Second Stage of the Investment Funds, Companies and Miscellaneous Provisions Bill

On Wednesday 18th May, 2005

I move “that the Bill be now read a Second Time”.

I am very pleased to bring this Bill before the House.

The Bill was initiated in the Seanad on 29^th March last and completed all stages in the Seanad on 26^th April. There were a number of amendments made at Committee Stage in the Seanad and these are contained in the text of the present Bill. I will to refer to the principal amendments in the course of this presentation.

Background

Since the International Financial Services Centre (IFSC) was launched in 1987, the Government has made a strong commitment to making Ireland an attractive and competitive location for a wide range of international financial services activities and institutions. Dublin is now host to half of the worlds top fifty banks and is one of the main European locations for insurance (both life and general), mutual funds and corporate treasury.

The Government values the important role that the financial services industry plays in the Irish economy. It is a very significant employer, with a total of over 51,000 working in the sector, of which over 17,000 are engaged in providing wholesale or international services.

Ireland has been exceptionally successful in attracting international financial services companies to locate here. That is a trend that we want to see continue. A recent IDA commissioned report by Deloitte Management Consultants reviewed future options for the International Financial Services Sector in Ireland and concluded that

there are still excellent opportunities to grow and develop the sector based on innovation, skills and expertise. In particular, the Report identified opportunities around:

• Becoming the major European centre for specialist debt/financing products and securitisation;
• Being a world class location for managing global/regional banking products 
• Developing and enhancing Ireland’s position as a major centre for asset servicing 
• Building scale in asset management, and
• Positioning Ireland as being the pan European location for insurance products.

The Funds Industry has played a crucial role in contributing to the growth of the IFSC. The industry has grown rapidly throughout the 1990s and today there are over fifty international funds administrators and over twenty custodians in Ireland employing over 5000 people. These companies are currently servicing 3668 Irish domiciled funds and sub-funds with net asset values of almost €463 billion together with another €200 billion under administration in non-domiciled funds.

With a view to providing the greatest flexibility to the Funds Industry, while at the same time keeping appropriate controls in place, this Bill makes a number of changes to the existing legislation in this area. It provides for the introduction of a new type of investment fund vehicle - the non-UCITS Common Contractual Fund (CCF) and it also provides for the introduction of cross investment and segregated liability for investment funds.

Apart from the changes to the laws relating to investment funds, a number of other changes to general company law are proposed, many of which will also directly or indirectly impact on at least some aspects of companies used as investment companies.

There is a currently a lot happening at the EU level in the financial services area.

The 42 action points identified in the Financial Services Action Plan have essentially been completed at EU level and in this Bill, the Companies legislation is being amended in anticipation of the transposition of two EU Directives dealing with Market Abuse and Prospectuses. The Market Abuse Directive, which covers both insider dealing and market manipulation, will simplify administration and reduce the number of different rules and standards across the European Union. The Prospectus Directive will make it easier to raise capital in Europe and increase transparency and market integrity.

In Part 6 miscellaneous amendments are being made to the Companies Acts to remove anomalies and make other changes that need to be made.

Certain pieces of consumer protection legislation are being amended in Part 7 largely to increase the maximum fines that can be imposed on conviction. This Part also contains amendments to the Competition Act and the Industrial and Provident Societies Act which were agreed in the Seanad.

Provisions of the Bill

I will now turn to the provisions of the Bill and will explain in some greater detail what each of these is designed to achieve. Obviously this is not intended as an exhaustive account of the contents of each section.

Part 1

Part 1 of the Bill contains some preliminary technical matters including the commencement of the legislation, interpretation, the making of orders and regulations and how parts of the Bill will relate to the existing Companies Acts.

Part 2

The purpose of Part 2 of the Bill is to provide for the introduction of a new type of investment fund vehicle - the non-UCITS Common Contractual Fund (CCF).

