UK: The Irish Central Bank Consults on Legislation to Implement UCITS IV, a New Definition of Money Market Funds and Changes to Other Provisions Governing Irish Funds

Last Updated: 1 March 2011
Article by Michelle Moran and Natalie O'Sullivan-Gallagher

The Central Bank published on 17 February 2011 revised drafts of UCITS Notices, Non-UCITS Notices ("Notices NU") and Guidance Notes reflecting the changes to be implemented in accordance with directive 2009/65/EC ("UCITS IV"), and reflecting general amendments, in particular those relating to the definition of money market funds.

A consultation paper was published in addition to the revised UCITS Notices, Notices NU and Guidance Notes calling for responses to be submitted to the Central Bank by 15 March 2011 by the fund industry. We understand that it is intended that implementing legislation will be in place by Easter 2011.

As predicted, the provisions of UCITS IV, related implementing directives and European Securities and Markets Authority ("ESMA") guidelines were implemented without amendment by the Central Bank. The Central Bank has, in addition, elaborated on additional points on which this article focuses. It is clear, however, that there is still a great deal of clarification needed and this consultation is likely to reflect the start of intense dialogue with the industry to look at how many of these measures will be implemented in practice.


UCITS Management Companies

UCITS management companies will be required to comply with UCITS IV from 1 July 2011. To this end, the Central Bank requires all UCITS management companies to submit their revised business plans for review by 29 April 2011. In the UCITS Notices and Guidance Notes, the Central Bank has implemented the UCITS IV provisions but has also elaborated on the structure and organisation of UCITS management companies.

In accordance with the UCITS IV provisions, UCITS management companies must (i) establish, implement and maintain decision-making procedures and an organisational structure which clearly specifies reporting lines and allocates functions; (ii) take into account the nature, scale and complexity of the range of services and activities they undertake; (iii) establish a permanent compliance function to monitor and assess their risk management policies and procedures; (iv) maintain an internal audit system and risk management system; (v) maintain procedures and independence in the management of potential conflicts of interest; (vi) comply with rules of conduct to act honestly and fairly in all transactions, to act with due skill and care, to have and employ the appropriate procedures to ensure the proper performance of it business activities and to comply with the letter and spirit of all regulatory requirements; and (vii) to put in place a risk management process enabling it to monitor the risk of portfolio positions and their contribution to the overall risk profile of the portfolio and to provide details of this process to the Central Bank.

UCITS Self-Managed Investment Companies

UCITS self-managed investment companies ("SMIC") authorised from 1 July 2011 onwards must comply with all UCITS IV requirements. If authorised before 1 July 2011, the SMIC must update its business plan to reflect the implementation of rules of conduct and risk measurement before 1 July 2011. So from 1 July 2011, SMICs must comply with requirements (vi) and (vii) as set out above. The SMIC does not have to submit its business plan to the Central Bank for review prior to 1 July 2011 but the Central Bank may request the business plan for review and approval down the line. SMICs authorised before 1 July 2011 must comply with all UCITS IV requirements by 1 July 2013 as set out above.

A great deal of detail is being worked through within the Irish funds industry in the context of infrastructure and reporting in relation to the implementation of the amendments concerning UCITS management companies and SMICs and a further edition of DechertOnPoint will be devoted to reporting on this area.

Master-Feeder Funds

The Central Bank fully implements the UCITS IV provisions on master-feeder structures, providing additional information on (i) what information needs to be provided to the Central Bank in the event of the liquidation, merger or division of the master; and (ii) the information to be provided contained in the master-feeder agreement or alternatively in the internal conduct of business rules if both master and feeder have the same management company.

Key Investor Information Document ("KIID")

The Central Bank implements the UCITS IV provisions relating to the replacement of the simplified prospectus by the new KIID but while it states that the "KIID must be fair, clear and not misleading" it does not reproduce the civil liability clause (Article 79(2) of UCITS IV) (i.e., the statement that the management company or fund may be held liable for information that is misleading, inaccurate or inconsistent, with the prospectus, within the KIID) in this consultation. However, (i) the implementing EU regulation for the KIID will in any event be directly applicable; and (ii) the Central Bank has stated that this legislation and guidance would require compliance. This means that this liability standard and the requirement for the related disclosure to appear in the KIID will apply in Ireland. Further, given that this is not a point of contention by the Central Bank, this civil liability point will more than likely be covered in the final legislation.

The Central Bank will allow a stand-alone UCITS or UCITS umbrella fund authorised prior to 30 June 2011 to continue to publish a simplified prospectus until 30 June 2012, after which time they must publish a KIID. New stand-alone UCITS and new umbrella UCITS authorised after 30 June 2011 must produce a KIID. If an existing umbrella UCITS launches a new sub-fund after 30 June 2011, it may elect to publish either a KIID or simplified prospectus provided that all sub-funds adopt the same approach. The consultation provides further guidance on the content and preparation of the KIID consistent with guidance already issued at the EU level.

