Fund News - Issue 117 - July 2014

FUND NEWS

Financial Services / Regulatory and Tax / Issue 117

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

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Regulatory Content

European Union 3 Work programme for the European Economic

and Financial Affairs Council during the Italian presidency

3 UCITS V and CSD votes in Council 3 ESMA updated Q&A on AIFMD 4 ESMA paper on UCITS counterparty risk to CCPs

for centrally cleared OTC derivatives 5 ESMA consults on the new market abuse regime

Ireland 6 Publication of the Irish Collective

Assetmanagement Vehicle Bill 2014 6 Central Bank’s Consultation on Loan Originating

Qualifying Investor AIF 7 Central Bank’s Consultation on the Adoption of

ESMA’s Revised Guidelines on ETFs and other UCITS Issues

7 Central Bank’s Discretion for Exemption from Capital Buffers for SME Investment Firms from CRD IV/CRR

7 Feedback Statement on CP78: Consultation on Carrying out Depositary Duties in Accordance with Article 36 of the AIFMD

8 Central Bank’s Tenth Edition of the AIFMD Q&A 8 AIFMD – Status of Authorizations in Ireland

Luxembourg 9 New CSSF Circular 14/587 on UCITS depositary

bank duties 14 CSSF circular on material changes to openended

funds 15 CSSF updated FAQ on AIFMD

Switzerland 16 Federal Council launches consultation on Federal

Financial Services Act and Financial Institutions Act

International 17 U.S. SEC approves Money Market Fund Reform

Contents

Tax News

UK 18 Consultation on SDLT for Property Investment

Funds 19 Changes to UK offshore fund rules with regards to

AIFMD deferred remuneration

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Regulatory News

In the area of taxation the Italian presidency will focus on areas of transparency and the fight against tax fraud and evasion. They state that they will work towards an agreement on the Financial Transaction Tax, within the framework of an enhanced cooperation procedure taking due account of the implications for the proper functioning of financial markets.

The full text of the work programme for the Council is available at the following web link.

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST 11285 2014 INIT

UCITS V and CSD votes in Council

At the ECOFIN meeting on 23 July 2014 the final texts of the UCITS V Directive and the CSD (Central Securities Depositary) Regulation were formally adopted. The final texts are expected to be published in the Official Journal of the European Union in the coming weeks. As a reminder, the Directive and the Regulation will come into force 20 days after publication and in the case of UCITS V Member States will have 18 months to transpose the provisions into national law.

The final texts are available at the following link for UCITS V

http://register.consilium.europa.eu/doc/srv?l=EN&f=PE 75 2014 INIT

and at the following link for CSD.

http://register.consilium.europa.eu/doc/srv?l=EN&f=PE 49 2014 INIT

ESMA updated Q&A on AIFMD

On 21 July 2014 the European Securities and Markets Authority (ESMA) updated their Questions & Answers (Q&A) document on the Alternative Investment Fund Managers Directive (AIFMD) covering reporting to national competent authorities, depositary rules and the calculation of leverage by a private equity fund.

• More clarification is given for reporting data on derivatives, repos, FX spot trades, no trades, reverse repurchase agreements, cash holdings, bank overdrafts, substantial leverage, multiple share classes, re-hypothicated collateral and investment strategies with negative values during the reporting period in the consolidated reporting template.

• A new section with clarifications on the duties of the depositary, including:

– No cash monitoring is required for cash accounts opened in the name of financial/legal structures set up and controlled by the AIF/AIFM to hold the underlying investments;

– Cash flow reconciliation cannot be delegated to third parties, and only supporting tasks, such as administrative or technical functions, may be delegated;

– Cash monitoring includes cash accounts used for subscriptions and redemptions opened in the name of the AIF(M) or depositary;

– Defines “close of business day” for cash monitoring as the end of

Work programme for the European Economic and Financial Affairs Council during the Italian presidency

In their work programme published on 4 July, the Presidency stated that they will continue to strengthen the regulation of financial markets, to facilitate credit flows to the real economy and maintain confidence in the sound and efficient functioning of financial markets and intermediaries. They mentioned the following broad objectives:

• Complete the Solvency II framework;

• Finalise the European Long-term Investment Fund regulation (ELTIF);

• Advance on the revision of the Institutions for Occupational Retirement Provision Directive (IORP II);

• Progress on the regulation of indices and benchmarks;

• On “shadow banking”, continue work on the regulation for the reporting and transparency on Securities Financing Transactions regulation, and on the regulation of money market funds;

• Make significant progress on the Insurance Mediation Directive (IMD 2).

