Protected cell company legislation

Transcription

1 Investment Investment A publication from Mason Hayes & Curran Solicitors Summer 2004 Protected cell company legislation eagerly anticipated by Dublin industry Elsewhere in this issue Page 2-3 UCITS III Simplified Prospectus where do we stand? Page 4 IFSRA Funding Consultation Page 5 Revised Investment Services Directive Adopted Page 6 IFSRA Guidance on Retail Fund of Hedge Funds Issued Management Company Directive Draft Guidance Note Issued Page 7 Taxation on Savings Directive DFIA/NICSA Conference 2004 Investment Restrictions Template Anti-Money Laundering Guidance The Irish government is set to introduce legislation to facilitate the establishment of protected cell companies ( PCC ) in. The move, announced in April 2004, is seen by the industry as vital to the continued success of the Dublin industry. PCCs originated in Guernsey in 1997, in response to demands from the insurance industry. The success of the structure has meant that other offshore jurisdictions have followed suit, including the Cayman Islands with its Segregated Portfolio Companies, Bermuda (which passed the New Providence Mutual Ltd. Private Act allowing a PCC structure for this entity), Mauritius (which approved The Protected Cell Companies Act of 1999 [amended in 2000]) and St. Vincent and The Grenadines with their International Insurance (Amendments and Consolidation) Act of 1998 which allows protected premium accounts, introducing elements of the PCC. While the origins of the PCC were initially a response to demands from the captive insurance industry to resolve structural inefficiencies of the rent-a-captive concept, the PCC has become equally as important to the industry seeking to create new products in order to satisfy increasingly sophisticated investor demands. PCCs are vehicles particularly suitable to the operation of umbrella investment. At present, due to the provisions of Irish company law, umbrella established as investment companies cannot segregate liabilities as between the various sub-. Each sub-fund is, therefore, exposed to the liabilities of the other sub- within the umbrella, and a disclosure to this effect must be made in the fund s prospectus. Segregation is only possible where the fund is established as a unit trust structure. This has presented problems for fund promoters, particularly those looking to establish hedge in. The advantage for hedge, which employ higher risk investment and borrowing policies, of segregating liability within an umbrella structure is clear, however, it is not possible to do so within a corporate structure under existing Irish company law. Upon the introduction of the proposed PCC legislation, a promoter, for example, may structure a multi-class fund by setting up a PCC, in which each cell represents the different group of investments for which the distinct classes of shares are offered to the fund's investors. The use of a single entity structure such as a PCC for the different, as opposed to a family of structured with multiple trading subsidiaries in which each separate legal entity represents a particular sub-fund, may eliminate or reduce costs. This can be achieved, for example, by using a single board of directors, the same distributor, custodian, transfer and payment agent and the same prospectus. PCCs are vehicles particularly suitable to the operation of umbrella investment The proposed Irish legislation will only apply to investment and not to insurance and securitisation vehicles. The legislation will mean that a new corporate entity can be established whereby the liability of each sub-fund/cell within an umbrella structure can be segregated and protected from the other sub-/cells. This will ensure that the assets of one sub-fund are only available to those creditors of the company who are creditors in respect of that sub-fund, thus protecting the assets of that sub-fund from the creditors of the company who are not creditors in respect of that sub-fund. The legislation is expected to be introduced in Autumn 2004.

