolio management to mitigate conflicts of interests.

ANNEX

I

Risk Manager

Article 15 (1) functionally and hierarchically separate

Conflicts of interest mitigated to allow for independence and effectiveness.

Regulation 43: - Data , Independent review

Article 15 (3) (b) : Measure, manage and monitor investment risks including appropriate stress tests;

Article 15 (4): Set maximum level of leverageRegulation 39: Set risk limits, regular updates to senior management

Regulation 42: compensated in accordance with risk objectives,

ARTICLE

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Substitutes….?

Internal auditLegal RepresentativesDelegatesInsurersPlacement agentsIndependent Valuers

Compliance Monitoring

How does AIFMD extend what needs monitoring?

Bobby Johal, Technical, Cordium

COMPLIANCE

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Process Compliance: AIFMD Monitoring

The same only more so…

•Risk Management•Valuation•Disclosures•Marketing•Delegation•Miscellaneous

AIFMD Monitoring – Risk Management

• Risk Management Framework• ‘Risk factors’ – i.e. failure to

• implement effective risk management framework• establish an effective risk management function avoiding conflicts of

interest• to establish risk management policy to measure and monitor all risks

associated to the investment strategy of each AIF in accordance with the risk profile of the AIF

• To ensure periodic review of adequacy and effectiveness of framework, including stress and back testing.

• Failure to establish a liquidity management system • monitor and manage liquidity arrangements• established liquidity risk limits and stress testing.

AIFMD Monitoring – Risk Management

• Risk Management • Governance and risk management function

• Functional and hierarchical separation• Conflicts

• Risk Management policies• Limits (including on use of leverage)• Liquidity• Operational risk historic loss database

• Risk committee• Review

AIFMD Monitoring – Valuation

• Risk Factors – • A failure to implement a valuation policy• Valuation of securities is not subject to sufficient independent oversight

• Valuation Function - Internal vs External valuer• Governance• Functional independence• Conflicts of interest

• Policy • Personnel• Methodologies• Pricing models

AIFMD Monitoring – Disclosures

• Risk Factor - failure to make adequate disclosure in a timely fashion

• Investor disclosures - initial and ongoing • PPM/OM update • ‘Breaches’ of max outlined leverage• Liquidity • Annual Report

• Remuneration disclosures

• Private Equity disclosures• Processes for the monitoring of investments vis a vis disclosure obligations• Legal advice on form of words

• Systemic Reporting

AIFMD Monitoring – Marketing

• Risk Factor – lack of oversight leading to unlawful marketing• Contravention of marketing rights• Weak controls to demonstrate reliance on reverse solicitation

• Passport & NPPR notices• Monitoring of marketers and third parties

• Firm wide understanding of what you can do and jurisdictions in which the AIFM can lawfully market

• Controls around IR teams• Third party introducers –

• Clear agreements setting out perimeters of your marketing efforts• Ongoing DD

• Reverse solicitation- document or be damned

AIFMD Monitoring – Delegation

• Risk Factors • notify the FCA of an outsourcing of a AIFM management function;

identify a critical outsourcer; • to establish outsourcing rationale for each delegation. • poor oversight of delegate resulting in operational or reputational risk

• Great emphasis upon oversight of ‘delegations’• in appointment of depositaries and prime brokers• appointment of any ANNEX I. 2(a) service

• Administration• Marketing

AIFMD Monitoring – Delegation

• Where the AIFM has delegated one of the AIFM management functions, a rationale for that delegation is documented, appropriate due diligence undertaken and the regulator notified.

• demonstrate :• the delegate is qualified and capable of undertaking the function in

question• was selected with all due care• it can monitor the delegated activity effectively

• Monitoring of sub delegation

AIFMD Monitoring – Delegation

• Firm has outsourced AIFM management functions to such an extent as to be a 'letter box entity‘

• Broad anti-avoidance measure – consideration of Regulation Art 82.• Geographical / sectoral spread of investments • Risk profile• Investment strategy• What is delegated and what is retained• Corporate structure

• In all cases, ensure • performance of analysis to evidence delegation is ‘justifiable’ (Art.20)• that initial due diligence has been conducted; • and that regular oversight of the service is in place.

