1. DUBLIN: A Prime EU Location for Fund Administration Part I
The last fifteen years, since the establishment of the International Financial Services Centre ("IFSC") in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Dublin in 1988, has seen Dublin become one of a select number of key locations in the world where fund sponsors establish, launch and service investment funds.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
It has also become a key location within the EU for the administration and listing of hedge funds and funds of hedge funds.
The range and flexibility of the legal structures available has facilitated the growth of fund families aimed at investors with a broad range of investment criteria in a multiple of jurisdictions.
Managers and Promoters have been attracted to Dublin because of the existence of a highly competitive marketplace for service provision. Over 250 fund promoters have Dublin-based funds as part of their distribution strategy, including many of the world's most significant players.
According to Fitzrovia International, the Irish funds industry grew by nearly 30% in net assets (in USD) over the twelve months to 30 June, to reach USD 375.4 billion (up from USD 289.9 billion) in 2,334 funds.
When all funds serviced in Dublin (i.e. including non-domiciled funds under custody or administration) are included, total net assets reached USD 558.9bn. Only six years ago the total stood at just USD 68.5 billion.
In an international context, all Dublin-domiciled funds (i.e. legally established there) now exceed those of UK-domiciled funds, both in terms of assets and number of funds. And, as a cross-border fund servicing centre, Dublin accounts for around 38% of all fund assets serviced in Luxembourg and Dublin; six years ago this figure was 15%.
Dublin also enjoys the reputation as a centre of excellence in providing services to investment vehicles domiciled in other jurisdictions (where the domicile of origin allows for external service providers).
Summary of Services
* Fund Administration/Fund Accounting
* Management and Investment Management
* Trustee/Custodial Services
* Shareholder Services
* Legal Advisory Services
* Company Secretarial Services
* Audit and Accounting Services
FUND ADMINISTRATION/FUND ACCOUNTING
Dublin is now recognised as a Centre for Excellence in the provision of Administrative and Accounting services to Investment Funds. This reputation extends not only to Dublin domiciled funds but funds based in other jurisdictions including providing administration services to UK, Cayman, Bermudian, BVI, and Bahamian vehicles. Due to the variety of funds that can be established in Ireland, there is a corresponding depth and range in the experience of the Administrators. Dublin now offers a vast array of service providers ranging from the global pedigree name to the independent boutique operator.
Until last year, it was the Central Bank of Ireland, but today it is the Irish Financial Services Regulatory Authority ("IFSRA"), which is responsible for the regulation of the Administrators and imposes different requirements on Administrators in respect to Irish-incorporated funds as opposed to non-Irish incorporated funds. In respect of an Irish-incorporated fund, the regulations state that the minimum activities that must be carried out in the state are:
* Calculation of the Net Asset Value (NAV) including the calculation of the funds income and expense accruals
* Preparation of semi-annual and annual accounts
* Maintenance of the funds financial books and records
* Payment of the funds expenses
* Calculation and payment of dividends and distributions (if required)
* All back up documents underlying the books and records and the staff that maintain them.
* Supervision of the orderly liquidation and dissolution of the fund. (if required) In respect to a non - Irish incorporated fund, the regulations are minimal, but strong regulations apply to the regulated Administrator as opposed to the non-regulated fund. As a minimum, IFSRA requires that:
* A Health warning and disclosure that the fund is not regulated by the IFSRA be included in the fund's documentation; and.
* Submission of the agreement and other documents issued by the fund containing a reference to the Administration Company.
The Irish Authorities position, with regard to non-Irish funds, is basically one of a tax issue and not a regulatory issue. Therefore, in order to prevent the non-Irish incorporated fund becoming liable to Irish Taxation it is essential that "Mind and Management" of the fund is undertaken outside of Ireland.
Although the IFSRA does not regulate any non-Irish funds, it, nevertheless, does regulate the Dublin resident service providers, such as administrators, trustees, custodians, registrar & transfer agents, etc. It imposes strong regulations on those service providers, to the extent that it expects them to carry out the same level of care and utilise the same level of procedures and controls when acting for a non-Irish fund as they do when administering an Irish fund.
Thus, the IFSRA requires an administrator, for example, to apply the same standards and procedures when administering a Cayman fund as they would administering an Irish fund and this is particularly so with regard to complying with anti-money laundering regulations. There are over 40 Administration Companies Operating in Dublin.
Many fund promoters who do not have a physical presence in Ireland have established their own Irish registered Management Companies. The day to day activities of these Management Companies are generally delegated to Fund Administration Companies so enabling the Management Company to avoid the need to rent office space or employ staff directly. Such Management Companies which out-source their day to day activities are often referred to "Agency Management Companies".
There are a number of reasons why a promoter may wish to establish its own Management Company, including:
- If the Fund is to be established as a unit trust, a Management Company will be required as an integral part of the Fund's structure and will be a signatory to the Trust Deed constituting the Fund.
- Where the requirement for a Management Company is not obligatory, for example, where the Fund is established as an Investment Company with variable capital, the use of a Management Company may still be helpful as it can act as the central co-ordinator of service providers on behalf of the Fund Company. Under such an arrangement, the Fund will delegate all management activities to the Management Company which will then appoint different service providers.
