Funds General

Types of Fund

There were two broad types of investment funds in Ireland, UCITS and AIF. There are five types of legal structures:

• unit trust,
• contractual fund,
• investment limited partnership,
• investment company and
• Irish Collective Asset Management Vehicle.

Service Provider

The Central Bank authorises funds. It requires the appointment of

• an administrator,
• Irish-based depository/custodian; management company (Unit Trust and CCFs);
• Alternative Investment Fund Manager, where applicable;
• board of directors, where applicable;
• discretionary Investment Manager;
• Irish counsel;
• Irish-regulated external auditor.

ICAVs

The Irish Collective Asset Management Vehicle commenced in March 2015. It was designed to meet the demand of European investment funds and was intended to become the investment vehicle of choice for both AIFs and UCITS in Europe.

The ICAV is registered and authorised by the Central Bank. It provides a system of regulation similar to company law but distinct from it. Accordingly, it stands aside from the general provisions applicable to trading companies.

The ICAV may elect to be classified under certain US  taxation rules as an eligible entity.

The legislation allows for segregated assets and liabilities of sub-funds of an umbrella investment company, unit trust, ICAV or common contractual fund.

UCITs

UCITS are open-ended retail investment vehicles which invest in transferable securities and liquid financial assets. There were restrictions on borrowing and investment and the use of leverage and derivatives.

They may invest no more than 10% of net assets in unlisted securities. There is a maximum of 10%, which may be invested in any issuer. Where a fund invests more than 5% in a single issuer, the maximum holding over 5% is 40% of the Net Asset Value of the fund.

The UCITS fund was originally the only type of fund which could be distributed and sold to investors in another EU State.

AIFs

Alternative Investment Funds comprise two principal categories. A Retail Investor Alternative Investment Funds comprise two principal categories, a Retail Investor Alternative Investment Fund and a Qualifying Investor Alternative Investment Fund. There are investment diversification and borrowing restrictions applicable.

Certain investment and borrowing restrictions do not apply to a Qualifying Investor Alternative Investment Fund. The previous Qualifying Investor Fund regime was replaced by the new regime. Qualifying investors are institutions or persons with defined high net worth. See the separate sections. A QIAIF is not subject to any investment, borrowing or leverage limits. There is an obligation to spread risk.

The Retail Investor AIF replaced the previous Non-UCITS investment fund category. They are subject to fewer investment and asset restrictions than applied under the UCITS scheme. There are, however, significant investment and borrowing restrictions, including that borrowing may not exceed 25% of net assets.

A QIAIF may have an EU or non-EU Authorised Investment Fund Manager. The same applies to RIAIF. The authorised may market AIF to professional investors in the EU States.

AIF Fund Managers

The Alternative Investment Fund Managers Directive provides harmonised conditions for the operation of Alternative Investment Funds Managers. They may use passport rights in the EU to market Alternative Investment Funds, including QIAIF and RIAIF, to professional investors. They may manage AIFs in other States.

The AIFMD applies to hedge fund managers, private equity fund managers, real estate fund managers and operators of alternative investments operating and marketing to investors in the European Union.

UCITS seeks to update the regime to bring it in line with AIFMD. It provides for

• a new depository regime, including clarification of the eligibility, depository eligibility duties, responsibilities and liabilities;
• new rules governing remuneration policies of UCITS managers consistent with AIFMD and Capital Requirements Directive,
• harmonisation of minimum administrative sanction.

It was to be transposed into law by 18 March 2016.

Offering Document

A prospectus or offering document is a document issued prior to the sale of units in a fund. It sets out the terms of the investment. It must contain all information necessary to allow investors to make an informed assessment of the merits and risks of investing in the fund.

The directors or other management entity within the relevant fund constitution is responsible for the offering document. Their names are set out and they must accept responsibility for the information contained. They confirm that to the best of their knowledge, having taken reasonable care to ensure that this is the case, the information contained is in accordance with the facts and does not omit anything likely to affect the import of such information.

Many funds are umbrella funds with multiple sub-funds. The offering document must contain a prospectus about the fund and also the sub-fund. There is a supplement referable to each sub-fund.

The prospectus will set out the particulars of the

• the legal structure employed,
• nature of management,
• service providers and material contracts, including in particular, auditors, administrators, management companies, custodians, investment advisors and legal advisors;
• risk factors and investment warnings;

It will set out provisions in relation to accounts and information, fees and expenses, taxation, unit holder meetings, organisation of classes, termination and winding up.

The supplement is to set out particulars of the sub-fund investment objective, proposed investment types, investment instruments, investment approach, investment restrictions, and asset classes.

It will set out its approach to leveraging, where applicable. In particular, as to how it is to be employed and calculated.

It will set out details of classes, currencies, investments and holding levels, distribution and dividend policy, dealing procedures and rates of performance fees, and providers fees.