AIFMD Monitoring – Miscellaneous

• Business Plan – central importance to an AIFM• Risk factor – resources are incommensurate with risk profile• Up to date plan

• Capital adequacy• Risk Factor - Failure to meet threshold condition • Monitoring investments adequacy AUM re FUM

• Impact of large positions on capital resources

AIFMD Monitoring – Miscellaneous

• Depositary• Risk Factors:

• failure to appoint an appropriate provider• lack of suitable processes for ensuring provision of information required by depositary

• Consider performance metrics / MI• exceptions

• Remuneration• Risk Factor – failure to promote risk aligned remuneration practices• Policy –

• rationale for disapplication of Pay-out process rules• application to delegates

• Proxy Voting Policy (Regulation 37)• Risk factor – failure to meet best interests obligation

37

AIFMD Monitoring – Small AIFMs

• Limited obligations under the AIFMD

• Monitoring AUM• AUM methodology • Timing sensitivity around FCA notice

• Annex IV• Annual submission

Notifications compliance

What the regulator wants to know and when?

Jonathan Mott, Managing Consultant, Cordium

Those UK AIFM managing a EEA AIF - Passporting

Current positionoA Full-scope UK AIFM wishing to market a UK AIF or EEA AIF to professional investors in the UK required make a Notification of intention to market an AIF in the United KingdomoFirms will need to complete marketing passport form if they are a full-scope UK AIFM that wishes to provide cross border. The form is - Notification of intention to provide cross-border services in another EEA state with respect to marketing an AIF.oThe form requires information similar to that provided for in the application/variation of permission

Those UK AIFM managing a EEA AIF - Passporting

Under the consultationoThe Forms have been amalgamatedoNew form is the notification of intention to provide or amend cross border services in another EEA state for marketing an AIF (article 32); and/or notification of intention to market an AIF in the United Kingdom (article 31) (SUP 13 Annex 8BR)oAllows for initial notification and any material changesoIncludes the FUND 3.2.2R disclosures and requires a shortened version of the schedule of AIFs

31

Those UK AIFM managing a EEA AIF - Passporting

o Timing - FCA is required to, within 20 working days upon receiving the completed notification form, transmit this to NCAs of States where it is intended that the AIF be marketed.

o The FCA is then required to notify the AIFM.

o On receipt of this the AIFM may start marketing the AIF in the host Member State of the AIFM as of the date of that notification.

20

Those UK/EEA AIFMs managing non-EEA AIF – UK National Private Placement

oArticle 36 form: For authorised UK and EEA AIFMs marketing non-EEA AIF

oThe AIFM is entitled to market the AIF as soon as a notification containing all of the required information has been received by the FCA.

oThe article 36 form requires very little more than the schedule of AIFs but does require an officer of the Firm to attest that the AIFM and the AIF comply with the Directive.

oThis comes with an application fee of £250 per fund; and a periodic fee of £500 per fund.

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Notifications

General notification forms

General NotificationNew form 1 - New fund under management notification

o Found at SUP 15 Annex 6AR.• This is both for full scope UK AIFM or small authorised AIFM. • It requires along with details of the new fund, certain items to be appended to the

form. These are :o A new schedule of AIFs form;o Rules or instruments of incorporations of the AIF;o That contractual arrangements are in place with the depositary; &o The Fund 3.2.2R checklist, which lists where the disclosures required

under Article 23 are found.• And for sub-threshold AIFMs:

o A new schedule of AIFs form;o Offering documents; and o For it to confirm the status of the AIF

15

General NotificationNew form 2 - Notification of senior person amendments or removal form

oFound at SUP 15 Annex 6BR

oWhich provides for the notification of senior person amendments or removal

oVery little difference from existing individuals forms.

15

General NotificationNew form 3 - Material Changes notification form

o Found at SUP 15 Annex 6CR. The FCA state that this form should be used to:o notify them before implementation, of a material change to the

conditions for initial authorisation, or variation of permission;o notify them of the non-compliance of an AIF or if as AIFM you are

unable to ensure compliance by an AIF you manage;o notify them of the appointment or removal of an external valuer; or o notify them of material changes to the risk management policy and of

the arrangements, processes and techniques relating to risk measurement and management.

15

General NotificationNew form 3 - Material Changes notification form – Cont..

o The Form requires notification of:o Changes to AIF details

o The appointment, removal or change of function of a depositary that acts for an AIF. This section asks for due diligence undertake or the changes in function.

o The appointment or removal of an external valuer, which again requires a certain amount of due diligence from the AIFM.

o A material change to the risk management policy or to the arrangements, processes and techniques employed for risk management and measurement

The form requires the firm to document why this change is deemed material.

