Brexit and Investment Funds

Overview

The investment funds industry is an area that is heavily regulated at EU level by the Alternative Investment Fund Managers Directive (“AIFMD”), the Undertakings for Collective Investment in Transferable Securities Directive (“UCITS”) and the Markets in Financial Instruments Directive (“MiFID”).

Marketing of Investment Funds

(a)

(b) UK Domiciled Fund

UCITS

It will no longer avail of the right to passport across the EU under the UCITS regime.

To continue to be marketed in the EU:

national private placement regimes will likely apply; or
the fund could consider re-establishing in an EU member state

It will continue to avail of the right to passport into the EU.

If marketing into the UK, it is likely that UK national private placement rules/local law would apply.

AIFMD

If AIFM is UK licensed, it will no longer avail of the right to passport across the EU under the AIFMD regime.

To continue to be marketed in the EU, the fund could:

continue to be marketed by the UK AIFM with no great change if the AIFMD passport is extended to the UK post-Brexit; or
appoint an AIFM in an EU member state; or
consider re-establishment as a self-managed AIF within an EU member state.

Business as usual unless AIFM is UK licensed.

If marketing into the UK, it is likely that national private placement rules/local law would apply.

To continue to be marketed in the EU where AIFM is licensed, the fund could:

continue to be marketed by the UK AIFM with no great change if the AIFMD passport is extended to the UK post-Brexit; or
appoint an AIFM in an EU member state; or
consider converting to a self-managed AIF.

Distribution

For UK distributors of funds, the MiFID right to market cross-border will no longer be available. A UK Distributor may be able to continue marketing in the EU subject to local third country rules, or alternatively, establish a MiFID regulated entity in the EU.

Investment Funds will need to consider the markets in which they operate and whether, post-Brexit, it will still be possible for them to operate in those markets. For Irish funds marketing in the UK and for UK funds marketing in the EU, the landscape will change.

As of as of 7 January 2019, UK authorities are accepting formal notifications from EEA firms and funds that may wish to make use of the Temporary Permission Regimes.

This notification window will close on 28 March 2019 and firms that have not submitted a notification prior to 29 March will be unable to continue accessing the UK market on the same basis as currently. Furthermore, fund managers that have not submitted a notification for a fund will be unable to use the temporary permissions marketing regime for that fund. They will not be able to continue marketing that fund in the UK on the same basis as they did before exit day.

Other Key Considerations

Other issues for investment funds and fund managers to consider may include the following:

The London Stock Exchange (“LSE”) will no longer be recognised as an EU-regulated market and amendments to fund documentation will be required to ensure that securities listed on the LSE can still be purchased;
EU fund management companies are required to have at least two-thirds of their directors in the EEA - this could prove problematic for UK sponsored funds post-Brexit;
Legal and fund documentation will have to be amended to update definitions and certain clauses;
A possible ‘Brexit risk warning’ should be inserted into fund documentation;
Changes to the Taxation section in fund documentation may be required to reflect any changes in UK law;
There could also be implications in relation to investment objectives and policies of particular funds;
Member State of Reference – reconsideration of the member state of reference under AIFMD for those AIFs who intended to designate the UK as the member state of reference;
Recognised Market – there may be a requirement to specify individually each of the UK exchanges in UCITS fund documentation;
UCITS fund of fund rules – UK domiciled UCITS may lose their UCITS status with the result that Irish UCITS investing in UK UCITS may be required to rebalance their portfolios;
Remuneration requirements – the UK may continue to impose remuneration requirements on portfolio managers;
Approval of UK investment managers – the possibility of having to undergo the Central Bank of Ireland’s approval process for non-EU managers should the UK manager lose its MiFID status.

Conclusion

The potential impact of Brexit on both funds and fund managers needs to be considered and contingency plans acted upon. This is particularly relevant for fund managers wishing to keep EU distribution channels open. Ireland is a potential market for re-domiciliation and future product