In this issue:-
- Compromise Proposal Published By The Council Of The European Union On The Draft AIFM Directive
- UCITS IV
- Redomiciling Investment Fund To Ireland
- EU regulation Of Packaged Retail Investment Products
- European Commission Public Consultation On UCITS Depositaries
- IFIA And AIMA Launch Revised Guide To Sound Practices For Hedge Fund Administrators
- The Payment Services Regulations, 2009
- Lehman's Client Money Ruling
COMPROMISE PROPOSAL PUBLISHED BY THE COUNCIL OF THE EUROPEAN UNION ON THE DRAFT AIFM DIRECTIVE
On 30 April 2009, the EU Commission ("EC") published an initial draft of the Directive on Alternative Investment Fund Managers (the "Directive"). Since the publication of the Directive, the provisions of the Directive have been the subject of considerable debate (and criticism) amongst interested parties and have been discussed at numerous meetings of the EU Council working group, most recently under the Swedish Presidency. On 25 November 2009 the Swedish Presidency published a compromise proposal for the Directive. Details of the latest compromise proposal are set out below.
The Directive will apply to alternative investment fund managers ("AIFM") established in the EU that manage or market non-UCITS funds with assets under management exceeding €100 million. Accordingly, managers of hedge funds, private equity funds, real estate funds, commodity funds, infrastructure funds and any other alternative investment funds (hereinafter "AIF") will come within the scope of the Directive.
Under the Directive the EU Home State regulator is required to ensure that no AIFM manages an AIF unless it has been authorised in accordance with the Directive.
The Directive will:
- Adopt an 'all encompassing' approach to ensure that no significant AIFM is outside of regulation and oversight, while providing exemptions for smaller managers. It will only apply to AIFM managing a portfolio of €100 million plus. A higher threshold of €500 million applies to AIFM not using leverage (and having a five year lock-in period for their investors) as they are not regarded as posing systemic risks.
- Aim to regulate major sources of risks in the alternative investment value chain by ensuring that AIFM are authorised and subject to ongoing regulation;
- The original daft of the Directive would have required the AIFM to ensure that each AIF it manages appoints an independent valuation agent. The Directive as amended no longer requires the appointment of an independent valuation agent, however, the Directive sets out rules in relation to the valuation of investments;
- Both the original and second draft of the Directive impose certain obligations as regards "depositaries". An AIFM is required to ensure that a "depositary" holds all financial instruments that can be kept and which are subject to regular trading in a segregated account opened or held in the name of one or more AIF (and not in the name of the depositary or its agents). The original draft of the Directive imposed strict liability on depositaries for its own failures and for those of any sub-custodians which it appointed. The compromise proposal contained in the latest draft Directive modifies the strict liability position in a manner which is not entirely clear;
- Increase the transparency of AIFM and the funds they manage for supervisors, investors and other key stakeholders;
- The new draft of the Directive includes entirely new and detailed provisions relating to the remuneration policies and practices followed by AIFM. Details of the remuneration paid to the AIFM's employees (together with carried interest) will need to be disclosed to investors in the annual report. Such requirements were not contained in the initial draft;
- Ensure that all regulated entities are subject to governance standards and have robust systems in place for the management of risks, liquidity and conflicts of interest; A regulatory authority is required to impose limits on leverage that an AIFM may employ and may employ such other restrictions on the management of the AIF with respect to the collective investment schemes under its management;
- Impose a number of requirements in relation to the delegation of functions by an AIFM;
- Permit AIFM to market funds to professional investors throughout the EU subject to compliance with regulatory standards; and
- Grant access to the European market to third country funds after a transitional period of three years. The EC have said this is to allow the EU to check whether the necessary guarantees are in place in the countries where the funds are domiciled (with respect to among others equivalence of regulatory and supervisory standards and exchange of information on tax matters).
The Directive is still undergoing the legislative process (Level 1) and is therefore subject to further amendment. Interest groups such as AIMA, the City of London and international pension funds are lobbying EU politicians and policy makers for further amendments to the Directive. In the general opinion of those working within the hedge fund industry, although the latest draft of the Directive contains significant improvements, many of the current provisions are still objectionable and require further amendment.
Adoption Of The Directive
On 22 June 2009, the European Council of Ministers adopted the UCITS IV Directive which had been approved by the European Parliament on 13 January, 2009. This represents the culmination of an extensive period of debate and assessment of EU investment funds aimed at modernising the UCITS regulatory framework. The Directive is required to be transposed into national law to take effect by 1 July 2011.
