Important Enhancements to Ireland’s AIF Regime in Advance of AIFMD
The Central Bank of Ireland (“CBI”) has issued a consultation paper (the “Consultation Paper”) detailing major changes to the regulatory regime for Irish non-UCITS funds in advance of the implementation of the Alternative Investment Fund Managers Directive (“AIFMD”)1.
The consultation will be of significant interest to anybody currently promoting or managing Irish non-UCITS funds (including retail non-UCITS, PIFs2 or QIFs3). It will also be relevant to parties looking to structure funds or choose a fund domicile in advance of AIFMD.
While AIFMD is primarily aimed at creating a regulatory and supervisory regime for alternative investment fund managers (“AIFMs”), it also includes all non-UCITS funds (“AIFs”) within its scope (unless they are otherwise exempt). The CBI therefore views AIFMD as presenting a timely opportunity to redesign the current framework for the regulation of Irish AIFs.4
The redesign of the Irish AIF regime is only one part of a wider AIFMD project to enhance Ireland’s position as the leading EU domicile for AIFs. Further steps in this process will see implementation of the “Level 1” AIFM Directive into national law well in advance of next July’s deadline, the amendment of Irish domestic fund laws to comply with AIFMD and a series of enhancements to existing Irish AIF structures (including in relation to a “check the box” corporate fund and an improved investment limited partnership).
The Irish industry is also playing an active role in final discussions on the AIFMD Level 2 Regulations which are expected to issue shortly.
Overall Approach of the CBI
The CBI is proposing a redesign of the existing AIF regime to achieve the following outcomes:
- Optimal reliance on EU regulatory requirements as set out in AIFMD and hence no unnecessary duplication of regulation at national level in Ireland. The new regime is specifically designed to take account of, and be complimentary to AIFMD rather than engaging in unnecessary “gold-plating”;
- The creation of a higher risk AIF option as an alternative to the existing UCITS option for retail investors. The existing Irish retail AIF had in some respects been superseded by improvements in the UCITS product. The new changes will enhance the appeal of the retail AIF and permit some different options when compared to UCITS (e.g. on eligible assets and minimum liquidity frequencies). While we believe that UCITS will remain an EU gold standard, it is interesting to note the extent of the retail AIF upgrade, particularly as AIFMD permits Members States’ discretion to allow marketing of AIFs to retail investors.
- The elimination of regulations on QIFs which are not adding substantially to the protection of investors. This area of change is one of the most significant announced in the Consultation Paper. Material amendments are being made to core concepts impacting on Ireland’s flagship alternative fund product. A summary of the main changes is set out below under “Key Changes”;
- The application of the AIFMD depositary regime to all authorised AIFs, including those with AIFM below the thresholds. Prior to AIFMD, the Irish funds regime had seen the requirement for a depositary as a fundamental prerequisite for all authorised funds. The CBI has indicated that this is likely to continue although it is specifically highlighted for discussion in the Consultation Paper.
These general principles manifest themselves in important changes for existing Irish AIFs or anybody looking to establish AIFs in the future.
Who is Affected?
The new regime will affect all non-UCITS investment funds and investment fund managers currently established in Ireland under the following pieces of domestic legislation:
- Unit Trusts Act, 1990;
- Companies Act, 1990 Part XIII;
- Investment Limited Partnerships Act, 1994;
- Investment Funds, Companies and Miscellaneous Provisions Act 2005.
Retail non-UCITS funds, PIFs and QIFs will be significantly affected. It is also interesting to note that AIFMD has a wider scope than the current Irish non-UCITS authorised fund regime. The CBI has specifically flagged that other categories of funds may be caught, e.g. the “Exempt Unit Trust” regime, and that it will need to transition the AIFMD and non-AIFMD regimes carefully.
There are also several areas in the Consultation Paper, highlighted by the CBI, that intend to deviate from the minimum requirements of AIFMD, e.g. master-feeders, the regulation of AIFMs below the €100m/€500m AUM threshold etc.
As a result, it is important that you understand the impact of the proposed changes on all categories of Irish AIFs, and respond as relevant, or contact your usual Maples and Calder lawyer to discuss.
New Categories of Regulated AIFs
It is proposed that the current QIF regime will be replaced with a new Qualifying Investor Alternative Investment Fund ("QIAIF") regime.
For retail investors in non-UCITS products, a separate Retail Investor Alternative Investment Fund ("RIAIF") regime will be created.
The existing PIF regime has been in decline for a number of years (owing largely to the improvements in the QIF) and will be phased out. No new PIF structures will be authorised but the CBI will consider allowing existing PIFs to establish new sub-funds. If you currently promote or manage a PIF, it is important to note this and respond to the Consultation Paper.
Consolidation of the Rulebook
The CBI’s current non-UCITS requirements are somewhat fragmented and are set out in the NU Notices, related Guidance Notes and a series of Policy Letters. The CBI intends to consolidate all of these sources and replace them with a single “AIF Handbook” made up of the following chapters:
- RIAIF Requirements;
- QIAIF Requirements;
- AIFM Requirements;
- AIF Management Company Requirements;
- Fund Administrator Requirements; and
- AIF Depositary Requirements.
