Fund News - Issue 112 - February 2014

FUND NEWS

Financial Services / Regulatory and Tax / Issue 112

Developments in February 2014 Investment Fund Regulatoryand Tax developments in selected jurisdictions

2 / Fund News / Issue 112 / Developments in February 2014

Regulatory Content

European Union 3 Agreement between European Parliament and

Council on UCITS V 3 ESMA issues Final Reports on EuSEF and EuVECA 4 ESMA updated the Q&A on the application of AIFMD 4 ESMA updated AIFMD MoUs signed by EU

authorities

Luxembourg 5 MIFiD: Luxembourg’s Supervisory Authority

of the Financial Sector (CSSF) issues Circular 14/585 implementing ESMA’s Guidelines on Remuneration

5 CSSF updates FAQ on AIFMD

Ireland 6 Revenue publishes updated FATCA guidance 6 CBI publishes first EMIR Q&A – Different approach

from FCA on FX Forwards 7 CBI publishes first edition of UCITS Q&A 7 CBI publishes 7th Edition of AIFMD Q&A 8 CBI letter on Irish UCITS Man Co managing

non-Irish UCITS 8 CBI letter on classification of indices for UCITS 8 AML & Authorisation of “Trust & Company Service

Providers” 8 Key Dates Reminder

Malta 9 Proposed Conduct of Business Rules 9 AIFMD

Contents

Switzerland 10 CISA – Distribution of foreign collective

investment schemes targeted at retail investors as of 1 March 2014

10 Asset managers of Pension Schemes’ funds require a FINMA or equivalent foreign license or an admission by Pension Schemes’ Supreme Supervisory Authority

UK 11 IMA sets out its recommendations on the use

of dealing commission to pay for investment research

International 12 OTC derivatives: The Financial Stability Board

issues Feasibility Study on approaches to aggregate OTC derivatives data

13 IOSCO consult on the review of the Code of Conduct Fundamentals for CRA

Tax News

Malta 13 FATCA

Germany 14 Implementation of the AIFM Directive in Germany

International 14 OECD FATCA Project

Fund News / Issue 112 / Developments in February 2014 / 3

Regulatory News

• Strict liability for losses. Banks must repay all losses resulting from negligence or intentional failure.

• Restrictions on the re-use of the assets. Where the re-use will be permitted the collateral required for securities lending of shares of the UCITS will be subject to strict rules.

• In case on insolvency of its sub-custodian, the depositary must ensure that the assets held in sub-custody are not available to pay off the creditors.

Sanctions

• Administrative sanctions are harmonised: maximum administrative penalties of at least EUR 5 million or 10% of the turnover of the company, EUR 5 million for individuals.

• Other sanctions: in case of fraud, suspension of authorisation, temporary or permanent ban from fund management.

Whistleblowing

• Encourage whistleblowing through the implementation of secured channels within national authorities and ESMA.

ESMA issues Final Reports on EuSEF and EuVECA

On 11 February 2014, ESMA issued two Final Reports, the first (ESMA/2014/160) regarding European venture capital funds (EuVECA) and the second (ESMA/2014/161) regarding European social entrepreneurship funds (EuSEF). Each report constitutes

a draft Commission Regulation laying down implementing technical standards regarding the format of notification according to Regulation EU 345/2013 on EuVECA and to Regulation EU 346/2013 on EuSEF respectively.

The competent authority of the Fund’s home Member State shall notify by email the competent authorities of the host Member States and ESMA of the following events:

i. registration of a manager of a qualifying EuVECA/EuSEF,

ii. the addition of a new EuVECA/EuSEF to the register of the manager,

iii. the addition of a new domicile for the establishment of a EuVECA/EuSEF or

iv. the addition of a new Member State where a manager of a qualifying EuVECA/EuSEF intends to market qualifying EuVECA/EuSEF, following the model set out in Annex I.

The text of each Final Report can be found under the following links:

http://www.esma.europa.eu/system/files/2014-esma-161_draft_its_on_notification_-_eusef.pdf http://www.esma.europa.eu/system/files/2014-esma-160_draft_its_on_notification_-_euveca.pdf

European Union

Agreement between European Parliament and Council on UCITS V

On 25 February the negotiators of the Council and the European Parliament reached an agreement on the UCITS V Directive. The next legislative step will be the formal approval of the European Parliament and of the EU national governments. The text should enter into force before the Parliamentary elections in May 2014. To follow is the outcome of the key debated topics:

Management companies: Remuneration

• At least 50% of the variable remuneration must be paid in shares of the managed UCITS.

