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Funds Update - Ireland
Quarterly Update | October - December 2015

1 Legal & Regulatory

1.1 UCITS Update

1.2 AIFMD Update

1.3 Irish Collective Asset-Management Vehicles Act 2015

1.4 Revised Managerial Functions and Organisational Effectiveness Role: CP86

1.5 Programme of Themed Inspections in Markets Supervision

1.6 EMIR Update

1.7 Client Assets and Investor Money Regulations

1.8 Securities Financing Transactions Regulation in Effect

1.9 MiFID II/MiFIR Update

1.10 PRIIPs KID Regulation

1.11 CP97: Consultation on Central Bank Investment Firm Regulations

1.12 Market Abuse Regulation

1.13 Regulatory Reporting Requirements Update

1.14 Benchmark Regulation on Indices

1.15 ELTIFs: Irish Regulation

1.16 Solvency II Directive

1.17 EU Capital Markets Union

1.18 New AIMA Guides

1.19 Fitness & Probity: New List of PCFs

1.20 Fund Disclosures - Fee and Expense Allocations Scrutiny

1.21 Investment Funds Statistics: Q3 2015

1.22 Custody of CIS Assets Standards

1.23 Risk Assessment and Capital Planning for Fund Administrators

1.24 FRS 102 Fair Value Hierarchy - Guidance for Investment Funds

1.25 Anti-Money Laundering Update

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2 Tax

2.1 OECD Common Reporting Standard Implementation in Ireland

2.2 Repeal of EU Savings Directive

2.3 Irish Property Funds and Capital Gains Tax

2.4 VAT and Investment Funds – Significant New Case

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3 Listings

3.1 GEM Listing for Investment Funds

3.2 Update to the Transparency Directive

3.3 Quality of Disclosures in Financial Statements

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1 Legal & Regulatory

1.1 UCITS Update

There have been a number of developments over the quarter:

Central Bank UCITS Regulations 2015

The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 ("Central Bank UCITS Regulations 2015") which came into effect on 1 November 2015 consolidate all requirements which the Central Bank of Ireland ("Central Bank") imposes on UCITS, UCITS management companies and depositaries of UCITS.  They also supplement existing requirements, in particular, the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011.  The Central Bank restructured its UCITS guidance to reflect the publication of these Regulations. A comprehensive set of forms relating to UCITS applications and post authorisations have also been updated.

For more information see our client update, Introducing a New Regulatory Framework for Irish UCITS.

Feedback Statements

On 5 October 2015, the Central Bank published feedback statements on CP77 – Consultation on publication of UCITS Rulebook and CP84 – Consultation on adoption of ESMA’s revised guidelines on ETFs and other UCITS issues. 

In relation to CP84 the Central Bank had concerns about whether all UCITS should be able to derogate from the collateral diversification requirement where collateral consisted of securities issued or guaranteed by a State Issuer. In its consultation it stated that there were grounds for limiting the derogation set out in the European Securities and Markets Authority's ("ESMA") Guidelines to UCITS money market funds only. In the context of the new UCITS Rulebook (which took effect on 1 November 2015), the Central Bank has decided to implement the Guidelines in a modified manner to address these issues.

UCITS Q&A and Guidance on Permitted Markets, FDI and EPM and Management Companies

On 5 and 23 October 2015, the Central Bank published its seventh and eight editions of its UCITS Q&A. New questions were added to reflect the introduction of the Central Bank UCITS Regulations 2015 and certain transitional arrangements in place. On 4 November 2015, the Central Bank issued a ninth edition with further questions  relating to the Central Bank UCITS Regulations and ID 1043 was amended (prospectus disclosure long/short positions).

On 30 November 2015, the 10th edition issued which adds a new Q&A ID 1058 on the publication and submission to the Central Bank by a UCITS of its first annual/half-yearly reports.  ID 1050 on high concentration indices has also been amended. On 22 December 2015, an eleventh edition issued with a new question ID 1059 which corrects  an  error  that  internally managed investment companies must comply with Regulation 100(1)(7) of the Central Bank UCITS Regulations, (ensuring that  an  organisational  effectiveness role  is  performed  by  an  independent  chairman  or board member) rather than Regulation 100(1)-(6).

