AIF Rulebook 2014

The rulebook published by the Central Bank in September 2014  provides for requirements applicable generally to retail investor AIFs.  There are specific requirements for particular types of funds relevant to the class of assets involved.  There are extensive provisions dealing with qualified investor AIF requirements together with fund-specific requirements.  There are general requirements in respect of AIF fund managers, AIF management companies, AIF administrators and AIF depository.

The regulations distinguished between a category 1 fund which refers to a range of funds established within the EU and certain other jurisdictions and a category 2 investment fund in relation to which an authorized investor fund has confirmed to the Central Bank that the investment funds applies to all requirements applicable to retail investor funds.  This includes both funds authorized in the EU as well as certain other jurisdictions.

Retail AIFs and qualifying investors AIFs may be established as unit trust, designates investment companies, investment limited partners or common contractual funds. The conditions in relation to the AIF rulebook supersede requirements in previous non-UCITS notices.  The requirements must be read together with the relevant legislation.

The retail AIF will not appoint a management company a partner or manager which would acqire voting rights which enable it to exercise significant influence over an issuing body (investee company).  This does not apply to investments in other investment funds and  does not apply to venture capital development capital or private equity retail investor funds provided the prospectus indicates the intention regarding the exercise of legal and management control over underlying investments.

A retail investor AIF shall not grant a loan or act as guarantors on behalf of third parties. It shall not raise capital from the public throug the issue of debt security.

There are requirements as to the conditions on which it may track a gain and exposure to an index.  In essence, it must be structured in a manner that is reasonable and advantageous.  It must not be structured to circumvent the rules on retail investor AIFs.  The retail investor AIF must ensure the calculation and performance fees must be verified by the depository or other competent body for such purpose.

The retail AIF must specify the maximum annual fee charge by the management companies/general partners.  It may not be approved without a majority of the votes casts at general meeting.  Reasonable notice must be given to enable unit holders redeem before the increase is implemented.

A retail AIF may derogate from investment restrictions for six month following launch subject to observing the principle of risk spreading.The limits of investment set out in the rules and in the prospectus  shall apply at time of purchase of investments and continue thereafter.  If they are exceeded, this must be recorded and the remediation must be a priority.

Retail AIFs must not invest more than 20 percent of its net assets in securities are not traded and are dealt in regulated market which is operated regularly and is recognized and open to the public.  It may not invest more than 20 percent of its net assets in  securities issued by the same institution.

Where the policy is to replicate an index, the limit may be increased to 35 percent in the case of a single issuer where it is justified by exceptional market conditions.  Retail AIF may not hold 20 percent of any class of any security issued by any single issuer.  This does not apply to investments in other open-ended investment funds.

An AIF may only invest more than 20 percent and up to a 100 percent is net assets in  transferrable securities issued and guaranteed by the state local authorities and public bodies of which one or more states are member states with the prior approval of the Central Bank.

A retail AIF shall not keep on deposit more than 20 percent of net assets with any institution.  This is increased to 30 percent of net assets in respect of credit institutions authorised in  the EU and certain other states a depository and in certain other cases, other institutions with the approval of the Central Bank.

It may only invest in open-ended investment funds provided the underlying investment funds are regulated investment funds.  It shall not invest more than 30 percent of its net assets in any one fund.  If it invest more than 30 percent of its net assets in other investment funds, it must ensure the funds in which the investor prohibit investing 30 percent, more than 30 percent of their assets and other funds.

It may not invest more than 20 percent of net assets in unregulated open-ended investment funds.  It may  only invest in units of an investment fund managed by a management company or AIMF if its s management company or AIFF are associated or a related company where the investment fund in which the investment is being made has waived initial preliminary and redemption charges that would otherwise apply.  It must ensure commissions or other fees received by the management company or AIMF are paid into the fund.

The fund may not have an exposure to a counterparty in an over the counter derivate transaction which exceeds 10 percent of its net assets or in any case where the counterparty is not a relevant institution.

A retail AIF may only be permitted to borrow and secure such borrowing on its assets where this is permitted by its constitutional document.  It shall not borrow or have borrowings more than 25 percent of its net assets of any time.  It may not offset credit balances against borrowings for the purpose of determining the borrowings outstanding.

