A The firm is flexible, responsive, business like and highly commercial. Chambers Global
INTRODUCTION We have prepared this guide for the benefit of fund promoters and professional advisers who may be interested in the possibilities that Ireland offers as a location for establishing investment funds. This guide provides a brief overview of the legal, regulatory and taxation issues associated with the establishment and operation of investment funds in Ireland*. LK Shields Solicitors provides a comprehensive range of legal services to international financial services businesses. We advise and assist our clients in connection with a wide variety of financial and commercial activities, including: investment funds securities trading asset management regulatory risk management and compliance structured finance and derivatives transactions securitisations asset financing and leasing We act for some of the largest international companies, providing advice on the establishment, authorisation and listing of securities in all types of investment fund vehicles established under Irish law, investing in a wide variety of asset classes. I hope you find the information contained in this guide useful. If there is anything we can assist you with, please do not hesitate to contact us. January 2014 David Williams Partner and Head of Financial Services *We recommend that this guide be used as a point of reference for the matters discussed and not as a substitute for legal advice.
CONTENTS 1 INVESTMENT FUNDS IN IRELAND - OVERVIEW 4 2 KEY FEATURES OF INVESTMENT COMPANIES, UNIT TRUSTS AND COMMON CONTRACTUAL FUNDS 9 3 UCITS FUNDS 13 4 ALTERNATIVE INVESTMENT FUNDS 17 5 AUTHORISATION PROCEDURE FOR FUNDS 22 6 CONTINUING REQUIREMENTS FOR FUNDS 27 7 LISTING OF FUNDS ON THE IRISH STOCK EXCHANGE 29 8 TAXATION OF FUNDS IN IRELAND 31 9 SPECIALIST FUND STRUCTURES 34 9.1 Fund of Funds 34 9.2 Real Estate Funds 36 9.3 Private Equity Funds 37 9.4 Life Settlement Funds 38 9.5 Shariah Compliant Funds 39 9.6 Exchange Traded Funds 41 9.7 Money Market Funds 42 10 THE FINANCIAL SERVICES TEAM 44 3
1 INVESTMENT FUNDS IN IRELAND - OVERVIEW The IFSC Ireland's success as a leading European centre for investment funds started with the establishment of the International Financial Services Centre in Dublin's docklands area in 1987. Successive Irish governments have legislated for a wide variety of investment fund structures which compare favourably with structures available in other jurisdictions. The Central Bank The Central Bank is the responsible authority for Ireland for approving investment funds that are offered to the public. The Central Bank's notices, guidance notes, handbooks and application forms are available on its website: www.centralbank.ie. Legal and Regulatory Framework in Ireland for Funds The two main categories of Irish funds capable of being marketed to the public are UCITS Funds and Alternative Investment Funds (AIFs). UCITS Funds UCITS funds can be marketed to both retail and institutional investors. UCITS funds can invest in transferable securities and money market instruments and are subject to prescribed investment and borrowing restrictions which are set out in the UCITS Regulations. A UCITS fund may be established in one of the following legal forms: (a) (b) (c) an open-ended investment company registered as a public company; an open-ended unit trust; or an open-ended common contractual fund. UCITS Regime The Regulatory Landscape The original UCITS Directive was introduced in Europe in 1985 as one of many measures intended to liberalise the internal market for investment services among European Member States (the "Member States"). The UCITS Directive provided for the establishment of open-ended funds investing in transferable securities, in compliance with specified retail investment restrictions, with the possibility of being marketed throughout the EU (described in the UCITS Directive as an Undertaking for Collective Investment in Transferable Securities, a "UCITS"). In 1989, the Irish government legislated for UCITS funds in the form of unit trusts and open-ended investment companies and the UCITS Directive was implemented in Ireland by Ministerial Order, known as the UCITS Regulations, 1989. The UCITS directive created a European passport for the sale of UCITS funds established in any one of the Member States. The 1985 Directive was subsequently amended by two separate directives which have become known as the 'Product Directive' and the 'Management Company 4
Directive'. These Directives were given effect under Irish law by several Statutory Instruments in 2003 (the "UCITS III Regulations"), which also consolidated and amended the original UCITS Regulations, 1989. On 1 July 2011 the UCITS IV Directive was transposed into Irish law by the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (the "UCITS IV Regulations"). The UCITS IV Regulations consolidate all previous UCITS legislation in Ireland. UCITS IV was designed to streamline the process of cross-border sales of UCITS funds across the EU. The main features of UCITS IV are: A simplified notification procedure for the "passporting" of UCITS funds. UCITS wishing to market and distribute in another Member State must now notify the competent authority of their home Member State who will then transmit the notification to the competent authority of the host Member State within 10 working days. The introduction of a legal framework for the national and cross-border mergers of UCITS funds. The introduction of a form of asset pooling in the form of a "master-feeder" structure allowing a feeder UCITS fund to invest 85% or more of its assets in the shares/units of the master structures. The simplified prospectus was replaced by the key investors information document ("KIID"), a short and concise pre contractual document for investors with a specified format. The introduction of a full management company passport which allows a management company authorised in its home Member State to provide services to UCITS established in other Member States. Next Steps - UCITS V UCITS IV was initiated before the financial crisis erupted in 2008 and so preceded the shift in regulatory mindset sweeping through the financial services industry since that time. A draft UCITS V directive was released in 2012. UCITS V was prompted by the desire to secure stability in international financial markets and to align the UCITS product with the changes being implemented under the Alternative Investment Fund Managers Directive (the "AIFMD"). The main features of UCITS V are as follows: The introduction of a number of measures designed to clarify the role, eligibility, responsibility and liability of depositories (or custodians as they are familiarly referred to in Ireland). The significant expansion of the range of investigative and administrative sanction powers of the competent authorities of Member States. The introduction of new rules on remuneration for management companies consistent with those under the AIFMD and the Capital Requirements Directive. The principle is that remuneration policies should be consistent with effective risk management and designed to protect investor interests. 5
