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Regulated
Hedge Funds - Further Progress in Ireland1
The last four year period has been one in which the regulator, government and industry have been very active in formulating and implementing change and developing the framework for investment funds establishing in Ireland.
While the UCITS III Directives and legislation have dominated the landscape for some time this has not been to the detriment of development of the framework for regulated hedge funds.
The year 2000 saw the introduction by the Irish Financial Services Regulatory Authority (IFSRA) of an environment facilitating the establishment of professional investor hedge funds with the publication of Guidance Note 2/00.
Within two years IFSRA had moved further forward in providing for regulated funds of hedge funds saleable to retail investors. The rules facilitating professional investor hedge funds, which focus principally on the role of the prime broker and its relationship with the fund and the fund's custodian, have been under the microscope for some time now and have been the subject matter of intensive industry lobbying and consultation between IFSRA and industry.
The continued responsiveness of IFSRA to industry developments and requirements, while maintaining the high levels prudential regulation, have led to very welcome recent developments in the rules relating to retail funds of hedge funds and professional investor prime broker hedge funds.
Retail Funds of Hedge Funds
In June this year, and following industry consultation, IFSRA issued a revised NU25 which contains the rules governing funds of unregulated funds. NU 25 as originally introduced contained a limitation of 5% of net assets in any one unregulated fund and no more than 10% in units of funds managed by the same group. These limits were raised to 10% and 20% respectively if the underlying manager was authorised in an OECD jurisdiction.
The revised rules now contain a single diversification requirement and a fund is permitted to invest up to 20% of its net assets in the units of any one other fund. While there are additional disclosure requirements, there is no overall limit on the amount which can be invested in funds managed by the same group. The minimum subscription requirement of €12,500 has also now been removed.
Retail funds of funds are now permitted to invest up to 100% of their assets in unregulated funds subject to the stated diversification requirement of 20%. Such funds are also subject to the following a prohibition on investment in other funds of funds and feeder funds. This restriction is obviously designed to prevent a layering of investment and to provide for greater transparency.
NU 25 also imposes qualitative criteria on the underlying funds in which the regulated fund may invest. The underlying funds must be independently audited in accordance with generally accepted international accounting principles and must have their assets held by a party independent of the manager.
IFSRA also requires disclosure prospectus disclosures in relation to the risk profile of the underlying funds, specifically with regard to the risks associated with investment policies, leverage, liquidity issues and the effect of cumulative performance fees on returns. It is worth noting that the rules do not impose restrictions on the underlying funds and the issue is one of disclosure only.
The manager will also be required to demonstrate appropriate expertise and experience in managing alternative investment products and to also demonstrate that it has appropriate controls and systems in place to monitor the underlying funds.
The management of the fund must be able to provide to IFSRA on request, a detailed report on the risk profile and recent performance of the fund's investments.
Furthermore, where the fund invests more than 40% of net assets in schemes managed by the same group, the manager of the fund must make a quarterly report to IFSRA on the extent to which the underlying schemes diversified between trading strategies.
With respect to fees, initial and redemption charges must be waived by funds managed within the manager's group. Any commission received by the manager by virtue of investment in another fund cannot be retained by the manager must instead be paid into the property of the fund.
Direct investing prime broker hedge funds
Discussions between industry and IFSRA regarding the regulatory conditions attaching to the appointment of prime brokers and other financing counterparties have been ongoing for some time.
To date, prime broker funds have been operating in Ireland on the basis of the Guidance Note 2/00. Following these lengthy discussions, IFSRA has now issued a revised Guidance Note-/04 for consultation which contains substantial changes to the current regime. Industry groups have been working with IFSRA since the publication of the Guidance Note 2/00 to provide a more flexible framework for hedge funds in Ireland.
Under the current regime, a professional investor fund (minimum subscription of €125,000) and a qualifying investor fund (minimum subscription of €250,000 plus minimum net worth/assets test) may pass fund assets outside of the trustee network with such assets being held by one or more prime brokers as collateral.
The prime broker may then pledge, lend, re-hypothecate or otherwise utilise for its own purposes, these assets of the fund subject to certain conditions. One of the principle conditions which applies and which are now subject to amendment is a requirement that the assets so passed should not exceed the level of the funds indebtedness to the prime broker.
Draft Guidance Note-/04 would permit the assets so passed to have a value of up to 140% of the level of the funds indebtedness to the prime broker. This revised limitation would apply to professional investor funds only with the limitation being waived in its entirety for qualifying investor funds.
