www.pwc.

ie/funds

Regulatory
times

Welcome to the latest edition

of our quarterly PwC
Ireland asset management
newsletter. It covers both
local and international
regulatory topics affecting
the Irish funds industry.
April 2013

Contents
Money Market Funds Reform ............................................................................................................... 3
AIFMDESMA Publish Remuneration Guidelines ................................................................................ 5
AIFMD: Delaying decisions is no longer an option .............................................................................. 8
AIFMD Irelands Response ................................................................................................................. 9
ESMA Guidelines on ETFs and other UCITS issues ............................................................................. 12
UCITS Bonus Cap Fund Manager ....................................................................................................... 15
Central Bank of Ireland focuses its eagle eye on funds industry ........................................................ 16
FATCA & the US-Ireland Intergovernmental Agreement ................................................................... 20

Money Market Funds Reform

Can Money Markets Survive
Reform
Under the US regulations Rule 2a-7
of the Investment Company Act, the
shares of Money Market Funds
(MMF) may be redeemed at a stable
net asset value (NAV), typically one
dollar per share. Rather than
marking to market the portfolio
holdings on a daily basis as all other
open-end funds do, MMFs are
permitted to value their portfolios
either at amortized cost or by
penny-rounding. Any interest the
fund earns that would otherwise
raise the price gets shaved off and
reinvested to keep the value stable.
In exchange for this favourable
accounting treatment, MMFs are
required to follow strict risk-limiting
parameters as well as policies and
procedures to minimize deviation
between an MMFs amortized-cost
NAV and the market-based NAV so
that purchasing, redeeming, or
remaining shareholders are not
diluted or otherwise disadvantaged.
Since their creation in the US in
1983, MMFs have been hugely
successful as a short term funding
source. MMFs are a preferred cash
management vehicle for businesses,
colleges and universities, non-profit
organizations, government agencies,
and financial institutions for whom
the stable NAV is very attractive
from the standpoint of budgeting,
accounting, systems, and
transaction settlement.

What Went Wrong?

Implementing Reforms

In 2008, the USs oldest and largest

money fund, Reserve Primary,
broke the buck in the wake of the
Lehman Brothers bankruptcy. The
$64 billion fund was left holding
$785 million in Lehman paper; the
news started a run of investors
fleeing MMFs, a dangerously
destabilizing event for the entire
economy. Investors who remained
in the Reserve Primary ultimately
lost 3%, however the much bigger
issue was the resulting economic
melt-down that was borne out by
the financial crisis of 2008.

The key focus of regulators is to

implement reforms which will
eliminate any first mover
advantage whereby investors might
rush to exit a constant NAV fund in
times of stress trying to get their $1
back before the problems take hold.
A key goal in this respect is to
implement reforms which would
support an orderly liquidation
should there be a run on the funds.

As a result, in 2010 the SEC adopted

rules requiring greater transparency
and forcing MMFs to invest in more
liquid assets with higher credit
ratings and shorter maturities. The
funds industry supported that move.
Regulators, however, now want to
go further, but are being
aggressively opposed by the industry
in this respect. Constant NAV funds
for example, have come under
increased scrutiny from regulators,
who believe they pose a danger and
give an impression of safety even
though they are subject to credit,
interest and liquidity risk.

Regulators are considering

measures such as a mandatory
floating share price based on the
funds NAV rather than the stable
$1, as well as other measures such
as forcing funds to keep capital
buffers to offset small losses and
requiring a 30-day holdback of up to
3% of redemption proceeds, with
such amounts first in line to suffer
any investment losses where the
NAV buffer was exceeded. Floating
share values and redemption
holdbacks could mean that investors
would have no incentive to rush to
exit the fund at the first sign of
trouble. Capital buffers, meanwhile,
are a form of insurance against loss,
although shareholders would in
reality pay that price in even lower
returns.

One might imagine that regulators

might not focus excessively on such
an investment earning virtually
nothing. A MMF is, in theory, a
boring, hassle free investment
vehicle with minimal risks. However
in reality, politicians, regulators and
fund-company executives are
currently at logger-heads to decide
how these funds be allowed to
function in the future.

Towards the end of last year,

recommendations on MMF reform
were published by IOSCO, the FSB,
the FSOC and the European
Parliament. The European Systemic
Risk Board (ESRB) published
recommendations on reforms to
MMFs on 18 February 2013. Among
other things, the ESRB recommends
a mandatory variable net asset value
(NAV) and minimum amounts of
daily and weekly assets that MMFs
must hold.
While broadly in line with the
recommendations issued by these
bodies, the ESRB's are the first to
promote a mandatory move to a
variable NAV. The ESRB has asked
the European Commission to deliver
an interim report containing a first
assessment of its recommendations
by 30 June 2013, and a final report
on how MMFs have implemented
the recommendations by 30 June
2014.The ESRB's recommendations
are likely to have a significant
impact on the European
Commission's considerations ahead
of the legislative proposals on MMF
reform that it is due to publish in
the coming weeks.
In the US, the FSOC recommended
a floating NAV, a stable NAV with a
NAV buffer and a minimum balance
at risk, or a stable NAV with other
measures such as more stringent
investment diversification
requirements. IOSCO recommended
that stable NAV MMFs be converted
to floating NAV where possible. The
FSB endorsed that approach.

Proposal Opposition
Those opposed to reform raise
substantial concerns that some
these measures, if adopted, would
drive MMFs out of business, reduce
competition and choice, and alter
the fundamental characteristics of
MMFs, thereby destroying their
value to investors, issuers, and the
economy. Many also argue that,
rather than making the financial
system stronger, such reforms have
the potential to increase systemic
risk by driving investors into lessregulated, less transparent products.
Those opposed argue that forcing
constant NAV MMFs to adopt a
variable NAV would do little to
make such funds less vulnerable to
runs, could lead to an overall
decrease in future investments and
trigger significant outflows from
MMFs in the short term given that
investors would have to give up the
convenience, stability, and liquidity
of the constant NAV. Floating NAV
proposals may also introduce a host
of tax, accounting and operational
complications, it is claimed.
As regards redemption holdbacks,
opponents argue that this
alternative defeats the basic
liquidity feature of MMFs, will
increase costs and make MMFs
much less desirable as a cashmanagement tool. The redemption
holdback feature would create
serious operational issues that
would limit the usefulness of MMFs
in many respects, including check-

writing and debit card privileges and

the use of MMFs as sweep account
vehicles.
The Financial Stability Oversight
Council (FSOC) proposal for a NAV
capital buffer of up to 3 percent of
fund assets would, opponents claim,
drive money market fund sponsors
out of business and requiring
advisers to commit capital would
likely drive sponsors away from
offering regulated money market
funds. The implementation of
capital requirements is therefore
likely to lead to a consolidation in
the industry, resulting in a larger
risk concentration. As it is likely
that investors would contribute
indirectly to capital requirements, a
reduction of investor demand could
also be a consequence.
The FSB and the US will closely
watch the European Commission's
reaction to the ESRB's
recommendations. Imposing more
regulation on MMFs may be easier
in Europe than the US, where the
more mature MMF industry has
become highly effective its lobbying
capability. However regulators will
be acutely aware of the potential for
regulatory arbitrage if regimes are
not closely aligned in terms of
substance and timing, wherein
funds might flow from Europe to US
or vice versa.

