Non-UCIT (Pre-2013) Investments

General Investment Restrictions

General investment restrictions are applicable to non-UCIT schemes.  The following applies to all UCIT schemes except where dis-applied by schemes, by notices relating to schemes with specific investment and/or marketing objectives.  Schemes may derogate from the investment restrictions for six months following the date of their launch, provided they adhere to the principle of risk sharing.

The investment objectives and policies of the scheme must be clearly defined in the prospectus with sufficient information to enable the unitholder to be fully aware of the risks they enter.  A scheme may not invest more than 10% of its net assets and securities which are not traded on a market provided for in the constitutional document.  Restrictions in the respect of markets may be imposed by the Central Bank case-by-case.

A scheme may invest not more than 10% of its net assets in securities issued by the same institution.  Where the scheme has a sole objective of investments in Irish equities, it may derogate from the limit as follows: up to 15% of net assets may be made in an equity which has a weighting in excess of 10% of the ISEQ index.

An investment of 12.5% of net assets may be made in equity, which has a weighting between 8 and 10% of the ISEQ index.

Not more than 10% of the net assets may be kept on deposit with any institution.  This increases to 30% for certain credit institutions authorised by the EU by a State party to the Basle Capital Convergence Agreement (Switzerland, Canada, Japan, United States).

Credit institution authorised in Jersey, Guernsey, the Isle of Man, Australia or New Zealand.  In the trustee or a credit institution which is an associated or related company of the trustee, on a case-by-case basis.

In the case of an equity exchange index, the limit of 10% may be increased to 20%, subject to conditions. A scheme may not hold more than 10% of any class of security by any single issuer.  This does not apply to investments in other collective investment schemes of the open-ended type.

An investment company or a management company, in connection with all of the schemes it manages, may not acquire any shares carrying voting rights which would enable it to exercise significant influence over the management of an issuing body.

Investments

A scheme subject to authorisation by the Central Bank may invest up to 100% of its assets in transferable securities guaranteed by any State, local authorities, constituent elements or public international bodies of which the States are members. Full disclosure is to be made in the prospectus indicating the authorities and bodies concerned.

A scheme may acquire the units of another open-ended collective investment scheme subject to the following:

• the scheme may not invest more than 20% of its net assets in such schemes;
• may not invest more than 10% of net assets in unregulated schemes;
• where a scheme invests in a collective investment scheme managed by the same management company or associated or related company, the manager must waive preliminary, initial and redemption charges which would normally apply;
• where a commission is received by the manager by virtue of an investment in units of another collective scheme, this commission must be paid into the property of the scheme.

The Central Bank may allow derogations in the limits above to a scheme investing in another collective investment scheme or companies which are authorised or incorporated in non-EU States where they invest their assets in the securities of an issuing body which have their registered office in that State and where under the legislation of that State, this holding represents the most effective way in which the scheme can invest in the securities of that State.

The Central Bank may authorise a scheme to wholly own the shares of a limited company which would, in turn, invest in investments which are permitted under the notices where it is satisfied that this is justified as being in the interests of unitholders.

The limits on investments are deemed to apply at the time of purchase. If they are subsequently exceeded, the scheme must adopt as a primary objective remedying this position, taking into account the interests of unitholders.

A scheme may employ techniques and instruments for the purposes of efficient portfolio management and to provide protection against exchange rate risks under conditions laid down in other notices.

A scheme may engage, to a limited extent, in leverage through the use of techniques allowed in NU 16.  The maximum potential exposure created by the techniques and instruments or created through borrowing, shall not exceed 25% of the net assets of the scheme. The prospectus must disclose a scheme’s intention to engage in leverage.

A scheme may hold ancillary liquid assets.  A scheme may not carry out sales of transferable securities when they are not in the ownership of the scheme. A scheme may invest in warrants on transferable securities where they are traded or dealt with on a market which is provided for in the constitutional document.  Where this is so, a specific warning is required.  In other cases, no more than 5% of net assets may be invested in such warrant.

Techniques for efficient portfolio management may only be used in accordance with objective objects of the scheme.  It must be economically appropriate to efficient portfolio management.  The intention to use techniques must be disclosed.

Use of Derivatives

There are specific provisions in respect of derivative contracts.  There is specific restrictions and conditions on the basis and terms of call and put options on securities.  The assets, the subject of the securities must be maintained in the ownership of the scheme generally.  Put options may be written and sold on condition that the exercise value of the option is held by a scheme in liquid assets.

