The Crucial Role of Depositaries in AIFMD Compliance and Fund Administration Oversight

In the complex landscape of alternative investment funds (AIFs), ensuring robust oversight and compliance is critical. The Alternative Investment Fund Managers Directive (AIFMD) sets forth comprehensive regulatory requirements designed to enhance investor protection and reduce systemic risk. Central to this regulatory framework is the role of the depositary, which serves as a key player in overseeing fund administrators and ensuring adherence to AIFMD standards.
Understanding the AIFMD Framework

The AIFMD, adopted by the European Union in 2011, aims to regulate managers of alternative investment funds, including hedge funds, private equity funds, and real estate funds. One of its core mandates is to safeguard the interests of investors through stringent oversight mechanisms. This is where the role of the depositary becomes indispensable.
The Depositary’s Responsibilities

A depositary under the AIFMD is entrusted with a range of critical duties, primarily focusing on the oversight of the fund’s operations and ensuring that the fund complies with applicable laws and regulations. Key responsibilities of a depositary include:

  1. Safekeeping of Assets: The depositary is responsible for the safekeeping of the fund’s assets. This involves ensuring that the assets are properly registered and segregated, and that they are protected against fraud and misappropriation.
  2. Monitoring Cash Flows: The depositary must oversee the fund’s cash flows, ensuring that all payments and receipts are accurately recorded and monitored. This oversight helps to prevent mismanagement and ensures transparency in the fund’s financial operations.
  3. Oversight Duties: The depositary ensures that the net asset value (NAV) of the fund is accurately calculated and is in compliance with the fund’s valuation policy. Additionally, the depositary verifies that investor subscriptions, redemptions and transfers are processed in accordance with the fund’s constitutive documents.
  4. Regulatory Compliance: Ensuring that the fund complies with all relevant laws, regulations, and fund rules is a critical function of the depositary. This includes verifying that the fund’s investments are in line with its stated investment strategy and that all regulatory reporting requirements are met.
Importance of the Fund Administrator

The fund administrator plays a crucial role in the day-to-day operations of an AIF, handling tasks such as accounting, valuation, and investor reporting. The accuracy and efficiency of the fund administrator’s work are essential to the overall health and transparency of the fund. Given the pivotal role of the fund administrator, the depositary's oversight is vital to ensure that these operations are conducted with integrity and in compliance with regulatory standards.
Oversight of the Fund Administrator

The depositary’s oversight of the fund administrator involves several key activities:

1. Monitoring Valuation Processes: The depositary ensures that the fund’s assets are valued accurately and in accordance with the applicable valuation policies and procedures. This involves:

  • Reviewing the methodology used for asset valuation.
  • Verifying the independence and objectivity of valuation agents.
  • Ensuring that valuation adjustments are justified and well-documented.

2. Verification of Transactions: By verifying the fund’s transactions, the depositary ensures that all trades and investment activities are conducted properly and are in line with the fund’s investment mandate. This includes:

  • Checking trade confirmations and settlement instructions.
  • Ensuring that all transactions are recorded in a timely and accurate manner.
  • Monitoring for any unauthorized transactions or deviations from the investment policy.

3. Reconciliation of Accounts: The depositary conducts regular reconciliations of the fund’s accounts to ensure that all cash and securities transactions are accurately reflected in the fund’s records. This helps to:

  • Identify and resolve any discrepancies between the fund’s records and those of counterparties.
  • Confirm the accuracy of the fund’s cash balances and holdings.
  • Ensure that all corporate actions, such as dividends and interest payments, are correctly processed.

4. Risk Management Assessment: The depositary assesses the effectiveness of the fund administrator’s risk management processes. This involves:

  • Evaluating the controls in place to manage operational, liquidity, and market risks.
  • Reviewing the fund’s risk management policies and procedures.
  • Ensuring that the fund operates within its risk parameters and that any breaches are promptly addressed.

5. Compliance with Regulatory Requirements: The depositary ensures that the fund administrator adheres to all relevant regulatory requirements, including:

  • Monitoring compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.
  • Ensuring timely and accurate regulatory reporting.
  • Overseeing the implementation of any regulatory changes that impact the fund’s operations.

6. Investor Reporting: The depositary ensures that the fund administrator provides accurate and timely information to investors. This includes:

  • Reviewing periodic reports, including financial statements and performance reports.
  • Ensuring that disclosures are clear, accurate, and comply with regulatory requirements.
  • Verifying that any fees and expenses charged to the fund are justified and appropriately disclosed.
Conducting Oversight: On-Site Visits and Desk-Based Reviews

The oversight of a fund administrator by the depositary is executed through a combination of on-site visits and desk-based reviews:

  • On-Site Visits: These are conducted periodically to physically inspect the operations of the fund administrator. During these visits, the depositary reviews documentation, meets with key personnel, and assesses the physical security and operational processes. On-site visits provide a hands-on approach to verifying compliance and identifying potential issues.
  • Desk-Based Reviews: These involve regular and systematic examination of the fund administrator's records and reports from the depositary’s office. This includes reviewing transaction records, reconciliations, valuation reports, and compliance documentation. Desk-based reviews enable continuous monitoring and ensure that any irregularities are quickly identified and addressed.
Reporting to the Board

A critical aspect of the depositary’s role is to report its findings to the fund’s board of directors. This involves:

  • Regular Reporting: Providing periodic reports to the board that summarize the results of oversight activities, including any discrepancies, compliance issues, and recommendations for improvements.
  • Risk Alerts: Issuing alerts to the board in case of any significant risks or breaches detected during oversight activities, ensuring that appropriate corrective actions are taken promptly.
  • Audit Support: Assisting the board during internal and external audits by providing detailed records and evidence of compliance with AIFMD requirements.
Enhancing Investor Confidence

The rigorous oversight provided by depositaries under the AIFMD framework significantly enhances investor confidence. By ensuring that funds adhere to high standards of transparency, accountability, and regulatory compliance, depositaries play a vital role in protecting investors and maintaining the integrity of the alternative investment industry.


In conclusion, the depositary’s role under the AIFMD is pivotal in overseeing fund administrators and safeguarding the interests of investors. Through meticulous oversight of asset safekeeping, transaction verification, valuation processes, and regulatory compliance, depositaries ensure that alternative investment funds operate with the highest levels of integrity and transparency. By reporting their findings to the board, depositaries facilitate informed decision-making and robust governance. As the alternative investment landscape continues to evolve, the importance of the depositary’s role in maintaining investor trust and regulatory compliance cannot be overstated.

Rachel Ferrante
Depositary manager

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