The IFSRA imposes certain supervisory conditions on both Management Companies and Fund Administration Companies. These conditions include:
- A minimum capital requirement of EUR125,000 or three months expenditure, whichever is the greater.
- A minimum of two directors of the Company must be Irish residents and any appointments to the office of Director require the prior approval of the Central Bank.
- The Board of Directors of the Company should not have directors in common with the Board of Directors of the Trustee or Custodian of any scheme for which it acts.
- Annual audited accounts and semi-annual unaudited accounts must be submitted to the Central Bank.
Both the UCITS and Non-UCITS Guidance Notes issued by the Central Bank of Ireland state that the assets of either a Unit Trust, Investment Company or Investment Limited partnership must be entrusted to a Trustee for safe keeping.
The Trustee function includes the Custodian function. (A point of interest is that the notices make no distinction between the role of the custodian and of the trustee regardless of the investment vehicle concerned).
The regulations describe the eligibility criteria to act as as a trustee in the Dublin market - in terms of ownership, minimum levels of capitalisation, expected levels of competence and expertise.
There are certain practical distinctions between the Custodian's operational responsibilities and the fiduciary obligations they assume under the regulations. In a pure operational sense a custodian generally provides some or all of the following services: Asset Safekeeping; Security Settlement; Income Collection; Corporate Action; Processing; Cash Management; Securities Lending. In providing these services the Trustee/Custodian under the regulations also automatically assumes the following responsibilities to:
- Ensure that units are issued in accordance with the funds constitutional documentation and regulations
- Ensure that the NAV is calculated in accordance with the funds constitutional documentation and regulations
- Carry out the instructions of the Manager/Investment Company unless they conflict with the funds constitutional documentation and regulations
- Ensure that income is remitted to the fund on timely basis and is appropriately applied
- Enquire into the conduct of the Manager/Investment Company in each accounting period and report as to whether the fund has been managed in accordance with funds constitutional documentation and regulations.
The Trustee/Custodian cannot be the same legal entity as the Administrator to a fund. As a result service providers are established as either Administration Companies or Custodian Banks. Many financial institutions operate both Trustee/Custodians and Administrators as separate entities.
There are currently 23 Custodian Banks operating in the Dublin market.
Dublin is fast becoming recognised as a Centre for Excellence in the provision of shareholder services to Investment Funds. This reputation looks to extend to the retail side of the fund business, in anticipation of the expected boom in retail funds for the European market.
IFSRA is responsible for the regulation of the shareholder service providers and states that the minimum activities that must be carried out in respect to Irish incorporated funds are as follows:
* Receive requests for the issue or redemption of Participating Shares.
* Promptly notify the Directors and the Custodian/Paying Agent/Administrator of the
* Using the Redemption Price and Subscription Price provided by the Administrator, arrange for the following:
* the number of Participating Shares issued;
* the number of Participating Shares to be redeemed;
* the total amount receivable or payable by the Company in respect of such issues and redemptions.
* Forward or deposit with the Custodian Paying Agent or the Fund all monies received on behalf of the Company
* Direct the Custodian/Paying Agent to pay the amount due on redemption to the persons entitled thereto
* Respond to all shareholder correspondence addressed to the Fund,
* Dispatch to the shareholders of the Company such notices, reports, financial statements and other written material as may be requested from time to time by the Manager or the Fund
* Safekeep certificates or such other evidence representing shares of the Fund
* Maintain and safeguard the Register of Shareholders and other documents in connection therewith and enter on such Register all original issues or allotments of shares and all transfers and redemption of such shares,
* Arrange with the Custodian/Paying Agent the necessary foreign exchange transactions where payments in respect of the redemption of Participating Shares are tendered or requested in a currency other than the currency of the Fund.
* Ensure that all Money Laundering provisions have been satisfied in relation to shareholder transactions in accordance with the relevant legislation.
In respect to a non-Irish incorporated fund, the regulations apply to the regulated Administrator as opposed to the non-regulated fund. Again, IFSRA requires that:
* A Health warning and disclosure that the fund is not regulated by the Central Bank of Ireland be included in the funds documentation;
Submission of the agreement and other documents issued by the fund containing a reference to the Administration Company; and * IFSRA does require the Administrator to comply with Irish anti-money laundering regulations, when acting for non-Irish funds.
LEGAL ADVISORY SERVICES
Dublin Domiciled Investment Funds will generally appoint an Irish law firm to act as counsel to the Fund to carry out the following activities in respect of the initial Fund set-up and launch:-
- Co-ordinate all discussions with local regulatory authorities and in particular the IFSRA.
- For new Fund Promoters / Managers prepare the required Fund Promoter application for delivery to the IFSRA.
- Submit to the IFSRA the Fund "Fact Sheet" which is designed to allow the IFSRA to raise any initial questions they have on the specific Fund.
- Draft all required Fund documentation including; constitutional documents, prospectus and service agreements.
