ICAV - the New Irish Collective Asset-Management Vehicle by Mark Browne

The Investment Lawyer Covering Legal and Regulatory Issues of Asset Management

VOL. 22, NO. 6 • JUNE 2015

ICAV - the New Irish Collective Asset-Management Vehicle By Mark Browne

egislation was recently enacted in Ireland pro- recognized further afi eld in regions such as Asia, viding for a new type of corporate fund – the South America and the Middle East, it has become Irish Collective Asset-management Vehicle a global fund hub. As a result Irish funds are now L 2 (ICAV). ICAVs are new Irish legal structures specifi - distributed in over 70 countries globally. cally designed to constitute investment funds. Th ey Th e attraction of Irish domiciled funds lies in feature a number of specifi c advantages when com- their effi ciency, legal certainty and fl exibility, as well pared to previously available structures. Th is article as the depth of dedicated service providers catering seeks to outline the salient features of the ICAV, its to these products. Apart from the regulatory cate- diff erentiating characteristics and to highlight the gorizations mentioned of UCITS and AIFs, a wide instances where it is most likely to be of assistance to range of legal vehicles has existed for some time fund promoters and the manner in which it can be within which funds may be structured in Ireland used to best eff ect in this regard. including the variable capital investment company (the VCC), unit trust, common contractual fund Background (CCF) and investment limited partnership. Ireland is one of the world’s leading centers for Th e Irish funds industry has always sought to fund servicing, with over €3.2 trillion in assets cur- be innovative in terms of the availability of fund rently being administered in this jurisdiction1. It is also structures and the underpinning legislation has one of the key European fund domiciles, currently been updated on a number of occasions to ensure a playing host to over 5,800 funds, including enti- better fi t for purpose and to refl ect evolving indus- ties authorized both as Undertakings for Collective try requirements. Previous examples of this have Investment in Transferable Securities (UCITS) and included development of the CCF and enacting of also as alternative investment funds (AIFs), including relevant primary legislation, which in that case is the the most popular Irish authorized AIF, the Qualifying Investment Funds, Companies and Miscellaneous Investor Alternative Investment Fund (QIAIF). Provisions Act 2005. Th e introduction of the ICAV Th e pan-European passport available to UCITS, is the latest refl ection of this pattern. and more recently AIFs, means that Ireland has Th e relevant legislation providing for ICAVs, become one of the primary centers for domiciling the Irish Collective Asset-management Vehicles funds targeting European distribution over the past Act 2015 (the ICAV Act) was signed into law in 25 years. In addition, as such funds have become March 2015 and the fi rst ICAVs have already been

Copyright © 2015 by CCH Incorporated. All Rights Reserved. 2 THE INVESTMENT LAWYER registered as entities and authorized as funds by the such structures as feeders in master-feeder structures, relevant regulatory authority in Ireland, the Central although the Central Bank has issued clarifi cation Bank of Ireland (the Central Bank). that it would accept that observance of this requirement would be subject to directors’ discretion to look The ICAV- an Overview through to the level of diversifi cation carried on by Th e VCC has been the most popular choice of an underlying master in satisfaction of such require- legal structure for funds domiciled in Ireland to date ment, which has aff orded comfort in this regard. and comprises over 70 percent of the total. However, Directors of an ICAV will be able to determine to while the VCC structure has served the Irish funds dispense with the general requirement to hold an AGM industry well since its introduction and has become on providing 60 days notice to shareholders (subject to established as the structure of choice for funds domi- a right of 10 percent of shareholders or the auditor to ciled in Ireland, because the VCC is based on general require such a meeting to be held, as a safeguard). company law, rather than legislation specifi cally tai- An umbrella ICAV will be able to determine to lored to meet the needs of the funds industry, there prepare separate accounts with respect to each sub- are a number of applicable provisions which may fund. Th is will be particularly useful for platform be viewed as being inappropriate in the funds con- structures with multiple sub-investment managers text so it has been possible to optimize the position and would permit the adoption of separate fi nancial in this regard when designing this new legislation. year ends for diff erent sub-funds. Th e ICAV structure, therefore, off ers a number of No shareholder vote will be required for altera- enhancements to the VCC as a form of corporate tions of the Instrument of Incorporation of an ICAV vehicle and is likely to replace the VCC as the struc- provided the depositary certifi es that the proposed ture of choice for newly established funds. changes are non-prejudicial or have not been specifi ed by the Central Bank as requiring approval. Advantages of the ICAV Specifi c statutory provisions are included which In enacting legislation providing for the ICAV, will apply to fund mergers and amalgamations. the legislature was able to remove all references to gen- Provision has been made for the preparation of eral company provisions that were deemed inappro- a revised Director’s report to correct errors or with priate in the funds context. Having a separate piece respect to aspects of non-compliance. of legislation applicable to funds has also eliminated Th e ICAV will be able to “check the box” and the risk of unintended consequences for funds where be treated as a partnership for US tax purposes. Th is any changes are made to general companies legisla- is a primary attraction of this new product for some tion and has the benefi t of ensuring that one piece promoters and is addressed in detail below. of discrete and relatively straightforward legislation covers the structure. Th e opportunity was also taken Distinguishing Features to amend certain applicable provisions to ensure that Further distinguishing features of the ICAV they were more advantageous and appropriate to this when compared to the VCC are that the Central environment. Some examples are set out below. Bank of Ireland is the relevant authority for registra- VCCs are subject to a requirement to ensure risk tion purposes, rather than the Companies Registration spreading or diversifi cation under existing company Offi ce, and there is no requirement to have subscriber law. Th ere are therefore diffi culties regarding the use shareholders. Th e name of the constitutional docu- of such structures to be used to hold single assets, ment is the instrument of incorporation, rather than such as a single specifi c building in the context of a the memorandum and articles of association; and property fund. Th is concern also applies to the use of once registered, a “registration order” is issued for an