Implementation of the UCITS V Directive throughout Member States is likely to take place towards the end of 2014 or early in 2015. Further Enhancements - UCITS VI In July 2012 the European Commission published its UCITS VI Consultation Paper entitled "Product Rules, Liquidity Management, Depositary, Money Market Funds, Long Term Investments" (the "Consultation Paper"). The Consultation Paper invited comments from market participants on a very broad range of proposals for additional wide-ranging amendments to the UCITS product, namely: eligible assets and the use of derivatives efficient portfolio management techniques OTC Derivatives extraordinary liquidity management rules depositary passport money market funds long term investments. The Consultation Paper also invited comment on the alignment of the UCITS Directive with the AIFMD (in relation to, for example, delegation, risk and liquidity management rules, valuation and calculation of leverage). Alternative Investment Funds The Regulatory Landscape In 1990 the Irish government legislated for retail and professional investor funds other than UCITS funds, in the form of unit trusts and open-ended investment companies. These funds were (up until the introduction of the AIF regime, as described below) subject to a common framework of regulation under the Central Bank's Non UCITS Notices and Guidance Notes. Further legislation was subsequently enacted to provide for closed ended investment companies and investment limited partnerships to be set up as Non UCITS funds. The introduction of the AIFMD resulted in significant enhancements being made to the Non UCITS product offering in Ireland and further details of these developments are set out below. AIFMD came into force on 21 July 2011 and there was a deadline for transposition into national law of each Member State by 22 July 2013. The AIFMD creates a legal framework operating at European level to monitor and supervise alternative investment fund managers. The Irish transposing regulations were signed into law on 16 July 2013. The objective of AIFMD is to establish an EU framework for the regulation and oversight of alternative investment fund managers ("AIFMs"), which will be capable of 6
addressing the potential risks that might arise from the activities of AIFMs and ensuring the monitoring and supervision of those risks by the relevant competent authorities. AIFMD also permits, subject to compliance with strict requirements, AIFMs to provide services and market their funds across the EU's internal market (the so-called "passport"). AIFMD replaces the old non-ucits regime. The Non UCITS Notices and related Guidance Notes have been replaced by the AIF Rulebook. The AIF Rulebook provides for the establishment of two types of alternative investment fund, namely the retail investor alternative fund ("RIAIF") and the qualifying investor alternative investment fund ("QIAIF"). The main areas covered by the AIFMD are as follows: conditions and procedures for the authorisation of AIFMs. capital requirements for AIFMs. conditions for delegation of functions. The conditions for delegation have been the subject of much debate. The AIFMD provides that an AIFM cannot delegate to the extent that it becomes a letterbox entity. rules on valuation. rules on depositories, including rules relating to duties and liabilities. reporting requirements and leverage calculation methodology. exchange of information and cooperation agreements with third countries. Operating conditions for AIFMs, including rules on remuneration, conflicts of interest, risk management, liquidity management, investment in securitisation positions and organisational requirements. AIF Rulebook The most significant changes to the Non UCITS regime which are set out in the AIF Rulebook include: Replacement of the existing qualifying investor fund ("QIF") product with a new QIAIF regime. Introduction of a new RIAIF product. Abolition of the existing promoter approval process for Non UCITS funds and reliance instead on the requirements placed on Alternative Investment Fund Managers under the AIFMD and the legislation implementing the AIFMD in Ireland. Removal of prime broker and counterparty credit rating requirements. Introduction of a number of changes to how investors in different share classes within a Fund are be treated i.e. it may be possible to treat shareholders in one 7
share class differently to those in another share class subject to this treatment being fair. Introduction of ability of QIAIFs and RIAIFs to create share classes in order to "side pocket" distressed assets. QIAIFs will be permitted to place newly acquired assets into side pockets immediately after purchase thereby effectively depriving investors of their redemption rights over a section of the portfolio of the QIAIF. Extension of the initial offer period of property and private equity funds to 2 years and six months subject to certain considerations. Discontinuation of the professional investor fund ("PIF"). In reality this type of fund has been effectively obsolete for a number of years, a fact which was reinforced when the minimum subscription requirement for QIFs was reduced to 100,000 in 2010. Relaxation of the rules in relation to the verification of the performance fee calculation for QIAIFs and RIAIFs by the depository. Verification of performance fees can be performed by a suitable independent party appointed by the AIFM. Investment Funds in Ireland - The Future Clearly the international funds industry is witnessing a time of great regulatory change and growth. Ireland continues to demonstrate its strengths in adapting to the changing regulatory landscape, in particular this can be seen in the Central Bank's approach to implementing the AIFMD and on the expected landscape for Irish funds regulation and supervision after the implementation of the AIFMD. The Irish government has shown its commitment to make Ireland a leading European centre for investment fund promoters and continues to issue new initiatives in order to encourage the establishment of essential services and attract innovators. These measures, along with a favourable environment for financial services, will strengthen Ireland's position as a global domicile of choice for fund promoters. 8
