Funds Update - Ireland
Quarterly Update | Jan - Mar
On 1 February 2013 the Central Bank of Ireland (the "Central Bank") published all responses received and its feedback statement on the consultation paper on the implementation of the Alternative Investment Fund Managers Directive (2011/61/EU) ("AIFMD") (CP 60). Also issued with the feedback statement is a second draft of the Alternative Investment Fund ("AIF") Handbook.
On 5 February 2013 the European Securities and Markets Authority ("ESMA") published the following:
- A list of responses it has received to its consultation paper on key concepts of AIFMD; and
- A llist of responses it has received to its consultation paper on draft regulatory technical standards ("RTS") on types of alternative investment fund managers ("AIFMs").
- ESMA Remuneration guidelines
On 11 February 2013 ESMA issued their final report setting out guidelines for the remuneration of AIFMs under AIFMD. These guidelines will apply to managers of AIFs including hedge funds, private equity funds and real estate funds, as well as managers of other non-UCITS-regulated funds which are managed or marketed in the EU. AIFMs will be asked to introduce sound and prudent remuneration policies and organisational structures which avoid conflicts of interest that may lead to excessive risk taking.
Types of remuneration covered:
- For the purposes of the guidelines, remuneration consists of all forms of payments or benefits paid by the AIFM, of any amount paid by the AIF itself, including carried interest, and of any transfer of units or shares of the AIF, in exchange for professional services rendered by the identified staff;
- All remuneration should be divided into either fixed remuneration (payments or benefits without consideration of any performance criteria) or variable remuneration (additional payments or benefits depending on performance or, in certain cases, other contractual criteria).
Both components of remuneration (fixed and variable) may include monetary payments or benefits (such as cash, shares, options, remuneration by AIFs e.g. through carried interest models) or non-monetary benefits (such as discounts, special car allowances etc).
They will apply from 22 July 2013 subject to the transitional provisions of AIFMD.
AIFMD Level 2 Measures and Q&A
The Commission Delegated Regulation (EU) 231/2013 of 19 December 2012 supplementing AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision was published in the Official Journal on 22 March 2013. It will enter into force on the twentieth day following the publication and shall apply from 22 July 2013.
The European Commission has also published on its website questions and answers regarding the interpretation of AIFMD.
UCITS V will make amendments to the UCITS IV Directive (2009/65/EC) relating to the depositary function, remuneration requirements and administrative sanctions. On 21 March 2013 the European Parliament's Economic and Monetary Affairs Committee ("ECON") voted in favour of proposed amendments to the current draft UCITS V Directive text which included controversial remuneration rules (the "Rules").
In summary, the Rules require management companies to establish and apply remuneration policies and practices (proportionate to the size, nature and complexity of their activities) which cover fixed and variable components of salaries and discretionary pensions benefits.
Key remuneration rules are as follows:
- A bonus cap of 100% of salary (newly introduced)
- At least 50%, of any variable remuneration must consist of units of the UCITS (already in draft UCITS V proposals)
- Deferral of at least 25% of the variable remuneration component, over a period of at least three to five years (unless the life cycle of the relevant UCITS is shorter) (figure reduced from previous figure of 40%)
The Rules apply to specified categories of staff including fund managers, other persons who take investment decisions that affect the risk position of the fund, senior managers and risk takers. Of note, the Rules do not specifically apply to delegate entities appointed by the UCITS management company to carry out investment management activities.
ESMA is to produce remuneration guidelines to ensure the Rules are properly implemented.
Another significant newly introduced provision relates to performance fees. New measures mean that performance fees may only be applied for UCITS that are marketed exclusively to MiFID professional investors and such performance fees will be subject to new detailed requirements regarding calculation and also plain-English prospectus disclosure.
As a next step (and under the EU's ordinary legislative procedure) the revised proposal (including the proposal to cap the bonuses of EU managers) will now go to the full European Parliament which has indicated that it will consider it at its plenary session on 21 May 2013. Further amendments can be made at this stage. If the Council of the EU also accepts the original proposal and the Parliament's amendments (if any) the act is adopted by the Council, then signed by the Presidents of the Parliament and of the Council and published in the Official Journal.