• 40% of the variable remuneration – 60% if the bonus is very high – must be deferred for at least a three years period.

• ESMA Guidelines are expected to define the staff falling within the scope of the remuneration rules.

• Disclosure to investors will be limited to a mandatory reference in the KIID of the publication of the remuneration policy on a website and the possibility to obtain a copy free of charge.

Depositary regime

• Limited scope of entities that will be entitled to perform depositary functions: national central banks, credit institutions authorised in accordance with Directive 2013/36/EU, other legal entities, subject to capital adequacy requirements and authorised by the competent entity of a Member State.

http://www.esma.europa.eu/system/files/2014-esma-161_draft_its_on_notification_-_eusef.pdf



http://www.esma.europa.eu/system/files/2014-esma-160_draft_its_on_notification_-_euveca.pdf




ESMA updated the Q&A on the application of AIFMD

The ESMA published on 17 February an update of the Questions and Answers on the AIFMD. The Q&A clarifies the following points:

• On the first application of the remuneration policies, the Remuneration Guidelines will apply from the date of the AIFMD’s authorisation however a transitional period will apply in respect with the rules on variable remuneration. For AIFMs that performs activities before 22 July 2013 and submit an application for authorisation between 22 July 2013 and 22 July 2014, the rules on variable remuneration apply to payments for the first full performance period after the AIFM becomes authorised.

• It clarifies the remuneration rules in case of delegation of portfolio management or risk management activities by defining that staff covered by “appropriate contractual arrangements” are staff who have a “material impact on the risk

profiles of the AIFs it manages as a result of the delegation”. The Q&A also states that the remuneration rules in the CRD and those applicable under the Remuneration Guidelines are equally effective.

• AIFMs that wish to market new investments compartments of AIFs in a Member State where these AIFs have been already notified must undertake a new notification procedure to their competent authority.

• When a non-EU AIFM reports information to the national competent authorities of a Member State under Article 42 of AIFMD, only the AIFs marketed in that Member State have to be taken into account for the purpose of the reporting.

The text of the Q&A is available at the following web link:

http://www.esma.europa.eu/system/files/2014-163_qa_on_aifmd_february_for_publication.pdf

ESMA updated AIFMD MoUs signed by EU authorities

On 20 February 2014, ESMA published an updated version of the table showing the state of play of AIFMD Memorandum of Understanding (MoUs) signed by EU national supervisors with non-EU regulators worldwide. As a reminder, the AIFMD MoUs allow the exchange of information between EU and non-EU supervisors thus enabling non-EU fund managers to market alternative funds within the European Union.

The update of the AIFMD MoU is available at the following web link:

http://www.esma.europa.eu/system/files/aifmd_mous_signed_by_eu_authorities_2014m02d20.xlsx

Regulatory News








MIFiD: Luxembourg’s Supervisory Authority of the Financial Sector (CSSF) issues Circular 14/585 implementing ESMA’s Guidelines on Remuneration

The European Securities and Markets Authority (ESMA) issued Guidelines on policies and practice regarding remuneration (MiFID ) in October 2013 and the CSSF Circular 14/585 issued on 25 February 2014 implements these guidelines into Luxembourg law by adding an Annex V to the CSSF Circular 07/ 307. The ESMA guidelines, address the issues of i) conflicts of interest and ii) benefits, and are in particular related to Chapters 7 and 8 of CSSF Circular 07/ 307.

The objective of the ESMA guidelines is i) to harmonise the interests of clients with those of investment companies as well as ii) to prevent abusive sales. To this end, the notion of investment company also includes credit institutions that provide investment services, management companies of collective investment vehicles and external managers of alternative investment funds when providing the investment service of portfolio management or ancillary services.

Persons Concerned: Directly affected by the ESMA guidelines are people susceptible to have a significant influence on the service provided or the behavior of the company, including staff in direct contact with clients, commercial teams and staff indirectly involved in the provision of investment services or ancillary services, whose remuneration could create inappropriate incentives to act against the interests of customers. Included are also those who supervise the sales

Regulatory News

force and could be motivated to exercise pressure on the sales force or on financial analysts whose publications could be used to encourage clients to take investment decisions. Staff involved in the handling of complaints, in the retention of customers as well as in design and product development are also in scope. The notion of “concerned person” also covers agents related to the company.

Rules of Conduct: ESMA guidelines complement the legislation relating to the CRD IV and the guidelines derived from the CRD III and from the AIFMD, adding “rules of conduct” to the prudential aspects already covered by these legislative texts.

