Depositary and safekeeping

Application of FUND 3.11

The chapter applies through a table at FUND 3.11.2R, not as a block. Appointment, eligibility, conflicts and the contract bind the manager. The functional duties bind the depositary: cash monitoring, safekeeping, record-keeping and oversight.

FUND 3.11.4R requires a single depositary for each UK AIF, with the fund's assets entrusted to it for safekeeping. An AIFM of a non-UK AIF or non-UK feeder AIF marketed in the UK instead ensures those four duties are carried out by one or more entities other than itself, and tells the FCA who they are (FUND 3.11.33R).

The closed-ended route and group conflicts

An AIFM must not act as depositary or as a delegate of the depositary, and a prime brokerage firm acting as counterparty may act as depositary only on functional and hierarchical separation, with the conflicts identified, managed, monitored and disclosed to investors (FUND 3.11.7R). An AIFM and a depositary of an unauthorised AIF may come from the same group only where conflicts are avoided and there is sufficient organisational separation (FUND 3.11.6G).

Custody assets and record-keeping assets

Both limbs must be met. Assets failing either sit under FUND 3.11.23R, where the depositary verifies ownership from information or documents provided by the AIF or AIFM and, where available, external evidence, and keeps an up-to-date record. It does not hold them. FUND 3.11.24R prohibits reuse of the fund's assets without the prior consent of the AIF or of the AIFM acting for it.

Liability and contractual discharge

The liability standard is not in the Handbook. The strict standard, the obligation to return an identical financial instrument or its corresponding value, and the conditions for a contractual discharge sit in the AIFMD UK Regulation (SI 2013/1773) at regulations 29 to 32, not read at source for this course.

A transfer of liability requires a written contract between depositary and fund expressly allowing it and establishing an objective reason. The third-country discharge additionally requires the fund's rules or instruments of incorporation to allow it expressly, and investors to have been told of the discharge and its justifying circumstances before they invested.

Delegation of safekeeping

FUND 3.11.26R prohibits delegation of depositary functions, carving out supporting administrative or technical tasks. Only the two safekeeping functions may be delegated, on these conditions:

• the tasks are not delegated to avoid the requirements, and there is a demonstrable objective reason;
• all due skill, care and diligence in selection, and continuing in periodic review and ongoing monitoring of the delegate and its arrangements;
• structures and expertise proportionate to the assets entrusted;
• for custody of AIF custodial assets, effective prudential regulation including minimum capital requirements, supervision in the jurisdiction concerned, and an external periodic audit confirming the instruments remain in custody;
• segregation of depositary clients' assets from the delegate's own and from the depositary's; and
• no use of the assets without prior consent and prior notification.

FUND 3.11.29R relaxes the prudential limb alone, on five cumulative conditions, where the law of a third country requires local custody and no local entity satisfies it. The same requirements apply to any sub-delegate.

Proposed UK rules and the EU position

Medium and large UK AIFMs would still appoint a depositary for each UK AIF. Small AIFMs would not, and would comply with CASS 6, with the option of appointing one without otherwise becoming a medium UK AIFM (CP26/28 13.15 to 13.17). The single depositary requirement would give way to a split model, with the oversight depositary required to keep a record of ownership of all assets, custodial or not (13.28). A firm crossing into medium or large would have 6 months from notification for the new obligations and 12 months to appoint a depositary, those CASS rules applying meanwhile (2.18).