1 FUND NEWS March 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 90 – Regulatory and Tax Developments in March 2012 Regulatory News European Union Shadow Banking European Commission publishes Green Paper There has been an explosion in shadow banking activities over the past decade and the Financial Stability Board (FSB) estimated that shadow banking activities were worth around €46 trillion in 2010. The European Commission is keen to impose tougher requirements on shadow banking and published a Green Paper on 19 March 2012 outlining the Regulatory Content European Union European Commission publishes Green Paper on Shadow Banking Page 1 EMIR adopted by Parliament Page 3 ESMA final report on Short Selling Technical Standards Page 4 ESMA updates Guidelines on risk measurement for certain types of structured UCITS Page 4 Ireland New Irish Corporate Structure for Funds (SCIAV) Page 4 UCITS Notice 14 and non-UCITS Notice 2 – Disclosure of related party transactions Page 4 Luxembourg Specialised Investment Fund law amendments voted Page 4 UK FSA consults on a new contractual legal form of Authorised Fund Page 5 International IOSCO consults on exchange traded funds regulation Page 7 Tax Content Luxembourg Aberdeen Case E-Alerts Page 7 The Netherlands CAA with Norway re closed FGR Page 7 Fund News – March 2012 2 broad range of issues that require action at EU level to address the threats posed by shadow banking activities and entities. This comes in advance of the G20 meeting of Finance Ministers and Central Bank Governors in Washington D.C. on 20 April 2012. The paper focuses on the following entities and activities:  Securitization Special Purpose Vehicles (SPV)  Finance companies providing credit and securities entities falling outside banking regulation  Money Market Funds (MMF) and investment funds that are leveraged or provide credit, including Exchange Traded Funds (ETF)  Insurance and reinsurance firms that issue or guarantee credit products  Securities lending, repurchase transactions and securitization. Options being considered by the EU include increasing the capital requirements of shadow banks, or forcing them to comply with oversight rules that were originally intended for hedge funds. Clients will need to be aware of the impact that new regulations could have on their off balance sheet activities. Progress has already been made in the EU on many of the issues raised, either through direct or indirect regulatory initiatives but work is set to follow in the following areas:  In banking regulation, the Commission is considering extending the scope of financial institutions and entities covered by current banking law and may extend certain provisions in the CRD IV to non-deposit taking finance companies, thus capturing non- banks under stricter banking regulatory regimes. The Commission is investigating how to ensure that bank-sponsored shadow banking entities are appropriately consolidated and fully subject to Basel III rules, which will impact banks’ risk based capital and liquidity ratios. Options are also under consideration regarding bank exposures to shadow banking entities, and include extending the look-through to account for leverage of investments in funds and applying the CRD II capital rules to the treatment of liquidity lines for securitization vehicles to all shadow banking entities.  For asset management regulation, the Commission raises valuation and liquidity issues in constant NAV MMFs, and issues regarding collateral and conflicts of interest in securities lending and swaps transactions in ETFs, although many of these issues are being addressed by new ESMA rules.  The Commission is actively contributing to FSB work in relation to securities lending and repurchase agreements, an area also highlighted as a key concern. The specific issues to be addressed include collateral management, reinvestment of cash collateral, re- hypothecation and improved transparency for markets and supervisors. Firms should prepare for tighter rules coupled with improvements to market infrastructure in this area. For securitizations, the Commission will examine the effectiveness of measures already taken in CRD II and CRD III and consider extending measures to other sectors. Work is also underway in relation to resolution planning for non-banks. The Green Paper is available via the following web link and is open for consultation until 1 June 2012. http://ec.europa.eu/internal_market/bank /docs/shadow/green- paper_en.pdfShadow Banking Fund News – March 2012 3 EMIR adopted by European Parliament On 29 March 2012 the European Parliament approved at first reading the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories, also known as the European Market Infrastructure Regulation (EMIR). The new Regulation meets the G20 commitment in September 2009 at Pittsburgh that "all standard Over-The- Counter (OTC) derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest." Furthermore, they acknowledged that "OTC derivative contracts should be reported to trade repositories and that non-centrally cleared contracts should be subject to higher capital requirements." The main aspects of the regulation are as follows: • Obligatory clearing for standardised OTC derivatives through central counterparties; • Reporting for all derivatives (listed and OTC derivatives) to trade repositories, which would have to publish aggregate