AIFMDESMA Publish
Remuneration Guidelines
Final report published on
Guidelines on sound
remuneration policies under the
AIFMD
The European Securities and
Markets Authority (ESMA)
published its final guidelines on
sound remuneration policies under
the Alternative Investment Fund
Managers Directive (AIFMD) on 11
February, 2013. These guidelines
follow a consultation paper that was
released in June 2012. On review of
the final guidelines it appears that
the ESMA has reaffirmed much of
the draft regulation that was initially
proposed. However, the guidelines
do provide further clarity on certain
key aspects of scope,
proportionality, and remuneration
structures that may have a
significant impact on some firms.
Key Areas for Consideration
Two of the areas that have been
updated and which will be of
specific interest to many Irish firms
are:
1. The delegation of activities, and
how those entities to which
portfolio management or risk
management activities have been
delegated, may now be subject to
the regulatory requirements with
regards to remuneration;
2. The clarification from the ESMA
that non executive directors
(NEDs) together with partners
operating in Limited Liability
Partnerships (LLPs) are expected
to be included as Identified Staff
unless the firm can demonstrate
that such individuals do not have
a material impact on the risk
profile of the Alternative
Investment Fund Manager
(AIFM) or of the Alternative
Investment Funds (AIFs)
managed.

In addition, the Central Bank of

Ireland (CBI) has issued the second
draft of its AIF Handbook which
confirmed that the CBI are adopting
an approach that will offer start ups
(for small AIFMs which establish
QIAIFs) room to grow before falling
under the full AIFM chapter of the
AIF Handbook, including the
AIFMD rules in respect to
remuneration.
Given that the AIFMD requires that
transposition of requirements into
local EU Member State legislation
must take place no later than 22nd
July 2013, firms should take steps
now to understand how the
guidance applies to them.
Key Principles
Article 13 and Appendix II of the
AIFMD provide the framework and
principles of a remuneration policy
that promotes sound and effective
risk management. They do not
encourage inappropriate risk taking.
Listed below are some of the
noteworthy principles:
Fixed and Variable remuneration
must be appropriately balanced;
50% of the variable component
should consist of units of the AIFs
or equivalent;
40%/60% of the variable
component shall be deferred for at
least 3 to 5 years unless the life
cycle of the AIF concerned is
shorter;
Where remuneration is
performance based, such
remuneration must be based on an
assessment combining individual
and overall results. It must include
non financial criteria and must be
set in a multi-year framework;

Category of staff covered is

designated as senior management,
control function and risk takers.
Who do the Guidelines apply to?
The AIFMD currently stipulates that
the following Alternative Investment
Fund Managers (AIFMs) are in
scope of the requirements:
EU AIFMs which manage one or
more Alternative Investment
Funds (AIFs) irrespective of
whether such AIFs are EU AIFs or
non-EU AIFs;
Non-EU AIFMs which manage one
or more EU AIFs; and
Non-EU AIFMs which market one
or more AIFs in the European
Union irrespective of whether such
AIFs are EU AIFs or non-EU AIFs.
Exemptions to the Guidelines
The AIFMD provides exemptions for
smaller AIFMs which manage assets
not exceeding 100 million (or
500 million in unleveraged assets
with a five year lock-up period).
AIFMs below these thresholds are
subject to more limited
requirements only under the
Directive.
The CBI had originally proposed in
the Consultation on
implementation of Alternative
Investment Fund Managers
Directive (CP60) to apply the full
AIFMD requirements to all AIFs,
regardless of size. However,
following the consultation, the CBI
amended the draft AIF Handbook
and are now adopting a different
approach.
This means that qualified investor
AIFs (QIAIFs) authorised after 22
July 2013 (with AIFMs below the
threshold), will not be subject to
AIFMD rules on remuneration from
the date of launch for the initial two
years, but will be effectively subject

to the current QIF regime for that

period.
Organisations should review the
Feedback Statement on CP60
which was released by the Central
Bank on 1 February 2013 to
understand in further detail what
requirements they may be impacted
by. It should be noted that the
revised draft AIF Handbook is
subject to a further technical review
and the CBI could make further
changes to their approach before
finalising the legal text for the AIF
Handbook.

Key highlights of the final

guidance
Much of the ESMA guidance
remains intact from the original
draft; however, there has been a
degree of change in some important
areas.
1) Proportionality
In a significant move from the draft
guidance, the final guidelines
acknowledge that the application of
proportionality may lead, on an
exceptional basis, to the
disapplication of some
requirements. This is based on the
proviso that this is reconcilable with
the risk profile, risk appetite and
strategy of the AIFM and AIFs it
manages.
ESMA has decided not to prescribe
the situations in which such
proportionality applies, leaving this
to national regulators to determine
how they wish to apply.
According to the guidelines, the
different risk profiles and
characteristics among AIFMs justify
a proportionate implementation of
the remuneration principles with
the following criteria relevant to the
application of proportionality;
size of the AIFM and the value of
the underlying portfolio of AIFs it
manages together with exposures
and liabilities; and
internal organisation including
legal structure and complexity of
governance processes; and
nature scope and complexity of
activities including the type of
authorised activities, investment
policies and strategies, the
national or cross-border nature of
business activities and any
additional management of UCITS
funds.
Where principles can be disapplied
this must be in full i.e. there can be
no partial disapplication. If it cannot
be demonstrated that full
disapplication is appropriate then
the principles must be applied in
full. This approach mirrors the

approach taken by CEBS in the

implementation of CRD3.
2) Identified Staff
Each firm in scope will need to
identify a cohort of employees as
Identified Staff. Subject to
proportionality, AIFMD specifies
that Identified Staff will be subject
to specific requirements relating to
the structure and delivery of their
remuneration. The final guidance
confirms that the following
individuals will also be considered
Identified Staff:
Executive and non-executive
members of the governing body of
the AIFM;
Senior management;
Control functions;
Staff responsible for heading up
portfolio management,
administration, marketing and
HR;
Other risk takers whose
professional activities have a
material impact on the risk profile
of the AIFM or any AIF it
manages. This includes persons
capable of entering into
contracts/positions and taking
decisions that have a risk impact.
The final guidelines have clarified
that non executive directors
together with partners operating in
Limited Liability Partnerships
(LLPs) are expected to be included
as Identified Staff unless the firm
can demonstrate that such
individuals do not have a material
impact on the risk profile of the
AIFM or of the AIFs managed.
The concept of proportionality can
be extended to individuals and so it
may be possible for firms to justify
different approaches to different
subsets of Identified Staff provided
this is allowed under any future
structure that might be
implemented by national regulators.
3) Impacted remuneration
There has been little in the way of
change to ESMAs definitions of the

remuneration covered by the rules.

