1. INTRODUCTION

Ireland is internationally recognised as one of the world's most advantageous jurisdictions in which to establish international investment funds. Investment funds often use derivatives for efficient portfolio management and investment purposes. However, as regulated entities, there are myriad legal, regulatory, technical and commercial considerations that should be reflected in the trading documents to ensure that they remain legally enforceable and to protect the commercial interest of the parties.

The specific regulations applied by the Central Bank of Ireland (the "Central Bank") to an investment fund will depend on the type of investors to whom the fund is to be sold and its specific investment policies. The regulatory framework in Ireland is divided between Undertakings for Collective Investment in Transferable Securities ("UCITS") and Alternative Investment Funds ("AIFs"), both of which are governed by European and Irish legislation as well as the rules and guidance issued by the Central Bank. The primary difference in the regulation of each relates to the nature of investments which they are permitted to make, and to the particular investment rules and borrowing restrictions imposed by the Central Bank. UCITS are a form or retail or mutual fund while AIFs are restricted to sophisticated investors.

2. WHAT IS A UCITS?

UCITS are diversified, limited leverage, open ended investment funds whose object must be to invest capital raised from the public in transferable securities and other liquid asset classes. UCITS are open ended insofar as investors must generally be entitled to redeem their shares or units on request at least twice per month at regular intervals. There are restrictions on UCITS' investment and borrowing policies and on their use of leverage and financial derivative instruments.

The advantage of establishing a fund as a UCITS is that it can generally be sold without any material restriction to any category or number of investors in any EU Member State, subject to the filing of appropriate documentation with the relevant regulatory authority in those EU Member States. The UCITS brand has gained global recognition, with UCITS regarded as well-regulated funds with robust risk management procedures and a strong focus on investor protection. UCITS are widely accepted for sale in Asia, the Middle East, and Latin America.

The criteria used to determine eligible investments for UCITS are set out in detail in the Eligible Assets Directive.1 In summary, a UCITS must invest at least 90% of its assets in transferable securities or liquid financial assets listed or traded on recognised exchanges or markets. These include exchange traded or OTC financial derivative instruments. When first introduced, UCITS were only permitted to use derivatives for efficient portfolio management (i.e. hedging) purposes, but since 2003 they have been permitted to use derivatives for investment purposes as well.

3. LEGAL ENTITY TYPES

A broad variety of public tax-exempt investment fund vehicles can be established in Ireland. They are regulated by, and require the authorisation of, the Central Bank. The regulatory framework is divided between UCITS and AIFs, but for the purposes of this article we are focusing on investment funds regulated as UCITS. A UCITS may be established through any one of the following vehicles:

  • an investment company (public limitedcompany or plc);
  • an Irish Collective Asset-management Vehicle ("ICAV");
  • a unit trust; and
  • a common contractual fund ("CCF").

INVESTMENT COMPANY

An investment company is an entity with distinct legal personality that is managed and controlled by its board of directors and can enter into contracts in its own name. The assets are the property of the company, and each fund investor holds shares. A depositary is appointed to safekeep the assets on the company's behalf. An investment fund established as a company may be self-managed or appoint a management company. It must operate on the principle of risk spreading.

The paid-up share capital of the company must at all times equal the company's net asset value, the shares of which have no par value. An investment company may be structured as a stand-alone fund or an umbrella fund (see the section headed "Umbrella funds" below). Shareholders in an investment company have limited liability.

ICAV

The ICAV is a form of corporate fund structure introduced in March 2015. The ICAV has overtaken the investment company structure as the most popular of the Irish fund structures.

The ICAV represents a modernising and streamlining of the investment company fund structure and is designed specifically with the needs of investment funds in mind. The ICAV may be regarded as similar to a Luxembourg "SICAV" or a UK "OEIC." The ICAV is registered (incorporated) with the Central Bank and provides a tailor-made fund vehicle that is available as a corporate structure to both UCITS and AIFs as umbrella or standalone funds

One of the main advantages of the ICAV is that it is a corporate entity that can elect its classification under the U.S. check-the-box taxation rules. The ICAV has its own legislative regime (the ICAV Act 2015), which assists in ensuring that the ICAV is distinguished from ordinary companies and therefore avoids those aspects of company law legislation that would not be relevant to a collective investment scheme.

Like the investment company an ICAV can be established as a standalone or an umbrella structure. Investors own shares in the ICAV and the ICAV can issue and redeem shares continually. An ICAV must have a board of directors to govern its affairs. Similar to an investment company, the ICAV may either be managed by an external management company or be a selfmanaged entity.

The ICAV offers a range of potential benefits which reduce costs for ICAV investors and means that the ICAV has become the Irish investment fund vehicle of choice, regardless of the domicile of the investor base.

UNIT TRUST

A unit trust is created by a trust deed entered into by the trustee and the manager of the fund and this structure requires a management company. A unit trust is a contractual arrangement and the trust is not a separate legal entity, with the result that a unit trust does not have power to enter into contracts in its own name. In general, the manager or trustee enters into contracts for the account of a unit trust.

The trustee is registered as the legal owner of the assets on behalf of the investors, who receive units, each of which represents a beneficial interest in the assets of the unit trust. A unit trust may be structured as a stand-alone fund or an umbrella fund.

CCF

A CCF is an unincorporated body established by a manager pursuant to which the investors, through contractual arrangements, participate and share in the assets of the fund as co-owners; each investor holds an undivided co-ownership interest as a tenant in common2 with the other investors. The CCF has a similar structure to FCPs (Fonds Commun de Placement) established in Luxembourg.

The CCF is constituted under contract law (and not company law or trust law) by way of deed of constitution executed under seal between the manager and the depositary and does not have a distinct legal personality. Accordingly, the CCF cannot assume liabilities and, in the same manner as a unit trust, the manager and the depositary enter the various agreements for and on behalf of the CCF. The assets of the CCF are entrusted to a depositary for safe-keeping. A CCF may be structured as a stand-alone fund or an umbrella fund.

The main feature differentiating CCFs from other investment funds is that a CCF is totally tax-transparent. This means that investors in a CCF are treated as if they directly own a proportionate share of the underlying investments of the CCF rather than shares or units in an entity which itself owns the underlying investments. This is of particular interest to investors such as pension schemes, charities and life insurance schemes which have preferential tax rates on their investments and can retain these rates while obtaining the benefit of pooled investment management of their assets.

Footnote

1 Commission Directive 2007/16/EC implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions

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