Three ways to gain from implementing AIFMD efficiently

With the AIFMD requiring compliance from 22 July 2013 or 2014 (depending on the EU member state in question), fund managers are looking into what they need to do, given the time it may take to embed changes in their businesses. In order to turn obligation into opportunity, even at this late stage, preparing for the Directive efficiently will give managers the flexibility to comply in the way that will bring greatest benefit to their business.

Some of the larger alternative asset managers have been preparing for six months or more, making their foresight an advantage when raising money from investors. But, more recently, all asset managers falling within scope of the Directive have started to analyse what they’ll need to do in order to comply.

While many managers don’t have to comply for a year or more, preparation is a big task and time is shorter than it seems. Efficient gap analysis and project management is, therefore, of the utmost importance. Those that prepare well will realise a range of benefits, such as working with depositaries of choice and integrating business objectives into the task of compliance.

Time is of the essence

In the UK, Europe’s biggest centre for alternative asset management, many managers will not be required to comply with the Directive until 2014. Technically, the Financial Conduct Authority, the UK regulator, has given managers operating out of the UK until July 22 next year to become authorised. A number of other key jurisdictions, but not all, are also offering this one-year transition period, While, this welcomed ‘grace period’ will give alternative asset managers additional time to gear up for compliance, implementing a number of the requirements, such as, the appointment of an ‘AIFMD-ready’ depositary, is likely to be extremely time consuming.

In order to get ready efficiently, we advocate blending a legal analysis with an operational analysis. The former tends to look into issues such as which funds are in AIFMD’s scope and determining which entity is the AIFM (the formally designated manager under AIFMD) and so on. The latter typically examines how business processes, disclosures and reporting lines must be adapted.

We have been assisting managers using web-based gap analysis and project management that distills the Directive’s key elements into a number of questions that diagnose what a manager needs to do in order to comply. With the extent of AIFMD’s Level 1, Level 2 and technical standards ‘literature’ (over 300 pages of technical detail), we recognise the need for simplification. What’s more, we’ve been leveraging our understanding of the UCITS and MiFID requirements, as well as the existing local regulatory requirements, to help fund managers seeking to comply.

Three benefits

Implementing AIFMD efficiently, even at this relatively late stage, avoids a rushed implementation and brings a number of benefits. Below we highlight three of them:

  1. Accessing the best depositary
    Only a limited number of organisations will become ‘AIFMD-ready’ depositaries and they will have limited capacity. The earlier a manager starts to search for a depositary, the more chance it has of working with their depositary of choice. Some depositaries might not be willing to work with certain prime brokers or to facilitate particular investment strategies. So managers need to engage sooner rather than later.
  2. Integrating wider business objectives
    If implemented in an appropriate manner, some of AIFMD’s requirements complement business objectives. For example, managers can embed enterprise risk management in their wider businesses as, in our experience, up until now they’ve concentrated on portfolio risk management. But in this world of ever-increasing uncertainty, operational risk management procedures need more attention. What’s more, enterprise risk extends to the service providers engaged by the manager. Importantly, this makes sure that risk management covers all the services provided to funds, even if the manager doesn’t provide those services directly.
  3. Improving investor communication
    Investors have begun to ask detailed questions about specific areas of AIFMD compliance as part of operational due diligence. Managers need to be well prepared for the Directive, and have evidence of orderly implementation and on-going compliance processes. With formal policies and processes, and governance structure changes, the operational due diligence process may well be more efficient.

As many of the EU’s alternative managers prepare in earnest to be regulated for the first time, how they do so matters. There are good ways and bad ways of approaching this large task, which reaches to the heart of how some managers conduct their businesses. By preparing as effectively as possible, managers can analyse the changes they need to make in the context of their strategic goals, giving them competitive advantages at a time when regulation may well open up new opportunity.