On 5 October 2015, the Central Bank published guides to Financial Derivative Instruments and Efficient Portfolio Management and UCITS - Organisation of Management Companies. On 4 November 2015, it issued revised UCITS guidance in respect of Permitted Markets and UCITS FDI and EPM. The relevant revisions are in Paragraph 1 of the EPM Guidance on Permitted Markets and revisions to paragraphs 126-128 of the UCITS FDI and EMP Guidance. 

UCITS V Regulation on Obligations of Depositaries

On 17 December 2015, the European Commission adopted a Delegated Regulation supplementing the UCITS IV Directive (2009/65/EC), as amended by the UCITS V Directive (2014/91/EU) on the obligations of depositaries (C(2015) 9160). There are  few  changes  between  the  official  draft  and  the  draft  leaked  in  mid-2015.  The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither object, it will be published in the Official Journal of the EU and enter into force on the 20th date following its publication. It is to apply six months after the date of its entry into force. If this is the case there will  be  a  divergence  between  the  application  date  of  the  UCITS  V  Level  1 Directive (18 March 2016) and this regulation.

For more information see our client update, UCITS V Update - Level 2 Emerges.

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1.2 AIFMD Update

The European Union (Alternative Investment Fund Managers) Regulations 2013 (No. 257 of 2013) gave effect to Alternative Investment Fund Managers Directive ("AIFMD") in Ireland in July 2013. There have been a number of developments over this quarter:

(a) Central Bank AIF Rulebook Consultation, Reporting Guidance and Q&As

On 5 October 2015, the Central Bank's sixteenth edition of the AIFMD Q&A was published. New questions ID 1097 (Directed Brokerage), ID1098 (Board Composition) and ID1099 (Non-material Change) are included.  This version clarifies that, following on from the Central Bank’s feedback statement to CP86, only newly authorised alternative investment fund managers ("AIFMs") are subject to the authorisation process which requires the rationale for the board composition to be documented in the programme of activities. However, the Central Bank views it as "good practice" for the director performing the organisational effectiveness role for each authorised AIFM (new or existing) to document the rationale for the board composition and to include this in the programme of activities when it is next updated.

On 4 November 2015, the Central Bank published the latest version of the AIF Rulebook and a seventeenth edition of its AIFMD Q&A. A revision was made in the Q&A to question ID 1030 (Non-EU AIFM) and a new question ID 1100 (which states that the Central Bank is working on guidance concerning the holding subscription and redemption monies for individual sub-funds, as fund assets, within a single account in the name of the umbrella fund) is included.

On 30 November 2015, the Central Bank published CP99, a consultation on amendments to the AIF Rulebook which closes on 24 February 2016. Many are of a technical and clarificatory nature and several aim to align with changes under the recently published Central Bank UCITS Regulations 2015. Some of the main changes proposed include:

(i) Extending the category of investors who are exempt from the eligibility criteria and minimum subscription amount required to invest in a qualifying investor alternative investment fund ("QIAIF");

(ii) Amending the reporting requirement which applies to AIF depositaries where they provide services to non-Irish authorised AIFs;

(iii) Amending the capital and reporting requirements which AIFMs and AIF Management Companies;

(iv) Extending the list of requirements in the European Union (Alternative Investment Fund Managers) Regulations 2013 which apply to QIAIFs with registered AIFMs;

(v) Aligning the rules which apply to collateral received by retail investor alternative investment funds ("RIAIFs") under an OTC derivative or repo/securities lending contract and the rules which reference external credit ratings with those recently introduced for UCITS;

(vi) Clarifying that the requirement to hold minimum capital as eligible assets and in a separate account does not apply to internally-managed AIFs;

(vii) Removing references to bearer shares as this is no longer permitted by company law;

(viii) Introducing a requirement that external AIFMs and AIF Management Companies produce a second set of half-yearly accounts.

The Central Bank also published the latest version of the 'Reporting Guidance for Alternative Investment Fund Managers'.  This clarifies the reporting requirements for non-EU master AIFs not marketed in the EU that have either EU feeder AIFs or non-EU feeder AIFs marketed in the EU under Article 42 of AIFMD. The Central Bank now requires all AIFMs to report information on non-EU master AIFs from the 1 January 2016 reporting period.  It should be noted, however, that this information is not required to be reported where the non-EU master AIF and feeder AIF do not have the same AIFM.

