Elevating Trust in Financial Markets through Expert Depositary Services

Updated on: April 3, 2024

By: Michael Mekaeel, Head of Depositary

Global markets and economies have evolved significantly since the Alternative Investment Fund Managers Directive (AIFMD) went into effect across the European Union in 2013. This regulation has played a critical risk management role that has helped ensure the integrity and security of the financial markets by creating increased transparency, accountability, and oversight of complex financial instruments such as hedge funds, private equity, and other alternative investment funds.

This regulation requires AIFs to engage a depositary. Hired by a fund but viewed by regulators as a “watchdog,” depositaries are tasked with preserving the interests of the end investors in compliance with AIFMD.

To be successful in upholding its commitment to protecting the interests of both the fund and the end investor, a depositary must remain steadfast in maintaining objective independence while carrying out its duties, including raising concerns to regulators about their clients’ compliance efforts.

The relationship between a depositary and a PE firm can be viewed as merely a legal obligation, however, there are steps firms can take in the evaluation process to build the foundation for a strong partnership that helps uncover compliance concerns for proactive mitigation.

What to Look for in a Depositary Services Partner

In the years since AIFMD went into effect, regulators have become more astute in their understanding of the depositary role, which has enhanced their ability to attract talent and to conduct more in-depth inspections and examinations.

Getting the depositary relationship right is critical to your business, so there are a few key attributes to keep in mind when choosing a provider:

  1. Willingness to Understand Your Business: Every firm and fund is different, from investment strategy to deal approval process and governance structure. Choose a depositary that takes the time to understand your fund’s mandate and is willing to customize its service approach based on the asset type and operating structure of the fund. No two funds are the same, so using a pre-prescribed, boilerplate checklist of activities is not effective.
  2. Proactive, Transparent Communication is Key: Look for a depositary that is willing to educate you on the requirements and provides insights on whether your governance structure needs to evolve to better align with regulations. A depositary’s willingness to establish a proactive communications cadence with you will help avoid surprise revelations at board meetings or from regulators. This communication will become especially important when looking ahead to the AIFMD-II regulations that will come into effect in 2026.
  3. Objective Independence: Remaining unbiased is central to the depositary’s ability to protect the end investor and maintain your reputational integrity but possessing deep knowledge of the regulation is critical. Find a provider who intimately understands the ins and outs of AIFMD. One who understands potential challenges – including your action plan for overcoming them – and knows how to proactively address developing concerns. The right depositary will hold you accountable for progress against challenges, escalate concerns when there is inertia or lack of commitment to addressing problem areas,and be willing to make recommendations on potential corrective actions.

The Benefits of Integrated Depositary Services

An important consideration in choosing your partner is to examine the benefits of choosing an integrated provider. Because an integrated service provider can seamlessly coordinate with fund administration, accounting, and your transfer agent through practical information sharing on the back end, you save time by not having to send the same data to multiple providers and you create less room for error. Because they will have relationships across your organization, an integrated provider will ultimately gain a deeper, more comprehensive understanding of your fund profile, your processes, and your needs than a standalone provider.

Gen II: Your Answer for Unconflicted, Objective Depositary Services

At Gen II, we pride ourselves on our ability to provide unconflicted, objective independence that is combined with a commitment to professional relationship building and the collaboration necessary for a successful depositary services partnership. Our continuous oversight and monitoring are tailored based on the nature, scale, and complexity of your strategy and your organization. These factors coupled with our active industry engagement and intimate understanding of the regulatory requirements make us a worthy choice to fulfill your depositary requirements, safeguard the end investor’s interest, and protect your brand.

If you have questions, contact your Client Service Manager or contact us.



Published on: April 2, 2024

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