Where a retail AIF engages in transactions in financial derivate instruments where the investment are hedged, it must comply with provisions relating to calculation of global exposure.  This also applies to rebook transactions where the additional leverage is generated through the reinvestment of collateral.

A retail AIF may only engage in transactions in financial derivative instruments where they are dealt with in the market which is regulated operating regularly and recognized and open in the public in a member state or non-member state.

There are also detailed conditions regarding the quality of the collateral, calculation of exposures on an ongoing basis, and calculations from exposures arising from margin obligations.  These must be calculated and reflected in the overall limitations under the funds.  There are further specific provisions dealing with issues of concentration, risk management and reporting and the calculation of global exposures.  There are requirements for ongoing calculation of global exposures.

There are provisions applicable to methods for calculating valuations. The accuracy of valuate risk methodologies must be monitored.  One must conduct back testing to monitor the accuracy and performance with methodology.  It shall compare back testing, certain testing on an ongoing basis and certain other testing periodically, testing deals a number of over shootings.  The methodology must be reviewed and adjusted.  Particulars must be reported to the Central Bank in a quarterly basis.

A retail AIF using value at risk methodology must have a rigorous comprehensive risk adequate testing program in accordance with qualitative and quantitative requirements which are set out.  They are to be adequately integrated into the risk management process and are to be considered when making investment decisions.  This shall cover all the risks that affect the valuation or the fluctuations in value of the retail AIF to any significant extent.

A retail AIF shall not enter efficient portfolio management transactions which could result in a change to the declared investment policy or add supplementary risks in comparison to the general risks described in its constitutional documents.

Repo  contracts and securities lending may only be allowed in accordance with normal practice.  There are requirements in respect of collateral for such arrangements.

A retail AIF must comply with its constitutional documents at all times.  It must entrust its assets to a depository for safekeeping.  It must prescribe the remuneration and expenditure which the management  company or general partner are powered to charge.

It must specify in its constitutional documents the maximum charges relating to redemption and repurchase or units. It must specify the conditions for creation and cancellation of units and withdrawal of contribution.  It specify the manner of application of income.

It must set out the procedure to be followed for replacement of the manager.

Depository may not be replaced without the consent of the Central Bank.

The retail AIF may only issue bearer securities with the prior approval of the Central Bank.  It must issue registered certificates where  this is allowed by its constitutional documents.

Where retail AIF must specify in its constitutional documents rules for valuation.  They must define the expected method of valuation.

The fund may only purchase or sell assets at prices which conform with the rules in its constitutional documents. It may only redeem or repurchase units by dividing the net asset value of the fund by the number of unit.  Such price may be decreased by duties and charges.

There are provisions for valuation of various classes of assets including traded securities, investment funds, cash exchange, trade of derivative contracts, over the counter derivative contracts (in respect to which there are detailed requirements)

Fund must in this constitutional document specify that notwithstanding the expected valuation methods, valuation of a specific asset may be carried out under an alternative method that is deemed necessary and approved by the depository and the rationale and methodologies are clearly demonstrated.

There are provisions in relation to conditions on which classes of shares may be created.  They may only create one or more share classes or within the fund or subfunds subject to the conditions in the constitutional documents.  Each subfund being a single common pool, the are  assets not to be allocated to individual share classes.

There are provisions for umbrella retail investment funds.  It must get Central Bank approval for each subfund.  Each subfund must comply with the requirements to which it is subject.

The constitutional documents must provide the assets to be subfund shall belong exclusively to the relevantof fund and shall not be used directly or indirectly to discharge liability and claims of other funds.

There are conditions for establishment of subsidiaries and the making of investments through subsidiary.  Prior Central Bank approval is required.  It must be wholly owned and controlled by the fund. The subsidiary must not be an issuing body on investment fund.

Fund may not enter into a transaction with a management company, depository manager, certain connected parties save  where it is negotiated arms’ length and in the best interest of unit holder.  Transactions permitted are subject to certified valuation by person approved by the depository, usually on the best terms or specific confirmation.  In the case of a transactions with the depository that conforms to the above principles.