Funds Quarterly Legal And Regulatory Update Q4 2011 FD

(i) UCITS IV Notices and Guidance Notes

Following the signing into law of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (the "Regulations") – making Ireland one of only six Member States to have implemented the UCITS IV Directive by the transposition deadline – on July 1 2011, the Central Bank also issued revised Notices and Guidance Notes to explain and clarify various aspects of the Regulations and set down conditions not contained in the Regulations with which UCITS must conform, including:-

  • changes to the minimum activities regime as proposed under Consultation Paper 48;
  • provisions regarding the eligibility of and the process of changing trustees/custodians;
  • changes to the requirements for money market funds;
  • change of the minimum subscription amount for a Professional Investor Fund ("PIF") from €125,000 to €100,000; and
  • confirmation that the new disclosures for a investment fund's financial statements are required to be included in financial statements for financial years commencing July 1, 2011 onwards.

The Notices and Guidance Notices are both available on the Central Bank's website: www.centralbank.ie.

(ii) Non-UCITS Notices and Guidance Notes

The Central Bank has revised and updated its Non-UCITS Notices and Guidance Notes, applicable to collective investment schemes other than UCITS, including a new Guidance Note 2/11 regarding the appointment of Prime Brokers.

The Notices and Guidance Notices are both available on the Central Bank's website: www.centralbank.ie.

(iii) Guidance Note on FINREP for Fund Service Providers

On 8 September 2011 the Central Bank issued a guidance note, applicable to fund service providers authorised under the Investment Intermediaries Act 1995 and UCITS and Non- UCITS Managers, to provide information and direction on the completion of FINREP returns.

Fund Service Providers must submit their individual management/interim accounts, quarterly and monthly, as required and audited year-end financial statements to the Central Bank via its Online Reporting System.

It is available on the Central Bank's website: www.centralbank.ie.

(iv) Discussion Paper on UCITS ETFs and Structured UCITS

On 22 July 2011 the European Securities and Markets Authority ("ESMA") published a discussion paper seeking industry views to help focus its policy approach towards and possible guidelines on UCITS exchange traded funds ("ETFs") and structured UCITS. ESMA considers that existing regulatory requirements applicable to UCITS ETFs and structured UCITS are not sufficient to take account of the specific features and risks associated with these types of fund.

The discussion paper examines possible measures that could be introduced to mitigate risks, particularly where complex products are made available to retail investors. It also highlights the potential systemic risk caused by these innovative products and their impact on financial stability.

The specific topics covered by the discussion paper, in respect of which ESMA considers guidelines should be developed, include index tracking issues; securities lending activities; actively-managed ETFs; leveraged ETFs; secondary market investors; and quality and types of collateral received.

Responses to the discussion paper were due to be received by 22 September 2011 and in light of the feedback received, ESMA will develop a consultation paper on proposed guidelines for UCITS ETFs and structured UCITS.

ESMA has announced open hearings on 26 September 2011 in the Auditorium in ESMA, Paris, on this discussion paper.

The discussion paper may be viewed on the ESMA website: www.esma.europa.eu

(v) Q&A Document on European Money Market Funds

On 26 August 2011, ESMA published a Questions and Answers document to promote common supervisory approaches and practices in the application of the guidelines on a Common Definition of European Money Market Funds developed by its predecessor, the CESR, applicable for instance to collective investment undertakings authorised under Directive 2009/65/EC (which forms part of the UCITS legislative framework). Although the document is primarily aimed at ensuring supervisory authorities' actions converge along the lines of ESMA responses, it is also intended to help management companies by providing clarity as to the content of the CESR guidelines.

The document provides responses to questions posed by the public and competent authorities, on issues including the:

  • management company's internal rating process;
  • treatment of instruments;
  • determination of a recognised credit rating agency;
  • maturity of securities for money market funds; and
  • investment and share classes in different currency.

The Q&A document is available on the ESMA website: www.esma.europa.eu Questions on the practical application of the requirements of the CESR guidelines may be emailed to: moneymarketfunds@esma.europa.eu ESMA will review the questions and answers to determine whether any material needs to be converted into ESMA guidelines and recommendations.

(vi) Requirement for Original Application Forms/Documentation for Irish and Non-Domiciled Funds Removed

On 12 July 2011 the Central Bank confirmed it is willing to allow managers/administrators to dispense with requiring original application forms and other original instructing documentation for both Irish and non-domiciled funds where trade orders are transmitted electronically.

This follows confirmation in March 2011 by the Central Bank that managers/administrators could dispense with original application forms in connection with non-domiciled funds, subject to appropriate controls.

The extension of this confirmation to Irish domiciled funds follows a second submission from the Irish Funds Industry Association ("the IFIA") which recognised that the implementation by Revenue of the non-resident declaration "equivalent measures" removes the necessity to obtain original applications for Irish domiciled funds.

In applying the derogations from the requirement to obtain original applications/documents, managers/administrators must be satisfied that there are appropriate controls and procedures in place to comply with the applicable anti-money laundering/counter terrorist financing legislation and to mitigate the risk of fraud associated with the processing of transactions based on fax or other electronic instructions.

(vii) Alternative Investment Fund Managers Directive (the "AIFMD")

The AIFMD, which introduces harmonised EU rules for the authorisation and supervision of entities engaged in the management of alternative investment funds ("AIFs"), came into force on 21 July 2011. Member States must implement the AIFMD by 22 July 2013.

It is envisaged that the final version of the Level 2 implementing measures, which should afford clarity to the investment fund industry as to how the AIFMD will operate in practice, will be published by the European Commission (the "Commission") in early 2012.