KIID

Key Investor Information Document KIID is to be a two-page summary of information relating to the investment. The key investor information document is set out in two pages, in plain language, key information for retail investors. It is to set out

• investment objectives and policies, including summaries of objected policy instruments;
• risk and reward profile,
• charges including entry and exit charges,
• ongoing charges and fees,
• past performance charts,
• practical information.

KIID may be applied to particular sub-funds classes. A particular show class may be selected to represent other classes, provided that this is not misleading.

UCITs

The capital of a UCITS is generally raised by subscription in the EU, by way of an open offer. Shares in the fund must be redeemable on demand. Formerly, under the original version of UCITS, investment was limited to transferable securities. This has been expanded into eligible assets as defined. The assets must be held by an independent depository or custodian.

Each UCITS is to produce a key investor information document. This is a simple document, in simple terms, designed to inform the investor of the main features of the investment. Eligible assets now encompass transferable securities. This is a typically

• stock, shares and debentures debt.
• It may include hybrid investments and money market instruments. The investor itself must be regulated.
• Other collective investment schemes;
• cash deposits, maturity of less than 12 months;
• exchange traded derivatives or over-the-counter derivatives. This was originally limited to investment for official portfolio management. However, subject to conditions, it may invest in exchange-traded derivatives, over-the-counter derivatives and other derivatives subject to detailed conditions and restrictions.

UCITS are tightly regulated in terms of investment and borrowing restrictions. They limit leverage severely, at least 90%. Generally, at least 90% of net assets are to be invested in

• transferable securities and money
• market instruments issued on a listed or stock exchange.
• Money market instruments are securities that are to be admitted to an exchange within a year.
• Units of UCITS;
• units of other collective investment schemes;
• deposits with credit institutions and financial derivative instruments.

Not more than 10% may be with any one issuer, subject to exceptions.

The UCITS Regulation allows marketing throughout the EU. They can be marketed in other EU States without having to comply with any local securities laws. The fund must be authorised by the Central Bank in order to market abroad. Information must be submitted to the Central Bank and passed to the applicable Member States. The advertising documents, including the prospectus and KIID must be submitted to all authorities;

UCITS must comply with Marketing Regulations on domestic holders by the host State. They are subject to the advertising rules of the host State. The marketing documents, including KIID, must be published in the language of the host State. Paying agencies’ requirements may be required in the host State.

AIF’s Scope

Alternative Investment Funds cover all non-UCITS funds. It includes real estate funds, hedge funds, and commodities funds. An AIF may, in principle, invest in any type of assets. Individual AIF may, of course, be restricted to particular purposes.

The Alternative Investment Funds was established under EU Regulation in 2013. It seeks to establish a harmonised framework for monitoring and supervising Alternative Investment Funds, in particular in relation to risk to investors, financial market participants and counterparties to assist financial stability, to establish a harmonised EU system permitting passporting of products and services through the EU.

An AIF is an Alternative Investment Fund. It includes any collective undertaking, including the investment elements which raise capital from a number of investors with the view to investing it in accordance with a defined policy for the benefit of those investors, which is not subject to authorisation under the UCITS Directive.

The above applies to open-ended and close-ended funds, irrespective of their legal form, whether they are listed or unlisted and their structure. The investment compartments or sub-funds do not apply to an investment by a single investor.

The fund will not generally have a commercial or industrial purpose. Its essence is to raise funds from investors to generate a pool return. Generally, the unit holders or shareholders were not important to management or control.

Qualifying Alternative Investment Funds are open to professional investors. There is a minimum subscription of €100,000. However, there are very few investment restrictions.

Depositary & Manager

The assets of the funds must be maintained by an independent depository. The depository must have a certain minimal capitalisation, and it will generally be only satisfied by credit institutions or large-scale investment firms.

In the usual way, the depository is obliged to monitor compliance and undertake the safekeeping of assets. Safekeeping may be delegated in accordance with a written contract with the fund, particulars of which must be disclosed to the investors.

An AIF manager is subject to separate regulations. Each AIF must have a manager who is responsible for compliance with the AIF Management Directive obligations. Managing encompasses risk management or portfolio management.

The Manager may be an internal manager appointed by the fund. It may be the governing body of the fund. If mismanagement or portfolio management is delegated, the delegatee must itself be authorised by the Central Bank for these functions or by equivalent EU institutions. Delegates may be situated outside the EU but are subject to more stringent requirements. There must be an agreement in place with the State concerned in this regard.

AIFs must have policies for the valuation of their assets which are capable of an objective and independent valuation. The valuation may be undertaken by the AIF or may be delegated.

Regulator

Central Bank is the regulator of AIFs, AIFMs and UCITS in common with other financial service providers. The application must show that the AIFM has sufficient funds, suitable shareholders, sufficient management and staff of sufficient experience and repute and is in a position to comply with its obligation. There must be procedures in place to deal with risks. This risk must be capable of identified and managed.

The authorisation as UCIT managers and AIF managers is distinct from MiFID investment services authorisation.  The investment manager must have a remuneration policy and practice where the categories of staff are consistent with and promote effective risk management.