Once published, Member States usually have two years to transpose the provisions into their national law, meaning that UCITS V could apply by the end of 2014 at the earliest (although 2015 is a more likely implementation date).
However, if the Council does not approve all the Parliament's amendments or rejects them, it is then forwarded to the Parliament for its second reading and the legislative process is extended.
The European Commission Delegated Regulations (EU) No 148/2013 to 153/2013 of 19 December 2012 supplementing EMIR (the Regulation on OTC derivatives, central counterparties and trade repositories) were published in the Official Journal on 23 February 2013 and entered into force on 15 March 2013. From 15 March 2013 all counterparties to OTC derivatives contracts that exceed the clearing threshold (which, depending on the type of derivative invested in, ranges from €1bn to €3bn in unhedged exposure) must inform ESMA and their competent authority of that fact. However, first clearing obligations are not expected until summer 2014.
European Commission Delegated Regulation No 149/2013, Article 12.4 states that "financial counterparties shall have the necessary procedure to report on a monthly basis to the competent authority designated in accordance with Article 48 of Directive 2004/39/EC of the European Parliament and of the Council the number of unconfirmed OTC derivative transactions referred to in paragraphs 1 and 2 (in brief all OTC derivatives are captured although different timeframes apply for confirmation of the terms of the transaction depending on the type of derivative and status of counterparties thereto) that have been outstanding for more than five business days."
At this point financial counterparties (which term include UCITS and will also capture AIFs post-AIFMD) do not need to submit such a report unless specifically requested to by the Central Bank. However, it is expected that all impacted financial counterparties will, from 15 March 2013, have the necessary procedures in place to report to the Central Bank when requested to do so.
On 13 March 2013 ESMA published guidance on the recognition of third country central counterparties ("CCPs") under EMIR. On 15 March 2013 it published an opinion annexing draft RTSs on colleges for CCPs as required under EMIR.
On 15 March 2013 it also published a final report containing guidelines and recommendations for national competent authorities ("NCAs") when assessing interoperability arrangements between CCPs. The guidelines will become effective one month after their publication by ESMA on its website in the EU official languages. NCAs must notify ESMA whether they comply or intend to comply, including justification of the reasons for any non-compliance, within two months of publication by ESMA in all EU official languages.
Finally on 20 March 2013 ESMA published a set of questions and answers in order to promote common supervisory approaches and practices in the application of EMIR across the EU. The paper provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of EMIR. The content is aimed at competent authorities to ensure that their supervisory activities are converging along the lines set out in ESMA's responses. It should also help investors and other market participants by providing clarity on EMIR's requirements (for example, it clarifies that a negative affirmation within the prescribed timeframes may be sufficient confirmation of the terms of an OTC derivative contract provided this process is agreed in advance between the parties).
The Presidency of the Council of the EU has published compromise proposals on the MiFID II legislative proposals.
- A compromise proposal, dated 21 March 2013, on the proposed MiFID II Directive.
- A compromise proposal, dated 21 March 2013, on the proposed Markets in Financial Instruments Regulation ("MiFIR").
These proposals follow earlier Council compromise proposals, the most recent of which were dated 1 March 2013. The cover notes for both compromise proposals state that the latest additions and changes to the legislative proposals have been marked up.
The MiFID II legislative proposals will replace and recast the Markets in Financial Instruments Directive (2004/39/EC) ("MiFID").
The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2013 was published on 31 January 2013. Its primary purpose is to amend the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 in order to align certain provisions more closely with international standards and to amend some provisions to reflect operational requirements.
The framework provided for in the 2010 legislation is based on the 3rd EU Money Laundering Directive and the standards set by the Financial Action Task Force ("FATF"). It represented a radical overhaul of the anti-money laundering system which was put in place in the mid 1990's. One of the key features of the 2010 legislation is that it increased the customer due diligence ("CDD") measures which must be taken by the professions and businesses to whom the Act applies, i.e. designated persons such as banks and other financial institutions. The CDD measures involved include identification and verification of customers, monitoring transactions and services and obligations to report suspicions of money laundering or terrorist financing.
