FUNDS QUARTERLY LEGAL AND REGULATORY UPDATE
UCITS
(i) ESMA publishes updated questions and answers paper on the application of the UCITS Directive
On 5 April 2016, the European Securities and Markets Authority ("ESMA") published an updated version of its questions and answers paper on the application of the UCITS Directive (the "Q&A") following the implementation of the UCITS V Directive. The purpose of the Q&A is to promote common supervisory approaches and practices in the application of the UCITS Directive and its implementing measures. The updated Q&A consolidates into a single document all Q&As relating to the UCITS Directive. All previous Q&As published by ESMA relating to the UCITS Directive have therefore been repealed and replaced by the updated Q&A.
A copy of the Q&A can be found at the following link:
https://www.esma.europa.eu/sites/default/files/library/2016-181_ qa_ucits_directive.pdf
(ii) ESMA publishes discussion paper on UCITS share classes
On 6 April 2016, ESMA published a discussion paper on UCITS share classes (the "Discussion Paper") following on from its earlier consultation in December 2014 on different share classes of UCITS.
ESMA is now proposing the development of a common framework throughout the EU for the operation of share classes within UCITS based on a series of high level principles to be followed when setting up different share classes together with a set of supporting operational principles.
The high level principles are:
Common investment objective – share classes of the same fund should have a common investment objective reflected by a common pool of assets;
Non-contagion – UCITS management companies should implement appropriate procedures to minimise the risk that features, which are specific to one share class, could potentially adversely impact on other share classes of the same fund;
Predetermination – all features of the share class should be predetermined before it is set up; and
Transparency – differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.
The full text of the Discussion Paper may be accessed via the following link:
Dillon Eustace has prepared an article on the Discussion Paper, a copy of which may be accessed via the following link:
On 3 June 2016, Dillon Eustace filed its response to ESMA on the Discussion Paper (the "Response"). The Response focused exclusively on the subject of interest rate risk hedged share classes for UCITS funds, in respect of whom the firm advises.
The Response outlines:
- How interest rate hedged share classes are consistent with ESMA's views on the principle of share classes sharing a "common investment objective";
- How interest rate hedged share classes can operate within the traditional framework and parameters set out in the Discussion Paper which is designed to minimise cross-contagion risk and establish a level of operational segregation; and
- How interest rate hedged classes can comply with the principle of predetermination.
On 23 June 2016, ESMA published all responses it received on the Discussion Paper. In total, twenty-three responses were received and may be accessed via the following link:
https://www.esma.europa.eu/press-news/consultations/discussion-paper-ucits-share-classes
(iii) ESMA issues guidelines compliance table on exchange-traded funds ("ETFs") and other UCITS issues (the "Compliance Table")
On 12 April 2016, ESMA published a Compliance Table which provides details of the national competent authorities ("NCAs") who either comply or intend to comply with ESMA's guidelines on ETFs and other UCITS issues for NCAs and UCITS management companies (the "Guidelines").
All NCAs have stated that they either comply or intend to comply with the Guidelines. Additionally, the Financial Services Commission (Gibraltar), FMA (Liechtenstein) and Finanstilsynet (Norway) have also stated that they comply with the Guidelines.
The Compliance Table is available at the following link:
(iv) Use of past performance data of a merging UCITS sub-fund in KIIDs of a receiving UCITS sub-fund
In March 2015, ESMA published an updated questions and answers paper in relation to the key investor information document ("KIID") for UCITS (the "Q&A").
Question 4g in the Q&A clarified that where a receiving UCITS is a newly established UCITS with no performance history, the UCITS should use the past performance of the merging UCITS in the KIID of the receiving UCITS provided the competent authority of the receiving UCITS reasonably assesses that the merger does not impact the UCITS' performance. The performance of the UCITS is deemed to be impacted, in circumstances where there is, inter alia, a change to the investment policy or to the entities involved in the investment management. It should also be made clear in the KIID of the receiving UCITS that the performance is that of the merging UCITS.
Where an Irish UCITS wishes to avail of this clarification provided by ESMA, an email should be sent to the Central Bank of Ireland (the "Central Bank") via ucitsmergers@centralbank.ie seeking a confirmation of no objection.
We are aware that the Central Bank has recently provided a confirmation of no objection to the use of past performance of a Luxembourg merging UCITS in the KIID of a newly established receiving Irish UCITS.
(v) Irish Funds UCITS Rulebook Working Group
Irish Funds have established a UCITS Rulebook Working Group (the "Working Group") which is responsible for looking at issues arising from the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the "CBI UCITS Regulations") and some other miscellaneous issues affecting Irish UCITS from an industry perspective. The CBI UCITS Regulations replaced the UCITS Notices with an aim to consolidate into one document all of the conditions imposed by the Central Bank on UCITS, their management companies and depositaries.
On 22 April 2016 the Working Group submitted a list of issues which have arisen since the implementation of the CBI UCITS Regulations to the Central Bank for its consideration and has advised that is shall be maintaining a "live" list of issues going forward, which takes into consideration any changes arising as a result of amendments to the CBI UCITS Regulations.
(vi) Central Bank publishes updated UCITS Q&A document
On 2 June 2016 the Central Bank published an updated UCITS Q&A document (the "Q&A"), setting out answers to queries likely to arise in relation to UCITS. Additions to the Q&A list, published on the Central Bank's website, include ID 1064, ID 1065 and ID 1066, respectively.
