Central Bank of Ireland Streamlines Process for UCITS Financial Indices, Share Classes, Depositary Agreements and Mergers

The Central Bank of Ireland (the “Central Bank”) has introduced welcome changes to the authorisation and post-authorisation of UCITS and Retail AIFs by applying a self-certification process to a number of actions and a new application form procedure for UCITS Mergers. 

The changes, which are set out in a letter dated October 9 to Irish Funds, are effective immediately and will mean that (subject to receipt of relevant forms and applicable confirmations with regard to compliance with applicable guidance and legislation), prior Central Bank approval will not be required in a number of areas. This will significantly reduce the timeframe for effecting post-authorisation changes and certain aspects of the authorisation process. 

Review of UCITS Financial Indices 

Where a UCITS proposes to use a financial index, the Central Bank previously required a submission on eligibility if the underlying assets were not eligible assets or if direct investment would breach the UCITS risk diversification limits. 

In what is perhaps the most significant change introduced by the Central Bank, it has updated its Guidance on UCITS Financial Indices to provide that, with one exception, it will no longer require Index submissions to be made to it. For the convenience of readers, we have created an unofficial mark-up of the updated Guidance against the previous Guidance. 

The exception relates to a circumstance where one issuer exceeds a weighting of 20%. An investment of up to 35% is permitted provided that the Central Bank approves a submission on why such a weighting is justified by exceptional market conditions. 

While the other process changes being made require confirmations to be given by a Responsible Person (typically a director) or depositary (as appropriate), for UCITS Financial Indices, a certificate is required to be given by the Responsible Person of compliance with the relevant regulatory requirements (which are set out in the Guidance). 

As is increasingly the case, the Central Bank’s regulatory focus will be on a post-authorisation “quality assessment.” 

In line with the recent CP86 Fund Management Company Guidance¹ on information requests, the Central Bank may request a written submission on eligibility to be immediately available.

Accordingly, it is recommended, notwithstanding the fact that an Index submission is not required to be made to the Central Bank, that a submission should be prepared and kept up to date. 

The Guidance signposts what the content of such a submission should be and sets out what its minimum expectations are: 

• the rationale as to how the proposed Index achieves the objective of being a benchmark for the market to which it refers; 
• the methodology used to construct the Index (which should be adequately described and include data on constituent selection criteria, constituent price collection procedures, asset allocation rules and guidelines for altering and re-balancing the Index); 
• information on Index constituents and their current as well as historic weights; 
• details as to how the Index calculation methodology is verified, and 
• information should be provided on any fees embedded in the Index. 

Establishment of New Share Classes 

The relevant confirmation of compliance will come from a Responsible Person (typically a Director) and will need to include a confirmation that the class provides for public participation, which is relevant if the class restricts participation. 

Review of Depositary Agreements, Trust Deeds and Deeds of Constitution 

The relevant confirmation of compliance will come from the depositary. In most instances, comments raised by the Central Bank on these agreements have favoured the Fund over the depositary and the impact of this change may serve to strengthen the relative bargaining position of depositaries. 

Trust Deeds and Deeds of Constitution were typically only reviewed in the context of depositary obligations/duties. 

Review of Investment Limited Partnership Agreements for Retail AIFs 

This change brings Investment Limited Partnership Agreements in line with the similar process for corporate constitutional documents 

UCITS Mergers 

The Central Bank has also sought to streamline the rather cumbersome process for UCITS mergers by introducing an application form. 

The Central Bank will carry out quality assurance checks, selected on a random basis, in relation to all of the above following authorisation of a UCITS or Retail AIF. 

Footnotes

_{1) Specifically, page 102 of CP86 – "Record retention, archiving and retrievability."}