Irish UCITS investments in non-UCITS investment funds - Update

What has changed?

Rules establishing permitted investments by Irish UCITS in non-UCITS investment funds are set out at Regulation 68(1)(e) of the UCITS Regulations.

Question ID 1002 of the Central Bank of Ireland’s (CBI) UCITS Q&As (23rd edition) has clarified these rules to require that

• where a UCITS invests in a non-UCITS collective investment scheme, the constitutional document of the non-UCITS investment fund must include an express prohibition on investing more than 10% of its assets in other investment funds, and
• the non-UCITS investment fund must also either
  • be subject to requirements in its jurisdiction of domicile which are equivalent to certain UCITS investor protections, or
  • have requirements of the same effect in its constitutional document or offering document.

Previously, where a non-UCITS investment fund was not subject to a regime providing UCITS equivalent investor protections, the CBI’s UCITS rules had not explicitly required that it must include UCITS equivalent requirements in its constitutional document or offering document.

Question ID 1002 makes clear that a statement of the intended investment approach does not constitute a rule for the purpose of these requirements.

Why has this change been made?

Investment by UCITS in other collective investment schemes is a topic that has recently been under scrutiny both domestically and within the wider EU. The CBI’s move follows a similar recent policy update from the Luxembourg regulator, the Commission de Surveillance du Secteur Financier. As such, these moves can be seen in the context of broader efforts by the European Securities and Markets Authority (ESMA) towards supervisory convergence of regulators’ practices in applying EU legislation, as detailed in ESMA’s work plan for 2018.

What do I need to do?

The CBI’s update applies not only to future investments by UCITS in non-UCITS investment funds but also to existing investments.

As a result of the clarification, Irish UCITS should review their current investments in non-UCITS investment funds and take any necessary action to ensure that the constitutional documents or offering document of the non-UCITS investment funds meet the above requirements. Where necessary, the Irish UCITS may need to seek to realign its portfolio.

Where the non-UCITS investment fund is an umbrella fund and certain of its sub-funds may pursue a fund of funds strategy, it would appear (subject to further clarification from the CBI) that the "10% restriction on investment in other investment funds" provision which must be included in the constitutional document should also provide that this restriction is subject to any disclosure in the prospectus so as to allow a fund of funds strategy to be pursued.

The CBI’s update is also relevant to holdings in non-UCITS ETFs since these will fall within the same requirement - Question ID 1005 of the UCITS Q&As makes it clear that an open-ended fund cannot be treated as a transferable security.

When do I need to do this by?

The CBI’s Markets Update published alongside the UCITS Q&As provides that UCITS should be in compliance with the requirements of Question ID 1002 “as soon as possible taking into account the best interests of the investors”.
It also notes that, in any event, UCITS should be compliant with the new rules by no later than 05 October, 2018.