Set out below is a summary of the principle terms of the draft Guidance Note/04 on the appointment of prime brokers and related issues. While the principles of the changes have been approved by the Board of IFSRA, and IFSRA has confirmed that funds may immediately avail of its provisions, draft Guidance Note-/04 is currently with the industry for consultation and is therefore subject to change prior to publication in final form.
A PIF or QIF may enter into relationships with prime brokers where the fund can meet the following requirements:-
A. A PIF and QIF may pass assets of the fund to a prime broker which assets the prime broker may pledge, lend, re-hypothecate or otherwise utilise for its own purposes under the following conditions:-
1. In the case of a PIF, the assets so passed (including cash on deposit) shall not exceed 140% of the level of the PIFs indebtedness to the prime broker. In the case of a QIF, there is no limit on the extent to which assets may be passed to the prime broker subject to full disclosure in the prospectus of the extent of the potential exposure.
2. The arrangement provides for positions to be marked to market daily.
3. The prime broker agrees to return the same or equivalent securities to the fund.
4. The arrangements incorporate a legally enforceable right of set off for the fund.
B. Where the prime broker holds assets of a fund, other than as provided above, the prime broker must be appointed as a sub-custodian by the trustee. While the prime broker may take a charge over the assets so held, the assets must be held on a fiduciary basis.
C. The prime broker must be regulated as such by a recognised regulatory authority with the prime broker or its parent company having shareholders' funds in excess of €200million. The prime broker or its parent must also have a minimum credit rating of A1/P1.
Other financing counterparties
A PIF or QIF may enter into arrangements with counterparties, including counterparties to OTC derivatives provided that:
1. The counterparty has a minimum credit rating of A2/P2;
2. In the case of a PIF, risk exposure to the counterparty must not exceed 20% of net asset value rising to 30% in the case of a credit institution authorised in the EEA and other defined jurisdictions;
While these counterparty exposure limits are not applicable to QIFs, transactions which may give rise to counterparty exposure in excess of 40% of net asset value must be made in accordance with the conditions applicable to the appointment of prime brokers discussed above;
3. Counterparty risk exposure is measured on an aggregate basis to include for example exposures arising from investments in securities issued by the counterparty, amounts held on deposit and OTC derivative positions.
The draft Guidance Note-/04 also imposes stringent minimum monitoring and reconciliation obligations on the trustee of the fund.
While the substance of the changes to the prime broker rules are broadly welcome, a comprehensive industry submission has been made to IFSRA seeking certain clarifications, outlining potential issues and requesting further consideration by IFSRA of provisions viewed as problematic.
Industry will continue to work with IFSRA to ensure that the final Guidance Note-/04 is implemented in a way that respects both the need for sound regulation and the desirability of a healthy and efficient fund industry.
Future developments
Coming down the tracks, hopefully by the end of this year is a mini investment funds bill. The new legislation will enable ring fencing of liabilities at sub-fund level, cross investment between sub funds in an umbrella structure and contain provisions for establishing non-UCITs Common Contractual Fund structures.
IFSRA has also undertaken to review its requirements in relation to the provision by funds of collateral security to counterparties. The partnership of industry regulator and government clearly never rests in its work to preserve and enhance Ireland's position as the dominant regulated hedge fund jurisdiction.
The last four year period has been one in which the regulator, government and industry have been very active in formulating and implementing change and developing the framework for investment funds establishing in Ireland.
While the UCITS III Directives and legislation have dominated the landscape for some time this has not been to the detriment of development of the framework for regulated hedge funds.
The year 2000 saw the introduction by the Irish Financial Services Regulatory Authority (IFSRA) of an environment facilitating the establishment of professional investor hedge funds with the publication of Guidance Note 2/00.
Within two years IFSRA had moved further forward in providing for regulated funds of hedge funds saleable to retail investors. The rules facilitating professional investor hedge funds, which focus principally on the role of the prime broker and its relationship with the fund and the fund's custodian, have been under the microscope for some time now and have been the subject matter of intensive industry lobbying and consultation between IFSRA and industry.
The continued responsiveness of IFSRA to industry developments and requirements, while maintaining the high levels prudential regulation, have led to very welcome recent developments in the rules relating to retail funds of hedge funds and professional investor prime broker hedge funds.
Retail Funds of Hedge Funds
In June this year, and following industry consultation, IFSRA issued a revised NU25 which contains the rules governing funds of unregulated funds. NU 25 as originally introduced contained a limitation of 5% of net assets in any one unregulated fund and no more than 10% in units of funds managed by the same group. These limits were raised to 10% and 20% respectively if the underlying manager was authorised in an OECD jurisdiction.