2 KEY FEATURES OF INVESTMENT COMPANIES, UNIT TRUSTS AND COMMON CONTRACTUAL FUNDS The unit trust, the investment company and the common contractual fund structure are the most common forms of fund established in Ireland. The principal features of each structure are set out below: Investment company An investment company is structured as a variable capital company and incorporated as a public limited company. The investment company has separate legal personality. The affairs of the company are subject to the direction of the board of directors. At least two of the directors must be Irish residents. The articles of association of the company regulate such matters as the issue and redemption of shares in the company, the calculation of the net asset value of the company, the convening of shareholder meetings and the winding up of the company. Investment companies organised as umbrella funds can segregate liability between their subfunds as a matter of law and can cross invest in sub-funds within the same umbrella. The investment company is by far the most popular fund structure in Ireland. Below is an example of an investment company structure which is established as either a UCITS or an AIF and has appointed a UCITS management company or AIFM (as applicable). The investment management function is delegated to an investment manager. SHAREHOLDERS VARIABLE CAPITAL INVESTMENT COMPANY (Memorandum & Articles of Association) UCITS MANAGER / AIFM Investment management, administration & distribution CUSTODIAN / DEPOSITARY Safekeeping of assets ADMINISTRATOR Calculation of net asset value, arranging issue and redemption of shares, preparation of reports INVESTMENT MANAGER Discretionary investment management DISTRIBUTOR Distribution of shares INVESTMENT ADVISER (Optional) Investment recommendations 9
Unit trust The unit trust operates as an investment fund established under a trust deed between the management company and the trustee. The trust deed regulates the relationship between the fund manager, the trustee and investors in the fund. The trust deed defines the investment policy for the fund, sets out procedures for such matters as the issue and redemption of units in the fund and the calculation of the net asset value of the fund, and creates procedures for meetings of investors of the fund and termination of the fund. Below is an example of a unit trust structure which is established as either a UCITS or an AIF and has appointed either a UCITS management company or AIFM (as applicable). The investment management function is delegated to an investment manager. UNITHOLDERS UCITS MANAGER / AIFM Investment management, administration & distribution UNIT TRUST (Trust Deed) TRUSTEE / DEPOSITARY Safekeeping of assets ADMINISTRATOR Calculation of net asset value, arranging issue and redemption of units, preparation of reports INVESTMENT MANAGER Discretionary investment management DISTRIBUTOR Distribution of units INVESTMENT ADVISER (Optional) Investment recommendations 10
Common contractual fund The common contractual fund ("CCF") was created in 2003 to enable pension funds and institutional funds to pool their investments in a tax efficient manner. The CCF is an unincorporated body established by a management company by way of a deed of constitution between the manager and the custodian. The assets of the fund are held under the common ownership of the investors as tenants in common. Since the CCF is an unincorporated body and cannot assume any liabilities, the manager and custodian enter into various agreements on behalf of the CCF. The CCF may be structured as a stand alone fund or an umbrella fund. An Irish CCF is available for investment by all investors other than natural persons and its advantages can be summarised as follows: The CCF is a tax transparent vehicle and is exempt from tax on income and gains. The CCF is extremely flexible in terms of its structure and can be established as a UCITS fund or an AIF. VAT is not applicable to key services received by the CCF and the CCF is not obliged to charge VAT on its services. The CCF offers benefits to promoters, investment managers and investors by enabling them to avail of economies of scale, diversification of risk and specialised investment mandates. Below is an example of a CCF structure which is established as either a UCITS or an AIF and has appointed either a UCITS management company or AIFM (as applicable). The investment management function is delegated to an investment manager. INVESTORS UCITS MANAGER / AIFM Investment management, administration & distribution COMMON CONTRACTUAL FUND (Deed of Constitution) CUSTODIAN / DEPOSITARY Safekeeping of assets ADMINISTRATOR Calculation of net asset value, arranging issue and redemption of units, preparation of reports INVESTMENT MANAGER Discretionary investment management DISTRIBUTOR Distribution of units INVESTMENT ADVISER (Optional) Investment recommendations 11
New ICAV Structure The Minister for Finance has announced that he has approved, in principle, the development of legislative proposals for a new corporate structure (the "ICAV") for the Irish funds industry. The main advantage of the ICAV will be a vehicle that will allow US corporate entities to elect a favourable classification under the US "check-the-box" taxation rules. Initial US tax advice received indicates that the ICAV structure should allow US corporate entities to avoid certain adverse tax consequences for US taxable investors which would otherwise arise e.g. with an Irish public limited company ("plc") structure. Furthermore, the ICAV structure will remove certain compliance requirements under Irish company law, which will reduce administrative costs. The introduction of the ICAV in Ireland will increase the range of fund structures available to fund promoters. For existing plc structures, it is expected that there will be an option to convert to the new ICAV structure. The Department of Finance expects the proposed legislation will be enacted in early 2014. 12