General NotificationNew form 4 - Notice of AIFM delegation

This form allows for the following to be communicated to the FCA:oApplication for approval of delegate – where the intention is to delegate risk management or portfolio management function to an entity that is not authorised or registered for the purpose of asset management. oDelegate notification – where the intention is to (i) delegate risk management or portfolio management to an entity that is authorised or registered for the purpose of asset management and subject to supervision or (ii) delegate other AIFM management functions for which the AIFM is responsible (such as administration or marketing)oSub-delegate application/notification – where the AIFM consents to an existing delegate’s intention to sub-delegate a function to another entity.

The form also requires that certain due diligence is completed on the delegate and that should this require disclosure to investors marketing materials these are outlined.

4

What about Sub-threshold managers?

o Should a sub-threshold manager breach an AIFMD threshold the Firm is required by the FCA to notify it of:o Notification of temporary status – without delay from when the AuM

was first identified as temporarily above the sub-threshold limit.o Verification of temporary status – three months from when the AuM

was first identified as being temporarily above the sub-threshold limit.o Notification of permanent status – both the notification and the

application for full-scope AIFM authorisation should be sent without delay but in any event no later than 30 calendar days from when the AuM was first identified as being permanently above the sub-threshold limit.

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Other timings

Annual reportoAnnual report – AIFM must, for each UK AIF and EEA AIF it manages and for each AIF it markets in the UK, make the annual report available to the FCA no later than six months after the end of the financial year.

Periodic disclosuresoAn AIFM must, at the FCA's request, provide at the end of each quarter a detailed list of all AIFs which it manages.

Private equity notificationsoWhen an AIF acquires, disposes of, or holds shares of a non-listed company.oAIF acquires control of a non-listed company, the AIFM managing the AIF must notify :

o (i) the non-listed company; o (ii) the company’s shareholders of which the identities and addresses are

available to the AIFM or can be made available by the company or through a register to which the AIFM has or can obtain access; and

o (iii) the FCA. oThe notifications must be made as soon as possible, and in any event no later than ten working days

Other timings

Other timings

o Annex IV reporting – o The reporting period of a full-scope UK AIFM must end on the

following dates:o (1) for AIFMs that are required to report annually, on 31 December each

calendar year;o (2) for AIFMs that are required to report half-yearly, on 30 June and 31

December in each calendar year; ando (3) for AIFMs that are required to report quarterly, on 31 March, 30 June,

30 September and 31 December in each calendar year.

o The reporting is then required no later than one month after the period end.

1

Other timings continued

SS&C GlobeOp

AIFM Risk & Compliance

Governance -

a Depositary perspective

July 2014Presentation by Alan Davies Director, GlobeOp Markets Limited

Alternative Investment

Fund Managers Directive (AIFMD)

AIFMD: General Compliance Overview

48

The AIFMD became effective 22 July 2013 Most jurisdictions have a transitional period of one year, ending 21 July 2014, for AIFMs and Depositaries to comply

More than box ticking exercise: Regulator requires AIFM to demonstrate their Compliance arrangements work

Some of the European Economic Area (EEA) 30 countries have not yet enacted the AIFMD into law and there are some countries ‘Gold

Plating’: i.e. higher standards

AIFMD places increased regulatory and legal burden on AIFM’s = Relevant and appropriate Policies, Procedures & Permissions

Many member states are aligning the application of certain requirements, for example remuneration and reporting, to the AIFM authorisation date

49

Depositary Duties re Article 92 Regulation Provisions

Oversight Duties –General requirements (Article 92 Regulation)Oversight Duties –General requirements (Article 92 Regulation)The Depositary is required to assess the risks associated with the nature, scale and complexity of the AIF’s strategy and the AIFM’s organisation in order to devise oversight procedures which are appropriate to the AIF and the assets in which it invests and which are then implemented and applied. Such procedures shall be regularly updated.

Task / Article Summary of Duties Party

Cash Flow Monitoring /Article 21(7)

• Subscription cash received into AIF bank account(s)

• Reconciliations performed daily and problems notified to AIFM

• Depositary

Safekeeping of Custody Assets /Article 21(8)(a)

• Assets registered in name of the AIF and properly segregated

• Regular reconciliations, monitoring of risk and verification of ownership

• Prime Broker(s) / Custodian(s)

Safekeeping of Other Assets /Article 21(8)(b)

• Record keeping (OTC, bank loans, etc.)• Regular reconciliations and verification of

ownership

• Depositary

Oversight / Article 21(9)

• Oversight over AIF’s share dealings and net asset value (NAV) calculations

• Monitor AIFM and AIF compliance with investment restrictions and regulations

• Depositary

50

Risk and Compliance Governance

Key Points Key Points

AIFMD requires that an AIFM ensures a high standard of diligence in respect of all matters relating to the management of an AIF. This extends to establishing and implementing written policies and procedures on due diligence. Similarly risk management policies will form a ”pillar” of the AIFM’s overall governance approach.