In a related development on 5 February 2013 the European Commission published a proposed Directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing. In addition, the Commission has also published a proposed Regulation on information accompanying transfers of funds.
Both proposals take into account the latest recommendations of FATF and provide for a more targeted and focused risk-based approach.
In particular, the new Directive is intended to:
- Improve clarity and consistency of the rules across Member States.
- Extend its scope to address new threats and vulnerabilities.
- Promote high standards for anti-money laundering.
- Strengthen the cooperation between the different national financial intelligence units.
In February 2013, the Central Bank published their programme of themed reviews for 2013. The areas of primary focus for this year include:
the Code of Conduct on Mortgage Arrears; sales incentives in the banking, insurance, investment and stockbroking sectors; provision of information to consumers by investment and stockbroking firms; property insurance claims handling; Retail intermediaries and Moneylenders compliance; outsourcing; post-authorisation application of business plans to delegating UCITS and non-UCITS managers; client assets; review of governance on pricing procedures; data integrity of regulatory returns; and anti-money laundering/countering the financing of terrorism and financial sanctions.
In the investment funds context, the Central Bank is taking more interest in carrying out themed reviews. They have also commenced interviewing directors of investment funds. Preparation for these interviews is key and knowledge of the legal and regulatory environment of the respect investment fund is a prerequisite.
On 20 March 2013, the IFIA submitted its most recent draft Investment Funds Sectoral Guidelines on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing to the Central Bank.
The Central Bank is to respond to these Guidelines shortly.
On 15 March 2013 ESMA published "Questions and Answers on ESMA's guidelines on ETFs and other UCITS issues (December 2012).
The purpose of the Q&A by ESMA is to promote common approaches in the application of the UCITS Directive. Issues covered in the Q&A include:
- Efficient portfolio management techniques;
- Financial derivative instruments;
- Collateral management;
- Financial indices; and
- Transitional provisions in the December 2012 guidelines.
For further details please see our client update, ESMA issues a Q&A on their Guidelines on ETFs and other UCITS Issues
On 23 January 2013 the Central Bank confirmed that they will require Irish UCITS to comply with ESMA's opinion on their interpretation of Article 50(2)(a) which permits UCITS to invest up to 10% of its net assets in transferable securities and money market instruments, other than those eligible assets referred to in Article 50(1) by 31 December 2013.
ESMA's opinion is that Article 50(2)(a) refers only to investments in transferable securities and money market instruments and not to units or shares of collective investment undertakings. In Article 50(1), only sub-paragraphs (a) to (d) include the expression "transferable security" and only sub-paragraph (h) includes the expression "money market instruments". It follows that Article 50(2)(a) provides for a derogation from sub-paragraphs (a) to (d) and sub-paragraph (h) of Article 50(1), and not from sub-paragraph (e).
ESMA's opinion is that UCITS may only invest in units or shares of collective investment undertakings as defined in Article 50(1)(e) of the UCITS Directive.
The Central Bank has updated its UCITS Notices and certain UCITS Guidance Notes. This update reflects changes being made to align the UCITS Notices and Guidance Notes with measures contained in the recent ESMA Guidelines on ETFs and other UCITS issues which were published on 18 December 2012 and became effective (albeit with transition arrangements for certain aspects) on 18 February 2013. Further clarificatory changes were made in revised UCITS Notices issued on 28 March 2013.
For further details on the key changes please see our client update, Update to the Central Bank's UCITS Notices and Guidance Notes
Updated UCITS management company application form and a new application form for UCITS funds established as self-managed investment companies ("SMIC") have been published on the Central Bank's website.
2.7 Disclosure of Interests in other Entities - IFRS 12
The Industry Technical Committee of the Irish Funds Industry Association ("IFIA") has prepared a paper to assist in the preparation of financial statements and particularly the disclosure of interests in other entities as required by IFRS 12.
The Industry Technical Committee of the IFIA has produced a paper to provide practical guidelines for fund administrators with regard to the Central Bank's new regulatory reporting process which is being rolled out over the coming months.