3 UCITS FUNDS UCITS funds in Ireland are governed by the Central Bank's UCITS Notices and Guidance Notes, which are regularly updated and amended. A UCITS fund can be categorised as either a self managed investment company ("SMIC") or a UCITS which has appointed a UCITS management company. SMICs SMICs must have a minimum initial capital of at least 300,000. The initial capital may be provided by the promoter or investment manager and may be withdrawn upon receipt of subscriptions, provided the SMIC maintains a minimum capital of 300,000. SMICs need to comply with the majority of the provisions in the UCITS IV Regulations and the Central Bank's Guidance Notes in respect of the organisation of management companies. SMICs were required to fully comply with the UCITS IV Regulations from 1 July 2013. UCITS Management Companies All UCITS management companies must comply with the UCITS IV Regulations from 1 July 2011. UCITS management companies must satisfy the following key criteria: initial capital of at least 125,000 or one quarter of its total expenditure, whichever is higher; shareholders and directors and managers must satisfy tests in relation to fitness and probity; and directors and managers must be sufficiently experienced in relation to the types of fund to be managed. In addition, a detailed business plan must be submitted to the Central Bank which will set out in detail the organisation of the management company as well as detailed information in relation to how the specific management functions as set out in the UCITS IV Regulations will be complied with as well as administrative and accounting policies and procedures. UCITS as a retail fund structure Because of its nature as a retail fund structure, Irish law imposes certain restrictions on the investment and borrowing policies of funds that may be authorised as UCITS funds. These investment and borrowing restrictions are described in detail in the Central Banks UCITS Notices, available on www.centralbank.ie. A UCITS may be established under the UCITS IV Regulations in the form of an openended unit trust, an open-ended investment company registered as a public limited company or a common contractual fund. A UCITS must simultaneously satisfy the following requirements: the capital of a UCITS must be funded by means of an open offer to the public; 13
the unit/shares of an investor must be redeemed on demand; and investments can only be made in transferable securities and money market instruments and in accordance with detailed investment and borrowing restrictions which are set out in the Central Bank's Guidance Notes. Authorisation of UCITS A UCITS fund is required to be authorised by the Central Bank before it can be marketed to the public. The authorisation process is discussed in Section 5 below. Professional duties of related parties A UCITS fund, whether in the form of an investment company, unit trust or common contractual fund, is in essence a passive entity. The operational aspects of a UCITS fund are outsourced to the various professionals comprising the manager, the investment adviser/manager, the administrator and the trustee/custodian. The contract appointing the relevant service provider will impose minimum standards of professional care on these professionals, which they are required to observe in carrying out their duties. Anti-money laundering All Irish funds (whether established as UCITS or AIFs) are subject to the provisions of the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2013. This legislation also applies to the service providers of a fund. A fund is required to appoint a designated anti-money laundering reporting officer and to ensure that appropriate measures are put in place to ensure compliance with these anti-money laundering rules. UCITS Funds An Alternative Investment Fund Platform While originally developed as a retail distribution platform, following the changes introduced by the Product Directive (Directive 2001/108/EC part of UCITS III), UCITS funds now offer fund managers the flexibility to engage in alternative investment strategies. UCITS may be a suitable platform for managers who wish to "upgrade" their product offering and take advantage of the market recognition and consumer confidence that the UCITS brand enjoys. UCITS hedge funds have become increasingly popular in recent years as investors, wary of unregulated offshore products, are attracted to the transparency and the increased liquidity offered by the UCITS product. Alternative Investment Strategies UCITS can replicate the strategies employed by more traditional hedge funds such as long short strategies and relative value strategies through the use of financial derivative instruments ("FDI"). 14
UCITS may invest in FDI which reference assets in which they are permitted to invest directly such as: transferable securities and money market instruments; units of other collective investment schemes (both UCITS and AIFs); and deposits with credit institutions. Also permitted are FDI which reference financial indices, interest rates, foreign exchange rates and currencies. Financial indices must satisfy prescribed criteria relating to diversification and composition to qualify as a permitted investment. FDI may not be used to circumvent the asset diversification requirements which apply to UCITS. In general a 5/10/40 rule applies. UCITS may invest up to 10% of their net assets in the securities of one issuer, but aggregate investments of representing more than 5% in a single issuer must not comprise more than 40% of its net assets. UCITS may invest in both exchange traded FDI or over the counter ("OTC") FDI. Counterparties to OTC FDI must be investment firms or credit institutions authorised in the EEA or Consolidated Supervised Entities regulated by the Securities Exchange Commission. Counterparties which are not credit institutions must have a minimum credit rating of A2 or the UCITS must be indemnified against loss by an entity without such a rating. UCITS must adhere to counterparty exposure limits of 10% in the case of