As the name suggests, a Common Contractual Fund or CCF is a contractual arrangement established under a deal which provides that investors participate as co-owners of the assets of the fund. The CCF is not a separate legal entity and is transparent for Irish legal and tax purposes. As a result, the investors in the CCF are treated as if they own a proportionate share of the underlying investments of the CCF rather than shares or units in an entity which itself owns the underlying investments.

The consolidated UCITS (Undertakings for Collective Investment in Transferable Securities) Regulations provided the legislative framework for the establishment of the UCITS Common Contractual Fund, the UCITS CCF. The availability of the UCITS CCF has allowed Ireland to market itself as a jurisdiction for consideration to multinational companies looking for an investment fund structure to pool the assets of a number of individual pension funds. Pension pooling allows companies operating pension funds in several countries to ‘pool’ assets into a single pension pooling vehicle. The pension pooling vehicle then invests in assets, such as global equities, bonds and cash, on behalf of the investing pension funds. Pooling offers considerable economies of scale, particularly for smaller pension funds, and this in turn leads to cost savings and enhanced returns.

However, UCITS structures by their very nature include inherent restrictions e.g. restrictions in investment policy, acceptable asset classes, borrowing restrictions etc. These restrictions limit the value of the UCITS CCF structure and highlight the need for a CCF beyond the UCITS structure to complete the product range.

Section 8 deals with authorisation by the Central Bank and Financial Services Authority of the non-UCITS CCFs. The powers of the Central Bank in this Bill will be delegated to IFSRA – the Financial Regulator.

Section 9 deals with public information and reporting on the authorisation of CCFs.

Section 10 gives the Central Bank the powers necessary to impose such conditions as it considers appropriate and prudent for the orderly and proper regulation of the business of CCFs and Section 11 deals with refusal of such authorisation.

Section 12 deals with any alteration in the deed of constitution of a CCF, or change in the name of a CCF and Section 13 deals with the replacement of a management company or custodian.

Section 14 requires a management company to redeem units in the CCF at the request of the unit-holder at the going rate and creates an offence where a management company fails to redeem units as requested by the unit holder.

Section 15 prohibits management companies and it’s subsidiaries from making certain profits for themselves under the CCF.

Section 16 deals with the assets of a CCF. It provides that the assets of a CCF will belong exclusively to the CCF and shall be held by the custodian. Where a CCF is established as an umbrella fund the assets of each sub-fund shall belong exclusively to that sub-fund effectively ring-fencing them from the other sub-funds in the umbrella. This ensures that each sub-fund will have segregated liability. This means the assets of one sub-fund cannot be used to discharge liabilities incurred by another sub-fund within the umbrella. This is an important provision from the point of view of investor protection as different sub-funds may operate different investment strategies involving varying degrees of risk.

Section 17 deals with the liability of custodians of a CCF.

Section 18 applies certain provisions of the UCITS Regulations to non-UCITS CCFs subject to appropriate and necessary modifications including terminology.

Section 19 makes officers of a body corporate guilty of an offence where they have facilitated a body corporate in committing an offence under this Part of the Act.

Section 20 makes it an offence for a person to contravene any provision in this Part of the Act even though the Act may not have specifically created an offence of such contravention. For example, failure to comply with conditions imposed by the Bank under Section 10 will be an offence given the duty of compliance imposed by Section 10(6).

Section 21 deals with penalties.

Part 3

Part 3 provides for amendments to Part XIII of the 1990 Companies Act which deals with Investment Companies. The purpose of this Part is to provide for the introduction of cross investment and segregated liability for investment funds.

Cross investment will facilitate investment by one sub-fund of an umbrella fund into another sub-fund of the same umbrella. This is currently permitted in investment funds which are structured as unit trusts but is not possible in investment companies because the legislation currently provides that shares which are purchased by an investment company must be cancelled. This means that an investment company cannot currently purchase shares in itself and hold these for the benefit of the investors in a particular sub-fund. These provisions are aimed at removing this prohibition.

