Beginning in April 2020, depositaries under the EU Alternative Investment Fund Managers Directive ("AIFMD") must obtain independent legal advice with regard to protections afforded to the assets under the control of U.S. sub-custodians who want to act as delegates of the AIFMD depositary.

AIFMD is the regime that regulates EU managers of unregulated funds. The Alternative Investment Fund Manager is obligated to appoint a single depositary for each Alternative Investment Fund ("AIF") that it manages. As described more fully in a Cadwalader memorandum, the depositary under the AIFMD is responsible for, among other things:

  • ensuring that investor money and cash belonging to the AIF is booked correctly on accounts opened under the name of the AIF;
  • safe-keeping the assets of the AIF; and
  • confirming ownership of all other assets by the AIF.

Delegation and sub-delegation must be objectively justified and must follow strict obligations in relation to the suitability of the third party. The depositary may delegate its safekeeping functions to third parties subject to certain conditions.

To satisfy the selection obligations, a depositary must apply an appropriate documented due diligence procedure to the selection and supervision of the delegate. That specific procedure must be regularly reviewed and made available upon request to authorities. In addition, a depositary must meet various conditions when selecting a third party to whom safekeeping functions are delegated. In relation to exercising these due diligence mandates, new requirements are enshrined in the Commission Delegated Regulation 2018/1681. The purpose of these new requirements is to address issues caused by differences in national insolvency regimes across various non-EU countries.

Cadwalader attorneys stated that in the United States, the disposition of assets in custody upon receivership of the custodian differ based on the nature of the custodian and the nature of the assets in question. As a result of the fragmented nature of U.S. financial services law, each type of custodian has its own statutory regime governing receivership. The nature of the custodian can affect the receivership analysis and the opinion mandated to meet the EU requirements. In addition, securities held by a custodian in all of these receivership regimes are not swept into the receivership estate and are returned to the custodial customer. Cash held by a custodian is a different matter because a cash account can be perceived as a customer "deposit" with the custodian in certain U.S. insolvency regimes.

This memorandum was authored by Scott Cammarn, Ray Shirazi, Nick Shiren, Neil Macleod, and James McDonnell.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.