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A New Vehicle Of Choice For Irish Investment Funds

AUTHOR(S): Anne-Marie Bohan
PRACTICE AREA GROUP: Asset Management and Investment Funds
DATE: 18.03.2015

On March 12, 2015, legislation introducing Ireland’s newest investment fund vehicle came into effect. The Irish Collective Asset-management Vehicle Act 2015 is the culmination of a joint government and industry effort to make available to promoters “a legal framework for a corporate fund structure which is not a public limited company,” and gives effect to one of the commitments of the Irish government in its Strategy for the International Financial Services Industry in Ireland 2011-2016.

The Irish Corporate Asset-management Vehicle (ICAV) is a bespoke corporate vehicle that is specifically designed for investment funds and represents a significant development for the industry in Ireland. Commenting on the formal commencement of the act, the minister of state at the Irish Department of Finance, Simon Harris TD, described this as a red-letter day, with the act constituting one of the most significant developments for the Irish funds industry in many years.  
The ICAV is a new corporate legal vehicle for investment funds, rather than representing any form of new genus of regulated fund. It supplements, rather than replaces, the existing range of fund structures available under Irish law. Promoters of Irish investment funds can therefore now choose between a greater number of tax-exempt structures, namely the preexisting structures of investment companies, unit trusts, common contractual funds and investment limited partnerships (the latter in the case of non-UCITS), and for both UCITS (undertakings for the collective investment of transferable securities) and alternative investment funds (AIFs), the ICAV.
In many respects, there will be little difference between the ICAV and other collective investment scheme structures. Because the ICAV is not a new type of regulated fund, no new investment-related rules will apply as a result of the use of an ICAV structure, and applicable investment objective and policy restrictions will continue to depend on the regulated nature of the investment fund, i.e., as a UCITS or an AIF.
Investors will own shares in the ICAV, and open-ended ICAVs will able to issue and redeem shares on investor demand and according to disclosed dealing frequencies. It will also be possible to establish closed-ended ICAV schemes, subject to compliance with Central Bank requirements relating to closed-  ended funds.
Furthermore, each ICAV will also be required to appoint a depositary to safekeep its assets, in accordance with existing UCITS and Alternative Investment Fund Managers Directive requirements, and subject to Central Bank approval of the appointment of the particular depositary to the ICAV.
A number of parallels may be drawn between ICAVs and the form of investment fund company that can currently be established under the Irish Companies Acts (currently known as a Part XIII company, but which will become subject to Part 24 of the Companies Act 2014, which is expected to be commenced in June 2015). The investment fund company has been the most popular of the existing Irish collective investment fund vehicles to date, and is the most comparable amongst the existing structures to ICAV. Given the ICAV’s investment fund-centric characteristics and design, however, the ICAV is expected to prove even more popular.
ICAVs will be corporate vehicles with separate legal personality that can be established as UCITS or alternative investment funds, as stand-alone or umbrella funds, as open-ended or closed-ended vehicles, and may be either managed by an external management company or be internally managed. Umbrella ICAVs will benefit from segregated liability between subfunds, meaning that the assets and liabilities of each subfund within the umbrella will be protected and will not be available to, or conversely, negatively impact, the other subfunds. In all these respects, the ICAV and the investment company are mirror images.
Furthermore, many of the corporate governance aspects applicable to investment companies will apply to ICAVs. Both ICAVs and investment companies are required to have a board of directors, to whom primary responsibility for management of the body corporate is delegated, and the roles and duties of ICAV directors will not differ from those of the directors of an investment fund company. In that regard, the Companies Act 2014 has introduced some changes and innovations that will apply to directors of all Irish incorporated companies, including, for example, the codification under Irish law, for the first time, of the principal fiduciary duties of company directors.
The act applies equivalent provisions to the directors of ICAVs. The ICAV directors, of which there must be a minimum of two, will also be required to comply with the fitness and probity requirements of the Central Bank of Ireland, which will necessitate pre-approval by the Central Bank of the directors. 
There are, however, some key distinctions between ICAVs and investment companies. One of the primary advantages of the ICAV over the investment company, and one of the main rationales for its introduction, is the fact that it benefits from a bespoke legislative regime. Amendments to European and domestic companies legislation, which are generally designed with trading companies rather than investment funds in mind, will therefore not have automatic application to ICAVs. As a result, it will not be necessary to consider the potential impact of, and/or need to disapply, each such change in the context of the ICAV, diminishing the risk of inappropriate and unintended impacts. In addition, and in contrast to an investment company, the ICAV will not be required by legislation to have the aim of spreading investment risk.
