UNDERTAKINGS IN COLLECTIVE INVESTMENTS AND TRANSFERABLE SECURITIES ("UCITS")
(i) Central Bank letter to Irish Funds on authorisation procedures relating to UCITS and AIFs
On 8 October 2018, the Central Bank published revised guidance (the "Guidance") on the use of financial indices by UCITS. The purpose of the Guidance is to clarify the Central Bank's requirements where a UCITS intends to use a financial index for investment or efficient portfolio management purposes.
In particular, the Central Bank has introduced a new certification regime for UCITS funds under which the responsible person must certify in writing to the Central Bank prior to gaining exposure to a financial index that the relevant index complies with the requirements of the UCITS Regulations, the CBI UCITS Regulations and the Guidance.
The Central Bank has confirmed that a submission is required where the UCITS fund intends to replicate or track the composition of the relevant financial index. It has also advised that such a submission is also required where a UCITS intends to gain exposure to the relevant financial index for either investment purposes or efficient portfolio management purposes.
Consequently any UCITS which intends to gain exposure to an index which contains a constituent which represents more than 20% of that index (up to a maximum of 35% of the relevant index) must make a submission to the Central Bank prior to gaining exposure to the relevant index setting out why the exposure of up to 35% for a single issuer is justified by exceptional market conditions.
The Central Bank has stated that it is only possible for a UCITS to gain exposure to an index which is comprised of derivatives on commodities, notwithstanding the generic reference to "commodity indices" in Regulation 9 of the CBI UCITS Regulations.
The Central Bank has also confirmed that the disclosure obligations set down in Regulation 54(2) of the CBI UCITS Regulations only apply in the case of an index replicating UCITS fund which intends to avail of the increased diversification limits set down in Regulation 71 of the UCITS Regulations.
UCITS will now need to ensure that, prior to gaining exposure to a financial index for investment or efficient portfolio management purposes:
- The responsible person can confirm to the Central Bank that the relevant index is eligible for use by the UCITS, taking into account the specific criteria identified in the Guidance; and
- The responsible person will be in a position to provide the Central Bank with a submission (together with supporting documentation) as to why this is the case "immediately upon request".
Further information relating to these changes is provided in an article published by Dillon Eustace entitled 'Revised Central Bank Guidance on the use of Financial Indices by UCITS', which can be accessed here.
(ii) The Central Bank issues letter announcing certain amendments to its authorisation procedures for UCITS and RIAIF
On 9 October 2018, the Central Bank issued a letter addressed to the Irish Funds announcing certain amendments to its authorisation procedures, in the context of applications for undertakings for the collective investment of transferable securities ("UCITS") and retail investor alternative investment funds ("RIAIF").
The Central Bank has announced that with immediate effect, the pre-authorisation of the following will no longer be required by the Central Bank:
- The establishment of new Share Classes;
- Depositary Agreements;
- Trust Deeds or Deeds of Constitution; and
- Investment Limited Partnership Agreements;
Further information regarding these changes can be found in an article published by Dillon Eustace entitled 'Central Bank changes UCITS and Retail AIF Authorisation and Post-Authorisation Procedures' and can be accessed here.
(iii) Updated UCITS application forms
On 11 October 2018, the Central Bank published updates to its application forms for UCITS which are to be used when submitting an application through ORION.
The following sections of the application forms have been updated:
- Section 1 – Information;
- Section 2 – Prospectus;
- Section 10 - Sub-Funds Supplement;
- Section 12 - Authorisation day checklist; and
- Section 1 - Money Market Fund Regulation – Information.
The application forms can be accessed here.
(iv) Delegated Regulation on safekeeping duties of depositaries' for UCITS funds published in the Official Journal of the European Union
On 30 October 2018, a 'Delegated Regulation 2018-1618 amending Delegated Regulation (EU) 2016/438 with regard to the safekeeping duties of depositaries' for alternative investment funds ("New Delegated Regulation") was published in the Official Journal of the EU ("OJ").
The New Delegated Regulation supplements the UCITS IV Directive (2009/65/EC). In particular, the New Delegated Regulation further specifies how the safe-keeping functions of a third party under Article 22a(3)(c) of the UCITS IV Directive are to be fulfilled.
The European Commission adopted the New Delegated Regulation on 12 July 2018, and the Council of the European Union indicated that it had no objection to the New Delegated Regulation on 2 October 2018.
The New Delegated Regulation will enter into force on 19 November 2018 and will apply from 1 April 2020.
The New Delegated Regulation can be accessed in full here.
(v) Central Bank publishes the twenty-fourth edition of the UCITS Q&As
On 20 November 2018, the Central Bank published the twenty fourth edition of its "UCITS – Questions and Answers" ("Amended UCITS Q&As"), which has been updated as follows:
- ID 1030 – This question clarifies that the Central Bank will permit different dealing cut-off times for hedged and unhedged share classes in an Exchange-Traded Fund ("ETF"); and
- ID 1088 – This question has been added to clarify that a UCITS can be established which has both a listed share class and an unlisted share class. The Central Bank notes that this is possible, but such UCITS must be identified as a UCITS ETF. The listed share class must be identified as a listed share class. The unlisted share class must be clearly identified as an unlisted share class. The Responsible Person for a UCITS ETF must ensure the prospectus discloses the implications for investors depending on whether they are invested in the listed or unlisted share class.
The Amended UCITS Q&As can be accessed here.
(vi) Central Bank publishes reporting requirements for UCITS Management Companies
On 20 November 2018, the Central Bank published its reporting requirements for UCITS Management Companies.
Annual audited accounts of UCITS Management Companies must be submitted to the Central Bank within four months of the relevant reporting period end and must be accompanied by the Minimum Capital Requirement Report.
UCITS Management Companies are also required to submit certain financial information to the Central Bank, including half-yearly accounts of the management company twice in every financial year within two months of the end of the relevant half year along with the Minimum Capital Requirement Report. UCITS Management Companies may be required to submit additional monthly or quarterly financial information. The appropriate reporting interval is advised to a UCITS Management Company on an individual basis.
The document also details the reporting requirements in respect of returns that are to be submitted through the Central Bank's web-based Online Reporting ('ONR') system.
The Central Bank's reporting requirements for UCITS Management Companies can be found here.
(vii) Central Bank begins analysis on 2,000-plus Irish domiciled UCITS funds that report to be actively managed
On 5 December 2018, the Central Bank released a speech from Director General Derville Rowland, which stated that the Central Bank has begun its analysis on 2,000-plus Irish domiciled UCITS funds that report to be actively managed.
The analysis relates to potential situations where a fund manager indicates that they manage their funds in an active manner, while the fund's performance in practise adheres closely to a benchmark, a practice referred to as 'closet indexing'. The Central Bank has stressed that ensuring that investors are not disadvantaged by funds operating in a manner that is inconsistent with the way that they have presented their objectives, policies and charges in the fund documentation is one of its key priorities.
The analysis involves a full desk-based review of the funds documentation such as KIIDs and prospectus as well an assessment of their relevant disclosures.
A copy of the full speech can be accessed here.
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.