Differentiated share classes in a closed- ended QIAIF

The Central Bank of Ireland (CBI) issued guidance on the establishment of differentiated share classes in a closed-ended QIAIF (CE QIAIF). CE QIAIFs typically invest in illiquid assets. This development will likely be of interest to those who invest in private equity, credit and other private asset investment strategies

The guidance sets out CBI requirements where CE QIAIFs create differentiated share classes (or units, participations or interests, depending on the structure). Such share classes may provide for the allocation of the returns of specific assets to the share class or participation in the CE QIAIF other than on a pro-rata basis.

This will include:

  • the issue of shares at a price other than net asset value without prior CBI approval
  • the use of excuse provisions (which enable an investor to be excused from an investment that the CE QIAIF proposes to make) and exclude provisions (which permit the CE QIAIF to exclude an investor from a proposed investment)
  • stage investing (where new investors acquire interests in the CE QIAIF at a later stage in its life cycle)
  • management participation (through the establishment of management or “carry” classes which permit portfolio managers of a CE QIAIF to participate in investments of the CE QIAIF, including on the basis of conditions which differentiate the class from other classes in the CE QIAIF)

The CBI guidance sets out general conditions with requirements for the constitutional document, advance disclosure to investors, prospectus disclosures, record-keeping, capital accounting (and the methodology must be consistent with AIFMD). Moreover, the investor’s interest in a CE QIAIF must be proportionate to:

  • the capital it has paid into the CE QIAIF at a particular point in time; and/ or
  • the pre-determined flow of capital returns to the class; and/ or
  • the extent to which the class held by the investor participates in the assets of the CE QIAIF

Additional conditions apply to the use of excuse and/or exclude provisions, stage investing and the use of management classes.

These include the following:

  • the excuse and / or exclude provisions must be predetermined and documented (for excuse provisions by written document between the CE QIAIF and the investor before an investment is made and, for exclude provisions, by provisions in the prospectus and / or constitutional document), a formal legal opinion must be provided by the party invoking the provision outlining the basis on which the excuse or exclude provision is being invoked and the board of the CE QIAIF and AIFM must document whether it accepts the opinion and the consequences of accepting or disagreeing with such opinion
  • the stage investing provisions include the establishment of a new share class which provides for participation in existing and future investments of the CE QIAIF or in future investments only and certain other conditions
  • the conditions for management classes must be provided for in the prospectus and capital payments (both committed capital and preferred returns) must be allocated to relevant investor classes in priority to management classes

CBI framework for the authorisation of depositaries of assets other than financial assets

CBI issued new Guidance for Depositaries of Assets other than Financial Assets (DAoFI).

Key elements include the following.

  • The DAoFI may act as a depositary for certain types of AIFs, which primarily invest in assets that do not fall within the categorisation of a financial instrument capable of being held in custody. These attract less onerous depositary requirements (both in terms of liability standards and tasks to be performed) and so a proportionate approach to the role of the depositary can be applied.
  • The DAoFI may only act for specific types of AIFs (QIAIFs which have no redemption rights exercisable for at least five years from the date of initial investment and which generally do not invest in financial instruments that can be held in custody).
  • The AIF to which a DAoFI is appointed may, to a limited extent, invest in financial instruments which are the subject of custody obligations. This may arise, for example, where the AIFs in question fulfil obligations regarding assets invested in, or have obligations relating to the ongoing management of the AIF and its assets (for example, payment of fees and expenses). The CBI expects that a DAoFI will generally seek to delegate the custody of financial instruments to a depositary.
  • The CBI will not provide an exhaustive list of assets acceptable for a DAoFI to safe-keep. It considers that such asset classes will include documents of title for asset classes such as infrastructure, intellectual property, plant and equipment, land, art and wine. A list of asset classes is included at Q&A 1139 of the CBI's AIFMD Q&A and this will be updated from time to time. Q&A's 1136, 1137, 1138, 1139 also concern DAoFIs.
  • The guidance sets out the requirements (including suitability, capital, controls, policies and procedures, coverage of potential risks of professional liability, applicable AIF rulebook requirements).
  • The DAoFI is provided for under Regulation 22(3) (b) of the AIFM Regulations 2013.

