FUNDS QUARTERLY LEGAL AND REGULATORY UPDATE
Undertakings in Collective Investments and Transferable Securities ("UCITS")
(i) Central Bank publishes UCITS checklist
On 24 May 2018, the Central Bank of Ireland ("Central Bank") published the revised Undertakings for Collective Investment in Transferable Securities ("UCITS") checklist which provides the application forms to be completed where a UCITS seeks to submit their application for authorisation through Orion. The checklist has been updated solely to incorporate new data privacy language.
A copy of the guidelines and application forms can be found here.
(ii) Q&A on the Remuneration Disclosure Requirements under the UCITS Directive
On 25 May 2018, the European Securities and Markets Authority ("ESMA") published an updated version of the 'Questions and Answers – UCITS Directive' ("Q&A") which is the first update since October 2017.
The update adds one new question and answer to section IX – Remuneration on page 39 of the document. The question posed is:
Question 1: Do the remuneration-related disclosure requirements under Article 69(3)(a) of the UCITS Directive also apply to the staff of the delegate of a management company to whom investment management functions (including risk management) have been delegated? The answer is in the affirmative.
For further information please find a copy of the Q&A here.
(iii) Commission proposes Draft Delegated Regulation for safekeeping duties of Depositaries for UCITS and AIFs
On 29 May 2018, following an ESMA Opinion, the European Commission published its draft Delegated Regulations on the safe-keeping duties of depositaries for both UCITS and Alternative Investment Funds ("AIFs") (the "Draft Delegated Regulations").
The Draft Delegated Regulations will provide further clarity on the depositaries safe-keeping duties while increasing investor protection in asset segregation, record keeping, reconciliation frequency and contractual arrangements.
- The UCITS Draft Delegated Regulations
will provide further clarity to the requirements laid down in the
UCITS Directive and supplemented by Delegated Regulation 2016/438
which sets out the safe-keeping obligations of depositary delegates
to UCITS clients' assets.
Having noted diverging application by national competent authorities and market participants in overseeing and implementing obligations on depositories of UCITS client assets, the European Commission proposes via the Draft Delegated Regulation to amend the following Articles 13(1)(c); 13(2); 15; 16; 17(2); 17(3); and 22(3) in the Delegated Regulation 2016/438 in order to clarify further the requirements on depositories of UCITS clients' assets and enable a uniform application of the obligations across the European Union. The UCITS Draft Delegated Regulation can be viewed here. - The Draft Delegated Regulation for
AIFs will provide further clarity on the requirements and
obligations of depositaries in relation to the safe-keeping of AIF
clients' assets as set out in the AIF Managers Directive and
specified further in the Delegated Regulation 231/2013.
The Draft Delegated Regulation for AIFs was prompted by the European Commission's recognition of diverging applications of depositaries' obligations to protect AIF clients' assets by national competent authorities and market participants and proposes to amend the following Articles 89(1)(c); 89(2); 98; and 99 in the Delegated Regulation 231/2013 in order to rectify these shortcomings and enable a uniform application of the obligations across the European Union. The AIFs Draft Delegated Regulations can be viewed here.
(iv) Irish Funds issues responses to Draft Delegated Regulations as regards the safekeeping duties of Depositaries for both UCITS and AIFs
On 26 June 2018, the European Commission published two responses from Irish Funds to proposals on the safekeeping duties of Depositaries for both UCITS and AIFs:
- The first response offered feedback on the proposed amending Delegated Regulation (EU) No 2016/438 regarding safekeeping duties of Depositaries for UCITS funds, available here; and
- The second response offered feedback on the proposed amending Delegated Regulation (EU) No 231/2013 regarding safekeeping duties of Depositaries for AIFs, available here.
The responses focused on the preservation of the Depositary's right to delegate the registration and maintenance of the Depositary's books and records.
Irish Funds stated that it required additional clarity and amendment within the draft Regulations with respect to the following areas:
- Asset segregation, particularly the requirements imposed on Depositary Delegates and Sub-Delegates;
- Reconciliations, particularly with respect to the frequency proposed and how this obligation should be applied in the context of delegation; and
- Contractual requirements and their application to Depositary Delegates and Sub-Delegates.
(v) Irish Funds issues response to Central Bank consultation on UCITS Regulations
On 29 June 2018, Irish Funds published a response to the Central Bank Consultation Paper 119 on amendments to (and consolidation of) the Central Bank UCITS Regulations (the "Regulations").
Irish Funds welcomed the initiative to review the Regulations and the consolidation exercise, and emphasised the need to continue the development of a regulatory framework that is as user friendly as possible.
The Irish Funds response is available here and the Central Bank Consultation Paper 119, published on 29 March 2018, is available here.
