Welcome to the October – December 2021 issue of our Irish Quarterly Legal and Regulatory Developments report for asset management and investment funds. This report covers key developments during the quarter under the following headings:
- AIFMD developments;
- UCITS developments;
- Central Bank developments; and
- other legal and regulatory developments
1. AIFMD DEVELOPMENTS
1.1 Proposed amendments to the AIFMD framework
On 25 November 2021, the European Commission adopted a package of measures including proposed targeted amendments to the AIFMD framework.
The proposed amendments focus on:
- delegation arrangements including that AIFMs should employ or commit on a full time basis at least two natural persons who are EU resident;
- liquidity risk management including a proposal to insert a list of liquidity management tools in a new annex;
- supervisory reporting including the removal of limitations on the data that competent authorities should be able to receive from AIFMs on managed AIFs and the replacement of the current supervisory reporting template laid down in Annex IV of AIFMD;
- the provision of depositary and custody services including proposals to bring central securities depositories into the custody chain; and
- loan origination including the introduction of specific requirements for funds that originate
A period for feedback on this proposal runs until 24 January 2022.
Our advisory provides an overview of the proposed amendments to AIFMD. An overview of the proposals set out in the Capital Markets Union ("CMU") package is set out in section 4.8(a).
1.2 Central Bank AIFMD Q&As updated
20 December 2021 updates
On 20 December 2021, the Central Bank published updates to its AIFMD Q&As to include three new Q&As – ID 1151, 1152 and 1153 relating to (i) non-discretionary investment advisors; and (ii) performance fee requirements applicable to multiple manager RIAIFs.
I am a QIAIF operating a private equity strategy or invested in physical assets which do not qualify as financial instruments. What are the Central Bank's expectations in respect of an arrangement involving a non-discretionary investment advisor which provides services to the QIAIF?
An investment advisor may be appointed to provide services to a QIAIF on a non-discretionary basis. This may be appropriate where the expertise of an investment advisor is required, for example with respect to a geographical location or asset type. The role of the investment advisor is to provide relevant expertise in order to enable the AIFM (or investment manager if applicable) to perform their mandate.
The Central Bank understands that in the case of QIAIFs operating private equity strategies or otherwise invested in physical assets which do not qualify as financial instruments, an investment advisor may provide a range of services to the AIFM in respect of that QIAIF. Details to identify the investment advisor and the services provided should be comprehensively disclosed in the QIAIF's prospectus and may include services relating to identification and origination of investment proposals, due diligence and other operational activities relating to the assets or proposed investments of the QIAIF. Services of this nature are not typically provided for in other investment strategies, and as a result the fees paid to non-discretionary investment advisors providing these services appear disproportionately greater than those paid to other service providers of the QIAIF.
QIAIFs are required to disclose in its prospectus how fees of each service provider(s) are accrued and paid. Where such fees are payable directly from the assets of the QIAIF, the maximum fee and the potential to pay out of pocket expenses on normal commercial terms of each of the service provider is to be disclosed in the QIAIF's prospectus. Where a single figure is disclosed in the prospectus that covers all of the fees payable out of the assets of the QIAIF, the prospectus should disclose that the investment advisor will receive a fee greater than typically paid to a nondiscretionary investment advisor. This disclosure should cross-reference details of the services that the investment advisor is providing to the QIAIF in order to provide context for this fee.
The QIAIF's prospectus should also detail the role of the AIFM with respect to its ongoing oversight and review of services provided by such non-discretionary investment advisors. This should include information on how the AIFM will discharge its functions under AIFMD Level 2, including inter alia, Article 75(e) and (f).
The Central Bank intends to keep such arrangements under review and, depending on the evolution of market practice in this area, may conduct additional supervisory initiatives with respect to QIAIFs, including the role of non-discretionary investment advisors. For the avoidance of doubt, it is the Central Bank's expectation that the investment advisor is only performing a role that is advisory in nature. The AIFM must be in a position to evidence this upon request from the Central Bank.
Where an existing Retail Investor AIF has multiple managers or advisers ("multi-manager RIAIF"), can the RIAIF continue to pay a performance fee only on the performance of that part of the portfolio for which the investment manager or adviser is responsible and in respect of which there has been outperformance?
The Central Bank intends to implement Section XV, Question 7 of the ESMA Questions & Answers on the AIFMD. The Application Forms will be updated shortly in this regard. As such, the Central Bank requires that existing multi-manager RIAIF will have transitioned their current performance fee models into compliance with the ESMA Q&A by 1 January 2023 and will have updated their prospectuses accordingly by that time.
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.