For more information see our client update, Ireland Funds - AIFMD (NPPR) Changes to Annex IV Reporting Obligations.

(b) ESMA Q&As

On 1 October 2015, ESMA published its updated Q&A for AIFMD in relation to depositaries. It clarifies that when an alternative investment fund’s ("AIF") depositary sub-delegates custody of the AIF’s assets to either an EU or third-country central securities depositary ("CSD"), that CSD must comply with the delegation provisions in Article 21(11) of AIFMD. On 2 December 2015, ESMA published a further update updated which includes new questions and answers on reporting to national competent authorities.

On 15 December 2015, ESMA published another update which includes a new Q&A on the depositary liability regime.

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1.3 Irish Collective Asset-Management Vehicles Act 2015

The Central Bank is the registrar for Irish Collective Asset-management Vehicles ("ICAVs") under the Irish Collective Asset-management Vehicles Act 2015. On 19 November 2015, the application forms for registration and post-registration filings were updated.

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1.4 Revised Managerial Functions and Organisational Effectiveness Role: CP86

On 4 November 2015, the Central Bank published another feedback statement on CP86: Fund Management Company Boards - Feedback statement on consultation on delegate oversight guidance and Guidance on Fund Management Companies. Managerial functions for both UCITS management companies and AIFMs are consolidated into six separate functions and a new organisational effectiveness role is being introduced.

Fund management companies authorised before 1 November 2015 were to provide for the revised managerial functions by 30 June 2016. Those authorised after 1 November 2015 must have these managerial functions in place upon authorisation.  However work on the outstanding guidance is on-going and the Central Bank announced in December that it anticipates publishing it for public consultation by the end of Quarter 1 2016.  To reflect this, the deadline for compliance by existing fund management companies (i.e. fund management companies authorised before 1 November 2015) with the revised managerial functions and new organisational effectiveness requirements will be at least six months after the completion of the consultation process. Therefore existing UCITS management companies and AIFMs will not need to update their business plan/programme of activity until then. 

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1.5 Programme of Themed Inspections in Markets Supervision

The Central Bank published its programme of themed-inspections for 2016 on 14 December 2015. The planned themed-inspections, which supplement day-to-day supervisory activities, for 2016 are:

(i) Outsourcing – inspection of service level agreements and operational arrangements with outsourcing providers for investment firms, fund managers and fund service providers.

(ii) AIFM programme of activities – review of AIFMs adherence to their programme of activity.

(iii) Risk function - focus on the risk culture within firms including governance arrangements, risk ownership and responsibility.

(iv) Investment funds – analysis of the production costs of investment funds.

(v) Financial indices – review of the use of financial indices as eligible investments for UCITS.

(vi) Director time commitments - continued focus on various issues.

(vii) Client assets – focused review of client asset management plans for investment firms.

(viii) Information technology risk – focus on resilience of firms' IT systems.

(ix) Suitability – review of the suitability assessment of clients.

(x) Conduct – examination of the information provided to clients on an on-going basis.

(xi) Hedging arrangements – review of hedging arrangements at share class level for investment funds.

(xii) Market integrity – review of the practices of firms when dealing with insider information and their compliance with Market Abuse Regulations.

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1.6 EMIR Update

The European Market Infrastructure Regulation (Regulation on OTC derivative transactions, central counterparties ("CCPs") and trade repositories (Regulation 648/2012)) ("EMIR") is relevant to all Irish funds trading in financial derivative instruments ("FDI") whether on an exchange or otherwise.

On 5 November 2015, ESMA published a consultation (ESMA/2015/1628) on draft regulatory technical standards ("RTS") relating to indirect clearing arrangements for both OTC derivatives under EMIR and for exchange-traded derivatives under MiFIR which closed on 17 December 2015. It looked at accounts structure and segregation models, default management requirements and longer chains involving more than one indirect client.

On 13 November 2015, ESMA published its final report to the European Commission enclosing draft RTS and implementing technical standards ("ITS") on data reporting under Article 9 of EMIR proposing amendments to the current derivatives reporting fields.

ESMA entered into a memorandum of understanding with the Hong Kong Securities and Futures Commission that allows the exchange of information on derivative contracts held in trade repositories from 19 November 2015.

