Background

Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD) will come into effect on 22 July 2013. This will have significant implications for the managers (AIFMs) of alternative investment funds (AIFs) and for the AIFs themselves. On 30 October the Central Bank of Ireland issued a consultation paper (CP 60) on proposed changes to its regulatory regime to address the requirements of AIFMD. The purpose of this briefing is to provide a summary of some of the key points to consider.

Structure of the new regulatory regime applicable to non-UCITS funds

At present there are three categories of regulated non-UCITS funds in Ireland: retail non- UCITS, professional investor funds (PIFs) and qualifying investor funds (QIFs). The Central Bank's current requirements are set out in the Non-UCITS Notices and related Guidance Notes. These apply to varying degrees, depending on the category of fund in question. For example, in the case of QIFs, the application of the Notices and Guidance Notes is modified or disapplied to a significant extent.

It is proposed to replace all of the Notices and Guidance Notes with a single "AIF Handbook", comprised of the following six chapters:

  1. Retail Investor AIF (RIAIF) Requirements;
  2. Qualifying Investor AIF (QIAIF) Requirements;
  3. AIFM Requirements;
  4. AIF Management Company Requirements;
  5. Fund Administrator Requirements; and
  6. AIF Depositary Requirements.

Proposed changes to the regime and specific questions for consideration

It is proposed that a number of significant changes will be made to the regulatory regime. In addition, the Central Bank has asked for stakeholders' views on a number of specific proposals.

Abolition of promoter regime

The Central Bank has previously placed significant reliance on the promoter to underpin the formal regulatory regime by ensuring that only sizable entities with relevant experience and resources could establish AIFs in Ireland. The Central Bank now proposes to eliminate the promoter approval process and place reliance instead on the AIFM, taking into account the obligations on AIFM which the AIFMD imposes. For this to work, the Central Bank is proposing to clarify in more detail the obligations of directors in circumstances in which an AIF gets into difficulties.

Change to prime broker requirements

It is proposed that the AIF Handbook prime broker provisions be consistent with the AIFMD requirements and not include additional prime brokerage requirements or counterparty credit rating requirements, such as those previously included in the Central Bank's Prime Broker Guidance Note.

Restriction on investments in multiple unregulated "clone" funds

QIFs authorised under the existing regime are not subject to specific investment and borrowing restrictions. However, in order to avoid circumvention of the Irish regulatory regime, they may not invest more than 50% of net assets in a single unregulated investment fund. The Central Bank is not proposing to change this limit of 50% and, instead, proposes to tighten the regime slightly by adding a provision to prohibit investment in excess of 50% in unregulated investment funds which are identical in terms of management and strategy.

Enhanced ability to create side-pockets

The Central Bank has permitted both QIAIFs and RIAIFs to use share classes in order to side pocket assets which have become distressed, subject to certain safeguards. The Central Bank is considering whether open-ended QIAIF should be permitted to purchase assets and immediately place these in side-pockets. In that case the QIAIF would, in effect, no longer act as an open-ended fund for the totality of the portfolio and investors would lose redemption rights in respect of part of their total holding in the side pocketed classes.

Extended initial offer period for real estate and private equity funds

QIFs authorised under the existing regime are subject to requirements in relation to initial offer periods. In the case of QIFs which are real estate or private equity funds this period can be extended for a period of up to one year. The Central Bank is considering whether this period can be longer, possibly up to 2 years, provided that the arrangement and the terms to apply to investors who invest after the investment strategy has been initiated are both clearly outlined at the commencement of the capital raising period.

Discontinuance of PIF regime

The Central Bank is proposing to discontinue the professional investor fund (PIF) regime. This will mean that no new PIF structures will be authorised but the Central Bank will consider allowing existing PIFs to establish new sub-funds. The Central Bank has asked for stakeholders' views concerning the grandfathering provisions which should apply to PIFs.

Increased flexibility for retail non-UCITS funds

The proposed RIAIF Requirements 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. In addition, it is proposed that RIAIF be permitted to have at least the same ability to invest in derivatives that UCITS now have following UCITS III.

Loan funds

QIFs are currently permitted to invest in loans on the secondary market only (e.g., by way of loan assignments or participations). The Central Bank has indicated that in 2013 it proposes to look at the question of lending by QIAIFs (i.e., investing in loans on the primary market), which is currently prohibited.

Application of AIFMD to below threshold AIFMs and AIFs

Where an AIFM falls below the thresholds specified in the AIFMD1 it is not required to be authorised but must meet with registration requirements. Details of the registration procedure which will apply will be set out by the Central Bank at a later stage. However, the Central Bank considers that RIAIFs and QIAIFs "should be subject to all AIFMD requirements as they are authorised investment funds". This statement is open to question and needs to be assessed in light of the detailed rules proposed by the Central Bank as AIFMD seeks to regulate managers of AIFs not the AIFs themselves (except in the case of "internally-managed AIFs").

In the event an AIFM of an unregulated investment fund does not fall below the thresholds, or wishes to "opt in" to the full AIFMD regime as is permitted, the chapters of the AIF Handbook in relation to the AIFM and Depositary will apply.

Exempt unit trusts

The Central Bank notes that "exempt unit trusts" are not currently subject to the domestic regulatory regime although, as AIFs, they will be subject to certain requirements under the AIFMD. Where the AIFM of the exempt unit trust falls below the de minimis thresholds (see above) the AIFM will be subject to registration requirements. If the AIFM is above the threshold, the full AIFMD regime will apply. The Central Bank states that it will in the near future look at the option of extending the domestic regulatory regime to exempt unit trusts.

Transitional arrangements

The Central Bank advises that AIFs which hold an authorisation under the current regime must consider the impact of AIFMD implementation and this new domestic regime on them. In particular, the identity of the AIFM must be decided in the case of each AIF and consideration given to the need to update AIF documentation, including any changes necessary to reflect changes to contractual arrangements. All existing AIFs regulated under the regime outlined in the Consultation Paper will automatically move to being regulated under the AIFMD regime. This means that where an AIF, a manager or a fund service provider has an obligation which will no longer apply under the new regime, that obligation will automatically cease on the date from which the new regime is applicable. Equally, where the regime creates an obligation which did not apply hitherto, that obligation will apply automatically from the date the new regime goes live.

In this regard, the Central Bank has asked for proposals on any transitional measures that it should consider to facilitate an orderly transition for existing non-UCITS investment funds to the new regime.

Timetable

Responses to the consultation should be submitted no later than 11 December 2012. When the consultation process is complete, the Central Bank intends to issue an interim AIF Handbook. Thereafter, the Central Bank will conduct a technical examination of the interim AIF Handbook to refine drafting. However, that technical examination will be separate from the policy review that is now being conducted. It is the Central Bank's 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 Central Bank's proposed post-AIFMD regulatory framework.

Footnotes

1 AIFMD contains de minimis exemptions based on the level of assets under management. It does not require the authorization of AIFM who, together with any affiliates, manage:

  • AIF with total assets, including those acquired through the use of leverage, of less than €100 million; or
  • AIF with total assets of less than €500 million, provided that the AIF are unleveraged and are subject to redemption lock-up periods of at least five years.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.