Draft versions of each of these chapters form part of the CBI Consultation Paper. The CBI is inviting feedback on the specific text of these chapters but also on the overall change in format.
The aim is that the AIF Handbook will be a more user-friendly document, as it will seek to eliminate previous duplication (across Notices, Guidance Notes and Policy Papers) and texts where the understanding was unclear. The overall move is towards a simpler regime specifying “certain things which must be done and things which may not be done”.
If adopted, the CBI also believes that the AIF Handbook will be an organic document and capable of periodic updates. (It has already flagged a number of areas, including loan funds, which it intends to look at after the consultation).
Removal of the Promoter Regime
The CBI intends to remove the current promoter regime based for RIAIFs and QIAIFs, taking into account the obligations on the AIFM and a new framework for directors of Irish AIFs or management companies.
The removal of the promoter regime is likely to be welcomed by many managers seeking to set up AIFs in Ireland. While it had acted as a “quality threshold” for entry into the Irish market, the prudential safeguards will largely be maintained under the new AIFMD regime. The removal of the Irish minimum capitalisation requirement (€635,000 net shareholder funds test) will also facilitate managers from jurisdictions where there was no equivalent (e.g. U.S. managers).
QIAIF Product Enhancements
There are number of specific QIAIF changes including:
- greater flexibility to differentiate between investors in the same fund/sub-fund by using share classes (e.g. different liquidity, asset allocations or excuse and exclusion provision for prohibited investments) provided investors are treated fairly. The ability to have differing liquidity within the same “pool” is something which the Irish industry has been seeking for some time;
- enhanced borrowing provisions including permission to engage in bridge financing transactions, which will be particularly welcomed by private equity managers;
- removal of the Irish prime brokerage rules, OTC counterparty criteria and credit rating criteria. The Irish regime will instead rely on the AIFMD requirements for the appointment of prime brokers and in the current climate of volatile credit ratings. This will be very useful for managers in selecting and monitoring counterparties; and
- permission for open-ended QIAIFs to purchase assets and immediately place these in side-pockets. This feature will be particularly useful in the context of distressed or illiquid asset funds.
There are also a large number of changes to existing Notices and Guidance Notes in relation to QIAIFs. Most of the specific QIF “product” category rules are removed in favour of prudential rules applicable to all types of QIAIFs. Specifically the following Notices and Guidance Notes have been removed:
- Property fund restrictions;
- Private equity and venture capital fund restrictions;
- Futures and options and leverage futures and options schemes;
- EPM restrictions; and
- Guidance for multi-advisor funds, as set out previously in GN1/97.
The Consultation Paper
Please click here to obtain copy of the Consultation Paper.
All stakeholders are invited to provide comments on the draft AIF Handbook and on the questions raised in it. The deadline is 11 December 2012, and you can respond by:
- contacting your usual Maples and Calder lawyer to provide feedback and comments for an overall response we will be preparing on behalf of clients and colleagues; or
- sending your responses directly to the CBI. The relevant contact details are set out in full in the Consultation Paper (available via the above link).
Transitional Arrangements and Timing
The CBI intends to issue an interim AIF Handbook once the consultation is complete and conduct a technical examination of the interim AIF Handbook to refine drafting. It is the CBI’s current intention that interested parties should be able to rely on the interim AIF Handbook that is issued in response to this consultation as a guide to the proposed post-AIFMD regulatory framework in Ireland.
Therefore, existing AIFs regulated under the regime outlined in this Consultation Paper will automatically move to being regulated under the new AIFMD regime. Obligations which are removed will automatically cease on the implementation date and the new requirements (including any additional rules) will come into force. While this will cover the regulatory impact of the new Irish regime, AIFMs and AIFs will need to take account of additional actions and prior notice periods for obtaining investor consent to move to the new regime.
The publication of the AIF Handbook will not imply any finalisation of the Irish rules and the CBI will continue the process of dialogue with interested parties up to, and after, implementation of AIFMD.
Maples and Calder and AIFMD
Our lawyers have been monitoring the development of AIFMD since the outset; and our Partners have been advising industry bodies, regulators and government departments on implementation in key onshore and offshore jurisdictions - the British Virgin Islands, the Cayman Islands and Ireland.
With regard to the specific Irish changes, Peter Stapleton has been working closely with the Irish industry task force leading the industry pre-consultation process. Our other Dublin based Partners (listed above) hold roles on the IFIA Council and committees engaged in AIFMD discussion on an Irish and EU level.
While this client update relates to Irish funds, we intend, in due course, to send out further updates on Cayman Islands and British Virgin Islands funds as part of our overall information update to clients and colleagues in advance of AIFMD coming into force.
1 Directive 2011/61/EU.
2 Professional Investor Funds.
3 Qualifying Investor Funds.
4 The Central Bank’s approach to regulation is in line with AIFMD, e.g. Recital 10 provides: “This Directive does not regulate AIFs. AIFs should therefore be able to continue to be regulated and supervised at national level.”