The administrator and the depositary verify different things, and the register reads which.

A fund's register reads two names in the memorandum's list of service providers and takes comfort from both, and the comfort is often for the wrong thing. The administrator keeps the register of holders, computes the net asset value from the valuations it is given, issues the drawdown and distribution notices, runs the waterfall, prepares the accounts and reconciles the cash. It verifies arithmetic. The depositary, or the custodian where the regime uses that name, holds the fund's assets or the documents of title to them, verifies that the assets the fund says it owns exist and are the fund's, monitors the cash flows, and in some regimes oversees the manager's compliance with the constitution. It verifies existence and ownership. A private fund in a register jurisdiction may be required to have an administrator and not a depositary, or may be exempt from both, or may appoint one firm to do parts of each, and the register that reads the memorandum's list learns which by reading what each was engaged to do rather than what it is called.

This note sets out what each verifies and what neither does, the administrator's functions, the depositary's functions, the regimes' requirements for private funds, the exemption and what it removes, the one firm doing both, the fund of holding companies and the depositary's reach, the valuation's place between them, the cash monitoring, the engagement letters and their scope, the liability and the reliance, the lender's reading, the onshore interface, a comparison, a worked appointment as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What each verifies

The administrator takes the valuations the valuer gives, the cash balances the banks confirm, the transactions the manager instructs, and the constitution's economics, and computes: each holder's units, contributions, distributions and balance; the net asset value per unit; the charge; the waterfall; the accounts. Its verification is that the arithmetic is right on the inputs it received. It does not verify that the inputs are true.

The depositary takes the fund's record of what it owns and checks it against the world: the share certificates or the registrar's entries for the holding companies, the title deeds or the registry extracts for the onshore assets, the bank confirmations for the cash, the facility documents for the debt. Its verification is that the assets exist, are registered to the fund or its vehicles, and are not encumbered beyond what the fund disclosed. It does not verify that they are worth what the valuer says.

Neither verifies that the manager's investment decisions were good, that the valuation is right, or that the constitution's process was followed, except where the depositary's oversight function in a regime reaches the last.

Why the names mislead

The two names are read as a pair because public funds have both and the memorandum's list presents them as a pair. A register that has subscribed to public funds brings the expectation that the administrator is the books and the depositary is the assets, and both are there. A private fund's list may carry an administrator alone and call it a fund administrator and custodian, or carry a firm described as providing fund services, and the register reads the pair it expected. The names are the regime's categories of licence, and the functions are what the engagement letters say; a firm licensed as a depositary and engaged for safekeeping alone is a depositary doing one of four things. The register reads the letters.

The auditor beside them

The auditor is the third verifier, and its verification is annual, on the accounts as a whole, on a sample of assets and transactions, to a materiality threshold. It confirms bank balances directly, inspects a sample of title evidence, and reads the valuer's report for the accounts' fair value. It does not safekeep, does not monitor cash through the year, and does not verify every asset at every valuation date. A fund with an administrator and an auditor and no depositary has verification of existence once a year on a sample, and eleven months in which the manager's word is the fund's asset list.

The register of holders as the legal record

The administrator's register of holders is where a transfer takes effect, where a subscription is recorded and where a redemption, in an open-ended fund, is computed. It is the document the lender reads for the commitments it counts, the regulator reads for the holders' eligibility, and a buyer of units reads for what it is buying. An error in the register is a dispute about who holds what, and the administrator's liability for it is the register's recourse. The administrator's subscriber checks, for anti-money-laundering and eligibility under the fund's tier, are performed at admission and refreshed, and a holder admitted without them is a holder the regulator reads.

The administrator's functions

The register of holders is the administrator's first function, and it is the legal record of who holds what; a transfer is effective when the administrator records it. The drawdown notices, computed on each holder's commitment and the call's amount, and the distribution notices, computed on the waterfall, are its second. The net asset value computation, from the valuer's numbers and the accounts, is its third. The accounts, the regulatory reports, the tax reports to holders and the anti-money-laundering checks on subscribers are the rest. Its engagement letter lists them, and a function not listed is not performed.

The depositary's functions

Safekeeping is the depositary's first function: holding the documents of title or the securities accounts in which the fund's assets sit, so that the manager cannot move them without the depositary's act. Verification of ownership for assets that cannot be held, such as onshore real estate registered in a holding company's name, is its second: checking the registry and keeping the evidence. Cash monitoring, reconciling every flow into and out of the fund's accounts against the manager's instructions and the constitution, is its third. Oversight, where the regime requires it, of the manager's compliance with the constitution's investment restrictions, the valuation policy and the distribution rules, is its fourth. Its engagement letter lists which it performs, and a private fund's depositary often performs the first two and not the last two.

