On 16 April the IFIA published a guidance paper which aims to assist depositaries in discharging their regulatory obligations as regards transactions between parties connected to the depositary and a fund. The guidance outlines an approach which depositaries may follow in order to comply with their obligations.

Transactions with parties connected to the depositary and affiliated entities

Regulatory requirements

Any transaction carried out with a fund by a party connected to the depositary or its affiliates must:

  1. be carried out as if negotiated at arm’s length; and
  2. be in the best interests of the unit/shareholders; and
  3. (a) be subject to a certified valuation by an independent competent person approved for that purpose by the directors of the fund; or
    (b) be executed on best terms on an organised investment exchange; or
    (c) where 3(a) and (b) are not practical, be on terms which the directors are satisfied conform with 1 and 2.

Guidance

A list of all transaction types which are carried out between the fund and the depositary or parties connected to it during the relevant period may be provided by the investment manager to the directors, outlining the basis on which the investment manager is satisfied that each transaction type complies with the requirements of points 3(a) or (b) above.

Regarding transactions falling within the scope of point 3(c) above, the depositary should inform the fund of the type of transaction which has taken place and with which affiliate. This would enable the fund to consider approving a certified valuation or satisfying itself that the transactions were carried out in accordance with points 1 and 2 above.

Transactions with parties connected to the promoter, manager, investment adviser and affiliated entities

Regulatory requirements

These transactions must also comply with points 1 – 3 above, except that the independent competent person referred to at point 3(a) must be appointed by the directors and approved by the depositary.

Guidance

A list of all transactions between the fund, its investment manager, promoter or manager during the relevant period should be provided by the investment manager to the directors and categorised as:

  1. Transactions where the valuation was certified by an independent competent person, approved for that purpose by the depositary
  2. Transactions which were executed on best terms on an organised exchange
  3. Transactions which do not fall within categories 1 or 2

The directors should request the depositary to confirm that transactions falling within category 3 were carried out on terms as if negotiated at arm’s length and in the best interests of unit/shareholders. An independent review of the transaction by the depositary may be necessary if it was not brought to the depositary’s attention at the time of the transaction.

For full details click here for a link to the Guidance.