Futures contracts may be purchased on the condition that the exercise value is held at all times in liquid assets.  Future contracts may be sold on condition that the subject of the contract remains in the ownership of the scheme or on condition that all of the assets of the scheme or a proportion of such assets, which may be less in value than the exercise value of the futures contracts sold can be reasonably be expected to behave in terms of price movement in the same manner as the futures contract.

The total amount of the premium paid or received for options, together with the amount of initial margin paid for futures, may not exceed 10% of the net asset values of the scheme. The above conditions do not apply to transactions to close out an existing position.

Purchased and sold derivatives may be regarded as a single position provided both relate to the same underlying asset or if not the same, in the case of underlying fund income securities which bear a high degree of correlation in terms of price movement and are cash settled with the same currency exposure.

Both are to be sufficiently liquid and are mark-to-market on a daily basis. In the event that one of the positions is exercised, arrangements are such that the scheme will have the cover necessary to fulfil its actual or potential obligations under the outstanding position.

There are specific provisions regarding over-the-counter derivatives.  They are subject to additional requirements. Swap instruments must not expose the scheme to risks which would not otherwise be assumed.  The obligations of the scheme must be held at all times in liquid assets.

The counterparties must have a minimum credit rating of A-2 or equivalent or that scheme must be indemnified as a result of a failure by the counterparty by such entity.

The exposure to the counterparty must not exceed 10% of net assets (or under certain conditions 30%).  Exposures must take account of all exposures that the scheme might have to the counterparty.

The scheme must be satisfied that the counterparty will value the derivative with reasonable accuracy and on a reliable basis and that it could be sold, liquidated or closed by an offsetting at a fair value at any time at the scheme’s initiative; a clear description of the swap instruments which the scheme intends to use must be set out in the prospectus.

Periodic reports must provide information on swap instruments entered during the reporting period.

Where the swap instrument is a Credit Default Swap, the contract must be subject to daily valuation by the scheme and independently valued at least once a month; and the risks attached to the swap must be independently assessed on a half-yearly basis and the independent report submitted to the scheme for review.

The net maximum potential exposure created by such techniques and instruments or created through borrowing or through both shall not exceed 25% of net assets.

Stock Lending & Repo

There are provisions regarding the use of Repurchase/Reverse repurchase options and stock lending. They must only be used in accordance with normal market practice.  There are specific provisions regarding collateral.  Collateral obtained under a repo contract or stock lending arrangement must be in a number of liquid assets, including securities issued by public bodies or equity securities traded on a stock exchange in the EEA or other states.

Until the expiry of the contract or stock lending arrangement, collateral obtained must be marked to market daily;  must equal to at all times the value of the amount invested; must be transferred to the trustee or agent; or must be immediately available to the scheme without recourse to the counterparty, in the event of default by that entity.

Non-cash collateral cannot be sold or pledged, must be held at the risk of the counterparty, and must be issued by an entity independent of the counterparty. Cash collateral may only be invested with high rated entities.

A scheme may enter into a stock stock-lending programme organised by generally recognised International Central Securities Depositaries Systems, provided the programme is subject to a guarantee by the scheme operator.

The counterparty to a repo contract must have a minimum credit rating of A-2 or equivalent.

A scheme must have the right to terminate the stock lending arrangement at any time and demand a return on all securities loaned.  The agreement must provide that, once such notice is given, the borrower is obligated to redeliver the securities within 5 business days or other period as is normal in the market.

Repo contracts or stock lending do not constitute borrowing or lending for the general purpose of the NU notes.

A scheme may employ techniques and instruments intended to provide protection against exchange rate risks, including cross-currency hedging, in the context of management of its assets and liabilities.  The exposure of the scheme to foreign currency risk must not be leveraged.  The intention to enter such transactions must be disclosed in the prospectus, including details of the currencies. The periodic reports should indicate how these transactions have been utilised.

Professional Investors

The general conditions and restrictions in notices for non-UCTIS investment schemes may be dis-applied in the case of schemes marketing their units to professional investors only.  They may be dis-applied in whole or in part on a case-by-case basis.