The definition of carried interest
remains intact and the guidelines
reinforce that variable remuneration
should not be paid through vehicles
or methods that are employed at
artificially evading the remuneration
provisions. This includes amongst
others, the outsourcing of
professional services to firms that
fall outside of the scope of AIFMD
and the setting up of structures or
methods through which the
remuneration is paid in the form of
dividends or similar pay outs.
4) Delegation of activities
The guidelines specifically state that
an AIFM should ensure that the
entities to which portfolio
management or risk management
activities have been delegated are
subject to regulatory requirements
on remuneration. Furthermore, that
these requirements are equally as
effective as those under the
guidelines, or, that appropriate
contractual arrangements are
entered into to ensure there is no
circumvention of the remuneration
rules in the guidelines with respect
to payments to Identified Staff
within the delegate.
5) Remuneration committee
requirement
An AIFM which is significant will
be required to establish a
remuneration committee. In order
to establish whether or not an
AIFM is significant, firms will
need to consider the three key
principles under proportionality
above as well as:
whether the AIFM is listed or not;
the level of assets under
management of the AIFM e.g. the
value of the portfolio of the AIFs
they manage exceeds EUR 1.25
billion; and

the number of employees of the

AIFM e.g. having more than 50
employees, including those
dedicated to the management of
UCITS and the provision of the
services mentioned under Article
6(4) of the AIFMD which specifies
the range of activities the AIFM is
permitted to undertake;
the legal structure of the AIFMD
e.g. where AIFMs are part of a
larger entity which was obliged to
set up an existing remuneration
committee to support a whole
group which would include
checking the compliance of the
AIFM against the rules set out in
the ESMA guidelines;
whether the AIFM is also a UCITS
management company; and
the provision of the services
mentioned under Article 6(4) of
the AIFMD.
It is ESMAs view that the
establishment of a remuneration
committee is considered a matter of
best practice regardless of any
requirement to do so.
What next?
AIFMD requires that transposition
of requirements into local EU
Member State legislation must take
place no later than 22 July 2013.
Regulatory bodies in Member States
will now be required to implement
rules and regulations that are
aligned with Appendix II of the
AIFMD by this date. Although there
are some transitional arrangements
around the authorisation process,
once authorised, firms will need to
be compliant.

unclear. It is hoped that this will be

issued shortly.
Actions for firms
There is clearly a great deal of
information in this final report for
firms to digest. However, together
with the CBI AIF Handbook and
Feedback Statement on CP60, they
do provide most of the information
required to begin work in earnest
ahead of 22 July 2013. It is also
clear however, that some areas will
require further clarification from the
ESMA and from the CBI on how it
intends to transpose the AIFMD and
associated ESMA Guidelines into
Irish regulation.
Firms should act now to understand
how the guidance applies to them
and to critically assess their
governance structures and
remuneration frameworks they
operate. Although there may be
some benefit in the transition
provisions around the timing of the
introduction of required changes to
remuneration structures in some
instances, the associated policies
and governance will take time to
develop properly.
How we can help?
We can use our experience and
expertise to help you review the
current design and governance
arrangements in place with regard
to AIFMD. We will bring insight into
our work from extensive experience
in helping clients deal with the
impacts of regulation on
remuneration, incentive design,
governance and process
optimisation.
www.pwc.ie/reward

ESMA is to release a Q&A document

to provide further guidance on the
transitional arrangements for
selected provisions of the AIFMD
where the implementation date is

AIFMD: Delaying decisions is no

longer an option
The Level 2 Alternative Investment
Fund Manager Directive (AIFMD)
regulations have now been
published in the Official Journal of
the European Union and despite the
many challenges posed to the
industry in implementation, the
effective date of 22 July 2013 is
looming large. Is your organisation
ready?
To date, many have struggled with
the perceived lack of clarity in the
Level 2 requirements and while this
is certainly the case in some
instance, this cannot continue to be
used as a reason to avoid making
decisions and putting detailed
implementation plans into place.
Where should you start? If you are
an asset manager, this really
depends on your marketing strategy
in Europe. Private placement may
be a viable option depending on
where you plan to raise capital and
many non EU managers are hoping
to take this approach-if it is viable.

Third Country
Provisions

This may not suit all mangers and

therefore both EU and non EU
managers are looking at obtaining
authorisation for the EU AIFM in an
EU jurisdiction to avail of the
passport for marketing. Not all want
to wait until July 22, 2014 either,
with some seeing a competitive
advantage in being authorised from
the start, particularly if marketing to
EU countries where being AIFMD
compliant is the only option for
marketing alternative funds. If you
have not yet determined your
optimal marketing strategy taking
AIFMD into account, you should do
so.
Of course, for asset managers keen
to make an application for AIFMD
authorisation, they need to ensure
they know what it takes to be
compliant. A gap analysis should be
performed to determine where
priorities are and how to allocate
resources to those priorities and
close the gaps sufficiently prior to
authorisation.

Liquidity
Management

Marketing/
Passporting

Transparency

Licensing

Duty of Care

Leverage
Fund
Manager
Depositaries

Remuneration

Conflict of Interest

Delegation

Risk Management

Valuation

Asset managers are also looking to

their service providers to assist them
with AIFMD compliance.
Depositaries will be appointed for
both EU and non EU AIFs this year.
The key difference between EU and
non EU AIF depositary services is
primarily in the liability regime that
the EU AIF depositary is subject to
compared to the non EU AIF
depositary. The non EU AIF
depositary is subject to what has
been termed depositary lite which
while it brings the oversight
responsibilities to bear on the non
EU AIF; the depositary is not liable
for the safeguarding of the assets of
the AIF. There are operational
changes to effect to ensure that
depositaries for all AIFs can provide
the oversight services and these
need to be worked out between the
AIF, the AIFM and other parties
such as the prime brokers.
Fund administrators are primarily
focused on offerings around the
transparency and reporting
requirements on AIFMD-which will
apply to both EU and non EU AIFs
this year, with some AIFs making
their first reports to regulators in
October this year. A significant
amount of guidance is needed for
some of these reports; however it is
possible to start preparing now by
determining the potential scope of
the requirements to your client base
at the very least. It is worth noting
the response will still rest with the
AIFM.
If firms are to be ready for AIFMD,
it is time to start making decisions,
documenting assumptions and
moving forward with your
implementation plan.

Internal Control

AIFMD Irelands Response

Recent Updates
The long anticipated implementing
measures (Level II) of the AIFMD
were released on 19 December.
Ireland was already well advanced
in its preparation for the Level II
measures as evidenced by the
release of Consultation Paper 60
(CP60) by the Central Bank of
Ireland (CBI) on 30 October 2012
and the Feedback Statement to
CP60 which was published on 1
February 2014. These include
proposals that had anticipated many
of the final Level II AIFMD
requirements as well as introducing
other proposals such as one nonUCITS handbook, removal of the
promoter regime and a new vehicle,
the retail alternative investment
fund (RAIF). Furthermore, Ireland
has not just focused on the
regulatory framework but has also
continued to respond to investor
demand for tax effective, flexible
vehicles which will see the
introduction of legislation for a new
Irish corporate fund structure
(iCAV) in the first quarter of 2013 in
addition to a new limited
partnership structure expected also
in first quarter of 2013.

