In a letter addressed to Irish Funds, the representative association for the funds industry in Ireland of 9 October 2018, the Central Bank of Ireland (CBI) announced certain changes to its authorisation procedures aimed at ensuring efficiencies whilst taking into account investor protection. These changes had been flagged during the summer but have only just been formalised and are with immediate effect.
UCITS Financial Indices - Self-Certification/ Simplification
The CBI has introduced a self-certification regime for indices used by UCITS funds in its updated Guidance on UCITS Financial Indices (Guidance).
Prior to the issue of the revised Guidance, the CBI required that indices used by UCITS funds be submitted for CBI review where an index comprised of corporate issuers exceeded the usual UCITS concentration limits or where the index was comprised of ineligible assets, i.e. assets in which a UCITS cannot invest directly, such as commodity futures.
The CBI review process involved the submission to the CBI of various due diligence documents.
A confirmation of compliance of the index with the CBI requirements had to be submitted to the CBI as part of the index submission and also in instances where the index submission was not required.
The New Index Certification Process
The Guidance has introduced a self-certification regime for UCITS proposing to use an index. As before, the CBI requires a confirmation of compliance of the index with the CBI requirements. As part of the new certification process, this confirmation must now be provided by a director on behalf the UCITS management company.
The CBI has also simplified the requirement for a submission in circumstances where the weighting of a single corporate issuer in an index makes up more than 20% and up to 35% of the index. This would arise in the context of indices comprised of corporate issuers whereby the usual UCITS "5/10/40" concentration limit for corporate issuers is exceeded. In these circumstances, the index could avail of the increased "20/35" concentration limit envisaged by the UCITS rules. Under the Guidance, the index submission in respect of "20/35" indices is now limited to setting out why the market conditions justify increasing the concentration limit for investment in a single issuer to 35%. The index due diligence documentation is no longer required to be provided to the CBI as part of the index submission.
Index Quality Assessments
The CBI expectations as to the information that a UCITS manager must maintain in respect of indices used by the UCITS under its management are set out in the Guidance for the first time. It is made clear in the Guidance that the CBI expects a UCITS manager to be in a position to demonstrate at all times that indices used by the UCITS under its management comply with the regulatory requirements. It is envisaged that the CBI would carry out spot checks and the Guidance sets out the following minimum information that must be provided to the CBI upon request:
- the rationale for the index being a benchmark for the market to which it refers;
- the methodology used to construct the index ;
- information on index constituents and their weights;
- details as to how the index calculation methodology is verified;
- information on any fees embedded in the index;
- any technical and marketing documents produced by the index sponsor.
Summary and Action Required
Notwithstanding the simplification that the new certification regime brings, UCITS managers are likely to find that not a whole lot has changed as far as the CBI review process is concerned. In summary, index submissions have been done away with for indices comprised of ineligible assets and have been simplified for indices that rely on the increased "20/35" issuer concentration limits. A confirmation in respect of index compliance (now in the form of a certification from the UCITS manager) still has to be given for every index. The level of due diligence that UCITS managers have to carry out pursuant to the UCITS requirements on the indices they use has also not changed.
Arguably of greater note is that the CBI has formally set out its expectations as to the level of information it expects to receive at short notice from a UCITS manager in relation to the indices used by the UCITS under its management. It is now timely for UCITS managers to review the index due diligence documentation maintained by them against the CBI requirements and ensure that it is in the form that could be provided to the CBI at short notice upon request.
Self-Certification of Depositary Agreements, Trust Deeds/Deeds of Constitution
Depositary Agreements for UCITS and retail AIFs will no longer be subject to the prior review of the CBI. Instead, the depositary will be required to confirm that the finalised Depositary Agreement is in compliance with the relevant legislation and CBI guidance and in particular that the provisions of the Depositary Agreement are in compliance with all relevant liability requirements. This confirmation together with the executed Depositary Agreement and relevant CBI form should be submitted on the authorisation day as part of the authorisation application.
A similar self-certification process has also been introduced for Trust Deeds (in relation to funds established as unit trusts) and Deeds of Constitution (for funds set up as common contractual funds), which documents would include depositary duties.
Amendments to these documents will also be subject to a self-certification process.
This new process is similar to the self-certification regime currently in place in relation to Depositary Agreements (and other constitutive documents for detailing depositary duties) for qualifying alternative investment funds (QIAIFs).
Review of Investment Limited Partnership Agreements
Currently, the constitutive documents for funds established as companies or ICAVs are not subject to review by the CBI. Similarly, Investment Limited Partnership Agreements for retail AIFs will no longer be subject to prior review by the CBI.
Establishment of New Share Classes
The establishment of a new share class in an authorised UCITS or retail AIF fund will no longer be subject to prior review by the CBI. The revised prospectus/supplement should be accompanied by a confirmation from a director of the management company that the establishment of the share class accurately reflects the requirements of the relevant CBI form and of any relevant CBI guidance and legislation. Where it is intended to restrict share class ownership the confirmation must confirm that the restriction is "sufficient to allow that the class provides for public participation".
CBI Random Checks
The CBI will carry out quality assurance checks, selected on a random basis, following authorisation of the relevant fund in relation to the changed regime for Depositary Agreements, Investment Limited Partnership Agreements and new Share Classes.
UCITS Merger Applications
A UCITS Mergers Applications Form has been prepared in order to streamline the merger application process and will be available on the CBI's website shortly. The application form reflects the requirements under the Irish UCITS Regulations and does not introduce any new requirements.