Investment Funds: New Central Bank Regulations for UCITS
25 June 2019
On 27 May 2019, the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2019 (the “CBI UCITS Regulations”) entered into Irish law regulating Irish UCITS self-managed investment companies (“SMIC”), UCITS management companies (“ManCo”) and depositaries of UCITS. The new regulations replace, and for the main part restate the Central Bank UCITS regulations that entered into force in 2015 (the “2015 UCITS Regulations”).
Many of the requirements of the 2015 UCITS Regulations are restated in the CBI UCITS Regulations. In addition, the CBI UCITS Regulations consolidate amendments that had been made to the 2015 UCITS Regulations and in certain instances also incorporate guidance that was previously available on the Central Bank’s website. As can be seen from the Central Bank’s CP119 Feedback Statement, the CBI UCITS Regulations also reflect the results of a consultation process conducted by the Central Bank with industry stakeholders.
The key amendments introduced by the CBI UCITS Regulations are as follows:
Regulation 73 of the CBI UCITS Regulations requires a UCITS, which uses financial derivative instruments at share class level, to disclose the following in its prospectus:
A clear description of the strategies that the UCITS pursues and the effect that this may have on the relevant share class(es)
A description of the general currency hedging strategies of the UCITS and the features of individual currency share class(es)
Where a UCITS intends to invest in any asset that is denominated in a currency other than the base currency at share class level, a disclosure:
As to whether it is the intention of the UCITS to hedge the resulting currency exposure back into the base currency and, if it is so intended, to what extent, and
Of the general costs and, if relevant, exchange rate risk that is associated with the currency strategy
Where a UCITS has established an unhedged currency share class, a disclosure:
That a currency conversion will take place upon subscriptions, redemptions and distributions at prevailing currency exchange rates, and
That the value of the share class expressed in the class currency will be subject to currency fluctuations in respect of the base currency
Where a UCITS has established hedged share classes, a disclosure shall state:
That, to the extent that hedging is successful, the performance of the class is likely to move in line with the performance of the underlying asset or assets
That investors in the hedged class will not benefit if the class currency falls against the base currency or against the currency in which the assets of the UCITS are denominated
The implications for unitholders of the hedging policy, including at least the following:
A statement indicating the extent to which the UCITS intends to hedge against currency fluctuations and noting that, while not the intention, nonetheless over-hedged or under-hedged positions may arise due to factors outside of the control of the UCITS
A statement that over-hedged positions shall not exceed 105% of the net asset value of the class and under-hedged positions shall not fall below 95% of the net asset value of the class
A statement that the hedged positions will be kept under review to ensure that over-hedged positions and under-hedged positions do not exceed the permitted level. A review for these purposes must incorporate a procedure to ensure that any position materially in excess of 100% of net assets is not carried forward from month-to-month
A statement that transactions will be clearly attributable to a specific class
A statement that currency exposures of different currency classes may not be combined or offset and that currency exposures of assets of the UCITS may not be allocated to separate share classes, and
A statement that the costs and gains or losses of the hedging transactions will accrue solely to the relevant class
Half-yearly and full 12 months accounts
Under the 2015 UCITS Regulations, a UCITS SMIC/ManCo was required to prepare half-yearly accounts twice in every financial year to cover the first six months and also the second six months of that financial year; each of which was required to be submitted to the Central Bank within two months of the end of the reporting period to which the relevant accounts relate.
This requirement has now changed, under the CBI UCITS Regulations a UCITS SMIC/ManCo must now prepare:
- Half-yearly accounts to cover the first six months only of that financial year, which is required to be submitted to the Central Bank within two months of the end of the relevant half-year to which the particular accounts relate to, and
- Accounts for the full 12 months of the relevant financial year, which must be submitted to the Central Bank within one month of the end of that financial year
Monitored email address
Regulation 47 of the CBI UCITS Regulations requires a UCITS to establish and maintain an email address for correspondence with the Central Bank. This email address is required to be monitored daily and the Central Bank must be promptly informed, in writing, of any change to that email address. This requirement puts on a statutory footing the previous guidance of the Central Bank on this matter.
Money market funds
The requirements regarding money market funds that existed under the Replaced 2015 Regulations have been updated and amended to reflect the requirements of the EU Money Market Fund Regulation that has applied to all new UCITS authorised by the Central Bank on and after 21 July 2018 and to all existing UCITS since 21 January 2019.
Annual management fee of a structured UCITS
Regulation 41 of the CBI UCITS Regulations now permits a structured UCITS, which provides a pre-defined return to investors, to charge an annual management fee calculated on the basis of a percentage of the initial offer price per share of that structured UCITS.
Regulation 40 of the CBI UCITS Regulations, which codifies the Central Bank’s existing guidance on performance fees, will require performance fees to crystallise and be payable once per year on:
- Achieving a new high net asset value over the life of the UCITS, or
- The out-performance of an index
On 6 June 2019, the Central Bank published an updated version of its UCITS Q&A, where it clarified the following in relation to performance fees:
- It is acceptable to charge performance fees at an individual investor level or at a share class/fund level, as adjusted for subscriptions and redemptions, and
- The crystallisation and payment of a performance fee by a UCITS upon the redemption of units by an investor is not considered to be an annual calculation for the purposes of Regulation 40 of the CBI UCITS Regulations
The CBI UCITS Regulations apply an 18 month grandfathering period for UCITS in existence as at 27 May 2019 to comply with the requirements relating to the crystallisation of performance fees.
Many of the new requirements in the CBI UCITS Regulations, which were not present in the Replaced 2015 Regulations such as those relating to share classes, an email address and performance fees, were already part of Central Bank guidance. The elevation of the new regulations to statutory instrument illustrates the importance that the Central Bank places on them, by putting the new regulations on a statutory footing the Central Bank will be able to use its extensive enforcement powers if they are not complied with.
For more information on the likely impact of the CBI UCITS Regulations, contact a member of our Investment Funds team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.