Cayman Islands: Funds - Ireland - Quarterly Update Q4 | October - December 2015

1 Legal & Regulatory

1.1 UCITS Update

There have been a number of developments over the quarter:

Central Bank UCITS Regulations 2015

The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 ("Central Bank UCITS Regulations 2015") which came into effect on 1 November 2015 consolidate all requirements which the Central Bank of Ireland ("Central Bank") imposes on UCITS, UCITS management companies and depositaries of UCITS. They also supplement existing requirements, in particular, the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011. The Central Bank restructured its UCITS guidance to reflect the publication of these Regulations. A comprehensive set of forms relating to UCITS applications and post authorisations have also been updated.

For more information see our client update, Introducing a New Regulatory Framework for Irish UCITS.

Feedback Statements

On 5 October 2015, the Central Bank published feedback statements on CP77 – Consultation on publication of UCITS Rulebook and CP84 – Consultation on adoption of ESMA's revised guidelines on ETFs and other UCITS issues.

In relation to CP84 the Central Bank had concerns about whether all UCITS should be able to derogate from the collateral diversification requirement where collateral consisted of securities issued or guaranteed by a State Issuer. In its consultation it stated that there were grounds for limiting the derogation set out in the European Securities and Markets Authority's ("ESMA") Guidelines to UCITS money market funds only. In the context of the new UCITS Rulebook (which took effect on 1 November 2015), the Central Bank has decided to implement the Guidelines in a modified manner to address these issues.

UCITS Q&A and Guidance on Permitted Markets, FDI and EPM and Management Companies

On 5 and 23 October 2015, the Central Bank published its seventh and eight editions of its UCITS Q&A. New questions were added to reflect the introduction of the Central Bank UCITS Regulations 2015 and certain transitional arrangements in place. On 4 November 2015, the Central Bank issued a ninth edition with further questions relating to the Central Bank UCITS Regulations and ID 1043 was amended (prospectus disclosure long/short positions).

On 30 November 2015, the 10th edition issued which adds a new Q&A ID 1058 on the publication and submission to the Central Bank by a UCITS of its first annual/half-yearly reports. ID 1050 on high concentration indices has also been amended. On 22 December 2015, an eleventh edition issued with a new question ID 1059 which corrects an error that internally managed investment companies must comply with Regulation 100(1)(7) of the Central Bank UCITS Regulations, (ensuring that an organisational effectiveness role is performed by an independent chairman or board member) rather than Regulation 100(1)- (6).

On 5 October 2015, the Central Bank published guides to Financial Derivative Instruments and Efficient Portfolio Management and UCITS - Organisation of Management Companies. On 4 November 2015, it issued revised UCITS guidance in respect of Permitted Markets and UCITS FDI and EPM. The relevant revisions are in Paragraph 1 of the EPM Guidance on Permitted Markets and revisions to paragraphs 126-128 of the UCITS FDI and EMP Guidance.

UCITS V Regulation on Obligations of Depositaries

On 17 December 2015, the European Commission adopted a Delegated Regulation supplementing the UCITS IV Directive (2009/65/EC), as amended by the UCITS V Directive (2014/91/EU) on the obligations of depositaries (C(2015) 9160). There are few changes between the official draft and the draft leaked in mid-2015. The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither object, it will be published in the Official Journal of the EU and enter into force on the 20th date following its publication. It is to apply six months after the date of its entry into force. If this is the case there will be a divergence between the application date of the UCITS V Level 1 Directive (18 March 2016) and this regulation.

For more information see our client update, UCITS V Update - Level 2 Emerges

1.2 AIFMD Update

The European Union (Alternative Investment Fund Managers) Regulations 2013 (No. 257 of 2013) gave effect to Alternative Investment Fund Managers Directive ("AIFMD") in Ireland in July 2013. There have been a number of developments over this quarter:

(a) Central Bank AIF Rulebook Consultation, Reporting Guidance and Q&As

On 5 October 2015, the Central Bank's sixteenth edition of the AIFMD Q&A was published. New questions ID 1097 (Directed Brokerage), ID1098 (Board Composition) and ID1099 (Non-material Change) are included. This version clarifies that, following on from the Central Bank's feedback statement to CP86, only newly authorised alternative investment fund managers ("AIFMs") are subject to the authorisation process which requires the rationale for the board composition to be documented in the programme of activities. However, the Central Bank views it as "good practice" for the director performing the organisational effectiveness role for each authorised AIFM (new or existing) to document the rationale for the board composition and to include this in the programme of activities when it is next updated.

On 4 November 2015, the Central Bank published the latest version of the AIF Rulebook and a seventeenth edition of its AIFMD Q&A. A revision was made in the Q&A to question ID 1030 (Non-EU AIFM) and a new question ID 1100 (which states that the Central Bank is working on guidance concerning the holding subscription and redemption monies for individual sub-funds, as fund assets, within a single account in the name of the umbrella fund) is included.

