Welcome to the May edition of our Asset Management and Investment Funds Legal and Regulatory Update.
In this issue we consider the Central Bank's COVID-19 related letter to fund management companies, some helpful Revenue guidance on board meeting attendance during COVID-19, the Central Bank's notice of intention to comply with ESMA's guidelines on stress testing in money market funds, the recent ESAs' consultation on ESG disclosures under the Disclosure Regulation, and the European Commission's new Action Plan to fight money laundering and terrorist financing.
If you would like to discuss any of the topics covered, please feel free to contact a member of our team.
Central Bank's COVID-19 Letter to Fund Management Companies
The Central Bank has issued a number of COVID-19 related communications over the past months and on 30 April, issued a further communication to the Funds industry.
In a letter addressed to fund management companies regarding measures in light of ongoing market uncertainty due to COVID-19, the Central Bank re-emphasised the importance of liquidity management at this time. The Central Bank noted that in the context of recent market conditions, it expects that effective liquidity management would include an assessment as to whether a UCITS has appropriate liquidity management tools in place. Such an assessment should take into account dealing frequency, investment strategy, portfolio composition and the investor profile of the fund. Where it is considered necessary to expand the range of such tools, or make other changes to address liquidity risk, the fund management company should take the necessary steps to amend the relevant fund documentation, ensuring clear and effective notification to investors. Any such notice should give investors sufficient information (including information on any potential risks or costs) and sufficient time to redeem prior to the implementation of any such change.
The Central Bank's communication also addresses breaches of the Central Bank UCITS Regulations 2019 arising from current market volatility. In this regard, the Central Bank expects fund management companies to minimise the potential for such breaches. However, it notes that certain requirements may be breached for reasons outside of the control of the fund management company. Where breaches have occurred, they should be reported to the Central Bank in the normal course and may be subject to supervisory engagement depending on the nature of the breach in question. Any breach should be remedied as a priority, taking due account of the interests of investors. The Central Bank notes that fund management companies should consider the appropriateness of communicating the occurrence of any breaches arising to their investors whether by way of disclosure in the financial statements or by way of other separate communication.
The Central Bank acknowledged that the current crisis brings with it challenges, some of which have not materialised and the consequences of which may remain unclear for fund management companies. As part of its ongoing obligations to ensure risks are identified, monitored and managed during this time, fund management companies should consider the risk factors disclosed in prospectus documentation and whether there are any new risks that should be included.
The communication also addresses additional data requests and temporary PCF appointments during the pandemic and provides some helpful flexibility regarding these PCF appointments.
Revenue Guidance on COVID-19 related Travel Restrictions and Meeting Attendance
Irish fund management companies must be tax resident in Ireland. Companies will largely be regarded as tax resident in Ireland if their central management and control is located in Ireland. Central management and control of a company is determined by examining where and by whom strategic control of the company's operations occurs and this is usually the function of the board of directors. Key factors are where directors' meetings are held and where directors take decisions formally or informally. In practice, companies that follow normal corporate governance procedures (i.e. strategic decisions are taken by the directors in properly constituted board meetings) will usually have their tax residence where the majority of directors' meetings are held (assuming in person meetings) and the Central Bank requires Irish fund management companies to hold at least four meetings per year in Ireland. In the current environment, directors may be unable to travel to meetings in Ireland. Accordingly, consideration should be given to the impact (if any) on the tax residence of companies of holding virtual meetings with directors participating from outside Ireland.
In this regard, the Irish tax authority ("Revenue") has issued helpful guidance dealing with the Irish position for non-Irish directors who are unable to attend board meetings because of COVID-19 travel restrictions.
Essentially, if the director had a pattern of attending board meetings in Ireland previously and this has been interrupted because of COVID-19 travel restrictions, Revenue will disregard that absence for Irish corporation tax purposes. Similarly, where an individual is present in the State and that presence has resulted from travel restrictions related to COVID–19, Revenue will disregard such presence in the State for corporation tax purposes for a company in relation to which the individual is an employee, director, service provider or agent.
The individual and the company should maintain a record of the facts and circumstances of the bona fide relevant presence inside, or outside the State, for production to Revenue if evidence that such presence resulted from COVID-related travel restrictions is requested.
Local tax advice in the jurisdictions in which non-Irish resident directors are resident would also need to be considered.
Sustainable Finance: ESAs Consult on ESG Disclosures
On 23 April, the European Supervisory Authorities (ESMA, EBA and EIOPA) published a joint consultation on the level two measures ("RTS") in respect of required ESG disclosures under the Disclosures Regulation.
The Disclosures Regulation applies to financial market participants ("FMPs"), which includes AIFMs, UCITS management companies and self-managed UCITS. It imposes disclosure and transparency requirements on FMPs and requires them (amongst other requirements) to:
- publish information on their websites regarding their policies on the integration of sustainability risks in their investment decision-making process;
- make pre-contractual disclosures on how they incorporate sustainability risks in their business; and
- comply with pre-contractual transparency rules on sustainable investments.
The RTS set out the detailed content, methodologies and presentation of the required disclosures and primarily cover two areas of disclosure:
- the need to publish an Adverse Sustainability Impact statement. FMP's must publish a website statement on the due diligence policy in respect of the principal adverse impacts of their investment decisions on sustainability factors in relation to climate and other environmental impacts; and the adverse impact in the field of social and employee matters, respect for human rights, anticorruption and anti-bribery matters. There is a mandatory reporting template for this statement; and
- pre-contractual and ongoing, website and periodic reports disclosures.