Cross-Border Mergers

The Guidance Notes provide guidance on the merger of both UCITS and non-UCITS. The merger of UCITS will be governed by this and by the final legislation. The guidance notes provide that the approval by the general meeting of unitholders of the UCITS of the proposal to merge will only be effective if unitholders have been given a right to redeem their units free of charge before the proposed merger. The merger of non-UCITS must be discussed with the Central Bank before it is put to the unitholders for their consideration.

Financial Derivative Instruments ("FDIs")

The consultation incorporates current EU provisions relating to UCITS investing in FDIs as part of their general investment policies as well as for hedging. This consolidates and reflects legislation and guidance already issued in the EU under UCITS IV and previously led by the Committee of European Securities Regulators (where the FDI Group was chaired by the Central Bank within the EU and so such straightforward implementation would have been expected in Ireland) and now, the newly constituted ESMA. This represents a focus on ensuring that a UCITS must establish an extensive system of risk limitation in order to ensure that the accompanying risks are properly managed, measured and monitored on an on-going basis through specific guidance on areas such as eligible assets, risk management, risk measurement calculation of global exposure and counterparty risk.

Notification Requirements

The Central Bank sets out the provisions for the new passporting procedure for both UCITS authorised in Ireland and those authorised in another EU Member State intending to market its units in Ireland. However, it does not provide clarification on many of the practical issues that are likely to arise such as how to transition to the new procedure when funds are currently operating under the present passporting system. It is likely that further work and clarification will be needed in this area.

Tax Position

The Irish Funds Industry Association has confirmed that further to the Finance Act 2010 and in light of UCITS IV, it regards the following tax benefits to apply:

  • UCITS management companies will continue to benefit from the 12.5% corporation tax.
  • Foreign UCITS managed in Ireland under UCITS IV will not be regarded as having a taxable presence in Ireland and no adverse Irish tax consequences arise.
  • The introduction of enhancements to tax exemptions from Irish transfer taxes where units are issued to a foreign fund as opposed to its unitholders is likely to benefit master-feeder funds under UCITS IV and funds re-domiciling to Ireland.
  • For fund mergers under UCITS IV, no Irish transfer tax will apply.


  • The Central Bank implements provisions regarding money market funds: Both UCITS and non-UCITS money market funds must comply with the ESMA Guidelines on a Common Definition of European Money Market Funds ("ESMA Money Market Guidelines") by 1 July 2011. Most Irish money market funds comply with these guidelines in implementing their investment policies but the prospectus of each money market fund will have to be amended in order to indicate whether it is a "short-term money market fund" or a "money market fund" by 1 July 2011. This classification will also have to be included in the KIID. Money market funds must also provide adequate information regarding the risk and reward profile of the fund to enable investors to identify risks specific to the investment strategy of the fund. Non-UCITS must also comply with the ESMA Money Market Guidelines.
  • Minimum subscription requirements for professional investor funds: Following the amendment in October 2010 of Notice NU 24.8 reducing the minimum subscription amount for qualifying investor funds ("QIFs") from €125,000 to €100,000, the Central Bank proposes to reflect this change generally for professional investor funds.
  • Related party transactions: The UCITS Notices have been amended in order to include an additional reporting requirement of details of transactions entered into during the reporting period to be provided in the annual and semi-annual reports, including a list of all transactions, the name of the related party and the fees paid to that party. The Guidance Notes also now include a requirement to refer in the business plan of a UCITS management company or SMIC to this reporting requirement.
  • Minimum capital requirements: The UCITS Notices have been amended to include format and content changes to the minimum capital requirement report for management, administration and trustee companies.
  • Closed-ended collective investment schemes: The Central Bank has clarified the requirements for shareholder approval of changes to the duration, investment objective and policies of closed-ended collective investment schemes. The Central Bank intends to apply the same requirements to limited liquidity collective investment schemes. The amendments state that for (i) a change to the investment objective; (ii) a material change to the investment policies; (iii) a change to the duration of a fund; or (iv) an increase in management fees where investors have not been given an opportunity to redeem, the change must be approved by votes representing at least 75% of the shares in issue. This reduces to 50% of the votes cast where investors have been given such an opportunity. For non-material changes of investment policies, 50% of the votes cast is necessary if there is no option to redeem; if there is an option to redeem then investors just need to be provided with reasonable notification prior to the implementation of the change.
  • Change of Service provider: An audit is no longer required at the date of the change of service provider. This change has been incorporated into the draft UCITS Notices. It is intended that similar amendments will be made to the Notices NU after the present consultation.
  • Other tax developments worth noting: A waiver has been introduced so that for Irish-registered funds sold abroad non-resident investors need no longer complete a non-resident declaration for tax purposes. Management companies holding units in an Irish regulated fund which it manages can complete a declaration to ensure that no exit tax is deducted on payments from that fund.

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.

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