Research

We’re half way through 2018 and it’s been a busy six months in the regulatory space for asset managers. This briefing outlines a number of key developments at both domestic and EU level, regarding, regulatory returns, CP86, anti-money laundering, corporate governance, remuneration, depositaries and cross-border distribution of collective investment funds.

Regulatory returns

In June 2018, the Central Bank of Ireland (Central Bank) published guidance¹ providing information and direction on the completion of the Fund Profile Return (FPR) which replaces the Annual Investment Fund Sub-Fund Profile return.

The FPR covers all authorised alternative investment funds (“AIFs”) and Undertakings for Collective Investment in Transferable Securities (“UCITS”). According to the Guidance, it “seeks to capture the essential information relevant to the investment policy, operation and governance” of the relevant sub-fund.

The FPR must be completed within 10 working days of the approval/authorisation of a new Sub-Fund/Standalone Fund (collectively “Sub-Fund”). It must also be completed on an annual basis to confirm the Sub-Fund’s profile and update for changes. The first annual FPR is required for all Irish authorised Sub-Funds at 30 June 2018 and is due on 31 August 2018. Thereafter the FPR is required at 31 December and is due on the following 28/29 February.

CP86

As set out in earlier briefings^{2, 3} existing fund management companies (FMCs) (being UCITS management companies, AIFMs, self-managed UCITS and internally managed AIFs) established prior to 1 November 2015, must comply with the new rules introduced under the CP86 regime by 1 July 2018. These include the requirement to appoint a designated person for six specific managerial functions.

Under the Central Bank’s Fitness and Probity Regime, persons carrying out certain functions must be pre-approved by the Central Bank. These functions are known as Pre-Approval Controlled Functions (PCFs). The function of a Designated Person with responsibility for managerial functions falls under PCF-39. The functions of executive and non-executive directors fall under PCF-1 and PCF-2 respectively.

On 15 June 2018 the Central Bank published a communication⁴ to clarify arrangements for submitting applications under the Central Bank’s Fitness and Probity Regime, in order to act as a designated person of an FMC.

According to the Central Bank, in instances where an FMC appoints a director as a designated person, both roles will require a separate fitness and probity assessment (under PCF-1/PCF-2 and PCF-39). However, in the case of an FMC that is required to appoint a designated person by 1 July 2018, the Central Bank will not require directors who currently act as a designated person, or are appointed to this role on or before 30 June 2018, to apply for approval as a PCF-39.

Anti-money laundering requirements

The Irish government has published the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2018, which is intended to transposed the Fourth Money Laundering Directive 2015/489. For further information, please see our briefing⁵.

Corporate governance

The Central Bank has published its Second Consultation Paper on the Corporate Governance Requirements for Investment Firms and Market Operators⁶.The Central Bank first consulted on this issue in 2015. The revised consultation takes into account the implementation of the MiFID II regulatory framework as well as the responses received by the Central Bank to its initial consultation.

The proposed corporate governance requirements will apply to firms authorised by the Central Bank that are designated as High, Medium High or Medium Low Impact under the Central Bank’s Probability Risk Impact System (PRISM) (Relevant Firms). It will not apply to firms designated as Low Impact, although the Central Bank is encouraging such firms to adopt the requirements consistent with best practice.

The consultation closes on 31 July 2018 and the corporate governance requirements are to apply to relevant firms from 1 July 2019.

Remuneration

Article 69(3)(a) of the UCITS Directive 2009/65 requires UCITS management companies (ManCo) and self-managed UCITS to publish an annual report which includes the total amount of remuneration for the financial year paid to its staff, and the number of its beneficiaries.

On 25 May 2018, the European Securities and Markets Authority (ESMA) updated its UCITS Q&A⁷ to include a new question and answer (Q&A) which states that the remuneration disclosure requirement set out in Article 69(3)(a) of the UCITS Directive also applies to the staff of a ManCo’s delegate to whom investment management functions have been delegated.