This circular comes into force with immediate effect and can be found (in French) at:

http://www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf14_585.pdf

CSSF updates FAQ on AIFMDOn 20 February the CSSF has published the 5th version of their Frequently Asked Questions (FAQ) document concerning the AIFM law in Luxembourg. The CSSF added topics regarding the valuation of the AIF’s assets and transaction costs.

Key aspects include:

• Valuations of the AIF’s assets:

For the types of valuation set-ups, AIFMs can either perform itself the valuation function or appoint one or several external valuers who “must

be a legal or natural independent from the AIF, the AIFM and any other persons with close links to the AIF or the AIFM”. The decision for an AIFM of appointing the AIF’s depositary as his external valuer is subject to the condition that it has functionally and hierarchically separated the performance of its depositary functions from its tasks as external valuer and the potential conflicts of interest are identified, managed, monitored and disclosed to the investors of the AIF. A third party appointed as an AIF’s administrator can be considered as an external valuer if it provides tailor-made valuations for individuals assets, specifically those requiring subjective judgement on the value of the assets. The appointment has to be made in a contract.

• Transaction costs

AIFs set up as part II funds must disclose the transaction costs in their periodical financial reports under a specific heading “transaction costs” of the profit and loss account or in the notes to the accounts.

The updated FAQ is available at the following web link:

http://www.cssf.lu/fileadmin/files/AIFM/FAQ_AIFMD.pdf

Luxembourg








Regulatory News

collateral or security and with the exception of entities instructing agents to transmit funds but not financing the transfers); investment entities and trusts where the trust/trustee engages another financial institution to manage the trust or financial assets on its behalf.

The updated guidance clarifies that the definition of “Financial Account” does not include shareholdings on an issuer’s share register or debenture/loan stock holdings, however, shareholdings and loan/debenture stock holdings can be “financial instruments/contracts” and are reportable if held in a custodial account.

The Revenue Commissioners will accept observations and comments on the updated guidance until 21 May 2014. Revenue’s updated draft FATCA guidance is available at the following link:

http://www.finance.gov.ie/sites/default/files/FATCA.%20Draft%20Guidance%20Notes%2016%20Jan%202014.pdf

Separately, the Revenue Commissioners have confirmed that they are working towards the enactment of Regulations with an effective date of 1 July 2014 i.e. in line with the date from which FATCA withholding applies under US Treasury Regulations.

For KPMG Ireland’s guidance on FATCA as it relates to the investment management industry, please see the following link:

http://www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Pages/fatca-investment-management.aspx

CBI publishes first EMIR Q&A – Different approach from FCA on FX Forwards At the time of writing, the Central Bank has yet to be appointed as the National Competent Authority in Ireland for EMIR purposes. However, the Central Bank has produced an EMIR Q&A document which states that it is taking a different approach to that taken by the FCA regarding FX forwards carried out for commercial rather than investment purposes.

The Central Bank views such trades as falling within the scope of EMIR whereas the FCA’s view is that they fall outside the scope of EMIR.

The Central Bank has indicated that FX transactions with a settlement date beyond the spot date are to be considered as forward contracts falling within the definition of a derivative, and accordingly subject to the EMIR reporting obligation.

The Central Bank’s EMIR Q&A also states that, generally, any trade with settlement of T+3 or greater will be treated as a forward transaction (on the

Ireland

Revenue publishes updated FATCA guidance

On 7 February 2014 the Irish Revenue Commissioners published updated draft FATCA guidance (dated January 2014) which provides guidance to “Reporting Financial Institutions” on how to comply with their obligations under the Financial Account Reporting Regulations 2014 but which does not have the force of law. The updated guidance supersedes the Revenue’s previous guidance from May 2013.

Chapter 5 contains guidance on the identification and reporting of interests in collective investment undertakings and other entities.

The implementation dates contained in the updated guidance have been aligned with the latest implementation dates contained in the final U.S. Treasury Regulations and Model IGAs (i.e. delaying the implementation of FATCA by six months) and the updated guidance specifies that the first year in respect of which any information may be reportable is 2014.

The updated guidance clarifies that Revenue will not regard an entity which is carrying on activities within the investment entity definition as an investment entity if its gross income over the previous three calendar years from these activities is less than 50 per cent of its total gross income.

The updated guidance clarifies which entities fall within the definition of “Financial Institution” including custodians (with the general exception of insurance brokers as they do not generally hold assets on behalf of clients); depositaries (with the exception of entities that accept deposits solely as










basis that the general market convention for settlement of spot transactions is T+2) unless the market convention for such currency pair is unequivocally different from T+2.