European Union

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business day in the jurisdiction in which the depositary is established;

– Depositaries need to verify AIF compliance with fund rules, instruments of incorporation and anti-money laundering, yet are not obliged to verify compliance with labor law or contracts with third parties unrelated to asset or risk management activities;

– Confirms that the depositary is required to verify the ownership of derivative contracts that are subject to netting clauses;

– Confirms that units in funds should be held in custody, unless national law requires that they are registered in the name of the AIFM.

• A private equity fund raising debt through a financial structure to finance the acquisition of a non-listed company shall be included in

the calculation of leverage exposure if (1) the structure is specifically set up to directly or indirectly increase the exposure at the level of the AIF and (2) the AIF controls such a structure. However, where the AIF does not bear the losses beyond its investment in a financial structure that is used to acquire non-listed companies, the structure shall not be considered meeting condition (1) and hence does not have to be included in the calculation of leverage. In any case, these structures should not be used to circumvent the provision of AIFMD on leverage. Debt at the level of the target company should not be included in the leverage calculation.

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

http://www.esma.europa.eu/news/ESMA-issues-updated-QA-applica-tion-Alternative-Investment-Manag-ers-Directive-AIFMD?t=326&o=home

ESMA paper on UCITS counterparty risk to CCPs for centrally cleared OTC derivatives

On 22 July 2014, ESMA issued a discussion paper (ref:ESMA/2014/876) seeking views on how the limits on counterparty risk in OTC derivative transactions that are centrally cleared should be calculated by UCITS and whether the same rules for both OTC transactions that are centrally cleared and exchange-traded derivatives (ETDs) should be applied by UCITS. UCITS are allowed to invest in both ETDs and OTC derivatives, while only the latter are subject to counterparty risk exposure limit of 5% of assets or 10% when the counterparty is a credit institution.

ESMA argues that UCITS should consider EU central counterparties (CCPs) and recognized EU CCPs as having relatively low counterparty risk, due to the stringent oversight requirements under EMIR, and should be considered as low risk market infrastructure. Consistent with other legislation, in particular Articles 305 and 306 of the Capital Requirement Regulation No 575/2013 (CRR) for credit institutions and investment firms such exposure benefits from lower capital treatment without being risk-free.

The paper concentrates on the impact of a default of a clearing member or of

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other clients of the clearing member on UCITS. ESMA argues that UCITS have a higher counterparty risk vis-à-vis the clearing member under an omnibus client segregation arrangement, than under individual client segregation. They also state that UCITS should apply the same counterparty risk limits to CMs for both OTCs and ETDs in the case of an individual client segregation or an omnibus client segregation arrangement. Other types of segregation arrangements maybe offered by CCPs, and in those cases UCITS should also apply some counterparty risk limits consistent with the approach currently envisaged bank’s exposure to CCPs and these limits should be the same for both OTCs and ETDs. UCITS entering into OTC derivative transactions, not in scope of EMIR shall apply the 5%/10% counterparty risk limits to CMs.

With reference to indirect clearing arrangements, ESMA considers these as equivalent to direct clearing arrangements, which means that the same counterparty risk limits for UCITS in the different segregation models should apply.

ESMA calls for comments on the specific questions raised in the full text paper before 22 October 2014 available at the following web link.

http://www.esma.europa.eu/system/files/2014-esma-876.pdf

Regulatory News

ESMA consults on the new market abuse regime

The European Securities and Markets Authority (ESMA) has launched a consultation on the level 2 and 3 measures for the new Market Abuse Regulation (MAR) which entered into force on 2 July 2014. ESMA issued two consultation papers seeking stakeholders’ views on the draft regulatory and implementing technical standards (RTS/ITS) and Technical Advice (TA) which will become applicable in July 2016.

ESMA’s draft RTS/ITS and TA specify the application of MAR to new products, venues and trading techniques and addresses transparency and governance issues.