positions by class of derivatives; • The work of trade repositories will be monitored by the European Securities and Markets Authority (ESMA), which would be responsible for granting or withdrawing their registration; • Stringent rules for Central Counterparties (CCPs) regarding capital, organisation and conduct of business standards; • CCPs from third countries will be recognized in the EU only if the legal regime of the third country in question provides for an effective equivalent system for recognition; • A "light touch" regime has been awarded to pension schemes with regard to the clearing obligation. For these schemes, the obligation would not apply for three years, extendable by another two years plus one, subject to proper justification. • risk mitigation standards for contracts not cleared by a CCP (e.g. exchange of collateral). Which contracts have to be cleared? To have as many OTC contracts as possible cleared through a CCP, the Regulation introduces two approaches to determine which contracts must be cleared: • a 'bottom-up' approach: In this case when a competent authority has authorised a CCP to clear a class of derivatives, it will inform ESMA who will assess whether a clearing obligation should apply to that class of derivatives in the EU, and develop draft Regulatory technical standards which will have to be adopted by the Commission. • a 'top-down' approach: In this case, ESMA, on its own initiative and in consultation with the European Systemic Risk Board, will identify contracts that should be subject to the clearing obligation but for which no CCP has yet received authorisation. The rules on clearing OTC derivatives, reporting on derivatives transactions and risk mitigation techniques for non- centrally cleared OTC derivatives will apply, among others, to UCITS and their managers and to alternative investment funds managed by alternative investment fund managers (AIFM). Before the EMIR rules are implemented, the European Supervisory Authorities (ESAs) first need to develop technical standards. The ESAs must submit these standards to the Commission by 30 September 2012. In line with G20 commitments, these new standards should be fully adopted by the Commission by the end of 2012. Central counterparties will have to apply for authorisation under the new European regime at the latest six months after the adoption of the technical standards by the Commission. In the meantime, CCPs must continue to comply with national rules on authorisation. The date of application of the reporting obligation and clearing obligations will be determined in the new technical standards to be developed by 30 September 2012. Fund News – March 2012 4 Short Selling ESMA final report on technical standards On 28 March 2012 the European Securities and Markets Authority (ESMA) published their final report to the Commission containing draft technical standards on the Regulation 236/2012 on Short Selling and certain aspects of Credit Default Swaps. The draft standards were submitted to the European Commission and the Commission has three months to decide whether to endorse ESMA’s draft technical standards. The report, which includes a cost-benefit analysis, is available via the following web link: http://www.esma.europa.eu/content/Dra ft-technical-standards-Regulation-EU-No- 2362012-European-Parliament-and- Council-short-sel ESMA updates Guidelines on risk measurement for certain types of structured UCITS ESMA published additional guidelines (Ref: ESMA/2012/197) on the requirements on the calculation of global exposure relating to derivative instruments, to provide certain types of structured UCITS with an optional regime for the calculation of the global exposure using the commitment approach. The Guidelines are available via the following web link: http://www.esma.europa.eu/page/Invest ment-management-0 Ireland New Irish Corporate Structure for Funds (SCIAV) Currently, Irish funds structured as corporate funds are set up under Irish company law and therefore are subject to standard requirements imposed on all Irish companies. The Irish Minister for Finance has agreed to introduce a new corporate structure designed specifically for the funds industry. The main advantages of the new structure are that it will meet US check-the-box requirements and reduce administrative costs. Existing Irish funds will be able to convert to this new structure. The new legislation should be in place by the end of 2012. UCITS Notice 14 and non-UCITS Notice 2 – Disclosure of related party transactions The Irish regulator has issued an information note on these regulatory rules. The note clarifies the type of parties and the types of transactions which should be set out in the related party disclosure report. Luxembourg Specialised Investment Fund (SIF) law amendments voted by Parliament The law of 26 March 2012 that amends the Specialised Investment Fund (SIF) law of 13 February 2007 introduces some important changes to the hugely successful SIF regime. The main amendments are as follows: 1. Requirement for regulatory approval of the SIF before the launch of activities The new law abolishes the option of launching a SIF prior to obtaining the required regulatory approvals from the Commission de Surveillance du Secteur Financier (CSSF). In practice very few fund promoters embraced this facet of the law that made possible the prior launch of a SIF, and the