The regimes' requirements for private funds

Each register jurisdiction fixes which funds need which provider. Public funds need both in every regime. Private funds for professional investors above a threshold need an administrator in most regimes and a depositary in some, with exemptions for funds whose assets are of a kind a depositary cannot hold, such as real estate and private companies, or whose holders are few, or whose manager is of a category the regime trusts. An exempt private fund may appoint a depositary voluntarily, and many do, because the register asks. The memorandum states which the regime requires, which the fund appointed, and what each was engaged for.

The exemption and what it removes

A fund exempt from the depositary requirement has no one checking that the assets exist and are the fund's except the auditor, annually, on a sample. The manager holds the share certificates of the holding companies, instructs the banks, and tells the administrator what the fund owns. The administrator computes on the manager's word. The register that reads an administrator's name and a depositary's absence has read a fund whose arithmetic is verified and whose existence is not, and asks the manager to appoint a depositary for safekeeping and ownership verification at least, or to have the auditor verify ownership at each valuation date.

One firm doing both

A firm licensed for both functions may be appointed to both, under separate engagements, with separate teams and information barriers the regime requires. The appointment is efficient and it removes the check the two functions give each other: an administrator that computes on a depositary's confirmed asset list has an independent input; one that computes on its own firm's list has an internal one. The regime permits it with conditions, the engagement letters state the separation, and the register reads whether the separation is real.

The fund of holding companies

A fund in a register jurisdiction holds positions through holding companies, and the depositary's reach ends at the fund's direct holdings: the shares of the first holding company. Below it, the holding companies' own assets are verified by the depositary only if its engagement extends to look-through, which the regime may require for wholly owned vehicles and the engagement may extend further. A depositary that safekeeps the first holding company's share certificate and verifies nothing beneath has verified that the fund owns a company, and the onshore parcel three layers down is on the manager's word. The engagement letter's look-through provision is the register's reading.

The valuation's place

The valuer values; the administrator computes on the valuation; the depositary verifies that the valued asset exists and is the fund's. None of the three verifies the others' work, and the committee reads across them: the valuer's report against the depositary's asset list, the administrator's computation against both. A net asset value that includes a position the depositary's list does not show is a question for the manager, and a committee that reads the three together asks it.

The cash monitoring

Cash monitoring is the depositary's function that catches the most, because every fraud and most errors move cash. The depositary reconciles each flow against the manager's instruction and the constitution's authority for it: a drawdown received against the notice, an acquisition payment against the board's resolution, a distribution against the waterfall computation, a charge against the constitution's clause. A fund without cash monitoring has a manager whose instructions to the bank are checked by the bank's signatory rules alone, and the register reads the signatory rules for whether two signatures are required and whose.

The engagement letters

Each provider's engagement letter defines its scope, its standard of care, its liability cap, its right to rely on the manager's information, and its termination. A letter that lets the provider rely on the manager's information without verification for the functions the register expected it to verify is a letter that removes the function, and the register's counsel reads the letters for the reliance provisions. The constitution names the functions the fund must have performed, and the engagement letters are read against it.

Liability and reliance

The administrator is liable for its arithmetic, to a cap, and relies on its inputs. The depositary is liable for the loss of assets in its custody, in most regimes strictly and without cap for assets it held, and for its verification and monitoring to a standard of care. The register relies on each through the fund, and the engagement letters say whether holders may rely directly. The depositary's strict liability for custodied assets is the reason it costs what it does and the reason an exempt fund's register asks for one.

The regulator's reading

The regulator reads the providers as the fund's controls: the administrator for the register's accuracy and the subscriber checks, the depositary for the assets' existence and the cash's authority, the auditor for the accounts. An inspection asks for the engagement letters, the annual reconciliations and the committee's readings, and a fund whose providers' scopes leave a function unperformed has a control gap the regulator names. The exemption from the depositary requirement is a release from the appointment, and the regulator still expects the manager to show how existence and ownership are verified without it.

The lender's reading

A lender reads the administrator's register of holders for the commitments it lends against and the depositary's asset list for the security it takes. A capital-call lender's facility requires the administrator to confirm commitments and to notify transfers; a lender against positions requires the depositary to confirm ownership and encumbrances and to act on the lender's instructions on enforcement. A fund without a depositary gives the lender the manager's confirmation, and the lender prices it.

The onshore interface

Onshore assets in a register jurisdiction are registered to the onshore holding company, and the onshore registry is the evidence of ownership; the depositary's verification is a registry extract, obtained and kept. Onshore cash sits in onshore bank accounts in the holding company's name, and the depositary's cash monitoring reaches them only if the engagement extends to the holding companies' accounts. A regime that requires onshore companies to use onshore banks has cash the fund's depositary may not see, and the onshore board's own controls are the monitoring. The depositary's look-through and the onshore board's controls meet at the holding company, and the engagement letter says where.