Asset managers should be particularly interested in the following elements:

• The extension of the scope to financial instruments traded on a MTF and OTF. To this end ESMA’s technical work updates and strengthens the existing framework by defining how to address these new markets and trading strategies and by introducing new requirements;

• A process for public disclosure of inside information and the timing of these disclosures;

• Framework for “market soundings” covering dealings between an asset manager and sell-side brokers. The technical standards amplify the market soundings requirements (disclosures, timings, investor consent, record keeping requirements, internal processes and controls) in order to ensure appropriate procedure for dealing with the information received from sell-side brokers;

• The specification of procedures to enable reporting of actual or potential infringements of MAR.

Both Consultation Papers are open for feedback until 15 October 2014. The Consultation Paper on draft technical standards on the Market Abuse Regulation is available at the following web link

http://www.esma.europa.eu/system/files/esma_2014-809_consultation_paper_on_mar_draft_technical_stan-dards.pdf

and the Consultation Paper on ESMA’s draft technical advice on possible delegated acts concerning MAR can be found here.

http://www.esma.europa.eu/system/files/esma_2014-808_consultation_paper__on_mar_draft_technical_ad-vice_0.pdf

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Regulatory News

Publication of the Irish Collective Asset-management Vehicle Bill 2014

The anticipated legislation introducing the Irish Collective Asset-management Vehicle (“ICAV”) was published by the Department of Finance on 29 July 2014, in the form of the Irish Collective Asset-management Vehicle Bill 2014 (the “Bill”). The ICAV enhances Ireland’s competitiveness as a leading funds domicile and offers an alternative to similar vehicles widely available elsewhere. The Irish government has prioritized this legislation and the next step is its enactment which is expected to happen before the end of 2014. The Central Bank has indicated that it expects to be able to process ICAV authorizations within two weeks of the enactment of the ICAV legislation.

The ICAV enhances Ireland’s attractiveness for the establishment of investment funds by providing a tailor made corporate structure which will disapply elements of company law not appropriate to an investment fund and which is more tax efficient for US investors. It is available for both UCITS funds and AIFs and existing funds can convert or redomicile to the new ICAV structure. Other important benefits include the ability to produce more streamlined audited accounts, the ability to easily amend constitutive documents and the option not to hold AGMs in specific circumstances.

Ireland

A US investor cannot make a “check the box” election to disregard (and make transparent for tax purposes) an Irish fund which has been formed as a public limited company (“plc”). This is because Irish companies in the form of a plc must be respected as corporations for US tax purposes. The ICAV is designed not to be a plc and therefore not a “per se” corporation for US check the box rules. It preserves the option for US investors to achieve transparent tax treatment of the fund for US tax purposes. US investors can get the benefit of transparent or “look through treatment” to the underlying assets for tax purposes instead of having to tax the fund entity as a company.

The Bill is available at the following link.

http://www.finance.gov.ie/news-cen-tre/press-releases/press-release-icav

Central Bank’s Consultation on Loan Originating Qualifying Investor AIF

On 28 July 2014 the Central Bank issued a Consultation Paper on direct loan origination by investment funds. This proposal has been mooted for a while, in fact it was the subject of a Discussion Paper which issued in July 2013, which examined how the demand for funding from small and medium sized enterprises could be met by the asset management industry. The approach as to how this can be achieved is set out in the consultation paper.

The consultation proposes permitting qualifying investor alternative investment funds (“QIAIFs”), set up under the AIFMD framework, to be established with the sole strategy of loan origination. These QIAIFs will benefit from the AIFMD passport and the Central Bank’s 24 hour approval process. It is proposed that in order to engage in this activity, these QIAIFs will be subject to rules on credit assessment, diversification, liquidity, leverage and disclosure as well as AIFMD requirements.

This significant development offers a new investment strategy for alternative investment funds. The proposal is to amend Chapter 2 of the AIF Rulebook to reflect the new rules. The consultation closes on 25 August 2013 and the new framework may be in place by the end of the year.

The link to the consultation paper, including the proposed amendments to the AIF Rulebook, can be found here.

http://www.centralbank.ie/regula-tion/marketsupdate/Documents/CP 85_28 JUL 2014 Loan Origination.pdf

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Central Bank’s Consultation on the Adoption of ESMA’s Revised Guidelines on ETFs and other UCITS Issues

On 28 July 2014, the Central Bank also issued a consultation on proposed changes to ESMA’s revised guidelines on ETFs and other UCITS issues. ESMA’s Guidelines on ETFs and other UCITS first became effective on 18 February 2013 and were revised in March 2014. The revised rules provide for a derogation from the collateral diversification requirement where collateral consists of sovereign or quasi-sovereign securities and for the extension of this derogation to all UCITS funds.

