By Jennifer Fox, Dillon Eustace – The EU Alternative Investment Fund Managers Directive (2011/61/EC) (“AIFMD” or “the Directive”) will be transposed into Irish legislation by implementing regulations and will come into effect on 22 July, 2013.
In Ireland the implementation of AIFMD is grounded not only on the Directive and on the European Commission Delegated Regulation of 19 December, 2012 (the “Level 2 Regulations”), but also on the long established regulatory framework in place for alternative investment funds. In this regard, Ireland services over 40% of all alternative fund assets with Irish domiciled funds now representing over EUR277 billion in assets with over 2,100 funds.
Building on this framework, the Central Bank of Ireland has now issued its AIF Rulebook which sets out the conditions applicable to fund managers (“AIFMs”) and to funds (“AIFs”) which are additional to those imposed directly by legislation.
The AIF Rulebook will replace the current Central Bank’s NU series of Notices and Guidance Notes. Further, the Central Bank issued a “Q&A” paper on 15 May, 2013 which contains useful information on the new regulatory regime and how it proposes to address various transitional requirements.
The Central Bank has now put in place an informal process to accept applications for authorisations of AIFMs and will be in a position to formally process such applications after 22 July, 2013.
Under the new post-AIFMD regulatory regime, it is possible to become authorised in Ireland as an external AIFM (i.e. a management company) or as an internally managed AIFM (i.e. a self-managed investment company).
Transitional arrangements in Ireland
The transitional arrangements for existing managers, for new funds and for non-EU managers have now been clarified. Some practical scenarios are considered below:
A new EU AIFM (including an internally managed AIF) seeking to launch post 22 July, 2013:
Such an entity will require authorisation under Irish legislation implementing the Directive. An AIFM which is below the threshold size set out in the Directive (i.e. managing AIFs with assets under management of less than EUR100million (including leverage) or certain closed-ended funds with a 5 year lockup and assets under management of under EUR500million) will be subject to a “lighter touch” registration regime. Such sub-threshold AIFMs are required to comply with transparency (prospectus and accounts disclosure) requirements, certain organisational requirements, valuation and liquidity management rules.
An existing Irish AIFM:
The Central Bank has clarified that such entities can avail of a 12 month transitional period and are required to submit an application for authorisation within 12 months of 22 July, 2013. During this transitional period, the AIFM must take steps on a “best efforts” basis to comply with national law implementing the Directive.
Whilst no guidance has yet emerged on the meaning of “best efforts” it is expected that existing AIFMs would begin to take steps towards documenting their organisational and contractual arrangements to demonstrate compliance and move towards applying for authorisation over the coming year.
Existing Irish AIFMs seeking to establish new AIFs:
AIFMs who are availing of the transitional period can establish new AIFs. Until the AIFM is authorised, the new AIF will remain subject to the pre-AIFMD regulatory regime, i.e. the Central Bank NU Notices and Guidance Notes.
Existing Irish umbrella Qualifying Investor Funds (“QIFs”) launching new sub-funds:
An existing umbrella QIF can avail of the transitional period until the AIFM is authorised and can launch new sub-funds during this period.
Non-EU AIFM seeking to set up an Irish AIF after 22 July 2013:
Such an entity will be permitted to avail of a 2 year transitional period (until at least 22 July 2015) provided it has an AIFM capable of carrying out all the tasks of an authorised AIFM by 22 July, 2015. During the transitional period, the non-EU AIFM will need to comply with the “lighter touch” requirements applicable to registered AIFMs (see above). The Central Bank has indicated that it will keep the extent of this transition for non-EU AIFM under review in line with any common EU position which will emerge.
Non-EU AIFM with an existing Irish QIF:
Such entities can continue to operate and can avail of a 2 year transitional benefit provided that it has an AIFM capable of carrying out all the tasks of an AIFM by 22 July, 2015.
A non-EU AIFM availing of the transitional period cannot avail of the passport under the AIFM Directive to market to professional investors within the EU and will be required to rely on private placement regimes and applicable marketing rules in EU member states.
Authorisation as an Irish AIFM
Although the Directive is principally a manager-related directive it has several elements which directly impact the fund product (the AIF), for example the depository requirements, prospectus disclosure requirements, valuation and so forth. A summary of the requirements for authorisation of the AIFM and the AIF are set out below.
With regard to the authorisation of the AIFM, the AIF Rulebook sets out comprehensive provisions for making an application for authorisation. This requires inter alia, the submission of a programme of activity (business plan), details of the shareholders and key management of the AIFM, evidence of compliance with the minimum capital requirements under the Directive and details of compliance with the organisational and code of conduct requirements as set out in the Level 2 Regulations. In accordance with good corporate governance principles, the AIF Rulebook provides that the board of directors of an AIFM will be required to have responsibility for sixteen specific managerial functions and to provide such details in its programme of activity. These functions include inter alia, decision making, monitoring investment policies and performance, monitoring compliance, risk management, remuneration, valuation, conflicts of interest and so forth. Where the AIFM appoints delegates, the Central Bank also requires a detailed reporting framework to be included in the programme of activity including escalation and rectification of material breaches.
