On 30 October 2012 the Central Bank of Ireland (the Central Bank) published Consultation Paper CP60 “Consultation on implementation of Alternative Investment Fund Managers Directive”. Our previous bulletin which describes the original consultation paper was circulated on 2 November 2012 and can be found here. On 1 February 2013 the Central Bank issued a feedback statement on CP60 as well as a revised draft of its new AIF Handbook. The Central Bank’s feedback on the key issues raised in CP60 are set out below, as well as an analysis of the related changes to the AIF Handbook.
Abolition of promoter requirement
The Central Bank has confirmed that it will dispense with the requirement that alternative investment funds (AIFs) have an approved promoter. The Central Bank acknowledges that the obligations on the alternative investment fund manager (AIFM) set out in the Alternative Investment Fund Managers Directive (AIFMD) would be duplicative and the investor protections in AIFMD are sufficient so as not to require it to impose any additional requirements. However, the Central Bank has insisted on including related new provisions in the AIF Handbook clarifying the obligations of directors when an AIF gets into difficulties. Respondents to CP60 had argued that articulating such standards might amount to prejudging specific situations. The Central Bank believes that it can articulate good standards in this way without pre-judging any particular situation and it will always be open to assessing the particular circumstances affecting an investment fund and its directors. It also believes that this text is important as it puts all directors on notice that the Central Bank views the actions of a director of an AIF in difficulties as matters which can be taken into account when making any future assessments of the fitness and probity of that director.
The Central Bank has decided to continue the general prohibition on investment by a qualifying investor AIF (QIAIF) of more than 50% of nets assets in a single unregulated fund but has provided greater flexibility in terms of the circumstances in which this will not apply. The approach of applying a 50% threshold was criticised on the basis that it was not consistent with the master/feeder provisions of the AIFMD (which apply an 85% threshold).
A QIAIF will be able to invest in excess of 50% in a single unregulated fund where it has a minimum subscription limit of €500,000 and where its prospectus contains a detailed and prominent disclosure which identifies on an item-by-item basis those obligations and conditions which apply to the QIAIF and its AIFM but which do not apply to the underlying unregulated investment fund and its manager. Previously, the criteria which had to be fulfilled to avail of this derogation were more extensive and included requirements relating to the capitalisation and assets under management of the promoter and also required consideration of the custodial, auditing and risk management arrangements at the level of the master AIF. This move to a more disclosure-based regime is to be welcomed, although the requirement for “item-by-item” disclosure of differences between the feeder and master AIFs is novel and may present some practical challenges in the initial stages.
Flexibility in use of side-pockets
The draft AIF Handbook has been amended to provide that QIAIFs can purchase assets and immediately place these in side pockets. No limit applies to the amount of assets which can be side pocketed in this manner. In the Central Bank’s opinion, this means that something amounting to a separate closed-ended investment fund is established each time that a side pocket is created. Given the impact which this has on a unitholder’s ability to redeem (an investment in the QIAIF will be redeemable but a holding of side pocket units will not), a QIAIF which includes the flexibility to purchase distressed or illiquid assets and immediately side pocket these will not be permitted to describe itself as “open-ended”. It must describe itself as a QIAIF which is “open-ended with limited liquidity”.
Initial offer periods for real estate and private equity funds
As part of the enhancements to the AIF Handbook for private equity and real estate funds, the Central Bank has clarified its proposal to allow a longer initial offer period for QIAIFs investing in illiquid assets including real estate and private equity. Respondents had indicated that longer initial offer periods would be appropriate for funds with multiple closings but the Central Bank expressed concern that even if arrangements are in place to compensate earlier investors (e.g., an additional charge being payable by investors coming in after a first closing to recognise the cost of monies subscribed/committed in first or subsequent closings), the longer the offer period the more difficult it becomes for early investors to assess the importance and adequacy of those arrangements. The draft AIF Handbook has been amended to provide that these types of QIAIFs may have initial offer periods of up to 2 years and 6 months starting from the date of the first closing.
Discontinuation of professional investor fund (PIF) regime
The Central Bank considers that the retail investor AIF (RIAIF) and QIAIF regimes will adequately cover the universe of non-UCITS investment funds. Accordingly, the Central Bank is discontinuing the PIF regime and is encouraging, although not requiring, existing PIFs to convert to RIAIFs or QIAIFs.
PIFs in existence as at 22 July 2013 will be permitted to continue. The draft AIF Handbook has been amended to include a new chapter concerning grandfathering arrangements for such PIFs. Existing PIFs will not be permitted to establish new sub-funds or new share classes from 22 July 2013 onwards. While the rationale for prohibiting the establishment of new sub-funds can be understood, the ban on establishing new share classes for existing funds is not immediately clear and could impair the ongoing activities of an existing PIF.
Enhancements to retail investor AIF regime
The Central Bank has confirmed that the new RIAIF requirements will allow for the creation of an investment fund which is subject to less investment and eligible asset restrictions than the UCITS regime but is more restrictive than the QIAIF regime. In particular, key limits on investment in unlisted securities, single issuers and other investment funds have been raised. Furthermore, unlike UCITS, RIAIFs will be permitted to carry out physical short sales. However, the Central Bank has not accepted all suggestions made by respondents. For example, the requirements, if applicable, for an emerging markets risk warning and a specific risk warning for gold RIAIFs have been retained.
