The Central Bank of Ireland ("Central Bank") AIF Rulebook was introduced with effect from 22 July, 2013 to coincide with the implementation of the Alternative Investment Fund Managers Directive (EU 2011/61) ("AIFMD") as transposed in Ireland by the EU (AIFM) Regulations 2013 (SI257/2013) (the "AIFM Regulations"). While the Central Bank has updated the AIF Rulebook on a number of occasions since then, it is now conducting a full review of the AIF Rulebook and has produced a consultation paper identifying the proposed amendments to existing policy as well as technical amendments ("CP99").
A copy of the consultation paper is available from the Central Bank website at the following link.
The deadline for responses to CP99 is 24 February, 2016.
A. PROPOSED POLICY CHANGES
The Central Bank has divided its consultation paper into proposed policy changes and proposed technical changes. The key proposed policy changes to the AIF Rulebook are as follows:
(i) Extension of the exemptions from the eligibility criteria and minimum subscription amount required to invest in a Qualifying Investor AIF ("QIAIF")
Eligible investors in QIAIFs are defined in the AIF Rulebook and they must subscribe a minimum of €100,000. However, the following investors can currently be accepted without meeting this minimum subscription requirement:
- management company, general partner, investment manager or investment advisor;
- a director of one of the above; or
- an employee of one of the above who is either directly involved in the investment activities of the QIAIF or is a senior experienced employee.
It is proposed to extend this list of entities to include the AIFM or an entity within the AIFM's group, a director of the AIFM or a relevant employee of the AIFM.
This update is to be welcomed as it clarifies any ambiguity as to whether an AIFM was captured under the 'investment manager or investment advisor' category.
(ii) Amendment of the reporting requirement applicable to AIF depositaries where they provide services to non-Irish AIF
AIF depositaries are currently required to provide a quarterly return to the Central Bank which provides aggregate information on non-Irish authorised investment funds to which they provide depositary services.
The current AIF Rulebook does not require depositaries to provide data in respect of investment funds if another entity includes such data in their return. The Central Bank proposes to remove this provision, consequently requiring all depositaries to report all data, regardless of whether another entity is also reporting separately on the services they provide in respect of the same investment fund.
The Central Bank views this amendment as a necessity in order to allow for supervisors to have access to an 'accurate picture of the amount of activity carried out by each regulated entity in their own right'.
While this change seems to make sense from an ease of review and streamlining of information perspective for the Central Bank, this may meet with resistance from Irish depositaries as it could significantly add to their existing compliance burden. Provided this does not lead to increased costs to funds which are then passed on to investors we do not have an issue with this proposed change.
(iii) Amendment of the capital and reporting requirements applicable to AIFMs and AIF Management Companies
The AIF Rulebook includes provision for a reporting template (Minimum Capital Requirement Report) with notes on compilation. As these reports are now submitted online via the Central Bank's online reporting system, this current system is now outdated. Subsequently, it is proposed to align the AIFM capital reporting requirements with the reporting requirements used by UCITS management companies as set out in the Central Bank Supervision and Enforcement Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferrable Securities) Regulations 2015 (the "Central Bank's UCITS Regulations") by way of a significant update to the existing AIF Rulebook.
This is further evidence of the Central Bank (in conjunction with its consultation paper 86- fund management companies- effectiveness) looking to align reporting requirements, in as far as is applicable, between AIFMs and UCITS management companies. At least in as far as it updates the outdated provisions of the AIF Rulebook in terms of the content of the capital report and applies a consistent approach, this change in policy seems reasonable.
AIF Management Companies:
The Central Bank's previous Consultation paper (CP97) proposed amending capital requirements for Fund Administrators (set out in Part 5 of the Central Bank Investment Firms Regulations).1 The Central Bank proposes to apply these same capital rules to AIF Management Companies and to amend the AIF Rulebook accordingly.
As the current AIF Rulebook requirements in terms of capital requirements mirror those which are applied to Fund Administrators, it seems like the correct approach to ensure that the AIF Rulebook is updated in line with the revised rules for those entities under CP97.
(iv) Extension of the list of requirements from the AIFM Regulations which apply to QIAIFS with registered AIFMs
During the initial two years of establishment post 22 July, 2013, a QIAIF with a registered AIFM is effectively governed by the previous regime that was applied to Qualifying Investor AIFs before AIFMD was introduced i.e. under the Non UCITS Series of Notices as well as the application of certain requirement of the AIFM Regulations 2013 (SI 257 of 2013). The provisions which apply to those registered AIFMs and in turn the QIAIFs they manage are currently set out Part III of Chapter 2 of the AIF Rulebook The Central Bank now intends to extend the applicable requirements under this regime to include the following:
- requirement to treat all investors fairly2; and
- requirement to inform investors of any arrangement made by the depositary to contractually discharge itself of liability and of any changes with respect to depositary liability without delay.3
This update is not surprising considering the import given to each of these principles of investor protections which are likely ones which the registered AIFM had considered as prudent to adhere to in any event so this change will bring certainty and enhance investors' protections from that perspective.