CESR Open Hearing On UCITS IV
On 1 September 2009, the Committee of European Securities Regulators (CESR) held an open hearing on its draft advice on UCITS IV covering;
- Key Information Document;
- Organisational requirements and conflicts of interest;
- Rules of conduct; and
- Risk management.
The deadline for responses to the UCITS IV consultations was extended to 10 September, 2009.
CESR Consultation Paper On UCITS IV
In September, CESR published a further consultation paper in relation to Level 2 technical advice for certain of the other UCITS IV provisions. The paper sets out draft advice on:
- The content and format of the information that should be provided to unitholders of funds proposing to merge, in order to allow the unitholders to make informed judgements about the impact of the merger on their investment, including a specified format of the information letter to be provided to unitholders regarding the merger.
- Measures relating to master-feeder structures including: (a) the content of information-sharing agreements between the funds and which legal regime should apply to cross-border agreements; (b) measures to avoid market timing or other arbitrage issues; (c) alternative courses of action for feeder funds in the event of a master fund's liquidation, merger or division; (d) information sharing agreements between like-service providers (depositaries and auditors) if the master and feeder UCITS have different service providers, and (e) types of irregularities impacting negatively on the feeder UCITS that must be reported by the master UCITS' depositary.
- Measures relating to the notification procedures for cross-border marketing of UCITS, including: (a) the scope of the information required to be published by each Member State in relation to laws, regulations and other provisions relating to the marketing of UCITS established in another Member State within the host's territories; (b) the definition of common standards and the content of procedures for facilitating the host State access to supporting documentation sent with the notification letter, and in particular the need for databases at national of EU level; (c) common standards and procedures for notification by UCITS to host States of amendments to the relevant documents; (d) the exhaustive content and a proposed format of the standard notification letter and attestation to be sent by the UCITS to the competent authority of its home state when it wishes to passport into another Member State, and
- Procedures and technical arrangements for facilitating the electronic communication and exchange of information required during the notification procedure and procedures to deal with the situation where there are technical problems or the host State competent authority establishes the notification file is incomplete.
REDOMICILING AN INVESTMENT FUND TO IRELAND
The Irish government has now introduced new draft legislation to allow for a more efficient system for re-domiciling non-Irish domiciled corporate funds into Ireland. The new system is expected to be in place by the end of 2009 or early in 2010.
The new system will enable corporate funds established and registered in certain jurisdictions to apply to the Register of Companies in Ireland ("CRO") to continue as a company under the laws of Ireland and to apply to the Financial Regulator to be authorised as a fund in Ireland. This re-domiciliation regime will enable re-domiciled funds to be authorised in Ireland as either a non-UCITS or UCITS funds provided that they meet the relevant criteria for the chosen fund structure.
Most likely, redomiciliation will be used by promoters wishing to utilise the UCITS product or the Irish QIF product (the vehicle most used for hedge funds, FoHF and less liquid/highly leveraged products) with the new redomiciliation opportunity making the process more straight forward and, most importantly, avoiding any necessity of having to liquidate a portfolio or engage in asset for share swap arrangements.
Should you require any additional information on the re-domiciliation process, please see the Dillon Eustace publication entitled "Re-Domiciling an Investment Fund to Ireland"
EU REGULATION OF PACKAGED RETAIL INVESTMENT PRODUCTS
In July, 2009 the European Council of Economics and Finance Ministers ("ECOFIN") published its conclusions on packaged retail investment products against a background of EC work to consolidate product information requirements and rules on product sales for investment products (including investment funds) bought by retail investors. It is expected that the EU Commission will issue proposals for a regulatory environment for the sale and disclosures of packaged retail investment products.
EUROPEAN COMMISSION PUBLIC CONSULTATION ON UCITS DEPOSITARIES
In July, 2009 the EC launched a public consultation on UCITS depositaries. This public consultation was part of a comprehensive review of the existing European regulatory principles applicable to depositary functions. The objective was to clarify and strengthen the regulation and supervision of UCITS depositaries, with a view to increasing the level of the protection of UCITS investors. The areas of particular interest related to safe keeping and supervisory duties and the responsibility regime. This consultation closed on 15 September 2009.
CESR issued a response to the EC's consultation in late September. In its letter to Commissioner McCreevy, CESR stated that it "expresses support for greater clarity, legal certainty and harmonisation in the duties and responsibility of UCITS depositaries. These entities play a key role in the UCITS framework, particularly in the promotion of investor protection. As such, the design and implementation of a robust and transparent legal framework is to be encouraged."