2 UCITS III Simplified Prospectus In January 2004, the Irish Financial Services Regulatory Authority ( IFSRA ) issued a draft Guidance Note in relation to the form and contents of the Simplified Prospectus as required of all UCITS by Council Directive 2001/107/EC (the Management Directive ). The Simplified Prospectus should contain all the essential information about the UCITS so as to enable investors to make an informed judgment of the investment proposed to them The Management Directive requirement to publish a Simplified Prospectus, in addition to the long form prospectus, extends to both new and existing UCITS. Representatives from both the industry and IFSRA have expressed concern that the Management Directive does not provide for a transition period for the publication of a Simplified Prospectus by existing UCITS. On a strict interpretation of the Management Directive, all UCITS (regardless of when they were first authorised) would have been obliged to publish a Simplified Prospectus from 14 February 2004, despite the fact that final guidelines on its content have yet to be issued. At this stage, it appears likely that the European Commission will suggest that on 1 March 2005 they will review how Member States are progressing with having existing UCITS publish a Simplified Prospectus, thereby introducing an informal transition period until 1 March A final decision is expected shortly. On the assumption that the informal transition period will be introduced, existing UCITS are not required to produce a Simplified Prospectus immediately. However, certain EU Member States may not permit such a transition period and thus, UCITS who market their shares/units in those member states may be obliged to produce a Simplified Prospectus immediately. The draft Guidance Note was issued from IFSRA with a view to canvassing industry views on the form and content of the Simplified Prospectus. It is based on ongoing discussions with the Committee of European Securities Regulators (CESR)/UCITS Contact Committee. It is expected that the final guidance will issue in the near future, but the following summarises the main points as they stand at present: a. The Simplified Prospectus should contain all the essential information about the UCITS so as to enable investors to make an informed judgment of the investment proposed to them. It must contain, in summary form, the key information set out in Schedule 4 of the UCITS Regulations, namely: Brief presentation of the UCITS when the fund was created and an indication of the Member State where the fund has been registered/incorporated; in the case of UCITS having different investment compartments, an indication of this circumstance; management company (when applicable); expected period of existence (when applicable); trustee; auditors; financial group (e.g. a Bank) promoting the UCITS. 2

3 Investment A publication from Mason Hayes & Curran Solicitors where do we stand? Investment information short definition of the UCITS objectives; the fund s investment policy and a brief assessment of the fund s risk profile (including, if applicable, information required by Regulations 51 and 52 (in relation to investments by the UCITS in other collective investment schemes) and by investment compartment); historical performance of the fund (where applicable) and a warning that this is not an indicator of future performance such information may be either included in or attached to the prospectus; profile of the typical investor for which the fund is designed. Economic information tax regime; entry and exit commissions, other possible expenses or fees, distinguishing between those to be paid by the unitholder and those to be paid out of the fund s assets. Commercial information how to buy the units; how to sell the units; in the case of UCITS having different investment compartments, how to pass from one investment compartment into another and the charges applicable in such cases; when and how dividends on units or shares of the UCITS (if applicable) are distributed; frequency and where/how prices are published or made available. Additional information statement that, on request, the full prospectus, the annual and half-yearly reports may be obtained free of charge before the conclusion of the contract and afterwards; competent authority; indication of a contact point (person/department, timing, etc.) where additional explanations may be obtained if needed; b.in relation to fees and expenses payable by the UCITS, the fund is obliged to publish: a Total Expense Ratio ( TER ) which is to be calculated at least once a year on an ex-post basis. The TER is equal to the ratio of the UCITS total operating costs to its average net asset value. The method used to calculate the TER must be verified by the fund s auditors. UCITS investing in other The method used to calculate the TER must be verified by the fund s auditors collective investment schemes ( CIS ) must produce a synthetic TER equal to the ratio of the UCITS total operating costs (ie. those costs expressed by TER of the underlying CIS weighted on the basis of the UCITS investment proportion), plus the subscription and redemption fees of the underlying CIS divided by the average net assets of the UCITS; and a Portfolio Turnover Rate to provide an indication of the level of transactions carried out during the relevant period. The formula to be used is: (Purchase of Securities + Sale of Securities) (Subscription of Units + Redemption of Units) Monthly Average of Total Assets (ie. Average of Daily or Weekly NAVs) X 100 The Simplified Prospectus will need to be submitted to IFSRA and should be accompanied by a letter from the directors of the investment company or management company or from the UCITS legal advisers, confirming that the Simplified Prospectus conforms with the IFSRA Guidance Note, that it is consistent with the full prospectus and that it does not contain any information which is not included in the full prospectus (other than TER, performance and portfolio turnover data). The Simplified Prospectus will also be required to be updated on at least an annual basis. 3