The AIFMD provisions on

delegation are likely to impact the
operations of many alternative fund
managers. The new provisions seek
to avoid so called letter-box entities
where little or no substantial
activities are undertaken by the
managers themselves. The
provisions do enable managers to
continue to operate on a delegation
model subject to demonstrating
compliance with certain criteria in
order to avoid being deemed a
letter-box entity. The CBI is happy
to consider further submissions in
respect to this item alone given the
Level II proposals in this area were
published subsequent to CP60.
Irelands low corporate tax rate of
12.5%, Ireland will be an attractive
location for any managers
considering adding substance to
their operations to comply with such
AIFMD provisions.

AIFMD level II measures are to be

issued as regulations, these will
become effective in all EU countries
from July 2013. The Irish proposals
are the first to provide specific
clarity and practical insight for Irish
funds subject to the AIFMD as well
as for other Non-UCITS funds
which are not within the scope of
AIFMD for example, by virtue of
their size. The CBI has also worked
with the local industry to develop
these proposals and responded to
concerns raised in the subsequent
responses. CP60 and the Feedback
Statement also included proposals
for service providers such as the
fund administrators and
depositaries as well as those
regarding the fund structures which
are important and deserve separate
consideration.

These new product options will

provide greater flexibility for a
broad range of investment strategies
improving the tax efficiency for
investors in certain instances while
maintaining the benefits of a
sophisticated regulated fund
environment. Additionally, recent
legislative changes such as those
enabling the redomiciliation of NonIrish funds from certain locations to
Ireland without changing their
corporate structure and
complemented by the proposed
introduction of the iCAV structure
will ensure that Ireland has tax
efficient products for managers
considering relocation from nonEuropean domicile to comply with
the AIFMD provisions.

So what are the key proposals for investment

managers to be aware of in Ireland when
considering future fund structures?

Removal of the promoter regime, including

capital requirements. The AIFMD requirements
on the AIFM provide sufficient safeguards for
investors should an AIF get into difficulty and
therefore the promoter is no longer needed.

The professional investor fund (PIF) regime is to

be discontinued and the qualified investor fund
(QIF) has been replaced with the qualifying
alternative investment fund (QAIF). The
advantages of the QIF have been broadly been
retained but the QAIF is aligned with the details
of the AIFMD. The minimum investment is
100,000 for an investor in a QAIF.

Introduction of a RAIF which offers investment

managers the flexibility of a structure that can be
marketed to other investors excluded by the
AIFMD. The means that retail investors have the
option of investment in a higher risk (and

hopefully higher return) product over and above

UCITS, for example, the ability to invest in gold
subject to appropriate disclosures. The proposals
in CP60 contain specific proposals for RAIFs
who wish to invest in venture capital, private
equity, real estate and fund of funds. There are
also proposals for a RAIF to invest in other
unregulated funds subject to certain criteria.

Proposals were included to permit both QAIFs

and RAIFs to use side pockets for part of their
portfolio as part of the investment strategy, not
just when certain assets are distressed.

Requirements were also proposed for AIF

management companies where the AIF
management company would not be subject to
the AIFMD. These included the requirement for
capital held to be the greater of 125,000 or one
quarter of the companys annual expenditure
from the most recent annual accounts.

10

Structuring options
Ireland provides not only an optimal tax environment for
alternative products to be domiciled, additionally an
optimum tax environment for alternative managers to
undertake specific functions and operations due to the
competitive corporate tax rate of 12.5%.
In addition to the current broad range of tax efficient
structures available in Ireland, an update this year is
expected to see the introduction of legislation for a new
Irish corporate fund structure, the iCAV in addition to
amendments to the current limited partnership
legislation to improve its operational effectiveness of the
limited partnership and clarity to the tax status of the
structure. The proposed iCAV structure will be formed
as a limited company, and as such, will be eligible to be
treated as a transparent entity for US tax purposes. The
classification as a transparent entity for US tax purposes
will be possible for the iCAV as the limited company will
be able to satisfy the requirements for US taxation
purposes and therefore be in a position to avoid adverse
tax consequences which apply to a PLC structure that
cannot check the box to be treated as tax transparent.
The iCAV will not replace the plc structure, which will
continue to exist with the iCAV being available as an
alternative platform. The inclusion of the iCAV within

the Irish legislative framework certainly increases the

variety of structures available in Ireland and ensures we
are not at a disadvantage vis a vis other jurisdictions.
Other recent legislative changes have facilitated the
redomiciliation of non-Irish funds from certain offshore
locations to Ireland tax efficiently with minimum
administrative obligations. With the AIFMD Regulations
implementation date fast approaching, the availability of
a non public form of corporate entity, such as the
proposed iCAV is likely to lead to much greater activity
in this space, given the investor profile of the majority of
funds located in these offshore locations.
The legislation is expected to be introduced in 2013 and
further demonstrates Irelands commitment to the
alternatives fund industry. The above developments
highlight that Ireland has the regulatory framework and
oversight regime to ensure that the implementation of
the directive will be effective. Additionally, Ireland offers
the appropriate choice of tax efficient products for
alternative managers. Ireland is already recognised as a
centre of excellence for the servicing of alternative assets,
it has sophisticated know-how and intelligence from the
servicing of these asset classes for many years and is
committed to ensuring that an appropriate environment
is available to alternative managers impacted by the
directive.

11

ESMA Guidelines on ETFs and

other UCITS issues
Reference: ESMA/2012/832,
Publication date: 18th
December, 2012
Application date: 18th February
2013
The The ESMA Guidelines on ETFS
and other UCITS issues consolidate
ESMAs guidance on ETFs and other
issues and the outcome of a related
consultation paper, the results of
which were published by ESMA in
July 2012. Therefore UCITS
managers were largely familiar with
the provisions of these guidelines
before their publication.
Nevertheless they have been
somewhat controversial, particularly
the regulations relating to two main
areas: Efficient Portfolio
Management techniques, including
securities lending, which state that
all revenues arising from such
techniques, net of direct and
indirect operational costs, should be
returned to the UCITS and the
extensive provisions with regard to
collateral, including diversification
rules.
The stated purpose of the ESMA
guidelines is To protect investors
by providing guidance on the
information that should be
communicated with respect to
index-Tracking UCITS and UCITS
ETFs together with specific rules to
be applied by UCITS when entering
into over-the-counter financial
derivative transactions and efficient
portfolio management techniques.
Consistent with other recent
regulations in the funds industry
much of the guidelines focus on
transparency, transparency in
relation to the investment
techniques, the risks, leverage, the
use of financial derivative
instruments, indices etc. Risk
management, another consistent

theme in recent regulation, is also

included with obligations relating to
the calculation of global exposure
for index-tracking leveraged UCITS
and the calculation of counterparty
risk.
Scope of the Guidelines
In order to ensure a level playing
field for all UCITS and prevent
regulatory arbitrage between funds
ESMA has chosen to apply many of
the standards within these
guidelines to all UCITS funds,
rather than just ETFs. Mr Steven
Maijoor, Chair of ESMA stated at
the EFAMA Investment
Management Forum held late last
year, stated the following in relation
to the scope of these guidelines;
The first thing I would like to point
out about these guidelines is that
they take a comprehensive approach
to the issues identified. By this I
mean that rather than setting out
provisions applying to ETFs only,
we considered that it made more
sense from a regulatory perspective
to tackle certain activities in a
holistic way. So, while some of the
new provisions are very relevant to
ETFs, targeting only ETFs would
have led to the risks of regulatory
arbitrage and an uneven playing
field.