The Central Bank has concerns about the credit quality of this type of collateral. The paper proposes to only permit the derogation to UCITS when a credit assessment of the collateral is conducted, particularly where that collateral constitutes more than 20% of the collateral basket.

The consultation closes on 17 October 2014 and if the proposals are accepted it would have the effect of the rules on

collateral in Ireland being different to those of those in other Member States. The consultation can be found via the following link.

http://www.centralbank.ie/regula-tion/marketsupdate/Documents/CP 84_ 28 JUL 2014.pdf

Central Bank’s Discretion for Exemption from Capital Buffers for SME Investment Firms from CRD IV/CRR

The Central Bank has issued a consultation paper, on 28 July 2014, outlining its proposed approach in relation to the possible exemption of SME investment firms from being subject to the capital conservation buffer and the countercyclical capital buffer as provided for in the Capital Requirements Directive IV (“CRD IV”) and Capital Requirements Regulation (“CRR”). SME investment firms in this context are defined as those enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50m and/or an annual balance sheet total not

Regulatory News

exceeding €43m and which are authorised to provide the MiFID investment services and activities of “dealing on own account” and/or “underwriting of financial instruments” and/or placing of financial instruments on a firm commitment basis.

The consultation closes on the 12 September 2014 and can be found at this link.

http://www.centralbank.ie/regula-tion/marketsupdate/Documents/CP81.pdf

Feedback Statement on CP78: Consultation on Carrying out Depositary Duties in Accordance with Article 36 of the AIFMD

Feedback was issued by the Central Bank, on 28 July 2014, on the recent consultation to manage conflicts of interest where an Irish authorized fund administrator proposes to provide fund administration services and perform the depositary duties set out in AIFMD Article 21(7) (monitoring of cash flows of the AIF) and AIFMD Article 21(9)

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(oversight of AIFM operations), for a non-EU AIF (depo lite). In the feedback the Central Bank acknowledges the potential conflict of interest and states that its intention is to mitigate this conflict by only allowing these functions to be performed by a subsidiary of the fund administrator.

Regarding the depositary service of safe keeping as set out in AIFMD Article 21(8), the Central Bank previously stated that any entity wishing to provide this service must be authorized to provide “custodial operations involving the safe-keeping and administration of investment instruments” under the Investment Intermediaries Act 1995 (“IIA”). In this feedback the Central Bank states that an entity does need to be authorized to perform this function, both in respect of financial assets and other assets, albeit it acknowledges a firm may also be authorized under MiFID or the CRD (and not just under the IIA). This is clarified in ID 1021 of the tenth edition of the Central Bank’s Q&A on AIFMD.

Please find the feedback statement at the following link.

http://www.centralbank.ie/regula-tion/poldocs/consultation-papers/Pages/closed.aspx?CPNumber=CP78

Central Bank’s Tenth Edition of the AIFMD Q&A

On the 28 July 2014, the Central issued the tenth version of the AIFMD Q&A. Amendments were made to question ID 1021 (as described above) and new questions 1072-1077, on remuneration, governing law and leverage, were included.

The tenth AIFMD Q&A is available at this link.

http://www.centralbank.ie/regula-tion/marketsupdate/Documents/AIFMD%20QA%2010%20Final%20%20clean.pdf

AIFMD – Status of Authorizations in Ireland

At the expiration of the transitional period for AIFMD i.e. 22 July 2014, the Central Bank had authorized 64 AIFMs. In addition, 35 AIFMs had been registered. In total, 99 AIFMS have the authority to operate within the state and the 64 authorized AIFMs also have the right to market themselves throughout the EU. This follows a period of intense interaction between the Central Bank and AIFM applicants where the merits of each application were closely scrutinized. A further 24 applications are largely complete but authorisation was not finalized. These may, in due course, be granted.

Regulatory News

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New CSSF Circular 14/587 on UCITS depositary bank duties

On 11 July 2014, the CSSF published a circular that is addressed to all credit institutions under the law of 5 April 1995 acting as a depositary bank for UCITS, to all UCITS and to their appointed management company. This circular clarifies the regulatory framework for UCITS depositary banks by defining the duties and obligations of the depositary and the necessary organizational requirements to be put in place. The rules contained in the circular are based on the AIFMD depositary regime, and also aligns with the UCITS V regime in advance of the upcoming changes. In this light, the circular introduces detailed rules on client asset segregation, the due diligence and monitoring of sub-custodians, cash-monitoring duties and oversight duties. However there is no change to the current liability regime.

