Due to their legal nature, UCITS established as unit trusts or as CCFs require a Management Company in their structure (following implementation of UCITS IV, the Management Company is no longer required to be located in Ireland). This is because a unit trust is created by a Management Company and Trustee entering into a trust deed and, in the case of a CCF, it is constituted contractually by the Management Company unilaterally entering into a deed of constitution. UCITS established as investment companies have the option as to whether or not to appoint a management company. UCITS which do not appoint a management company are known as "self-managed investment companies" ("SMICs").

Up until the introduction of UCITS IV, the Management Company of a UCITS had to be located in the same jurisdiction as the UCITS itself. Since the introduction of UCITS IV, the Management Company of a UCITS may be located in a different EU member state to that of the UCITS.

Management Company

In the fund management industry, particularly when dealing with collective investment schemes, the terms "Management Company" and "Investment Manager" have different meanings, different functions and different passports. These distinctions can at times become blurred, but it is important to understand the difference as explained further below.

When we refer to a "Management Company" (the term "Management Company" and "Manager" are used interchangeably and refer to the same entity), we are referring to the entity which has the ultimate responsibility for the overall management of a collective investment scheme. This overall management function encompasses overall control of the collective investment scheme, including the discretionary investment management function, the fund administration function and the distribution function.

If a Management Company is used for a collective investment scheme, the contractual arrangements are structured so that the Management Company is mandated to carry out investment management, fund administration and distribution in respect of the Irish domiciled collective investment scheme but the reality, in most cases, has been that the Management Company delegates out fund administration to a regulated administrator, the distribution activity to a distributor in the jurisdiction where the UCITS is being distributed and the investment management function to an appropriately regulated Investment Manager which, if it is a European entity, would be authorised in its Home EU Member State under the Markets in Financial Instruments Directive ("MiFID").

Permitted Activities of UCITS Management Companies

A UCITS Management Company can be authorised for collective portfolio management and, but not or, for individual portfolio management. This means that a UCITS Management Company can act as Management Company to collective investment schemes and, if it wishes to expand its authorisation, it can also provide discretionary asset management services to other types of clients (i.e. clients which are not collective investment schemes) such as pension funds, corporates, insurance companies and retail investors.

See Appendix C for the full range of services and an explanation of the terms collective portfolio management and individual portfolio management as they apply to UCITS Management Companies.

Management Company Passport

The Management Company passport allows a UCITS Management Company to pursue in other EU Member States the activities for which it has been authorised in its home Member State, including the management of UCITS domiciled in other Member States. This can be achieved either (i) through the establishment of a branch or (ii) on a freedom of services basis.

The Management Company passport was first introduced under UCITS III and perfected under UCITS IV.

Establishment of Branch

A Management Company wishing to establish a branch in another EU Member State must notify its home regulator of its intention to do so. Such notification will be required to include:

  1. the name of the other EU Member State in which it intends to operate;
  2. a programme of operations including a description of the activities envisaged and the organizational structure of the branch;
  3. a description of the risk management process put in place by the Management Company; and
  4. the address of the Management Company in its host Member State from which documents may be obtained and details of those responsible for the management of the branch.

Freedom to Provide Services

A Management Company wishing to pursue activities in another EU Member State under the freedom to provide services must notify its home regulator and provide it with the following information:

  1. the name of the other EU Member State in which it intends to operate; and
  2. a programme of operations including stating the activities and services it will undertake, including a description of the risk management process put in place by the management company.

The Management Company's home regulator must communicate the completed information to the regulator in the host Member State within two months of receiving the completed notification, in the case of a branch, and one month, in the case of the free provision of services. Where the Management Company wishes to pursue the activity of collective portfolio management, its home regulator shall also send to the regulator in the host Member State an attestation of the scope of the Management Company's authorisation along with details of any restriction on the types of UCITS that the Management Company is authorised to manage.

A Management Company which is establishing a branch in another Member State will be subject to the rules of conduct applicable to Management Companies in that Member State. It shall be entitled to commence business on receipt of confirmation from the regulator in the host Member State or two months from the date when its home regulator notified the regulator in the host Member State.

