AIFMD’s Annex IV – Are Hedge Fund and Private Equity Fund’s Prepared? Investors may have heard rumblings lately in the hedge fund and private equity communities about something called Annex IV. If you a US based investor you may not even have come across the term yet or know why it is being discussed. Complicating the matter further is an alphabet soup of regulatory abbreviations surrounding the term. Here is a quick primer on the issue and why it is important for both US and non-US investors to know about this issue. Is Annex IV the Same As Form PF? Annex IV is a regulatory filing that is part of the Alternative Investment Fund Managers Directive (“AIFMD”). Under the AIFMD regime, if you are a fund manager looking to market a fund, referred to as an Alternative Investment Fund (“AIF”) in the AIFMD world, in Europe then you most likely need to fill out some variation of Annex IV. The form must be filed with a so-called Nationally Competent Authority (“NCA”) in each EU country where marketing is conducted, such as with the Financial Conduct Authority (“FCA”) in the UK. It is also worth nothing that investors are not alone in confusion surrounding Annex IV. To provide some clarity, the FCA recently published a guide for fund managers for reporting under Annex IV. Further complicating the matters is that the actual process of filing the form out is also still being finalized. In the UK the FCA is anticipated to allow filing electronically via its GABRIEL system beginning this month. Filing may also be completed by completing the European Securities and Markets Authority (“ESMA”) Annex IV reporting template. From the perspective of largely US based funds, many have compared Annex IV to the US SEC’s Form PF. Indeed there are many similarities between the two including varying levels of form completions based on asset under management eligibility criteria, sometimes known as Regulatory Assets Under Management (“RAUM”) . Also similar to Form PF there have been reports of fund managers grumbling about how a firm’s use of leverage can distort the RAUM figure and make them seem larger than they actually are. Why do funds care about this? Wouldn’t showing higher asset levels be considered a good thing? Not necessarily from a regulatory perspective as there are more robust filing requirements for larger institutions, referred to in AIFMD speak as Systemically Important Financial Institutions (“SIFIs”). Another similarity between Annex IV and Form PF are different filing deadlines for different institutions. Some firms have to begin filings this month and eventually all eligible firms have to report by January 31, 2015.
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The types of data collected is also somewhat similar including details of :
Markets traded by the funds
Portfolio diversification including details of large concentrations and top holdings
Investment strategies and markets traded
Based on these similarities some managers have sought to take short cuts and simply copy the data from Form PF into Annex IV. This article from COO Connect outlines however, that this should not be done on a wholesale basis and due to issues such as the way data is grouped differently on the forms only approximately 60% of the information overlaps. Also similar to Form PF, once the initial Annex IV filings are complete there are also ongoing filing requirements. Putting the technicalities aside here is general summary of the ongoing filing deadline:
Between €100 million and €500 million – annually ongoing filings
Between €500 million and €1 billion: semi-annual ongoing filings
Over €1 billion – quarterly ongoing filings
Annex IV Operational Due Diligence Considerations From an operational due diligence perspective some questions investors may want to ask your fund manager relating to Annex IV include:
Are your required to fill out Annex IV? If not, why?
If yes, what is your plan to handle to the initial Annex IV filings?
Have you worked with domestic and European legal counsel or a compliance consultant to assist in completing the Annex IV filings?
Have you discussed any increased data collection and reporting requirements necessary to complete the filings with fund trading counterparties and third-party service providers such as prime brokers and administrators?
Have you begun to collect any data, static or otherwise, for the filing so far? If not, when do you plan to start?
Have you gone through the exercise of comparing what data from Form PF you may be able to use for Annex IV?
What is the plan for ongoing Annex IV filings?
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How much do you estimate the time and resources spent on the initial Annex IV filing will cost?
Are you working with any third-party firms to assist in completing the filings?
Will the expenses for initial and ongoing Annex IV filings, sometimes referred to as offsetting, be passed onto investors as a fund expenses or will they be a management company expense? Is this consistent to the way other compliance expenses such as Form PF have been handled?
Annex IV is simply the latest development fund managers operating in a global environment must navigate. With the steady growth of global financial regulation and compliance requirements through efforts such as AIFMD, it increasingly important for investors to take measures during the due diligence process to learn not only how fund managers are meeting these challenges but also whether investors are sharing the bulk of the expenses for fund compliance. Originally posted on the Corgentum Consulting blog at www.Corgentum.com/blog For More Information
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About Corgentum Consulting Corgentum Consulting is a specialist consulting firm that performs operational due diligence reviews and background investigations of fund managers and directors. The firm works with investors including fund of funds, pensions, endowments, banks and family offices to conduct the industry's most comprehensive operational due diligence reviews. Corgentum's work covers all fund strategies globally including hedge funds, private equity, real estate funds and traditional funds. The firm's sole focus on operational due diligence allows Corgentum to ensure that the firm's clients institute best practice due diligence and avoid unnecessary operational risks. For more information visit www.Corgentum.com
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