The Irish investment funds industry has been particularly busy throughout 2005 and early 2006 with the introduction of numerous legal and regulatory initiatives at both local and EU levels.
The European Commission’s green paper on the enhancement of the EU framework for investment funds, published in 2005, provided a general assessment of the impact of the Undertaking for Collective Investment in Transferable Securities (Ucits) directives and charted the proliferation of Ucits across the EU since the original 1985 Ucits directive.
The green paper also prioritises the simplification of notification procedures for passporting investment funds. Many Ucits sold cross border face difficulties and uncertainty in some host countries operating this notification procedure. This has given rise to significant compliance costs and unnecessary delays, highlighting the need to develop consistent standards for notification requirements. Since publication of the green paper, the Committee of European Securities Regulators (CESR) has issued consultation papers, in October 2005 and May 2006, on this matter and it will be interesting to see its final guidelines, which are expected in July 2006.
Following two rounds of consultations in 2005, CESR published the final text of its advice on clarification of definitions concerning eligible assets for investment by Ucits in January 2006. A draft of a possible EU Commission regulation on this topic, largely based on the final CESR paper, has been released and is currently being considered by relevant authorities.
The implications for existing Ucits funds resulting from such a regulation will be interesting. For instance, it may be necessary for competent authorities in member states to agree a transitional period to allow existing Ucits funds to ensure they are compliant with the regulation’s requirements.
New fund options
Closer to home, the Investment Funds, Companies and Miscellaneous Provisions Act 2005 was signed into law on 29 June 2005. Among other things, the act provides for the establishment of a non-Ucits common contractual fund (CCF), segregated liability for sub-funds of umbrella investment companies, cross-investment between sub-funds of an umbrella investment company and the provision of flexibility regarding the choice of appropriate accounting standards by Irish investment funds.
A CCF is a contractual fund structure whereby institutional investors, particularly pension funds, can pool assets in a tax-efficient manner.
The vehicle presents opportunities for investment managers who are managing assets on a segregated basis for their clients and for large multinationals with staff pension funds in many different jurisdictions and who want to exploit the advantages offered by pooling the assets of these funds. Non-Ucits status enables a CCF to invest in a greater range of assets and provide greater leverage than a Ucits CCF.
The act also provides for segregation of liability between sub-funds of an Irish umbrella fund structured as an investment company.
It specifically provides that no Irish umbrella investment company shall apply the assets of any one sub-fund towards the liabilities of any other sub-fund within that umbrella structure.
For existing umbrella corporate structures, the act sets out the procedure for converting to segregated-liability status, including the requirement for shareholders to vote on the proposition. Creditors of existing umbrella corporate structures must also be given an opportunity to object to the introduction of segregated liability. Many investment fund promoters have already taken advantage of this welcome development, which puts umbrella investment companies in a similar position to umbrella unit trusts under Irish law.
The act also provides for cross-investment between sub-funds of an umbrella investment company addressing the company law technicality which prevents an investment company from investing in its own shares. This enables investment fund promoters to avoid being forced to establish separate fund structures + continued where their intention is to cross-invest between the structures. In addition, the act offers flexibility to Irish collective investment schemes vis-à-vis accounting standards. Permissible standards now include Irish, UK, Japanese, US and Canadian GAAP.
There is also an obligation on listed investment funds to create and maintain insider lists comprising names of all persons working for the relevant investment fund entity who have access to inside information relating to that investment fund.
Directors are required to disclose any transactions conducted on their own account relating to financial instruments of the investment fund. As of 1 June 2006, the Irish Financial Regulator’s Market Abuse Regulations took effect. These include guidance on compliance with Irish market abuse law. Needless to say, the practical application of these provisions has been the subject of much debate and it is anticipated that practical guidance from the Irish funds industry’s representative body, the Dublin Funds Industry Association, will be forthcoming.
The Takeover Directive was implemented into Irish law as of 20 May 2006 and affects Irish investment funds structured as closed-ended investment companies whose shares are listed on the Irish Stock Exchange (ISE). The Irish Takeover Panel is the competent authority under this legislation which introduces certain new regulatory obligations for such companies. It is anticipated that there will be ongoing dialogue between Irish fund industry representatives and the relevant authorities regarding the practical implications of these obligations for such companies.
The Irish Financial Regulator issued amendments (December 2005) to its policy on the publication of prices for Irish investment funds. The amendments state that investment funds listed on the ISE may publish prices on the official website of the ISE in accordance with the following conditions: dealing prices must also be available from the office of the investment fund, its manager or administrator; dealing prices posted on the internet must be up to date; and the fund’s prospectus must provide information relating to the publication policy adopted by the investment fund.
In March 2006 the Irish Financial Regulator updated its draft guidance note ‘Undertakings for Collective Investments in Transferable Securities – Financial Derivative Instruments’. The guidance note clarifies the treatment of financial derivative instruments in Ucits, in particular how risk management controls and limits are implemented and documented. This followed extensive consultation between the regulator and representatives of the Irish fund industry and the new guidance note was broadly welcomed. The finalised guidance note was issued on 31 May 2006.
Despite the volume of legislative and regulatory developments over the past 12 months, there is still an appetite for establishing new investment products domiciled in Ireland.
Several investment banks have structured as Irish investment funds products which traditionally would have been established and sold as debt securities. Their motivation was to meet demand for their products from investors who, for regulatory or other reasons, may not have been able to acquire the products as debt securities. A number of large investment managers have also set up Irish fund products which represent the core of their liability-driven investing proposition for their clients. n
Brian McDermott is a partner and head of the investment funds unit at A&L Goodbodycontinued #