In line with the Level 2 Regulations there are specific provisions in respect of delegation and in this regard, particular consideration has to be taken when the AIFM is delegating investment management. The principal requirement is that the AIFM cannot delegate the performance of investment management to an extent that it exceeds the functions carried out by the AIFM itself, i.e. to the extent that it becomes a letterbox entity. It would appear that whilst the AIFM can delegate both portfolio management and risk management it cannot delegate the entirety of both at the same time. The onus will be on each AIFM applicant to consider carefully the extent of any proposed delegation of investment management functions, which will be reviewed closely by the Central Bank.
Authorisation of the AIF
Prior to the introduction of AIFMD, the QIF became one of the key European regulated fund products for all types of alternative strategies. On the product side, the new Irish regulatory rules have introduced some important changes and enhancements to the established regulatory regime. In summary, the new regime provides for two fund products (i) the qualifying investor alternative investment fund or “QIAIF” (which will be the successor to the QIF) and (ii) the Irish retail investor AIF or RIAIF. Importantly, like its predecessor, the QIF, the authorisation of the QIAIF can still be done on a fast track basis, i.e. the QIAIF will be authorised within one business day after submission of completed fund documentation and certification that certain regulatory requirements have been met. However, the fast-track process will not apply if the QIAIF is seeking authorisation as an internally managed AIFM (in which case it will need to make a full AIFM application).
QIAIFs are subject to a minimum subscription of EUR100,000 (or foreign currency equivalent). It can only be marketed (i.e. using the AIFM passport) to professional investors although there is a higher EUR500,000 figure for QIAIFs which invest more than 50% of net assets in any one unregulated fund. The key feature of the QIAIF is that, like the QIF predecessor, it is subject to virtually no investment restrictions (except those specified in the Directive in respect of private equity structures, investment in securitisations and certain rules in respect of feeder type investments). In addition, there is no limit on leverage or borrowing subject to disclosure of maximum leverage levels in its offering document. The QIAIF structure is therefore suitable for a wide variety of fund structures including hedge funds, venture/development capital, private equity, real estate, or long only funds. One advantage of the QIAIF is that it will be able to avail of the new EU marketing passport once it has an authorised AIFM. Non-EU AIFs and AIFMs should also be able to avail of the transitional rules to continue to market their funds under current private placement arrangements throughout the EU (subject to restrictions in individual EU member states).
QIAIFs present a number of liquidity options and can be structured as open-ended, open-ended with limited liquidity or closed-ended. They can also utilise a variety of features to address liquidity such as gates, sidepockets, holdbacks and in-specie redemptions.
The RIAIF is an alternative fund product for the retail market and has no minimum subscription. The product is more flexible than the UCITS (with regard to risk and investment diversification rules) but is subject to more restrictions than QIAIFs. Further, similar to a UCITS fund the documentation (i.e., prospectus, depository agreement, trust deed) for a RIAIF will need to undergo a review process with the Central Bank.
Summary of key changes
Other key highlights introduced by the new regulatory regime in Ireland are as follows:
• Removal of the promoter regime for a new QIAIF. The requirement to have a promoter has been removed and instead replaced with the requirement to have an authorised AIFM. However, a RIAIF is still required to have a promoter with a minimum capital of EUR635,000 who is regulated in a recognised jurisdiction;
• Removal of specific rules previously contained in the Central Bank’s NU Notices in respect of private equity funds, property funds, futures and options funds and multi-adviser funds. It is anticipated that this will afford greater flexibility for such fund structures. The AIF Rulebook now only contains certain rules relating to money market funds, feeder funds and the use of subsidiaries (although the letter of authorisation of the AIF may specify other conditions);
• More flexible rules in respect of share classes for QIAIFs so that subject to certain conditions, assets (including derivatives) can be allocated to investors in individual share classes;
• Replacement of the requirement to ensure equal treatment of shareholders with fair treatment of shareholders. This will facilitate the creation of share classes in the same portfolio with different dealing deadlines;
• Extension of initial offer periods for private equity and venture/development capital funds to 2 years and 6 months from the date of the initial closing;
• Permitting QIAIFs to use sidepockets so that illiquid/hard to value assets can now be sidepocketed immediately upon investment. This should create opportunities for AIFs who invest in distressed or illiquid assets;
• Removal of prime broker and OTC counterparty credit rating and minimum shareholder fund requirements and replacement with the due diligence requirements under the AIFM Directive.
In addition to the AIFMD-related legal and regulatory changes, there are also plans in progress to significantly overhaul Ireland’s limited partnership structure, which is designed to bring that structure more in line with limited partnerships in other jurisdictions. This will coincide with changes to Irish tax legislation (Irish Finance Act 2013) which will treat such structures as transparent for Irish tax purposes. In addition, there will shortly be a new corporate legal structure available in Ireland known as the ICAV which will be able to “check the box” in order to facilitate investment by US taxable investors.