By function · by provider	The administrator	The depositary	Neither, unless engaged
Register of holders	Keeps it
Drawdowns and distributions	Computes and issues	Monitors the cash
Net asset value	Computes on the valuation		Verifies the valuation
Waterfall and charge	Computes	Monitors the cash
Accounts and reports	Prepares
Existence of assets		Verifies
Ownership of assets		Verifies and keeps evidence
Safekeeping		Holds documents and accounts
Look-through to holding companies		If engaged
Oversight of the constitution		If the regime requires
Investment decisions			The committee reads; nobody verifies

An appointment, as a type

A private fund for professional investors in a register jurisdiction is required to appoint an administrator and is exempt from the depositary requirement because its assets are onshore real estate through holding companies. The manager appoints an administrator for the register, the notices, the net asset value, the waterfall, the accounts and the subscriber checks, under a letter the register's counsel reads for reliance. At the anchor's request it appoints a depositary voluntarily for safekeeping of the holding companies' share certificates, ownership verification by registry extract at each valuation date through every wholly owned layer, and cash monitoring of the fund's and the holding companies' accounts, under a letter with look-through to the onshore companies and strict liability for custodied documents. The two are different firms. The committee reads the valuer's report, the depositary's asset list and the administrator's computation together each year. The lender takes the depositary's confirmation of ownership for its security. The fund's net asset value is arithmetic on a valuation of assets that exist and are the fund's, and the register knows which provider verified which.

The structure paper's page

The structure paper carries a page on the providers: the regime's requirements and exemptions for the fund's category, the list of functions against the constitution, the assignment of each function to a provider, the engagement letters' scope and reliance and liability, the look-through and the cash monitoring's reach, the auditor's place, the lender's confirmations and the committee's annual reading. The page is written before the memorandum's list, so that the list describes engagements rather than names, and it is the page the anchor's counsel reads first.

The open-ended fund's difference

An open-ended fund, or a closed-ended fund with a redemption window, has a net asset value on which holders subscribe and redeem, and the administrator's computation is the price. The depositary's verification at each dealing date is what makes the price a price of assets that exist, and the regimes that require depositaries for open-ended funds require them for that reason. A private fund with a redemption window and no depositary prices its redemptions on the manager's word, and the redeeming holder and the remaining holders each bear the word's error in opposite directions.

The second fund's reading

A manager's second fund is read against the first fund's providers: whether a depositary was appointed where the regime exempted, whether its look-through reached the onshore assets, whether the committee read the three reports together, and what the readings found. A first fund whose depositary found an undisclosed onshore facility in year four is a fund whose manager was checked, and the second fund's anchor reads it as the structure working; one whose exit found a charge nobody verified is a fund whose manager was not. The second fund's provider list is the first fund's record, and the anchor that asked for the first fund's depositary asks again.

The change of provider

An administrator or depositary may resign or be replaced, and the transition is a transfer of the register of holders, the minute books, the documents of title and the verification evidence from one firm to another under a transfer agreement with a reconciliation at the date. A transition without a reconciliation is a register whose continuity is the manager's word, and the committee reads the reconciliation as it reads the annual lists. The engagement letters' termination provisions fix the notice and the cooperation, and the regime may require its approval of the replacement.

Four cases, as types

A fund appoints an administrator and no depositary, and the manager holds the holding companies' share certificates. A holding company is found at exit to have been charged to a lender the fund did not know of, under a resolution the manager's nominee directors signed; the administrator's net asset value had carried the company unencumbered for three years.

A fund appoints one firm to both functions without the separation the regime requires. The administrator's computation uses the depositary's asset list prepared by the same team from the manager's schedule, and the position the manager omitted is omitted from both.

A fund appoints a depositary whose engagement stops at the first holding company. The onshore parcel beneath two layers is transferred by the onshore company's board, on the developer's nominee's instruction, and the depositary's list shows the fund owning the first holding company throughout.

A fund appoints both, separately, with look-through and cash monitoring to the onshore accounts, and the committee reads the three reports together. The register's comfort is for the right things.

What each party holds

The manager holds the appointments, the engagement letters and the information it supplies.

The administrator holds the register, the computations, the notices and the accounts.

The depositary holds the documents, the verification evidence, the cash reconciliations and the oversight where engaged.

The valuer holds the valuation neither verifies.

The committee holds the reading across the three.

Counsel holds the regime's requirements, the exemptions and the engagement letters' scope and reliance.

