Constitution of Funds

Overview

Funds may be constituted as a unit trust, a common contractual fund, a company (2015 Act) or an investment limited partnership.  It may be authorized by the Central Bank as a UCITS or alternative investment fund.

A UCITS fund may be sold to the public.  There are, accordingly, significant restrictions on investment and borrowing.

The alternative investment fund is a collective investment undertaking which raises capital from investors with a view to investing it in accordance with a defined investment policy for the benefit of investors. The alternative investment firm manager is an entity whose business is managing one or more AIF.  An AIF is, by definition, not a UCITS.

AIFs

There are two principal categories of AIF funds, an AIF retail fund and an AIF qualifying investor fund (QIF).  Each is governed by a Central Bank rulebook replacing non-UCITS notices.

Retail funds have similar regulatory requirements to UCITS funds.  QIF funds are aimed at more sophisticated investors who qualify in accordance with criteria.  See generally the chapter on qualified investment funds.

QIFs are subject to fewer investment limitations, including the unrestricted ability to borrow and engage in leverage, provided this is clearly disclosed.

Managers of AIFs may market funds to professional investors throughout the EU on a passport basis.  It is possible to create segregation of funds within a single legal vehicle.  They may have to segregate assets so that their assets may not be available in the winding up of other sub-funds under the same umbrella.

All funds under the umbrella have the same regulatory status.

Open & Closed Ended

An open ended fund is one which investors may redeem on a long going basis at least quarterly.  UCITS funds are always open-ended close.

Closed ends funds may limit redemptions for protracted periods.  An AIF may be closed-ended or open-ended.

There may be funds with intermediate degrees of liquidity in terms of the frequency of redemption.

Key Service Providers

The key fund service providers and participants will require regulation by the central bank.  This includes, in particular, the promoter, manager, investment manager, trustee or custodian and administrator.

The promoter may be an investment manager and constitute an investment manager of the fund.  A promoter itself may be required to be proved if not previously approved by the central bank.

If the investment manager makes discretionary investment decisions, a manager’s funds assets on an ongoing basis may be the promoter entity but need not be so; it will need to be — if a separate entity, it will need to be regulated, authorized by the central bank in its own right or authorize in another EU state.  It will be subjected to regulation under MiFID.

There may or may not be a separate management company.  Where the fund is self-managed, the UCITS notes prescribe management obligations, including minimum capital obligations.

Regulatory Approval

AIF management companies must be approved by the Central Bank and comply with the requirements for UCITS management companies. The fund itself must be authorized and approved by the central bank.

The review involves a review of the documentation for the fund, including the prospectus.  The Bank may rely on the confirmation of legal advisors in relation to ancillary documents.

Following the submission of the fund documents, the Central Bank may revert with comments, requirements, and the promotional notion, which its advisors must seek to revise the document and deal with issues raised by the central bank.

An approved entity may be established and undertake the necessary corporate organisation and then enter the key contracts referred to above.  Final documentation is submitted to the Central Bank prior to the proposed authorisation date once in order for the central issue authorisation on the same business day, and the fund may be launched.

There is an expedited process for authorisation of a qualified investor AIF.  The bank does not engage in a prior review relying on confirmations from directors and legal advisors that the document complies with the rules.

Key Documents

The prospectus is the offering document to investors.  The fund is contractually obliged to comply with the prospectus.

The memorandum and articles of association,  trust deed, deed of constitution and deed of partnership will be the relevant constitutional document of the fund depending on whether if it is formed as a company, trust, contractual fund or partnership.  It will define the operation of the fund and the rights of investors.

The custodian agreement must be entered with the entity responsible for safekeeping assets.  In the case of a unit trust, the trustee may provide for the custodian/ trustee relationship.

The management agreement is the agreement between the fund and the manager.  In the case of contractual funds or trusts, it may be provided for in the trustee deed itself.  In the case of a corporate fund, the management agreement will be entered.

The investment management agreement provides for the appointment of an investment manager to deal with the discretionary management of investments. A prime broker agreement may be entered in the case of a qualified investor fund.

A form of application form is completed with the Central Bank for UCITS or AIF.  Letters of confirmation are required from legal advisors and others to provide confirmation to the central bank on key issues.  The notes and guidance notes and notices find the banks’ requirements and are set out in detail in different chapters.

The fund may be listed on the Irish stock exchange.  The stock exchange publishes listing particulars for funds which cover many of the same areas as the central bank required prospectus.

Key Responsibilities

The investment manager is responsible for investment.  This is subject to the conditions and restrictions in the prospectus and the constitutional documents.

It instructs the custodian respect of the purchase, sale and transfer of assets.  It must report all transactions to the custodian and administrator.  It refers to investment in management reports.

A unit trust or common contractual fund must appoint an Irish resident management company.  This is not required in respect of a corporate fund.  The promoters may establish a special-purpose company to manage the fund.

The manager provides investment management and advice, accounting administration services, and general management services.

The custodian takes responsibility for the safekeeping of the fund’s assets.  It must ensure that the decisions comply with the prospectus and limitations and conditions applicable to the fund.

The custodian is responsible for maintaining and safeguarding the assets of the fund.  It must be a bank or have substantial capitalisation.

The administrator undertakes administrative duties of the fund.  It may act as a registrar of investors and process payments and subscriptions. The administrator must be regulated and have the required capitalisation.