certain credit institutions and 5% otherwise. Counterparty exposures can be reduced by appropriate margining arrangements. Shorting Although UCITS are not permitted to engage in physical short selling, they may take short positions through the use of FDI. This is crucial to the ability of the UCITS to engage in alternative strategies, enabling it pursue long short and relative value strategies. Leverage and Investment Diversification UCITS may employ leverage of up to 100% of their net asset value through the use of FDI. The UCITS manager may employ this leverage in taking additional long positions or to pursue a long short strategy. This enables managers to pursue strategies which can range from 200% long or short to 100% long and 100% short. Risk Management UCITS which elect to use FDI as part of their investment process must adopt a risk management process demonstrating the controls which are in place to manage risk. As part of this process UCITS must elect to classify themselves as either sophisticated or non-sophisticated. The correct election is judged on a case by case basis and will depend on the type of strategies which are being pursued and the extent of FDI use. Non-sophisticated UCITS may employ the commitment method to determine their leverage, converting the FDI into a position in the underlying assets. Sophisticated UCITS must use a risk metric such as value at risk to measure the level of volatility in the fund. 15
Distribution Opportunities. The UCITS IV Regulations have enhanced the cross border opportunities for marketing UCITS funds. A UCITS can now distribute its product in other Member States without the necessity to approach the individual competent authorities in each Member State. A UCITS need only approach its home competent authority by way of a standard notification procedure which must be reviewed and transferred to the competent authority of the Member State where it is proposed to market the UCITS within 10 working days. This will permit the UCITS to market its product no later than 10 working days after a completed notification. When advertising and conducting marketing in another Member State, the UCITS must adhere to the generally applicable local laws in relation to advertising and marketing. Adequate measures must also be taken by the UCITS to ensure that there are facilities in the host Member States for making payments to investors, redeeming shares/units and making available the information which the UCITS is required to provide locally. UCITS therefore need to consider the appointment of distributors and paying agents in jurisdictions where they wish to have a presence. Registration outside the EU is also facilitated, for example in markets such as Switzerland. UCITS products are also accepted for sale in Asia, the Middle East and Latin America. The main distribution channels for UCITS funds are currently retail and private banks, Independent Financial Advisors (IFAs) and insurance wrappers. Since the introduction of UCITS IV, all UCITS funds must now provide a KIID to investors. The KIID was introduced in order to provide concise and meaningful information for investors in UCITS products globally. The KIID is a key distribution tool for UCITS funds and it must be provided to investors at the pre-contract stage. All KIIDs must include an ongoing charges figure. The aim of this figure is to allow investors to directly compare the costs of various UCITS funds. In addition, all KIIDs must include a Synthetic Risk and Reward Indicator (SRRI), which displays the historic volatility of the UCITS' performance and categorises it accordingly, with the aim of giving investors an overview of the key risks which may be encountered when investing in a given fund. 16
4 ALTERNATIVE INVESTMENT FUNDS Regulated AIFs in Ireland are governed by the Central Bank's AIF Rulebook which, similarly to the UCITS Notices, will be regularly updated and amended. The Rulebook lays out separate rules for RIAIFS, QIAIFs, AIF Management Companies, AIF Administrators and AIF Depositaries. All AIFs must appoint an AIFM. There can only be one AIFM of an AIF. The AIF can be externally managed (where the AIF appoints an external AIFM) or internally managed (where the AIF chooses not to appoint an external AIFM and instead will itself become authorised as its own AIFM (this is similar to the self-managed investment company structure which applies to UCITS funds)). AIFs can be established as QIAIFs or RIAIFs. QIAIFs QIAIFs are subject to a minimum subscription requirement of 100,000 or 500,000 where the QIAIF invests more than 50% of its net assets in unregulated funds. Investors must fall into one of the following categories: (a) (b) (c) professional client within the meaning of Annex II of the Markets in Financial Instruments Directive (MiFID); or receive an appraisal from an EU credit institution, MiFID firm or UCITS management company that the investor has appropriate expertise, experience and knowledge to adequately understand the investment, or certifies that they are an informed investor by providing a written confirmation that the investor has such knowledge and experience as to enable the investor properly evaluate the merits and risks of the prospective investment, or a confirmation that the investors business involves the management, acquisition or disposal of property as the same kind of property of the QIAIF; or certifies that they are an informed investor by providing one of the following: confirmation (in writing) that the investor has such knowledge of an and experience in financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or confirmation (in writing) that the investor's business involves, whether for its own account or the account of others, the management, acquisition or disposal of property of the same kind as the property of the QIAIF. Investors must certify in writing to the QIAIF that they meet the minimum criteria and are aware of the risks involved in the proposed investment. QIAIFs are subject to very few investment restrictions and are not subject to any borrowing or leverage limits. The Central Bank does not impose any risk diversification requirements on AIFs (with the exception of funds of funds). The QIAIF 17