On 30 November 2015, the Central Bank published CP99, a consultation on amendments to the AIF Rulebook which closes on 24 February 2016. Many are of a technical and clarificatory nature and several aim to align with changes under the recently published Central Bank UCITS Regulations 2015. Some of the main changes proposed include:

  1. Extending the category of investors who are exempt from the eligibility criteria and minimum subscription amount required to invest in a qualifying investor alternative investment fund ("QIAIF");
  2. Amending the reporting requirement which applies to AIF depositaries where they provide services to non-Irish authorised AIFs;
  3. Amending the capital and reporting requirements which AIFMs and AIF Management Companies.
  4. Extending the list of requirements in the European Union (Alternative Investment Fund Managers) Regulations 2013 which apply to QIAIFs with registered AIFMs;
  5. Aligning the rules which apply to collateral received by retail investor alternative investment funds ("RIAIFs") under an OTC derivative or repo/securities lending contract and the rules which reference external credit ratings with those recently introduced for UCITS;
  6. Clarifying that the requirement to hold minimum capital as eligible assets and in a separate account does not apply to internally-managed AIFs;
  7. Removing references to bearer shares as this is no longer permitted by company law;
  8. Introducing a requirement that external AIFMs and AIF Management Companies produce a second set of half-yearly accounts.

The Central Bank also published the latest version of the 'Reporting Guidance for Alternative Investment Fund Managers'. This clarifies the reporting requirements for non-EU master AIFs not marketed in the EU that have either EU feeder AIFs or non-EU feeder AIFs marketed in the EU under Article 42 of AIFMD. The Central Bank now requires all AIFMs to report information on non-EU master AIFs from the 1 January 2016 reporting period. It should be noted, however, that this information is not required to be reported where the non-EU master AIF and feeder AIF do not have the same AIFM.

For more information see our client update, Ireland Funds - AIFMD (NPPR) Changes to Annex IV Reporting Obligations

(b) ESMA Q&As

On 1 October 2015, ESMA published its updated Q&A for AIFMD in relation to depositaries. It clarifies that when an alternative investment fund's ("AIF") depositary sub-delegates custody of the AIF's assets to either an EU or third-country central securities depositary ("CSD"), that CSD must comply with the delegation provisions in Article 21(11) of AIFMD. On 2 December 2015, ESMA published a further update updated which includes new questions and answers on reporting to national competent authorities.

On 15 December 2015, ESMA published another update which includes a new Q&A on the depositary liability regime.

1.3 Irish Collective Asset-Management Vehicles Act 2015

The Central Bank is the registrar for Irish Collective Asset-management Vehicles ("ICAVs") under the Irish Collective Asset-management Vehicles Act 2015. On 19 November 2015, the application forms for registration and post-registration filings were updated.

1.4 Revised Managerial Functions and Organisational Effectiveness Role:

CP86

On 4 November 2015, the Central Bank published another feedback statement on CP86: Fund Management Company Boards - Feedback statement on consultation on delegate oversight guidance and Guidance on Fund Management Companies. Managerial functions for both UCITS management companies and AIFMs are consolidated into six separate functions and a new organisational effectiveness role is being introduced.

Fund management companies authorised before 1 November 2015 were to provide for the revised managerial functions by 30 June 2016. Those authorised after 1 November 2015 must have these managerial functions in place upon authorisation. However work on the outstanding guidance is on-going and the Central Bank announced in December that it anticipates publishing it for public consultation by the end of Quarter 1 2016. To reflect this, the deadline for compliance by existing fund management companies (i.e. fund management companies authorised before 1 November 2015) with the revised managerial functions and new organisational effectiveness requirements will be at least six months after the completion of the consultation process. Therefore existing UCITS management companies and AIFMs will not need to update their business plan/programme of activity until then.

1.5 Programme of Themed Inspections in Markets Supervision

The Central Bank published its programme of themed-inspections for 2016 on 14 December 2015. The planned themed-inspections, which supplement day-to-day supervisory activities, for 2016 are:

  1. Outsourcing – inspection of service level agreements and operational arrangements with outsourcing providers for investment firms, fund managers and fund service providers.
  2. AIFM programme of activities – review of AIFMs adherence to their programme of activity.
  3. Risk function - focus on the risk culture within firms including governance arrangements, risk ownership and responsibility.
  4. Investment funds – analysis of the production costs of investment funds.
  5. Financial indices – review of the use of financial indices as eligible investments for UCITS.
  6. Director time commitments - continued focus on various issues.
  7. Client assets – focused review of client asset management plans for investment firms.
  8. Information technology risk – focus on resilience of firms' IT systems.
  9. Suitability – review of the suitability assessment of clients.
  10. Conduct – examination of the information provided to clients on an on-going basis.
  11. Hedging arrangements – review of hedging arrangements at share class level for investment funds.
  12. Market integrity – review of the practices of firms when dealing with insider information and their compliance with Market Abuse Regulations.

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Authors
Peter Stapleton
Stephen Carty
Ian Conlon
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