ICAV rather than a “certifi cate of incorporation” as Regulation: they may be established as UCITS would be the case for a company. Th e “Instrument of or AIFs (including QIAIFs); and Incorporation” of an ICAV can be considered to be a Listing: both VCCs and ICAVs may, but are cross between the instrument of incorporation of a UK not required to, be listed on a stock exchange Open Ended Investment Company and the Articles (including, but not limited to, the Irish Stock of Association of a VCC. Each ICAV will feature the Exchange which is the world’s leading stock word “ICAV” as a suffi x in its name (instead of public exchange for listings of investment funds). limited company or plc, as appropriate, for the VCC). Partnership Treatment Similarities As noted above, the ICAV will be eligible to “check While emphasizing the advantages which an the box” to be treated as a partnership for US tax pur- ICAV off ers when compared to a VCC it is impor- poses. Th e VCC is established in Ireland as a public tant to note that it is a form of corporate structure limited company (plc) and such entities are specifi cally that does also have many similarities with existing prohibited from electing to be treated as partnerships corporate funds, such as the VCC. Accordingly the for US tax purposes. Accordingly the VCC may not be ICAV does not represent a re-inventing of the wheel treated as a partnership for US tax purposes. in that regard and investors, service providers and Corporate structures used for funds in competing counterparties can be assured that many of the fea- jurisdictions such as Luxembourg and the Cayman tures they are familiar with in a VCC still apply. Islands (being the SICAV and exempt company, Some of the common features that are probably respectively) are not subject to this prohibition. Th is worth noting in this regard that both forms of struc- has allowed them to be used by US taxpayers as pass- ture share relate to governance, potential regulatory through vehicles not subject to the more onerous authorizations, liability, and structure. Th e follow- “passive foreign investment company” and “controlled ing provisions apply to both by way of example in foreign corporation” anti-deferral regimes applicable respect of these headings: to shareholdings in non-US corporate fund vehicles. Prior to the ICAV, promoters seeking a tax Governance: Responsibility for governance is car- transparent vehicle in Ireland to off er to US taxpay- ried by a board of directors. An external manage- ers tended to use the unit trust structure, as this is ment company may be appointed or the structure eligible to check the box. However, there is a general may exist as a self-managed entity. Corporate preference for corporate master funds due to investor directors are not permitted in either case. Most and counterparty familiarity with corporate entities. of the current company law provisions relating to US taxable investors will generally have a prefer- the appointment, removal and conduct of direc- ence for investing through a partnership structure. tors remain. Furthermore such provisions are over- One of the most signifi cant changes to Irish com- laid by the Central Bank’s fi tness and probity and pany law relating to fund vehicles in recent years was administrative sanctions regime. the introduction of redomiciliation provisions con- Structures: Umbrella structures comprising tained in the Companies (Miscellaneous Provisions) multiple sub-funds may be established and in Act 2009 (the 2009 Act), which enabled fund com- such cases segregated liability will apply between panies in specifi c off shore jurisdictions, such as the sub-funds; Cayman Islands or British Virgin Islands, to change Enforcement: the (Irish) Director of Corporate their domicile to Ireland from their existing country Enforcement may exercise powers over both of domicile. Key advantages of eff ecting a redomi- structures (as well as the Central Bank); cile rather than simply incorporating a new entity in