On 21 December 2015, the Commission Delegated Regulation ((EU) 2015/2205) on RTS on central clearing through CCPs for interest rate derivatives came into force. UCITS/AIFs will have to centrally clear certain classes of interest rate swaps denominated in the G4 currencies (EUR, GBP, JPY and USD) from 21 June 2016 (for funds that are already clearing members). For funds that are not already clearing members and have a gross notional exposure to uncleared OTC derivatives below EUR 8 billion, the start date for clearing OTC interest rate swaps is 21 June 2017. These classes are fixed-to-float interest rate swaps, float-to-float swaps, forward rate agreements and overnight index swaps. The next clearing obligations will cover index credit default swaps as well as interest rate swaps denominated in NOK, PLN and SEK ESMA's draft RTS on these are with the European Commission for approval.

OTC derivatives transactions between a UCITS/AIF and a third country counterparty will be in scope if the third country counterparty would be subject to the OTC clearing obligation if it were established in the EU (i.e. a financial counterparty or a non-financial counterparty that exceeds the clearing thresholds). 

Action point: fund managers trading in interest rate swaps should identify how soon they need to comply with the OTC clearing obligation (effective date varies depending on clearing member status, level of exposure to uncleared OTC derivatives) and put appropriate arrangements in place.

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1.7 Client Assets and Investor Money Regulations

The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Client Asset Regulations 2015 came into force on 1 October 2015. Investment firms are required to issue a Client Assets Key Information Document to new retail clients from this date and to existing retail clients by 1 January 2016.

The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Investor Money Regulations 2015 will take effect from 1 April 2016. On 5 October 2015, the Central Bank published the first edition of the Investor Money Q&A on queries likely to arise in relation to implementation. It deals with general questions on the applicability of the regulations, issues around the segregation of collection accounts and risk management and audit requirements.

On 22 December 2015, the Central Bank issued guidance on UCITS and AIF Umbrella Funds - Cash Accounts focuses on operating an umbrella fund cash account for subscriptions and redemptions, which are considered fund assets (not subject to Investor Money Regulations).  This guidance provides information on:

• general principles;

• policies and procedures that should accompany such an account;

• disclosures that should be made to investors;

• treatment of subscription, redemption and dividend monies;

• insolvency of one sub-fund within an umbrella fund.

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1.8 Securities Financing Transactions Regulation in Effect

The Regulation on securities financing transactions ("SFTs") covers all forms of lending, borrowing and re-use of securities in the EU and in all the branches of counterparties to SFTs no matter where they are located. It requires SFTs to be reported to trade repositories, places additional binding reporting requirements on investment managers, and introduces prior risk disclosures and written consent before assets are rehypothecated. The SFT Regulation was published in the Official Journal of the EU on 23 December 2015 and came into force on 12 January 2016 with the exception of certain transitional provisions in Article 33.

For more information see our client update, SFTR – A Briefing on the Impact for Funds.

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1.9 MiFID II/MiFIR Update

The Markets in Financial Instruments Directive (2014/65/EU) ("MiFID II") and the Markets in Financial Instruments Regulation (Regulation 600/2014) ("MiFIR") will repeal and recast the Markets in Financial Instruments Directive (2004/39/EC) ("MiFID") They are to be transposed into national law by 3 July 2016 and to apply from 3 January 2017 (subject to a small number of excepted sections). Both require ESMA to develop a number of RTS and ITS.

As a result of MiFID II, investment firms, trading venues and supervisors need to rebuild their transaction and reference data reporting systems. It will be later in 2016 before the implementing rules are final and the building of these IT systems, can only start when the rules are all agreed so there is a timing issue. Therefore ESMA has raised its concerns with the Commission and whether all or parts of MiFID II will be delayed is currently subject to discussion and agreement between the Commission, the European Parliament and the Council of the EU.

On 23 December 2015, ESMA published a consultation (ESMA/2015/1909) on guidelines on its draft RTS on transaction reporting, reference data, order record keeping and clock synchronisation required by MiFID II and MiFIR. It also published its final MiFID II guidelines on cross-selling practices which intend to ensure that investors are treated fairly when an investment firm offers two or more financial products or services as part of a package, guidelines on complex debt instruments and structured deposits and guidelines for assessment of knowledge and competence under MiFID II (all of which are due to come into effect on 3 January 2017).