Regarding a scenario whereby a UK broker does not recognise a FX trade as a forward; the Central Bank advises that that the determination of whether a trade constitutes a reportable derivative contract should be based on the requirements applying in the country where the counterparty is located rather than that of the other counterparty or the trade itself.

Regarding the reporting of unconfirmed OTC derivative transactions, the Central Bank expects that all impacted financial counterparties will, from 15 March 2013, have the necessary procedures in place to report to it when requested to do so.

The Central Bank’s EMIR Q&A is available at the following link:

http://www.centralbank.ie/regulation/EMIR/Pages/FAQs.aspx

CBI publishes first edition of UCITS Q&A

On 4 February 2014 the Central Bank published the first edition of a UCITS Questions & Answers document, mirroring the Q&A document that it has published for the AIFMD. Like the AIFMD Q&A, the UCITS Q&A is designed to provide guidance and reduce uncertainty on regulatory requirements, however, is not relevant in assessing compliance with regulatory requirements.

The first edition of the Central Bank’s UCITS Q&A reflects the contents of its memorandum of understanding (MoU) dated 23 January 2104 regarding the implementation of ESMA’s guidelines on ETFs and UCITS issues. We reported on the MoU in Issue 111 of Fund News (January 2014).

The MoU (and now the UCITS Q&A) specify that an Irish UCITS authorised before 18 February 2013 can avail of the transitional provisions set out in ESMA’s guidelines and that, subject to clarification provided by ESMA, a reasonable interpretation of the reference to “revenue” in ESMA’s guidelines is that it is applicable only to revenue from securities lending arrangements and repurchase/reverse repurchase agreements.

The UCITS Q&A can be obtained from the website of the Central Bank of Ireland at the following link:

http://www.centralbank.ie/regulation/industry-sectors/funds/ucits/Pages/WhatsNew.aspx?ListID=74e95c1a-5bba-42cc-ab33-84db484abe97&ListItemID=36

Regulatory News

CBI publishes 7th Edition of AIFMD Q&A

On 4 February 2014, the Central Bank of Ireland published a seventh edition of the AIFMD Q&A amending its previous answer on the AIFMD passport.

The Central Bank had previously advised that, with the exception of UCITS management companies, the additional services of Article 6(4) of the AIFMD did not benefit from the AIFMD passport. However, the Central Bank has updated its previous advice in the light of the recent agreement to amend Article 33 of the AIFMD, as part of the agreement reached on MiFID II.

The Central Bank will now accept AIFM passport notifications from other national competent authorities where the notification includes services set out in Article 6(4) of AIFMD and it will process notifications from Irish authorised AIFMs who advise the Central Bank of their intention to provide the Article 6(4) services, for which they have received an authorisation.

The seventh edition of the AIFMD Q&A is available at the following link:

http://www.centralbank.ie/regulation/industry-sectors/funds/aifmd/Documents/AIFMD%20QA%20NO%207_FINAL%201.pdf













CBI letter on Irish UCITS Man Co managing non-Irish UCITS

The Central Bank has written to industry to specify that where an Irish UCITS management company is appointed to a non-Irish UCITS fund and the Irish management company proposes to delegate functions relating to non-Irish UCITS funds to a non-Irish depositary, the Central Bank will seek confirmation from the home regulator of the UCITS that these arrangements meet local regulatory requirements.

The Central Bank will consider each proposal on its merits to ensure that adequate separation of functions and conflicts of interests are in place.

CBI letter on classification of indices for UCITS

The Central Bank has written to industry to specify that there should be no distinction between “indices” and “financial indices” for the purpose of applying the ESMA Guidelines on ETFs and other UCITS issues and that it has not changed its policy regarding the review of indices since the publication of ESMA’s Guidelines.

AML & Authorisation of “Trust & Company Service Providers”

New Regulations have been enacted which transfer the power to authorise certain “Trust & Company Service Providers” (“TCSPs”) for anti-money laundering purposes from the Minister of Justice and Equality to the Central Bank of Ireland.

However, the Regulations will only apply to TCSPs which are “designated persons” and subsidiaries of a credit institution or a financial institution. TCSPs which do not fulfil these criteria will continue to be authorised by the Department of Justice and Equality.

The Regulations come into operation on 3 March 2014 and have been enacted by way of a Statutory Instrument: S.I. No. 79 of 2014 the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (Competent Authority) Regulations 2014.

