The Central Bank of Ireland (the “Central Bank”) issued feedback on 28 March 2014 to its consultation in relation to whether investment structures, most notably exempt unit trusts (“EUTs”), should be considered to be Alternative Investment Funds (“AIFs”) in the wake of the implementation of the Alternative Investment Fund Managers Directive (“AIFMD”) in Ireland. The feedback statement entitled “Feedback Statement on CP68: Consultation on types of alternative investment funds under AIFMD and unit trust schemes under the Unit Trusts Act 1990 (including EUTs, REITs etc.)” (the “Feedback”) also addresses the position of REITs and SPVs in this regard.
In July 2013, the Central Bank published Consultation Paper - CP68, inviting submissions in relation to key questions regarding investment structures provided for under Irish law whose status under the AIFMD was unclear. The consultation was focused on whether these structures ought to be brought within its regulatory ambit and considered as AIFs under the AIFMD. The status of EUTs is of major importance to the Irish pension industry as they have been a key vehicle used for pensions in Ireland but have been outside the regulatory scope of the Central Bank until now. CP68 also considered the status of other structures, specifically REITs and SPVs.
REITs are viewed as potentially playing a key role in revitalising the Irish property market and Ireland is determined to position itself as a key European domicile for such products. Ireland is already one of the primary European domiciles for SPVs. Accordingly, the treatment of such structures under Irish law is of general interest as well as being of considerable importance to relevant stakeholders.
Some policy pointers
While our analysis will focus on EUTs, REITS and SPVs, the Central Bank review does provide some pointers to likely policy orientations on issues such as raising capital and single investor funds.
Before moving on to the specific structures, we will review the Central Bank’s position in relation to these issues.
Many managers will be looking at what boundaries will be applied by regulators to the concept of reverse solicitation under the AIFMD and, during the consultation, it was suggested that “an EUT could be established at the instigation of the investor and therefore could be deemed not to “raise capital”“.
The Central Bank’s response to this was quite firm, stating:
“The notion that EUTs are created after capital is raised or provided by investors does not in the view of the Central Bank allow for EUTs to fall outside the definition of AIF. In practice this argument could be made by any number of investment funds and reliance on this element could be a measure for circumvention. The Central Bank therefore does not accept that a timing test alone is sufficient to ground a test as to whether external capital has been raised within the meaning of the AIFMD.”
However, the Central Bank has indicated that where it can be shown that a structure was established solely at the initiative of the investors in that structure (rather than an intermediary or product provider) and provided investment decisions are also made by the investors, this will generally not be deemed to constitute an AIF. This should exempt co-ownership scenarios.
Single investor funds
Many EUTS are established as single investor vehicles and the Central Bank was happy to accept that such vehicles will remain out of scope provided that the “unit trust scheme is constitutionally confined to one beneficiary”. The constitutional prohibition is criticial. This analysis will also apply to umbrella structures provided each sub-trust has one beneficiary and there is no sharing of benefits between sub-trusts. The Central Bank has also clearly stated that the single beneficiary cannot be an entity representing multiple ultimate beneficiaries and this statement will need to be borne in mind when it comes to structuring.
The investment structures analysed
The basis upon which EUTs were exempt from regulatory oversight and registration under applicable legislation, being the Unit Trusts Act 1990, was because they were limited to investment by pension funds and charities only and accordingly, not open to the “public”. However under AIFMD, the key test is not “availability to the public” but whether it is marketed to retail investors. In these circumstances, the Central Bank has indicated that it will require such AIFs to be regulated, irrespective of the requirements of the Unit Trusts Act.
The blanket exemption from Central Bank regulatory oversight which EUTs previously enjoyed has accordingly been removed but a number of significant exemptions have been identified so that not all EUTs will constitute AIFs.
(i) Single Investor Funds
See the analysis above.
The continuation of this exemption with respect to single investor structures should be a considerable relief to the pension industry as it will mean that many structures will be capable of being placed outside the scope of the AIFMD and its inherent compliance costs. However, in many cases, an element of restructuring will be necessary to take advantage of this, for example where umbrella trusts are used, they may be “contaminated” by collective funds or other steps will be necessary to ensure compliance, for example amending the constitutional documents of schemes to limit them to a single investor.
(ii) Schemes limited to charities and/or regulated occupational pension schemes
While the Central Bank has discretion with regard to schemes marketed to retail investors, it has accepted the “availability to the public” test may apply with regard to professional investors and as a result, accepts that schemes limited to charities and/or regulated occupational pension schemes do not need to seek authorisation.
While SPVs were in scope for the purposes of the Consultation, the Central Bank has for the moment merely restated its opinion in relation to this matter as expressed in its AIFMD Q&A document from November 2013.