4 IFSRA Funding Consultation On 24 May 2004 IFSRA published its response to the consultation process initiated by the publication of its December 2003 consultation paper on The Funding of IFSRA. The response details the regulator s approach to the industry funding of the regulator and sets out its 2004 budget. IFSRA is also committed to ensuring that there is no cross-subsidisation between different funding categories and that each sector its own regulation In the initial consultation document, IFSRA proposed to impose levies on regulated bodies to fund its activities from 2004 onwards while also carrying out reviews of its various activities to ensure that it ultimately delivers value for money. The response now sets out, in detail, the level of funding required from the various industry sectors. For 2004, IFSRA estimates the total cost of regulation to be 38.5 million of which it will seek to recover 19.6 million from the financial services industry. The funding allocation as between the various industry sectors for 2004 is as follows: Description Credit Institutions Insurance Undertakings Intermediary Firms Securities & Investment Firms Collective Investment Schemes (CIS) & Service Providers to CIS Credit Unions Moneylenders Approved Professional Bodies Exchanges Bureaux de Change Total Total 000s 6,000 3,800 2,650 2,145 3,690 1, ,600 Total Note: service providers to collective investment schemes who act as discretionary portfolio managers to collective investment schemes are considered to be Securities & Investment Firms. These figures are subject, however, to an independent review by KPMG. Despite industry submissions that the regulator should be co-funded by the industry and the Exchequer, it is IFSRA s % view that the industry should, in future, fund the entire cost of regulation. However, IFSRA does acknowledge the need for further consultation on this issue and has agreed to maintain the industry levy at 50% of the IFSRA budget for 2005 and 2006, in order to facilitate this. This will cover the entire period of IFSRA s Strategic Plan, which is due to be published shortly. IFSRA is also committed to ensuring that there is no cross-subsidisation between different funding categories and that each sector its own regulation. At this stage it is not clear precisely what amounts each entity will be obliged to pay, however, the December 2003 consultation paper does set out IFSRA s view on how this should ultimately be calculated: a. an annual charge to depend on the nature of the authorisation held for intermediary firms, exchanges, collective investment schemes, money lenders, approved professional bodies (under the Investment Intermediaries Act, 1995), mortgage intermediaries and bureaux de change); and b. an annual charge based on the volume of a regulated entity s business in the case of credit institutions, insurance undertakings, securities and investment firms, service providers to collective investment schemes and credit unions. The industry has, generally speaking, welcomed the concept of funding the regulatory system on the basis that it provides us with an opportunity to develop a world class best practice regulatory approach to the financial services industry. One of the critical factors in s success as an international financial services centre has been its respected regulatory regime and the opportunity now exists for this reputation to be enhanced by providing the regulator with adequate resources to bring the system to a new level of efficiency and quality. 4