The new circular is a major shift from a broad principle based approach to a detailed rules framework. The rules on UCITS depositaries contained in the IML Circular 91/75 will no longer apply after 31 December 2015. However the 91/75 regime will still apply to non-AIFs and to Luxembourg AIFs that are managed by a registered AIFM.

Luxembourg

1. The safekeeping of assets

The circular clarifies the organizational provisions to be implemented by the UCITS’ depositary in order to be able to produce a complete inventory of all UCITS’ assets at the end of each business day. The notion of custody shall be understood as monitoring of assets. It implies that the depositary must know at all the times how the assets of a UCITS are invested and where and how these assets are available.

The concept of assets for which a third-party/sub-custodian ensures safekeeping covers the financial instruments which are recorded on a securities account opened in the books of the depositary or third party/sub custodian – i.e. transferable securities, money market instruments and the units of funds and any other asset that is registered or held in an account opened in the name of the depositary or third party/sub custodian. This category includes also financial instruments that are physically delivered to the custodian for storage or to a third party/sub custodian. The same applies to the financial instruments issued in a dematerialized form.

The category of assets that cannot be subject to safekeeping, covers mainly certain types of derivatives (such as derivatives traded OTC, swaps, options, futures and others), as well as units of UCITS or other UCI or other types of eligible assets which are only recorded directly in the name of the UCITS with the issuer or its agent (registry administrator or transfer agent).

Regulatory News

1.1. Specific organisational requirements regarding custody

Organizational requirements are detailed differently depending on the entity ensuring the custody of the assets of a UCITS:

The depositary:

Each asset for which the depositary has custody must be segregated from the own assets of the depositary. The depositary must ensure that the financial instruments are properly recorded; that segregated accounts are properly kept; organizational provisions are put in place in order to minimize the risk of loss or the diminution of assets or the rights related to these assets (due to fraud, deficient administration, inadequate recording or negligence); the right of ownership of the UCITS’s assets is verified.

Third party/sub-custodian:

The depositary ensures that the third party/sub custodian keeps the necessary registers (records) and accounts; keeps these registers (records) and accounts of a manner that guarantees correctness (accuracy); carries out regular reconciliations; establishes appropriate organizational provisions in order to minimize the risk of loss or the diminution of the value of the assets or rights related to these assets (due to fraud, deficient administration, inadequate recording or negligence).

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The depositary will need to perform a proper due diligence on the third party, and perform regular reconciliation with registers and accounts, and control that assets are properly segregated. The depositary must receive on an annual basis a confirmation that the segregation of assets is respected and a complete inventory of the assets of the UCITS under the custody of the third party/sub-custodian.

Entities downstream of the third party/sub-custodian:

Regarding segregation, the depositary shall require that each third party/sub-custodian ensures that the assets belonging to UCITS’s clients of the depositary are protected from insolvency of the entity which is immediately downstream in the chain of custody.

Regarding the due diligence rules, the depositary must require to receive from each third party/sub-custodian an annual confirmation that the latter applies the due diligence rules with regard to every entity which is immediately downstream.

The depositary must benefit from instruction and information rights vis-à-vis of each third party/sub-custodian, in order to ensure that it can exercise its obligations in relation with the UCITS assets. The means of using this right must be documented in an appropriate manner.

Assets not subject to safekeeping:

The depositary must receive all relevant information, to ensure that UCITS has the ownership of the assets and that the segregation and due diligence are performed. Concerning the assets that are not subject to safekeeping, the depositary must:

• Ensure access to all relevant information;

• Ensure that it has sufficient and solid information in order to be assured of the ownership of the fund’s assets;

• Keep a register of the assets of which it has assurance that they are owned by the UCITS;

• Ensure in all cases that all UCITS implements and applies the appropriate procedures in order to: (i) verify that all acquired assets are recorded in an appropriate way (ii) verify that the positions which figure in the account books of the UCITS and the assets of which the depositary has the assurance that they are the property of the UCITS correspond to each other.

1.2. Due diligence rules

The Circular defines due diligence duties when selecting third parties (such as sub-custodian, central administration agent, transfer agent, prime brokers, etc.) and monitoring their performance.