In the document, the Central Bank confirmed that:
“as a transitional arrangement, entities which are either: (a) Registered Financial Vehicle Corporations with the meaning of the FVC Regulation (Regulation (EC) no. 24/2009 of the European Central Bank); or (b) Financial vehicles engaged solely in activities where economic participation is by way of debt or other corresponding instruments which do not include ownership rights in the vehicle as are provided by the sale of units or shares”
will not be deemed to be subject to the AIFMD by the Central Bank at this time. The Central Bank may revise its position in this regard at a future date depending on the views and approach of ESMA who is expected to issue further guidance in this regard. ESMA had touched on the position of SPVs to an extent in earlier consultation documents, but further guidance is still expected in this regard.
The Central Bank’s clarification is important as it confirms that Irish securitisation SPVs or Section 110 companies can currently be considered out of scope.
Legislation providing for REITs was introduced for the first time in Ireland via the Finance Act 2013. Two REITS have successfully been established to date and more are in the pipeline. These have attracted considerable international interest as a means of accessing exposure to the recovering Irish property market.
There has been an element of uncertainty to date as to whether REITs constitute AIFs. It may be argued that REITs are ordinary companies with general commercial purposes and as such, are not collective investment undertakings. A review of the criteria issued by ESMA for determining whether or not a structure ought to be considered as an AIF would indicate that a REIT may fall outside the relevant scope on the basis that they have a “general commercial or industrial purpose”, namely property development or property rental. Other factors that may lead to the conclusion that a REIT does not constitute an AIF might include the manner of involvement of the REIT in the day-to-day management of underlying investments, the lack of an external investment manager, the differences in structure of a REIT compared to a typical fund in terms of life span and redemption facilities and the fact that a REIT does not have the provision of investment returns to investors as its essential purpose.
Furthermore, it can be argued that REITs do not have a defined investment policy which is fixed when investors commit to the fund, and which the investment manager must follow. Rather, they have a corporate or business strategy which is not formally fixed and they follow a flexible investment policy as required by its operating business.
The Central Bank has not definitively determined that REITs constitute AIFs in the Feedback. It has, however, noted that the initial REITs established in Ireland have themselves indicated that they are likely to be AIFs and it has observed that it has "not encountered a REIT structure in Ireland which we do not believe to be an AIF and therefore considers that the onus remains on any REIT to demonstrate otherwise”. Accordingly, the position of the Central Bank is essentially that there is a rebuttable presumption that a REIT is an AIF and the onus rests with any REIT to demonstrate that it does not constitute one, should it wish to make such a submission.
It is interesting to compare the approach of the Central Bank in this regard to that of other European regulators. In the UK, the FCA’s final guidance provides that there is no presumption either way as to whether or not a REIT is an AIF. The German regulator, the BaFIN, has revised its original draft approach to this issue, which was to deem REITs to automatically constitute AIFs and instead examines each vehicle on a case-by-case basis.
Accordingly, it is possible that REITs could be structured to stay out of the scope of AIFMD. Structuring a REIT so that it is exempt from AIFMD compliance requirements may enable the structure to avoid considerable administrative costs and as such, achieve a competitive advantage over comparable AIFMD compliant vehicles. On the other hand, such a structure would be unable to take advantage of the European passport provided for under the AIFMD and as such, would be more restricted in its distribution. Promoters of REITs should accordingly consider the pros and cons of being deemed to be an AIF and consider making a submission to the Central Bank if the costs of compliance with the AIFMD will outweigh any distribution benefits.
Implications and timing considerations
Unit trusts currently in existence which need to apply for authorisation from the Central Bank under the Unit Trusts Act 1990 as a result of its determinations in the Feedback should do so by 1 October 2014 (unless they can restructure to make use of one of the exemptions cited prior to that date). A further exception which might be relevant applies in the case of existing closed-ended schemes, where an Irish AIFM that has managed closed-ended AIFs from a period preceding 22 July 2013 may continue to manage such AIFs in the absence of authorisation under the Regulations, provided it has not made any additional investments since 22 July 2013.
The standard transitional arrangements under the AIFMD will apply to AIFMs of EUTs found to be AIFs. Accordingly, AIFMs below the threshold set out in Regulation 4 must register with the Central Bank by 22 July 2014 and those above this threshold must seek authorisation by this date. At the same time, the Central Bank has stated that, in view of the timing of the Feedback, it will be willing to work with applicants within the legally defined applicable timescales, to facilitate compliance.
The Central Bank is to update the AIFMD Q&A document which appears on its website to reflect the policy determinations set out in the Feedback. Some further clarifications or amendments may be forthcoming in due course, depending upon ESMA’s approach to the issues it is examining, especially regarding SPVs and REITS.
Firms which were awaiting the outcome of the Central Bank’s deliberations should now proceed to determine the implications of the Feedback and take the necessary steps to ensure compliance. This may include undertaking a restructuring of existing EUTs to minimise the impact of the Central Bank’s determinations, as well as applying for registration or authorisation. In view of the looming deadlines, prompt action is advisable.