Ireland are that this permits the company to preserve (i) Registration of the ICAV - this is similar to its track record and contractual arrangements. the registrar role, which is undertaken by However, the redomiciliation legislation did not the Irish Companies Registration offi ce with succeed in attracting large numbers of overseas com- regard to VCCs. Th e Central Bank will issue panies and one of the key reasons for this was the a Registration Order for a new ICAV within fact that the redomiciled Irish company would be ten business days from the date of receipt by it unable, as a VCC, to eff ect a “check the box” elec- of a complete application for registration duly tion. Th e ICAV Act has remedied this. signed by two of the proposed directors and subscribers. Th e prospectus and service provider Master- Feeder Considerations agreements will not need to be submitted at this ICAVs are not subject to a requirement to diver- time. All company related fi lings will be made sify and therefore represent an appropriate vehicle to the ICAV registration section of the Central to be used as a corporate feeder. It is appropriate to Bank post registration. note that while, as mentioned above, they may elect (ii) Fund authorization - this is a separate process to “check the box” to be treated as partnerships they conducted through the funds authorization sec- are not subject to a requirement in this regard and tion of the Central Bank. As outlined above, an therefore a master-feeder combination involving ICAV may be structured as a UCITS or an AIF two ICAVs could involve one checking the box and and the standard new fund authorization pro- a second one, the master, refraining from doing so cess will apply. In the case of a QIAIF this can and hence act as a corporate blocker. Utilizing two be the 24 hour approval process. ICAVs in such a master-feeder structure, rather than an ICAV and a VCC, for example, has the advantage Directors of a proposed new ICAV will need of simplicity from an investor perspective and also to be approved by the Central Bank under its fi t- ensures consistency. ness and probity regime before it is authorized as Umbrella ICAVs are also permitted to cross a fund. Th is documentation is submitted after the invest between sub-funds so it is possible to have initial registration stage is complete and a fi le refer- a single ICAV comprising the feeder and master in ence number can be obtained for the Central Bank’s one legal entity. Unfortunately, however, it is not yet Online Reporting System. Th e directors should be clear that the US tax authorities will accept such a approved prior to the fund approval application scenario where one sub-fund elects to be treated as a being completed. partnership and a second does not. Accordingly this is not currently recommended and separate entities Converting to an ICAV should be used for master-feeder structures. Where an existing corporate fund structure Any decision to establish any such master-feeder exists it is possible to convert this to an ICAV rather would primarily be driven by the target investor base than requiring the formation of a new structure. for the fund and would only be necessary in certain Th is applies to both Irish and non-Irish entities. specifi c circumstances. Th e ICAV Act also permits existing VCCs to convert to ICAV status. Th e process is straightfor- Practical Considerations: ward and somewhat similar to the existing process for How to Establish an ICAV redomiciliation of companies provided for by exist- Where a new entity is to be established as an ing Irish company law (and as such it has been tried ICAV this will entail a two stage process, both of and tested). Shareholder approval and a declaration which are conducted with the Central Bank. of solvency (necessitating an audit engagement, but