is an ideal structure for various different types of funds e.g. property funds, private equity funds, funds of funds and hedge funds. The fast-track authorisation process that existed for the previous QIF regime applies equally to QIAIFs (provided that all service providers to the QIAIF, including the AIFM, has been approved by the Central Bank and applications for authorisation will be processed in 24 hours (see Section 5 below)). RIAIFs The RIAIF requirements allow for the creation of a fund that is subject to less investment and eligible asset restrictions than apply under the UCITS framework but is more restrictive than the QIAIF regime. A number of strategies can be accommodated within the RIAIF that cannot be carried out by a UCITS structure. For example, a RIAIF may invest in physical gold, unregulated funds and Chinese securities (subject to appropriate disclosure requirements and investment conditions). In addition, a RIAIF may be marketed to retail investors although this would be on a Member State by Member State basis, rather than via a marketing passport. It should also be noted that RIAIFs can be marketed to professional investors under the passport provisions of the AIFMD. The Alternative Investment Fund Managers Directive The AIFMD essentially regulates the management of an AIF. The scope of the AIFMD applies to: (a) (b) (c) any legal person established in a Member State whose regulator business is managing one or more AIFs, whether established within or outside the EU which (i) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and (ii) does not require authorisation pursuant to the UCITS Directive; any non-eu AIFM managing an AIF established in the EU (whether or not the AIF is marketed in the EU); and any non-eu AIFM marketing an AIF within the EU (irrespective of where the AIF is established). MiFID firms and credit institutions cannot be appointed as the AIFM of an AIF. UCITS management companies however are permitted to hold a dual authorisation under the UCITS IV Regulations and the AIFMD. The AIFM is responsible for the portfolio management and risk management functions of the AIF. The AIFM can delegate tasks to third parties, which in turn can sub-delegate such tasks. The AIFM cannot however delegate its functions to the extent that the AIFM becomes a letterbox entity. 18
Registered AIFMs AIFMs which fall within the following categories will be subject to a lighter touch regulation and are required to register as an AIFM as opposed to a full authorisation under the AIFMD: (a) (b) AIFMs which either directly or indirectly through a company with which the AIFM is linked by common management or control, or by a substantial direct or indirect holding, manage portfolios of AIFs whose assets under management, including assets acquired through use of leverage, in total do not exceed a threshold of 100m; or AIFMs which either directly or indirectly through a company with which the AIFM is limited by common management, or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management, in total do not exceed a threshold of 500m when the portfolio of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of the initial investment in each AIF. Registered AIFMs do not benefit from the rights granted to authorised AIFMs under the AIFMD, however they do need to comply with certain requirements of the AIFMD such as the requirement to monitor systematic risk. Authorised AIFMs The following are some of the key considerations for AIFMs Capital Requirements AIFMs are required to have initial capital of at least 125,000 (in the case of an external manager) or 300,000 (if it is an internal manager) and to have its own funds equal to 0.02 per cent of the value of any assets of the AIF over 250 million, subject to a maximum requirement of 10 million. Up to half the funds may instead be guaranteed by a credit institution or insurance undertaking. The AIFM will also be required to have sufficient funds to cover potential liability for professional negligence or to have appropriate professional indemnity insurance. Remuneration The AIFMD provides that each AIFM must have remuneration policies and practices for prescribed categories of staff that are: consistent with and promote sound and effective risk management; and do not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the AIFs they manage. A list of principles which must be taken into account when determining remuneration policies and practices are set out in Annex II to the AIFMD. 19
Reporting AIFMs are required to report certain information to the Central Bank in connection with the AIFs which they manage. Guidelines published by ESMA on 1 October 2013 have provided clarification on the reporting requirements under the AIFMD. AIFMs will be required to report on investment strategies, exposure and portfolio concentration. According to the Guidelines, key elements that AIFMs will have to report to national competent authorities include information on portfolio concentration (e.g. breakdown of investment strategies of each AIF, principal markets/instruments in which the AIF trades, turnover of each AIF, total value of assets under management of each AIF) and risk profile of each AIF (including the liquidity profile and leverage of each AIF). Distribution AIFMs can avail of a European passport which permits EU based AIFMs to market AIFs to professional investors (as defined in MiFID) throughout the EU subject to a notification process. Unlike the UCITS passport, the AIFMD passport is granted to the AIFM and not the AIF which it manages. Non-EU based AIFMs cannot become authorised under the AIFMD and avail of the passport until at least 2015. By July 2015 at the earliest, the European Securities and Markets authority (ESMA) is required to prepare a report detailing its opinion on the functioning of the passporting regime for EU managers and its advice on the extension of the passport to non-eu managers. Within three months of receiving this advice, the Commission shall specify a date for the introduction of a passport for non- EU managers (the "Extension Date"). Non-EU managers wishing to market an AIF within the EU up until the Extension Date must do so in relevance with relevant national private placement regimes and only where the following conditions are met: they will be required to comply with the requirements of the AIFMD with respect to transparency and asset stripping; there must be co-operation agreements in place between the competent authorities in the EU jurisdiction in which they wish to market and the state in which they established; and the state where the manager is established must not be listed as a non-cooperative country and territory by the Financial Action Task Force. From the Extension Date onwards, non-eu managers who wish to market EU AIFs in the EU will be required to seek authorisation in their Member State of Reference. A Member State of Reference is the EU Member State with which the non-eu manager is most closely established and must be determined in accordance with the rules set out in the AIFMD. Non-EU managers wishing to market Non-EU AIFs in the EU after the Extension Date will have the option of seeking authorisation in their Member State of Reference or continue to rely on the national private placement regimes. It should be noted however that 3 years following the Extension Date, ESMA is required to issue a report to the European Commission detailing its opinion on the function of the passport 20