UCITS ManCos can ensure compliance in two ways:

• where the delegate is subject to equally effective regulatory requirements on remuneration disclosures for its staff to whom investment activities have been delegated, the ManCo should use the information disclosed by the delegate to fulfil the ManCo’s Article 69(3)(a) obligations; or
• by putting in placing appropriate contractual arrangements with the delegate to allow the ManCo to receive at least information on the total amount of remuneration for the financial year paid by the ManCo, the investment company and, where relevant the UCITS itself to the delegate’s identified staff.

According to the new Q&A, that disclosure may be provided on an aggregate basis, i.e., by means of a total amount for all the delegates of the management company in relation to the relevant UCITS. The new Q&A reflects an existing Q&A in ESMA’s Q&A on the Application of the AIFMD.

Depositaries

The European Commission has published proposals to amend the requirements on the safekeeping duties of depositaries under the Level 2 measures applicable under the UCITS Directive and the Alternative Investment Fund Managers Directive (AIFMD).

The new proposals follow up on ESMA’s opinion on asset segregation, published in July 2017. They seek to clarify the rules on the obligations imposed on depositaries in order to facilitate their uniform interpretation throughout the EU. Among other things, the proposals provide that UCITS, AIFs and other client assets can be comingled at the level of the first custodian under the condition that they are initially held by the same depository (or are initially held by the same custodian where the latter further delegates the custody of assets down the custody chain).

If adopted, the proposals will amend both Commission Delegated Regulation 2016/438 (which supplements the UCITS Directive)⁸ and Commission Delegated Regulation 231/2013 (which supplements AIFMD)⁹.

Cross-border distribution of investment funds

As set out in our related briefing¹⁰, on 12 March 2018, the Commission presented proposals for:

• a Directive amending Directives 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment funds (“Proposed Directive”); and
• a Regulation on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No346/2013.

The Proposed Directive would amend AIFMD so as to include a new definition of ‘pre-marketing’ and to specify the conditions under which pre-marketing can occur. According to the proposed definition, ‘pre-marketing’ means:

“a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established.”

On 15 June 2018, the Council of Ministers published its compromise proposal¹¹, which among other things includes a new, more expansive definition of “pre-marketing”. According to the Council’s definition:

‘pre-marketing’ means a direct or indirect provision of information or communication on investment strategies or investment ideas by an EU AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF or a compartment of an AIF, which is not yet established or which is established, but not yet notified for marketing in accordance with Article 32, in that Member state where the investors are domiciled or have their registered office, and which in each case does not amount to an offer or placement to the investor to invest in the units or shares of that AIF or a compartment

The Council’s definition is likely to be warmly welcomed by those member states which take a more expansive approach on the issue of pre-marketing than that of the Commission. Once the European Parliament has finalised its position, the Proposed Directive will be the subject of trilogue discussions between the Commission, Council and Parliament before it is finally adopted.

Mark is Head of the Investment Management Group at McCann FitzGerald. He advises a wide variety of clients who are engaged in the promotion and management of all types of investment funds, including UCITS funds, money market funds, ETFs, hedge funds, real estate funds, infrastructure/real assets and private equity funds. He works with some of the largest fund managers in the domestic and international funds market, as well as with large institutional and seed investors, such as pension schemes, and many of the leading prime brokerage houses. Mark also provides advice on investment business regulation and financial services law.

With over 600 people, including over 430 lawyers and professional staff, McCann FitzGerald is Ireland’s premier law firm. The firm is divided broadly into four main groupings of corporate, banking and financial services, dispute resolution and litigation and real estate (including construction). We also operate industry sector and specialist practice groups which comprise professionals from different groupings. McCann FitzGerald was named as a Top 50 innovative firm and the FT Innovative Lawyer Awards 2017 and awarded “Law Firm of the Year 2018” at The Lawyer European Awards. For more information, please visit www.mccannfitzgerald.com.