The Circular also defines the due diligences process which should include:

• General information about the sub custodian/ downstream entity (legal status, incorporation date, nationality, social capital, etc.);

• Professional reputation of the board members and the directors of the sub-custodian/downstream entity;

• The sub-custodian/downstream entity disposes of adequate resources and expertise in relation to the complexity of assets;

• Supervision of the sub-custodian/downstream entity, including capital requirements;

• Segregation of assets;

• Sub-custodian/downstream entity is exercising its functions, procedures & internal controls, in an honest, fair, professional and independent way.

• Valuation of regulatory framework, including the country-risk, risk of safekeeping and enforceability of contracts of the sub custodian/downstream entity;

• Valuation allows the depositary to determine the potential effects of an insolvency.

• The depositary must implement emergency plans in order to avoid possible insolvency (interests of the UCITS’s unit holders have to be kept in mind);

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The obligation to perform due diligence is also applicable in relation with all the assets which are not subject to safekeeping. In this case, the depositary validly discharges its due diligence obligations by ensuring that an adequate due diligence procedure is put in place by the UCITS or its management company.

The depositary has at any moment a right to information in respect of the assets which are the property of the UCITS for which he acts. This right to information must enable him to have access to the information available to all third parties involved in the management of the UCITS. This right further involves a right of access to a reporting system of a third party custodian/sub-custodian, clearing broker, available through web access. The depositary also has to have a right to instruction vis-à-vis each third party custodian/sub-custodian.

1.3. Specific rules depending on UCITS investment policy

Specific organisational requirements must be applicable to the depositary in accordance with the investment policy and strategies of the UCITS. It shall provide details about specific situations that arise when a fund follows a policy of investment which requires the implementation of specific organizational arrangements at the level of the custodian.

Collateral management: the depositary needs to be able to determine whether or not the collateral is the property of the UCITS. Without prejudice to the responsibility of the UCITS, the depositary is required to:

• Ensure that the securities received by the UCITS are obtained prior or simultaneously to the transfer of the securities lent;

• Verify that the securities to be received are conform to legal and regulatory provisions (circular 13/559).

Investment of an UCITS in derivatives: the UCITS has to ensure that the depositary:

• Knows all the positions of the UCITS in such derivatives;

• Monitors the exposures related to the initial margin deposits – carried out by the UCITS at an intermediary – and margin calls of derivatives negotiated on a regulated market. The depositary can rely on the broker statements.

Prime broker: if foreseen by the UCITS prospectus, a UCITS can enter into an arrangement with a prime broker in order to use all or part of the services provided by such a prime broker. If such

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an arrangement is permitted, the depositary has, himself or through the UCITS, to ensure compliance with the provisions set out below. The UCITS has to act with the necessary competence, care and diligence when designating a prime broker. The depositary has exercise due diligence a right to refuse the choice and nomination of a prime broker by the UCITS when the prime broker is to conserve assets which are the property of the UCITS.

The depositary has to receive from the prime broker:

• An annual confirmation certifying the compliance with the rules regarding diligence and segregation of assets;

• A complete inventory of all the positions of the assets of the UCITS which are held directly or indirectly by the prime broker.

In order to avoid any conflicts of interest between the depositary, the UCITS (or, if applicable, the management company) and/or its unitholders, the depositary of the UCITS cannot act as prime broker, unless he separates the execution of his functions as depositary and the tasks as prime broker, and that any potential conflicts of interest are identified, managed and monitored and disclosed to the unitholders of the UCITS in an appropriate manner. The prime broker contract shall contain general provisions, possibilities of transfer of assets within the limits authorized in the prospectus, and a statement by the broker to the depositary regarding the daily asset values.

Concentration of assets with a limited number or single third party: it is

allowed if the depositary puts in place organizational arrangements in order to:

• Ensure that the accounts opened with these third parties are in the name of the depository, with reference to the name(s) of the UCITS;

• Ensure that the accounts opened with the representatives of the third parties identify the particular UCITS as the final economic/financial owner;

• Ensure the obligations of asset segregation;

• Allow the depositary to replace the third party at any moment.

Investments by UCITS in other funds:

• Rules on due diligence obligations on funds in which the UCITS intends to invest.

• Rules on the registration of the investments of a UCITS in funds, such can be made directly by the investing UCITS.