subsequent submission of the application file within one month of launch. Nevertheless the old regime gave leave to fund promoters to quickly launch a new SIF, once an informal go-ahead from the CSSF had been secured, and the new rules are expected to have a negative impact on the "time to market" of some new SIFs. Fund News – March 2012 5 In addition, the SIF approval requirements have been extended to require CSSF approval of those persons who will perform the intellectual portfolio management, requiring that they are honorable and have sufficient experience and expertise in the type of SIF managed. The law also foresees new rules dealing with the appointment of independent asset managers that will need to be licensed or registered asset managers, and subject to prudential supervision. The SIF will be required to conduct a detailed due diligence on the asset manager prior to their selection. 2. New rules on Risk Management and Conflicts of Interest In line with the forthcoming Alternative Investment Fund Managers Directive (AIFMD) requirements, the SIF will be obliged to implement appropriate risk management systems to monitor, measure and manage the risks in the portfolio. The SIF will need to be structured and organised in such a way as to minimise the risk of conflicts of interest, and have in place a policy to manage any conflicts that may arise. It is foreseen that the CSSF may issue further detailed regulations defining the precise requirements in relation to risk management and conflicts of interest management. 3. Possibility to cross-invest between sub-funds in same umbrella structure The SIF regime has been brought into line with the UCITS regime by allowing sub-funds in the same umbrella structure to invest in one or more sub- funds in the umbrella, subject to some specific conditions. This new feature opens up the possibility of creating fund of funds within the same umbrella structure as well as providing opportunities to generate other management and operational efficiencies, and has been keenly awaited by the funds industry. The law was published in the Mémorial (Official Journal) on 30 March 2012 and came into effect on 1 April 2012. The full text of the law (in French) is available via the following web link: http://www.legilux.public.lu/leg/a/archive s/2012/0063/index.html UK FSA consults on a new contractual legal form of Authorised Fund On 6 March 2012, within its quarterly consultation paper (“CP 12/5”), the Financial Services Authority (”FSA”) set out its proposals to extend the eligible legal forms of UK Authorised Funds to include co-ownership schemes and limited partnership schemes. The consultation and proposed rules are aligned to the proposed tax regulations intended to enable the UK to have a tax transparent authorised fund suitable as a UCITS IV master fund and generally as a tax efficient pooling vehicle. Currently the FSA can only authorise funds that take the legal form of a unit trust (“AUT”) or an open-ended investment company (“OEIC”), neither an AUT nor an OEIC provide an appropriate legal form for a tax transparent fund. It is generally the case that for a UCITS Master fund to be tax efficient for a wide range of prospective investors, including UCITS Feeder funds, and also for the UK to have a tax Fund News – March 2012 6 efficient pooling vehicle in general (i.e. including Non-UCITS Retail Schemes (“NURS”) and Qualified Investor Schemes (“QIS”)) then it requires a tax transparent fund. HM Treasury (HMT) has proposed that the UK tax transparent fund should take either the legal form of a co-ownership scheme or a limited partnership scheme and that both would have to be authorised by the FSA but also considers that the type of fund should not be restricted to UCITS funds but should include NURS and QIS. The HMT’s proposal was discussed in Fund News issue 88: http://www.kpmg.co.uk/email/02Feb12/ 266160/KPMG_Fund_News_Issue88.ht ml The proposed authorised co-ownership scheme and limited partnership schemes are to be contractual in legal form and so are collectively referred to as authorised contractual schemes (“ACS”) by the FSA, with a proposed new definition for such schemes. An ACS will not be subject to corporation, income or capital gains tax. This differentiates the ACS from AUTs and OEICs. The co-ownership scheme will not have legal personality and the scheme’s assets are held by investors as tenants in common (in Scotland as common property) and managed on their behalf by the manager with the depositary having legal title as a custodian. In the limited partnership scheme it is proposed that the authorised fund manager will be the general partner and the depositary will be a limited partner. The investors will be limited partners. The scheme is to be formed under the Limited Partnership Act 1907 (amended). In introducing rules for the ACS the FSA has reflected the similarities between the ACS and the AUT and the consultation only discusses where an ACS is treated differently from an AUT, for example recognising that there is no transfer or units or, therefore, box management for an ACS. While an AUT or an OEIC can take an umbrella form with a number of sub- funds, only the co-ownership form of an ACS is to be permitted to be an umbrella scheme and the FSA proposes not to permit the limited partnership to be an umbrella scheme. If a co-ownership scheme is established as an