Depositary Assessments and RequirementsDepositary Assessments and Requirements

Full Depositary - EEA AIF Depositary “Lite” – non-EEA AIF

Oversight √ √

Risk √ √

Compliance √ √

Prior to agreeing to act on behalf of an AIFM & AIF, a Depositary will assess the existing risk and compliance governance in place at the AIFM. This can take various forms but will include a review of such arrangements and a site visit to determine the depth and nature of such arrangements.The results of the review will feed into the overall assessment of the AIFM and its control environment. This is likely to have a significant weighting factor for the Depositary’s Due diligence outcome.Depositaries may be reluctant to act for AIFM’s where the Due diligence outcome is not of an appropriate standard.Also, it does not affect the process as to whether the AIFM is taking full Depositary or Depositary “Lite” services, as the same standard applies to both types of depositary service.

51

Risk and Compliance Governance

Depositary Review/ Due DiligenceDepositary Review/ Due DiligenceThe KEY factors: PROCESS AND EVIDENCE

The Depositary will need to be satisfied that Policies are appropriate for the AIFM and AIF’s. In addition, they will need to evidence the Policies are being followed. Ideally, there will also be a program for ongoing or periodic review of the policies. The depositary will normally undertake a site visit to review and examine the process in question.

Typical PoliciesTypical Policies

It is customary for an AIFM to have full governance policies surrounding risk management, within which may be a liquidity and valuation policy, compliance policies, including controls and testing of the business together with regulatory and legal requirements.Policies, whilst containing information that will be common among market participants, are not “off the shelf” solutions and must be relevant and appropriate for each AIFM.

Connect with Depositary DutiesConnect with Depositary Duties

AIFMD requirements placed on the Depositary should be reviewed by the AIFM to gain an understanding as to what the Depositary obligations and duties are.

52

Risk and Compliance Governance

Key AIFM Policies to be reviewed by the DepositaryKey AIFM Policies to be reviewed by the Depositary

Risk Management Policy (RMP) {Refer to FUND 3.7}

The RMP should contain all relevant information and polices in respect of the AIFM’s Risk Management arrangements. This will provide details as to the manner in which the AIF is risk managed, covering portfolio and trading strategies, limits and any other relevant factors, including AIFM due diligence on investments and the AIF’s risk profile taking into account the investment objective. The RMP should also include Policies on Credit & Counterparty Risk, and Operational Risk.

In addition, FUND requires the AIFM to ensure there are safeguards against conflict of interest. This may be part of the RMP or a separate Policy. The RMP should also include the AIF’s Leverage limits and details as to how these are calculated and maintained.

Liquidity Management Policy {Refer to FUND 3.6}

The AIFM must ensure consistency in respect of investment objectives, liquidity and redemptions.

A Policy must be in place that considers the AIF’s liquidity risk, including the profile of its investments. The AIFM must also apply stress tests to the portfolio to asses the liquidity of the AIF under relevant scenarios.

Valuation Policy {Refer to FUND 3.9}

Being responsible for the valuation of the AIF’s assets requires the AIFM to have an appropriate Valuation Policy in place. This should include details of the valuation methodologies that should match the profile of the AIF’s investments. Key aspects to consider include independence, controls, liquidity adjustments, models used in the valuation process, consistency of application and ongoing review of the Policy.

.

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Important Notice

Notice: This document is provided for informational purposes only, and the contents hereof are subject to change without notice or update. This presentation is not an offer or a contract. No contractual obligations, representations or warranties are formed either directly or indirectly by SS&C GlobeOp in providing this information, nor is it intended for this information to take the place of your and your organization’s own independent due diligence and investigation. SS&C GlobeOp has a variety of available services; in the event that SS&C GlobeOp is or has been chosen to provide certain services, those services shall be specifically described in and subject exclusively to a services agreement between SS&C GlobeOp and your organization. The pricing, service and technical information contained herein is proprietary to SS&C GlobeOp and is SS&C GlobeOp's confidential information. Any use or distribution of this information other than internally within your organization on a need-to-know basis is strictly prohibited.

GlobeOp Markets Limited is Authorised and Regulated by the Financial Conduct Authority, 447534.

Questions