Insight

DO IRISH SPVS THAT ISSUE ASSET-BACKED SECURITIES NEED TO ESTABLISH AN AUDIT COMMITTEE?

The Irish Minister for Enterprise, Trade and Innovation published the European Communities (Statutory Audits) (Directive 2006/43/EC) Regulations 2010 (the Regulations) on 25 May 2010. The Regulations give effect to Directive 2006/43/EC on statutory audits of annual accounts.

From 20 November 2010, Regulation 91(1) requires the board of directors of a “public-interest entity” (as defined below) to establish an audit committee. The preamble to the Directive describes the role of such audit committees as “…an effective internal control system…to minimise financial, operational and compliance risks, and enhance the quality of financial reporting”.

A “public-interest entity” is defined in the Regulations as including, inter alia, a company governed by the laws of an EU Member State whose transferable securities (as defined in Directive 2004/39/EC (MiFID) which includes debt securities) are admitted to trading on a regulated market of any EU Member State (such as the Main Securities Market of the Irish Stock Exchange).

Consequently, a “qualifying company” (within the meaning of Section 110 of the Taxes Consolidation Act 1997 (as amended)) (an Irish SPV) whose debt securities are listed on a regulated market of an EU Member State would be characterised as a “public-interest entity” for the purposes of the Regulations. However, if the sole business of the Irish SPV relates to the issuing of “asset-backed securities” (as defined below), then such an Irish SPV may avail of an exemption from the requirement to establish an audit committee under Regulation 91(9)(d).

The relevant definition of “asset-backed securities” (from Commission Regulation (EC) No 809/2004) is securities which (a) represent an interest in assets, including any rights intended to assure servicing, or the receipt or timeliness of receipts by holders of assets of amounts payable thereunder or (b) are secured by assets and the terms of which provide for payments which relate to payments or reasonable projections of payments calculated by reference to identified or identifiable assets.

Irish SPVs who wish to avail of this exemption must, in accordance with Regulation 91(10), draft a statement setting out the reasons why it considers the establishment of an audit committee by it is not appropriate and, accordingly, why it has availed itself of the exemption. Such a statement must be included in any annual report published by it, or in an annual return or other periodic statement delivered by it to a competent authority. We understand that Irish audit firms will suggest the form of statement that will be required.