A sizeable proportion of UCITS and non-UCITS investment companies established in Ireland are established as umbrella funds. An umbrella fund is comprised of one or more sub-funds, each of which pursues different investment strategies and objectives. The reason for establishing a fund as an umbrella fund is to enable investors to switch freely between different investment strategies and to facilitate ease of administration of the fund by the promoter or investment manager, with consequent cost savings.

Ideally, an investor who invests in a particular sub-fund should be in the same position as if that sub-fund were itself a limited liability company. The investor should be subject only to investment risks and liabilities incurred in the pursuance of the investment strategy attributable to the sub-fund in which it has chosen to invest and should not be exposed to potential liability as a result of activities in other sub-funds.

An investment company is a single legal entity and sub-funds are simply represented by the issue of a new class of shares within that investment company. Sub-funds of an investment company do not therefore have the ability to segregate their liabilities from those of the investment company as a whole. Shareholders and creditors are therefore currently subject to the risk that their rights in respect of the sub-fund(s) with which they deal could be affected by activities in and liabilities incurred by other sub-funds. This is why segregated liability is being introduced.

Section 24 amends Section 255 of the 1990 Act to provide that an umbrella fund may acquire and hold funds in any of its sub-funds for the purpose of transferring the funds to another one of its sub-funds. Essentially this allows for cross investment in investment companies.

Section 25 amends the 1990 Act through the insertion of 5 sections into Part XIII of that Act to provide for segregated liability for investment funds. It provides a mechanism by which any existing umbrella funds wishing to avail of the benefits of segregated liability must obtain approval by way of special resolution of the members. Where segregated liability applies, any liabilities of a sub-fund will be discharged solely from the assets of that sub-fund. Segregated liability will not apply to umbrella funds which had commenced trading before the commencement of this Act unless the members of the umbrella resolve that it should (by special resolution).

Section 26 amends Section 257 of the 1990 Companies Act which relates to powers of the Financial Regulator over investment companies. The purpose of this amendment is to extend the Regulator’s powers to management companies of investment funds.

Section 27 amends Section 260 of the 1990 Act to disapply certain provisions of the Companies (Amendment) Act 1983 to investment companies. This arises from the provisions for cross investment for investment companies.

Part 4

The purpose of Part 4 is to enact provisions which need to be enacted in primary law to ensure the smooth and effective transposition of the EU Market Abuse Directive which covers insider dealing and market manipulation. The same framework will apply to both categories of market abuse. This will simplify administration and reduce the number of different rules and standards across the European Union. It covers all financial instruments admitted to trading on at least one regulated market in the European Union.

Section 28 provides for definitions used in this Part.

Section 29 allows the Minister to make regulations under this Act for the purpose of implementing the Market Abuse Directive, three supplemental Directives and, if necessary, to give full effect to the Market Abuse Regulation. It is recognised that it can be particularly difficult to sustain and prosecute an allegation of market abuse, so much so that the new Directive focuses on administrative sanctions rather than requiring Member States to have criminal sanctions. In the case of Ireland, such administrative sanctions will be provided for in the transposing Regulations. While that is the case, it is considered that the criminal sanction regime that was provided for in Part V of the Companies Act 1990 should be retained. It had been intended to make these Regulations under the European Communities Act 1972. However, section 3(3) of that Act states that regulations under section 3 shall not create an indictable offence. Consequently, for legal certainty, an amendment was made in the Seanad giving the Minister the powers under this Act to make regulations transposing the Directive.

Section 30 creates the penalty that can be imposed for a person found guilty of an offence in this context. It provides for a maximum fine of €10million and/or maximum 10 years in prison for conviction on indictment. Summary offences will be dealt with in the transposing regulations.

Section 31 provides for civil liability for breaches of Irish market abuse law. It provides that a person contravening those provisions will be liable to pay compensation to any party involved in the transaction who was not in possession of the relevant information for loss suffered as a result. This section also deals with breaches concerning market manipulation and provides that a person contravening those provisions will be liable to compensate parties dealing in shares as a result of the breach. The guilty person must also account to the company issuing the shares for any profit made from the transaction.