5 Investment A publication from Mason Hayes & Curran Solicitors Revised Investment Services Directive Adopted On 27 April 2004, the EU Council of Ministers formally adopted the Directive on Financial Instruments Markets 2004/34/EC (the Directive ), also referred to as the Investment Services Directive. This represents a central component of the EU Financial Services Action Plan and is important in ensuring the further integration of EU financial services markets. The previous incarnation of the Investment Services Directive (the ISD ), which formed the basis for s Investment Intermediaries Act, 1995, is now considered ill-equipped to respond to the needs of today s marketplace. Among the perceived shortcomings are that: it does not provide sufficient harmonisation to allow effective mutual recognition of investment firm licences; it contains outdated investor protection disciplines in view of new business models, market practices and related risks; it did not cover the full range of investment services, including advice and financial dealing; it does not address issues presented by the recent phenomena of exchange competition; it provides member states with a choice as to whether market structure should be regulated, which has led to a situation where the financial systems in different member states are drifting further apart rather than converging; and its provisions in relation to co-operation between the various regulatory authorities are inadequate. In light of these difficulties and of the generally accepted view that the benefits of efficient capital markets will be optimised by pooling liquidity and allowing supply and demand for financial instruments to impact on a pan-european basis, the EU Commission and the European Parliament agreed on improving the regulation of EU securities markets, following the recommendations of the Committee of Wise Men chaired by Alexandre Lamfalussy. The Directive will allow investment firms, banks and exchanges to provide their services across borders on the basis of their home country authorisation. It will bring closer into line national rules on the provision of investment services and the operation of exchanges, with the ultimate aim of creating a single European securities rule book. It is intended to benefit investors, issuers and market participants by promoting efficient and competitive markets, most notably by allowing investment firms to process client orders outside regulated exchanges, which is currently not possible in some Member States. All EU Member States must implement the Directive by 30 April 2006 It will enhance investor protection, for example, by setting minimum standards for national competent authorities and by establishing effective mechanisms for real-time cooperation between competent authorities, in different EU Member States, when investigating and pursuing breaches of the Directive. The principle of a pre-trade transparency obligation is also introduced whereby internalisers (i.e. firms trading outside regulated markets) would be obliged to disclose the prices at which they will be willing to buy from and/or sell to their clients. This was the source of intense debate prior to the Directive s enactment where many felt that firms would perceive that the requirement would have made trading strategy obvious to competitors and that the rules would have made firms less willing to provide liquidity to investors. As a result of intense lobbying, this disclosure obligation is limited to transactions up to standard market size, defined as the average size for orders executed in the market. This will guarantee that European wholesale markets will not be subject to the rule and will mean that wholesale brokerdealers will not be subjected to significant risks as market makers. The Directive also includes a set of protective measures for internalisers when they are obliged to quote, which will allow them to provide this essential service to their customers without incurring undesirable risks. These measures include the ability to update and withdraw their quotes. In addition, it should result in the establishment of a fair marketplace for retail investors which prevents financial institutions from discriminating between small investors, for example, by offering some of them undisclosed improvements to publicly quoted prices (so-called price improvement ). All EU Member States must implement the Directive by 30 April As with many of the other FSAP measures, the Directive confines itself to setting out the general high-level obligations which Member State authorities should enforce. The EU Commission will enact more detailed implementing measures based on a detailed consultation process with the Committee of European Securities Regulators. At that stage, we will be in a better position to assess the likely impact of the Directive. 5

6 It is proposed to disapply the minimum subscription requirement and increase the amount permitted to be invested in any one scheme IN BRIEF IFSRA Guidance on Retail Fund of Hedge Funds Issued On 30 April 2004, IFSRA issued a draft revised Notice in relation to Funds of unregulated schemes. This Notice provides for the authorisation of retail collective investment schemes which may invest their assets in unregulated schemes, including hedge and other alternative investment. There had been concerns that the existing Notice required amendment to satisfy a perceived appetite among retail investors for these types of investment product. The DFIA has been in discussions with IFSRA over the past few months in relation to this issue, resulting in the issue of the revised Notice. In summary, it is proposed to disapply the minimum subscription requirement and increase the amount permitted to be invested in any one scheme. It is also proposed to remove the limit of 10% of net assets on direct investments by of. Under the proposed changes, of, including of unregulated, will be able to invest in assets other than collective investment schemes, subject to the usual investment restrictions. Finally, the draft Notice does not permit of unregulated to invest in other of. While investment in feeder schemes is also prohibited, the general Notices have been amended to clarify that investment in certain master/feeder structures is permitted. On a related issue, and following extensive consultation with the industry, IFSRA is expected to finalise its guidance in relation to assets deposited with prime brokers shortly. Management Company Directive Draft Guidance Note Issued Council Directive 2001/107/EC (the Management Directive ), in addition to obliging all UCITS to publish a Simplified Prospectus (see page 2), provides for a system for regulated management companies to passport their services throughout the EU. In March 2004, IFSRA issued draft Guidance Notes and Notices in relation to the organisation of UCITS management companies. The Guidance Notes and Notices set out proposed new authorisation procedures for management companies which will enable IFSRA to satisfy itself as to the suitability of the companies directors, shareholders and operating procedures. The Guidance Notes also contain details of the capital requirements as they apply to management companies and selfmanaged investment companies, as well as the various prudential and supervisory requirements as provided for in the Management Directive. In May 2004, the DFIA submitted its response to the draft Guidance Note and Notices. While broadly welcoming the regime proposed, the industry has a number of concerns, for example, in relation to the provisions relating to the compliance monitoring by the management company, the absence of the upper limit for the capital requirement for management companies and the proposed requirement that the management company keep its own copies of books and records. In addition to this, the industry is seeking clarification on a number of issues and have suggested that IFSRA host an industry forum to discuss the proposals. 6

