Qualifying AIF Operation

Table of Contents

Subscription Conditions

A Qualifying Investor AIF shall have a minimum subscription of €100,000 or other equivalent in another currency. It shall not accept subscriptions from persons or groups amounts of less than this for individual investors.

The fund may only accept subscriptions from investors whois a professional clients within the meaning of the MiFID Directive;

receives an appraisal from a credit institution, a MiFID firm or a UCITS management company that the investor has appropriate expertise, experience and knowledge to adequately understand the investment in the fund or;
certifies that he is an informed investor by providing confirmation that he has such knowledge and experience in financial and business matters as would enable the investor to properly evaluate the merits and risks of a prospective investment or confirmation that the investor’s business involves whether for his own account or account of others, the management, acquisition or disposal of property of the same kind as the assets of the fund.

Within the EU, the fund may only be marketed to professional investors as defined by the Alternative Investment Fund Directive unless the Member State permits sale to a wider category equivalent to those above.

The fund may grant an exemption from the minimum subscription to the management company or general partner;

a company appointed to provide investment, management or advisory services to the fund;
a director of the fund, investment company or general partner or director of the company;
an employee of the management company, investment company or general partner appointed to provide the relevant services to the fund, where the employee is directly involved in the activities, investment activities of the fund or as a senior employee of the company and has experience in the provision of investment management services.

In the case of investments by employees, the fund must ensure that the management company, investment company on general partner etc. is satisfied that the prospective unit holders fall within the criteria above. The fund must ensure that investing employees must certify that they are availing of this exemption and that they are aware that the investment is normally limited to a minimum subscription of €100,000.

The fund must ensure that the prospective unit holders certify in writing that they meet the minimum criteria above and are aware of the risk in the proposed investment and in particular, the risk of losing the entire investment.

Raising Funds & Fees

The fund shall raise capital from the public through debt securities. This does not restrict it preventing issuing notes on a private basis to a lending institution to facilitate financing arrangements. Details of the note must be provided for in the prospectus.

The fund shall not grant loans or act as a guarantor on behalf of a third party. This does not limit its acquisition of debt securities or securities which are not fully paid or entered into bridging financing transactions where the financing extended to the fund is backed by sufficient legally binding commitments to discharge the financing within the requisite times.

The fund may not employ a management company or partner which has an interest in any investee entity. This does not apply to investments in other funds nor to funds which are venture capital, development capital, or private equity qualifying funds. The position must be disclosed in the prospectus. In any such case of an investment, the preliminary initial and redemption charges must be waived.

The calculation of performance fees must be verified by a depositary or a competent person appointed by the fund manager and approved by the depositary.

The fund shall specify in its constitutional documents the maximum annual fee charged by the manager or equivalent entity. It shall not be increased without approval of the majority of votes at the general meeting.

In the event of such approval, the dissenting shareholders must be able to redeem their shares within a period.

The fund shall specify in its constitutional documentation or prospectus the maximum charge relating to the redemption or repurchase of units. Once again, this may only be varied by General Meeting and dissenting holders must be allowed to sell their shares before implementation.

Key Constitution Requirements

The fund must comply with its constitutional documents. It must entrust its assets to a depository for safekeeping. It must prescribe in its constitutional documents the remuneration and expenditure which the management company, general partner and depository are empowered to charge and the method of calculation of such remuneration, the costs to be borne by the fund.

The fund is to specify in its constitutional documents the manner of application of its income. It shall, where relevant, specify the circumstances under which they may be affected and the procedure to be followed for the replacement of the management company.

The depository may not be replaced without the approval of the Central Bank. The constitutional documents must specify procedures.

There are restrictions on the issue of bearer securities. Prior consent of the Central Bank is required. There are special protections regarding subscription and redemption of assets in specie. They relate to valuation entrustment to the depository and the depository being satisfied that they do not materially prejudice existing unit holders.

The fund shall specify in its constitutional documents the rules for valuation. They must clearly and unambiguously define an expected method of valuation and a framework for variations in the valuation. Assets may only be purchased at valuations in accordance with the rules.

Redemption

Units may only be sold if the price is arrived at by dividing the net asset value of the fund by the number of units. The price may be increased by duties and charges. Units may be redeemed and repurchased at a price arrived at by dividing the net asset value by the number of units. Such prices may be decreased by duties and charges.

Where the fund is an open-ended Qualifying Investor Fund, it shall provide redemption facilities on a quarterly basis at least. Where a qualifying fund is an open-ended qualifying fund, it shall provide redemption facilities on at least a quarterly basis. It shall redeem on request, at least 10% of its net assets on a monthly basis of 25% on a quarterly basis. It shall not impose a redemption fee in excess of 5% of its net assets value.

Qualifying funds which offer redemption and settlement facilities, unless on a quarterly basis or provide a period of 90 days or greater between dealing deadline and payment, are not subject to any regulatory parameters in terms of dealing frequencies, minimum redemption quotas or timeframe for settlements provided they classify themselves as open-ended Qualifying Investment Funds with limited liquidity.es

Share Class

Where the fund creates more than one class of share, must comply with certain requirements. The classes must be defined in the constitutional document. Each sub fund must constitute a single pool. Assets may not be allocated to individual share classes.

