Ireland: Changes To The Irish Qualifying Investor Fund Regime

1. Introduction

Following a process of consultation between the Irish Financial Regulator and the Irish Funds Industry Association ("IFIA"), a number of important positive changes have now been introduced to the regime for the authorisation and regulation of Qualifying Investor Funds ("QIFs").

2. QIFs - Background

A QIF is a non-UCITS product regulated in Ireland by the Financial Regulator which can be structured as an investment company, unit trust, investment limited partnership or common contractual fund (single portfolio or umbrella with segregated liability). QIFs have a minimum subscription requirement per investor of €250,000 (or equivalent) and can be sold only to qualifying investor individuals with a minimum net worth of €1.25 million (excluding principal private residence/contents) or institutions who own or invest on a discretionary basis at least €25 million (or are themselves owned by qualifying investors).

The Financial Regulator will authorise a QIF for marketing to investors one business day after the submission of formal approval documents. The approval documents are submitted on a self-certification basis and promoters and their legal advisors must confirm they meet legal and regulatory criteria.

QIFs structures give promoters the opportunity to use Irish regulated investment vehicles for a complete range of different fund types depending on the requirements of their targeted investors. The absence of investment and borrowing restrictions and immediate authorisation process means that QIFs are the vehicles which are most frequently used in the alternative investment space - hedge funds, fund of hedge funds, venture capital/private equity, real estate funds, etc - and are a mainstay of the non-UCITS Irish domiciled product offering.

These latest changes to the regime and revised regulatory provisions relating to QIFs are further evidence of the ongoing steps being made by the Irish investment funds industry to provide a dynamic environment for regulated funds.

It is anticipated that these changes, which are summarised below, will enhance Ireland's appeal as a domicile for a broad range of investment funds.

3. Summary of Changes

Investment in Collective Investment Schemes – Increased Limits and Changes to Disclosure Requirements

A QIF fund of funds is now permitted to invest up to 50% of its net assets in any one unregulated collective investment scheme. This represents an increase from the previous 40% limit, contained in Guidance Note 1/01. Consequently, a QIF which is a fund of funds may invest up to 100% in unregulated collective investment schemes, subject to a limit of up to 50% of its net assets in any one unregulated collective investment scheme.

Additionally, a QIF will only be considered to be a feeder fund (and therefore subject to the prospectus disclosure requirements, outlined in Non-UCITS Notice 22, paragraphs 2 and 3) if it has as its principal objective the investment in another single fund.

The net effect of this is that a QIF will be permitted to invest above 50% in a regulated collective investment scheme and, provided investment in such scheme is not its principal investment objective, it will be able to do so without being required to (i) give details on the underlying fund in its prospectus; (ii) attach the underlying fund's accounts to the fund's accounts; (iii) disclose in the prospectus details of the relationship between the fund and the underlying fund; or (iv) give details of fees and expenses the fund will incur as a result of its investment in the underlying fund. Investment in such underlying fund will remain subject to the requirements, outlined in Non-UCITS Notice 22, paragraphs 4 and 5, that the manager of the underlying fund waives any subscription charge for the fund's investment and that the manager of the fund repays to the fund any commission received by it due to the fund's investment in the underlying fund.

Feeder Funds – Unregulated Underlying Funds – Criteria and Fast-Track Procedure

The Financial Regulator generally prohibits Irish authorised funds from feeding into unregulated funds. However, it has provided for a regime whereby a derogation may be granted from that general prohibition for QIFs in very limited circumstances.

Where a QIF fund of funds aims to invest more than 50% in one unregulated collective investment scheme such a derogation will be required.

Section D of Annex 1 of Guidance Note 1/01 outlines the criteria for obtaining this derogation. This focuses on, inter alia, the size, track record and assets under management of the promoter, includes a requirement that the Irish feeder fund and unregulated master fund are managed within the same group and requires that the underlying unregulated fund complies with certain rules similar to those that apply to QIFs (for example independent custody and requiring an annual audit).

Section D has been revised to give further guidance on the criteria for acceptable promoters of such feeder funds and the criteria for suitable underlying unregulated funds. This incorporates guidance previously contained in a letter from the Financial Regulator to the funds industry representatives of 2nd June, 2006.

Regarding promoters, revised Section D now discloses that the promoter group should have capital in excess of €100 million, assets under management at least in the region of €4 billion and have carried out asset management activity for a minimum of ten years. Regarding the underlying funds,Section D now outlines that the prime broker/financing counterparty arrangements of the underlying unregulated fund must meet the corresponding requirements imposed on Irish funds.