They must not incentivise risk-taking inconsistent with the risk profile rules of the AIF that they manage. The AIFM must determine remuneration and policies practice in accordance with the criteria set out in that Directive.

Remuneration

The ESMA has published remuneration guidelines. They are applicable to certain categories of staff. Remuneration covers all types of payments, including payments and benefits in kind. Remuneration is to be disclosed in financial statements.

There were rules as to how variable remuneration may be paid. Equivalent rules apply to the UCITS as and from 18 March 2016. The UCITS remuneration guidelines are broadly the same.

Managers & Delegation

An AIF must identify the manager responsible for portfolio and risk management for the fund. They will also be usually responsible for administrative and investment management under the management agreement. The competent authority must be notified before delegation arrangements are effective.

The Central Bank must be notified of the delegation. The delegation structure or purpose must be justified. The delegate must have the resources to perform the relevant tasks. The delegation must not be to such an extent that it ceases to be an AIF Manager.

The AIMF may not delegate portfolio management and risk management functions to the depository or a delegate of the depository. They may be delegated to other entities.

The AIF Manager must create and maintain a programme of activities document which must be approved by the competent authorities.

UCITs

Broadly similar provisions apply to UCITS.  See separately in relation to the detailed rules applicable to UCITS and AIF.  UCITS are limited in terms of the instruments in which they can invest. No more than a certain percentage may be invested in particular entities. Investment in property is not permitted. Precious metals, etc.

The Central Bank authorises funds. The following is usually required.

• application for authorisation
• a draft prospectus, trust deed, custodian deed
• completed information IQs on directors;
• draft risk management process with respect of derivatives;
• draft business plan application;
• prospectus,
• trust deed,
• custody agreement, where applicable.
• custodian letters regarding share classes;
• custodian’s letters regarding registration and assets.

Upon notification of clearance, marked up, updated versions are required to show relevant data. Original executed agreements, including instruments of incorporation, management agreement, administration agreement, investment management agreement, and final prospectus.

Filings

Initial filing to include

• application form,
•  business plan,
• questionnaires regarding external management companies,
•  information on remuneration,
• policies and practices,
• delegation and sub-delegation arrangements,
• statement of responsibility.

Post-authorisation filings are required in respect of

• amendments of documents,
• creation of new sub-funds,
•  change of service provider,
• revocation of approval of funds.

Post-authorisation filings  may avail of a fast-track procedure.

Fund Management and Service Providers

The manager of a UCITS fund may be the fund itself or an external manager. Self-managed funds must be authorised as a UCITS management company or an AIF manager. Externally managed funds must appoint a unit funds management company or AIF manager. They are appointed by a management agreement.

The management company, whether self-managed or externally managed, must be authorised by the Central Bank. It must submit a business plan and programme of activities.

This must set out

• fund risk management,
• regulatory compliance,
• investment management,
• operational risk management,
• distribution,
• capital and financial management,
• details of how the above six management functions are to be complied with.

It must set out details of directors, designated persons, delegates reporting to designated persons, and organisational effectiveness.

The management agreement or AIF management agreement may allow delegation of portfolio management, risk management or distribution services. No delegation is permitted of custodian or depository services to the management company. It must be dealt with directly by the fund with the custodian or depository.

• It must pay fees of its delegates from its own fees or from fund assets.
• It must exercise due care and diligence in selecting the delegates.
• It must monitor and supervise delegates.
• It is liable for fraud, negligence, and bad faith in the performance of its duties.

The administration agreement may provide for the appointment of the administration registrar or transfer agency services. It may provide for fund accounting and financial reporting duties, including calculation of a NAV, unit prices, fees, and maintenance of records of transactions.

The registrar and transfer agency will provide for the maintenance of registers of unit holders, administration of subscriptions, transfers and redemptions. Compliance services may be contracted in respect of tax compliance and money laundering.

Depositary Agreements

The depository agreement provides for the appointment of a custodian or depository to provide safekeeping and custody of assets. There is a provision for strict liability under AIFMD and UCITS 5.

The depository is likely to be liable under the agreement for loss caused by its negligence or failures. Tt is to be responsible for

• safekeeping and custody of financial instruments;
• asset ownership verification,
• oversight of funds,
• monitoring of investments and borrowing limits;
• monitoring of cash flows;
• inquiries into the management of the  fund and management company
• reporting to unit holders where required;
• monitoring and oversight of delegates.

Investment Management Agreement

The investment management agreement provides for the provision of investment management services. It may provide for full and discretionary power and authority to manage the assets of the fund or a sub-fund. There are general obligations

• to perform functions in accordance with the investment objectives and policies, strategies and limits of the prospectus,
• report to the fund on the performance of sub-funds,
• liability for negligence, bad faith in the performance of duties,

Its activities are subject to oversight by the depository.

The risk management process for the UCITS is prepared by the investment manager. It details

• financial derivative instruments the investment manager will employ in respect of the sub-fund
• how it will measure, monitor, and manage risks attached to the positions,
• how the leverage of the fund will be calculated,
• worked examples using prescribed methods of calculation