CBI common supervisory action on UCITS costs and fees

As previously flagged, the European Securities and Markets Authority (ESMA) launched a Common Supervisory Action (CSA) on costs and fees.

As part of the CSA, the CBI is issuing detailed questionnaires requesting both qualitative information and quantitative data from a significant proportion of Irish UCITS. As with last year's CSA on liquidity, the provisional questionnaires are shared for information purposes in advance of the finalised versions being issued. This will facilitate preparedness for submission and completion in the timeframe provided.

The aim of the CSA on costs and fees is to assess the compliance of supervised entities with the relevant cost-related provisions in the UCITS framework and the obligation of not charging investors with undue costs. For this purpose, the CBI will take into account the supervisory briefing on the supervision of costs published by ESMA in June 2020. The CSA will also cover entities employing Efficient Portfolio Management (EPM) techniques to assess whether they adhere to the requirements set out in the UCITS framework and the ESMA Guidelines on ETFs and other UCITS issues. Some clients will already have looked at these issues in the context of the UK FCA's annual Assessment of Value requirements.

We expect that the finalised questionnaires will be available for completion in early March and that the timeframe for completion and submission will be approximately three weeks.

The CBI has indicated that it is the responsibility of the board of directors of each UCITS or UCITS manager to ensure that processes are put in place to ensure that it is in a position to complete and submit the questionnaires in the timeframe provided. It has encouraged in scope firms to now begin compiling responses to the questionnaires in order to facilitate a timely response to the CBI. The CBI has also noted that it will actively assess and analyse the information provided and, where needed, request further information and/or schedule direct engagements with the relevant UCITS.

CBI's Beneficial Ownership Register for Certain Financial Vehicles (CFVs)

  • The CBI published details of how to Access the Beneficial Ownership Register, this includes a listing the CFVs on the register .
  • Two further CFV categories (ILPs and CCFs) will be available on the register from 1 September 2021. The relevant provisions of the ILP (Amendment ) Act 2020 came into force on 1 March 2021. ILPs and CCFs have a 6 month transitional period so the deadline for ILPs and CCFs in existence at 1 March will be 31 August 2021. ILPs and CCFs authorised after 1 March 2021 will have 6 months to register.
  • Where an entity needs to update the register, this requires a full resubmission as detailed on Submit or Amend the Beneficial Ownership Register.
  • CFVs will be levied in H1 2021 in respect of the 2020 costs of the register.

CBI markets updates

The CBI published issue 2 and issue 3 of 2021 of its markets updates. It contains updates from the CBI and ESMA. CBI updates include:

  • CBI updates its communication on regulatory flexibility for securities markets, investment management, investment firms and fund service providers
  • CBI response to the European Commission's public consultation on the review of the AIFMD
  • statement on margining and clearing requirements under EMIR
  • CBI publishes Feedback Statement on Consultation Paper 132 and final guidance on share class features of closed-ended QIAIFS
  • CBI publishes Q&A relating to authorisation of DAoFI and scope of defined term in AIF Rulebook
  • CBI speech by Gerry Cross, Director of Policy & Risk and Asset Management and Investment Banks (Interim) on Ready for change: The new prudential regime for Investment Firms

Ireland for Finance Action Plan 2021

The Ireland for Finance Action Plan for 2021 was launched. It has four priority areas, namely sustainable finance, diversity, regionalisation, and digital finance.

  • The plan has 16 new measures in addition to ongoing measures. The investment funds industry features specifically with promotion of the ILP vehicle being called out as a new measure.
  • The report specifically mentions the increase in activity / employment across MIFID firms, AIFMs and UCITS ManCos.
  • The report also mentions that the CBI will publish a consultation paper setting out proposals on how the CBI Bank can enhance its strategic stakeholder engagement (see below).
  • There is significant focus on sustainable finance. In a funds context there is a specific focus on continuing to raise awareness of the responsible investment agenda, led by SIF Ireland.

CBI consultation on stakeholder engagement

The CBI issued Consultation Paper 136: Enhancing our Engagement with Stakeholders. The consultation includes proposals to enhance the CBI's stakeholder engagement in certain areas and will build on existing engagement with relevant stakeholders to facilitate greater discussion of cross-sector, strategic issues that affect the Central Bank’s oversight of the financial system. The consultation closes on 11 May 2021.