(v) Alignment of the rules which apply to collateral received by Retail Investor AIFs ("RIAIFs) under an OTC derivative or a repo/securities lending contract and the rules which reference external credit ratings with the rules recently introduced for UCITS
The current rules which apply to collateral received by RIAIFs under an OTC derivative contract, a repurchase or reverse repurchase agreement or a securities lending contract are at conflict with the rules applicable to UCITS in these areas. This is because the RIAIF rules are based on UCITS rules, which were recently amended by virtue of the Central Bank's UCITS Regulations to reflect the relevant ESMA guidelines. It is therefore proposed to amend the RIAIF requirements in order to align them with those applied to UCITS and also to revise the requirements for eligible counterparties.
At present the requirements are based on a minimum credit rating. In line with the approach which has been applied in respect of UCITS, it is proposed to introduce a threshold which AIFMs must apply in their credit assessments of these entities.
It is also proposed to amend the references to external credit ratings in the investment rules for RIAIF Money Market Funds and QIAIF Money Market Funds to align with the approach to external credit ratings in the equivalent UCITS rules.
The application of a consistent approach by the Central Bank in this area and clarifying this in the AIF Rulebook is to be welcomed.
(vi) Clarification on the requirement to hold minimum capital as eligible assets and in a separate account
Under AIFMD, certain AIFs can be internally-managed. In this instance certain AIFM rules apply including those relating to capital. In the case of AIFMs the Central Bank has issued additional rules in relation to capital and, in particular, a rule that the minimum capital in the form of eligible assets must be held in an account that is separate to the account used by the AIFM for the day-to-day running of its business.
According to the Central Bank it was never intended that this obligation should apply to an internally-managed AIF as this does not make sense in practice. Accordingly the proposal to clarify this rule is a positive development.
(vii) Removal of all references to bearer shares in the AIF Rulebook
The Companies Act 2014 prohibits the issue of bearer shares by investment companies and on that basis it is proposed to amend the AIF Rulebook accordingly.4
While this update is inevitable and makes sense, those AIFs which currently have bearer shares in issues should note the transition period provided for in the Companies Act 2014 for cancelling / divesting such shares and the AIF Rulebook amendment should also make this clear as regards its application for existing AIFs.
(viii) Requirement of AIFMs and AIF Management Companies to produce a second set of half-yearly accounts
It is proposed to align the AIF Rulebook with the Central Bank's UCITS Regulations so that AIFMs and AIF Management Companies will be required to produce half-yearly reports covering the second half of the financial year.
According to the Central Bank, this change will provide it with more complete and timely information which in turn will allow it to compare and analyse reports from the first 6 months of the year with the second 6 months.
While the merits of this approach have been debated at length under the Consultation Paper 77 on the UCITS Rulebook, with many arguing that the costs and compliance burden outweigh the perceived benefit, in light of the aforementioned policy of the Central Bank to align the reporting requirements of UCITS Management companies with AIFMS and AIF management companies, this change in policy is not surprising.
B. PROPOSED TECHNICAL CHANGES
The key proposed technical changes to the AIF Rulebook are as follows:
(i) Clarification as to which rules apply to QIAIFs with non-EU AIFMs
Under AIFMD, Member States may permit non-EU AIFMs to manage and/or market AIFs to professional investors in their jurisdictions subject to certain criteria being met
The Central Bank proposes to clarify that Part III of the Chapter 2 of the AIF Rulebook (relating to QIAIFs) which sets out the requirements of the AIFM Regulation which apply to registered AIFMs (which are now to be amended as per Section A (iv) above) applies to all QIAIFs with non-EU AIFMs.
While this proposal is reflecting what is currently set out in the latest Q&A of the Central Bank dated under ID1031 which provides that all QIAIFs set up on or after 22 July, 2013 will be subject to the rules applicable to AIFs with registered AIFMs and that certainty is welcome, what is not clear is whether this will also apply to those QIAIFs which were established prior to 22 July, 2013.
ID1031 currently provides that QIAIFs authorised before 22 July, 2013 which designate a non-EU AIFM, will be allowed to avail of the relevant transition period allowed for these funds (i.e. until the European Commission turns on the non-EU AIFM passport) provided that at all times the QIAIF can show that its management company and AIFM arrangements when considered in their entirety at least meet the standard which would have applied under the non-UCITS regime which applied in Ireland immediately prior to 22 July, 2013 (i.e. the NON-UCITS Series of Notices). Therefore it is possible that this proposed technical change would in fact be a policy change by the Central Bank and we will be seeking clarification from them on this point on our response to CP99.
(ii) Removal of the rule in relation to approval by the Central Bank of changes in direct or indirect ownership of AIFMs
The existing AIF Rulebook states that if an AIFM intends to change qualified holdings or direct or indirectly ownership, approval must first be obtained from the Central Bank.
