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Start doing a dry run for Annex IV reporting, urges SEI’s Henkel

The Annex IV report under AIFMD contains 38 specific questions for the AIFM and over 300 questions for each AIF being passported across the EU. To say that it is a complex beast is an understatement.

“AIFMD regulation is like an onion; the more you peel it back the more you want to cry,” is the candid response of Joseph Henkel, part of the Global Solutions team at SEI’s Investment Manager Services division in Dublin.
As AIFMs gear up to prepare their first filing by 31 January 2015, SEI is urging its clients, both EU and non-EU, to go through a dry run to understand the questions and identify what assumptions, which will likely be numerous, need to be made. Managers should document those assumptions, which will at the very least provide a precursor to possible future challenges in determining what the national regulator is looking for.
‘ESMA hasn’t been too clear on the type of information they are looking for. That’s why we are urging managers to go through a dry run now. If they leave it to January, it may be too late to make any requisite changes. The reporting deadline is a lot tighter than Dodd-Frank’s Form PF. Managers only have 31 days to get their first filing completed,” says Henkel.
Static data collection
Even though managers have been doing a similar reporting exercise to the SEC in the US, estimates suggest that from a data collection standpoint there is only a 60 per cent overlap. Still, managers can commence with aggregating what Henkel refers to as “static data” on the AIFM and the AIF. This includes information related to which EU countries it is marketed to, Legal Entity Identifiers (LEIs), which managers will already have under EMIR reporting obligations, names and classes of each AIF, counterparties being used, borrowing facilities and so on.
“Managers can accumulate a lot of that data now. We’ve already provided clients with a template for the static data questions in Annex IV. Once the manager has compiled the static data they should move on to the security master information,” suggests Henkel.
One of the many nuances of Annex IV, and which highlights the complexity referred to by Henkel above, is that the valuation information on a manager’s investments differs from the information that needs to be derived for reporting purposes.
In effect, managers will be required to use a separate data repository purely for regulatory reporting purposes. And even then, different data sets and templates will be required depending on the type of filing; be it Annex IV, Dodd-Frank, EMIR etc.
This is the “Russian Doll” effect that managers need to get to grips with.
“A lot of what the regulators are looking for in Form PF or Annex IV is information that we, acting as a fund administrator, don’t necessarily need to value a fund’s assets with. One of the things we learned from our early Form PF days is that there are different ways of slicing and dicing the data that the regulators want. Each regulator has their own asset class categories that they want you to tag in their filings.
“At SEI, for example, one of the major asset class categories is common stock. A national regulator might categorise that common stock further by breaking it down into financial equities and non-financial equities. Managers won’t necessarily have that level of tagging within their security master data,” explains Henkel. “Under AIFMD, financial equities might be tagged one way, and a completely different way under Form PF.”
In November 2014, the UK’s financial regulator, the FCA, updated its ‘Reporting Annex IV Transparency Information to the FCA: Questions and Answers’ publication. The FCA has issued guidance to AIFMs that two reports will need to be filed electronically via its GABRIEL system (or by using ESMA’s Annex IV reporting template). These are:

  • AIF001 – Manager report, requiring information on the AIFM
  • AIF002 – Fund transparency report, pertaining to information on the AIF

Challenges to private equity managers
Whilst hedge fund managers have already garnered experience through filing Form PF, for the private equity management community this regulatory reporting exercise in Europe is a whole new ballgame. In short, AIFMD regulation was constructed without due consideration of private equity firms, some of whom have been running strategies for many decades, without any systemic risk issues, yet who now find themselves ensnared.  
Many PE houses still do their own internal administration, often using Excel spreadsheets. Previously, particularly for those with minimal holdings or transactions, this was not a significant problem. In a regulated environment, however, reliance on manual processes is set to become a lot harder. If a regulator comes in and asks the manager to provide an audit trail, they’re going to have a hard time doing that in Excel.
Admittedly, on the data aggregation side, PE managers are not going to find this quite as burdensome due to the fact that their portfolios are not comprised of hundreds, if not thousands of financial instruments being regularly traded. 
“Nevertheless, they still have to be able to pull data out on each investment within the private equity vehicle and disclose various aspects of these investments within the reporting framework,” says Henkel.
“A lot of the PE managers we speak to say that they intend to take on the reporting requirements for this coming year-end, to get an understanding of what’s involved, and will look to then use a third party Annex IV reporting solution next year. That’s something that we saw with our Form PF solution. Clients took it upon themselves to do the first reporting cycle to determine what was needed and find out what was involved, saw how much of a pain it was, and that led to us getting a 200 per cent increase in the number of clients between the original filing in December 2012 and the December 2013 filing.”
Many of SEI’s clients who appointed them to provide the Form PF solution have since signed up to avail of their Annex IV solution. Even though a lot of PE firms might continue to do in-house administration, AIFMD will undoubtedly push them to outsourcing Annex IV reporting, particularly in light of the fact that they will also need to appoint an independent depositary. By offering both services as a value-add, administrators such as SEI are hoping to support the PE community as they adjust to this new life of regulatory oversight.
Use estimated valuations now, then file a final version
For most PE firms, Q3 valuation data is still being finalised. Given that the first filing is due 31 January 2015, they will have no time to submit the Annex IV report using accurate Q4 valuation data as it won’t be completed.
“One of the assumptions we’re putting into the filing is that we’re basing the initial report on September valuations. Then we will help the manager to file a second, up-to-date report, based on December’s valuations, in February,” confirms Henkel.
This is just one example of how assumptions are making Annex IV such a minefield for managers to navigate through. Henkel says that for one mid-sized client, with whom SEI is well down the line in terms of completing the dry run, approximately 60 assumptions have been made. These assumptions, says Henkel, are being used as a way to communicate to the regulators, ‘This is what we have done, this is the data we have used with as much due diligence and care as possible’.
“There were assumptions that we also needed to make with Form PF. However, the difference to Annex IV is that you’re only filing to one entity, the SEC. Here in Europe, you have the FCA in the UK using Annex IV version 1.1 whereas the rest of the EU is using Annex IV version 1.2. It may sound like it is just a slight nuance, but there are differences that further add to the complexity for the reporting AIFM.
“Also, whereas with Form PF where we can file on behalf of the manager, because there are so many requirements with Annex IV, we can only facilitate the output creation. It’s then down to the manager to file the report on time,” clarifies Henkel.
Frequency of reporting: quarterly, semi-annually or annually?
ESMA has provided the following guidance on the methodology for calculating EU AuM for Annex IV:

