Legal Entity Identifiers (LEIs) and Funds
Since the financial crisis regulators have increasingly scrutinized the fund industry, this has meant new regulation such as the US Dodd-Frank Act Title IV, the European Union Directive on Alternative Investment Fund Managers (AIFM) and the Undertakings for Collective Investment in Transferable Securities (UCITS) V Directive, all aimed at better fund regulation and reporting.
The scope of the issuance of the Legal Entity Identifier includes funds as outlined by the FSB's recommendation:
"Examples of eligible legal entities include, without limitation: all financial intermediaries; banks and finance companies; all entities that issue equity, debt or other securities for other capital structures; all entities listed on an exchange; all entities that trade stock or debt; investment vehicles, including mutual funds, pension funds and alternative investment vehicles constituted as corporate entities or collective investment agreements (including umbrella funds as well as funds under an umbrella structure, hedge funds, private equities, etc); all entities under the purview of a financial regulator and their affiliates, subsidiaries and holding companies; and counterparties to financial transactions."
Funds can have various structures, from the simplest stand-alone fund, which has a single investment portfolio, to more complex umbrella structures. Umbrella funds consist of a fund which would be considered a legal entity under which there can be one or many sub-funds. These funds can either be
- Segregated funds, common in Luxembourg SICAVs, which consist of sub-funds that are legal entities in their own right. The assets of each sub-fund being ring-fenced and so cannot be called upon to meet an excess of liabilities of one of the other sub-funds or
- Non-segregated funds, common in ICVCs, UK OEIC, German KAG, French FCP, Dutch FGR and pension funds e.g. ERISA, these have sub-funds or "sleeves" which are not considered legal entities in their own right.
Each sub-fund is usually differentiated by a specific investment policy, investment objective or currency. Within each sub-fund different classes of shares might be created with investors buying these shares. Different fund classes usually have different internal fee structures, which would distinguish retail and institutional classes. The classes do not represent separate legal entities and so should not be allocated LEIs.
Hedge funds differ from mutual and pension funds, the so-called "real money" funds, in terms of investment strategies, leveraging, pricing and the liquidity employed. The degree of regulatory oversight also differs. Investors can gain exposure to hedge funds through several different types of vehicles: direct investment into the hedge fund, fund of hedge funds, fund-of-one or managed accounts. Each of these, including managed accounts, will require LEIs, as will any investment managers, prime brokers, executing brokers and custodians involved in any trades.
One of the common type of hedge fund structure is the "master feeder". Investors invest into a feeder fund, which in turn invests into a master fund. The feeder funds are not tied to a particular master fund and are their own legal entity. A master fund is its own legal entity and so would require a Legal Entity Identifier. In the US, the master is usually set up as a limited partnership or a limited liability company. In Europe hedge fund managers tend to utilise Irish Qualifying Investor Funds (QIF) and Luxembourg Specialised Investment Funds (SIF).
"The GMEI (CICI) request should be received from the separate entity that is responsible for providing the "mind and management" of the fund".
Funds can be managed by various methods, the most common are:
- managed by the asset holder (self-managed funds)
- where there is a Financial Intermediary involved (legal representative of the fund)
- where there is a Trustee involved
Although some asset managers may not exclusively manage some funds and so duplication of registration is a possible risk.
For Pensions and Charities the LEI should be applied at the Pension Fund or Charity fund level. Large corporates usually operate separate pension schemes in each country of operation, each one would be a separate legal entity, and therefore each one must have its own LEI.
Registering a Fund for a Legal Entity Identifier (LEI)
The first step is to determine if the fund is a legal entity or not, this is not always apparent (see above). If the fund is a legal entity it should be registered under its full legal name, and fund codes should not be included (although this may change going forward). The registered address and country should be that of the fund and not that of any intermediary. For a sub-fund the name submitted should be in the form "[Umbrella Fund Name] – [Sub-fund Name]”.
Determining parent information for a fund is not as straightforward as it might first appear as the fund manager may be acting as an agent or a principal. IFRS 10 Appendix B has some examples which highlight the complexities. Under IFRS 10, the assessment of control is not a one-time exercise, there is the requirement for continuous assessment.
It is possible for a fund manager to execute trades on their own account and not on behalf of the funds it manages, in which case the counterparty would be the fund manager and so would require an LEI. More generally the funds would be the counterparty of any derivative transaction. If a derivative contract is concluded at the level of a sub-fund, the sub-fund needs to have an LEI for reporting purposes as the sub-fund will be the counterparty. Otherwise, the umbrella fund should be identified as the counterparty and have an LEI for reporting purposes and the sub-fund identified as the beneficiary. This means that even if the sub-fund is not a legal entity it will still require an LEI. The trick is to determine the risk entity when assigning the LEI.
Some fund managers manage sub-funds using a pooling technique, for example, a fund manager with funds based in the UK and Ireland might manage the portfolios on a pooled basis and achieve efficiencies due to the economies of scale. The same pooling technique can be used by pension sponsors pooling their pension funds. These pools can have a separate legal identity and so require a LEI.
Identifying Direct and Ultimate Parents for the GLEIS
Entities that have or acquire an LEI should report to their local operating unit (LOU) their "ultimate accounting consolidating parent". The ROC has concluded that reporting by the child entity, combined with some option for the parent to report is the preferred approach for the collection of hierarchy information. How will this collection of information be handled for funds?
Assessing whether a fund manager is acting as a principal for a fund and therefore has control and should consolidate the fund or whether they are acting as an agent is not straightforward but IFRS 10 outlines how the determination is made. The qualitative nature of the principal/agent evaluation set out in IFRS 10 could result in differences in reporting amongst fund managers. There are some useful examples in appendix B of IFRS 10. The principal/agent status can also change over time so IFRS 10 introduced the need for continuous assessment of control.
Additionally some investment funds may be classified as a "structured entity", a fund not controlled by voting or similar rights. IFRS 12 defines a structured entity as "an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements". For structured entities that are not consolidated by the reporting entity, i.e. unconsolidated structured entities, IFRS 12 requires specific additional disclosures to be made.
The ROC has stated that it will consider in 2016 how funds managed by an entity will supply their parent information but for the moment it is not defined in the "Collecting data on direct and ultimate parents of legal entities in the Global LEI System - Phase 1" documentation issued by the LEI ROC.
Identifying Funds from LOU data
Each LOU should distribute its data in a common data file format. Within the file there is a field called an AssociatedEntity. The field is used to provide the LEI or name of another entity, such as an umbrella fund, fund manager or other hierarchically assoicated entity.
Comments, References & Further Reading:
- GMEI Portal Manual: Investment Fund Registration Instructions
- LEI Fund Guidance May 12th 2013
- IFRS 10 (subscription required)