Section D also outlines additional requirements that must also be met where the underlying unregulated fund is a fund of funds. Section D has also been revised to set out further details on the Derogation Request Procedure, This also incorporate guidance previously contained in the letter to the funds industry.

A QIF which has previously obtained a derogation, and is seeking a further derogation on the same basis, will now be able to avail of a fast-track procedure. Under this procedure a formal derogation request is made by the manager or investment manager of the QIF (confirming that the derogation is sought on the same basis as a previously granted derogation). If the derogation relates to a fund other than the fund involved in the original derogation, this fund's offering document must be submitted to the Financial Regulator as part of the derogation request. A response will be received from the Financial Regulator in five working days (provided no issues are identified as a concern on review of the offering document).

Risk Spreading for Investment Companies

Section 253(2)(a) of the Companies Act, 1990 (as amended) requires QIFs structured as investment companies to spread investment risk. Guidance Note 1/07 now outlines that the Financial Regulator does not impose diversification limits to apply this principle and that it is the responsibility of the directors of each investment company to ensure this obligation is met.

Interim Financials

QIFs structured as investment companies or investment limited partnerships will no longer be required to publish and file semi-annual accounts with the Financial Regulator. This has been reflected in an updated version of Non-UCITS Notice 24 (amending Non-UCITS Notice 11).

It should be noted that some existing funds' constitutional documents may impose an obligation to prepare and file semi-annual accounts with the Financial Regulator. Such funds will be required to continue to meet this obligation until their constitutional documents are amended.

This requirement shall continue to apply to unit trusts and common contractual funds due to specific legislative requirements to this effect. It is expected the disapplication of these legislative requirements will be sought in due course. It is also expected that a similar derogation will be sought from the Irish Stock Exchange requirements in this respect.

Limited Liquidity Funds

A limited liquidity fund is a fund that offers voluntary redemption facilities on a less than quarterly basis. Previously, a QIF that was considered to be a limited liquidity fund was required to indicate on the cover of its prospectus that it was a limited liquidity fund. The requirement to make this disclosure on the cover of the prospectus will no longer apply. Guidance Note 1/07 has been amended to reflect this.

The Financial Regulator will now permit a QIF to disclose, on the cover of its prospectus, that it is "openended with limited liquidity", if it offers voluntary redemption facilities less than quarterly but at least annually.

The limited nature of redemption facilities must be clearly disclosed in the QIF's prospectus.

Share Class Prospectuses

A QIF will now be permitted to issue a separate prospectus in relation to a share class within a QIF or a sub-fund thereof, provided that the existence of other share classes is clearly outlined to investors. The directors of the QIF or the management company or the QIF's legal advisers must confirm to the Financial Regulator that the share class prospectus is consistent with the other prospectus(es) of the QIF (except regarding share class specific information). The prospectus cover must state whether the prospectus relates to the fund as a whole, a sub-fund or a class.

Issue of Debt Securities by a QIF

The Financial Regulator will not permit a QIF to raise capital from the public through the issue of debt securities but will permit a QIF to issue notes on a private basis to a lending institution to facilitate financing arrangements, provided details of such issue are clearly disclosed in the QIF's prospectus. This is provided for in Guidance Note 1/07.

Warehousing

A clarifying amendment has been made to Guidance Note 1/07 to provide that assets acquired under a warehousing arrangement may be acquired at market value or cost price (if lower than the current market value). Details of any proposal to acquire assets pursuant to a warehousing arrangement, including details of fees payable, must be fully disclosed.

Naming Requirements – Distributor

Guidance Note 1/07 has been amended to remove the requirement that any exclusive distributor whose name is used, in conjunction with the name of the promoter, in the title of a QIF, or sub-fund thereof, must be wholly owned by the promoter or its parent.

Conversion of a Professional Investor Fund ("PIF") to a QIF

While not specifically included in the changes to the Notices and Guidance Notes, the Financial Regulator has recently indicated that a PIF will now be permitted to convert to QIF status once it has met the following requirements:

i. the conversion is approved by not less than 75% of the votes cast in person or by proxy at the general meeting, and the votes in favour represent more than half the total number of shares;

ii all shareholders participating in the conversion process must meet qualifying investor criteria and make QIF shareholder status confirmations to the fund prior to the conversion taking place;

iii all shareholders who do not make QIF shareholder status confirmations to the fund, will have their shares redeemed prior to the conversion taking place (this will include shareholders who vote against the conversion and non-responding shareholders).

4. Revised Financial Regulator Documentation

Guidance Note 1/01, Guidance Note 1/07, Non-UCITS Notice 24 and the QIF Application Form have been revised to reflect the changes discussed above, as appropriate, and the updated documents will shortly be available on the Financial Regulator's website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.