The ICAV has also been designed with a view to giving it operational benefits, which give it an advantage over investment companies. Among these are the ability to dispense with an annual general meeting in certain circumstances (subject to the right of the auditors or members with 10 percent of the voting rights to call an AGM), and to produce audited accounts at a subfund level. In addition, the act provides that prior approval of members will not be required in order to change the constitutional documents of the ICAV where the depositary certifies in writing that the relevant changes do not prejudice the interests of the members and the Central Bank has not otherwise mandated that the change is of a type that must be approved by the members. Each of these represents an incremental advantage over the investment company from an operational and a cost perspective.
One of the key features of the ICAV is its ability to elect its classification under U.S. “check the box” taxation rules. In contrast, investment companies cannot currently check the box for U.S. tax purposes, meaning that they are treated as separate entities and are therefore subject to two levels of tax, firstly at the corporate level where the income is earned and then secondly at the shareholder level when distributions are made. This ability to check the box gives the ICAV an advantage in that it can opt to avail of more favorable tax treatment. For fund promoters wishing to market European funds to U.S. investors and having a preference for doing so through a corporate vehicle, the ICAV therefore represents a significant development.
Unlike investment companies, which must interact with both the Companies Registration Office and the Central Bank, the Central Bank will act as the sole regulatory body for ICAVs. The process for establishing an ICAV will be a two-stage process, with the Central Bank acting as both the registration and authorization body.
The first step is the registration of the ICAV, which is in effect the incorporation process. This is a straightforward process, and is the same for all ICAVs, irrespective of intended nature of the authorized ICAV as a UCITS or as an AIF. The second stage, the authorization process, will however depend on whether the ICAV is to be regulated as a UCITS or an AIF. The nature of the authorization sought will dictate the nature and contents of the ICAV’s documentation, as well as the timeframe and requirements for authorization. However, the authorization process will be no different than for any other fund structure.
In that regard, a UCITS or retail investor AIF authorization will typically take between four to six weeks, while there is a 24-hour approval process for qualifying investor AIFs (“QIAIFs”). While setup costs should therefore be roughly equivalent to those for an investment company, the operational benefits of the ICAV structure should result in lower ongoing operational costs.
The Central Bank commenced accepting applications for registration of ICAVs on March 16, 2015, which was within two business days of the commencement of the act, and it is expected that the first ICAV QIAIFs will be authorized by early April 2015.
For existing investment companies that wish to avail themselves of the benefits of the ICAV, the act includes a straightforward process that allows for conversion to ICAV status, and which applies irrespective of whether the investment company in question is authorized as a UCITS or an AIF. The conversion process does require the approval of the investment company’s shareholders and certain directors statutory declarations, but it is anticipated that the cost benefits arising from the additional flexibility afforded by the ICAV are likely to outweigh the costs of converting.
And importantly, as conversion operates by way of continuation, the process will allow the fund and manager to continue to rely on past performance data and existing contracts. In essence, the fund corporate entity continues to exist, albeit in different corporate form.
It will not be possible to use the ICAV conversion procedure in respect of an existing UCITS or AIF be possible to merge existing funds into a new ICAV structure, with the precise rules that apply to the merger depending on whether the merging fund is a UCITS or an AIF.
The act also addresses the issue of fund migrations into Ireland through a combined migration and conversion process. This is broadly similar to the conversion process, and allows for the redomiciliation of certain non-Irish investment companies to Ireland as ICAVs by way of continuation. Because migration operates to allow the non-Irish investment company to retain its existing legal identity, as though it had originally been incorporated in Ireland as an ICAV, the migrating fund can benefit from continued reliance on past performance data and existing contracts.
The ICAV offers a new, enhanced corporate vehicle as an alternative to the existing investment company structure available under Irish law. While it leaves the existing options intact, it offers an enhanced and bespoke investment fund corporate vehicle, satisfying both promoter and investor appetite, and reflecting a practical balance between organizational and operational flexibility, and investor protection. As such, it is expected to become the vehicle of choice for Ireland-domiciled investment funds, regardless of the domicile of the investor base or the regulatory status of the fund, and its introduction is a firm demonstration of the Irish government’s and the Irish fund industry’s continued commitment to enhancing the fund industry in Ireland.
This article originally appeared in Law360 on the 16 March 2015. 


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