The Central Bank of Ireland (“Central Bank”) has today issued a consultation paper (CP 77) on the publication of a draft UCITS Rulebook. The consultation period will close on 28 March 2014.

The UCITS Directive is implemented in Ireland by a Statutory Instrument – the UCITS Regulations, which designate the Central Bank as the competent authority for the authorisation and supervision of UCITS.

The UCITS Notices were developed by the Central Bank to explain and clarify various aspects of the UCITS Regulations and set down conditions not contained in the Regulations with which UCITS must conform.

Subsequently, the Central Bank commenced the practice of issuing Guidance Notes to provide direction on issues relating to the funds industry. As this guidance did not constitute a regulatory requirement, its standing was unclear. 

The Central Bank proposes to replace the existing series of UCITS Notices and Guidance Notes with a single consolidated document, to be called the UCITS Rulebook, containing all of the conditions that the Central Bank imposes on UCITS funds, their management companies and depositaries in addition to the requirements of the UCITS Regulations. 

The purpose behind the UCITS Rulebook is to create a consolidated, yet simplified set of rules that apply to UCITS, to facilitate greater certainty regarding UCITS requirements and to avoid any repetition or paraphrasing of relevant legislative provisions. The draft UCITS Rulebook follows the same approach adopted by the Central Bank in relation to its implementation of the Alternative Investment Fund Managers Directive which resulted in the publication of a single rulebook for Alternative Investment Funds (the “AIF Rulebook”) with the aim of creating a “more accessible and readable regulatory framework”.

Although the draft UCITS Rulebook principally transposes current provisions specified in the UCITS Notices and Guidance Notes, in some instances, the Central Bank is proposing to remove existing requirements. Dechert will produce a more detailed OnPoint that will examine the consultation in greater detail and, in particular, the changes to the existing regulatory framework that are being proposed. Despite the fact that the Central Bank will no longer publish Guidance Notes, it does intend to continue to provide guidance from time to time on its website.

The Central Bank has highlighted a number of questions upon which it is seeking industry feedback. It is interesting to note that two of these questions relate to the first two Guidance Notes issued by the Central Bank in 1996 on the Promoter Requirement and the Permitted Markets requirement.

1. Promoter Requirement
As stated in the consultation, the Central Bank has placed great reliance on the Promoter to ensure that only sizeable entities with relevant experience could establish UCITS in Ireland. Promoters were required to have shareholder funds of at least €635,000 based on latest audited accounts. These requirements caused difficulties for managers for whom the shareholder funds amount and audit requirement was in excess of their local regulatory requirements. The Central Bank now proposes to eliminate the promoter approval process for UCITS. Similar to the approach adopted by the Central Bank in relation to Alternative Investment Funds, the promoter approval process is expected to be replaced by reliance on the regulatory regime for UCITS management companies, with increased emphasis on the obligations of directors when UCITS get into difficulty.

2. Permitted Markets
The Central Bank proposes to withdraw Guidance Note 1/96 which sets out the Central Bank’s criteria for determining whether a market meets the definition of “regulated market” as set out in the UCITS Regulations. The withdrawal of Guidance Note 1/96 means that the Central Bank will not publish a list of permitted markets for UCITS and that it will not review submissions on proposed regulated markets. UCITS will be required to regularly review the list of stock exchanges and regulated markets to ensure that they continue to meet the regulatory criteria and they will be required to consult with the depositary to ensure that adequate custody arrangements are in place. The removal of current guidance on the criteria for regulated markets may serve to remove some of the uncertainty regarding the eligibility of certain markets that trade 144A securities and, in particular, convertible bonds.

3. Financial Reporting Requirements
In a move that will likely see some pushback from industry, the Central Bank is proposing to require UCITS management companies (including self managed investment companies) and depositaries to submit half yearly management accounts covering the second six months of the financial year (in addition to the current requirement to publish such accounts covering the first six months of the financial year and audited annual accounts). In a question that will surely be answered in the affirmative, the Central Bank requests feedback on whether the proposal would add significantly to the current reporting burden on UCITS management companies and depositaries. Using the conventional 31 December year end as an example, such a move will probably require the convening of an additional board meeting to approve these accounts by the end of February, with a further board meeting to approve the annual audited accounts being scheduled for the end of April. This will add significantly to the reporting burden at the busiest time of year for those involved in the financial reporting process.

The Central Bank requests all responses to the Consultation Paper to be submitted no later than 28 March 2014. Following the end of the consultation period, the Central Bank will carry out a technical examination of the draft UCITS Rulebook to refine its drafting and then issue a final UCITS Rulebook on a statutory basis.

The Consultation Paper and draft UCITS Rulebook can be viewed on the Central Bank’s website.