The relevant application form for TCSP authorisation and further information can be obtained from the website of the Central Bank of Ireland at the following link:

http://www.centralbank.ie/regulation/processes/anti-money-laundering/tcsp/Pages/Introduction.aspx

Key Dates Reminder • 28 February 2014 – Deadline for filing

the Annual Pre-Approval Controlled Function (“PCF”) Confirmation Return for Investment Firms, Funds and Fund Service Providers. See the Central Bank’s “Regulatory Transaction Review” which addresses in situ amendments, ONR System Administrator Responsibilities and the PCF Annual Confirmation Return:

http://www.centralbank.ie/regulation/processes/fandp/serviceproviders/Documents/Regulatory%20Transactions%20Review%20Issue%208.pdf

• 28 March 2014 – Closing date for submissions on the Central Bank’s UCITS Rulebook proposals. See Issue 111 of Fund News (January 2014).

• 31 March 2014 – Deadline for Administrator’s submission of the Fund’s Annual Survey of Liabilities Return with Q1 data for the OFI1 return. Further information is available from the Central Bank’s website:

https://www.centralbank.ie/polstats/stats/reporting/Pages/securityfundadmins.aspx

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• 31 March 2014 – Deadline for the Revenue’s receipt of the Section 891(c) Return of Values Report for 2013. See Issue 106 of Fund News (August 2013) regarding the Return of Values (Investment Undertakings) Regulations, 2013 SI 245/2013.

• 25 April 2014 – Register online via the IRS portal to obtain a GIIN by 25 April 2014 for FATCA compliance. See KPMG Ireland’s advice at the following link:

http://www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Pages/fatca-registration-the-time-to-act-is-now.aspx

• 21 May 2014 – Deadline for responses to the Revenue Commissioner’s updated draft FATCA guidance.

Malta

Regulatory News

Proposed Conduct of Business Rules

The Malta Financial services Authority (“MFSA” or “Regulator”) issued a consultation document, with a deadline of 14 March 2014, on the Proposed Conduct of Business Rules for the enhanced protection of customers in investment services. Some of the recommendations will impact customers in the wider area of financial services.

The aim is to implement changes to the Current Conduct of Business Regulatory Regime, and define appropriate policy changes for the enhanced protection of customers of investment services. This includes achieving consistency while maintaining different regulations, avoiding any regulatory gaps in the Conduct of Business regulation, and achieving completeness. The recommendations retain three standard levels of care that firms must show its clients, while ensuring that each level is not abused. The focus of these rules is transparency and clarity.

AIFMD

An updated Q & A document with regards to AIFMD was released by the MFSA on 14 February 2014. This has been released to aid existing fund managers finalise the self-assessment questionnaire for submission by the deadline of 31 March 2014, as well as guide prospective fund managers looking to establish in Malta.

This document, in addition to consolidating the Regulators view on the various AIFMD topics, reiterated Malta’s position on the applicability of the Investor Compensation Scheme Directive. It also clarified its position of readiness to accept the passporting of MiFID services by EU AIFMs to Malta, and that a full scope AIFM may offer Article 6(4) services cross border under the AIFM passport.

It also provides further insight into how the Registered Incorporated Cell Company structure may be utilised under the Directive. The Q & A can be accessed at the following link:

http://mfsa.com.mt/pages/viewcontent.aspx?id=510.









CISA – Distribution of foreign collective investment schemes targeted at retail investors as of 1 March 2014

As of 1 March 2014, a Memorandum of Understanding (MoU) between the Swiss Financial Market Supervisory Authority (FINMA) and the respective supervisory authority of the Fund is required for the distribution of foreign collective investment schemes targeted at retail investors. This is due to the recent revision of the Swiss Collective Investment Schemes Act (CISA) which entered into force on 1 March 2013. Such MoU are a prerequisite for FINMA to continue authorizing the distribution of foreign collective investment schemes targeted at non-qualified investors.

MoU between FINMA and foreign supervisory authorities

A distribution of foreign collective investment schemes targeted at retail investors shall be permitted only if there is an approval by FINMA. One requirement is the existence of an agreement for cooperation and exchange of information between FINMA and the relevant foreign supervisory authority. Such MoU had to be in place until 28 February 2014. According to FINMA, agreements have been concluded with the supervisory authorities of Ireland, France, Germany, Luxembourg and Liechtenstein before the end of February 2014. For the distribution targeted at qualified investors, there is no requirement for MoUs.

Declaration of the foreign authority and request for extension of the deadline

In case there was no conclusion of a MoU until 28 February 2014, the Fund’s representative was required to provide a declaration of the respective authority (until 28 February 2014 as well), stating that the authority is willing to cooperate and exchange information with FINMA. Apart from that, there was the possibility of submitting a request for extension of the deadline to FINMA.