Key Provisions include

A requirement for UCITS ETFs to

bear the identifier UCITS ETF.

The guidelines for index-tracking

UCITS require full transparency
on the index, its components, the
replication model, etc. The
transparency provided should be
sufficient to permit the investor to
replicate the index.

In relation to leveraged indextracking UCITS, increased

transparency on the use of
leverage and its associated costs.

In relation to securities lending the

UCITS must be able to recall all
UCITS assets that are lent either
under a TRS or other derivatives.

All revenues arising from EPM

techniques, net of direct and
indirect costs, should be returned
to the UCITS.

There are various rules relating to

the management of collateral
including that collateral should be
diversified in terms of country,
markets and issuers.

The guidelines refer to various

investment policies and techniques
including Efficient Portfolio
Management (EPM) techniques
(securities lending, repos etc), use of
Total Return Swaps, use of Financial
Indices and rules around collateral
management.

12

Further Guidance
ESMA published a Q&A document
to support the Guidelines on ETFs
and other UCITS issues on the 15th
March. It is ESMAs stated aim to
update this document as additional
questions are received.
The Q&A provides further guidance
on some of the more controversial
elements of the guidance and areas
that were unclear. One of the more
notable and welcome clarifications
is around securities lending; as
noted above the guidelines state that
all net revenues arising from EPM
techniques are to be paid to the
fund. EMSA has clarified however
that it is acceptable for securities
lending agents to be paid a normal
compensation for their services and
for such fees to be deducted from
the gross revenues arising from the
EPM techniques. The costs and fees
paid, as well as the revenues arising
from EPM techniques should be
disclosed in the funds annual
report. It is also possible for the
fund manager to act as securities
lending agent (where permitted in
local legislation), this should be
clearly disclosed and the details of
the fees paid to the fund manager
must be disclosed also.
ESMA also provides a number of
clarifications in relation to financial
derivative instruments in its Q&A
document, including a welcome
clarification for UCITS that enter
into an unfunded total return swap,
swapping the performance of its
assets for the performance of
another portfolio of assets; for the
calculation of exposure for the
UCITS investment restrictions it is
not necessary to calculate the
exposure based on both portfolios as
the actual exposure of the UCITS is
to one of the portfolios (the portfolio
swapped in) only. Both portfolios
however should comply with the
UCITS investment limits.
In relation to financial indices
ESMA has clarified that the
guidelines apply to UCITS that use
financial indices for investment
purposes, they do not apply to

UCITS that use indices as

performance benchmarks.
It is not all good news however in
the Q&A, particularly on the
question of collateral; ESMA has
clarified that all collateral must
comply with the criteria and
restrictions set out in the guidelines.
Also re-invested cash collateral
should be diversified, which means
that the 20% issuer limit applies to
re-invested cash collateral.
Regarding the transitional
provisions, although there is a 12
month transition period for most
provisions, including the collateral
requirements, any new reinvestment
of pre-existing collateral must
comply with the guidelines
immediately.

Guidance for UCITS using

Financial Indices
The Guidance Notes provide clear
guidance to UCITS managers on
how the ESMA Guidance will be
dealt with by the CBI. Certain
index-tracking funds will need to be
approved by the CBI, the
requirement for approval is
determined largely in relation to the
components of the index and
whether they are eligible assets
under the UCITS regulations.
1.

Indices comprised of UCITS

Eligible Assets
a.

If on a look-through basis, the

UCITS investment restrictions
(e.g 5/10/40 rule etc.) are not
breached, there is no necessity
to have the index approved by
the CBI.
i. Following authorisation if a
passive breach occurs there is
no need to seek authorisation
at this point.
ii. If on a look-through, the
UCITS could not invest in the
individual constituents of the
index, without breaching the
UCITS investment
restrictions. The index needs
to be approved by the CBI,
prior to fund approval.

CBI UCITS Guidance Notes

Updates to incorporate ESMA
Guidance on ETFs and Other
UCITS Issues:
The CBI has amended its guidance
notes to reflect the ESMA guidance
on ETFs and other UCITS issues:
Related amendments have been
made to CBI Guidance Note 2/07 on
UCITS Financial Indices and 3/03
on UCITS Financial Derivative
Instruments.
These amendments reflect the
provisions of ESMAs Guidance
notes with regard to:
Index-tracking UCITS and UCITS
ETF
Risk Management for Financial
Derivative Instruments
EPM Techniques,
Repurchase/Reverse Repurchase
Agreements and Securities lending
for the purposes of efficient
portfolio management.

2.
a.

Indices comprised of Ineligible

Assets
The index must be approved
by the CBI, prior to fund
approval.

Where a UCITS uses an index solely

as a performance benchmark, the
Central Bank does not need to
review the index.

13

Approval of Indices
The CBI will focus on four main
areas in their approval of
indices.
1. The Index is sufficiently
diversified (as per ESMA
Guidelines)
2. The Index is an adequate
benchmark for the market to
which it refers.
3. Publication of the Index
(relevant transparency in
accordance with the ESMA
Guidelines).
4. The index is independently
managed. *
(*This does not mean that the
UCITS and the index provider
cannot form part of the same
economic group, however in this
circumstance arrangements for the
management of conflicts of interest
must be in place.)
Repurchase/Reverse
Repurchase Agreements and
securities lending for the
purposes of EPM.
The UCITS Guidance confirms the
rules and approach taken in relation
to the ESMA Guidance, this includes
some of the more controversial
elements of the guidance such as:

All assets received by a UCITS in

the context of efficient portfolio
management techniques should be
considered as collateral and
should comply with the rules
regarding collateral.

the provisions relating to collateral

management, any new
reinvestment of existing cash
collateral should comply
immediately.
Conclusion

A UCITS should ensure that it is

able at any time to recall any
security that has been lent out or
terminate any securities lending
agreement into which it has
entered. (Similar rules for
repurchase agreements and
reverse repurchase agreements).
All the revenues arising from
efficient portfolio management
techniques, net of direct and
indirect operational costs, should
be returned to the UCITS.
Transitional Provisions
Generally the guidelines provide a
12 month transitional period for
existing UCITS and ETFs, for new
funds however the regulations
apply from the implementation
date. The UCITS ETF Identifier
requirement applies from the
earlier of 12 months from the
application date or the first
occasion after the application date
on which the name of the fund is
changed for another reason.
As noted in the Further Guidance
section above, although the 12
month transition period applies to

These guidelines infer a significant

burden on fund managers,
particularly for index-tracking
UCITS for whom the transparency
required is greatly increased. The
CBI guidance however is welcome as
it gives clarity on the CBIs policy
with regard to approving indextracking UCITS.
For the timelines, new funds are
already under subject to these
requirements as is any reinvestment
of cash collateral for existing funds.
For existing funds an initial analysis
of whether the fund will require
approval would be worth completing
at this stage in order to prepare for
the work effort required for the
approval of funds. The transparency
and risk management requirements
are very much in line with other
recent and imminent fund
legislation, a holistic view across all
new and imminent legislation would
be a worthwhile exercise for fund
managers and administrators to
avoid having to re-develop or tweak
systems for each piece as it comes
into effect.

