On 2 January the Central Bank issued a consultation paper CP77 on the publication of a UCITS Rulebook. It is intended that the UCITS Rulebook will replace the existing UCITS Notices and Guidance Notes and consolidate into one document all of the conditions which the Central Bank imposes on UCITS, their management companies and depositaries.
In doing so, the Central Bank is seeking to align the format of the UCITS rules with the Central Bank's AIF Rulebook published for alternative investment funds.
STRUCTURE OF RULEBOOK AND CENTRAL BANK DRAFTING APPROACH
The proposed UCITS Rulebook contains the following three chapters:
Chapter 1 – Product Requirements
Chapter 2 – Management Company Requirements
Chapter 3 – Depositary Requirements
Draft versions of each of these chapters form part of the consultation document. The Central Bank states that the UCITS Rulebook is composed in a somewhat different manner than the existing UCITS Notices and Guidance Notes. The Central Bank's aim is to "eliminate duplication and texts whose standing is unclear, i.e. which provides guidance for industry on what could be done but which does not clearly constitute a regulatory requirement". This means, for example, that a large volume of the UCITS Notices which effectively replicated provisions of the UCITS Regulations will be removed from the UCITS Rulebook. In future, readers will need to refer to both the Rulebook and the UCITS Regulations to have an accurate view of all requirements. In this regard, the UCITS Rulebook will not be as user friendly as the UCITS Notices which served as a reliable reference source for all material regulatory requirements. What the Central Bank terms as "residual guidance" will be published on the Central Bank's website. Therefore, we expect to see elements of the existing Guidance Notes and possibly the UCITS Notices reproduced in the guidance published on the website.
QUESTIONS FOR CONSIDERATION
While the Central Bank is consulting on the whole of the UCITS Rulebook, it has sought views on the following questions in particular:
ABOLITION OF PROMOTER APPROVAL REQUIREMENT
The Central Bank has previously placed significant reliance on the "promoter" of a UCITS by ensuring that UCITS could only be established by sizeable entities (those with minimum capital of ¤635,000) which could support the UCITS in difficulty and had relevant experience. The Central Bank is proposing to eliminate the promoter approval process for UCITS, in the same way as it has done for alternative investment funds. Instead, the Central Bank will place reliance on the regulatory regime for UCITS management companies and proposes to elaborate on the obligations of directors when a UCITS gets into difficulties. This mirrors the approach the Central Bank has taken for alternative investment funds in the AIF Rulebook. This will be seen as a welcome development by smaller promoters and should simplify the process of establishing an Irish UCITS by new entities.
REMOVAL OF CENTRAL BANK ROLE IN REVIEWING REGULATED MARKET LISTS
UCITS are permitted to invest in transferable securities and exchangetraded derivatives which are listed or traded on stock exchanges or regulated markets. Guidance Note 1/96 sets out the Central Bank's approach to determining whether a market meets the criteria for 'regulated markets' set out in the UCITS Regulations. Since the introduction of Commission Directive 2007/16/EC on eligible assets ("Eligible Assets Directive"), there has been some overlap between matters covered by that Directive and Guidance Note 1/96. The Central Bank proposes to remove this duplication by withdrawing that guidance note. As a result, the Central Bank will no longer review submissions on proposed regulated markets and will no longer publish a list of permitted markets for UCITS. This should be a positive development as it should enable UCITS to determine whether a particular market meets the requirements of the Eligible Assets Directive without the necessity of checking this against the list published by the Central Bank or getting individual regulatory approval for an investment in a particular market.
ADDITION OF REQUIREMENT FOR SECOND HALFYEAR MANAGEMENT ACCOUNTS FOR MANAGEMENT COMPANIES AND DEPOSITARIES
The Central Bank proposes to extend the current financial reporting requirements for UCITS management companies and depositaries. Currently UCITS management companies and depositaries are required to submit halfyearly management accounts covering the first six months of the financial year and audited annual accounts. It is proposed to require the additional submission of half-yearly management accounts covering the second six months of the financial year. We understand though that the Central Bank does not propose to extend this requirement to UCITS established as self-managed investment companies. This proposal will add to the current reporting burden placed on UCITS management companies and depositaries. Given that the Central Bank already receives financial information covering the second six month period in the annual audited financial statements, it would be helpful if the Central Bank could articulate why the submission of additional unaudited information will assist the Central Bank when the same information is already provided in the audited accounts.
The Central Bank has also asked for stakeholders views as to whether any aspects of the current regulatory regime which are within the discretion of the Central Bank are no longer necessary or appropriate. Responses to the consultation must be submitted by 28 March 2014. When the consultation process is complete the Central Bank will conduct a technical examination of the UCITS Rulebook to refine drafting.
We continue to review the detail of the changes proposed in the UCITS Rulebook and will issue further bulletins, as necessary.
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.