The lender holds its confirmations from each.

Where it surfaces

It surfaces at the memorandum, when the register reads the list and asks what each was engaged for. It surfaces at the anchor's diligence, when the anchor's counsel reads the engagement letters for reliance provisions. It surfaces at the first valuation date, when the committee reads the valuer's list against the depositary's and finds a position on one and not the other. It surfaces at the lender's security, when the lender asks for the depositary's confirmation of ownership and there is no depositary. It surfaces at the onshore transfer, when a parcel moves beneath the depositary's look-through. It surfaces at the cash, when a payment leaves the fund on one signature. And it surfaces at exit, when the buyer's diligence finds a charge over a holding company nobody verified.

The cost of getting it wrong

A fund whose existence is unverified costs the register a net asset value computed on the manager's word, and the register learns at exit what the word was worth. A fund whose cash is unmonitored costs the register the manager's errors and, rarely, its frauds, found by the auditor a year late. A fund whose depositary stops at the first holding company costs the register the onshore assets' verification, which is where the value is. Each cost is an engagement letter's scope, and the cost of extending the scope is a provider's charge per layer per year.

The committee's annual reading

Each year the committee reads three documents together: the valuer's report, listing the positions valued and their values; the depositary's asset list, listing the positions verified, the ownership evidence and the encumbrances; and the administrator's net asset value computation, listing the positions included and the values used. The three lists match or they do not, and a mismatch is a position valued and not verified, verified and not valued, or included at a value the valuer did not give. The committee asks the manager, minutes the answer, and reads the cash monitoring report for flows the constitution did not authorise. The reading takes a meeting and it is the register's annual verification that the verifiers verified.

A timeline, as a type

At the fund's design the regime's requirements are read: an administrator is required and the depositary is exempt. The constitution lists the functions. The administrator is engaged under a letter the anchor's counsel read for reliance. The anchor asks for a depositary and one is engaged for safekeeping, ownership verification with look-through to the onshore companies, and cash monitoring of every account in the chain. The lender takes the depositary's ownership confirmation for its security in year two. The committee reads the three reports together each year and in year four finds a position on the valuer's list that the depositary's list shows encumbered by an onshore facility the manager had not reported; the manager explains, the facility is disclosed, and the minute records it. In year seven the buyer reads the depositary's verification evidence for every layer and completes without a title condition. The register's comfort was for the right things, because the letters said what each provider did.

The sequence

1. The regime's requirements for the fund's category are read: which providers are required, which exemptions apply.
2. The functions the fund needs are listed against the constitution: register, notices, net asset value, waterfall, accounts, safekeeping, ownership verification, cash monitoring, look-through, oversight.
3. Each function is assigned to a provider by engagement letter, with the scope, the reliance and the liability read.
4. A voluntary depositary is appointed where the regime exempts and the register asks.
5. The look-through and the cash monitoring are extended to the holding companies and the onshore accounts.
6. The committee reads the valuer's, the depositary's and the administrator's reports together each year.

Questions a manager asks

Is a depositary worth the cost for real estate. It holds share certificates and registry extracts rather than securities, and its strict liability is for the documents; its verification and cash monitoring are the value, and the register usually asks for them.

Can the auditor do the ownership verification. Annually, on a sample, as part of the audit; a depositary does it at each valuation date on everything.

What does look-through cost. The depositary's charge for each layer's verification; it is priced per company per year and it is the register's comfort for the onshore assets.

Who instructs the depositary. The fund, acting by its board or the manager under delegation, within the constitution; the depositary refuses an instruction outside it where its oversight function is engaged.

Does the administrator check the valuation. No; it computes on it, and a committee that wants the valuation checked appoints a second valuer or reads the instruction letter.

What if the administrator and the depositary disagree on the asset list. The committee reads both and asks the manager; a disagreement is a position one of them did not see, which is the reason for two.

Terms used

Administrator: the provider that keeps the register, computes the net asset value and the waterfall, and prepares the accounts.

Depositary or custodian: the provider that safekeeps assets, verifies ownership, monitors cash and, where required, oversees the constitution's compliance.

Look-through: the depositary's verification beneath the fund's direct holdings into the holding companies.

Cash monitoring: the reconciliation of every flow against the instruction and the constitution's authority.

Exemption: the regime's release of a private fund from the depositary requirement.

Reliance provision: the engagement letter's term letting a provider rely on the manager's information.

What to read

The regime's rules on administrators and depositaries for the fund's category; the engagement letters' scope, reliance and liability; the depositary's look-through provision; the committee's annual reading across the three reports. On this site, the DIFC and ADGM fund rooms and the vehicles room under Structures.