To qualify for this derogation, the scheme must have a minimum subscription of €100,000 or equivalent in other currencies.  The aggregate investments in sub-funds can be taken into account for this purpose.  The amount of subsequent subscriptions who have already subscribed in €100,000 is unrestricted.

An exemption from the minimum subscription requirement can be granted to the following.

• management company or general partner.
• Investment management company or advisory services company.
• Director of the same.
• Employee of the same.
• Where the employee is directly involved in investment activities or is a senior employee of the company who has experience in the provision of investment management services.

Exemption may also be granted to investors who are trustees of pension plans provided the investors commit to invest the subscription period within 12 months from subscription.

The prospectus must include a prominent warning that the standard Central Bank conditions in relation to investments and leverage do not apply.

The prospectus must describe the investment objectives of the scheme in a comprehensive, accurate, readily informable, comprehensible manner such as to be sufficient to enable investors to make an informed judgment on the investments proposed.

The prospectus must  contain quantitative parameters, which  limit  the extent  of leverage that will be engaged in by the scheme and the extent to which investments of  the scheme will be concentrated in a single or narrow range of exposure.  The limit should be relevant to the investment policies of the scheme.  Where the scheme may employ more than one investment policy, different limitations may be applicable.

Schemes marketing solely to professional investors are not required to make public the issue on redemption price of the shares.  However, they must be made available to unitholders on request.  Periodic reports issued by a scheme, marketing solely to professional investors, must disclose that distributions have been made out of the capital of the scheme.

Venture or Development Capital Schemes

Collective investment schemes which invest in venture and development capital investment are subject to following rules in addition to general rules.  Certain general rules may be dis-applied as below:

the title must make clear that the scheme is a venture or development capital scheme.  The minimum subscription must be €12,500 or foreign exchange equivalent.  The scheme may not invest more than 20% of its net assets intended for investment in venture or development capital investments in any one company or group of companies.  The scheme may derogate this for a year from its launch from this requirement.

The requirements include general restrictions on investment, limiting holdings to 10% and prohibiting investment in a company where significant control or influence is exercised, which is dis-applied. The scheme may provide for partly paid units or shares.

The redemption procedure must be fully disclosed in the prospectus.  The investment advisory company, general partner, management company, etc., must have specific experience in the area of investment in venture or development capital.  There are special requirements with respect to the reports, annual and bi-annual, half yearly.

The prospectus must contain a description of the risks involved, including a prominent warning that above-average risks are involved and the suitability of the type of investment being owed for persons in a position to take such a risk. The risk and likelihood of delays in meeting redemptions in respect of unquoted shareholdings and a recommendation that more than 5% of an investor’s portfolio be invested in such a scheme.

The prospectus must also contain information on conflicts of interest and issues between the management company and the investment adviser.   Where the scheme invests principally in venture and development investments, issue and redemption prices must be made available after evaluation of the portfolio has taken place at least twice a year.

Umbrella Schemes

Where an investment scheme is constituted as an umbrella scheme, each sub-fund must comply with the laws, regulations and conditions in relation to collective investment schemes.  The prospectus must clearly state the charges applicable to the exchange of units in sub-funds if any.

The constitutional documents must provide the assets of each fund are not to be used directly or indirectly to discharge the liabilities of any other fund and are not to be available for such purpose.

The prospectus must set out that the fund is an umbrella fund with segregated liability between sub-funds.

A unit trust of a common contractual fund constituted as an umbrella fund, may have separate periodic reports for each fund.  The report must name the other sub-funds and state that each sub-fund report is available free of charge on request.

An investment company must include accounts for all sub-funds of the company in its periodic reports.

An umbrella fund which has been authorised by the Central Bank must obtain approval for each sub-fund.  Details of the proposed sub-funds and the amendment or supplement to the prospectus, which will set out the investment objectives and policy for the new sub-funds, must be submitted for approval.  Where the supplement to the prospectus is issued, the supplement must state that the scheme is constituted as an umbrella fund and name other sub-funds.

Investments by a sub-fund within an umbrella scheme in the units of another sub-fund must, in addition to both provisions not invest in a sub-fund which in itself holds units in other sub-funds within the umbrella.

Investing sub-fund may not charge an annual management fee in respect of part of the assets in the other sub-funds.

Investments by a sub-fund within an investment company constituted by an umbrella scheme in the schemes of another sub-fund by way of transfer for consideration are subject to prior notification to the Central Bank.