14

UCITS Bonus Cap Fund Manager

The European Parliament's Economic and Monetary Affairs Committee (ECON) voted on 21 March 2013 to cap fund
managers' bonuses at 100% of salary, similar to the rules on bankers' pay which were passed in recent weeks by the EU as
part of the CRD IV.
If passed unchanged, the proposed amendments would result in remuneration regulations under UCITS V that are more
onerous than those under AIFMD, CRD III and CRD IV and would result in asset management businesses managing UCITS
products facing even tougher rules than the banking sector.
In addition to the bonus cap, the proposed UCITS V definition of identified staff is far more explicit than in other
comparable directives and would extend the number of Identified Staff significantly in most firms across senior
management, front, middle and back office.
Timing
Our understanding is that these compromises will now be voted on by the European Parliament, and would form the
Parliament's position during the process to finalise the UCITS V directive text. The most likely effective implementation date
at this stage is 1 January 2015, with any rules applying to remuneration paid after that date. For firms with a December year
end this would mean that payments in respect of the 2014 performance year are likely to be the first subject to UCITS V
rules.
For 'Identified Staff':
-

the variable component of remuneration should not exceed one times

the fixed component of remuneration. Unlike similar provisions in
CRD IV, we understand that there is no proposed flexibility in respect
of this ratio i.e. there is no ability to increase this compensation mix
to 2 to 1 with shareholder agreement
At least 50% of variable compensation should be delivered in the
form of units in the funds, unless the management of UCITS counts
for less than 50% of the total portfolio of the management company.
This is a similar requirement to those set out in AIFMD
At least 25% of variable compensation should be deferred over a
period which is appropriate in the context of the lifecycle and
redemption policy of the UCITS funds. This should rise to 60% where
variable remuneration is 'particularly high'. The 25% suggested is
lower than the 40% in both CRD III and AIFMD

The remuneration policy of the management company should be owned

and overseen by a supervisory body, which is independent from those in
executive functions

Large, complex firms should operate a remuneration committee which

includes employee representatives. This is a similar requirement set out
in the CRD IV text

Disclosure relating to remuneration practices should be made available

to all stakeholders. This differs from the AIFMD disclosure rules which
require disclosure to investors through the fund accounts
-

Unlike AIFMD, CRD III / CRD IV which require full compliance or

complete neutralisation of the provisions, we understand that the
proposals would allow partial neutralisation of the provisions under
UCITS

Remuneration requirements
We set out below our understanding of
the key requirements under the proposed
amendments to the directive:
Individuals subject to the
requirements
The rules will apply to a group of
'Identified Staff'. We understand that the
proposals would include temporary and
contract staff, as well as permanent
employees at fund and sub-fund level.
Unlike CRD III, CRD IV or AIFMD this
explicitly includes:
Fund managers
Other persons who take investment
decisions that affect the risk position of
the fund and those who can influence
them
Senior management, risk takers,
personnel in control functions; or any
other employee or other staff receiving
total remuneration that falls within the
remuneration bracket of senior
management and decision takers and
whose professional activities have a
material impact on the risk profiles of the
management companies or of UCITS
they manage.

15

Central Bank of Ireland focuses its

eagle eye on funds industry
As the financial system scrambles to
get back on track post the global
credit crisis, regulators worldwide
have a tough agenda in preventing a
reoccurrence of similar events in the
future. The main approach has been
to propose many new regulations for
future adoption. This is now coupled
with increased supervision via more
active engagement with regulated
firms involving inspections and
increased reporting. The Central
Bank of Ireland (CBI) is no different
and has implemented a new
supervision framework called the
Probability Risk and Impact
System (PRISM). It is the Central
Banks risk-based framework for the
supervision of regulated firms. It
provides a framework for
supervisors in challenging firms,
judging the risks they pose to the
economy and the consumer and
mitigating those risks supervisors
judge to be unacceptable. Firms
should ensure that their policies and
procedures are up to date, their staff
roles and responsibilities are clear,
their business model is understood
by all and that they remain
compliant with any new CBI
pronouncements in order to be
inspection ready.
The Central Banks new
supervisory regime
PRISM has been deployed for funds
and their service providers since 1
June 2012. So what does this mean
for the funds industry?
Under PRISM, each regulated firm
(funds and service providers) is
given a risk rating. Firms with the
higher risk ratings - those whose
activities or potential failures have
ability to have the greatest impact
on financial stability and the
consumer - will receive a high level

of supervision under structured

engagement plans, leading to early
interventions to mitigate potential
risks. Conversely, those firms which
have the lowest potential adverse
impact will be supervised reactively
or through thematic assessments.
The Central Bank will take targeted
enforcement action against firms
across all impact categories whose
poor behaviour risks jeopardising
their statutory objectives including
financial stability and consumer
protection. Reputation risk is also a
factor to consider for the Irish funds
industry.
PRISM operates by calculating an
impact categorisation for the
regulated entities in Ireland, to
allow the CBI to decide on the level
of engagement and therefore
resources they apply to any
individual firm. The key metrics that
will be used for the funds industry
are assets under management and
turnover, with focus on client assets
where relevant.
If we examine the funds industry
under this framework, fund service
providers tend to have a higher
impact categorisation, with more
subsequent engagement from
supervisors. In contrast, each
individual fund, in itself, has a
limited potential impact on financial
stability and investors in the event
of failure - and so, cannot and
should not expect the same level of
supervisory engagement as afforded
to the fund service
providers. Therefore funds are
categorised as low impact. The
PRISM supervisory model does
provide capacity for the CBI to react
to triggers and problems that
emerge in individual funds and
service providers as well as random
spot-checks and focused themed
inspections. It should be also noted
that whilst funds are low impact

entities, the funds industry is

recognised as a high impact
industry. Therefore, we would
expect to see attention and
resources devoted to the funds
industry as a sector.
Level of engagement
Higher impact firms can expect a
cycle of engagement activities with
the Central Bank, involving
potentially, having one of the CBI
inspections teams on site as
frequently as once a quarter
reviewing an aspect of the firms
risk. Medium-high impact firms can
expect to have a full risk assessment
with extensive on site investigatory
work once every two to four years.
Medium-low impact firms will also
receive periodic full risk
assessments.
Low impact firms will typically
engage with the CBI on a reactive
basis where a trigger occurs or if
selected for themed inspections. The
expectation however, is that low
impact firms still need to ensure
that they comply fully with all
regulatory requirements in the same
fashion as higher impact firms.
They will be monitored through a
combination of semi-automated
checking of returns, themed
inspections and spot checks as well
as issues identified arising from any
summary inspections that may be
conducted. As with other impact
categories, failure to comply with
requirements may lead to
enforcement action. In addition to
the minimum engagement activities,
there will be additional engagement
where needed to address identified
issues, request additional
information or conduct themed
reviews.

