Compliance Monitoring as an AIFM

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 Team
Who’s watching who? Who’s watching what?
An introduction to AIFMD oversight, roles,
responsibilities and possible duplication
Jonathan Wilson
Projects Director, EMEA

The AIFMD team
Portfolio
Manager
Risk
Manager
Prime
BrokerMarketing
Compliance
Administrator
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
I
X

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
2
2

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
4
3

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
1
8

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
2
1

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
6
0

Compliance software
o Interactive Compliance Calendar
o Interactive compliance task scheduling
o Risk-based monitoring framework
o Work-flow Features
o 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 leverage
Regulation 39: Set risk limits, regular updates
to senior management
Regulation 42: compensated in accordance
with risk objectives,
ARTICLE
1
5

Substitutes….?
Internal audit
Legal Representatives
Delegates
Insurers
Placement agents
Independent Valuers

Compliance Monitoring
How does AIFMD extend
what needs monitoring?
Bobby Johal, Technical,
Cordium
COMPLIANCE
6
1

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

• 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

• 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 position
oA 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 Kingdom
oFirms 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

Passporting
Under the consultation
oThe Forms have been amalgamated
oNew 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 changes
oIncludes the FUND 3.2.2R disclosures and requires a shortened version of
the schedule of AIFs
31

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.
36

Notifications
General notification
forms

General Notification
New 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

New 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

New 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

New 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.

New 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.
30

Other timings
Annual report
oAnnual 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 disclosures
oAn 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 notifications
oWhen 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; and
o (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

SS&C GlobeOp
AIFM Risk & Compliance Governance -
a Depositary perspective
July 2014
Presentation 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 PointsKey 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
Depositary Review/ Due DiligenceDepositary Review/ Due Diligence
The 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
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.
.

53
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.

Compliance Monitoring as an AIFM

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