The Front Page, Asset Management & Investment Funds: Irish Practice Developments

Address by Director of Market Supervision, Gareth Murphy, at the Irish Funds Annual Conference 

Gareth Murphy, Director of Market Supervision at the Central Bank of Ireland (Central Bank) addressed the Irish Funds Annual Conference. Mr Murphy focussed particularly on six areas related to:

• fund management companies;
   
• directors’ time commitments;
   
• NAV calculation;
   
• the possible extension of the AIFMD 3rd country passport;
   
• capital markets union; and
   
• shadow banking.

Most of these areas are considered in some detail below. The topic of the ESMA Opinion on the possible extension of the AIFM passport to non-EU countries will be of particular interest to some readers. "This opinion (to the European Commission, European Parliament and European Council) must issue by 22 July. ESMA has produced a detailed framework which will ensure that each non-EU country is assessed on a consistent basis. One of the key elements of this framework is that ESMA must have sufficient information of the regulatory regime in the non-EU countries and that there are strong levels of supervisory cooperation with regulators in these jurisdictions. This body of work covers all non-EU countries with whom an MOU [memorandum of understanding] was agreed over the last two years under AIFMD, covering 44 non-EU jurisdictions.  Though it is too early to indicate what the final advice might contain, two points are clear:

• first, the ESMA advice will be provided on a country-by-country basis as opposed to a blanket advice on the extension of the passport;
   
• second, given the fact that the AIFMD regime has only really been live for 11 months, it is clear that there is insufficient experience of how some non-EU regulatory regimes are likely to support the extension of the AIFMD passport; this is critically important as EU national competent authorities designated as 'member states of reference' will have to rely on these non-EU regulatory regimes in various ways."

As chair of ESMA's Investment Management Standing Committee, Mr Murphy's preference is that "the balance of the ESMA advice prioritises quality over haste".

Board and Corporate Governance Requirements

The Central Bank published a document for Fund Management Company Boards including:

• a Feedback Statement on CP86 (Part I),
   
• Consultation on Delegate Oversight Guidance (Part II),
   
• Publication of Guidance on Organisational Effectiveness (Part III),
   
• Publication of Guidance on Directors time commitments (Part IV),
   
• Next steps (Part V).

This will impact the operations of the boards and management of Irish fund management companies. While it is titled Fund Management Company Boards, that term also includes self-managed UCITS and internally managed AIFs which are AIFMs.

Part IV deals with director time commitments and requires, amongst other things, that separate time commitments be identified for the chairperson and designated function roles and that a separate letter of appointment is required in respect of the designated function roles. It goes on to detail a number of undesirable consequences for companies the boards of which include individuals with more than 20 directorships and significant professional time commitments. Part V notes an immediate change to the management company authorisation process which will require the rationale for the board composition to be included as part of the application. While divergence from the new guidance will not be a regulatory breach, the Central Bank will refer to this guidance when forming a view as to whether a fund management company has complied with its regulatory obligations. Existing fund management companies will need to update business plans or programmes of activity (as the case may be) by 30 June 2016.

Feedback Statement on CP86;

• Clarification of the role of designated person; the Central Bank has clarified that it does not require directors to perform managerial functions. It will issue guidance that designated persons should receive separate letters of appointment from fund management companies. Where a director is also appointed as a designated person, he/she should receive two separate letters of appointment.
   
• Streamlining of managerial functions; The Central Bank will streamline the existing managerial functions to six: investment management, fund risk management, operational risk management, distribution, regulatory compliance and capital and financial management. The role and function of each Designated Person will be proposed in a future consultation.  Conflicts of interest will be included in the organisational effectiveness role; complaints handling will be separated into complaints concerning distribution, which will fall within the distribution managerial function, and all other complaints, which will fall within the regulatory compliance managerial function. Internal audit will be included in the organisational effectiveness role. Risk management will be separated into two separate managerial functions, namely fund risk management and operational risk management. These separate managerial functions may, but do not need to be, conducted by a single person. However, the same person may not perform managerial functions in relation to risk management and investment management. The Central Bank will not classify the organisational effectiveness role as one of the managerial functions. Instead, it is a task which must be undertaken by an independent director with oversight by the board. The independent director with responsibility for the organisational effectiveness role should not perform any of the six managerial functions.
   
• Irish resident director requirement; the Central Bank will retain the requirement for two Irish resident directors and has defined Irish residence as presence in Ireland for 110 working days per year (this is based on half a working year excluding vacation and public holidays). This requirement is in place for AIFMs and will also be introduced in Central Bank UCITS Regulations which are intended to replace the UCITS Notices and which are due to be published shortly.
   