If there is neither a MoU, nor a declaration of the foreign authority, nor a request for extension of the deadline to FINMA, a distribution of foreign collective investment schemes targeted at retail investors seems no longer permissible in Switzerland.

Asset managers of Pension Schemes’ funds require a FINMA or equivalent foreign license or an admission by Pension Schemes’ Supreme Supervisory Authority.

As of 1 January 2014, Asset Managers of Swiss pension schemes are required to either be regulated by FINMA, a foreign regulator, or they must be admitted as asset manager for pension schemes by the Pension Schemes’ Supreme Supervisory Authority. On 19 February 2014, the Pension Schemes’ Supreme Supervisory Authority issued its detailing regulations on the subject, requiring provisionally admitted managers to now file full applications for admission in accordance with the now issued detailing regulations.

The admission is granted upon an extensive “integrity test” but does not lead to an ongoing prudential supervision. The Pension Schemes’ Supreme Supervisory Authority also made it clear in its letter to the provisionally admitted asset managers that applications already filed will not be treated and that new applications in accordance with the detailing regulations were required. Provisionally admitted asset managers who wish to continue to manage funds of Swiss pension schemes must now file an application to the Pension Schemes’ Supreme Supervisory Authority, based on the sample application issued under the detailing regulations. The deadline is 31 July 2014; on the same date the provisional admissions will expire. If a full application is submitted, managers may pursue their activity until a decision on the application is rendered.

Regulatory News

Switzerland


IMA sets out its recommendations on the use of dealing commission to pay for investment research

On 18 February, in the light of the debate from the Financial Conduct Authority (“FCA”) initiated at the Asset Management Conference (30 October 2013 – Fund News issue 108) and the subsequent FCA consultation paper (“CP 13/17”) of 25 November 2013 on use of dealing commission, responses to which were due by 25 February 2014 (Fund News issue 109), the Investment Management Association (“IMA”) has published a paper: “The Use of Dealing Commission for the Purchase of Investment Research”.

This paper responds to the challenge to the industry established by Martin Wheatley (CEO of the FCA) in his key note speech at the conference last October. The report looks at conflicts of interest management, alongside the need to provide: value for money; accountability; and transparency to clients. While it commits to further work it also considers that the UK cannot stand alone on this and calls for an international approach if the UK is not to risk its competitiveness.

What is clear is that the IMA wants to ensure that the advantages it sees in the current regime are retained while accepting that improvements can be achieved. It sets out a framework by which alternatives to the current approach could be measured at the same time as committing to do work on: benchmarking; managing conflicts; and price discovery and disclosure.

In the view of the IMA the measures of a good regime for research payments are, in summary:

1. For clients, the regime should:

a) Operate in the best interests of clients; manage conflicts; and deliver value for money; and

b) for any cost borne by a client it should be in the interest of the client to bear that cost; and all costs should be disclosed in a timely and understandable way.

2. For markets, the regime should:

a) Deliver research efficiently and transparently, supporting negotiation of best value for clients.

b) Provide access to competing research providers without negative implications for market research on SMEs or barriers to: entry by new providers; or access by start-up investment managers; and

c) research information providers should not discriminate supply as a consequence of provision of other services such as execution or allocation.

d) Allow the UK to remain internationally competitive for asset management and associated financial services.

The full report (30 pages) is available here:

http://www.investmentuk.org/press-centre/2014/press-release-2014-02-18/

Regulatory News

UK




OTC derivatives: The Financial Stability Board issues Feasibility Study on approaches to aggregate OTC derivatives data.

G20 Leaders agreed, as part of their commitments regarding OTC derivatives reforms, that all OTC derivatives contracts should be reported to trade repositories (TRs). The FSB was requested to assess whether implementation of these reforms is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.

Since the data will be reported to multiple TRs located in a number of jurisdictions, the FSB requested further study of how to ensure that the data reported to TRs can be effectively used by authorities and in particular through enabling the availability of the data in aggregated form. The FSB, in consultation with the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO), will then make a decision on whether to initiate work to develop a global aggregation mechanism and, if so, according to which type of aggregation model and which additional policy actions may be needed to address obstacles.

In response to FSB’s request, a feasibility study (consultation paper) has been issued on 4 February 2014 that sets out and analyses the various options for aggregating OTC derivatives TR data. The draft has been prepared by a study group set up by the FSB and composed of experts from member organisations of CPSS and IOSCO and some other organisations.

