Various Non-Units Funds

Table of Contents

Collective Investment Schemes

A collective investment scheme whose principal object is an investment in another single collective investment scheme is subject to the following rules in addition to general rules, which are not dis-applied below.

The underlying schemes must be authorised in Ireland or in other jurisdiction recognised by the Central Bank as providing equivalent investor protection. The prospectus must contain sufficient information in relation to the schemes in which investment is made to enable investors to make an informed judgment of the investment proposed. The periodic reports of the underlying scheme must be attached to the fund’s periodic report.

The scheme must make appropriate disclosures regarding the relationship between it and the underlying scheme, including comprehensive information relating to charges and expenses in respect of the underlying scheme. A manager of the underlying scheme must waive the preliminary and initial charge that it is entitled to charge for its own account in relation to the acquisition of units in the feeder scheme.

Where a commission is received by a manager of the scheme by virtue of an investment in the units of the underlying scheme, the commission must be paid into the property of the scheme. The scheme may employ techniques for the purpose of efficient portfolio management and to protect against exchange risks in accordance with the limitations in the NU notes.

Closed-Ended Schemes

An applicant who wishes to establish a closed-ended scheme must satisfy the Central Bank that the nature of the scheme as reflected in its investment objectives and the nature of its potential investors, the life or period of closure of the scheme, the intention regarding the listing of the scheme and any proposals from the manager to arrange for a market to be made to provide liquidity such as would be appropriate or prudent to approve as a closed-end scheme. The scheme must have a finite closed-ended period. Its duration must be provided for in its constitutional documents.

The Central Bank may permit the scheme to derogate from the provisions of the NU requirements relating to general supervisory conditions and provide for the issue of units other than at net asset value. The scheme must demonstrate that the unitholders will not be prejudiced by this provision.

The conditions under which the units are issued are subject to the approval of the Central Bank. The prospectus must make appropriate reference to the fact that the scheme will not redeem its units where applicable.

Qualifying Investors

Schemes for marketing solely to qualifying investors and which are not bound by the limits relating to investment objectives and policies in the NU notes.

Conditions and restrictions relating to investment objectives and policies and leverage set out in the NU notes are dis-applied in respect of schemes marketing solely to qualifying investors. Details of the conditions and restrictions are set out briefly below. Changes are not allowed to investment objectives, policies or levels of leverage employed unless the Central Bank gives derogations.

Investment companies marketing solely to qualifying investors must confirm in writing that the scheme will maintain the aim of spreading investment risk. Periodic reports issued by the investment company must confirm the aim has been maintained.

In order to qualify as a qualifying investor scheme, the scheme must have the following characteristics: a minimum subscription of €100,000 or its equivalent in other currencies is required. The aggregate of the investor’s investments in the sub-funds of an umbrella scheme can be taken into account for this purpose. An investor who has invested €100,000 is unrestricted and may accordingly qualify. Institutions may not group amounts of less than €100,000 for individual investors.

A qualifying investor is

a professional investor as defined under the MiFID Directive.
An investor who receives an appraisal from an EU credit institution, MiFID firm or UCITS management company has the appropriate experience, expertise and knowledge to adequately understand the investment in the scheme.
An investor who certifies that he is an informed investor by providing confirmation that he has such knowledge and experience in financial and business matters as would allow the investor to properly evaluate the merits and risks of the prospective investment (to be given in writing). Alternatively, he may furnish confirmation in writing that his investment business involves, whether on its own account or the account of others, the management, acquisition and disposal of property of the same kind as the scheme assets.

Qualifying Investor Issues

An exemption from the minimum subscription requirements and qualifying investor criteria can be granted to

the management company or general partner; the promoter or entity within the promoter’s group;
a company appointed to provide investment management or advisory services;
directors of the above:
employees of the above where the employee is directly involved in the investment activities of the scheme or is a senior employee and has experience in the provision of investment management services.

In the case of investments by employees, the managing entity must be satisfied that prospective investors fall within the criteria. The certification below must be completed. The investors must certify that they are aware the scheme is normally marketed only to qualifying investors subject to a minimum subscription of €100,000.

Qualifying investors must certify in writing to the manager that they are aware of the risks involved in the proposed investment and the fact that there is potential to lose all of the sum invested.

Prospectus

The prospectus must contain a prominent warning that the Central Bank has not set limits and restrictions on investment objectives and policies or on the degree of leverage that may be used. It must also contain a statement regarding the statutory obligations to spread investment risk.