Alternative Investment Fund Management Directive ("AIFMD")
(i) Market trends of the AIF industry revealed
On 4 April 2018, unprecedented data outlining the market trends of all AIFs operating within the European Union was published in the ESMA report – 'Trends, Risks, Vulnerabilities, Report No. 1, 2018' (the "Report"). The collection of this data was facilitated by the stringent reporting obligations placed on AIFs and AIF managers ("AIFM") introduced by the AIFMD which came into force in 2013. The Report's findings include that:
- The passport regime is the predominant method of managing cross-border AIFs in the European Union;
- A few large AIFs are currently dominating the market;
- Under the AIFMD AIFs are classified under different types of funds: hedge funds, real estate, funds-of-funds, private equity, "other" or "none". The category "other" is used for 67% of the total assets managed by AIFMs. "Other" is comprised of inter alia fixed income fund, equity fund, infrastructure fund and commodity fund;
- 90% of assets in AIFs are invested using six strategies, including equity funds, infrastructure funds and commodity funds. Of these six, the fixed income fund is most popular comprising 33% of all net asset value ("NAV") with commercial real-estate only accounting for 8% of NAV; and
- AIFs main borrowing source is found to be the reverse repurchase agreement
The data in the Report was gathered for the end of 2016 and covers 60% of AIFs in the European Union. It is the first analysis of the market structure of AIFs in Europe and aims to assist the understanding of potential risks and to inform policy-making processes for AIFs.
The full Report can be found at here.
(ii) Section 13 and 14 forms published by Central Bank for RIAIFs
In May 2018, the Central Bank published two new forms for Retail Investment Alternative Investment Funds ("RIAIF") when filing Risk Management Packages ("RMP") for such entities. The new form under Section 13 is for paper based applications while the form under Section 14 is for Orion based applications.
The Central Bank no longer prior review RMPs for RIAIFs. Instead the following documents should be submitted to the Central Bank for new RIAIFs or where the RMP for an existing RIAIF has been materially amended:
- Signed and dated version of the RMP;
- Filing of the form 13 or 14; and
- RMP cover letter.
For further information on the new forms please find a link to the Section 13 application here and a copy of Section 14 application here.
(iii) Thirtieth Edition of the AIFMD Q&A published
On 4 May 2018, the Central Bank published its Thirtieth Edition of the alternative investment funds managers' directive ("AIFMD") Questions & Answers ("Q&A"). The update comprises of only one change:
- Question ID1083: which relates to loan originating qualifying investor alternative investment funds is amended to include the obligation on providers of business loans to report to the Central Credit Register ("CCR") from 31 March 2018.
A copy of the Thirtieth Edition of the Q&A can be found here.
(iv) The Central Bank publishes RIAIF checklists
On 24 May 2018, the Central Bank published the revised RIAIF checklist which provides the application forms to be completed where a RIAIF seeks to submit their application for authorisation through Orion. The checklist has been updated solely to incorporate new data privacy language.
A copy of the guidelines and application forms can be found here.
(v) Central Bank published QIAIF checklists
On 24 May 2018, the Central Bank published the revised QIAIF checklist which provides the application forms to be completed where a QIAIF seeks to submit their application for authorisation through Orion. The checklist has been updated solely to incorporate new data privacy language.
A copy of the guidelines and application forms can be found here.
(vi) Compromise text to the European Commission's Proposal for a Directive and Regulation on the cross-border distribution of collective investment funds published
On 1 June 2018, the Council of the European Union published two Presidency compromise proposals to the European Commission's proposed directive and regulation on the 'cross- border distribution of collective investment funds. The proposals aim to break down barriers to cross-border investments in Europe by harmonising diverging national rules and increasing transparency. These proposals form part of the European Commission's plan to develop the Capital Markets Union and making distribution simpler, quicker and cheaper for all kinds of investments.
- Directive Proposal
The European Commission published their Directive Proposal on 12 March 2018 with the objective of amending the AIFM Directive 2011/61 and the UCITS Directive 2009/65 to amongst other things harmonise the definition of "marketing" and "pre-marketing" so that the standard marketing communications equally apply to marketing communications for AIFs and UCITS thereby levelling the playing field. Currently there is confusion among fund managers regarding when 'marketing' is deemed to have taken place under the AIFMD leaving them uncertain as to when their obligation to register the fund kicks in.
- Regulation Proposal
The European Commission also published the Regulation Proposal in March 2018 which has the objective of introducing a harmonised framework across Europe for aspects of cross-border distribution funds including in marketing communications, the transparency framework for national provisions on marketing requirements, verification of compliance with national provisions and pre-marketing through the amendment of the European Venture Capital Funds Regulation 345/2013 and the European Social Entrepreneurship Funds Regulation 346/2013.
The Compromise texts address the definition and conditions of pre-marketing in the Directive Proposal and the Regulation Proposal. A copy of the compromise texts are available here and here, respectively.
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