AIFMs falling below the thresholds specified in AIFMD are subject to registration requirements only. The Central Bank had proposed that RIAIFs and QIAIFs with such AIFMs should be subject to all AIFMD requirements as they are authorised investment funds. Many respondents to CP60 were strongly opposed to these proposals because of the perceived inconsistency with AIFMD and the impact on small QIAIFs, particularly in their start-up phase.
However, the Central Bank noted that many of the flexibilities which it is introducing for QIAIFs (e.g., discontinuing the promoter regime) are based on the premise that these QIAIFs will have a “Full AIFM” (i.e., an AIFM authorised under, and complying in full with the requirements of, AIFMD as opposed to being subject to the “registration only” regime for sub-threshold AIFMs). Having given the matter consideration, the Central Bank has decided to take an alternative approach which offers start-up AIFMs which establish QIAIFs room to grow before falling under the full AIFM chapter of the AIF Handbook.
The Central Bank will also give recognition to the fact that existing QIAIFs have promoters who were approved by the Central Bank by allowing existing small QIAIFs to continue under the current rules. Accordingly, the draft AIF Handbook has been amended to provide as follows:
QIAIFs authorised after 22 July 2013 with AIFM below the threshold:
- no promoter regime will apply to these QIAIFs;
- these QIAIFs will be subject to a condition that they must have a Full AIFM within two years from the date of launch; and
- during those initial two years, these QIAIFs will effectively be subject to the current QIF regime. This means that during the initial two years, QIAIFs will not be subject to, for example, the AIFMD rules on remuneration or risk management.
QIAIFs authorised before 22 July 2013:
- these QIAIFs have promoters who were approved by the Central Bank; and
- these QIAIFs will effectively be permitted to operate under the current QIF regime plus the AIFMD depositary requirements indefinitely.
All RIAIFs will be required to have a Full AIFM.
Verification of the calculation of performance fees
The Central Bank currently requires that the calculation of performance fees payable by RIAIFs and QIAIFs must be verified by the depositary. This requirement has been changed to allow a suitable independent party other than the depositary to carry out this function.
Publication of condensed portfolio statement
RIAIFs and QIAIFs must currently include in their periodic reports a detailed portfolio statement which lists each investment. The Central Bank has amended the draft AIF Handbook to provide that RIAIFs and QIAIFs can include a condensed portfolio statement in their periodic reports which lists positions/exposures greater than 5% of net asset value. RIAIFs and QIAIFs must make the full portfolio statement available to unitholders on demand. This can be made available to potential investors at the RIAIF’s or QIAIF’s discretion.
Voting requirements for fund amalgamations
The Central Bank has reviewed its voting requirements for amalgamations of AIFs. It considers that these are important protections and are being retained. However, it has reviewed its requirement that non-voting unitholders in an amalgamation situation be compulsorily redeemed and has concluded that the removal of this requirement is a useful refinement of the amalgamation rules for both RIAIFs and QIAIFs. This is a welcome change as previously a derogation from this requirement had to be sought from the Central Bank on a case-by-case basis.
The feedback statement contained a number of important clarifications in respect of the timing of the application of the new AIFMD regime:
- ESMA is planning a Q&A document to provide guidance on the transitional arrangements for those provisions of the AIFMD where the precise effective date is unclear. It is hoped that this will issue as a matter of urgency as this will determine whether existing AIFMs must comply in full with AIFMD from 22 July 2013 or have until 22 July 2014 to do so;
- the authorisation process for AIFMs is expected to be in place by the end of the first quarter of 2013 so that applications can be received and processed prior to 22 July 2013. Of course, authorisations of AIFMs cannot issue until 22 July 2013 at the earliest. This is a welcome announcement as it will enable managers to be authorised under AIFMD and utilise the marketing passport from the earliest possible date;
- there are no transitional provisions for depositaries and the Central Bank states that “from the effective date” depositaries must comply with the provisions of AIFMD. It is hoped that either the Central Bank or the ESMA Q&A document referred to above clarifies what this will mean in the context of existing AIFMs. In other words, if a “grace period” to 22 July 2014 applies to them, it would seem consistent that this applies in respect of all AIFMD requirements, including the depositary provisions; and
- the Central Bank had been urged by respondents to bring into effect before 22 July 2013 any enhancements included in the draft AIF Handbook which were unrelated to AIFMD and which did not rely on protections introduced by AIFMD. The Central Bank has rejected this proposal, explaining that the measures and enhancements contained in the draft AIF Handbook are considered to be a single package.
Conclusion and next steps
The feedback on CP60 and the draft revised AIF Handbook confirmed many of the positive developments proposed in the initial consultation, in particular the abolition of the promoter requirement and enhancements to the AIF regime to facilitate private equity and real estate investments. It also includes improvements to the rules on master-feeder structures and subthreshold AIFMs which address at least some of the concerns raised by respondents in the consultation process.
The Central Bank’s purpose in publishing the revised draft AIF Handbook is to assist AIFMs in planning for the implementation of the AIFMD which will come into effect on 22 July 2013. The revised draft AIF Handbook will be subject to a further technical examination to refine drafting. This is separate from the policy review which has now been concluded, although the Central Bank reserves the right to make further changes to its approach prior to finalising the legal text of the AIF Handbook. While the publication of this draft Handbook is welcome, the key point about transitional arrangements (if any) applicable to existing AIFMs must now await clarification by an ESMA Q&A document.