A Management Company which is providing its services under the freedom to provide services, shall be entitled to commence providing its services into the other EU Member State within one month from the date when its home regulator provided the notification information to the regulator in the host Member State.

A Management Company which pursues the activity of collective portfolio management on a cross-border basis by establishing a branch or under the freedom to provide services must comply with the rules of its home Member State which relate to organizational requirements, delegation arrangements, risk management procedures, prudential rules and supervision. It is its home regulator who is responsible for the supervision of compliance with these requirements.

In addition, a Management Company which provides collective portfolio management in another EU Member State must comply with the rules of the UCITS home Member State which relate to the constitution and functioning of the UCITS. These include the investment polices and limits, valuation of assets, marketing arrangements and obligations contained in the prospectus and fund rules (i.e. articles of association, trust deed or deed of constitution).

Where a UCITS is managed by a Management Company in a different Member State, the Management Company and the custodian will be required to enter into a written agreement regulating the flow of information deemed necessary to allow the custodian to perform its functions.

Importantly, under UCITS IV, the home Member State of the UCITS may not impose additional requirements such as capital requirements or requirements in relation to the performance or delegation of services. It will nevertheless be important to consider tax implications when determining whether to avail of the passport.

Substance Requirements and Managerial Functions

A UCITS Management Company cannot be an empty box, must be managed by at least two persons and the board must be responsible as a whole for the following ten key management functions.

  • Decision taking: there must be clear responsibility and competence in relation to all material decisions affecting the operation and conduct of business of the Management Company. Generally, the Central Bank considers that key strategic and material issues / decisions relating to the Management Company should be considered by its board of directors;
  • Monitoring compliance: the board must put in place procedures designed to ensure compliance with all applicable legal and regulatory requirements;
  • Risk Management: the board must put in place procedures designed to ensure that all applicable risks pertaining to the UCITS can be identified, monitored and managed at all times;
  • Monitoring of Investment Policy, investment strategies and performance: the board must put in place procedures to ensure and verify that the investment policies and strategies are complied with and to ensure the availability of up-to-date information on portfolio performance;
  • Financial Control : the board must put in place procedures to ensure all relevant accounting records are properly maintained and are readily available including production of annual and half-yearly financial statements;
  • Monitoring of Capital : the board must put in place procedures to ensure compliance with applicable capital adequacy requirements;
  • Internal Audit : the board must put in place procedures to ensure effective internal audit procedures;
  • Supervision of Delegates : the board must have clear structures in place for the ongoing monitoring of work delegated to third parties;
  • Complaints Handling: the board must have arrangements in place to ensure that complaints from unitholders are addressed promptly and effectively;
  • Accounting Policies and Procedures: the board must have procedures in place to ensure that proper accounting policies and procedures are employed in respect of the management company and all collective investment schemes under management.

It is important to note that both Management Companies and SMICs are required to demonstrate compliance with the above management requirements.

In advance of commencing operations, a Management Company must submit a detailed Application for Authorisation and a Business Plan to the Central Bank setting out how the above functions are going to be performed, by whom, where and what reporting lines are put in place.

Organisational Requirements

UCITS IV has introduced new MiFID like organisational and internal control requirements, conflicts of interest requirements and risk management requirements for UCITS Management Companies. In addition, UCITS Management Companies are required to comply with new rules of conduct. The new requirements affect all UCITS Management Companies, whether they operate on a fully delegated basis (delegating out administration, investment management and distribution activities) or whether they retain, for example, administration and delegate out investment management and distribution.

SMICs are equally affected by the new organisational requirements (although there is a longer transitional period for SMICs for certain of the new requirements).

Importantly, the UCITS IV Directive recognises the principle of proportionality. In other words, the application of most (but not all) of the new organisational requirements must take into account the nature, scale, and complexities of different UCITS Management Companies. Factors which may be relevant in determining the extent to which the proportionality principle should apply may include the number of UCITS managed, number of sub-funds within umbrellas, the extent of use of derivatives or of complex trading strategies, number of investors etc.

