Criminal Justice (Money Laundering and Terrorist Financing) Act 2010
The Third Anti-Money Laundering Directive was transposed into Irish law on 5 May, 2010 by the Criminal Justice (Money Laundering and Terrorist Financing) Act, 2010 (the “CJA 2010″) and has been effective as of 15 July, 2010.
The period of consultation in respect of the final draft of the industry Money Laundering Guidance Notes has now closed. Once the core guidance notes have been published, it is expected that the process of finalising the sectoral guidance notes will commence.
On the 25 March, 2011 Council Regulation (EU) No 296/2011 amending Regulation EU No 204/2011 came into effect. This concerns restrictive measures to be applied in view of the situation in Libya. Designated persons are required to have appropriate procedures in place to meet with the requirements of this Regulation.
If you would like further information on anti-money laundering requirements or any changes arising out of the CJA 2010, Dillon Eustace regularly advises on all aspects thereof and provides training sessions on this topic. Training can be held either at Dillon Eustace’s office at 33 Sir John Rogerson’s Quay, Dublin 2 or in house training can be provided at a venue of your choosing.
UCITS, Non-UCITS & Hedge Funds
EC’s Draft Directive on Alternative Investment Fund Managers
The consultation period for the European Securities and Markets Authority’s (“ESMA”) call for evidence on the Alternative Investment Fund Managers Directive Level 2 implementing measures ended in January. ESMA is to provide further details in due course in relation to any public consultation it will carry out in light of responses to the call for evidence.
The European Commission wrote to ESMA on the 21 February, extending the deadline for ESMA’s Level 2 technical advice for a further month (to 16November, 2011).
For detailed information on the Directive including how it may impact your business, please refer to your usual contact in the Asset Management and Investment Funds Unit of Dillon Eustace.
ISE Approves Additional Requirements for Listing Actively Managed ETFs
Further to an application by Dillon Eustace to list the first actively managed ETF on the Irish Stock Exchange (the “ISE”), the ISE has issued a policy note addressing a number of rule changes facilitating such listings going forward. A review of these changes is available on our website:http://www.dilloneustace.ie/download/1/Active%20ETF%20ISE%20Policy%20-%20Article%20short%20FD%20Feb2011.pdf
European Systemic Risk Board Holds First Meeting
The European Systemic Risk Board (“ESRB”) held its first meeting on 20 January, 2011.
The ESRB is aimed at contributing to the prevention or reduction of systemic risks to financial stability in the EU that arise from developments within the financial system.
The European Central Bank has commented that the ESRB will also contribute to the smooth functioning of the internal market and is aimed to ensure a sustainable contribution of the financial sector to economic growth.
However, the European Commission has stated that the ESRB will not have any binding power to impose measures on Member States or national authorities. It has been conceived as a “reputational” body with a high level composition that should influence the actions of policy makers and supervisors by means of its moral authority.
The seat of the ESRB will be in Frankfurt, Germany. The Chair of the ESRB is the President of the European Central Bank, Jean-Claude Trichet, while Mervyn King, Governor of the Bank of England, was elected as first Vice-Chair of the ESRB by the members of the General Council of the European Central Bank.
ESMA’s Definition of European Money Market Funds
ESMA has published its guidelines on a common definition of “European money market funds” (the “Guidelines”).
The Guidelines aim to improve investor protection by setting out criteria to be applied by any fund that wishes to market itself as a money market fund. The criteria reflect the fact that investors in money market funds expect the capital value of their investment to be maintained while retaining the ability to withdraw their capital on a daily basis. A common definition will also help provide a more detailed understanding of the distinction between funds which operate in a very restricted fashion and those which follow a more ‘enhanced’ approach.
The Guidelines set out two categories of money market fund: Short-Term Money Market Funds and Money Market Funds. This approach recognises the distinction between shortterm money market funds, which operate a very short weighted average maturity and weighted average life; and money market funds which operate with a longer weighted average maturity and weighted average life. For both categories of fund, ESMA expects that there should be specific disclosure to explain clearly the implications of investing in the type of money market fund involved. For Money Market Funds, for example, this means taking account of the longer weighted average maturity and weighted average life of such funds. For both types of money market fund, this should reflect any investment in new asset classes, financial instruments or investment strategies with unusual risk and reward profiles.