The paper i) discusses the key requirements and challenges involved in the aggregation of TR data, and ii) proposes criteria for assessing different aggregation models. Following this public consultation and further analysis by the study group, a finalised version of the report, including recommendations, will be submitted to the FSB in May 2014 for approval.

The public consultation paper examines the three broad types of model for an aggregation mechanism: i) a physically centralised model; ii) a logically centralised model; and iii) the collection and aggregation by authorities themselves of raw data from TRs. A variety of alternatives within these three types of model would need to be examined further in the final report in May.

The study is focusing on the feasibility of options for data aggregation in the current regulatory and technological environment. The aggregation options are being considered on the basis that they would complement, rather than replace, the existing operations of TRs and authorities’ existing direct access to TR data.

The paper analyses the key factors and challenges associated with the three models. It divides these considerations into two types:

• legal considerations, and

• data and technology considerations.

Based on this analysis, the paper proposes a set of criteria to be used in order to provide a common and systematic structure for the assessment of the options in the final report. The paper does not at this stage propose draft conclusions or recommendations for the final report.

The FSB wishes to have feedback via this public consultation process on these considerations and criteria before proceeding to the assessment itself.

The report is structured as follows.

Chapter 1 lays down the objectives, scope and approach followed by the feasibility study.

Chapter 2 makes a brief stock-take of the current status of TR implementation, including the current and planned global configuration of TRs, in order to provide background on the scale and scope of the aggregation challenges.

Chapter 3 summarizes the different types of requirements of authorities for aggregated OTC derivatives data, focusing in particular on the minimum pre-requisites for aggregation in order that the data are useable by authorities to fulfil their various mandates.

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International


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Chapter 4 describes the legal and policy considerations, concerning submission of and access to data and governance of the aggregation mechanism, that are relevant to the choice of aggregation model.

Chapter 5 discusses the data and technology considerations associated with meeting authorities’ requirements for aggregated data under the different choices of model.

Chapter 6 presents the criteria for the assessment of the options derived from the discussion in Chapters 3, 4 and 5, and (to be drafted for the final version of the report following public consultation) the assessment of the pros and cons of the different aggregation options against those criteria.

Chapter 7 (to be drafted for the final version of the report following the public consultation) will conclude with the overall recommendations of the study, as well as pointing to policy areas that might need further attention from the FSB, standard setters or jurisdictions, and areas where further study may be needed.

IOSCO consult on the review of the Code of Conduct Fundamentals for CRA

On 10 February 2014, IOSCO published a consultation report on Code of Conduct Fundamentals for Credit Rating Agencies (CRA) which proposes revisions and updates of the 2008 IOSCO Code of conduct for CRA.

This review will take into account the fact that CRAs are now supervised by national authorities and therefore align the IOSCO CRA code with the CRA registration and oversight programs that many IOSCO members have implemented in recent years, and that continue to operate as the international standard for CRA self-governance.

The revision is aimed to strengthen the IOSCO CRA Code by (1) enhancing provisions regarding the protection of the integrity of the credit rating process, managing conflicts of interest, providing transparency, and safeguarding non-public information; (2) adding measures regarding governance, training, and risk management; and (3) seeking to improve the clarity of the IOSCO CRA Code.

The comments on the review of the IOSCO CRA Code should be submitted before 28 March 2014.

The text of the consultation report is available at the following web link:

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD437.pdf

FATCA

The IGA between Malta and the United States has now been signed. By adopting the Model I LGA, Maltese financial institutions will be reporting directly to the Maltese tax authorities. Registered financial institutions may be exempted from withholding US tax on payments made to US shareholders, as well as on tax being withheld on income derived from US Investments.

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Malta




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Implementation of the AIFM Directive in Germany

Significant changes of the German Investment Tax Act (GITA)

Have you already considered whether your fund will continue to be within the scope of the GITA?

Significant changes of the German Investment Tax Act which became effective on 24 December 2013 could change the qualification of your funds for German Tax purposes. To avoid negative consequences for your investors we therefore strongly recommend to thoroughly analyze relevant investment vehicles at an early stage.

New Definition for the Scope of Investment Tax Act

The new rules of the GITA are applicable to all investment asset pools in the definition of the AIFM Directive, (e.g. UCITS, AIF).

In addition and based on this regulatory scope of application, the new GITA differentiates between the following two categories of investment vehicles for tax purposes:

• Investment Funds and

• Investment Corporations

Generally, an investment vehicle that intends to further qualify as a privileged “tax transparent” investment fund must meet the definitions under the new GITA set out under § 1 para. 1b GITA (“Qualifying Investment Funds”).

