Private investment fund banking has evolved over the past decade as investor demand for financial controls on money movement has steadily increased. If properly structured, the establishment of bank accounts and related services to handle the flow of investor subscriptions/redemptions, fund investments, and fund expenses can be quite simple and painless.
However, there are some common mistakes invest- ment managers make when establishing such accounts that often lead to issues. As a banking professional cov- ering the alternative investment management industry for the last seven years, I have developed a solid under- standing of private investment fund banking. In this article, I’ve highlighted some best practices for establishing private investment fund bank accounts.
As part of its investor services offering, third-party fund administrators have an active role in ensuring the proper security controls are in place for all money movement. It is therefore important for the fund administrator and fund bank to have a solid working relationship. The fund administrator must have confidence that the bank has the technology, product and service offering necessary in order to meet the money movement control protocol it has laid out in its suite of investor services.
Examples of these controls are: segregation of du- ties for money movements, dual approval requirement for entitling online banking users for money movement rights, prohibiting certain banking transactions such as branch/teller withdrawals, and prohibiting ACH debits.
Ensuring the fund administrator and fund bank have a solid relationship also makes the bank onboarding process more efficient. If there is an active working relation- ship between the two firms, the fund administrator will be very familiar with the bank’s requirements and processes and will often assist in the onboarding process. This allows the manager to focus its time and efforts on the many other tasks at hand before the fund launch.
Banks covering the alternative investment management industry have differing client acceptance policies and target markets. It is best practice for the fund management company principal(s) and the bank to have an open conversation upfront regarding the bank’s policies and target market to avoid the needless submission of information and documentation.
Also, it is important to confirm the bank has finalised its client acceptance process before distributing the private placement memorandum (PPM) to investors containing the bank account wire instructions. It is not uncommon for banks to open deposit accounts and distribute account wire instructions before they’ve completed due diligence and have determined whether or not the fund vehicle is a suitable client. This can lead to serious issues if the fund manager has distributed a PPM listing the bank name and wire instructions before the due diligence process is complete.
If the bank ultimately decides the client is not suitable, the account is closed and the manager is then forced to scramble to find a new fund banking partner, amend the PPM to reflect the new banking instructions, and ex- plain the situation to its investors. This is obviously not the type of conversation a manager wants to have with its new investor base.
It is best practice to establish fund bank accounts and services with a dedicated fund banking group. I have experienced countless cases where a fund management company principal opens fund bank accounts with the wrong line of business within a bank. Most commonly, the principals will walk into a local branch to open an account. These accounts are generally housed within the bank’s retail line of business. When the branch manager notices the significant swings in account balances, the accounts are typically either closed or an internal account transfer attempt is made.
The other common scenario is that a fund management company principal will choose to open the fund bank account with his or her private banker or business banker. Often that private banker or business banker will be unaware that the bank has a policy mandating that all private investment fund bank accounts be held with the dedicated fund banking group. When bank management or compliance discovers the account, the account typically must be closed or a transfer attempt is made.
Article originally posted on www.hfmweek.com
About the author:
Joe Christian is managing director and head of the wintrust funds group, a chicago-based banking group with a focus on the alternative investment management industry. christian created the group in 2011 after nine years of employment with J.p. morgan.