A summary of the new organisational requirements is set out below. It should be noted that the following section focuses on UCITS Management Companies carrying out collective portfolio management, not individual portfolio management.

(i) General Requirements - Management Companies are required to have adequate internal organisational and control mechanisms, clear reporting lines and assignment of responsibilities. Other requirements imposed are to protect confidentiality, the security and integrity of information and the requirement to ensure adequate business continuity policies. The principle of proportionality and the recognition of the ability to delegate, as highlighted above, apply.

(ii) Resources - Management Companies are required to employ "personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them" and to carry out due diligence on delegates. This requirement is subject to the proportionality principle referred to above. As highlighted above, the UCITS IV Directive recognises that UCITS Management Companies should be able to delegate some of their activities to third parties, provided proper due diligence checks are carried out and delegates are monitored.

(iii) Complaints - Management Companies are required to establish, implement and maintain effective and transparent procedures for complaints handling. Each complaint and the measures taken for its resolution must be recorded, investors must be able to file complaints free of charge and management companies must make information regarding complaint handling available to investors free of charge.

(iv) Electronic data processing, record keeping and other recording requirements - Management Companies are required to ensure timely and proper recording of each portfolio transaction and of subscription and redemption orders. In addition, they are required to ensure appropriate safeguards are put in place to ensure that electronic data processes are secure and that the integrity and confidentiality of recorded information in respect of the UCITS is maintained. UCITS IV also imposes detailed record keeping obligations in a similar manner to the requirements under MiFID.

(v) Accounting procedures - From an accounting perspective at least, all assets and liabilities of a UCITS must be directly identifiable at all times. This would appear to be a practical necessity anyway in terms of the NAV calculation process.

(vi) Control by senior management and supervisory function - UCITS IV requires reinforced oversight duty by senior management in respect of delegated service providers. Senior management (which can include directors) must receive on a frequent basis, and at least annually, written reports on matters of compliance, internal audit and risk management, investment policy and strategies indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies. On a regular basis they must also receive various other written reports relating to the discharge of those functions.

(vii) Compliance function, internal audit function and risk management function - UCITS IV requires a permanent compliance function, internal audit function and a permanent risk management function respectively for Management Companies. These requirements are subject to the proportionality principle referred to above.

(viii) Risk Management Policy: Management Companies are, again subject to the proportionality principle, required to establish, implement and maintain an adequate risk management policy, which addresses all risks which may be material for the Management Company, including market, liquidity, counterparty and operational risks.

(ix) Exercise of Voting Rights - Management Companies are required to develop adequate and effective strategies for determining when and how voting rights attached to instruments held in the UCITS' portfolios are to be exercised, to the exclusive benefit of the UCITS concerned. The strategy for the exercise of voting rights shall determine measures and procedures for monitoring relevant corporate events, ensuring that the exercise of voting rights is in accordance with the investment objectives and policies of the relevant UCITS and preventing or managing any conflicts of interest arising from the exercise of voting rights.

(x) Personal Transactions - Management Companies are required to identify and record "relevant person's" personal transactions and to ensure the notification and recording of personal transactions to the Management Company. They are also required to ensure that proper preventative measures are put in place to prevent potential breaches by individuals of the market abuse rules.

A "relevant person" means any of the following:

  1. a director, partner or equivalent, or manager of the management company or investment company;
  2. an employee of the management company or investment company, as well as any other natural person whose services are placed at the disposal and under the control of the management company or investment company and who is involved in the provision by the management company or investment company of collective portfolio management;
  3. a natural person who is directly involved in the provision of services to the management company under a delegation arrangement to third parties for the purpose of the provision by the management company of collective portfolio management.

(xi) Conflicts of Interest - the UCITS IV Directive extends to UCITS and their Management Companies, the provisions under MiFID which requires investment firms to identify, manage and disclose their conflicts of interest. In this regard, Management Companies are required to adopt a written policy which will (a) identify when potential conflicts will arise and in doing so, they will need to consider the implications of group entities; and (b) set out the procedures to be followed and measures to be adopted in order to manage such conflicts. Again, the proportionality principle applies.