In this regard, on 13 July 2011, ESMA published a consultation paper setting out its advice to the Commission on possible implementing measures of the AIFMD. It is available on the ESMA website: http://www.esma.europa.eu/

The proposals published in the Consultation Paper cover three broad areas:

  • General provisions, authorisation and operating conditions
     This section includes draft advice on various issues, including the identification of portfolios of AIFs under management by an alternative investment fund manager ("AIFM"), valuation of the assets of the fund, calculation of the value of assets under management, initial capital and own funds, conflicts of interest, risk management, liquidity management, delegation of AIFM functions and organisational requirements.
  • Depositaries
     This section sets out draft advice on the contract evidencing the appointment of the depositary, depositary functions, segregation obligations, depositary liability on the loss of financial instruments, external events beyond reasonable control and objective reasons to contract a discharge, i.e. to delegate liability in certain limited circumstances.
  • Transparency and leverage
     This section covers advice on the definition of leverage, appropriate methods for its calculation and limits to leverage, the content and format of the annual report to be prepared by the AIFM and information to be reported to authorities and investors.

Stakeholders had until 13 September 2011 to submit their feedback to ESMA and in light of the feedback received, it will finalise its advice to the Commission in time for submission by the deadline of 16 November 2011. The IFIA welcomed the consultation and the opportunity to clarify, among other things, the requirements relating to valuations and the depositary which are of crucial importance to the industry in Ireland.

The IFIA issued their responses to the Consultation Paper on 14 September 2011. The IFIA responses can be found at: www.esma.europa.eu.

(viii) ESMA Consultation Paper – Possible Implementing Measures of the AIFMD in relation to Supervision and Third Countries

On 23 August 2011 ESMA published a Consultation Paper, setting out its proposals for detailed rules on supervision and third country entities underlying the AIFMD, which complements the consultation documented above. Feedback from stakeholders was to be received by 23 September 2011, in light of which ESMA will finalise its proposals for submission to the Commission by the deadline of 16 November 2011.

The topics covered by the Consultation Paper in relation to dealing with third countries include the following:-

  • supervisory co-operation and the exchange of information;
  • the marketing of non-EU alternative investment funds ("AIFs");
  • the delegation of certain functions (i.e. risk and portfolio management) to service providers outside the EU; and
  • the assessment of equivalence of third country depositary frameworks.

The Consultation Paper is available on the ESMA website: http://www.esma.europa.eu/

(ix) ESMA Consultation Paper – Guidelines on Systems and Controls in a Highly Automated Trading Environment for Trading Platforms, Investment Firms and Competent Authorities

On 20 July 2011, ESMA published a consultation paper setting out proposals for detailed guidelines for trading platforms, investment firms and competent authorities to address the challenges of a highly automated trading environment. The proposals cover four broad areas, namely electronic trading systems, fair and orderly trading, market abuse and direct market access and sponsored access. The proposed guidelines seek to clarify the obligations of trading platforms (regulated markets and multilateral trading facilities) and investment firms executing orders on behalf of clients and/or dealing on their own account under the existing EU legislative framework. As such, separate standards are included in each of the above areas for trading platforms and investment funds.

ESMA considers that the proposed guidelines contribute to the efficiency, orderly functioning and resilience of trading in a highly automated environment. This initiative is being undertaken as part of the update review of the Market in Financial Instruments Directive ("MiFID"). As such the proposals may need to be adapted to the revised version of MiFID once finally adopted and/or transformed into technical standards, where appropriate.

The consultation paper is available on the ESMA website: www.esma.europa.eu ESMA will consider the responses it receives to this consultation by October 3 2011 and expects to adopt final guidelines at the end of 2011.

(x) IFIA Voluntary Corporate Governance Code for Investment Funds

The IFIA received a significant volume of feedback from the funds industry on the draft "Industry Corporate Governance Code - Investment Funds and Management Companies Code" by the submission deadline of 24 June 2011. This feedback has been discussed with the Central Bank and a number of the issues raised therein are now being considered by the Central Bank's policy committee. Its response is awaited, following which a finalised voluntary Code will be published. Given the additional time required for this consideration, the final code will not become effective until 1 January 2012, as opposed to the original anticipated adoption date of 1 September 2011, although it is still envisaged that a transitional period of 12 months will be included.

The Code is aimed at providing boards and directors of Irish authorised collective investment schemes ("CIS") and Irish authorised management companies of CIS ("ManCo") with a 9 framework for best practice in terms of company governance and oversight and as such, although the Code is voluntary, its adoption will be recommended by the Central Bank. The Code makes provision for various key corporate governance issues including: the composition and role of the Board; the chairman and directors; board appointments and powers reserved to the board; meetings; delegation; risk management; audits; compliance functions; and internal control.

(xi) Irish UCITS in Chile

The IFIA obtained clarification from a Chilean legal expert, Felipe Cousiño, of the status of Irish UCITS in Chile, following the recent move by the Chilean pension regulator, the Comisión Clasificadora de Riesgo (CCR), which resulted in a change in the classification of Irish domiciled UCITS funds from the General Investment Category to the Restrictive Investment Category.

It is understood, that Irish UCITS are reclassified and that this means that Chilean pension funds will continue to be allowed to invest in Irish domiciled funds but will be subject to the special investment limits contained in the Investment Regime set out by the Chilean Superintendency of Pensions. These special limits are quite high so in practice it would seem there would not be regulatory pressure for any divestment and there would still be room for further investment, possibly subject to a rebalancing of the portfolio of investments that fall under the special limits.

The timing of the decision to reclassify Irish funds is set against a background of recent EFAMA statistics that show that for the first half of 2011 Irish domiciled UCITS funds recorded the highest level in the EU of net inflows of EUR 39 billion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.