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1. INTRODUCTION
Ireland is internationally recognised as one of the world’s
most advantageous jurisdictions in which to establish international
investment funds. Investment funds often use derivatives for
efficient portfolio management and investment purposes. However, as
regulated entities, there are myriad legal, regulatory, technical
and commercial considerations that should be reflected in the
trading documents to ensure that they remain legally enforceable
and to protect the commercial interest of the parties.
The specific regulations applied by the Central Bank of Ireland
(the “Central Bank”) to an investment fund will depend on
the type of investors to whom the fund is to be sold and its
specific investment policies. The regulatory framework in Ireland
is divided between Undertakings for Collective Investment in
Transferable Securities (“UCITS”) and Alternative
Investment Funds (“AIFs”), both of which are governed by
European and Irish legislation as well as the rules and guidance
issued by the Central Bank. The primary difference in the
regulation of each relates to the nature of investments which they
are permitted to make, and to the particular investment rules and
borrowing restrictions imposed by the Central Bank. UCITS are a
form or retail or mutual fund while AIFs are restricted to
sophisticated investors.
2. WHAT IS A UCITS?
UCITS are diversified, limited leverage, open ended investment
funds whose object must be to invest capital raised from the public
in transferable securities and other liquid asset classes. UCITS
are open ended insofar as investors must generally be entitled to
redeem their shares or units on request at least twice per month at
regular intervals. There are restrictions on UCITS’ investment
and borrowing policies and on their use of leverage and financial
derivative instruments.
The advantage of establishing a fund as a UCITS is that it can
generally be sold without any material restriction to any category
or number of investors in any EU Member State, subject to the
filing of appropriate documentation with the relevant regulatory
authority in those EU Member States. The UCITS brand has gained
global recognition, with UCITS regarded as well-regulated funds
with robust risk management procedures and a strong focus on
investor protection. UCITS are widely accepted for sale in Asia,
the Middle East, and Latin America.
The criteria used to determine eligible investments for UCITS
are set out in detail in the Eligible Assets Directive.1
In summary, a UCITS must invest at least 90% of its assets in
transferable securities or liquid financial assets listed or traded
on recognised exchanges or markets. These include exchange traded
or OTC financial derivative instruments. When first introduced,
UCITS were only permitted to use derivatives for efficient
portfolio management (i.e. hedging) purposes, but since 2003 they
have been permitted to use derivatives for investment purposes as
well.
3. LEGAL ENTITY TYPES
A broad variety of public tax-exempt investment fund vehicles
can be established in Ireland. They are regulated by, and require
the authorisation of, the Central Bank. The regulatory framework is
divided between UCITS and AIFs, but for the purposes of this
article we are focusing on investment funds regulated as UCITS. A
UCITS may be established through any one of the following
vehicles:
- an investment company (public limitedcompany or plc);
- an Irish Collective Asset-management Vehicle
(“ICAV”); - a unit trust; and
- a common contractual fund (“CCF”).
INVESTMENT COMPANY
An investment company is an entity with distinct legal
personality that is managed and controlled by its board of
directors and can enter into contracts in its own name. The assets
are the property of the company, and each fund investor holds
shares. A depositary is appointed to safekeep the assets on the
company’s behalf. An investment fund established as a company
may be self-managed or appoint a management company. It must
operate on the principle of risk spreading.
The paid-up share capital of the company must at all times equal
the company’s net asset value, the shares of which have no par
value. An investment company may be structured as a stand-alone
fund or an umbrella fund (see the section headed “Umbrella
funds” below). Shareholders in an investment company have
limited liability.
ICAV
The ICAV is a form of corporate fund structure introduced in
March 2015. The ICAV has overtaken the investment company structure
as the most popular of the Irish fund structures.
The ICAV represents a modernising and streamlining of the
investment company fund structure and is designed specifically with
the needs of investment funds in mind. The ICAV may be regarded as
similar to a Luxembourg “SICAV” or a UK “OEIC.” The ICAV is registered (incorporated) with the
Central Bank and provides a tailor-made fund vehicle that is
available as a corporate structure to both UCITS and AIFs as
umbrella or standalone funds
One of the main advantages of the ICAV is that it is a corporate
entity that can elect its classification under the U.S.
check-the-box taxation rules. The ICAV has its own legislative
regime (the ICAV Act 2015), which assists in ensuring that the ICAV
is distinguished from ordinary companies and therefore avoids those
aspects of company law legislation that would not be relevant to a
collective investment scheme.
Like the investment company an ICAV can be established as a
standalone or an umbrella structure. Investors own shares in the
ICAV and the ICAV can issue and redeem shares continually. An ICAV
must have a board of directors to govern its affairs. Similar to an
investment company, the ICAV may either be managed by an external
management company or be a selfmanaged entity.
The ICAV offers a range of potential benefits which reduce costs
for ICAV investors and means that the ICAV has become the Irish
investment fund vehicle of choice, regardless of the domicile of
the investor base.
UNIT TRUST
A unit trust is created by a trust deed entered into by the
trustee and the manager of the fund and this structure requires a
management company. A unit trust is a contractual arrangement and
the trust is not a separate legal entity, with the result that a
unit trust does not have power to enter into contracts in its own
name. In general, the manager or trustee enters into contracts for
the account of a unit trust.
The trustee is registered as the legal owner of the assets on
behalf of the investors, who receive units, each of which
represents a beneficial interest in the assets of the unit trust. A
unit trust may be structured as a stand-alone fund or an umbrella
fund.
CCF
A CCF is an unincorporated body established by a manager
pursuant to which the investors, through contractual arrangements,
participate and share in the assets of the fund as co-owners; each
investor holds an undivided co-ownership interest as a tenant in
common2 with the other investors. The CCF has a similar structure
to FCPs (Fonds Commun de Placement) established in Luxembourg.
The CCF is constituted under contract law (and not company law
or trust law) by way of deed of constitution executed under seal
between the manager and the depositary and does not have a distinct
legal personality. Accordingly, the CCF cannot assume liabilities
and, in the same manner as a unit trust, the manager and the
depositary enter the various agreements for and on behalf of the
CCF. The assets of the CCF are entrusted to a depositary for
safe-keeping. A CCF may be structured as a stand-alone fund or an
umbrella fund.
The main feature differentiating CCFs from other investment
funds is that a CCF is totally tax-transparent. This means that
investors in a CCF are treated as if they directly own a
proportionate share of the underlying investments of the CCF rather
than shares or units in an entity which itself owns the underlying
investments. This is of particular interest to investors such as
pension schemes, charities and life insurance schemes which have
preferential tax rates on their investments and can retain these
rates while obtaining the benefit of pooled investment management
of their assets.
Footnote
1 Commission Directive 2007/16/EC implementing Council
Directive 85/611/EEC on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective
investment in transferable securities (UCITS) as regards the
clarification of certain definitions
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