On 22 July 2013, the Alternative Investment Fund Managers Directive (AIFMD) came into force. In the Netherlands, the AIFMD has been implemented by means of the Dutch Financial Supervision Act (FSA) and by delegated regulations under the FSA. Many real estate investment funds have become subject to the AIFMD’s provisions.
AIFMD aims to provide for an internal market for managers of alternative investment funds (the Managers) and a coherent and stringent regulatory and supervisory framework for the activities of Managers within the European Economic Area (EEA).AIFMD lays down rules and requirements for the approval, ongoing operation and transparency of Managers and the alternative investment funds they manage (the Funds).
Among other matters, AIFMD determines that Managers must appoint a depositary (the Depositary) for each of the Funds they manage. The Depositary performs certain specific depositary duties in respect of the Funds. One of these duties is to verify the ownership of (certain) assets presented as belonging to the Funds or to the Manager as agent for the Funds, such as real estate assets.
This article sets out the legal framework at a European level regarding the duty of the Depositary to verify ownership of a Fund’s real estate assets, as well as its impact in the Netherlands.
Information required for ownership verification pursuant to AIFMD
Pursuant to Article 21(8) AIFMD, the ownership rights to the assets of the Funds are assessed by the Depositary on the basis of (i) information or documents provided by the Fund or by the Manager, and (ii) where available, external evidence.
Information to be provided by the Fund and/ or the Manager
The Manager must provide the Depositary with all information necessary for the Depositary to comply with its obligations regarding ownership verification. Furthermore, Article 90(2) of the Level 2 Regulations determines the following:
- the Depositary has access without undue delay to all relevant information it needs in order to perform its ownership verification and record-keeping duties, including relevant information to be provided to the Depositary by third parties; and
- the Depositary possesses sufficient and reliable information for it to be satisfied as to the Fund’s ownership of the assets, or of the ownership of the Manager acting on behalf of the Fund.
In addition to information provided by the Manager or the Fund, the assessment of ownership by the Depositary must, where available, be based on external evidence (pursuant to Article 21(8) AIFMD).What is meant by “where available” and what falls under the scope of “external evidence” is not detailed in AIFMD or in its delegated regulations. As such, it is left to national laws and regulations to further substantiate the requirements for ownership verification of (real estate) assets by the Depositary. These requirements and the legal process for ownership verification will therefore differ throughout the EEA and other countries, depending on where the real estate assets are located. Where no specific ownership verification requirements have been adopted in connection with the implementation of AIFMD, it is likely that ownership verification will take place in accordance with national best practices, as is the case in the Netherlands.
Information provided by third parties
In practice, in the process of obtaining all relevant information for the verification of ownership of the real estate assets, the Depositary may want to rely on the performance of tasks or provision of information by third parties, such as lawyers, notaries, or public registration authorities. Notably, reliance on such third parties does not legally discharge the Depositary from its own responsibility for the proper performance of its task of verifying ownership, however under Dutch law, relying on a third party known to have a high level of reliability, such as an international law firm (including DLA Piper) can allow the Depositary to argue successfully that it has complied with its obligation to perform its ownership verification tasks properly.
It should be noted that involvement of third parties in the ownership verification process should only take place to the extent that this involvement does not qualify as “outsourcing” (uitbesteding) within the meaning of AIFMD, unless the requirements for outsourcing as included in AIFMD are complied with (see below for more on outsourcing).
Verification of ownership of real estate assets located in the Netherlands
In view of the above, we take the view in the Netherlands, that verification of the ownership of real estate assets located in the Netherlands may be (mainly) based on the extract from the land register since this extract is, at law, conclusive evidence of ownership. It is our view that the extract of the land register qualifies as “available external evidence”, and by referring to this extract the Depositary has fulfilled its statutory obligations to verify ownership of real estate assets located in the Netherlands.
However, the Dutch regulator (the Dutch Authority for the Financial Markets (AFM)) takes the view that the Depositary may (also) want to review relevant notarial deeds regarding those real estate assets located in the Netherlands. Furthermore, depending on the circumstances, the Depositary may want to contact the relevant notary or a third party in order to obtain more information.
In practice, the Depositary must ensure that the extract of the land register corresponds with any additional information available. For example, additional information that the Depositary has collected for itself, or information that it has received from the Fund, the Manager, or from third parties. Notably, from the point of view of Dutch law, the Depositary is only required to assess information concerning the ownership of the real estate assets and not necessarily to investigate the existence of any lease agreements concluded in relation to those assets.
Ownership verification on a look-through basis
Importantly in relation to the above, Article 90(2) of the Level 2 Regulations determines that the Depositary’s ownership verification duties apply on a look-through basis to underlying assets held by financial and/or legal structures established by the Fund or by the Manager acting on behalf of the Fund for the purposes of investing in the underlying assets, and which are controlled directly or indirectly by the Fund or by the Manager acting on behalf of the Fund. This obligation does not apply to fund of funds structures or master-feeder structures where the underlying Funds have a Depositary which provides ownership verification and record-keeping functions for these Funds’ assets.
According to the AFM, the look-through obligation in relation to ownership verification applies irrespective of the country in which the real estate assets are located. If the Depositary, with its corporate seat in the Netherlands, does not have sufficient expertise regarding the foreign jurisdictions in which the real estate assets are located, it is the responsibility of the Depositary to ensure that it gains sufficient expertise (which can include engaging an international law firm such as DLA Piper). Provided certain conditions are met, the Depositary may in this respect rely on the knowledge and performance of third parties, or the Depositary may outsource its ownership verification task regarding these assets.
Ownership verification— outsourcing
A Depositary may only outsource certain of its depositary tasks. One of the tasks which is suitable for outsourcing is ownership verification. Should the Depositary decide to outsource its ownership verification tasks, the provisions of AIFMD and its delegated regulations, as (partly) implemented in the FSA and delegated regulations on outsourcing must be complied with. It should be noted that outsourcing does not discharge the Depositary from its own responsibility for the proper performance of the tasks it has outsourced.