Section 32 gives the competent authority the power to make supplementary rules to allow them to fulfil their role as competent authority.

Section 33 amends the Central Bank Act of 1942 to include the Market Abuse Directive (and related Directives) and the Prospectus Directive in the list of Directives for which the Central Bank has responsibility to enforce. This deals with confidentiality of information obtained by the competent authority and effectively prohibits its disclosure.

Section 34 allows the Minister to provide, by order, that one or more provisions of Irish market abuse law may apply to any market specified in the order. This is to anticipate the establishment of any new market.

Part 5

The purpose of Part 5 is to amend the 1963 Companies Act dealing with Offers of Securities to the Public. This is in anticipation of the transposition of the EU Prospectus Directive which it is proposed to transpose by way of Regulations.

This Directive will make it easier to raise capital in Europe and increase transparency and market integrity. By harmonising the necessary disclosure requirements, the new legal framework as a whole creates an effective "single passport" for both EU and non-EU issuers; in other words it means that once a prospectus is authorised in one Member State, it can be used in all the others, cutting red tape and costs for issuers. A prospectus is a disclosure document, containing key financial and non-financial information, that a company makes available to potential investors when it is issuing securities (such as shares, bonds, derivative securities etc.) to raise capital and/or when it wants its securities admitted to trading on exchanges. The Directive will reinforce protection for investors by guaranteeing that all prospectuses, wherever in the EU they are issued, provide them with the clear and comprehensive information they need to make investment decisions.

Like the Market Abuse Directive, the Prospectus Directive is being transposed by Regulations, but certain “complementary” changes are being made in Part 5 of the present Bill to amend and where necessary to update national prospectus law provisions which do not arise directly from the EU Directive and which accordingly must be made in primary law. In this regard, indictable criminal and civil sanctions are being retained and where necessary modified to reflect the new regime that is being introduced. Moreover, certain requirements are being repealed (such as the 4 day rule contained in section 56 of the Companies Act, 1963).

Furthermore, in circumstances where an offer of securities to the public is outside the scope of requiring the preparation and publication of a prospectus under the EU Directive, or where an offer is made in such a way as to avail of an exemption under Article 3.2 of the Directive, there will be no requirement in national law to prepare a prospectus, as had been the case up to now. However, in one instance, and that is where the total value of the securities offered amounts to less than €2½ million, then the offeror will be required to publish certain warnings in the offering document.

These changes reflect the EU requirements and will remove unnecessary bureaucracy where the size of the offer of securities is very small.

Section 35 provides for definitions used in this Part.

Section 36 deals with the construction of certain terms in the 1963 Act in cases where provisions have been amended or inserted by this Part and Section 37 provides for necessary repeals and revocations which are being made in anticipation of the transposition of the Directive.

Section 38 deals with civil liability for misstatements in the prospectus and provides that certain persons will be liable to pay compensation to persons who acquired securities on faith of that prospectus for loss or damage sustained because of untrue statements or omissions in the prospectus. Section 39 provides for exceptions and exemptions applying to Section 38.

Section 40 provides for a restriction of liability in cases where certain non-equity securities are involved.

Section 41 provides for indemnification of certain persons in cases where a director has withdrawn his or her consent, has not consented to become a director or has not consented to the issue of a prospectus and to an expert who has withdrawn consent or has not given consent to the issue of a prospectus.

Section 42 provides that an expert must give consent to the inclusion of statements made by him or her in a prospectus.

Section 43 allows the Minister to make regulations under this Act for the purpose of implementing the Prospectus Directive. Like the Market Abuse transposing Regulations I spoke about earlier, it had been intended to make these Regulations solely under the European Communities Act 1972. However, section 3(3) of that Act states that regulations under section 3 shall not create an indictable offence. Consequently, for legal certainty, an amendment was agreed in the Seanad giving power to the Minister under this Act to make regulations transposing the Directive.

