By Paul Murray – Ireland was the first jurisdiction within the European Union to establish a regulatory framework specifically for alternative investment funds, and it is already an established domicile in this space. The country’s reputation for sophisticated and robust regulation developed from a focus on areas such as managing conflicts of interest, depositary liability and corporate governance concerns.
As such, the requirements of the Central Bank for alternative funds anticipated many of the themes of the EU’s Alternative Investment Fund Managers Directive, which places Ireland in a particularly strong position to benefit from the opportunities that the directive represents.
In broad terms, Esma’s final advice to the European Commission on possible implementing measures (the so-called Level 2 measures) for the AIFM Directive has been welcomed in Ireland. While certain aspects of the advice have not been met with universal approval, there are a number of important clarifications that are certainly helpful, particularly in defining the scope of a depositary’s function regarding the safekeeping of assets and what will be considered to constitute an external valuer for the purposes of the directive.
Esma’s advice regarding the delegation of functions is also helpful from an Irish perspective. As a general principle, the AIFMD provides that a manager of alternative funds may not delegate so many of its functions that it is reduced to a ‘letter-box entity’, and must be able to justify its entire delegation structure of objective grounds.
Esma has helpfully clarified that in its view a manager should be able to justify the delegation of functions in order to optimise business functions and processes, including the achievement of cost savings.
In the not uncommon case of a self-managed Qualifying Investor Fund or a QIF with an Irish management company that has delegated portfolio and risk management functions to a US investment manager, presumably invariably to optimise its business functions and processes, it is hard to imagine how such an arrangement could lead to the Irish management company being deemed to constitute a letter-box entity.
One key issue that remains to be clarified is what entity will constitute the manager in various circumstances. The directive itself simply defines alternative investment fund managers as “legal persons whose regular business is managing one or more alternative investment funds”, which is not particularly helpful where portfolio or risk management functions have been delegated by the directors of an alternative fund to another entity (which in turn may sub-delegate such functions).
Esma has recognised this problem and stated that it intends to develop draft technical standards to provide further clarity on this issue as a matter of priority. The current expectation is that a draft paper will be published in this regard during the first half of 2012.
On the basis of Esma’s advice to the Commission, our expectation is that its guidance will broadly follow the management company provisions of the Ucits directive. This should ensure that the structure developed very successfully in Ireland for Ucits funds can be effectively replicated for AIFs and maintain the jurisdiction’s attractiveness to managers looking to follow a ‘co-domiciliation’ model by establishing regulated onshore versions of their offshore funds. This can only be of benefit to Ireland as an alternative fund domicile.
Paul Murray is an asset management and investment funds partner with William Fry
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