  • To determine the ‘threshold’ for Annex IV reporting, AIFMs should include assets of all AIFs under management whether EU-based or marketed in the EU;
  • For purposes of determining the “Frequency” of reporting under Annex IV, non-EU AIFMs should only include the assets of the AIFs that are marketed in the EU and apply that to all Member States.

Touching on that last point, this is a recent development that has caught U.S. managers out.
Speaking to Hedgeweek recently, Mario Mantrisi, Senior Advisor to the CEO and Member of the Executive Board at KNEIP, one of the industry’s long-standing legal and regulatory report providers, commented: “A U.S. manager targeting the UK and the Netherlands, for example, will have to report to both regulators. The surprise is that ESMA has said that to determine the frequency of reporting—which depends on the AuM of the manager – a consolidated AuM position must be taken. That US manager might have EUR500mn in the UK and EUR500mn in the Netherlands, which ordinarily would equate to two Annex IV reports a year. However, an aggregate AuM of EUR1bn means that the frequency of reporting becomes quarterly rather than semi-annually.”
Determining the frequency of reporting requires a decision tree methodology based on whether the manager is EU based or non-EU based. The total assets of the manager will be considered, referred to as regulatory AuM, as well as the size of the AIF, the manager’s status (EU or non-EU), whether they are employing leverage or not in the fund, and the type of assets being held in the fund.
Broadly speaking, the frequency of reporting can be broken down as follows:

  • AuM is EUR100mn – EUR500mn (unleveraged): Semi-annual
  • AuM is more than EUR1bn: Quarterly
  • Any single AIF exceeds EUR500mn – Quarterly
  • De minimis managers with less than EUR100mn: Annually

“Provided total assets under management in the management company are less than EUR1bn this will require an annual report, both for the manager report and the AIF report. If the manager’s AuM exceeds EUR1bn, they will be required to make a quarterly filing.
“However, the frequency of reporting is based on regulated AuM.  Managers that are trading derivatives need to be aware of this issue. The fund’s NAV might be EUR400mn, for example, but the manager’s regulated assets might total EUR5bn, in which case they would face quarterly, not semi-annual, filings. Managers need to be aware that the frequency of reporting is based on notional value not net asset value,” states Henkel.
The SEI Annex IV solution
One of the biggest benefits that SEI offers its clients is that, from a compliance perspective, its team is able to project manage the entire process, right up to final filing.
Not only do they coordinate with the manager, they set up dry runs and go through any questions that arise from that process and document everything for the manager to see where they’ve derived the information.
“We coordinate with all the different parties to make sure the report is fully compliant. Our staff is familiar with the regulation and not only that, they can impart their experience of doing filings for other clients to give each manager more of a consultative approach; ‘here’s what we’ve done with a similar client, and this is how we addressed issue X’,” says Henkel, noting that the team is able to leverage the work it has done with clients on Form PF.
“To do a dry run under Annex IV, we already have a lot of the security master data in place from doing Form PF filings. There’s also a lot of investor transparency data that the regulators are looking for; entity type, terms and conditions, side letters. All of this information needs to be reviewed. There are synergies between Annex IV and Form PF not just on the portfolio investment side, but also on the investor side as well.”
For PE managers in particular, they will no doubt need assistance on regulatory reporting and depositary requirements. If they still intend to do the administration in-house, SEI can offer value-added services such as Annex IV with minimal disruption.
Something that all alternative managers will welcome as they dry away the tears.

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