Global Legal Insights: Fund Finance 2017

Author:Mr Kevin Murphy, Kevin Lynch and David O'Shea
Profession:Arthur Cox

Overview of the Irish funds industry

Ireland is regarded as a key strategic location by the world's investment funds industry. Investment funds established in Ireland are sold in over 70 countries across Europe, the Americas, Asia, Africa and the Middle East. As of July 2016 there were 6,284 Irish domiciled funds with net assets of over €1.9trn. While the majority of these fund assets are held in UCITS funds1, Irish-domiciled AIFs2 had in excess of €460bn in net assets as of July 2016 (representing significant growth in the size of alternative investment funds since the introduction of AIFMD in 2013). The majority of the investment in these regulated investment funds comes from non-Irish institutional investors.

General introduction to the regulatory framework

The Central Bank of Ireland ("Central Bank") is responsible for the authorisation and supervision of regulated financial service providers in Ireland, including regulated investment funds and investment managers. The powers delegated to the Central Bank are set out in the laws and regulations applicable to the relevant financial services sector. In addition, the Central Bank issues guidance in relation to various aspects of the authorisation and ongoing requirements applicable to financial service providers and investment fund products in Ireland.

Common fund structures

Ireland as a domicile provides a variety of potential fund structures, which can be broadly categorised as regulated by the Central Bank or unregulated.

Regulated structures There are four main types of regulated fund structure in Ireland (as described below): (i) variable capital investment companies ("Investment Companies"); (ii) Irish collective asset management vehicles (or "ICAVs"); (iii) unit trusts; and (iv) common contractual funds (or "CCFs"). Each of these regulated fund structures may be established as UCITS pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011, as amended (the "UCITS Regulations" 3) or as an alternative investment fund ("AIF") pursuant to the EU (Alternative Investment Fund Managers) Regulations 2013 (the "AIFMD Regulations")4. An AIF may also be established as a regulated investment limited partnership (pursuant to the Investment Limited Partnership Act 1994). These structures may be organised in the form of umbrella schemes with segregated liability between compartments ("sub-funds").

Investment Companies An Investment Company is established as a public limited company under the Irish Companies Acts. They have a separate legal identity and there is no recourse to the shareholders. There is a requirement to spread risk if the fund is established as an Investment Company. It is typically the board of directors of the Investment Company who will have to approve any decision to borrow, grant security or enter into derivatives, although it will be important in each case to review the Investment Company's constitutional documents including its memorandum and articles of association, prospectus and/or supplement thereto and any management agreements that have the authority to execute the necessary agreements.

ICAVs The ICAV is an Irish corporate investment fund which was introduced in 2015 to meet the needs of the global funds industry, pursuant to the Irish Collective Asset Management Act 2015 (the "ICAV Act"). Since its creation, the ICAV has replaced the Investment Company as the most commonly used structure for newly established funds in Ireland. One of the main advantages of the ICAV is that it may be eligible to elect to be treated as a transparent entity for the US federal income tax proposes by "checking the box". This would allow US taxable investors to avoid certain adverse US tax consequences that would normally apply to "passive foreign investment companies". Most Irish funds have historically been authorised as Investment Companies and, as such, are required to comply with many of the rules applicable to Irish companies which may not be relevant or appropriate to an investment fund. The ICAV is a bespoke corporate structure that is specifically designed to give more administrative flexibility than an Investment Company. For example, the ICAV may:

amend its constitutional documents without shareholder approval in respect of changes that do not prejudice the interest of shareholders and do not come within certain categories of changes specified by the Central Bank; prepare separate financial statements for sub-funds; issue debenture stock, bonds and any other securities; and allow directors to dispense with the holding of an AGM by giving written notice to all shareholders. UCITS and AIFs established in Ireland can convert into an ICAV subject to compliance with the conversion process specified by the Central Bank. However, it is not possible to use the ICAV conversion procedure in respect of an existing UCITS or AIF unit trust, investment limited partnership or common contractual fund. Importantly, it does not affect the legal existence of the fund or any preconversion rights or obligations. The ICAV Act contains a mechanism for existing corporate collective investment schemes established in the Cayman Islands, the British Virgin Islands, Bermuda, Jersey, Guernsey and the Isle of Man to migrate or redomicile to Ireland as an ICAV by operation of law. The migration process is the same as the fund redomiciliation process that was introduced in Ireland in 2009, pursuant to which non-Irish funds can move to Ireland and become subject to Ireland's regulatory regime for investment funds. The main difference with the ICAV migration process is that the application for migration is made solely to the Central Bank and not to the Irish Registrar of Companies. The analysis in relation to who has authority to contract e.g. borrow, grant security, enter into derivatives, for an ICAV are the same as for an Investment Company.

Unit Trusts Unlike an Investment Company, a Unit Trust is not a separate legal entity but rather a contractual fund...

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