On 5 October 2015, the Central Bank published the Central Bank UCITS Regulations 2015 which are to come into effect on 1 November 2015. These new Regulations, which are to be known as the UCITS Rulebook, document in one place all of the requirements which the Central Bank imposes on UCITS investment funds, UCITS management companies and UCITS depositaries. The issue of the UCITS Rulebook is the culmination of a consultation process (CP 77) on the Irish UCITS rules that was initiated as far back as January 2014.
NEW UCITS RULEBOOK
The new UCITS Rulebook sets out the Central Bank requirements for Irish UCITS. The UCITS Rulebook will supplement the existing Irish legislative requirements (and in particular, the Irish regulations which implement the UCITS Directive - the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011). It is the first time that the rules have been issued by the Central Bank on a statutory basis as the new UCITS Rulebook is published in the form of Central Bank regulation.
The format of the UCITS Rulebook follows that of the AIF Rulebook in that the rules are grouped firstly by entities and secondly by subject matter. It is intended that the UCITS Rulebook contains all of the rules imposed by the Central Bank and so includes any derogations from the rules previously granted by the Central Bank to UCITS so as to allow all UCITS to operate on a level playing field. The guidance issued by the Central Bank has also been restructured and will now be located in the Central Bank's UCITS website guidance. The UCITS Rulebook, along with guidance published on the Central Bank's website, will replace the existing UCITS Notices and Guidance Notes.
Although the new UCITS Rulebook largely reflects the conditions set out in the Central Bank UCITS Notices, a small number of policy changes are addressed in the new UCITS Rulebook which are described in the feedback statement on CP 77 below.
FEEDBACK STATEMENT ON CP 77
In conjunction with the publication of the new UCITS Rulebook, the Central Bank has also issued a feedback statement on its original consultation on CP 77 on the publication of the UCITS Rulebook which deals principally with three issues which are described below.
Previously the Central Bank only allowed sizeable entities with relevant experience to establish Irish UCITS by requiring them to submit to a promoter approval process. The Central Bank is dispensing with the promoter regime for UCITS in the same way as it has done so for Irish authorised AIFs. Instead of a promoter approval process the Central Bank will place reliance on the regulatory regime for UCITS management companies and self-managed investment companies and on the elaboration of the obligations imposed of directors when a UCITS gets into difficulties.
The removal of the promoter approval process is a welcome change for those asset managers wishing to establish a UCITS in Ireland for the first time as they will no longer need to submit information in relation to their ownership, regulatory status, experience or financial condition in order to be approved as a promoter of an Irish fund. Also, the process for establishing an Irish fund for new entrants will become more streamlined once the promoter approval process is dispensed with as the promoter approval had to be in place before UCITS fund documents could be submitted to the Central Bank for review and the approval of a promoter typically took several weeks to obtain.
The Central Bank has also confirmed that any changes in the shareholding of the existing promoters no longer need to be notified to the Central Bank.
The Central Bank is withdrawing its Guidance Note 1/96 on permitted markets which sets out the Central Bank's approach to determining whether a market or exchange on which investments are listed or traded meet the criteria for regulated markets set out in the UCITS Regulations (i.e. that the markets are open, regulated, recognised and operate regularly). The Central Bank will no longer publish a list of permitted markets for UCITS and will no longer review submissions on proposed regulated markets to be added to the list of regulated markets included in a UCITS prospectus. It is the responsibility of the UCITS to ensure that a UCITS complies with the requirements set out in the UCITS Regulations and the new UCITS Rulebook. This change is helpful for those UCITS that would like the flexibility to determine whether Rule 144A securities without an undertaking to register or with an expired undertaking and which are traded on the US broker-dealer market may be considered to be traded on a regulated market for UCITS purposes and so no longer attributed to the 10% bucket for securities that are not listed or traded on a regulated market.
NEW REPORTING FOR UCITS MANAGEMENT COMPANIES AND DEPOSITARIES
The Central Bank will require UCITS management companies and depositaries to prepare six monthly management accounts for the two six month periods in any calendar year. This new requirement will allow the Central Bank to be able to compare and analyse the two sets of six monthly reports of these entities in any year which it is currently not possible for the Central Bank to do under the current reporting requirements.
The feedback statement also addresses a number of other general UCITS queries. One issue addressed in the feedback statement worth mentioning in particular is the requirement that when a redemption gate is applied to a UCITS unsatisfied redemption requests should not receive priority to any subsequent redemption requests as this may materially prejudice investors and particularly small investors. The Central Bank's feedback states that all redemption requests should be dealt with on a pro rata basis while a redemption gate is in force. The constitutional document of some UCITS may provide that at the time a redemption gate is imposed existing redemption requests are to be dealt with in priority to subsequent redemption requests. UCITS will need to consider whether changes to the constitutional document (and the prospectus in which the redemption gate provisions are summarised) will be needed to address this issue.
UPDATED Q & A
The Central Bank has also published the seventh edition of its UCITS Q&A. The updated Q&A is intended to provide answers to common UCITS queries. Seventeen additional questions and answers are addressed in the updated Q&A which range from specific requirements that apply to particular types of funds (such as guaranteed funds) to more general information on matters such as the maximum level of certain fees and the length of shareholder notice requirements. By way of example, the Q&A helpfully includes information on, among other things,
- how to determine whether the corporate governance mechanisms of a closed-ended fund are to be assessed in order to determine if it is an eligible investment;
- how to consider appointments of service providers and dealings in shares by connected persons;
- the type of information to be included in annual reports on the model used for calculating any VAR limits; and
- the need for the rationale of a UCITS board composition to be documented in a business plan for new UCITS and that it is "good practice" for a director performing the new organisational effectiveness role to document the rationale for board composition when the UCITS business plan is next updated.
The publication of the new UCITS Rulebook has been expected for some time and essentially codifies the Central Bank's rules for UCITS in one document which is helpful for practitioners and asset managers alike. However, any UCITS operating with derogations from the existing Central Bank rules needs to ensure that the derogations are addressed in the new UCITS Rulebook before it takes effect on 1 November 2015. Lastly, the dispensing of the promoter approval process and the changes in the way that the list of regulated markets is determined are particularly welcome.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.