CESR also made specific recommendations as to the definition of safekeeping in that it could be composed of overall control of assets and segregation. CESR stated that a key requirement of the overall control of assets "would be that the assets could not be transferred by the manager/management company without prior knowledge or consent of the depositary." In terms of segregation, CESR believes in "imposing explicit controls on rehypothecation and clarifying that the sub-custodian should also be obliged to put in place proper segregation arrangements."
CESR also stated its concern about the EC's desire to apply certain elements of the Alternative Investment Fund Managers Directive ("AIFM") to the UCITS sphere as regards depositaries. CESR Members do not think the current draft of the AIFM represents a solid basis for the requirements that should apply to UCITS depositories. CESR sees the proposals in its consultation response as a good starting point for an improved legislative framework for depositaries.
IFIA AND AIMA LAUNCH REVISED GUIDE TO SOUND PRACTICES OF HEDGE FUND ADMINISTRATORS
On 18 September, 2009 the IFIA announced the publication of the revised Guide to Sound Practices for Hedge Fund Administrators in conjunction with AIMA. THE IFIA commented that the Guide, originally published in 2004, has benefited from significant updating by the industry Alternative Investment Committee to reflect various industry developments in areas such as valuations, tax and anti-money laundering.
The section on valuation, one of the most crucial and topical subjects in the industry, includes the IFIA Sample Pricing Policy Document as an appendix. This document also prepared by the Alternative Investment Committee provides detailed guidance and examples of what a sample pricing policy might contain. The Guide includes sections on a fund's start up phase; how administrators interact with a fund's investors; how the net asset value is calculated; and the additional services and support functions that administrators provide.
THE PAYMENT SERVICES REGULATIONS 2009
On 30 September the Minister for Finance brought Directive 2007/64/EC into law through the implementation of S.I. No. 383 of 2009 the European Communities (Payment Services) Regulations, 2009 (the "Regulations"). Part 1 and 2 come into operation on 1 October, 2009 with the remainder of the Regulations coming into operation on 1 November, 2009. It establishes a harmonised legal framework for payments services in the EU and EEA.
The Regulations essentially deal with three issues:
- it establishes who may provide payments services;
- it establishes transparency requirements to ensure that payment service providers give requisite information to their customers as related to payments; and
- it sets out the relative rights and obligations of payment service providers and payment service users.
The Regulations cover payments made by electronic means but excludes payments made by cash and cheque.
The six categories of payment service provider covered by the Regulations are:
- Credit Institutions;
- Electronic Money Institutions;
- Post Office Giro Institutions;
- Payment Institutions;
- European/National Central Banks; and
- Member States or Regional/Local Authorities.
The Regulations create a new class of regulated firm known as Payment Institutions which must obtain authorisation from the Financial Regulator in order to provide payment services. Payment Service Providers are also permitted to provide payment services under the Regulations and must comply with certain provisions of the Regulations but are not required to seek authorisation.
The Financial Regulator previously stated that any person who provides payment services without an appropriate authorisation may risk committing a criminal offence. Payment Institutions that require authorisation are required to contact the Financial Regulator (Clare Ahern or Shane Howe, Financial Institutions and Funds Authorisation, Financial Regulator, PO Box 9138, College Green, Dublin 2, Telephone: (01) 2244308 or (01) 2244386 Email: firstname.lastname@example.org or email@example.com).
LEHMAN'S CLIENT MONEY RULING
On 15 December, 2009, the High Court of England and Wales ruled on an application by the administrators of Lehman Brothers International (Europe) (LBIE) concerning client money which ought to have been segregated and protected in Lehman's hands in the event of insolvency. The client money protection is provided under both European legislation and UK domestic regulation.
The High Court had been asked to determine whether clients of LBIE whose money should have been segregated by LBIE, but had not been, still benefited from the protection of the statutory trust established by the FSA's CASS rules.
In summary, the High Court decided that the client money pool is to be distributed to those clients for whom LBIE had segregated client money at the time of its administration. There was no question of the pool being topped-up either to make good past failures, or to bring the pool up to date (so that it contained at the point of administration what would have been segregated had LBIE not gone into administration).
As a result, clients entitled to client money protection but for whom LBIE failed to comply with its obligation to segregate that money, will not be entitled to participate in the pool of client money controlled by the administrators.
The respondents have been given permission to appeal the decision to the Court of Appeal. No date has yet been fixed for the hearing of this appeal, but, given the obligation on the administrators to distribute the client money pool as soon as possible, it is expected to be heard early in 2010.
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.