In our second investment funds law newsletter for 2018, our Asset Management Department would like to brief you on a number of recent developments and upcoming regulatory deadlines.
In this issue:
On 29 March 2018, the Central Bank of Ireland (“Central Bank”) published a consultation paper (CP119 or the “Consultation”) on amendments to and the consolidation of the Central Bank UCITS Regulations (“CB UCITS Regulations”). The Consultation proposes a number of amendments to the CB UCITS Regulations including:
- changes to reflect the European Securities and Markets Authority (“ESMA”) Opinion on UCITS Share Classes (issued in January 2017);
- updates to reflect the application of the EU Money Market Fund Regulation (“MMFR”);
- new obligations in relation to UCITS performance fees provisions, the majority of which were previously contained in Central Bank guidance; and
- further amendments arising from the Central Bank’s annual review of the CB UCITS Regulations.
The Consultation also proposes consolidating the CB UCITS Regulations and the draft amending and consolidating regulations are set out in the appendix to the Consultation. Responses to the Consultation are sought by 29 June 2018.
The publication of this Consultation as a welcome example of the Central Bank’s ongoing engagement with industry. While it is evident that the Central Bank has carefully considered the proposed amendments to the CB UCITS Regulations, some proposals may warrant further consideration, including:
- the proposal for UCITS’ semi-annual and annual accounts to list each share class in the UCITS and indicate which are hedged may be impractical for UCITS with large numbers of share classes; and
- the proposal on crystallisation of performance fees lacks some of the nuances contained in the IOSCO report on which this proposal is based, meaning that some of the options that the IOSCO report provides may not be offered to UCITS in future.
Matheson intends to respond to the Consultation and we would welcome any feedback that you would like to include in this response.
On 14 March 2018, the Central Bank published a communication in relation to the ESMA opinions on supervisory convergence in the context of relocations from the UK to the remaining EU member states (“EU27”), which were published last summer.
The Central Bank has now concluded a comprehensive review of the way it addresses the issues covered in the ESMA opinions and the Central Bank has identified process enhancements related to the authorisation of investment fund managers authorised under the UCITS Directive and the AIFMD and investment firms authorised under MiFID, which will ensure the Central Bank’s processes are fully aligned with the ESMA opinions. These procedural enhancements will be made by updating the Central Bank’s application forms and internal procedures.
The application forms for UCITS management companies, UCITS self-managed investment companies, AIFMS and MiFID firms will be updated to incorporate the following requirements:
- details and rationale for the geographical distribution of planned activities;
- objective justification for delegation arrangements in relation to critical functions;
- details of due-diligence undertaken during selection process;
- information on business continuity arrangements;
- information on how legal risk is assessed;
- details on delegate remuneration requirements; and
- details on how best execution obligations continue to be met when dealing with execution venues outside of the EU.
In the interim, until the relevant application forms have been updated, the items listed above will be incorporated as part of the Central Bank’s authorisation process.
The Central Bank’s communication may be accessed here.
The Central Bank has written to funds to advise that it is launching an updated version of the IF Annual Sub-Fund Profile return. The new return is to be known as the Fund Profile return.
The first Fund Profile return is to be prepared for the period up to report date 30 June 2018, with a submission due date of 31 August 2018. This 30 June 2018 return is applicable to all sub-funds authorised by the Central Bank as at 30 June 2018, whether they are dormant, have assets or have not launched.
The previously scheduled IF Annual Sub-Fund Profile return with report date 31 December 2017 has now been removed from the Online Reporting System (“ONR”) and the new return will be added in late April 2018. All sub-funds, regardless of whether the IF Annual Fund Profile return for report date 31 December 2017 has already been submitted to the ONR, will be required to submit the new updated return for report date 30 June 2018.
Subsequent Fund Profile returns are to be prepared as of the annual calendar year end, ie, for report date 31 December of the calendar year in question. These returns will also carry a submission due date of two months after the reporting date, ie, 28 February of the following calendar year in question. As a result, in 2018 alone, in addition to the 30 June 2018 return, the Fund Profile return will be required to be submitted for report date 31 December 2018. This second return will carry a submission due date of 28 February 2019.
Central Bank Confirms Deadlines for Money Market Fund Authorisations
On 27 March 2018, the Central Bank wrote to industry to advise that money market funds (“MMFs”) which are availing of a transitional period, available under the MMFR, must submit all documents requiring review to the Central Bank no later than 1 September 2018. This will allow the Central Bank to manage this transitional period and ensure a decision on an application for authorisation can be made by the 21 January 2019 deadline.
EFAMA Letter to European Commission on Reverse Distribution Mechanisms
On 10 April 2018, the European Funds and Asset Management Association (“EFAMA”) wrote to the European Commission (“Commission”) in response the Commission’s February letter setting out the Commission’s Legal Service reasoning underlying its conclusion that the use of reverse distribution mechanisms by constant net asset value (“CNAV”) MMFs was incompatible with the MMFR.
A reverse distribution mechanism or RDM, also known as share cancellation, is used by CNAV MMFs denominated in negative yielding currencies (primarily Euro) to apply negative income to investor shareholdings. The distribution of income, whether positive or negative, is necessary for CNAV MMFs to maintain a constant NAV. The EFAMA letter argues that the Commission’s opinion is based on a fundamental misunderstanding of the nature of both CNAV MMFs and RDM and requests that the Commission carefully consider its position and what steps should now be taken to address the concerns arising.
Members of the European Parliament have also written to the Commission to argue that ESMA was acting ultra vires in proposing to prohibit the use of RDM, as this prohibition was not contemplated in the MMFR itself.