The Central Bank proposes to remove this provision as the AIFM Regulations provide that an AIFM cannot be authorised unless the Central Bank is inter alia satisfied with the suitability of its qualifying shareholders.
Effectively what was provided for in the AIF Rulebook was over and above what was required in the AIFM Regulations so this amendment is necessary and will mean that in future any such change to applicable holdings will require notification to the Central Bank as opposed to approval which is a positive development for AIFMs.
(iii) Amendment to the rule in relation to approval by the Central Bank of changes in direct or indirect ownership of AIF Management Companies
The existing AIF Rulebook states that if an AIF Management Company intends to change qualified holdings or directly or indirectly ownership approval must first be obtained from the Central Bank.
It is proposed to amend a typographical error to require approval of proposed changes in qualifying holdings and include a reference to direct or indirect shareholding of 10% or more of an AIF Management Company when defining a qualifying holding.
This proposed change will bring a welcome clarity to this provision.
(iv) Removal of the rule in relation to Client Asset Requirements issued under the MiFID Regulations where AIFMs propose to hold client asset accounts for processing subscriptions and redemption monies of AIFs
It is proposed to remove this rule as the legal authority it was implemented under is now revoked and the Central Bank Supervision and Enforcement Act 2013 (Section 48(1)) Investor Money Regulations 2015 for Fund Service Providers ("IMR") now apply and AIFMs are captured by the IMR (which takes effect on 1 April, 2016).
Provided there is no time lag between the applicability of the revised AIF Rulebook and the IMRs then this change makes sense.
(v) Clarification of the rules that apply when a QIAIF invests more that 50% in a single unregulated investment fund
QIAIFs may invest in unregulated investment funds provided that investment in any one underlying fund is limited to 50% of its net assets. However, this rule does not apply where the QIAIF has a minimum subscription of €500,000 and complies with certain disclosure requirements.
Industry feedback highlighted that this rule was susceptible to misinterpretation when QIAIFs avail of this exemption, in particular when considered with regard to an obligation to provide investors with periodic reports from the underlying unregulated investment fund. The Central Bank proposes to clarify the ambiguity this text has created.
This change will bring a welcome clarity to these rules which are currently confusingly drafted and will make it clear exactly which rules may be disapplied by QIAIFs which invest more than 50% in unregulated investment schemes provided they meet the increased minimum subscription and disclosure criteria.
(vi) Clarification of the rules which apply where AIFs establish subsidiaries
The present AIF Rulebook prohibits a subsidiary from appointing any third parties or entering into any contractual arrangements unless the AIF is a party to such appointments or contractual arrangements.
The Central Bank proposes to clarify that the reference to contractual arrangements relates only to those arrangements which concern the appointment of third parties.
Again, this clarification is to be welcomed and we would expect the associated Central Bank application forms to be revised accordingly.
(vii) Clarify the conditions which apply where a RIAIF invests in an underlying fund of funds
Under the AIF Rulebook, RIAIFs may invest in other investment funds provided that the funds in which they invest do not themselves invest more than 30% in other investment funds. RIAIFs may also invest in an underlying investment fund which is itself a fund of funds provided that the fund is regulated and due attention is brought to the higher fees which will arise from this layered structure.
The AIF Rulebook, as currently drafted, implies that the underlying fund of funds in which the RIAIF invests could not invest more than 30% in other funds. It is proposed to amend the AIF Rulebook to clarify this.
This clarification is necessary as the imposition of this limit on the underlying fund of funds of a RIAIF defeats the purpose of allowing RIAIF to invest in these funds (subject to the relevant criteria being met) in the first place.
(viii) Clarification of the conditions which apply where RIAIFs create share classes
The proposed change will avoid ambiguity in the interpretation of text concerning the creation of RIAIF share classes which the Central Bank considers could be interpreted to invalidate the application of some of the rules which apply when share classes are created.
We think that this update is to be welcomed as the text as currently drafted is unclear as to which rules apply to the initial creation of share classes.
As you can see, most of the changes being proposed by the Central Bank to the AIF Rulebook as part of the CP99 are necessary to rectify errors in drafting, avoid unintended interpretations of the current text and to reflect changes in legislation or industry practice. With the exception of the potential extension of the rules applicable to registered AIFMs to pre 22 July, 2013 QIAIFs and the requirement for AIFMs and AIF Management Companies to produce half yearly accounts, we would not expect much resistance from the industry on these proposed changes. Nonetheless, the Central Bank has invited consultation until Wednesday 24 February, 2016. Dillon Eustace will be providing comments to the Central Bank and should you wish to provide any comments on CP99 to the Central Bank we would be happy to incorporate them into our submission.
2. Regulation 13(1)(f) of AIFM Regulations 2013
3 Regulation 24(2) of AIFM Regulations 2013
4 Companies Act 2014, Part 3, Chapter 1, Section 66(10)
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.