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1.10 PRIIPs KID Regulation

The Regulation on key information documents ("KIDs") for packaged retail and insurance-based investment products ("PRIIPs") ("PRIIPs KID Regulation") introduces a new pan-European pre-contractual product disclosure document for PRIIPS in EU Member States from 31 December 2016.

On 11 November 2015, the Joint Committee of the European Supervisory Authorities ("ESAs") (the EBA, EIOPA and ESMA) published a consultation paper (JC/CP/2015/073) on KIDs for PRIIPs. The Joint Committee is to develop draft RTS on the content and presentation of the KIDs for PRIIPs. The consultation sets out the proposed requirements to include in the preparation of the KIDs such as a common mandatory template for each KID, a summary risk indicator of seven simple classes for the risk and reward section, methodologies to assign each PRIIP to one of the seven classes and detail on performance scenarios. The consultation closed on 29 January 2016.

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1.11 CP97: Consultation on Central Bank Investment Firm Regulations

On 4 November 2015, the Central Bank issued a consultation paper on proposed Central Bank Regulations to apply to certain investment firms. The consultation closed on 27 January 2016.

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1.12 Market Abuse Regulation

The Market Abuse Regulation (Regulation 596/2014) ("MAR") will apply from 3 July 2016 and the Directive on criminal sanctions for insider dealing and market manipulation (2014/57/EU) ("CSMAD") has to be transposed into Irish law on the same date (together, MAD II). MAR updates and strengthens the existing framework by extending its scope to new markets and trading strategies and by introducing new requirements.

On 17 December 2015, the European Commission adopted a Delegated Regulation supplementing the MAR as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers' transactions. The Council of the EU and the European Parliament will now consider the Delegated Regulation.

The European Commission Implementing Directive ((EU) 2015/2392) on the MAR relating to reporting to competent authorities of actual or potential infringements of MAR entered into force on 7 January 2016 and sets out rules on the procedures relating to reporting actual or potential breaches of MAR set out in Article 32(1) of the Regulation, including the arrangements for reporting and measures to protect persons working under a contract of employment and to protect personal data.

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1.13 Regulatory Reporting Requirements Update

On 23 December 2015, the Central Bank issued updated guidance for Irish authorised investment funds' board of directors / management company / AIF management company / general partner, as appropriate, on the reporting requirements relating to the extension of its Online Reporting System. 

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1.14 Benchmark Regulation on Indices

On 9 December 2015, the Council of the EU announced that the Permanent Representatives Committee has approved, on behalf of the Council, the final compromise text of the proposed Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds ("Benchmark Regulation"). It will now be submitted to the European Parliament for a vote at first reading and to the Council for final adoption.

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1.15 ELTIFs: Irish Regulation

The Regulation on European Long-Term Investment Funds (EU/2015/760) ("ELTIF Regulation") is designed to provide a framework for retail investment in illiquid asset classes such as infrastructure projects and unlisted companies. ELTIFs will have to apply for authorisation, have a regulated structure and comply with specified rules so that they offer long term and stable returns. It came into force on 9 December 2015. The Irish European Union (European long-term investment funds) Regulations 2015 were signed into effect on this date to facilitate the establishment of ELTIFs in Ireland. ELTIF application forms are available from the Central Bank. 

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1.16 Solvency II Directive

The Solvency II regime came into force on 1 January 2016 ((Directive 2009/138/EC) as amended by the Omnibus II Directive (Directive 2014/51/EC)). The European Communities (Insurance and Reinsurance) Regulations 2015 transpose it into Irish law. It establishes a revised set of EU-wide capital requirements and risk management standards for insurers and reinsurers and delivers a supervisory system that is consistent across all EU Member States. Solvency II will affect investment decisions taken by insurers and reinsurers. Therefore investment funds with insurance company investors will have to have systems in place to deal with more the new reporting requirements so that the insurance company investor can comply with its Solvency II obligations. 

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1.17 EU Capital Markets Union

On 30 September 2015, the European Commission launched its capital markets union ("CMU") action plan to build a single market for capital.

On 10 November 2015, the Council of the EU published a press release welcoming the plan. It calls for the swift adoption of the proposed Securitisation Regulation and the proposed Regulation amending the Capital Requirements Regulation (Regulation 575/2013) and stresses the importance of preserving the financial stability objectives of financial legislation, consumer and investor protection and the single market. It also invites the Commission, in the relevant sectoral reviews, to assess the impact of third-country regimes in current regulations on the structure of EU capital markets, the competitiveness of the EU financial industry, as well as access to third-country markets and to report, at least every six months, on progress made in the development of the CMU.