7 Investment A publication from Mason Hayes & Curran Solicitors Taxation on Savings Directive As reported in our January 2004 Newsletter, implementation of the provisions of the Taxation on Savings Directive relating to the establishment of identity and residency was to occur by 1 January 2004 and the main provisions of the Directive are due to be implemented on 1 January This deadline, however, is dependant upon EU Finance Ministers agreeing by 30 June 2004, that third countries such as Switzerland, Andorra, Liechtenstein, Monaco, San Marino and the US and member state territories such as Jersey, Guernsey, Isle of Man and many of the Caribbean islands will adopt similar/equivalent measures. Discussions with the member state territories are progressing well, however, discussions with the third countries have not been without their challenges. It has been reported that the third countries were insisting on linking their agreement to adopt equivalent measures to a number of unrelated requests (e.g. Switzerland were requiring conclusion on many bilateral agreements with the EU, most notably free movement of persons, while Monaco were seeking their removal from member state tax blacklists). Discussions with the member state territories are progressing well All of these issues have been addressed, however, once the relevant bilateral agreement with Switzerland is signed, the Swiss parliament will need to ratify their relevant domestic legislation, which may also require a referendum in that country. Therefore, the Swiss will not be in a position to meet the commencement deadline of 1 January Representation has been made to have the commencement date deferred to 1 January In conclusion, therefore, it is becoming increasingly unlikely that the implementation date of 1 January 2005 will be met. DFIA/NICSA Conference 2004 Investment Restrictions Template Anti-Money Laundering Guidance The DFIA/NICSA Seventh Annual Global Funds Conference was held in Dublin in the Four Seasons Hotel from 1 to 3 June This year s conference explored a number of issues including portfolio enhancement, the evolution of alternative investments and UCITS III. The conference was opened by An Taoiseach (Irish Prime Minister), Bertie Ahern and the keynote address was delivered by Peter Sutherland, former Irish Attorney General, EU Commissioner and current Chairman of Goldman Sachs International. Following the implementation of Council Directive 2001/108/EC (the Product Directive ), IFSRA and the industry have been working together to agree an investment restrictions template to be inserted into the investment restrictions section of all UCITS prospectuses. This template will be particularly useful for existing UCITS wishing to avail of the new investment opportunities presented by the Product Directive. The template was agreed on 25 February UCITS who insert the template in their prospectus must have their lawyer certify that the investment restrictions section of the prospectus complies with the template. IFSRA will not then review that section any further. In April 2004, the Dublin Funds Industry Association issued an industry specific Guidance Note entitled Procedures to prevent Money Laundering in administered by a member of the DFIA. This was prepared by the DFIA Transfer Agency Committee in response to the Anti- Money Laundering Steering Committee's revised Guidance Notes for Financial Institutions (Excluding Credit Institutions) which were issued in July The industry Guidance Note is a result of a detailed consultation between the industry and the regulator and sets out in detail the AML procedures to be followed by fund administrators/transfer agents operating in. The contents of this publication are to assist access to information and do not constitute legal or other advice. Readers should obtain their own legal and other advice as may be required. Copyright 2004 Mason Hayes & Curran 7

8 CONTACTS Fionán Breathnach Partner Direct Line: David O Donnell Partner dodonnell@mhc.ie Direct Line: Dan Walsh of Counsel dwalsh@mhcny.com Direct Line: Dublin: 6 Fitzwilliam Square, Dublin 2, Tel: mail@mhc.ie New York: 261 Madison Avenue, Suite 400, New York, NY 10016, USA Tel: mail@mhcny.com CORPORATE HUMAN RESOURCES TECHNOLOGY LITIGATION INVESTMENT FUNDS