• Requirement to document rationale for Board composition; The Central Bank believes that documenting the rationale for the board composition is good practice which will instil the discipline of considering board composition in a systematic way. The Central Bank is implementing this proposal and is expecting that this matter be included in a fund management company’s business plan/programme of operations.

Consultation on Delegate Oversight Guidance,

• The draft Central Bank Guidance on Delegate Oversight is detailed (at 17 pages) and reflects the matters covered in the Committee on Collective Investment Governance (CCIG) report which was part of CP86. As the CCIG report was consulted on in CP86, the consultation period is shortened and will close on 24 July 2015.

Guidance on Organisational Effectiveness

The Central Bank sets out Guidance on the Organisational Effectiveness role which sets out examples of the types of matters which the independent director undertaking the organisational effectiveness role will be involved in:

• Monitoring the adequacy of a fund management company’s internal resources to its day-to-day managerial roles.
   
• Reviewing the organisational structure of the fund management company and considering whether it remains fit for purpose.
   
• Considering the conflicts of interest affecting the fund management company and its investment funds under management and initiating action, such as escalation to the board, where these are having or are likely in the near future to have an adverse impact.
   
• Reviewing the board composition and reporting on this to the board.
   
• Organising periodic board effectiveness evaluations and overseeing how well the decisions taken by the fund management company and the arrangements for the supervision of delegates are working in the interests of investors.

Guidance on directors’ time commitments

The Central Bank currently considers that a reasonable number of working hours available for each individual is approximately 2000 per year. This is based on a 9 hour day and 230 working days per annum. This ‘total’ time allocation should be considered by individuals when taking on new directorship roles and should include all professional commitments including other directorships and employments held. The Central Bank intends to treat high levels of directorships combined with high aggregate levels of annual professional time commitments as a risk indicator. The Central Bank believes that a reasonable number of directorships is 20 (all directorships of any nature are included in this figure). The Central Bank intends to engage directly with individuals with these high levels of directorships combined with high aggregate levels of time commitments. In the rare case of the proposed appointment of directors who already hold in excess of the defined number of directorships and the defined number of annual hours representing aggregate professional time commitments, the Central Bank will:

• Request a letter from each board which will set out the proposed time commitment for that director in accordance with the Irish Funds voluntary Corporate Governance Code.
   
• Withdraw from corporate Qualifying Investor AIF which proposes such a director, the option of the 24 hour authorisation time-frame. In each such case the Central Bank will be considering additional enquiries which will not be capable of being completed within that timeframe.

Previously authorised investment funds which continue to have individual directors who hold more than the defined numbers of directorships and aggregate hours representing annual professional time commitments after 1st January 2016 will be given priority consideration for inclusion in Central Bank thematic reviews where board effectiveness is being tested in any respect.

Next steps

• The authorisation process for fund management companies now requires:
  • A copy of each designated person’s letter of appointment to be submitted.
     
  • The rationale for the board composition to be included in the business plan/programme of operations.
• The Central Bank will amend its AIF Rulebook and include in its forthcoming Central Bank UCITS Regulations as follows:
  • The number of managerial functions will be reduced to six, namely investment management, fund risk management, operational risk management, distribution, regulatory compliance and capital and financial management.
     
  • The organisational effectiveness role must be performed by an independent director which must be an independent chair or an independent board member.
     
  • The same person must not perform managerial functions in relation to risk management and investment management.
     
  • The independent director with responsibility for the organisational effectiveness role must not perform any of the six managerial functions.
• The Central Bank intends to develop further guidance to cover:
  • Managerial functions guidance (the tasks involved for each function, time involved, rate of payment etc.), on-going control guidance (how designated persons should oversee their regulatory obligations),
     
  • Operational guidance (policies and procedures and record-keeping), and
     
  • Procedures (authorisation process and fund management company passport).

Please speak with your usual contact in the A&L Goodbody Asset Management & Investment Funds team if you wish to contribute to the consultation or if we can assist you further.

Companies Act 2014

The Companies Act 2014 came into effect on 1 June 2015. The Central Bank issued a Q&A Update concerning the Companies Act 2014 to clarify that  the Central Bank does not require UCITS management companies, alternative investment fund managers, AIF management companies, fund administrators, depositaries and investment firms which are companies to convert to Designated Activity Companies (DACs) under the Companies Act 2014.

The Central Bank is of the view that corporate structuring is a matter for each entity.  Notwithstanding the corporate structure chosen, regulated financial service providers must comply with all regulatory requirements applicable to them.  Please speak with your usual contact in the A&L Goodbody Asset Management & Investment Funds team for more detail on this topic.

Revised AIF rulebook

The Central Bank issued a revised AIF Rulebook with a new definition which is relevant in the context of the requirement to have 2 Irish resident directors for funds and fund service providers. Irish resident is defined as a person who is present in Ireland for the whole of 110 business days per year.