16

Impact funds industry are you

inspection ready?
Good compliance should be an
integral part of your business. There
is an avalanche of new regulation
and increased engagement with
regulators. Transcending both these
trends, is the importance of being
aware and clear about the risks
associated with your business and
how these are addressed. Are your
policies and procedures clear and up
to date with business changes and
regulatory change? Is your
monitoring programme sufficiently
thorough and robust? Is your
management reporting highlighting
the key risks to the business? Are
you documenting your policies and
rationale for changing and
responding to emerging risks or
breaches and new regulations? Have
your staff members been
appropriately briefed and trained?

Governance arrangements must

enable the upwards and
downwards reporting of risks and
issues.
Committees and decision making
forums mandated to consider
quality and outcomes as part of the
business activities they oversee.
Business subjected to regular
review (e.g. by compliance,
internal audit, or a third party).
Management reporting should
highlight all key risks and
emerging risks in the business.

Below outlines some of the key areas

that should be reviewed;

Business Model
Strong risk management is critical
to the running of your business
irrespective of the regulations.
Understanding and demonstrating
detailed knowledge of the business
model, the associated risks and the
controls and mitigants in place is of
uttermost importance. This should
filter down through the business , it

Corporate Governance
The corporate governance structure
must enable effective direction and
oversight of the business. Boards
have overall responsibility for
compliance and effective risk
management and controls:

The CBI will seek an understanding

of how the firm is governed. Good
corporate governance acts as a
control mechanism providing
confidence to stakeholders that the
institution is managed in a sound
and prudent manner. The CBI will
look at the governance structure, the
quality of the individuals and how
the structures operate in practice.

is important to train staff so they

understand the business model and
why certain procedures are in place.
Reporting lines & systems
It is important that there are clearly
defined reporting lines. Staff should
be clear on management roles and
responsibilities, e.g. staff are sure
who is responsible for key areas
and/or who has ownership of
important duties/actions. Many
areas of regulation can lead to
overlap in some entities, which may
leave ownership of a specific
responsibility unclear, it is
important that no gaps exist where
issues may fall through the cracks.
Firms should have robust systems,
with strong contingency plans for
any issues encountered, processes
automated when possible and
actions taken should be clearly
understood and followed up to
ensure they effectively resolve
issues.
Firms should also consider an
approach to identify not just
breaches, but to understand why
these breaches occur and take steps
to prevent recurrence either through
training or a change in procedures.

17

Policy documents
Policy documents should include
appropriate, clear and relevant
information. Your company policies
should be tailored and reflective of
your business and your business
risks, not generic. Procedures
documents should be detailed and
contain controls to address your key
risks, they should be tailored as
necessary for different product types
and to address the specific risks for
that product or process.

controls and processes. It is

important that these are followed up
and resolved on a timely basis.

Do the documented policies

address the specific risks and
requirements associated with
different product types or business
lines?
How rigidly are they enforced?
What is the impact of any failure
to adhere to them?
Are they regularly updated to take
account of any business,
regulatory, tax or legal changes?
Do the findings from testing
indicate any gaps or failures in the
procedures or necessary changes
to the policy document?
Are gaps and issues chased and
additional controls put in place,
where appropriate?

There will also be an increase in

online reporting, with this move it is
important that firms provide
accurate data as this information
will used by the CBI in their analysis
of firms and the industry in general.
If inaccurate information is
provided it may cause a trigger for a
CBI inspection at one level, at
another level, it leads to an
inaccurate picture of the firms risk
profile and potentially the sectoral
risk.

Monitoring programme
Firms should have robust
methodologies for identifying risks
and ensuring that procedures and
controls are in place to manage
those risks. The monitoring
programme should be driven by the
key business and compliance risks
and the regulatory framework that
governs your business. Gaps and
issues should be quickly identified,
escalated and acted upon.
Firms should also clearly document
how issues were resolved, lessons
learnt etc. It is important to add this
information to training programmes
to promote awareness and prevent
reoccurrence.
Your risk and compliance
monitoring and internal audit
programmes should highlight risks
and areas of weakness in the

Future trends
Going forward, we will see increased
interaction from firms in the funds
industry with the CBI. This will not
just be within the compliance areas
but the wider business model. The
PRISM model reviews transcend all
levels of organisations.

The CBI will focus more on trend

analytics and emerging risks
through the information and
insights they have acquired through
a variety of means for example
regulatory reporting, themed
inspections, spot checks and
emerging international trends.
Furthermore, firms supervised by
the Central Bank have been placed
in peer groups. PRISM allows
supervisors to access pertinent
quantitative and qualitative
information about all firms in a peer
group, which will allow for easy
comparison of key quantitative risk
indicators. This peer group
comparison will increase peer group
intelligence result in more
transparency in what are the right
systems, people and processes
needed for a robust risk focused
organisation. It will also provide the
CBI with data indicating which, if
any, firms are outside the norms
within a peer group, which may lead
to further investigation.

18

Enforcement helps to deliver a

regulatory regime which is credible
and effective. The CBI has stepped
up their work in this area. Last year
they entered into enforcement
settlements with 10 financial
providers, resulting in a range of
sanctions including the
disqualification of 2 directors and
fines totalling 5 million. In all
impact categories discussed above,
failure to comply with requirements
may lead to enforcement action.
Although, funds are considered low
impact given the reactive nature of
the inspections, the CBI has made it
clear that low impact does not mean
lower compliance standards, they
intend to investigate any breaches
uncovered. As stated in their
Enforcement Strategy, a key
component of PRISM is a vigorous

application of enforcement effort. It

is also clear that publicity regarding
any enforcement actions is seen as a
deterrent and sanctions issued to
date have been well publicised.
Indeed, for low impact firms, the
most efficient use of CBI resources
is to take quick, decisive
enforcement action. We expect that
themed inspections will be
undertaken with a view to applying
sanctions in order to publicly
highlight breaches and poor
industry practices and that the
themes for inspection will be
selected on that basis .Therefore it is
critical that firms are prepared for
themed inspections / spot checks at
all times.

framework for engaging with the

CBI and the renewed focus on
themed inspections from the CBI.
Well run, compliant firms will be
well prepared to interact with the
CBI if and when required.
Notwithstanding, everyone can
benefit from examining their models
to see if there is room for
improvement taking the areas
considered above into account. Well
managed firms have strong
corporate governance structures,
clear business models, up to date
policies, well trained staff and
robust monitoring programmes and
can clearly demonstrate this to any
Regulator.