Copyright © 2015 by CCH Incorporated. All Rights Reserved. VOL. 22, NO. 6 • JUNE 2015 5 not a full audit) will be required for such a conver- Investor Appetite sion. It can be noted that a number of the fi rst funds Fund boards might form the view that convert- to be registered as ICAVs are eff ective redomicilia- ing to the simpler ICAV regime weakens the tions of existing funds from the off shore domiciles rights of shareholders who invested on the basis to Ireland. of company law protections or is otherwise not worth the short term expense. Going Forward More than three quarters of Irish funds are cur- Cost rently structured as VCCs. It is now expected that While a conversion would entail incurring the the ICAV structure will replace the VCC as the costs of a conversion and related ancillary work default option for fund structuring going forward, (including obtaining shareholder consent), due to suitability for funds and fl exibility. It will be this may be balanced to an extent over time by possible for existing VCCs to undertake a conver- reduced costs of compliance. For example there sion into an ICAV and accordingly to take advantage will not be a requirement to hold annual general of its benefi ts outlined above. meetings. Some promoters may wish to wait before using the structure to ensure that no unforeseen issues Structuring Considerations arise with it and there is greater familiarity with As noted above, ICAVs have been designed to the structure in the industry generally. Apart from facilitate acting in master-feeder structures. A deci- new funds, it is expected that key factors for those sion to feature an ICAV in such a structure will considering converting an existing structure to an largely be driven by a decision to target US taxable ICAV will be the target investor base, the nature of investors. the assets to be held, investor preference and cost. Set out below are some of the structuring Some considerations regarding these options are options on the basis of three key target investor included below: scenarios:

Target Investors Combination of US taxable investors, US tax If the distribution strategy of the fund includes exempt investors and investors from the rest of targeting US taxable investors, it is likely that the world; the ICAV will be the appropriate vehicle (see Combination of US taxable investors and inves- below for further exploration of this point). tors from the rest of the world; or Combination of US tax exempt investors and Single Asset Funds investors from the rest of the world. ICAVs are not subject to a risk spreading requirement so it is possible to establish single asset It can be noted that where a check the box funds (as well as using ICAVs as feeder funds). election is not required (for example when targeting US tax exempt investors), the existing VCC Sub-Fund Accounts structure would work just as well as the ICAV in Th e fl exibility to prepare separate accounts at a terms of US tax equivalence (but as outlined above sub-fund level will be particularly attractive to the ICAV does have various other advantages). fund platforms and multi manager products Where US sales are contemplated, a US wrapper who may have sub-funds as sleeves for diff erent and US subscription documentation are highly underlying managers. recommended.

(a) Combination of US taxable investors, US tax (i) if these provisos cannot be met, a master-feeder exempt investors and the investors from the rest structure with of the world — a transparent Delaware feeder fund into an Th is combination of target investor types would ICAV master fund (which checks the box) be best served by a structure involving either: for US taxable investors; and — a diff erent ICAV (that is, not part of the (i) a single ICAV with a qualifi ed electing fund same umbrella and which would not check (QEF) election (as opposed to a check the box the box) as a feeder fund into the ICAV mas- election). ter fund for non US investors (this structure will also generally be attractive to US tax or exempt investors).

(ii) a master feeder fund comprising: (c) Combination of US tax exempt investors and — a transparent Delaware feeder fund into an investors from the rest of the world ICAV master fund (which checks the box) Th is combination of target investor types would for US taxable investors; and be best served by a structure involving a single ICAV — a diff erent ICAV (which does not check the (which would not check the box). Th is is unlikely to box) as a feeder fund into the ICAV mas- be an attractive structure for US taxable investors, ter fund for US tax exempt and non-US however. investors. Summary Reduced establishment costs for the single ICAV Th e ICAV is a new Irish corporate structure spe- with a QEF election may be off set by extra ongoing cifi cally designed to be used as an investment fund. It accounting costs linked to the QEF election. Th is has a number of advantages when compared to exist- option is also less attractive to US taxable investors. ing vehicles and is expected to become the default choice for new investment funds domiciled in Ireland (b) Combination of US taxable investors and going forward. It is also anticipated that managers investors from the rest of the world with existing off shore funds will take advantage of Th is combination of target investor types would this structure to redomicile such funds into Ireland be best served by a structure involving either: because it facilitates eff ectively addressing the needs of a key investor base – US taxable investors. (i) a single ICAV (which checks the box) provided the fund administrator can prepare K-1 partnership accounts for US taxable investors and there Mr. Browne is a partner in the Dublin offi ce of is no US trade or business risk within the fund Dechert LLP. (such a risk is unlikely for UCITS strategies but may be a relevant consideration for QIAIFs) NOTES 1 See http://www.irishfunds.ie/statistics/. or 2 http://www.ifi aevents.ie/distribution/.

Copyright © 2015 by CCH Incorporated. All Rights Reserved. Copyright © 2015 CCH Incorporated. All Rights Reserved Reprinted from The Investment Lawyer, June 2015, Volume 22, Number 6, pages 23–28, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.wklawbusiness.com