Ireland: Ireland Announces Further Enhancements to its Investment Funds Regime

Ireland Implements Funds Re-Domiciliation Legislation

The commencement order giving effect to the provisions of the Irish Companies (Miscellaneous Provisions) Act 2009 (the "Act") which provides for the efficient re-domiciling of offshore fund companies to Ireland has been signed.

The Act permits offshore fund companies from prescribed jurisdictions to re-register as Irish companies whilst preserving their legal identity. As there is no change of legal entity, the migration should not constitute a taxable event for investors and the fund will be able to maintain its track record.

The commencement order prescribes certain countries, whose domestic laws permit both outward and inward redomicilation under conditions which are substantially similar to Ireland, from which offshore fund companies may re-domicile to Ireland. The jurisdictions which offer reciprocity and which are prescribed are the British Virgin Islands, the Cayman Islands, Jersey, Guernsey, Bermuda and the Isle of Man.

The Irish Financial Regulator (the "Financial Regulator") will shortly be issuing guidance on the regulatory process for redomiciling funds.

Financial Regulator Permits Retail Debt Funds to Charge Fees and Expenses to Capital

The Financial Regulator will now permit the charging of fees and expenses of open-ended retail distributing fixed income funds ("Retail Debt Funds") to capital provided the Retail Debt Fund complies with the requirements of the Financial Regulator and detailed risk warnings are made to investors.

Background

Although retail funds were permitted, in accordance with the requirements of the Financial Regulator and appropriate accounting standards, to determine how fees and expenses should be charged, the Financial Regulator required Retail Debt Funds to charge fees and expenses only to income. A Retail Debt Fund could only charge fees and expenses to capital if it did not accrue income during the relevant accounting period.

This policy arose from a concern that investors in a Retail Debt Fund might not appreciate that a policy which permitted fees and expenses to be charged to capital could lead to capital erosion which would not be the expectation for a fixed income investment. The Financial Regulator was also concerned that if fees and expenses were charged to capital that returns to investors could be misleading and ultimately undermine investor confidence.

General Requirements for Charging Expenses to Capital

In addition to the additional requirements below, Retail Debt Funds must comply with the following requirements which apply to all retail funds seeking to charge expenses to capital:

• provision for charging fees and expenses to capital has been made in the relevant constitutional document; and
• the prospectus includes appropriate disclosure, including:
• • the rationale behind the policy;
  • a prominent risk warning to describe the effects of charging fees and expenses to capital, i.e., that capital may be eroded and that income will be achieved by forgoing the potential for future capital growth; and
  • a similar risk warning in the subscription application form referring to the effect of the charging policy including possible capital dilution, as follows: "unit holders/shareholders should note that all/part of the fees and expenses will be charged to the capital of the CIS. This will have the effect of lowering the capital value of your investment".

Retail Debt Funds – Additional Requirements

The following additional requirements apply for Retail Debt Funds:

• the greater risk of capital erosion must be highlighted in the prospectus, together with the likelihood that, due to capital erosion, the value of future returns will also be diminished;
• where the priority of the Retail Debt Fund is the generation of income rather than capital growth this should be highlighted. In addition, the prospectus should include a statement that distributions made during the life of the fund must be understood as a type of capital reimbursement; and
• any income statement issued to investors where expenses have been charged to capital should include a statement to explain the effect of this accounting policy including wording to the effect that the investor's capital amount has been reduced.

Action to be Taken

If you manage or are considering the establishing a Retail Debt Fund and would like to avail of the additional flexibility afforded by the change of regulatory policy, you should take the following steps:

• review the fund's articles of association or trust deed to ensure that the fund has the capacity to charge fees and expenses to capital. Usually, the articles of association or trust deed will state that the directors/manager have authority to determine whether fees and expenses can be charged against income, or capital gains, or against the capital or assets of the fund and in such manner and over such period as the Directors determine;
• if there is no provision for charging fees and expenses to capital, the articles of association or trust deed will need to be amended. An amendment to the articles of association will require approval of shareholders, which can be obtained at a separately convened meeting of the shareholders. Alternatively, if the change in accounting policy is not an immediate priority for the fund, the articles of association can be approved by shareholders at the next AGM of the fund;
• update the prospectus disclosure regarding the charging of fees and expenses to capital and include additional risk warnings required by the Financial Regulator;
• irrespective of whether articles of association or trust deed permit the charging of fees to capital, we recommend you write to shareholders/unitholders of the fund and notify them in advance of the change in accounting policy (Depending on the terms of the prospectus, the materiality of the proposed change, etc., the directors/manager should consider if it is appropriate in the circumstances to obtain shareholder/unitholder approval); and
• require the administrator to put in place procedures to ensure that income statements disclose the effect of charging fees and expenses to capital and which notify investors where relevant that their capital has been reduced.

Enhancing Branding Opportunities: Financial Regulator Permits the Sole Name of an Investment Manager to be Used in the Name of a Sub-Fund

In the case of umbrella funds, the Financial Regulator now permits the sole name of the investment manager to be used in the title of a subfund where the name of the promoter or its brand name is contained in the name of the umbrella scheme.

Background

While in most cases, the Fund Promoter and Investment Manager are the same entity, in instances where they were not, the Financial Regulator would not permit the sole use of the name of the investment manager in the name of a fund, or sub-funds within an umbrella fund (except where the investment manager was majority owned by the promoter or the parent of the promoter). The Financial Regulator had concerns that a policy which permitted the sole use of the investment manager's name in the title of a sub-fund might lead investors to mistakenly believe that the investment manager was the promoter of the fund.

Following industry submissions which addressed the Financial Regulator's concerns, the Financial Regulator will now permit the sole name of the investment manager to be used in the title of a subfund, on condition that the name of the promoter or its brand name is contained in the name of the umbrella scheme.

Where a supplemental prospectus is published in respect of a sub-fund, the Financial Regulator requires the name of the promoter to be clearly stated on the cover page of the supplemental prospectus.

Action to be Taken

If you are an investment manager and would like your name to be used in the title of an existing subfund (assuming the requirements of the Financial Regulator can be complied with), you should take the following steps:

• update the prospectus disclosure and all marketing documentation regarding the name of the sub-fund. It will be necessary, however, to review the fund's articles of association or trust deed as sometimes these documents may specify the names of sub-funds and may not have been drafted with sufficient flexibility to enable you to change the name of the subfund without obtaining shareholder/unitholder approval; and
• in advance of the change of name of the subfund, write to the shareholders/unithoders and inform them of the intention to change of the name of the sub-fund.

The new policy of the Financial Regulator will be important for investment managers who provide portfolio management services only to Irish funds and for promoters of fund platforms whose subfunds are managed by a range of non-affiliated investment managers. Permitting the sole reference to the investment manager to be included in the name of a sub-fund will improve the branding and marketing opportunities of such sub-funds by their investment managers.

In this context, it is worth noting that the Financial Regulator is currently reviewing its promoter approval requirements, in particular, the promoter capitalisation requirements. The outcome of the Financial Regulator's review is expected shortly. We will update you in relation to such industry developments as they arise.

Changes to Qualifying Investor Criteria Expected Shortly

The minimum subscription requirement for investors in an Irish Qualifying Investor Fund ("QIF") at present is €250,000 (or its foreign currency equivalent) combined with a minimum net worth requirement. Following industry submissions, we expect the Financial Regulator will shortly announce that the minimum subscription requirement for QIFs will be reduced and the minimum net worth requirements will be amended in line with MiFID professional investor criteria.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.