The prospectus must describe the investment objectives and investment and borrowing policies. They must be comprehensive and accurate, reasonably comprehensible to investors and sufficient to enable investors to make an informed judgment on the investment proposed. The prospectus must contain quantitative parameters on the extent of leverage which will be engaged in by the scheme.

The prospectus must contain a prominent risk warning which will make specific reference to the potential for above average risk involved and the suitability of the investment only for persons who are in a position to take such a risk.

Qualifying Investor Modifications

Schemes solely marketing to qualifying investors are not required to make public the issue and redemption prices of their units. They must be available to unitholders on request.

Investment companies or investment limited partnerships marketing solely to qualifying investors are not required to publish half-yearly reports. The annual report must disclose distributions have been made out of the capital of the scheme.

The provisions which are dis-applied for the benefit of qualifying investor schemes include the following:

restriction on percentage borrowing allowed,
certain obligations in respect of repurchase.
publication of half-yearly reports.
most of the investment restrictions limiting investment to a certain percentage of net assets.
limitations in respect of venture and development schemes.
many of the restrictions on the use of derivatives and efficient portfolio management techniques.
In the case of venture and development capital schemes, the minimum subscription amount and the maximum subscription of net assets are allowed.
In relation to property schemes, the principal investment restriction;
the principal restrictions in relation to futures and options schemes;
the principle restrictions in relation to futures and options schemes;

Funds of Unregulated Funds

Fund of funds schemes, may invest no more than 10% of their net assets in unregulated schemes ordinarily. Schemes which propose to invest more than 10% in unregulated schemes, including investments in hedge funds and other alternative investment funds are subject to the following rules. They are in addition to general rules.

The investment fund may invest no more than 20% of net assets in their unit of any one scheme. The underlying scheme must be subject to independent audit in accordance with accepted International Accounting Standards. It must have arrangements in place such that all assets are held by a party independent of the manager.

The prospectus must prominently disclose certain risks, including

that the scheme is not subject to the same legal and regulatory protection as applies generally and involves special risks which could lead to risk, a loss of all or a substantial part of the investment.
that the investment is not suitable for all investors and should take into account financial circumstances and suitability as part of a portfolio.

The warning specifically advises consultation with a professional investment advisor.

Prospectus Requirements

In addition to normal information, the prospectus must include information on the special risks above. It must draw specific attention to the investment policies of the underlying schemes, the level of leverage employed by them;

the expected impact of fees charged at both levels of the scheme and underlying schemes on overall performance;
the cumulative effect of performance fees which may arise at the scheme and underlying scheme level;
potential liquidity problems;
potential valuation difficulties.

The prospectus must provide an explanation in plain English of the alternative investment strategies which the underlying schemes may employ. It must describe the diversification policies of the scheme including information on the extent to which the scheme will diversify between trading strategies and also the extent to which it will invest in underlying schemes which have demonstrated a high volatility of return.

Management Issues

The periodic reports must list the names of the underlying schemes, their managers and their domicile. It must provide information on the impact of fees, including performance fees and returns to unitholders.

The management of the scheme and its delegates, where applicable, must demonstrate appropriate experience and expertise in relation to alternative investment schemes. Detailed information to enable the Central Bank to be satisfied that the controls and systems are in place to monitor constantly the activities of the underlying schemes, their managers and risk assessment procedures must be so provided.

This will include,

information on the extent to which the management of the schemes and its delegates will review the background and experience and expertise of the underlying managers;
review on an ongoing basis the risks of the underlying schemes and the risks of the strategies being employed, including the amount of gearing inherent in those strategies and counterparty risk;
monitor the overall leverage of the scheme.

Investments

The management of the scheme must be able to provide the Central Bank, on request, with a detailed report on the risk profile and recent performance of the scheme’s investments. Where a scheme invests more than 40% of net assets in assets managed by the same management company or an associated or related company, the management of the scheme must provide a quarterly report to the Central Bank on the extent to which the underlying schemes diversify between trading strategies. A scheme may not invest in units of another fund of funds or of a feeder fund scheme.

Where the scheme invests in funds of a collective investment managed by the same management company or related management company, the manager of the scheme in which the investment is being made must waive the preliminary and initial redemption charges that it would normally charge. Where commission is received by the manager of the scheme by virtue of an investment in units of another collective investment scheme, this must be paid into the property of the scheme.

Where the scheme is open-ended, it must provide at least one dealing day per month. The maximum interval between submission of a redemption request and payment must not exceed 95 calendar days.

The scheme must retain up to 10% of redemption proceeds, where which reflects the policies until such time as the full redemption proceeds from the underlying scheme are received.