Updated AIFMD Q&A

The Central Bank issued an updated AIFMD Q&A (13th edition) with new Q&As

• IQ.1030 on the transitioning of professional investor funds and QIAIFs which can continue to be managed by non-EU AIFMs under the existing transitional arrangements until at least 22 October 2015. At that time this position will be revisited and, if necessary, revised to align it with the European Commission’s decision (on, among other things, the application of the AIFMD passport to non-EU AIFMs) and any transitional arrangements provided.
   
• IQ.1058 (somewhat revised) on when the NU Series of Notices will cease to apply to a professional investor fund and what rules will apply instead.
   
• IQ.1089 to 1093 (new) on marketing of unauthorised AIFs.

Updated UCITS Q&A

The Central Bank issued an updated UCITS Q&A (5th edition) with a new Q&A 1013 clarifying that an investment fund which re-domiciles to Ireland as a UCITS may disclose its past performance in its KIID for to the period when it was domiciled outside Ireland where the UCITS management company confirms that:

• the UCITS investment policy, strategy and portfolio composition have not been substantially altered as a consequence of the transfer to the UCITS regime;
   
• there is no change to the entities involved in the investment management of the UCITS;
   
• it is satisfied that the past performance data is accurate; and
   
• appropriate disclosure will be included with the past performance in the KIID stating that the data relates to a period when the investment fund was domiciled outside Ireland and was not authorised as a UCITS.

ONR Annual Sub-fund Profile Return

The Online ONR Annual Sub-Fund Profile return must be filed annually before 30 June for each Irish authorised investment fund (whether it is a sub-fund or a standalone fund) which was authorised at the calendar year-end prior to the 30 June. This is set out in the Central Bank paper on Regulatory reporting requirements of Irish authorised investment funds (last updated in March 2015).

EuSEFs and EuVECAs

The Central Bank has published application forms for EuVECA managers and application forms for EuSEF managers.  As highlighted in the May Front Page, the European Union (European Social Entrepreneurship Funds) Regulations 2015 (SI 166/2015) and the European Union (European Venture Capital Funds) Regulations 2015 (SI 167/2015) designate the Central Bank as the Competent Authority for European Social Entrepreneurship Funds (EuSEFs) and European Venture Capital Funds (EuVECAs). Both EuVECAs and EuSEFs are part of the European Commission's programme to expand capital markets in Europe and decrease the reliance on bank finance.

EuVECAs are the result of a European Commission project designed to strengthen venture capital financing across the European Union (EU) in order to realise the commercial potential of European small and medium enterprises.  EuVECAs allow EU-registered AIFMs to manage certain types of qualifying venture capital funds domiciled in the EU and to market, EuVECAs to professional (and certain other) investors throughout the EU.  EU registered AIFMs can market EuVECAs on a cross-border basis within the EU by way of a EuVECA passport without the threshold restrictions that apply to using a passport under AIFMD – Directive 2011/61/EU).

Sitting alongside EuVECAs, the European Commission has introduced the EuSEF regime as a means by which investment management products can intermediate capital from investors to "social businesses".  As with EuVECAs, EU registered AIFMs can market EuSEFs to professional (and certain other) investors on a cross-border within the EU without the threshold restrictions that apply to using a passport under AIFMD.

Markets Update 

On 12 June 2015 the Central Bank published Issue 3 of 2015 of its Markets Update which looked at; 

Central Bank of Ireland

• Address by Martin Moloney, Head of Markets Policy, to the UCD Sutherland School of Law Conference on Islamic Finance. 
   
• Central Bank of Ireland publishes Fund Management Company Boards document (discussed above).
   
• Central Bank of Ireland publishes revised AIF Rulebook (discussed above).
   
• Central Bank of Ireland response to European Commission Green Paper on Capital Markets Union. 
   
• Statutory Instruments for European Social Entrepreneurship Funds and European Venture Capital Funds signed by Minister for Finance (discussed in May Front Page).
   
• Q&A Update concerning the Companies Act 2014 (discussed above).
   
• AIFMD: Thirteenth Edition of the AIFMD Q&A published (discussed above).
   
• UCITS: Fifth Edition of the UCITS Q&A published (discussed above).

European Securities and Markets Authority (ESMA)

• European Securities and Markets Authority calls for modification of UCITS Directive (discussed in May Front Page).
   
• European Securities and Markets Authority publishes updates to Q&As on the AIFMD application (discussed in May Front Page).

European Commission

• European Commission publishes responses to Green Paper on Capital Markets Union

International Organisation of Securities Commissions (IOSCO)

• IOSCO publishes 2014 Annual Report

For more information please contact Nollaig Greene or a member of the Asset Management & Investment Funds Team.

Date published: 23 June 2015