regime for Non-EU managers and advising whether the national private placement regimes should be terminated. In the absence of obstacles being identified by ESMA, national private placement regimes could be abolished, in which case, Non-EU managers will only be permitted to market Non-EU AIF within the EU if they are duly authorised under the AIFMD. 21
5 AUTHORISATION PROCEDURE FOR FUNDS Fund Documentation The fund documents fall into three categories: the prospectus the organisational documents the agreements with service providers. The Prospectus An offer to the public to invest in an Irish fund can only be made on the basis of information concerning the fund contained in a written prospectus, approved by the Central Bank. The prospectus is the document which pulls together information on the operation of the fund to enable investors to make an informed judgement of the investment opportunity presented to them. The prospectus (and the key investor information documents in the case of a UCITS) must be offered to investors free of charge together with a copy of the organisational documents of the fund before an investment in the fund may be accepted. Material changes to the information contained in the prospectus must be notified to investors in the periodic reports of the fund. A change to the investment objectives or a material change to the investment policy of a fund may not be effected without the prior written approval of the unitholders or shareholders of the fund. The Organisational Documents The memorandum and articles of association (or deed or constitution or trust deed, as appropriate) set out the rules governing the operation of the fund and the relationship between the fund and its investors. Any proposal to make changes to the organisational documents of a fund must be notified in advance to the Central Bank and may only be made with the prior consent of a majority of the investors in the fund. Changes are usually brought into effect after a specified time period, after notification to investors, to allow investors who do not agree with the changes sufficient time to redeem their holdings in the fund before the changes are implemented. Agreements with Service Providers The duties of each of the parties involved in the operation of the fund are set out in various agreements, such as: the management agreement; the investment management agreement; 22
the investment advisory agreement; the custody agreement/depositary agreement; the administration agreement; and the distribution agreement. In the case of UCITS funds, proposed amendments to the custody agreement must be approved in draft in advance by the Central Bank. Amendments to the remaining Agreements must be filed with the Central Bank in final form, although the Central Bank should be notified in advance of the proposal. The relevant section of the Central Bank's application form must be submitted in each case. The terms of these agreements set out in detail the duties, responsibilities and liabilities of the parties, the terms of remuneration and the notice provisions on termination. It is important to ensure consistency between the prospectus, organisational documents and the agreements. Approval of Directors - Central Bank's Fitness and Probity Standards The Central Bank's Fitness and Probity Standards (the "Standards") came into effect on 1 December 2011 and were fully implemented by 1 December 2012. The Standards were introduced pursuant to Section 50 of the Central Bank Reform Act 2010 (the "Act"). Directors of investment fund companies, UCITS management companies and AIFMs fall within the category of Pre Approval Controlled Functions (PCFs) and are therefore subject to the Central Bank's Standards. Individuals who intend take up a directorship role in a fund company, UCITS management company or AIFM must complete an online Individual Questionnaire which is submitted online to the Central Bank for assessment. The Standards require that persons engaged in PCF roles such as directorships must be competent and capable to carry out that function, must act honestly, ethically, with integrity and be financially sound. Post authorisation, fund companies, UCITS management companies and AIFMs are required under the Standards to continue to monitor the fitness and probity of the directors by keeping the due diligence information on these individuals up to date. The proposed directors of a new proposed fund company, UCITS management company or AIFM must be approved by the Central Bank before the fund, UCITS management company or AIFM can be authorised by the Central Bank. UCITS Promoter Approval A promoter seeking to establish an Irish domiciled fund is required to obtain approval in its own right as a promoter of funds. This procedure involves submission of the Central Bank's promoter application form addressing issues relating to the competence and integrity of the promoter and the adequacy of the promoter's financial resources. 23