Following engagement with IFIA industry representatives on the Transfer Agency Committee regarding the reporting dates for the Return of Values (Investment Undertaking) Regulations 2013, the Irish Revenue Commissioners has agreed to the industry proposal. In other words, 30 September 2013 is the agreed date for the submission of the first return and 1 January 2014 for the commencement of tax reference number procedures.
The Cayman Islands has passed changes to its Monetary Authority Law to facilitate the marketing of Cayman Islands AIFs in the EU. With these changes in place the Cayman Islands Monetary Authority ("CIMA") stands ready to sign the cooperation agreements with EU regulators required under AIFMD which comes into force on 22 July 2013.
Background on AIFMD and the Cayman Islands
Many US-based managers of Cayman Islands AIFs currently market into the EU using the existing regimes - including national private placement rules ("NPPRs") - in place in the relevant EU countries. In order to continue to do so after 22 July 2013 certain preconditions will need to be met.
Aside from the need for a cooperation agreement between the US Securities and Exchange Commission and the relevant EU securities regulators, one of the main preconditions is for a cooperation agreement to be put in place between CIMA and each of the relevant EU securities regulators where marketing takes place.
ø 0-6pEU-based AIFMs of Cayman Islands AIFs will also require a cooperation agreement between their home EU securities regulator and CIMA.
On 25 March 2013 the Cayman Islands Government issued a press release (the "Release") headed "Cayman Amendment Paves Way for AIFMD Compliance". It highlights that CIMA has been in discussion with ESMA (the pan-EU securities markets authority negotiating the form of the cooperation agreements) since early 2012 and that the passing of The Monetary Authority (Amendment) Law 2013 will allow CIMA to use the ESMA model when entering into additional cooperation agreements with EU securities regulators.
The Release states that CIMA's board of directors has already approved that CIMA may enter into agreements with the relevant EU regulators on the basis of the ESMA model. With 22 July 2013 fast approaching, it is anticipated that ESMA will announce completion of negotiations, and signing of cooperation agreements, with key fund jurisdictions (including the Cayman Islands and the US) in the near future. The Release affirms that the Cayman Islands have taken all necessary steps to be included in that process.
For further details please see our client update, Cayman Stands Ready for AIFMD Cooperation Agreements
On 16 January 2013 ESMA announced that it has approved co-operation agreements between the Brazilian Comissão de Valores Mobiliários ("CVM") and the EU securities regulators for the supervision of AIFs, including hedge funds, private equity and real estate funds.
ESMA has negotiated the agreement with the CVM on behalf of all 27 EU national securities markets regulators. The co-operation arrangements include the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of the respective supervisory laws. They will apply to Brazilian AIFMs that manage or market AIFs in the EU and to EU AIFMs that manage or market AIFs in Brazil.
ESMA is currently negotiating co-operation agreements with other non-EU authorities that are members of IOSCO with a view to having these in place before July 2013.
Under AIFMD, the fund industry from a non-EU country whose securities regulator does not have a co-operation arrangement in place by July 2013 will not be permitted to offer or manage AIFs in the EU.
The European Systemic Risk Board ("ESRB") has published a paper on Recommendations on Money Market Funds – setting out the vision for regulatory reform. As a leading European location for Money Market Funds, the IFIA notes with interest the recommendations from the ESRB with the stated intention of avoiding the build-up of macro-prudential systemic risk. While there is general consensus for the need of additional regulatory reform of Money Market Funds the IFIA stress the global nature of this market and absolute need for a globally co-ordinated and consistent regulatory solution.
In March 2013 Sharon Bowles, chairwoman of ECON tabled amendments to the European Commission's proposal for regulation on a new key information document calling on ESMA to introduce an online fund analyser, similar to that created by FINRA in the US, which would allow investors to calculate the end value of their investment after fees and costs have been taken into account.
It also calls on ESMA to develop an independent online fund calculator which will be included on its website which would allow investors to compute the reward of a proposed retail investment product by entering information on the expected duration of the investment, the amount of the investment, and the assumed underlying investment return in percentage terms in order to determine the end value of the investment after costs.
In February 2013 the Swedish Financial Services Authority (Finansinspektionen) reiterated its changes to its requirements for foreign UCITS marketing into Sweden which require a paying and information agent to be appointed in Sweden.