None of the above should be new to

firms, what is new is the formal

19

FATCA & the US-Ireland

Intergovernmental Agreement
On 21 December 2012, the Charg
daffaires at the US Embassy in
Ireland and the Minister for Finance
of Ireland signed an
intergovernmental agreement (the
US-Ireland IGA), for which enabling
provisions are due to be enacted
into Irish tax legislation in the
coming months.
The IGA changes the way in which
FATCA affects Irish financial
institutions. Its effect is to give Irish
laws and regulations precedence in
governing FATCA compliance for
Irish entities and it provides that
reporting will be carried out to the
Irish Revenue Commissioners,
rather than to the IRS. The
reporting requirements will apply to
all Irish financial institutions, as
defined, regardless of whether the
entity has US account holders or US
assets.
US-Ireland IGA
The US-Ireland IGA defined the
types of Irish financial institutions
which are in scope for FATCA as:
1.
2.
3.
4.

A Custodial institution;
A Depository institution;
An Investment Entity; or
A Specified Insurance
Company.

administrator, at the funds

discretion.
The US-Ireland IGA also defines the
types of institutions that are either
exempt from the scope of FATCA or
that can qualify as DeemedCompliant Financial Institutions.
Entities qualifying under the
Deemed Compliant status will
benefit from a reduced compliance
burden under FATCA. Such entities
include non-profit organisations,
financial institutions with a local
client base and certain collective
investment vehicles. Collective
investment vehicles may qualify
under the Deemed Compliant
status where all of the interests in
the vehicle are held by or through
one or more financial institutions
that are not nonparticipating
financial institutions. This is very
beneficial for fund-of-fund type
vehicles or funds whose interests are
all sold through nominees which are
themselves reporting financial
institutions.
IGA Benefits

Specific definitions are attached to

each type of entity above.

The US-Ireland IGA addresses legal

barriers encountered by Irish
financial institutions when
complying with FATCA, as well as
ensuring that the burdens imposed
on financial institutions are
proportionate and further the goal
of combating tax evasion.

For the asset management industry,

the IGA covers investment funds,
their administrators and investment
managers, as well as other parties
involved in the running of the fund.
The forthcoming Irish regulations
are expected to clarify that the fund
is the party with primary
responsibility for complying with
the relevant obligations, but that
certain due diligence and reporting
responsibilities can be delegated to a
third party, such as the fund

Under the IGA and its enabling Irish

provisions, reporting Irish financial
institutions will not be required to
sign an agreement with the IRS, as
envisaged by the FATCA
regulations. Instead, relevant
entities must report account holder
information annually to Irish
Revenue. Irish Revenue will then
collate and exchange this
information with the IRS. The first
deadline for the exchange of
information between Irish Revenue

and the IRS is 30 September 2015,

in relation to information for both
2013 and 2014.
Under the US-Ireland IGA,
reporting Irish financial institutions
are considered to be compliant and
as a result, those entities should not
suffer 30% FATCA withholding tax
on US source income or gross
proceeds. Similarly, reporting Irish
financial institutions should not be
obliged to operate 30% FATCA
withholding tax on such payments
made to recalcitrant account holders
or investors provided the
requirements of the IGA are met.
This is a very positive feature of the
US-Ireland IGA, and means that the
task of developing complex
withholding tax systems to identify
and withhold on payments to
certain account holders is avoided in
most cases.
The above beneficial treatment is
available to financial institutions in
Model I IGA countries (such as
Ireland). Certain countries, such as
those with banking secrecy
provisions in their local law, will
enter Model II IGAs, the terms of
which are distinguishable from
Irelands Model I agreement. The
main difference is that financial
institutions in countries which sign
a Model II agreement (e.g.
Switzerland) will still be obliged to
sign a direct agreement with the IRS
in order to comply with FATCA.

20

IGA Requirements
Some of the key requirements of
reporting Irish financial institutions
under the US-Ireland IGA include
the following:
Register as a reporting Irish
financial institution and receive a
Global Intermediary Identification
Number (GIIN);
Apply due diligence procedures to
identify and report certain
information on US Reportable
Accounts (as defined) and
accounts held by NonParticipating Financial
Institutions;
Update account on-boarding
procedures with effect from 1
January 2014 to identify whether
the account holder is considered a
US person (individual accounts)
and classify and document the
account into different categories of
account holder (entity accounts);
and
Report annually certain details on
US Reportable Accounts.
Further clarification on the
requirements under FATCA may
also be sought from the Final
FATCA Regulations which were
released by the IRS in January 2013

Deadlines
Some of the key deadlines for
FATCA are:

Summer 2013 Irish

regulations and guidance notes
expected to be released.
No later than 15 July 2013
Registration portal will be
available online (including all
Foreign Financial Institutions
(FFIs) covered under the USIreland IGA).

25 October 2013 last day to

register on portal to be on first
IRS list of FFIs.

2 December 2013 IRS will

post the first list of FFIs and
intends to update the list
monthly.

1 January 2014:

New account on-boarding

procedures must be in place.
30% FATCA withholding tax
commences for non-compliant
entities. Reporting Irish
financial institutions should not
suffer withholding tax on
payments received from the US.

30 September 2015 Irish

Revenue required to exchange
information relating to the
calendar years 2013 and 2014
with the IRS.

30 September 2016 - Irish

Revenue required to exchange
information relating to the
calendar year 2015 with the IRS.

FATCA Status of Other Countries

Apart from Ireland, other countries
that have signed IGAs with the US
are:

United Kingdom (signed Model

I IGA September 2012)

Denmark (signed Model I IGA

November 2012)

Mexico (signed Model I IGA

November 2012)

Switzerland (signed Model II

IGA February 2013)

In February 2013, Germany

announced that it had initialled a
Model I IGA with the US. However
the agreement has not yet been
signed. In March 2013, the Cayman
Islands government announced that
it would adopt a Model 1 IGA for
FATCA. This is a very important
development for the Irish funds
industry given that many Irish fund
administrators provide services to
Cayman funds. Other countries are
also in various stages of negotiations
with the US with regards to signing
an IGA.

21

Contacts
The Regulatory Advisory Services team are happy to address any
questions you might have on any of these regulatory news updates.
European & Irish regulations
Dervla McCormack
+353 1 792 8520
dervla.mccormack@ie.pwc.com

FATCA specialists
Rebecca Maher
+353 1 792 8634
rebecca.maher@ie.pwc.com

Ken Owens
+353 1 792 8542
ken.owens@ie.pwc.com

Seamus Kennedy
+353 1 792 6840
Seamus.Kennedy@ie.pwc.com

Fiona Lehane
+353 1 792 8657
fiona.lehane@ie.pwc.com

Director Remuneration Specialists

Sean Walsh
+353 1 792 6542
sean.walsh@ie.pwc.com

Ailish Custerson
+353 1 792 7109
ailish.custerson@ie.pwc.com
Olivia Sweetman
+ 353 1 792 8152
olivia.sweetman@ie.pwc.com

Kenneth Feaheny
+353 1 792 6305
kenneth.feaheny@ie.pwc.com

Dermot Finnegan
+ 353 1 792 8693
dermot.a.finnegan@ie.pwc.com

22

www.pwc.ie/funds

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