Section 44 provides for penalties on conviction on indictment for offences under Irish prospectus law. This would cover a situation where securities are offered to the public or listed without issuing a prospectus.

Section 45 provides for criminal liability for untrue statements and material omissions in a prospectus.

Section 46 sets out requirements for offering documents prepared for local offers and specifies statements - essentially warnings - which must be included in those documents. Such documents must be registered with the CRO. Local offers are transactions not regulated by the Directive where the total consideration for the offer is less than €2½ million.

Section 47 provides that a document prepared in accordance with EU prospectus law or an offering document does not constitute an investment advertisement within the meaning of the Investment Intermediaries Act 1995 and Section 48 gives the competent authority the power to make supplementary rules and issue guidelines.

Sections 49 to 52 amend the 1963 Act to encompass EU prospectus requirements.

Part 6

Part 6 provides for various amendments to company law legislation.

Section 53 amends section 60 of the 1963 Act. A number of these amendments implement recommendations of the Company Law Review Group

Sections 54 and 55 provide for electronic filing agents. This was recommended by the Company Law Review Group. It allows companies to appoint electronic filing agents to file documents with the Companies Registration Office (the CRO) in electronic form.

Sections 56 and 57 provide for the reservation of a company name with the CRO. A name may be reserved for 28 days and an applicant may seek an extension of this period for another 28 days only.

Section 58 amends section 128 of the 1963 Act to clarify a reference in that provision.

Section 59 amends section 195 of the 1963 Act and provides that a director of a company may notify the CRO of a change in name or address and that one notification can be used to change those details in respect of all companies of which he or she is a director.

Section 60 amends section 302 of the 1963 Act by extending the period within which liquidators may comply with notices issued by the CRO to encourage more widespread use of this provision and to avoid time consuming and expensive high court applications.

Section 61 amends section 371 of the 1963 Act and is a similar provision to that of Section 60 but relates to ‘company’ and ‘officer’ as opposed to liquidator.

Section 62 amends section 12B of the Companies (Amendment) Act 1982. It allows the CRO in the event of striking off a company for failure to make annual returns to advertise their intention to do so in the CRO Gazette in cases where they have no registered office address for the company. This will apply where a company fails to make an annual return for 20 consecutive years and will only relate to companies incorporated prior to 1982 as since then companies must provide a registered office from the date of its incorporation.

Section 63 is a new section inserted in the Seanad which amends section 22 of the Companies (Amendment) Act 1986 to make it possible for the offences dealt with in that section to be prosecuted on indictment. It is considered that such an option ought to be available in the more serious instances where (for example) a company fails to follow fundamental accounting principles (Section 5 of the 1986 Act) or where—having opted against following such principles—the company fails to publicly draw attention to that decision, the reasons for it and the financial consequences thereof.

Section 64 amends section 19 of the 1990 Act. This extends ODCE’s powers in requiring production of documents to include where circumstances suggest that the affairs of a body are or have been conducted in a way that is unfairly prejudicial to some or all of its creditors.

Section 65 amends section 20 of the 1990 Act. Subsection (3) of section 20 of the Companies Act 1990 provides that any material information which is seized by officers of the Director of Corporate Enforcement under subsection (2) of the section may be retained for a period of 6 months, or such longer period as may be permitted by a judge of the District Court. The Office of the Director for Corporate Enforcement (ODCE) have had considerable operational difficulties with the operation of this provision. The position under all criminal justice legislation, other than for ODCE and the Competition Authority, is that material seized on foot of a search warrant is retained until the conclusion of the proceedings. To my mind, there is no valid reason why an exception to this type of provision should be made for the ODCE and the Competition Authority. This provision was agreed at Committee Stage in the Seanad.

Section 66 amends section 21 of the 1990 Act. This will allow ODCE to share confidential information with the Irish Auditing and Accounting Supervisory Authority (IAASA) for the purposes relevant to IAASA’s statutory functions.

