Since the global financial crisis in 2008, many institutions and persons active in the financial markets have been subject to an increasing number of regulations and directives, including, of course, the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD), imposing obligations, rules and procedures on not only alternative investments funds (AIFs) and managers acting on behalf of AIFs (AIFMs), but also on their depositaries. One of the obligations of a depositary is to verify the ownership of assets of the AIF or the AIFM and to maintain a record of those assets (asset verification). Apart from providing an obligation to keep up-to-date records (article 21(8)), the AIFMD does not stipulate many guidelines on how the obligation to carry out asset verification may be complied with in practice. In 2013, a Commission-delegated Regulation (EU) No. 231/2013 (the AIFMD Supplement), provided some additional guidelines on asset verification by depositaries. However, the question remains open as to whether the depositary needs to carry out an independent (own) asset verification (or can rely on documents provided by the AIFM instead), and if the former, how frequently such an independent asset verification should be carried out.
The absence of any concrete guidelines on asset verification presents depositaries with a dilemma. On the one hand a depositary must comply with its obligations under the AIFMD, but on the other hand it is aware that an independent asset verification, especially if it is to be undertaken frequently, is a time-consuming and expensive activity. This article reviews the relevant legislation and suggests how depositaries may comply with their obligations in this area. It should be noted that this view may not correspond with the view of the European Securities and Markets Authority (ESMA), who—to the best of the authors’ knowledge— has not provided any guidelines on these matters.
The most important article on asset verification is article 90 of the AIFMD Supplement. From this article, it can be seen that the asset verification is a two-way street: both the AIFM and the depositary have responsibilities to ensure that the asset verification is performed correctly. Indeed, they are, to a certain extent, dependent on each other.
The AIFM must provide the depositary with relevant information on an ongoing basis. The frequency of “ongoing” is not defined in article 90, but it does state that the AIFM must ensure that third parties provide the depositary with certificates or other documentary evidence (i) every time there is a sale or acquisition of assets and (ii) at least once a year.Thus, at the very least, the AIFM must keep the depositary informed of the status of the AIF’s assets at least once a year.
The depositary’s obligations are specified in more detail, but entail (briefly) (i) an obligation to hold an upto-date inventory of the AIF’s assets at all times and (ii) an obligation to possess sufficient and reliable information to carry out an asset verification.
Correct procedures in place
Effectively, these two obligations imply that the depositary must at least have sufficient procedures are in place so that the AIF’s assets cannot be assigned or otherwise transferred without the depositary having been informed of that. As noted above, this is a two-way street, as the depositary will (partly) be dependent on the AIFM or a third party providing the information to him. This means that even though the depositary has an obligation to keep its inventory of the AIF’s assets up to date, if the AIFM does not inform the depositary (intentionally or unintentionally) of any sale or acquisition, it may prove difficult to rule that the depositary has failed to keep an up-to-date inventory, provided the depositary has adequate procedures in place. However, the obligation of the AIFM to ensure that the depositary be informed at least once a year is clearly laid down in article 90, meaning the depositary is (or at least, should be) aware of this obligation and should make sure the AIFM complies. Therefore, if the inventory of the AIF’s assets turns out to contain out-of-date and/or incorrect information while no verification has been carried out at least once in that particular year, the depositary could be held responsible for this out-of-date and/ or incorrect information.
Independent asset verification
It is not clear whether the procedures outlined above include sufficient safeguards for a depositary to satisfy the requirements for an “up-to-date inventory” and “sufficient and reliable information”, or whether an independent asset verification is required as well. Article 90 of the AIFMD Supplement clearly formulates the responsibility for the depositary as broadly as possible, so that this obligation may include an independent asset verification as well. However, if the depositary carries out this ownership verification itself and compares it to the information it has received from the AIFM (and checks for any discrepancies), it may be concluded that the depositary has fully complied with the obligations under article 90 of the AIFMD Supplement.
Based on the above, the depositary would be advised to carry out an independent asset verification in the following circumstances:
- If the AIFM provides the depositary with comprehensive and up-to-date information at least once a year, and the depositary has no (reasonable) doubt that the information provided by the AIFM is incorrect or incomplete, then it is considered that the depositary need not carry out an additional asset verification.
- If the AIFM provides the depositary with information, and the depositary has (reasonable) doubt that the information provided by the AIFM is incorrect and/or incomplete, the depositary should notify the AIFM of that immediately and ask for the additional information required to assuage that (reasonable) doubt. Should the depositary still not be satisfied with the information provided by the AIFM, then it is recommended that the depositary carry out an additional independent asset verification.
- Irrespective of the above, it is recommended that the AIFM carries out an independent (own) asset verification at least once every three years.