umbrella it will have to be with each scheme in the umbrella being operated on a “protected cell” basis. In line with the prevention of the transfer of units in the co-ownership scheme, the Treasury proposes to amend the Limited Partnerships Act 1907 so limited partners may not assign their units with the general partner’s permission. That the units in an ACS are not generally transferable accords with the tax transparent status of the scheme, however, the FSA needs to consider and consult on the specific commercial circumstances when its rules need to permit transfers such as authorised fund mergers and reconstructions. A restriction on transfer of units means that an ACS will not have “box management” and the related transfer of units between investors via “the manager’s box”. Investors’ subscriptions and redemptions of units will result in creation and cancellation of units for each investor. In a co- ownership scheme a manager could hold units as an investing co-owner but in a limited partnership scheme the manager, as the general partner, could not also be an investor (a limited partner). CP 12/5 is 244 pages – the FSA’s proposals for Authorised Contractual Schemes are contained in Chapter 8 and Appendix 8. The relevant sections are: Chapter 8 (pages 43 to 54) Proposed changes to the Collective Investment Schemes Sourcebook – this includes the FSA’s consultation questions; and Appendix 8 (pages 135 to 243) – in which the amendments to the FSA’s Handbook are detailed. FSA’s CP 12/5 is available via this web link: Fund News – March 2012 7 International IOSCO consults on Exchange Traded Funds (ETF) regulation The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published a consultation report entitled “Principles for the Regulation of Exchange Traded Funds (ETFs)” which examines the key regulatory issues regarding ETFs. The report also proposes 15 principles to assess the quality of regulation and industry practices relating to ETFs regarding investor protection, sound functioning of markets and financial stability. The principles address ETFs that are set up as Collective Investment Schemes (CIS) and are not meant to encompass other Exchange-Traded Products (ETPs). The principles are categorized as follows: • Principles related to ETF classification and disclosure • Principles related to Marketing and Sale of ETF shares • Principles related to the structuring of ETFs • Principles relating to broader risk of liquidity shocks and transmission across correlated markets. Comments must be submitted before 27 June 2012. The full report is available on the IOSCO website at www.iosco.org Tax Luxembourg Aberdeen Case E-Alerts The latest Aberdeen E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) discusses the recent Dutch Court of Appeal ruling that grants full withholding tax refund to Finnish investment funds. The e-alert is available via the following web link: http://www.kpmg.com/LU/en/IssuesAnd Insights/Articlespublications/Pages/Aber deene-alerts-Issue2012-06.aspx The Netherlands CAA with Norway re closed FGR The Netherlands have concluded a Competent Authority Agreement (CAA) with Norway regarding the tax treatment of a Dutch closed FGR ('besloten fonds voor gemene rekening'). A closed FGR is treated as tax transparent for Dutch tax purposes. This implies that all income and gains derived through such FGR are attributed to the investors in proportion to their participations in the FGR. FGRs are frequently used for asset pooling by pension funds and other investors. In the CAA the Norwegian tax authorities confirm that a closed FGR will also be regarded as tax transparent for the application of the tax treaty concluded between the Netherlands and Norway. Previously, the Netherlands have concluded similar CAAs with Canada, Denmark and the United Kingdom. It is expected that CAAs with other countries (including the USA and Switzerland) will follow. The CAA is available via the following web link https://www.officielebekendmakingen.nl /stcrt-2012-5658.pdf Fund News – March 2012 8 Contact us Dee Ruddy Senior Manager T: + 352 22 5151 7369 E: dee.ruddy@kpmg.lu Audit Nathalie Dogniez Partner T: + 352 22 5151 6253 E: nathalie.dogniez@kpmg.lu www.kpmg.lu Publications Tax Georges Bock Partner T: + 352 22 5151 5522 E: georges.bock@kpmg.lu Advisory Vincent Heymans Partner T: +352 22 5151 7917 E: vincent.heymans@kpmg.lu 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 endeavour 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. © 2012 KPMG Luxembourg S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Investor Assurance: The Road to Transparency here UCITS IV - Fill the glass to the brim II: have we broken through? An update on the tax implications of UCITS IV here Charles Muller Partner T: +352 22 5151 7950 E: charles.muller@kpmg.lu IFRS Practice Issues: Applying the consolidation model to fund managers here . March 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 90 – Regulatory and Tax Developments in March 2012 Regulatory. valuation and liquidity issues in constant NAV MMFs, and issues regarding collateral and conflicts of interest in securities lending and swaps transactions in ETFs, although many of these issues. is considering extending the scope of financial institutions and entities covered by current banking law and may extend certain provisions in the CRD IV to non-deposit taking finance companies,