In an important step towards ensuring that Ireland is one of the first jurisdictions to implement the Alternative Investment Fund Managers Directive (“AIFMD”), the Central Bank of Ireland (“Central Bank”) has today published a consultation in relation to a draft alternative investment funds handbook (the “AIF Handbook”) which will replace the existing non-UCITS notices and guidance notes. Work on the implementing regulations which will transpose the AIFMD into national law is also in its advanced stages and is part of wider process to enhance the Irish investment funds regime. This process includes the amendment of existing investment funds legislation, the introduction of a new Irish funds vehicle with favourable tax treatment for certain US investors and the revision of the legislation governing investment limited partnerships to further facilitate private equity funds.
The Central Bank has taken the opportunity presented by the implementation of the AIFMD to revise and recast the current non-UCITS notices and guidance notes which had been refined and adjusted over a number of years in response to industry developments. Announcing the consultation on the AIF Handbook (the “Consultation”), the Central Bank stated that the approach adopted “aims to turn the Irish regulations into a proportionate investment funds framework which accommodates investors across a wide spectrum of capability and sophistication.”
The Central Bank has invited comments on the AIF Handbook as a framework for the protection of investors in alternative investment funds (“AIFs”) by 11 December 2012. It is expected that the Central Bank will issue a response to the Consultation in early 2013 and will then publish a finalised AIF Handbook so that investors and asset managers have clarity as to the Irish requirements.
Key changes to the regulatory regime
One of the key changes discussed in the Consultation is a proposal to bring an end to the current promoter approval process. The Central Bank proposes to place increased reliance on the alternative investment fund manager (“AIFM”) which must be appointed under the terms of the AIFMD. The Central Bank also intends to clarify the obligations of directors of an AIF which is facing unusual or difficult circumstances. The removal of the promoter approval process will streamline procedures for fund managers who wish to use Ireland as a funds domicile as such managers will no longer have to satisfy the additional approval and capital requirements that apply at present.
In outlining its general approach, the Central Bank has stated its intention to create a more flexible retail AIF option. Retail non-UCITS were originally very similar to UCITS in terms of the investment restrictions which applied. However, the UCITS regime evolved at a more rapid pace than the non-UCITS retail funds regime, with the result that UCITS investors could invest in a broader range of eligible assets. The current investment restrictions which apply to retail non-UCITS will be eased as the range of investment limits which currently apply to retail non-UCITS funds will be changed so as to allow retail investors to use Ireland’s new non-UCITS regime to invest in unlisted securities, derivatives and other asset classes to an extent which has not been possible previously.
In implementing the provisions of the AIFMD, the Central Bank has also introduced references to “fair treatment” of investors which may ultimately replace the existing requirement of equal treatment of investors. This may allow a fund to apply differing treatment for separate share classes provided such treatment is fully disclosed in advance to investors.
A single rulebook for alternative investment funds
The AIF Handbook consolidates all of the requirements currently contained in the non-UCITS notices and guidance notes applicable to various types of fund and fund managers into a single rulebook containing discrete sections to facilitate ease of access to relevant information. The chapters contained in the AIF Handbook are set out below.
- Qualifying Investor AIF Requirements
The current qualifying investor fund (“QIF”) regime will be replaced by a similar Qualifying Investor Alternative Investment Fund (“QIAIF”) regime, but the Central Bank has stated that it will eliminate regulations on QIAIFs which do not add substantially to the protection of investors. There will therefore be fewer requirements in areas such as share classes, dealing frequencies, counterparty eligibility, issuance of partly paid units, duration of closed funds and disclosure requirements across a broad range of areas. The decision to have dedicated a standalone section in the AIF Handbook setting out the requirements which will apply to QIAIFs is a logical and appropriate approach as the majority of non-UCITS currently domiciled in Ireland are currently QIFs.
It is noteworthy that the Consultation states that in 2013 the Central Bank proposes to consider the question of lending by QIAIFs, which is currently prohibited.
- Retail AIF Requirements
This chapter sets out the conditions which the Central Bank will apply to AIFs that are authorised by the Central Bank and that are not qualifying investor AIFs (referred to in the AIF Handbook as “RIAIFS”). The requirements which will apply to AIFs established in other jurisdictions which propose to market to retail investors in Ireland are also set out in this chapter.
The Central Bank is proposing to discontinue the professional investor fund (“PIF”) regime. Since the minimum subscription requirements for QIFs and PIFs have been aligned, the new streamlined regime would divide AIFs into QIAIFs and RIAIFs only. No new PIF structures will therefore be authorised but the Central Bank will allow existing PIFs to continue in existence and may allow them to establish new sub-funds.
- AIFM Requirements
The AIF Handbook sets out the requirements which apply to alternative investment fund managers that have applied for authorisation as an AIFM under the AIFMD. It also addresses the requirements applicable to alternative investment fund managers that do not manage assets exceeding the thresholds prescribed in the AIFMD and therefore must register with the Central Bank (but are not required to be authorised).
- AIF Management Company Requirements
This chapter of the AIF Handbook sets out the requirements which will apply to all management companies of alternative investment funds, whether they are the authorised AIFM or not. The requirements are therefore additional to the requirements arising from the AIFMD, which are set out in the AIFM Requirements referred to above. The AIF Handbook also sets out additional conditions relating to AIF management companies which are not authorised under the AIFMD regulations.
- Fund Administrator Requirements
These requirements set out the conditions which the Central Bank will impose on fund administrators.
- AIF Depositary Requirements
This chapter will apply to depositaries of AIFs. Where the AIF is not authorised by the Central Bank the chapter clarifies that the depositary operating conditions are limited to those which apply under the AIFMD. In relation to prime brokers, the draft requirements incorporate the requirements set out in the AIFMD but do not include the prime broker requirements set out in Guidance Note 2/11 on the Appointment of Prime Brokers and Related Issues.
Questions for consideration
In addition to requesting feedback on the draft AIF Handbook, the Central Bank has raised a number of specific questions for stakeholders to consider. These questions address issues related to the proposal to eliminate the promoter approval regime; enhancing the RIAIFs regime; discontinuing the professional investor fund regime; the use of side pockets by QIAIFs; initial offer periods for real estate or private equity funds; the issue or partly-paid units; investment in commodities such as gold and investment in emerging markets.
In relation to transitional arrangements, the Central Bank has outlined general principles in the Consultation but also invites input from stakeholders as to what transitional measures should apply to facilitate the orderly transition for existing non-UCITS investment funds into the new regime.
The Consultation is one of the key steps in the transposition process and ensures that Ireland is at the vanguard in implementing the AIFMD. The deadline for transposing the AIFMD into national law is 22 July 2013 and the significant work to date on the implementing legislation and the AIF Handbook means that Ireland will be “AIFMD-ready” in advance of that deadline. Furthermore, the Irish regulatory regime already incorporates many of the provisions set out in the AIFMD, such as the requirement to have a depositary and that funds are administered and valued by entities already authorised and supervised by the Central Bank. Therefore, the operational and business challenges presented by the AIFMD will not be felt as acutely in Ireland as may be the case in some other jurisdictions.
The publication of the Consultation follows detailed preliminary discussions with industry on the implications of the AIFMD. Members of the Asset Management and Investment Funds Group were involved in these discussions. The Consultation on the AIF Handbook offers industry an important channel for contribution and engagement in a substantive review of the non-UCITS notices and guidance notes. The partners in the Asset Management and Investment Funds Group will be involved in making a submission in response to the Consultation. We would welcome input from our clients in this regard.
A copy of the Consultation is available here.