The revised rules now contain a single diversification requirement and a fund is permitted to invest up to 20% of its net assets in the units of any one other fund. While there are additional disclosure requirements, there is no overall limit on the amount which can be invested in funds managed by the same group. The minimum subscription requirement of €12,500 has also now been removed.
Retail funds of funds are now permitted to invest up to 100% of their assets in unregulated funds subject to the stated diversification requirement of 20%. Such funds are also subject to the following a prohibition on investment in other funds of funds and feeder funds. This restriction is obviously designed to prevent a layering of investment and to provide for greater transparency.
NU 25 also imposes qualitative criteria on the underlying funds in which the regulated fund may invest. The underlying funds must be independently audited in accordance with generally accepted international accounting principles and must have their assets held by a party independent of the manager.
IFSRA also requires disclosure prospectus disclosures in relation to the risk profile of the underlying funds, specifically with regard to the risks associated with investment policies, leverage, liquidity issues and the effect of cumulative performance fees on returns. It is worth noting that the rules do not impose restrictions on the underlying funds and the issue is one of disclosure only.
The manager will also be required to demonstrate appropriate expertise and experience in managing alternative investment products and to also demonstrate that it has appropriate controls and systems in place to monitor the underlying funds.
The management of the fund must be able to provide to IFSRA on request, a detailed report on the risk profile and recent performance of the fund's investments.
Furthermore, where the fund invests more than 40% of net assets in schemes managed by the same group, the manager of the fund must make a quarterly report to IFSRA on the extent to which the underlying schemes diversified between trading strategies.
With respect to fees, initial and redemption charges must be waived by funds managed within the manager's group. Any commission received by the manager by virtue of investment in another fund cannot be retained by the manager must instead be paid into the property of the fund.
Direct investing prime broker hedge funds
Discussions between industry and IFSRA regarding the regulatory conditions attaching to the appointment of prime brokers and other financing counterparties have been ongoing for some time.
To date, prime broker funds have been operating in Ireland on the basis of the Guidance Note 2/00. Following these lengthy discussions, IFSRA has now issued a revised Guidance Note-/04 for consultation which contains substantial changes to the current regime. Industry groups have been working with IFSRA since the publication of the Guidance Note 2/00 to provide a more flexible framework for hedge funds in Ireland.
Under the current regime, a professional investor fund (minimum subscription of €125,000) and a qualifying investor fund (minimum subscription of €250,000 plus minimum net worth/assets test) may pass fund assets outside of the trustee network with such assets being held by one or more prime brokers as collateral.
The prime broker may then pledge, lend, re-hypothecate or otherwise utilise for its own purposes, these assets of the fund subject to certain conditions. One of the principle conditions which applies and which are now subject to amendment is a requirement that the assets so passed should not exceed the level of the funds indebtedness to the prime broker.
Draft Guidance Note-/04 would permit the assets so passed to have a value of up to 140% of the level of the funds indebtedness to the prime broker. This revised limitation would apply to professional investor funds only with the limitation being waived in its entirety for qualifying investor funds.
Set out below is a summary of the principle terms of the draft Guidance Note/04 on the appointment of prime brokers and related issues. While the principles of the changes have been approved by the Board of IFSRA, and IFSRA has confirmed that funds may immediately avail of its provisions, draft Guidance Note-/04 is currently with the industry for consultation and is therefore subject to change prior to publication in final form.
A PIF or QIF may enter into relationships with prime brokers where the fund can meet the following requirements:-
A. A PIF and QIF may pass assets of the fund to a prime broker which assets the prime broker may pledge, lend, re-hypothecate or otherwise utilise for its own purposes under the following conditions:-
1. In the case of a PIF, the assets so passed (including cash on deposit) shall not exceed 140% of the level of the PIFs indebtedness to the prime broker. In the case of a QIF, there is no limit on the extent to which assets may be passed to the prime broker subject to full disclosure in the prospectus of the extent of the potential exposure.
2. The arrangement provides for positions to be marked to market daily.
3. The prime broker agrees to return the same or equivalent securities to the fund.
4. The arrangements incorporate a legally enforceable right of set off for the fund.
B. Where the prime broker holds assets of a fund, other than as provided above, the prime broker must be appointed as a sub-custodian by the trustee. While the prime broker may take a charge over the assets so held, the assets must be held on a fiduciary basis.
C. The prime broker must be regulated as such by a recognised regulatory authority with the prime broker or its parent company having shareholders' funds in excess of €200million. The prime broker or its parent must also have a minimum credit rating of A1/P1.