The consultation also includes proposals under the recently agreed Taxonomy Regulation (see our previous article) on the establishment of a framework to facilitate sustainable investment on the "do not significantly harm" principle. The consultation closes on 1 September 2020.
The Disclosures Regulation will apply from 10 March 2021, with the requirement for the annual accounts disclosure applying from 1 January 2022. Fund management companies should review the requirements and assess how they can achieve compliance by the 2021 deadline.
Money Market Funds: Central Bank Notice of Intention to Comply with ESMA Guidelines on Stress Testing
On 30 April, the Central Bank published a notice of intention regarding compliance with ESMA's guidelines on stress testing scenarios in Money Market Funds ("Guidelines").
The notice states that the Central Bank intends to consult on the incorporation of a provision in the Central Bank UCITS Regulations and AIF Rulebook that all managers of money market funds adhere to the Guidelines, and that in the interim, it expects full compliance with the Guidelines from 4 May 2020.
Under the Money Market Funds Regulation ("MMFR"), money market funds ("MMFs") (or their managers) are required to conduct regular stress tests as part of their risk management and regulatory disclosure obligations. Therefore, each MMF must have stress testing procedures in place to identify stress events, or future changes in economic conditions, and to assess the impacts these different scenarios may have on the MMF. These stress tests should be based on objective criteria and consider the effects of severe plausible scenarios.
The Guidelines establish common reference parameters for these stress test scenarios and include stress test scenarios in relation to hypothetical changes in MMFs':
- liquidity levels;
- credit and interest rate risks;
- redemptions levels;
- widening/ narrowing of spreads among indexes to which interest rates of portfolio securities are tied; and
- macro-economic shocks.
The results of these stress tests must be included in the quarterly reports to national regulators that are required under the MMFR. The Central Bank has deferred the deadline for receipt of the first of these quarterly reports until July 2020 and may extend this deadline further, in light of a recent ESMA announcement that it was extending its deadline for receipt of these reports to September 2020, due to required enhancements to the reporting templates.
European Commission Action Plan and Consultation
On 7 May, the European Commission ("Commission") adopted an action plan aimed at further strengthening the EU's fight against money laundering and terrorist financing ("Action Plan") and is consulting on its proposals.
The Action Plan sets out a series of measures aimed at closing loopholes and weak links in the EU's AML rules, building on six “pillars”. Each pillar is aimed at improving the EU's overall fight against money laundering and terrorist financing, as well as strengthening the EU's global role in this area. When combined, the Commission believes that the six pillars will ensure that EU rules are more harmonised and, therefore, more effective. The Commission intends to deliver on all its proposed actions by early 2021.
The six pillars of the Action Plan are:
- ensuring the effective implementation of the existing EU AML/CFT framework;
- establishing an EU single rule book on AML/CFT;
- bringing about EU level AML/CFT supervision (this would see the establishment of a single EU-level supervisor);
- establishing a support and cooperation mechanism for FIUs (Financial Intelligence Units, in Ireland the Revenue Commissioners and an Garda Síochána);
- enforcing Union-level criminal law provisions and information exchange; and
- strengthening the international dimension of the EU AML/CFT framework.
The consultation on the Action Plan closes on 29 July 2020.
Revised "Blacklist" of High-Risk Third-countries
Under the Fourth EU Money Laundering Directive ("4MLD") enhanced customer due diligence must be applied when dealing with customers in high risk third countries. Previously, the European Commission ("Commission") published a "white-list" of third country equivalent jurisdictions. However, this system was deemed ineffective and 4MLD requires the EU to establish a list of high-risk third countries that have serious deficiencies in their AML/CFT regimes. In 2019, the Commission published a delegated regulation identifying 23 countries for these purposes. That blacklist was, however, rejected by the European Council, and the Commission was required to prepare a new list of high-risk third countries and on 7 May, the Commission adopted a delegated regulation amending its list of high-risk third countries with strategic deficiencies in their AML/CTF regimes.
Countries added to the list: The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe.
Countries that have been delisted: Bosnia-Herzegovina, Ethiopia, Guyana, Lao People's Democratic Republic, Sri Lanka and Tunisia.
The delegated regulation must also be approved by the European Council and Parliament within one month (or two months, if the scrutiny period is extended). If neither rejects it, the regulation will be adopted and enter into force 20 days following its publication in the Official Journal of the European Union. Article 2 of the regulation, which adds countries to the list, will take effect from 1 October 2020.
The Commission has also published a new methodology to identify these high-risk third-countries. The aim of this new methodology is to provide more clarity and transparency in the process of identifying these third countries. The key new elements concern:
- the interaction between the EU and FATF listing process;
- an enhanced engagement with third countries; and
- reinforced consultation of Member States experts.
MiFID: ESMA Reminds Firms of Conduct of Business Obligations
On 6 May, ESMA issued a public statement on the risks for retail investors when trading under the highly uncertain market circumstances due to the COVID-19 pandemic. ESMA also reminded investment firms of the key conduct of business obligations under MiFID when providing services to retail investors, namely product governance, information disclosure, suitability and appropriateness.
Originally published 26 June, 2020
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.