(xii) Rules of Conduct - The rules of conduct are broadly grouped into four main areas, namely, the duty to act in the best interests of UCITS and their unitholders, the duty of Management Companies to ensure a high level of diligence on the selection and monitoring of investments in the best interests of the UCITS they manage, reporting obligations in respect of execution of subscription and redemption orders, and best execution and order handling rules. With regard to the latter, MiFID type best execution rules are now applied and UCITS Management Companies are required to take all reasonable steps to obtain the best possible result for the UCITS, taking into account price, costs, speed, likelihood of execution and settlement, order size and nature, or any other consideration relevant to the execution of the order.

(xiii) Inducements - The UCITS IV Directive prohibits a Management Company from receiving fee and commission payments as well as non monetary benefits in relation to the activities of investment management and administration, except if:

  1. paid or provided to or by the UCITS or on behalf of the UCITS;
  2. paid or provided to or by a third party (other than the UCITS) provided there is appropriate disclosure and the payment is designed to enhance the quality of the service; or
  3. proper fees which enable or are necessary for the provision of the relevant service, including custody costs, settlement and exchange fees, regulatory levies or legal fees, and which by their nature, cannot give rise to conflicts with the management company duty to act in the best interests of the UCITS.

UCITS IV recognises that UCITS Management Companies should be able to delegate some of their activities to third parties provided, inter alia, proper due diligence checks are carried out to ensure the third party is qualified. In many cases, therefore, UCITS management companies meet their obligations set out above by ensuring that their delegates meet the requirements of the Directive (and by obtaining comfort from their delegates in the form of agreements, side letters or otherwise). Ultimate responsibility for ensuring that they do so, however, rests with the Management Company.

Capital Adequacy

A UCITS Management Company must have at all times:

(i) initial capital of at least €125,000 ("Initial Capital Requirement") plus the Additional Amount (if required), as set out below; or

(ii) one quarter of its total expenditure taken from the most recent annual accounts ("Expenditure Requirement").

whichever is higher ("Minimum Capital Requirement").

When the net asset value of the collective investment scheme under management exceeds €250,000,000, a Management Company must provide an additional amount of capital equal to 0.02% of the amount by which the net asset value exceeds €250,000,000 ("Additional Amount"). A Management Company need not provide up to 50% of the Additional Amount if it benefits from a guarantee of the same amount given by a credit institution or insurance undertaking and the form of guarantee is approved by the Central Bank.

The total of the Initial Capital Requirement and the Additional Amount required to be held by a Management Company is subject to a maximum of Euro 10,000,000 A Management Company is required to hold the higher of the Expenditure Requirement or the Initial Capital Requirement in the form of eligible assets, which must be easily accessible, free from liens and maintained outside the Management Company's group.

The minimum capital requirement for a SMIC is Euro 300,000 and it is not subject to any additional expenditure or other requirements.

Authorisation Procedure

The current application process for a Management Company engaged in collective portfolio management only and which delegates out the fund administration, asset management and distribution functions to third parties is as set out below. An initial meeting with the Central Bank should be organised to introduce the parent group. This will be followed by preparation, completion and filing with the Central Bank of the following documents:

  • formal Application for Authorisation (there is a specific application form for this purpose);
  • detailed Business Plan setting out the legal nature of the Management Company, types of activities which it proposes carrying on, its organisational structure, how it will perform the ten oversight functions, three year financial projections, details of proposed capitalisation, overall group structure, sample of transaction flows for the type of transactions to which it will be engaged;
  • Individual Questionnaires for each of its proposed Directors, senior management, each individual who holds directly or indirectly 10% or more of the capital or voting rights of the company and of any other individual who is in a position to exercise significant influence over the management of the company;
  • Code of Conduct, Anti-Money Laundering procedures, reporting lines etc;
  • Group structure details (considerable information may be required).

Following review of these documents the Central Bank will then enter into correspondence with the applicant which regularly takes the form of submitting additional documentation and providing clarifications where required.

For reasonably complete applications, the normal authorisation time is approximately four months. It is important to note that the authorisation of the Management Company will normally run in tandem with the authorisation of the first UCITS to be managed by the Management Company.

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