If these conditions cannot be met, the investment vehicle might be classified

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as an investment corporation (Investment Partnership or Investment Corporation). Consequently these vehicles are not entitled to report tax information according to § 5 GITA. Nevertheless they are obliged to consider § 18 (for Investment Partnerships) or § 19 (for Investment Corporations) of the GITA.

Grandfathering and Transition Period:

Funds launched until the promulgation date on 23 December 2013 which fulfill the fund definition of the former GITA but not the new one according to § 1 para. 1b sent. 2 GITA, are deemed to be investment funds for tax purposes until the business year which ends after 22 July 2016.

Funds launched from 24 December 2013 onwards are compelled to meet the new requirements according to § 1 para. 1b sent 2 GITA in order to report tax information according to § 5 GITA

Other amendments:

• For financial years starting after 31 December 2013, indirect expenses are allocated to both, ordinary income and capital gains. A transition period for financial years starting after 31 March 2014 is currently in discussion.

• To abolish certain tax benefits in relation to fund investments (e.g., bond stripping) a new para. 1a has been included in § 3 GITA.

• Furthermore capital repayments can only take place when all income and capital gains of the current and of previous business years have been entirely distributed to the investors.

OECD FATCA Project On 13 February 2014, the OECD released its global standard for automatic exchange of financial account information. The Global Standard developed by the OECD and G20 countries in close cooperation with the EU, is part of the project known as the “OECD FATCA”.

As the name “OECD FACTA” suggests, the Global Standard is based on the Model 1 intergovernmental agreement (“IGA”) to implement the U.S. tax and reporting provisions commonly known as FATCA. The Global standard has been endorsed by the G20 Finance Ministers and Central Bank Governors at their meeting of 22 February in Sydney, Australia.

The Global Standard provides a common global approach for jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. To that end, the Global Standard sets forth the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

Scope

The Global Standard consists of two components:

• The Common Reporting Standard (CRS), which contains the reporting and due diligence rules to be imposed on financial institutions; and


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• The Model Competent Authority Agreement (CAA), pursuant to which governments would agree to exchange the information reported.

As mentioned above, both the CAA and the CRS draw heavily on the U.S. Model 1 IGA. It is therefore not surprising to note that the scope of the CRS is largely the same as the U.S. Model 1 IGA across three key dimensions:

• Financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income,) but also account balances and sales proceeds from financial assets.

• Financial institutions that are required to report under the CRS include not only banks and custodians, but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies.

• Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations). The CRS includes the requirement to look through passive entities to report on the individuals that ultimately control these entities.

The CRS also describes the due diligence procedures that must be followed by financial institutions to identify reportable accounts and obtain accountholder identifying information that is required to be reported.

Legal basis

Before entering into a reciprocal agreement to exchange information automatically with another country, it is essential that the receiving country has the legal framework and administrative capacity and processes in place to ensure the confidentiality of the information received and that such information is only used for the purposes specified in the instrument.

The legal basis for automatic exchange of information (“AEOI”) foreseen by the CAA will therefore either be the

Multilateral Convention on Mutual Administrative Assistance in tax matters, or alternatively a bilateral treaty. In either case the OECD’s Standard then envisages a bilateral Competent Authority Agreement providing for automatic exchange of information.

Next steps

Based on the information published by the OECD, it is now foreseen that the Global Standard will be further developed to include technical solutions to implement the actual information exchanges. These technical solutions, along with a commentary providing further interpretive detail regarding the CRS, will be prepared in advance of the September 2014 G20 Finance Minister meetings.

The text of the New Common Reporting Standard can be found at:

http://www.oecd.org/tax/exchange-of-tax-information/automaticexchange.htm

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG Holding AG/SA, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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Markus SchunkPartnerT: +41 58 249 36 82 E: [email protected]

Christoph GroebliPartnerT: +41 58 249 29 76 E: [email protected]

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Yvan MermodPartnerT: +41 58 249 37 80 E: [email protected]

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Lars SchlichtingPartner, LegalT: +41 58 249 32 59 E: [email protected]

Astrid KellerPartnerT: +41 58 249 28 82 E: [email protected]

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Pierre ZächPartnerT: +41 58 249 64 12 E: [email protected]

Pascal SprengerDirector, LegalT: +41 58 249 42 23 E: [email protected]

Grégoire WincklerPartner, TaxT: +41 58 249 34 95 E: [email protected]

Jean-Luc EparsPartner, LegalT: +41 58 249 37 49 E: [email protected]

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