A decision on the suitability of a fund promoter is made by the Central Bank based on responses received from the promoter addressing the issues set out in the Central Bank's promoter application form. The application for authorisation of the fund cannot be submitted to the Central Bank until the Central Bank has indicated its approval of the promoter entity. AIFM Approval The AIFM or the internally managed AIF must submit an application for authorisation (or application for registration in the case of registered AIFMs) to the Central Bank. The application should also include a programme of activities document which will set out the organisational structure of the AIFM and how it intends to comply with the provisions of the AIFMD. The application for authorisation should also include information on the remuneration policies and procedures of the AIFM, information on arrangements of the delegation of activities by the AIFM and information on the AIFs the AIFM intends to manage. The Investment Manager The investment manager (in circumstances where in the investment manager is a different entity to (a) the UCITS management company, in the case of a UCITS fund and (b) the AIFM, in the case of an AIF) is also required to submit an application for approval via the Central Bank's investment manager application form. Where the promoter of a UCITS will also act as investment manager, a separate investment manager application form does not have to be completed. Approval of Fund Documents UCITS Funds Once the Central Bank has indicated its approval of the promoter entity, the promoter is required to submit the prospectus and the custody agreement or trust deed (blacklined where a precedent or standard form agreement has been used) in draft form to the Central Bank accompanied by the relevant sections of the Central Bank's application form. The process is conducted on a phased basis. Initial drafts are reviewed by the Central Bank to ensure full compliance with applicable regulations and full consistency across the fund documents to a high level of detail. The length of the process and the extent of Central Bank's comments may depend on the quality of preparation of the initial drafts submitted to the Central Bank. Undoubtedly, the process is expedited in circumstances where the promoter is in a position to prepare documents on the basis of recently approved precedents. The Central Bank will not review the memorandum and articles of association of an investment company, the management agreement, the administrator/transfer agency agreement, the investment management/ advisory agreement or the distribution/paying agency/representative agency agreement. 24
The executed and original documents listed on the Central Bank's checklist must be filed no later than 12 noon on the proposed date of authorisation/approval together with the Central Bank's application form. Requests for derogations from certain Central Bank requirements should be clearly set out in the covering letter with the initial filing of the draft documents. All SMICs and management companies are required to submit a business plan in advance of authorisation, which sets out their organizational requirements. The business plan needs to be approved by the Central Bank before the fund is authorised. Where the fund intends to engage in the use of FDI, a detailed risk management process ("RMP") must also be reviewed and approved by the Central Bank as part of the fund's authorisation process. AIFs RIAIFs The process for approval of the fund documents for a RIAIF is similar to the procedure for UCITS funds set out above. Once the Central Bank has approved the AIFM, the AIFM is required to submit the prospectus and the depository agreement to the Central Bank (blacklined where a precedent or standard form agreement has been used). The length of the process and the extent of the Central Bank's comments may depend on the quality of the preparation of the initial drafts submitted to the Central Bank. The Central Bank will not review the memorandum and articles of association of an investment company, the management agreement, the administrator/transfer agency agreement, the investment management/ advisory agreement or the distribution/paying agency/representative agency agreement. The executed and original documents listed on the Central Bank's checklist must be filed no later than 12 noon on the proposed date of authorisation/approval together with the Central Bank's application form. Requests for derogations from certain Central Bank requirements should be clearly set out in the covering letter with the initial filing of the draft documents. 25
QIAIFS Fast Track Approval QIAIFS may avail of a 24 hour fast track approval process provided that all service providers to the QIAIF (including the AIFM) has been approved by the Central Bank. The application for authorisation (the fund documentation and relevant Central Bank applications forms) should be submitted before 3pm on the day prior to the proposed date of authorisation. Provided the application is not deemed to be incomplete by the Central Bank, the authorisation can be issued by the Central Bank by close of business the following day. Start Up Regime The Central Bank has confirmed that QIAIFs authorised after 22 July 2013 may avail of a "start up regime". Under this regime the QIAIFs (but not RIAIFs) are permitted to have a registered AIFM during the start up period of two years from the launch of the QIAIF, at the end of which an authorised AIFM must be appointed. AIFMs can avail of the "start up regime" so long as its assets under management does not exceed one of the following limits: (a) (b) 500m provided the AIF is not leveraged and the investors have no redemption rights for the first five years, or 100m including all assets acquired through leverage. QIAIFs established under the "start up regime" will effectively be permitted to operate under the old QIF regime (plus the relevant depository requirements under the AIFMD) for the period of two years from the launch of the QIAIF or until the AIFM's assets under management exceed the limits noted above (whichever is the earliest). Irish Stock Exchange Where shares or units in a fund are being listed on the Official List of the Irish Stock Exchange (the "ISE"), the ISE undertakes a separate approval process (see Section 7 of this Guide). This process is usually conducted through one of the ISE's listing sponsors and the ISE generally requires what it calls '48 hour documents' to be submitted before it will clear the shares or units for listing. This process generally occurs in or around the Central Bank's authorisation date. The shares or units cannot be listed until one business day following first allotment or issue of shares or units and the ISE requires written confirmation of such allotment or issue. 26