The Guidelines will enter into force in line with the transposition deadline for the revised UCITS Directive (1 July, 2011).
However ESMA has provided that money market funds existing prior to 1 July 2011 will have until 31 December 2011 to comply with certain provisions of the Guidelines. Please contact your usual contact at Dillon Eustace for further information.
Re-domiciliation of Collective Investment Schemes to Ireland
The Companies (Miscellaneous Provisions) Act 2009 amended the Companies Act 1990 and the European Communities (Undertakings for Collective Investments in Transferable Securities) Regulations 2003, to provide an efficient legislative mechanism for corporate investment funds to re-domicile into Ireland. The Companies Act 1990 (Relevant Jurisdictions under Section 256F) Regulations 2010, identified the following as relevant jurisdictions from which corporate CIS could re-domicile into Ireland: Bermuda, BVI, Cayman Islands, Guernsey, Isle of Man and Jersey.
Since the introduction of this legislation a number of funds have re-domiciled and more are in the process of re-domiciling. The first such re-domiciliation in respect of a Guernsey investment fund company to Ireland took place in this quarter. While the legislation provided an efficient legal mechanism for funds to re-domicile to Ireland, the Central Bank has now provided further guidance regarding the regulatory process and procedure for re-domiciling funds into Ireland e.g. the documentation that must be submitted to the Central Bank, confirmations required, etc.
In addition, although there are no legislative provisions which specifically address the redomiciliation of unit trusts to Ireland, the Central Bank has determined that a re-domiciliation process similar to that in place for corporate CIS should apply in respect of unit trusts.
Please contact a member of the Regulatory and Compliance Department in Dillon Eustace should you need further information on the regulatory process and procedure for redomiciling investment funds into Ireland.
Consultation on Revised UCITS Notices, NU Notices and Guidance Notes
In February 2011, the Central Bank issued a consultation paper on amendments to UCITS Notices, NU Notices and Guidance Notes to reflect the changes necessary under the UCITS IV Directive and other changes. Submissions by interested parties were to be made no later than 15 March 2011.
Corporate Governance Code for Irish Domiciled CIS
In late September, 2010, the IFIA published the voluntary Corporate Governance Code for Irish Domiciled Collective Investment Schemes (the “SI 450 Code”).
The SI 450 Code may be adopted by Irish domiciled collective investment schemes on a voluntary basis but the SI 450 Code does reflect existing practices imposed under the Companies Acts 1963 to 2009 and the Central Bank’s UCITS & Non-UCITS Notices along with Guidance Notes.
Adoption of the SI 450 Code should enable Irish domiciled collective investment schemes with shares admitted to trading on a regulated market to refer to the SI 450 Code in a specific section in the Directors’ Report of that collective investment scheme’s Annual Report and in doing so comply with the provisions of the S.I. No. 450 of 2009 (as amended). Back in January 2010, the IFIA had published template corporate governance statement disclosures which might be included in an investment funds financial statement to ensure compliance with the provisions of S.I. No. 450 of 2009 (as amended). As the SI 450 Code is now available, the IFIA has revised the template corporate governance statement disclosures.
The SI 450 Code covers general requirements applicable to a board of directors including its composition, meetings, its role and committees. It further deals with the audit, compliance and risk management functions.
Separate to the SI 450 Code, the IFIA at the request of the Central Bank is working on a revised corporate governance code for the funds industry. It is expect that the revised code will introduce a number of new standards not currently dealt with by existing corporate governance practices e.g. time commitment expected from each director, number of nonfund directorships, number of independent directors and non-executive directors, etc.
Please refer to your usual contact in Dillon Eustace for further details on the SI 450 Code or if you would like a copy thereof.