- Prepare legal agreements with Fund service providers.
- Submission of draft Fund documentation and material contracts to the IFSRA together with the application for authorisation of the Fund.
- Co-ordinate the launch of the Fund including working with the Fund's Irish stock broker in respect of the listing of the fund's shares on the ISETM, if required.
COMPANY SECRETARIAL SERVICES
Domiciliary Administration or Company Secretarial Services can be broadly described as comprising the following services. These are generally included in the Administration Agreements issued by Administration Companies or Company Secretarial Companies to Fund Structures and Management Companies.
- Provision of Legal Address: Funds and Management Companies authorised by the Central Bank of Ireland must have their registered address and head office in the jurisdiction (originally the IFSC). Constitutional and Statutory Documents etc will be retained at this address.
- Payment of Fund Directors: This will be done by Administrator.
- Prepare all Board Minutes and Resolutions.
- Hosting of Board Meetings/Preparation of Board packages: Funds and Management Companies are expected to hold, up to four, but at the very least two Board Meetings per annum, with the majority, subject to a minimum of two held within the jurisdiction.
- Organising the AGM and any EGMs that may be required, including keeping minutes and sending Notices, etc.
- Filings with the Central Bank/Irish Stock Exchange/Companies Office: The company secretary/domiciliary administrator will ensure that all local regulatory reporting is completed and filed according to statutory and stock exchange (if applicable) deadlines.
AUDIT AND ACCOUNTING SERVICES
All Dublin domiciled investment funds are required to submit audited financial statements to the Central Bank of Ireland within four months of the year-end.
As such an auditor's signature on the annual financial statements of investment funds is a regulatory requirement.
The auditors produce a "Management Letter", which discusses, not just the financial statements, but anything they have found, which they think is untoward, including, for example, comment on controls and procedures and how they are followed, etc. This Management Letter is also sent to IFSRA and is part of the audit report, although it may not be published for public consumption. Dublin funds are served by all of the major international accounting and auditing firms. All of these firms have invested heavily in resources and technology to expedite quality auditing in a specialised area and use their global networks to ensure that the Dublin funds industry keeps abreast with all international trends and developments.
The audit and accounting firms help their investment fund clients to solve complex business problems providing assurance and risk solutions that reasonably enhance their ability to build value and improve performance in an internet enabled world.
As well as providing audit services, the accounting firms involved in servicing the Funds Industry in Dublin provide a range of other services including:
* Advice on product design and structuring;
* Advice on distribution methodologies and strategies;
* Taxation services;
* Internal controls reporting including SAS 70 and FRAG21 Reports;
* General consulting assistance;
* Training courses for the funds industry;
* Advice on Generally Accepted Accounting Practice;
* E-business and Internet Solutions;
* Internal audit; and
* Performance measurement and attribution consulting and verification.
IRISH-AUTHORISED RETAIL FUND OF HEDGE FUNDS
Ireland is also emerging as a key location for retail funds of hedge fund products. Following a consultation process with the Industry, the IFSRA of Ireland in December 2002 published "CB Notice NU 25: Funds of Unregulated Funds Schemes" heralding the introduction of Irish authorised Retail Fund of Hedge Funds.
With a reputation as the established centre of excellence for the administration and domicile of alternative investment schemes, the introduction of Retail Fund of Hedge Funds has further enhance the attractiveness of Ireland as the location-of-choice for the growing hedge fund industry.
Commenting on the publication of the Central Bank notice, Damian Neylin, partner at PricewaterhouseCoopers noted, "Ireland has long been the EU domicile of choice for the establishment and administration of hedge funds sold on a cross border basis. This important initiative by the Central Bank of Ireland consolidates that position and highlights the willingness of the regulator to respond quickly to market requirements".
Gary Palmer, Chief Executive of the Dublin Funds Industry Association, added: "From an Industry perspective this once again proves Ireland's ability to deliver to the market the widest spectrum of product opportunities in a well regulated, effective and efficient way. Furthermore, speaking as a potential investor this development is to be welcomed as it allows the retail investor to benefit from, rather than read about, the opportunities of positive returns in falling markets".
Consolidated UCITS Regulations (which includes provisions for a Common Contractual Fund) and amending UCITS Product Directive Signed into Law
Ireland is at the forefront of introducing enabling legislation for UCITS. In June 2003, during the opening address at the DFIA/NICSA Sixth Annual Global Funds Conference, the Tánaiste (the Deputy Prime Minister), Ms. Mary Harney announced that she had just signed two Statutory Instruments into Irish Law, the first providing for consolidated UCITS Regulations, which provides for the establishment of a Common Contractual Fund structure. The second Statutory Instrument transposes the amending UCITS Product Directive into Irish law.
The Statutory Instrument to transpose the amending UCITS Product Directive has been fashioned in such a way as to allow the maximum flexibility for fund promoters ensuring that during this transition period Irish UCITS can be established under the provisions of the existing Directive or under the provisions of the amending Directive. This highlights the pragmatic approach of the regulator and legislature in ensuring, where possible, legislation is enacted in the most pragmatic way possible.
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