Capital gains and losses and income arising from the pool must be distributed so that they accrue equally to each unit holder relative to their participation in the sub-fund. Unitholders in a class must be treated equally. Unitholders in different classes must be treated fairly relative to each other.

Subject to the following rules, funds may allocate assets including financial derivative individuals, to individual share classes where the arrangement is not made for the purpose of pursuing a separate investment objective by the share class and does not result in the share class operating as a de facto separate sum fund and does not create an order to avoid regulatory requirements above.

The fund shall distribute and accrue losses and gains in income to each unit holder relative to their participation in the share class concerned, provided there is prominent disclosure in the prospectus of the ability to establish its share classes and the risks. There is a clear authority in the constitutional documents, there are unambiguous valuations and allocation processes in them and to the extent possible under the legislation, constitutional documents contain provisions aimed at achieving segregation of liability between share classes.

Sub-Funds

A fund may establish side pocket shares into its assets which have become illiquid or difficult to value may be placed, provided this has been allowed for under the constitutional document. Parameters must be defined and must be complied with. There are provisions for umbrella Qualifying Investor Alternative Investment Funds. Central Bank’s approval is required for each sub-fund. Separate records must be maintained.

The constitutional documents provide that the assets of the sub-fund shall belong exclusively to the relevant sub-fund and shall not be used directly or indirectly to discharge claims against any other sub-fund.

There are restrictions on the establishment of subsidiaries. Prior Central Bank approval is required. It must be wholly owned and controlled. It must not be an investment fund or issuing body. The subsidiary must not appoint third parties or enter arrangements without the fund being a party.

Arms-Lenght

Transactions between the fund and the management company, general partner, depository, fund manager, investment manager or delegates must be at arm’s length. Transactions must be in the best interest of unit holder.

There are controls on permitted transactions, including, in particular, certification evaluation by the depository, best execution terms or in organised investment exchange in accordance with the rules or, where not practical, execution on terms which the depository or the fund in case of transactions involving the depository is satisfied, comply with the above requirements.

Central Bank Consent & Reports

The supervisory requirements in respect of Qualifying Investor AIFs are broadly similar to those in respect of Retail AIF. See the separate section in that regard.

The fund does not alter its constitutional documents without Central Bank control or consent. There are similar provisions in respect of departures from directorships. Where they might create a concern on behalf of the Central Bank, they must be notified to the Bank immediately. There are restrictions on directors, there being directors in common between the fund and investment company. At least two investors must be Irish residents and current directorships must be disclosed.

Procedures are required in respect of the replacement of the depository. It must be notified to the Central Bank, which must be satisfied to receive particulars of the transfer of assets. The appointment of the depository may only be terminated on the appointment of a successor depositary.

Replacement of the management company, manager, general partner etc. requires the prior approval of the Central Bank. The procedures applicable must be approved and documented by the fund. Proposals to replace must be notified in advance to the Central Bank.

Monthly and quarterly returns must be made to the Central Bank using its online reporting system. The monthly returns must include full particulars of the unit fund type, closing net assets value at month end, number of units, value per unit at month end, payments made and received, issues and repurchases during the month, profit from operations, investment management fees and other expenses incurred. In addition to the monthly return, a quarterly survey of collective investment undertakings is required to the statistics division of the Bank.

Prospectus

The prospectus must be published and must be dated. Essential elements must be kept up to date. It must contain sufficient information for investors to make an informed judgment of the investment proposed.

It must be made available to prospective investors prior to the investment free of charge. It must be translated into English. The fund must comply with the terms of the prospectus.

Changes in the investment objectives require the consent of the majority. Dissenters must have the opportunity to redeem prior to implementation.

A range of detailed information is required, broadly similar to that in respect of Retail Alternative Investment Fund. In particular, it must specify

name and form and law,
brief indications of the tax system applicable,
accounting dates and distribution frequencies,
rules for applying income
details of the directors, past and current experience,
details of activities outside the company;
persons who accept responsibility for the information in the prospectus;
material third-party contracts, which may be relevant, including remuneration terms, base currency;
type and main characteristics of the units;
indication of stock exchanges in which the units are to be listed; description of remuneration policies.

There are special provisions in respect of umbrella funds. They must specifically set out that they are an umbrella fund with segregated liability between sub-funds.

Prospectus Disclosures

The prospectus must disclose the initial offer period. It must set out procedures, conditions for repurchase and redemption including the period within which redemption proceeds will normally be paid or discharged. Where the fund is an open-ended fund with limited liquidity, it must specify the limited nature of the redemption facilities.

Detailed information is required in relation to the management companies/general partners. This includes details of names and positions in the management company or partner of the members of the administrative management and supervisory functions, their experience current and past which is relevant to the fund and details of main activities outside the fund.

Details of service providers, including provisions of material contracts and remunerations.

The authorisation status must be prominently specified in the prospectus. In particular, it must specify that while the fund is authorised by the Central Bank, the Central Bank has not set limits or restrictions on its investment objectives, investment policies or the degree of leverage which may be employed. It is to state that authorisation is not an endorsement or guarantee of the fund by the Central Bank.

The prospectus must set out a description of potential conflicts and how they are going to be resolved. Prospective soft commission arrangements must be set out. Transaction with the general partner management company, depository etc. or its delegates will only be entered where it is disclosed and set out fully in the fund prospectus.