Recent research on the Alternative Investment Fund Managers Directive (AIFMD) reveals that many GPs are aware of what the directive says and does, but still aren’t feeling confident about their ability to fully comply with the EU law – which goes into effect this July.
Despite knowing the directive’s requirements, roughly two-thirds of fund managers say they’re specifically concerned about AIFMD reporting, according to Confluence, which surveyed GPs (and their administrators) about the directive earlier this year. In fact submitting completed AIFMD reports, which begins in January, was cited as GPs number one concern, edging out other AIFMD challenges like risk management, depository costs and remuneration.
“At the heart of their concern is AIFMD’s requirement for reports to be validated, formatted and posted [quickly],” says Melvin Jayawardana, European market manager at Confluence, an industry software provider.
Multiple EU-based CFOs speaking with PFM say they plan to rely on outside service providers to handle their AIFMD reporting, while others say they’re reviewing their in-house systems to see if all the right data is in place to complete the necessary forms.
The challenge is that AIFMD reporting, known technically as Annex IV, has more than 2,500 data points and most GPs don’t have fully integrated systems that allow all the necessary data to be generated from one place, says Mark Weir, senior vice president at fund administration firm Maples Fund Services.
COMPARISONS TO FORM PF
Some GPs are hoping that significant crossover between Form PF reporting – which US fund managers began recently filing for systemic risk monitoring purposes – and that for AIFMD will help solve some of their reporting burdens. Weir estimates that about 60 percent of the data points in AIFMD submissions will be shared with Form PF reports, but warns that subtle variations between the two including formatting and calculating certain things like risk, leverage and AUM, means that applying the same methodology to the two “could result in incorrect filings”.
But that is not to say fund managers cannot take advantage of the overlap. “In today’s environment regulatory reporting needs to be comprehensive and not operate in a silo. There will be common points that are reported to investors as well as regulators,” says Brandon Caroprese, senior associate at Rothstein Kass.
Caroprese says best practice is to look at regulatory reporting at an enterprise level. “You need to have one central data repository that is storing, normalizing and reconciling all the information relevant to the enterprise. So, investor information, your portfolio level detail, your risk metrics, everything in one data repository so it exists once.”
With a strong data warehouse, a firm’s IT team can generate requests off that information and more easily populate the regulatory forms, says Caroprese. And because the data exists in one warehouse “you don’t need to run multiple extracts to populate multiple forms” – an important feature considering that various regulators will expect reporting information to be consistent across forms, says Caroprese.
GPs too need a certain level of IT sophistication in order to file their Annex IV reports. “It needs to be populated in an XML format and you need somebody with XML expertise and that can be pretty expensive to have someone internally,” adds Caroprese.
NO BLANK ANSWERS
Unlike Form PF, all questions in Annex IV must be answered, regardless of fund type, warn compliance advisors. There are however some subsections tailored to specific investment strategies.
But because AIFMD reporting is something new for both fund advisors and their regulators, it isn’t exactly known what happens if a field is left blank.
“Is there going to be a grace period for getting any of this wrong? Do you get it back with a red cross through it and the FCA saying ‘do it again’?,” asks Seonaid Mackenzie, founder of regulatory incubator Sturgeon Ventures.
A source close to the UK’s Financial Conduct Authority (FCA) says enforcement action probably isn’t the first thing regulators will think of if someone sends an incomplete form. “Not being quite right on the first crack of a massive European policy is different to ripping off old ladies,” the source said.
But it’s still anyone’s guess how different regulators across the EU would respond to a compliance misstep. And making reporting more difficult is that different EU regulators may require different things.
As part of AIFMD, any non-EU fund managers marketing on the continent must file Annex IV as part of each country’s private placement regime. And while AIFMD reporting requirements are broadly similar across jurisdictions, differences do exist, namely that data points are filed in a multicurrency and language format.
Making things more difficult is that not all countries have finished implementing AIFMD into national law ahead of the July go-live date. So far 10 EU countries (including Italy, Spain and Finland) have yet to transpose the directive or even begun drafting legislation to do so.
Some clarity on the issue was provided in March when pan-EU regulator the European Securities and Markets Authority (ESMA) issued reporting guidance that sources expect national regulators to rely heavily on. One point of confusion the guidance helped address was around what language GPs should file their reports in. ESMA recommends that national regulators allow GPs to report information in English, which would allow multinational groups to centralize and harmonize their AIFMD reporting.
But because some national regulators haven’t issued their final reporting guidelines and templates, some GPs are not giving Annex IV their full attention, says James Gee, head of private funds regulation at law firm Weil, Gotshal & Manges.
“We’ve not seen too much evidence of this yet, but if significant divergence did emerge it would be a real problem for non-EU managers privately placing into Europe, says Gee.
Nonetheless, advisors recommend that fund managers work out where exactly Annex IV’s data points sit in their database and then use ESMA’s reporting template to test their ability to complete the form.