Section 67 amends section 166 of the 1990 Act. The purpose of this amendment is to give the court discretion regarding whether or not directors should file certain notices regarding directorships and disqualifications in civil and criminal proceedings.

Section 68 amends section 242 of the 1990 Act. Currently, that section makes it an offence to produce, lodge or deliver a document containing false information to the CRO. This amendment extends the offence to a person who completes or signs such a document. This again was recommended by CLRG.

Section 69 makes several amendments to the Companies Acts to replace the requirement to publish certain notices in Iris Oifigiúil with a requirement to publish them in the CRO Gazette. The CRO Gazette is a national centrally based electronic gazette which is held and maintained by the CRO on its website.

Section 70 is designed to address a number of incorrect references in Schedule 2 of the Companies (Auditing and Accounting) Act 2003.

Section 71 amends section 110A of the Company Law Enforcement Act 2001. Given the new functions that are being assigned to the Central Bank/IFSRA under Parts 4 and 5 in particular, the Bank sought equivalent provisions to those already afforded to the ODCE, CRO, officers of the Minister and inspectors, to facilitate the discharge of their functions under company law. The powers in question are set out in section 110A of the Company Law (Enforcement) Act 2001 (inserted by section 52 of the Auditing and Accounting Act 2003), and relate in general to the certification of certain matters relating to documents and related issues. It is intended that IFSRA will be the competent authority for market abuse and prospectus, and this provision will give IFSRA equivalent powers. This provision was inserted at Committee Stage in the Seanad.

Part 7

Part 7 deals with miscellaneous amendments to Competition, Consumer and Industrial and Provident Societies legislation.

Section 72 amends section 45 of the Competition Act 2002. Section 45(6) of the Competition Act 2002 provides that any books, documents or records which are seized or obtained under subsection (3) of that Act may be retained for a period of 6 months, or such longer period as may be permitted by a judge of the District Court. The Competition Authority have been experiencing considerable difficulties with this provision which is similar to section 65. As I mentioned when speaking on section 65 the position under all criminal justice legislation, other than for ODCE and the Competition Authority, is that material seized on foot of a search warrant is retained until the conclusion of the proceedings. Again, this section was inserted at Committee Stage in the Seanad.

Section 73 provides for amendments to the UCITS Regulations. The purpose of these amendments, which are contained in the Schedule to this Act, is to provide for cross investment and segregated liability for UCITS investment companies.

Sections 74 to 80 amend various provisions of consumer legislation to increase the maximum penalties on conviction under those provisions.

Section 79 also amends the Package Holidays and Travel Trade Act 1995 to increase the timeframe within which a prosecution may be taken from 12 months to 2 years.

Section 81, agreed in the Seanad, relates to the Industrial and Provident Societies Act which is the legislative framework for cooperative societies. Under this Act, there are statutory limits on the maximum amount which a member of a society may have by way of interest in the shares of a society and on the amounts which may be distributed by way of testamentary nomination or on intestacy. The limits were last adjusted in 1985 and 1990 and the Cooperative Movement have requested that they should be increased. The limits are increased in the case of shares, to €150,000 or 1 per cent of the total assets of a society and in the case of nominations and intestacy, to €15,000 and €10,000 respectively.

In the course of preparing these new financial limits, it became evident that the power of the Minister to alter the statutory limits by regulations had been inadvertently removed by the Credit Union Act 1997. The purpose of Section 82, which was prepared in consultation with the Attorney General’s Office, is to validate the financial limits that previously applied. Those limits will be replaced by the new limits provided in Section 81 and these will come into operation immediately on the enactment of this Act.

Conclusion

We must continue to be innovative and develop appropriate skills and expertise. A flexible, responsive and business-focused regulatory system has been the cornerstone of Ireland’s development, and continued progress on that front was recommended by the Deloitte Report. Our regulatory environment is a key component both of our competitiveness and of our international reputation.

I commend this Bill to the House

ENDS

TC 154