For further details please see our client update Global Registration Services – Market Update, Q1 2013
On 1 March 2013 the revised Collective Investment Schemes Act ("CISA") and revised Collective Investment Schemes Ordinance ("CISO") came into force. Both contain new rules governing the distribution of foreign collective investment schemes ("foreign CIS") in Switzerland.
For further details please see our client update Global Registration Services – Market Update, Q1 2013
On 14 February 2013 the Belgian Financial Services and Markets Act ("FSMA") published the revised Circular FSMA_2013_05 dealing with the notification procedure for foreign UCITS seeking to market in Belgium pursuant to Directive 2009/65/EC ("UCITS IV Directive"). This revised Circular reflects the Belgian Act of 3 August 2012 and the Royal Decree of 12 November 2012 implementing the UCITS IV Directive into Belgian law.
For further details please see our client update Global Registration Services – Market Update, Q1 2013
On 17 January 2013 the draft bill on investment companies and investment funds was submitted to the Czech Republic Parliament and is awaiting approval. It transposes the provisions of the UCITS IV Directive and AIFMD, as well as setting out a framework for collective investment vehicles similar in type to SICAVs.
Following the implementation of UCITS IV into Swedish law in August 2011, funds are no longer allowed to market on a solicited basis to Swedish investors (whether retail or institutional). The only exception to this is in circumstances where a Swedish investor contacts the fund on their own initiative (without any solicitation). Then the fund sell units to Swedish investors under private placement.
Ireland offers an attractive VAT regime for Irish investment vehicles such as regulated funds, capital markets issuers and financing vehicles. The judgment of the Court of Justice of the European Union ("ECJ") on 7 March 2013 in the Gesellschaft für Börsenkommunikation case provides important guidance on the VAT treatment of advisory services to such entities.
The main points are as follows:
- investment advice relating to a specified investment vehicle can qualify as a VAT exempt service;
- there should be greater scope to structure the provision of advice and investment management in a VAT neutral manner.
For further details please see our client update, Important EU Decision on VAT and Investment Advice
The Irish and US Governments on 21 December 2012 signed an Intergovernmental Agreement ("IGA") in respect of the US Foreign Account Tax Compliance Act ("FATCA") which will be implemented by the Finance Act 2013. FATCA requires foreign financial institutions ("FFIs") to report information on accounts held by US persons (individuals and entities) and US owned foreign entities.
Other countries that have signed IGA or are about to sign them are the UK, Mexico, Norway, Denmark, Netherlands, Germany, Spain, France, Italy and Canada.
As a result of the IGA; investment funds domiciled in Ireland do not need to enter into FATCA reporting agreements directly with the US Inland Revenue Service. Instead, they will be required to register as FFIs with the Irish Revenue Commissioners and can report directly in respect of their US-resident unit holders/shareholders.
The Revenue Commissioners are expected to produce draft regulations and guidance shortly on how FATCA requirements will operate in practice.
4.1 Prospectus Directive Update: Specific Situations that Require the Publication of a Supplement to the Prospectus
This ESMA consultation paper sets out a draft RTS concerning situations that require the systematic publication of a supplement to the prospectus which ESMA is obliged to develop in accordance with Article 16(3) of the Prospectus Directive. The listed situations are concrete examples of the general obligation in Article 16(1) to mention in a supplement every significant new factor, material mistake or inaccuracy relating to information included in the prospectus which is capable of affecting the assessment of the securities.
ESMA believes that the test whether a new factor, mistake or inaccuracy qualifies as a triggering event for producing a supplement is the same test as whether information should be included in the prospectus. As a consequence, significance or materiality should be assessed according to the same qualitative and/or quantitative criteria used when drafting the prospectus. In light of this, ESMA has identified a short list comprising 10 situations, which will always require issuers, offerors or persons asking for admission to trading to draw up and publish a supplement to the prospectus.
The paper includes a draft RTS setting out the situations that would require a systematic publication of a supplement as well as the minimum content of such a supplement.
Responses to the consultation are requested by 14 June 2013.
© Maples and Calder 2013
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.