Fund depositary requirements in Estonia

A depositary is the independent institution that holds a fund's assets in custody, monitors its cash and checks that the manager runs the fund according to the law and the fund rules. For a fully authorised alternative investment fund manager (AIFM) it is not optional, and finding one is often the step that decides when a new Estonian fund can launch. This guide explains when an Estonian fund needs a depositary, who may act as one, what the depositary does, how its liability works and how to plan the appointment. Our fee for supporting the depositary appointment is on the fund licensing page.

The rules come from the Investment Funds Act (investeerimisfondide seadus, IFS) in Riigi Teataja and Article 21 of Directive 2011/61/EU (AIFMD) in EUR-Lex. The guide is general information, not legal advice.

When a depositary is required

Under IFS § 285(1) every fund must have a depositary, except a fund managed by a small fund manager and a non-public fund managed by a UCITS management company (IFS § 285). At EU level, Article 21(1) of the directive requires an authorised AIFM to ensure that a single depositary is appointed for each fund it manages, and Article 21(2) requires the appointment to be evidenced by a written contract.

In practice this means:

• a fund managed by a full fund manager needs a depositary before it launches;
• a fund managed by a small fund manager — registered or licensed — does not have to have one, although professional investors sometimes ask for one as a condition of investing.

Our guide on small AIFM versus full AIFM explains which manager route you are on.

Who may be a depositary

For an Estonian fund, IFS § 286(1) allows a credit institution or an investment firm to act as depositary. The depositary of a fund established in Estonia must be entered in the Estonian commercial register as a public limited company or as the branch of a foreign company (§ 286(2)). Article 21(3) of the directive gives the same basic list at EU level — credit institutions and investment firms authorised in the Union, and certain other supervised institutions.

There is one important alternative for closed-ended private funds. Under IFS § 286(4), a non-public alternative fund whose units or shares cannot be redeemed for five years from its establishment, and whose investment policy does not generally invest in securities traded on a regulated market, may appoint as depositary another legal person that performs depositary functions as part of its professional or business activity subject to mandatory professional registration. The directive allows Member States to offer this option for such funds in the last subparagraph of Article 21(3). For private equity, venture capital and real estate funds this can widen the choice considerably, because a bank is not the only candidate.

Two parties are excluded to avoid conflicts of interest. The AIFM itself may not act as depositary, and a prime broker acting as counterparty to the fund may do so only if it has functionally and hierarchically separated its depositary functions from its prime brokerage and manages the conflicts (Article 21(4)).

The depositary of an EU fund must be established in the fund's home Member State (Article 21(5)). An Estonian fund therefore needs a depositary established in Estonia.

What the depositary does

The directive gives the depositary three groups of duties.

• Cash flow monitoring. The depositary ensures that the fund's cash flows are properly monitored — in particular that investors' subscription payments have been received and that all the fund's cash is booked on accounts opened in the name of the fund, the manager acting for the fund or the depositary acting for the fund (Article 21(7)).
• Safekeeping. Financial instruments that can be held in custody are held by the depositary, registered in segregated accounts in its books. For other assets — for example shares in private companies or real estate — the depositary verifies that the fund owns them and keeps an up-to-date record (Article 21(8)).
• Oversight. The depositary checks that the issue, redemption and cancellation of units, the valuation of units, the timely remittance of consideration and the application of the fund's income follow the law and the fund rules, and it carries out the manager's instructions unless they conflict with them (Article 21(9)).

The depositary acts honestly, fairly, professionally, independently and in the interest of the fund and its investors.

Liability

A depositary is liable to the fund or its investors for the loss of financial instruments held in custody, by itself or by a third party to which custody has been delegated. In that case it must return a financial instrument of the same type, or the corresponding amount, without undue delay; it escapes liability only if it proves that the loss arose from an external event beyond its reasonable control (Article 21(12)). This strict liability is one reason depositaries review new funds carefully and price their services according to the assets and the structure.

Planning the appointment

For a new manager the depositary should be approached early, in parallel with the authorisation file, not after it. What a depositary usually wants to see:

• the fund's strategy, target assets, expected size and investor base;
• the draft fund rules or articles, and the valuation policy;
• the manager's governance, risk management and anti-money-laundering procedures;
• the flow of money — where subscriptions arrive, where the fund's accounts are held, how distributions are paid.

The depositary agreement then sets out the flow of information, the fees and the procedures between depositary, manager and fund. The depositary's fees are a third-party cost of the fund; they are not part of our price.

Common problems

• Assets the depositary cannot hold. Funds investing in crypto-assets, unusual derivatives or assets in unusual jurisdictions may find fewer depositaries willing to accept them.
• Unclear cash flows. A structure where investors pay into the manager's own account, not the fund's, will not pass the cash monitoring duties.
• Late approach. A manager that is authorised but has no depositary cannot launch a fund that needs one.
• Wrong location. For an Estonian fund the depositary must be established in Estonia.

How we help

Our depositary appointment add-on covers preparing the depositary information pack, coordinating the depositary's due diligence, and reviewing the depositary agreement against the fund documents and the Investment Funds Act. It fits both the full AIFM authorisation and small manager projects whose investors ask for a depositary. We do not act as depositary ourselves and cannot promise that any institution will accept the appointment; that is the depositary's decision.

Delegation of custody

A depositary may delegate safekeeping to a third party, for example a sub-custodian in another market, only under the conditions set in Article 21(11) of the directive: the tasks may not be delegated to avoid the directive's requirements, there must be an objective reason, and the depositary must exercise due skill, care and diligence in selecting and monitoring the delegate. Delegation does not by itself relieve the depositary of its liability for the loss of financial instruments held in custody. For a fund investing across several markets, the depositary's network of sub-custodians is therefore part of the decision.

What a depositary costs

Depositaries charge for their own work and risk, usually as a combination of a fixed minimum and a percentage of the assets, with extra charges for transactions and cash monitoring. The price depends on the type and location of the assets, the number of investors and the complexity of the structure. It is a cost of the fund and is described in the fund documents; it is never included in our fee.

Frequently asked questions

Related guides

• Estonian AIFM licence
• Small AIFM or full AIFM in Estonia
• Estonian fund structure