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1.18 New AIMA Guides

In October 2015, the Alternative Investment Management Association published a Guide to Liquid Alternative Funds and a Guide to Sound Practices for Cyber Security. 

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1.19 Fitness & Probity: New List of PCFs

The Central Bank Reform Act 2010 (Sections 20 and 22) (Amendment) Regulations 2015 amend the Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 by replacing the list of Pre-Approval Controlled Functions  ("PCFs") in Schedule 2. The main changes of note are set out below. The new Regulations:

(a) Replaces "secretary" with "chief operating officer";

(b) Adds, in respect of AIFMs the following two categories (a) Head of Client Asset Oversight, and (b) Head of Investor Money Oversight;

(c) Lists PCFs for Internally managed AIFs or AIFMs and adds to the list designated persons to whom an AIFM or UCITS management company or management company of an AIF may delegate the performance of management functions and Head of Investor Money Oversight;

(d) Exempts limited partners (within the meaning of Section 3 of the Investment Limited Partnerships Act 1994) from the general list of PCFs;

(e) Changes "Head of Risk" to "Chief Risk Officer";

(f) Changes "Chief Actuary" to "Head of Actuarial Function" and adds "Head of Claims" in respect of specified PCFs.

The changes take effect from 1 January 2016. The Central Bank has also issued guidance in relation to these amendments to the fitness and probity regime.

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1.20 Fund Disclosures - Fee and Expense Allocations Scrutiny

Many in the market have noted with interest the ongoing US Securities and Exchange Commission ("SEC") focus on the disclosure of fee and expense allocations for funds managed by SEC registered investment advisers. There have been a number of significant enforcement actions which have resulted in fines and sanctions arising from unclear, misleading or negligent fee and expense allocations.

While such allocations have not yet been formally added to the Central Bank's list of themed inspections, it is possible that this area will indirectly fall within the scope inspections or be added to the list at a later date. In addition, many Irish UCITS and AIFs are managed (either directly or via delegation arrangements) by US investment advisers. Further, the areas the SEC has focused on are also covered by some of the laws and regulations applicable to Irish AIFs and UCITS (e.g. conflicts of interest). Therefore, we believe it is prudent for directors and managers to focus on the following themes which have emerged from SEC actions:

  • Holding individual directors liable for expense allocation and disclosure failures by a manager;
  • Settlement orders stating that a manager cannot consent to a conflict of interest on behalf of a fund where the conflict is between the manager and the fund. Caution when resolving conflicts without consulting fund investor committees (or independent third parties) needs to be exercised;
  • Fees paid by portfolio companies to the manager or its affiliates are just as likely to be scrutinised as fees paid by the funds themselves particularly if they affect the value of a portfolio company or fund;
  • The important of having written policies and procedures in place governing fees, expense allocations and so on is highlighted;
  • Disclosure should always be specific and consistent; and
  • Past fee and expense arrangements, as well as current practice should be examined.

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1.21 Investment Funds Statistics: Q3 2015

The main points to note in the Central Bank's December 2015 update are:

(a) The net asset value of investment funds resident in Ireland (IFs) declined by 7% over the quarter to Q3 2015, to €1,355 billion from €1,456 billion in Q2 2015, however €30 billion of this decline was due to a reclassification of bond funds to money market funds;

(b) Over the quarter, investment funds experienced a negative revaluation of 7% overall with equity and bond funds leading the downward revaluations by recording minus 10% and 5% revaluations respectively;

(c) In a quarter in which increased concern regarding the slowing Chinese economy, lead to spill over effects for global financial markets, equity funds were the hardest hit with revaluation decreases of €54 billion over the quarter; and

(d) Holdings of government debt stood at €290 billion in Q3 2015, with transactions inflows outweighing negative revaluations as investors searched for safe heavens.

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1.22 Custody of CIS Assets Standards

On 10 November 2015, the International Organization of Securities Commissions published its final report on standards for the custody of collective investment scheme ("CIS") assets (FR25/2015). It sets out eight standards divided into two sections aimed at identifying the core issues that should be kept under review by the regulatory framework to ensure investors' assets are effectively protected. The report also identifies some of the key risks associated with the custody of CIS assets, such as operational risk, misuse of CIS assets, risk of fraud or theft, and IT risk.