ID 1064 confirms that over-hedged positions arising as a result of share class hedging must be taken into account when calculating leverage (in the case of UCITS using VAR), counterparty risk and concentration exposures.
ID 1065 and 1066 relate to the conversion of certain regulated entities to a designated activity company ("DAC") under the Companies Act 2014 (the "Companies Act") and confirms that regulated entities other than credit institutions and insurance undertakings are not required to re-register as a DAC. Should any regulated entity re-register as a DAC, they are required to file a copy of the certificate of incorporation with the Central Bank.
A copy of the Q&A may be accessed via the following link:
(vii) Central Bank publishes its final consultation paper on Fund Management Companies
In June 2015, the Central Bank published its feedback statement on Consultation Paper CP 86: Consultation on Fund Management Company Effectiveness – Delegate Oversight ("CP 86").
In the 'Next Steps' section of the statement the Central Bank outlined its plans to publish additional publications to provide guidance to fund management companies on matters including:
- Delegate Oversight;
- Organisational Effectiveness;
- Directors' Time Commitments;
- Managerial Functions;
- Operational; and
- Procedures
On 4 November 2015, the Central Bank published its first publication setting out guidance for fund management companies which covers the first three areas listed above.
On 2 June 2016, the Central Bank published its third and final consultation on fund management company effectiveness which deals with the areas listed at 4-6 above. The paper is entitled "Consultation on Fund Management Company Effectiveness – Managerial Functions, Operational Issues and Procedural Matters" (the "Consultation Paper").
As was the case for CP 86 and the feedback statement, the term "fund management company" includes a UCITS management company, an authorised alternative investment fund manager ("AIFM"), a self-managed UCITS investment company and an internally managed authorised alternative investment fund ("AIF").
The Consultation Paper focuses on the following areas:
- Governance – the manner in which the directors of fund management companies should perform their roles and guide the company;
- Compliance – the manner in which designated persons carry out their managerial functions for the fund management company; and
- Supervisability – the capacity of the Central Bank to engage with the fund management company (including access to its records, directors and designated persons).
The Central Bank is of the view that a fund management company which has good structures and procedures in place around these three areas has a level of substance which can enhance investor protection.
Some of the commentary and draft guidance contained within the Consultation Paper would be in line with what may have been expected, based upon the consultations and guidance issued by the Central Bank to date. However, it also confirms a number of important points, some of which have not been addressed previously, namely:
- Organisational effectiveness – the Central Bank had confirmed that fund management companies authorised on or after 1 November 2015 should not delay implementing the requirements in relation to the organisational effectiveness role as outlined in Part II of its Fund Management Companies Guidance of November 2015;
- Location of directors and designated persons – the
Central Bank is proposing the following new rules around the
location of directors and designated persons:
A fund management company which has a PRISM impact rating of "Medium Low" or above will be required to have at least:
- Three Irish resident directors or at least two Irish resident directors and one designated person based in Ireland;
- Two thirds of its directors based in the EEA; and
- Two thirds of its designated persons based in the EEA.
- Two Irish resident directors;
- Two thirds of its directors based in the EEA; and
- Two thirds of its designated persons based in the EEA.
- Transitional period – the Central Bank is expected to provide a transitional period of one year following completion of the consultation process for fund management companies to comply with the new rules and guidance .
The closing date for submissions on the Consultation Paper is Friday 26 August 2016.
A copy of the Consultation Paper may be accessed via the following link:
Dillon Eustace has published an article on CP 86 which may be accessed via the following link:
(viii) Central Bank publishes consultation on amendments to the CBI UCITS Regulations
On 2 June 2016, the Central Bank issued a consultation paper on a second set of amendments to the CBI UCITS Regulations entitled "CP 105: Consultation on Amendments to the CBI UCITS Regulations" (the "Consultation Paper").
The Consultation Paper seeks feedback on proposed amendments to the CBI UCITS Regulations relating to the implementation of UCITS V into Irish law and certain other technical changes which have been identified by the Central Bank and the Irish funds industry following the introduction of the CBI UCITS Regulations. In addition, stakeholders are also encouraged to consider whether any amendments to the CBI UCITS Regulations other than those set out in the Consultation Paper may be required.
The closing date for submissions on the Consultation Paper is Friday 26 August 2016.
A copy of the Consultation Paper is available here:
(ix) Central Bank UCITS (Amendment) Regulations 2016
On 8 June 2016, the Central Bank issued the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) (Amendment) Regulations 2016 (the "Amending Regulations").
While the majority of the changes being made to the CBI UCITS Regulations via the Amending Regulations are to correct clerical errors which have been identified in the original legislation since implementation and to ensure consistency with other recently enacted UCITS legislation, the Amending Regulations also include the following:
- An obligation on UCITS management companies to ensure their remuneration policies and practices are consistent with the ESMA Guidelines on Sound Remuneration Policies under the UCITS Directive and AIFMD;
- Clarification that UCITS established as self-managed investment companies shall be required to put in place an organisation effectiveness role; and
- Clarification that UCITS management companies and self-managed investment companies shall be required to comply with (i) the new managerial functions set out in Schedule 10 of the CBI UCITS Regulations and (ii) the obligations to create an organisational effectiveness role by 30 June 2017 (rather than 30 June 2016 as provided in the original legislation) or such other date as may be specified by the Central Bank.
A copy of the Amending Regulations may be accessed via the following link:
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