The first week in October was a busy week for the Central Bank of Ireland (the “Central Bank”). In addition to the widely discussed Central Bank UCITS Regulations1 and revised UCITS Questions and Answers (“UCITS Q&A”), it published the sixteenth edition of its Q&A on the Alternative Investment Fund Managers Directive (“AIFMD Q&A”) and the first edition of the Investor Money Q&A, which sets out answers to queries likely to arise in relation to the implementation of the Investor Money Regulations2 .
The new AIFMD Q&A reflects amendments to the UCITS Q&A following the publication of the Central Bank UCITS Regulations (see related briefing here). Among other things, those Regulations update the provisions relating to the organisational requirements for the board of a UCITS management company, to take into account the Central Bank’s feedback statement on its Consultation on Fund Management Company Effectiveness – Delegate Oversight (“CP86”).
AIFMD Q&A and UCITS Q&A
The sixteenth edition of the Central Bank’s AIFMD Q&A contains 3 new questions dealing with directed brokerage services (ID 1097), board composition (ID 1098) and amendments to constitutional documents (ID 1099). As set out above, each of these new questions is reflected in the revised UCITS Q&A, which was also published on 5 October 2015 (respectively, ID 1045, ID 1046 and ID 1022).
Directed Brokerage Services
The Central Bank’s Alternative Investment Fund (“AIF”) Rulebook defines directed brokerage services as brokerage services in briefing relation to an authorised AIF pursuant to which a commission or similar payment is paid to or secured by the entity which issues instructions. The Central Bank UCITS Regulations define brokerage services in relation to a UCITS in the same way.
Both the updated AIFMD and UCITS Q&A state that directed brokerage services may involve the negotiation of recaptured commissions and monitoring of brokers to ensure that the selected brokers provide the highest standards for execution, value added services and investment research on behalf of their clients.
In its feedback statement to CP86 (“Feedback Statement”), published on 12 June 2015, the Central Bank indicated that it intended to make a number of changes impacting on fund management companies’ (“FMCs”) governance arrangements including streamlining managerial functions for UCITS managers and AIF managers (“AIFMs”) and requiring a FMC’s board to document the rationale for its composition as part of the authorisation process (see our related briefing here).
Following on from this Feedback Statement, Schedule 10 of the Central Bank UCITS Regulations outlines six separate managerial functions for which the board of a UCITS management company is responsible. These functions are: regulatory compliance; fund risk management; operational risk management; investment management; capital and financial management and distribution.
The AIFMD and UCITS Q&A provide further detail regarding the requirement to document the rationale for board composition. According to those Q&A, only new UCITS management companies and AIFMs are subject to the authorisation process which requires the rationale for the board composition to be documented in the business plan/programme of operations. However, the Central Bank is of the view that it is good practice for the director performing the Organisational Effectiveness role for each UCITS management company or AIFM (new or existing) to document the rationale for the board composition as part of developing this role and to include this in the business plan/programme of operations when it is next updated.
Unitholder Approval of Amendments to Constitutional Documents
Currently, under s.7 of the Unit Trusts Act 1990 and s.12 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005, the Central Bank must approve any amendment to a unit trust’s trust deed or a common contractual fund’s deed of constitution.
According to the updated AIFMD and UCITS Q&A, any such amendments must also be approved by the relevant unitholders, unless the depositary certifies that the changes are not material and will not prejudice unitholders.
This reflects the position under the Irish Collective Asset-management Vehicles Act 2015 which provides that prior approval of changes to the Irish Collective Assetmanagement Vehicle’s (“ICAV”) instrument of incorporation will not be required where the depositary certifies in writing that the changes do not prejudice the interests of the members of the ICAV and the Central Bank has not otherwise mandated that the change is of a type that the members must approve. See our related briefing here.
Investor Money Q&A
The Investor Money Regulations apply to Fund Service Providers (“FSPs”) holding investor money in collection accounts and will come into operation on 1 April 2016.
In March 2015 the Central Bank published Guidance for FSPs in order to assist in the implementation of the Investor Money Regulations. By way of further assistance, on 5 October 2015, the Central Bank also published the first edition of the Investor Money Q&A which supplement that Guidance and seek to limit uncertainty. As well as covering a number of general issues, the Investor Money Q&A deal with segregation, risk management and investor money examination.
The additional clarity provided by the new AIFMD and UCITS Q&A is to be welcomed, particularly in relation to the requirement to document the rationale for board composition. Existing FMCs do not need to update their business plans/programmes of activity specifically for the purpose of documenting the rationale for the board composition.
However, as outlined in the Feedback Statement, FMCs must update their business plans/programmes of activity so as to reflect the revised managerial functions by 30 June 2016. Consequently, every FMC should ensure that the rationale for the board composition is outlined in the business plan by that date at the latest.
Importantly, for UCITS management company applications, whether they be self-managed or externally managed applications, the revised managerial functions for UCITS become law on 1 November 2015 as they are contained in the Central Bank UCITS Regulations. Therefore any new UCITS management company applications that do not receive authorisation by 1 November 2015 will need to comply with the revised managerial functions immediately. Although the Central Bank has indicated that the revised managerial functions for AIFMs will similarly come into effect from 1 November 2015, it remains to be seen how the functions will be introduced into law.