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1.23 Risk Assessment and Capital Planning for Fund Administrators

On 22 December 2015, the Central Bank issued a consultation paper (CP100) on proposed regulations and guidance to apply to fund administrators. It requires feedback on its proposal to introduce a risk assessment and capital planning requirement for fund administrators authorised under the Investment Intermediaries Act 1995. This consultation is open until 15 March 2016.

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1.24 FRS 102 Fair Value Hierarchy - Guidance for Investment Funds

On 6 November 2015, the Financial Reporting Working Group of Irish Funds issued a guidance paper to the preparers of financial statements when categorising financial instruments within the fair value hierarchy under FRS 102. While the Financial Reporting Council or FRC recently issued FRED 62: Draft amendments to FRS 102, fair value hierarchy disclosures, the proposed amendment is expected to be introduced around March 2016 for accounting periods beginning on or after 1 January 2017 (with early application being permitted). As such the industry guidance should be of assistance in the intervening period.

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1.25 Anti-Money Laundering Update

On 25 June 2015, the Fourth Money Laundering Directive ((EU) 2015/849) ("MLD4") and the revised Wire Transfer Regulation ((EU) 2015/847) ("WTR") came into force. EU Member States must adopt and bring into force the measures transposing MLD4 into national law by 26 June 2017. The WTR applies from 26 June 2017.

On 21 October 2015, the Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA) launched a public consultation on two separate anti-money laundering ("AML") and countering the financing of terrorism ("CTF") guidelines required under the MLD4: risk based supervision guidelines and risk factors guidelines. This risk based supervision guidelines paper consults on the characteristics of a risk based approach to AML and CTF supervision and the steps supervisors should take when conducting supervision on a risk sensitive basis. The risk factors guidelines are aimed at helping firms identify, assess and manage the money laundering and terrorist financing risk associated with individual business relationships and occasional transactions. The consultation closed on 22 January 2016.

On 18 November 2015, the Central Bank published a report of its observations on Anti-Money Laundering, Countering the Financing of Terrorism and Financial Sanctions compliance by Funds and Fund Service Providers in Ireland.

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2 Tax

2.1 OECD Common Reporting Standard Implementation in Ireland

On 17 December 2015, regulations implementing the OECD Common Reporting Standard ("CRS") in Ireland were signed.  The adoption of CRS by Ireland means that from 1 January 2016, most Irish investment funds are required to put in place procedures to gather certain information about their investors. 

For more information see our client update, OECD Common Reporting Standard Implementation in Ireland – Implications for Irish Investment Funds and SPVs.

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2.2 Repeal of EU Savings Directive

On 10 November 2015, the Council of the European Union adopted a Directive repealing Council Directive 2003/48/EC (the Savings Tax Directive ("EUSD")).  Broadly, the EUSD only applied to certain payments by Irish UCITS funds and had limited impact on most Irish investment funds.  The repeal is as a result of the introduction of automatic exchange of information rules pursuant to CRS and the EU Directive on Administrative Cooperation (Council Directive 2011/16/EU).

Reporting under the EUSD is still required in respect of relevant payments made by UCITS in 2015.  The final EUSD reports relating to individuals resident in other EU Member States are due to be filed with Irish Revenue by 31 March 2016.

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2.3 Irish Property Funds and Capital Gains Tax

There has been a welcome simplification of the tax regime for regulated Irish property funds. Regulated property funds are broadly exempt from Irish tax on income and gains.  Non-Irish investors in such funds are also generally exempt from Irish tax on distributions or redemptions from the fund or on a sale of units.  Despite this, under Irish tax legislation, Irish property funds and investors were required to obtain an Irish tax clearance certificate (a Revenue form "CG50") on disposals of Irish land and shares in land-rich companies or face a 15% withholding levy.  This requirement was administratively burdensome in the context of funds and investors which were frequently dealing in land or shares.

The Irish tax authorities have now clarified that tax clearance certificates will not be required on disposals by Irish funds or other persons who are not subject to Irish capital gains tax.  This is a logical result and, in our view, should also apply to investors in Irish regulated funds in certain cases.  The simplification should further assist in the growth of Irish property funds as the vehicle of choice for significant investments in Irish property.