Consultation on legislative changes to the UCITS depository function and to UCITS managers’ remuneration
The IFIA has filed its response to the European Commission’s legislative proposal to review the current framework applicable to UCITS depositories and to introduce new provisions on UCITS’ managers’ remuneration with a view to improving the level of UCITS investor protection. Of particular note is the response concerning increased depositary liability. The European Commission is expected to respond to submissions during the second quarter of 2011.
The European Council voted on 22 June, 2009 for the adoption of the UCITS IV Directive (the “Directive”), as already adopted by the European Parliament in plenary session on 13 January, 2009. The Directive was adopted in accordance with the co-decision procedure, thus marking the end of the first step for the implementation of a European text.
The UCITS IV proposal containing amendments to the UCITS Directive 85/611/EC was first proposed by the EC on 16 July, 2008. This proposal did not take into account the management company passport which, after having been debated at ESMA level, was introduced in December 2008.
According to the Lamfalussy process, there are three levels before the transposition of the Directive shall be considered as fully completed among Member States. Similar to MiFID, the Directive provides that the details of certain provisions should be covered by Level 2 implementing measures to be adopted by the EC with a view to harmonising the implementation of the text. On 13 February, 2009 the EC submitted to ESMA a provisional request for technical advices on the new UCITS Directive implementing measures.
The consultation paper that ESMA published on 8 July, 2009 provided technical advice on the level 2 measures related to the UCITS management company passport. ESMA’s draft advice covered the organisational requirements that companies managing UCITS need to fulfil, and inter alia conflicts of interest those companies must avoid. The advice also included details on the companies’ rules of conduct, depositaries and risk management, as well as on supervisory cooperation. The majority of the suggestions made in the ESMA advices were carried through into the Commission Directive 2010/43/EU of 1 July 2010 implementing the UCITS IV Directive as regards organizational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company.
The final two steps of the Lamfalussy process will take place during and after the period of transposition of the Directive. Under Level 3, ESMA will be in charge of issuing interpretation recommendations to national authorities and under Level 4 the EC will control and advise Member States as to a proper interpretation and application of the Directive. Member States have until 1 July, 2011 to implement the text into national legislation. The Department of Finance has prepared the draft of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, which is expected to be brought into effect around Easter 2011.
The following is a summary of the key implications of the UCITS IV Directive:
Management Company Passport
The concept of a management company passport (“MCP”) was first introduced in Directive 2001/107/EC (the “Man Co Directive”). The Man Co Directive introduced an authorisation framework for Man Cos which is similar to that applied to investment firms under MiFID imposing requirements relating to minimum capital, internal management control mechanisms, probity and experience of the directors and management and conduct of business rules.
These measures were intended to harmonise the authorisation process of Man Cos in all EU Member States which in theory would enable the MCP provided for in the Man Co Directive (as explained below) to operate effectively whereby a Man Co established in one Member State could be appointed as Man Co of UCITS schemes domiciled in other Member States.
However, despite the new authorisation process and the provision of a MCP contained in the Man Co Directive, the MCP has not worked under the existing legal framework. This failure was attributed to the fact that the definition of “UCITS Home Member State” in the Man Co Directive meant that it was not possible for a Man Co to passport its services in the context of UCITS funds established as unit trusts.
The Directive enables European funds created under the UCITS regime to be managed by a management company authorised and supervised in a Member State other than the home Member State of the fund.
The Directive establishes a unified regime for both cross-border and domestic mergers of funds. Pursuant to the Directive, all funds are entitled to merge regardless of their structure (corporate, unit trust, or contractual type of funds).
Master Feeder Structure
The Directive sets out the first European regulation concerning the setting-up of master feeder funds. A feeder fund is defined in the Directive as a UCITS or a sub-fund thereof which has been approved to invest at least 85% of its assets in units of another fund. It can also set aside 15% of its assets to invest in derivative instruments or liquid assets etc. As far as the master fund is concerned, it cannot itself be a feeder fund, nor hold units of a feeder fund.