European Commission Draft Delegated Regulation on MMFs
On 10 April 2018, the Commission published a draft delegated regulation setting out further requirements in relation to eligible assets under the MMFR, including details of:
- the criteria relating to a simple, transparent and standardised securitisation or asset-banked commercial paper;
- the quantitative and qualitative credit quality requirements for assets received as part of reverse repurchase agreements; and
- the credit quality assessment criteria.
The European Parliament and Council of the EU will now consider the delegated regulation and will have a two-month scrutiny period within which they can object to the delegated regulation.
The draft delegated regulation may be accessed here.
On 14 March 2018, the Central Bank published an updated AIF Rulebook and updated AIFMD Q&A to reflect enhancements to its L-QIAIF regime, permitting L-QIAIFs to engage in a broader range of activities to include investing in debt or credit instruments. This is a welcome enhancement to the Central Bank’s L-QIAIF regime, which facilitates managers operating in the direct lending sphere. The Central Bank had announced its intention to published an updated AIF Rulebook reflecting the changes on 7 February 2018 (as outlined in our previous Investment Funds update).
The amendments “to permit lending within a broader credit focused strategy” follow industry engagement with the Central Bank and build upon the enhancements introduced in January 2017, which permitted investment in debt or equity securities of entities or groups to which the L-QIAIF lends or which are held for treasury, cash management or hedging purposes.
Ireland was the first EU member state to introduce a specific regulatory framework for loan originating investment funds and we welcome the Central Bank’s willingness to keep the applicable requirements under review as investor demands and European regulation evolve. Matheson advised on the establishment of one of the first L-QIAIFs in Ireland and we have been advising managers in relation to establishing L-QIAIFs over the past number of years.
On 12 March 2018, the Commission published a proposed directive and proposed regulation amending the UCITS Directive and the Alternative Investment Fund Managers Directive (“AIFMD”) with regard to the cross border distribution of funds. The proposals form part of the Commission’s project to build a European capital markets union (“CMU”) and follow a number of public consultations on the CMU generally, on the EU regulatory framework for financial services and on the cross border distribution of investment funds. We have set out a brief summary of the main proposals below.
- Definition of “pre-marketing” in the AIFMD
A definition of “pre-marketing” would be added to the AIFMD together with conditions under which an EU AIFM can engage in pre-marketing activities. AIFMs would therefore be permitted to test an investment idea or investment strategy with professional investors but would not be permitted to promote an established alternative investment fund (“AIF”) without notification.
- Local Facilities
Under the UCITS Directive, there is no obligation on UCITS to have local facilities in each member state where the UCITS is marketed. However, in practice, many member states require facilities in their territory for making payments to unitholders, repurchasing or redeeming units and making available the information that funds are required to provide. The proposed directive would prohibit member states from requiring UCITS to have a physical presence in the member state in which the UCITS is marketed. While still requiring that facilities are established in each member state where marketing activities are carried out, fund managers would be permitted to use electronic or other means of distance communication with investors.
Under the AIFMD, member states have a discretion as to whether to permit the marketing of AIFs to retail investors in their jurisdiction and can impose their own national private placement rules in this regard. The proposed directive seeks to ensure the consistent treatment of retail investors whether they are investing in a UCITS or AIFs. It would require member states that allow AIFMs to market units or shares of AIFs to retail investors in their jurisdictions to require that AIFMs make facilities available to retail investors to allow for subscriptions, making payments or repurchasing or redeeming units. Similarly to UCITS management companies, AIFMs would be allowed to use electronic or other means of distance communication for these purposes and member states would be prohibited from requiring an AIFM to have a physical presence in the member state in which the AIF is marketed.
Fund managers would be allowed to de-notify the marketing of their UCITS or AIFs only if a maximum of 10 investors who hold up to 1% of asset under management of the fund have invested in the fund in an identified member state. Transparency requirements would apply and the manager must make a repurchase offer.
- Notification Procedures
The proposed directive also aims to align national procedures for changes to the notification procedure for UCITS, introducing a precise timeframe for communicating competent authorities’ decisions.
- Marketing Communications
The relevant provision of the UCITS Directive addressing marketing communications to investors would be deleted and replaced by detailed provisions relating to marketing communications set out in the proposed regulation. The proposed regulation (which would apply to both UCITS and AIFs) would require that marketing communications are identifiable as such, present the risks and rewards of purchasing units or shares of AIFs and UCITS in an equally prominent manner and are fair, clear and not misleading. ESMA would be required to issue guidelines on the application of these requirements.
- Transparency of National Requirements
The article of the UCITS Directive requiring member states to ensure that their national laws, regulations and administrative provisions governing the cross-border marketing of UCITS within their jurisdictions are easily accessible from a distance, by electronic means and in a language customary in the sphere of international finance would be deleted. The proposed regulation would set out specific rules on the transparency of national law and requirements applicable to marketing communications.
- Central Databases
ESMA would establish and maintain: (1) an online central interactive database of fees and charges charged by competent authorities or the calculation methodologies used; (2) an online central database of all UCITS management companies and UCITS; and (3) an online database of national marketing requirements.
The proposed directive and proposed regulation will now be considered by the European Parliament and Council of the EU.
25 May 2018
|The General Data Protection Regulation comes into force.|
|29 June 2018||The Central Bank consultation (CP119) on amendments to and consolidation of the Central Bank UCITS Regulations closes.|
|1 July 2018||Existing fund management companies (UCITS management companies, self-managed UCITS, AIFMs and internally managed AIFs) must comply with the rules and guidance deriving from CP86.|
21 July 2018
|The MMFR must be implemented by member states. Existing MMFs must comply with the new rules by 21 January 2019.|
|31 August 2018||The first Central Bank Fund Profile return is to be prepared for the period up to 30 June 2018.|
|1 September 2018||MMFs availing of the transitional period must submit all documents requiring review by the Central Bank by this date.|