The new rules are causing significant effects on the hedge fund sector, but administrators who invest in expertise and technology to help their clients are finding themselves well placed to make the most of the opportunities, as Monette Windsor describes.
As managing director of UBS Fund Services, the largest fund administrator in the Cayman Islands, I’ve noticed that I’ve been spending a significant amount of time recently dealing with changes that are affecting the global funds industry.
When I looked back at my calendar, over the past quarter I attended 53 meetings, of which 24 related to pricing, custody, net asset value (NAV) calculations and other fund administration issues. A surprising 28 related to regulatory matters; of those, 12 concerned the Alternative Investment Fund Managers Directive (AIFMD), 10 the Foreign Account Tax Compliance Act (FATCA) and the remainder other current or proposed regulations.
One outcome of all these meetings has been that these new regulations present significant opportunities for fund administrators. By making a substantial investment and expanding our suite of regulatory services, we can strengthen our partnerships with existing clients and attract new business.
I was recently speaking with a CFO of a large hedge fund manager who was finding it increasingly difficult to keep up with all the regulatory reporting his funds needed to comply with. He estimated that his operations team reported more than 400 data points to various regulators each quarter. Although the same question may be asked on several different reports, the answers could differ depending on various factors.
For example, the NAV of a fund as of March 31 could be different if it was reported on April 15 or 30, as more current information may become available. Different regulators and their respective reports could also have various definitions and criteria which could change the outcome of an answer. Not only is it important for managers to be able to collect, calculate and report their answers, they must also be able to track what was reported at which point in time on each report, and be able to support their figures and assumptions should they be audited.
A natural fit
Many managers are looking to their administrators to help them with their regulatory reporting. Administrators are a natural fit, as the majority of their funds’ information and data is already housed in their systems. Managers must ask themselves many questions with regard to partnering with their administrators for regulatory reporting:
Do they want their administrators to prepare the entire report, and provide answers to populate the report, or just give the raw data so managers can do the calculations themselves?
If they deal with more than one administrator, how and where can the information be consolidated?
How much of their internal costs related to regulatory reporting will their investors allow to be charged back to the fund?
Similarly, if they outsource regulatory services, how much of these costs will their investors allow to be charged back to the fund?
By finding the right partner and having an open dialogue, managers can find the optimal outsourcing model for their regulatory reporting needs.
"Administrators can perform many of the functions for fund managers regarding FATCA as they already process investor transactions and track underlying anti-money laundering/know your customer data."
In addition to reporting, managers are also looking to administrators to provide new service lines with respect to regulations. For example, administrators can perform many of the functions for fund managers regarding FATCA as they already process investor transactions and track underlying anti-money laundering/know your customer data. Administrators are now being contracted to perform further tasks such as retroactive reviews and remediation for existing investors.
Due to the intricacies of the FATCA regulations, administrators must have tools and procedures in place to perform a system-based review for all investors, as well as a manual review in certain cases. The reviews as well as the remediation steps and results must be clearly documented, as they could be audited.
For new investors, administrators will also be reviewing and classifying each investor for FATCA purposes. Again, the complexities of the FATCA regulations and the new tax forms require system-based tools and expertise to ensure proper classification of each investor. Furthermore, systems and reporting will need to be customised based on the requirements of the regulator that each fund must report to.
For example, for a Cayman-domiciled fund, the reporting will go directly to the Cayman Islands Monetary Authority, because the Cayman Islands and US government have signed a Model 1 IGA. Some administrators are also contracting with funds to provide sponsoring entity services for FATCA.
CFOs and CCOs of hedge funds may find that contracting with their administrator to provide sponsoring entity and other FATCA services will be a very attractive option. This may be especially true for non-US managers, who do not have previous experience dealing with the US regulators. With the UK’s ‘son of FATCA’ hot on the heels of the US FATCA, as well as the similar initiative from OECD countries on the horizon, there will be even more demand for this type of regulatory assistance in the future.
The AIFMD effect
The AIFMD regulations in the European Union are also having a material impact on the hedge fund industry. EU managers are looking for solutions for their funds that are domiciled in the EU, Cayman Islands or other jurisdictions. It is also affecting non-EU managers, including those in the US, who historically have marketed their funds in the EU.
Administrators are being asked to provide a variety of AIFMD solutions to their clients. Some administrators are expanding their repertoires to offer management company services and depository services. By leveraging the experience and expertise of our colleagues in UBS’s Ireland and Luxembourg offices, UBS Fund Services has developed comprehensive procedures and controls in order to provide ‘depository-lite’ services from our Cayman Islands office. As we’re able to provide this service to funds administered by ourselves as well as third parties, we’ve been successful in getting referrals from on-island administrators that do not offer these services. By marketing this new service to existing clients and new prospects we’re able to increase revenues, as well as jobs, in the Cayman Islands.
The significant new regulations that have recently impacted alternative funds and their managers have resulted in unique opportunities for the Cayman Islands hedge fund industry. Managers are leveraging their administrators’ systems and expertise for regulatory reporting. They are also looking to their Cayman Islands administrators to provide new services such as sponsoring entity FATCA services and AIFMD depository-lite solutions.
Administrators who have made the necessary investments in expertise and technology to provide regulatory assistance to their clients are finding themselves well poised to capitalise on these current and future opportunities.
Monette Windsor is managing director of UBS Fund Services in the Cayman Islands. Originally from Vancouver, Canada, she came to the Cayman Islands in 2000 as an auditor with Arthur Andersen and joined UBS in 2002 as a fund accountant. She became the head of the Fund of Funds division in 2006. She can be contacted at: email@example.com
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