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2.4 VAT and Investment Funds – Significant New Case

The European Court of Justice ("ECJ") case of Staatssecretaris van Financiën v Fiscale Eenheid X NV cs C-595/13 is significant for investment managers and funds across Europe.  The case involved Dutch property companies which had raised capital from a number of investors in order to acquire and manage real estate. The companies received certain services, including real estate management services. The case required the ECJ to consider:

(a) the characteristics of a special investment fund for VAT purposes;

(b) whether actual property management services (i.e. real estate management including letting and maintaining the properties) were capable of benefitting from the VAT exemption for management of a fund.

The court provided welcome guidance on the meaning of the term "special investment fund" by identifying a number of key characteristics of such funds namely:

(a) the raising of capital from investors;

(b) the making of investments;

(c) the return of value to investors from the assets of the fund; and

(d) specific state supervision.

The court considered that any entity which displays these characteristics is capable of being a special investment fund. This finding is entirely in line with the historic Irish treatment of considering all regulated investment funds (ICAVs, unit trusts, investment companies and investment limited partnerships) as within the scope of the VAT exemption.

The reference to specific state supervision should in our view be satisfied by Irish regulated funds.

For property investment funds, an important element of the decision is the conclusion that investment in real estate is not a barrier to an entity being a special investment fund.  The VAT Directive refers generally to 'special investment funds', without mentioning any specific type of investment or making a distinction on the basis of the assets in which the funds are invested. There is nothing to indicate that it is limited to funds investing in securities.

This decision will be welcomed by the many investors and managers involved in Irish regulated property funds which are typically formed as Irish investment companies, regulated unit trusts or ICAVs. These entities should be entitled to the benefit of the VAT exemption for certain management services. In our view, this remains the case and is unaffected by the decision. 

Management

The court drew a distinction between what might be termed "high-level" management tasks, such as selection of property and raising capital, which are VAT exempt, and "operational management" namely letting, management and maintenance of properties which may be subject to VAT. 

The management exemption must be limited to transactions which are essential to the business of special investment funds. The selection and disposal of the assets under management, but also administration and accounting tasks, are covered by the concept of 'management'. The court took the view that the actual management of the underlying properties is not specific to the management of a special investment fund as it is inherent in any type of investment vehicle. Accordingly, the standard rules should apply to determine whether VAT applies to such services and as to whether there is scope for VAT recoverability. This finding is consistent with the approach generally taken by Irish property funds, where a distinction is drawn between an asset management fee (which is subject to VAT) and an investment manager fee (which is VAT exempt).

Conclusion

It is noteworthy that the ECJ is attempting to bring a more coherent and uniform approach to the VAT treatment of special investment funds. In several places, the court notes that the ability of Member States to define special investment funds is limited and must be consistent with the objectives pursued by the Sixth VAT Directive and with the principle of fiscal neutrality. Since the implementation of AIFMD, funds are increasingly being serviced by administrators and managers who are based in jurisdictions other than the jurisdiction of the fund itself.  As a result of this decision, the limitation of the definition of special investment funds to domestic entities by certain Member States may need to be reviewed. This case suggests that such a practice is questionable and may not be sustainable in light of the court's comments on fiscal neutrality.

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3 Listings

3.1 GEM Listing for Investment Funds

The Irish Stock Exchange ("ISE") is extending its market offering for investment funds by allowing investment funds to list on the Global Exchange Market ("GEM"). The ISE have issued a draft GEM rulebook for consultation. Comments were due by 15 January 2016. A brief summary of GEM:

(a) GEM is authorised by the Central Bank as a MTF and therefore EU securities legislation that applies to 'regulated markets'; (e.g. Prospectus, Transparency and Statutory Audit Directives) generally will not apply to GEM;

(b) A standalone ISE rule book will apply to investment funds seeking admission to listing and listed on GEM.  The GEM rulebook will not be materially different from the Code of Listing Requirements and Procedures for Investment Funds;

(c) The existing sponsor regime will apply to GEM;

(d) The regime will cater for retail and professional investors; and

(e) A transfer of listing from the MSM to GEM will be permitted by way of announcement which will be subject to pre-approval by the ISE. 

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© Maples and Calder 2016

This update is intended to provide only general information for the clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.

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