Key Investor Information
The key investor information (“KII”) shall replace the simplified prospectus which failed to provide investors with all basic information to enable them to make an informed investment choice. It is intended to be a short pre-contractual document written in a brief manner and in non-technical language which shall provide easily understandable, fair, clear and not misleading information on the fund to contemplated or actual investors.
The European Commission has now published a Regulation 583/2010 implementing the UCITS IV Directive as regards the key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of the website (the “Commission Regulation”).
On 1 July, ESMA issued Level 3 Guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the KII document. Such an indicator should be based on the volatility of the fund using weekly or monthly returns concerning the previous five years.
Simplified Notification Procedure
A fund wishing to market its units in a Member State different from its country of incorporation will notify its supervisory authority of such project, through a notification procedure which will then be transferred by its home regulator to the competent supervisory authorities of the contemplated host country (new “regulator-to-regulator” procedure).
Enhanced Cooperation between Supervisory Authorities
The proposed amendments to the Directive will result in increased cross-border operations necessitating a full and timely cooperation between supervisory authorities. The Directive encourages the exchange of information, harmonises the powers of the supervisory authorities and allows for the possibility of immediate verifications and investigations, consultation and mutual help mechanisms.
The enhanced cooperation between supervisory authorities is expected to result in a more simplified Regulator-to-Regulator notification. This will permit a UCITS to begin marketing its units in another Member State (the “Host Member State”) no later than 10 working days after the date of receipt of the required standard notification letter accompanied by complete documentation required in the application. It also greatly simplifies the documentation required, and significantly the only document which requires translation into the language of the Host Member State is the KII.
The notification procedures in the UCITS IV Directive have been broadly welcomed by the European funds industry as it is believed that they will improve administrative efficiency and facilitate more efficient marketing and reduce translation costs.
UCITS IV introduces significant changes for UCITS management companies which will need to be addressed well in advance of the 1 July 2011 start date. In particular, through the UCITS IV Implementing Directive, new MiFID-like organisational and internal control requirements, conflicts of interest requirements and risk management requirements will be applied to UCITS management companies. In addition, UCITS management companies will need to comply with new rules of conduct. In order to facilitate a smooth transition, the Central Bank requires that each existing UCITS management company submit a revised business plan for review by it on or before 29 April, 2011.
For detailed information on UCITS IV, please refer to your usual contact in the Asset Management and Investment Funds Unit of Dillon Eustace and the following publications which can be read on our website:-
- UCITS IV
- Management Company
- UCITS IV –
Key Investor Information Document – UCITS IV – Cross-Border Notifications
EU Commission publishes feedback on UCITS V consultation
On 17 February, 2011 the EU Commission published a response to the feedback it had received in respect of its consultation on the current framework applicable to UCITS depositaries and the introduction of new provisions on remuneration for UCITS managers. The key policy priority highlighted in the response is the clarification of UCITS depositary duties and liability regimes. In relation to the UCITS managers’ remuneration policy, the majority of respondents stressed that remuneration rules should be adjusted to the UCITS model. An impact assessment study will be published later this year alongside the EU Commission’s proposal for amendments to the UCITS Directive.
The European Commission has delayed publication of the UCITS V legislative proposal to the latter part of 2011 in order to allow time to include a new section on sanctions in the UCITS Directive. This is part of an initiative, the aim of which is to achieve greater convergence and reinforcement of the national sanctioning regimes in the financial sector. It is anticipated that the Commission will launch a public consultation on UCITS sanctioning regimes soon.
Companies now required to disclose auditors’ remuneration
Following the implementation of European Communities (Statutory Audits) (Directive 2006/43/EC) Regulations, 2010, an analysis of auditors’ remuneration is now required to be included in the statutory financial statements of Irish companies. Remuneration must be disclosed in respect of each of the following categories of work carried out by an auditor:
(a) the audit of individual accounts;
(b) other assurance services;
(c) tax advisory services;
(d) other non-audit services.
The requirement applies to financial years ending on or after 20 August, 2010.
Article by Paula Kelleher and Breeda Cunningham of Dillon Eustace Solicitors
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