Other financing counterparties
A PIF or QIF may enter into arrangements with counterparties, including counterparties to OTC derivatives provided that:
1. The counterparty has a minimum credit rating of A2/P2;
2. In the case of a PIF, risk exposure to the counterparty must not exceed 20% of net asset value rising to 30% in the case of a credit institution authorised in the EEA and other defined jurisdictions;
While these counterparty exposure limits are not applicable to QIFs, transactions which may give rise to counterparty exposure in excess of 40% of net asset value must be made in accordance with the conditions applicable to the appointment of prime brokers discussed above;
3. Counterparty risk exposure is measured on an aggregate basis to include for example exposures arising from investments in securities issued by the counterparty, amounts held on deposit and OTC derivative positions.
The draft Guidance Note-/04 also imposes stringent minimum monitoring and reconciliation obligations on the trustee of the fund.
While the substance of the changes to the prime broker rules are broadly welcome, a comprehensive industry submission has been made to IFSRA seeking certain clarifications, outlining potential issues and requesting further consideration by IFSRA of provisions viewed as problematic.
Industry will continue to work with IFSRA to ensure that the final Guidance Note-/04 is implemented in a way that respects both the need for sound regulation and the desirability of a healthy and efficient fund industry.
Future developments
Coming down the tracks, hopefully by the end of this year is a mini investment funds bill. The new legislation will enable ring fencing of liabilities at sub-fund level, cross investment between sub funds in an umbrella structure and contain provisions for establishing non-UCITs Common Contractual Fund structures.
IFSRA has also undertaken to review its requirements in relation to the provision by funds of collateral security to counterparties. The partnership of industry regulator and government clearly never rests in its work to preserve and enhance Ireland's position as the dominant regulated hedge fund jurisdiction.
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For
further information contact: |
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The
Equality Act 2004 introduces significant amendments to the Employment
Equality Act 1998 and the Equal Status Act 2000
On the 19th July, 2004 the President signed into law the Equality Act 2004, (the "Act"). The purpose of the Act is to make further and better provisions in relation to Equality of Treatments in the work place and elsewhere in Society.
The Act amends the Employment Equality Act 1998 and the Equal Status Act 2000. The Act also gives effect to numerous European Directives including the general framework for equal treatment and employment Directive (2002/73/EC), the equal treatment between persons irrespective of racial or ethnic origin Directive (2000/78/EC) and the equal treatment for men and women as regards access to employment, vocational training and promotion and working conditions Directive (76/207/EEC).
All sections of the Act came into operation with effect from the 19th July 2004 and the two main pieces of legislation affected are the Employment Equality Act 1998 and the Equal Status Act 2000.
The main
amendments to the Employment Equality Act 1998
On the 19th July, 2004 the President signed into law the Equality Act 2004, (the "Act"). The purpose of the Act is to make further and better provisions in relation to Equality of Treatments in the work place and elsewhere in Society.
The Act amends the Employment Equality Act 1998 and the Equal Status Act 2000. The Act also gives effect to numerous European Directives including the general framework for equal treatment and employment Directive (2002/73/EC), the equal treatment between persons irrespective of racial or ethnic origin Directive (2000/78/EC) and the equal treatment for men and women as regards access to employment, vocational training and promotion and working conditions Directive (76/207/EEC).
All sections of the Act came into operation with effect from the 19th July 2004 and the two main pieces of legislation affected are the Employment Equality Act 1998 and the Equal Status Act 2000.
- The extension of the scope of the 1998 Act to persons employed in a self-employed capacity.
- The extension of positive action provisions to all nine grounds covered by the Act (gender, age, disability, race, religious belief or lack of belief, family status, marital status, sexual orientation, member of the travelling community), the extension of the age ground provisions of the Act to persons under the age of 18. However, the person must be over the minimum school leaving age. The age ground provisions of the Act are also extended to people over the age of 65. However, employers will still be allowed to set a minimum recruitment age of 18 or under and to set retirement ages.
- Provision for the narrowing of the exclusions from the provisions of the 1998 Act in respect of employment in private household.
- The requirements on employers to provide reasonable accommodation to persons with disabilities. However, this is subject to a proviso that the provision of the reasonable accommodation does not impose a disproportionate burden on the employer.
- The transfer of the jurisdiction for discriminatory dismissal cases from the Labour Court to the Equality Tribunal.
- The new Act provides a means of redress for motor drivers under the age of 18 years who have been discriminated against by motor insurance companies.
- Provisions for the shifting of the evidential burden of proof from the complainant to the respondent once the complainant has established a prima facia case and
- Allowing claimants and respondents to choose any person, including an organisation to represent them before the ODEI Equality Tribunal.
| For
further information contact: Laurena Hughes at Email : lhughes@kilroys.ie © Kilroys Solicitors 2004 |
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Stamp
Duty exemptions on Agreements transferring Intellectual Property Rights
Section 74 of the Finance Act 2004 introduced an important exemption from Stamp Duty for instruments effecting the transfer of and contracts for the sale intellectual property. Prior to 1st April 2004 these instruments attracted stamp duty at rates up to 9%.
Intellectual property (as defined in section 101(1) of the Finance Act 2004) is any;
Section 74 of the Finance Act 2004 introduced an important exemption from Stamp Duty for instruments effecting the transfer of and contracts for the sale intellectual property. Prior to 1st April 2004 these instruments attracted stamp duty at rates up to 9%.
Intellectual property (as defined in section 101(1) of the Finance Act 2004) is any;
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patent,
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trademark,
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copyright,
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registered design,
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design right,
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invention,
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domain name,
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supplementary protection certificate or,
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plant breeder's rights.
The
exemption applies to any instrument effecting the sale, transfer or
other disposition of intellectual property, such as a contract for
sale, a licence or a mortgage executed on or after 1st April 2004.
Goodwill to the extent that it is directly attributable to the intellectual property being transferred is covered by the exemption but it should be noted that the exemption does not extend to any element of goodwill that is attributable to a business.
Instruments that deal with the transfer of property other than exempted intellectual property will have to apportion the consideration on a just and equitable basis as between the intellectual property and the other property.
Goodwill to the extent that it is directly attributable to the intellectual property being transferred is covered by the exemption but it should be noted that the exemption does not extend to any element of goodwill that is attributable to a business.
Instruments that deal with the transfer of property other than exempted intellectual property will have to apportion the consideration on a just and equitable basis as between the intellectual property and the other property.
| For
further information contact: Patrick Ryan at Email : pryan@kilroys.ie © Kilroys Solicitors 2004 |
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Residential
Tenancies Act 2004 becomes law with significant implications for the
private residential rental sector
1st September 2004 was the "commencement date" for the Residential Tenancies Act, 2004.
It is important to note that it applies to every dwelling the subject of a tenancy, including a tenancy created before the Act was passed.
The Act has introduced numerous changes to the legislation governing the relationship of landlord and tenant, which landlords in the private rental sector need to familiarize themselves with. Failure to abide by the rules could result in prosecution and the imposition of considerable fines.
1st September 2004 was the "commencement date" for the Residential Tenancies Act, 2004.
It is important to note that it applies to every dwelling the subject of a tenancy, including a tenancy created before the Act was passed.
The Act has introduced numerous changes to the legislation governing the relationship of landlord and tenant, which landlords in the private rental sector need to familiarize themselves with. Failure to abide by the rules could result in prosecution and the imposition of considerable fines.
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The Act requires landlords to register with the Private Residential Tenancies Board (PRTB) within three months from the commencement date - i.e. by the 1st December 2004.
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Landlords with a single tenancy will incur a €70 registration fee and landlords registering in respect of a number of tenancies can avail of a composite registration fee of €300.
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Delay in registering will result in a late penalty fine of €140. Those who refuse to pay shall be liable for a fine of up to €3,000 and/or six months in prison, along with a daily fine of €250 for a continuing offence.
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Rent increases may not occur more than once a year during the tenancy and landlords will not be able to seek rent increases greater than the going market rate.
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Depending on the length of occupation of a rented dwelling, the termination notice period shall range from a minimum of 28 days to a maximum of 112 days for landlords and from a minimum of 28 days to a maximum of 56 days for tenants.
The
Landlord can terminate without specifying grounds during the first
6 months, but once a tenancy has lasted 6 months, the landlord will
be able to terminate that tenancy during the following 3 ½
years only if any of the following apply;
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The tenant does not comply with the obligations of the tenancy.
- The dwelling is no longer suited to the occupant's accommodation needs (e.g. overcrowding).
- The landlord intends to sell the dwelling in the next 3 months.
- The landlord requires the dwelling for own or family member occupation.
- The landlord intends to refurbish the dwelling.
- The landlord intends to change the business use of the dwelling.
Other
provisions included in the Act are as follows;
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The abolition of the entitlement to apply, for the first time, for a long occupation equity lease under the 1980 Landlord and Tenant Act.
- The identification of management companies in tenancy registration details.
- The strengthening of the local authority powers to deal with anti-social behaviour in their estates.
| For
further information contact: Eamon Jones at Email : ejones@kilroys.ie or © Kilroys Solicitors 2004 |
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