1.4. General requirements regarding reconciliation

It is the responsibility of the depositary of the UCITS to put in place procedures which cover the totality of the reconciliations and the methods of reconciliation in order to fulfil his obligations concerning the assets of the UCITS, to effectively use such procedures in practice and to periodically review these procedures.

It is the responsibility of the internal audit or the internal controlling/

supervisory department to control the existence, the periodical update and the effective application of these procedures concerning the reconciliation and to ensure to resolve within a reasonable period of time any manifest differences of reconciliation.

2. Cash-flow monitoring

The depositary is required to guarantee the proper monitoring of the accounting and of the cash flows of the UCITS. It is the obligation of the UCITS to ensure that the depositary receives as soon as it takes up its functions and henceforth permanently, all the necessary information relating to the accounting and monitoring obligations of the cash flows.

In order to allow the depositary to have access to all the information concerning the cash accounts of a UCITS and to have a complete and comprehensive overview of all the cash flows of the UCITS, some minimum conditions have to be satisfied. The depositary has to keep the accounts in a manner ensuring their faithfulness and in particular that they correspond to the cash assets available to the UCITS, as well as to ensure that appropriate organizational provisions/dispositions are in place in order to minimize the risk of loss or diminution of the cash assets because of fraud, deficient administration/management, inadequate records or negligence.

The depositary generally ensures the appropriate monitoring of the cash-flows of each UCITS and in particular that each payment made by the unit holders or in their name for the subscription of units or shares are received and that all cash assets of

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each UCITS are accounted for in the respective accounts of the UCITS or the management company which acts for the UCITS or in the name of the depositary.

3. Oversight duties

The depositary executes all the tasks concerning the day-to-day management of the assets of the UCITS held by him. The oversight duties of the depositary are the following:

• In order to ensure that the depositary of a UCTIS can exercise his supervisory duties in an appropriate manner, he has to evaluate the risks relative to the nature, size and complexity of the strategy of each UCITS and the organisation of the management company in order to plan the necessary oversight procedures. Such procedures need to be reviewed regularly;

• The depositary has to ensure that subscription and redemption activities are in accordance with national regulations;

• The depositary has to ensure that the value of the units of the UCITS is calculated in accordance with national laws and fund rules. The primary responsibility for the valuation procedure lies to the management company. The depositary needs to ensure the existence of necessary valuation procedures for the calculation of the net asset value and that these procedures are effectively implemented. The depositary needs to regularly review these procedures and needs to have a clear understanding of the valuation

methods used by the management company;

• The depositary must carry out the instructions of the UCITS and of the Management Company;

• The depositary must ensure that transactions involving the assets of the UCITS are remitted to the UCITS within the usual time limits. The depositary must set-up a procedure that aims to detect any situations in which the counterparty of a transactions on a UCITS asset is not transferred to the UCITS in a usual time;

• The depositary has to ensure that the income of the UCITS is distributed in accordance with the applicable management agreement or UCITS statutes.

4. Designation of a credit institution as an UCITS depositary

A credit institution will need to submit an application for a license to act as a UCITS depositary. Entities that were already acting as a UCITS depositary before the publication of the circular, are not required to apply for a new license, but have to comply with obligations on experience, reputation and resources.

There must be a written contract between the UCITS and the depositary and the circular provides very detailed guidance as to the content of the depositary agreement.

The Circular requires that conflict of interests are prevented and managed accordingly. It will still be permitted to provide both depositary and central administration and transfer agent services so long as as different

functional and hierarchical reporting lines are in place.

There are information flows to be put in place towards the depositary. The UCITS has to ensure that the depositary has permanent access to all the relevant information which it needs in order to fulfil its obligations. If the management company is not located in Luxembourg, the depositary has to sign a written agreement with this management company, regulating the exchange of information.

The depositary has to ensure that the UCITS or, if applicable, the management company is informed as soon as possible of any information that concerns the UCITS assets.

Finally, to comply with reporting obligations of the depositary towards the authorities, the depositary has to provide the CSSF on request with all the information that the depositary has obtained in the exercise of its functions to be able to monitor compliance with the applicable laws and regulations. If the CSSF is not the competent supervisory authority of the UCITS and/or the Management Company, it shall communicate the information to the relevant competent authority.

5. Delegation framework

The depositary is authorized to delegate certain functions, or tasks linked to its different functions. The UCITS depositary should ensure that policies and procedures correctly identify the risks associated with any delegation. Any delegation by the depositary must be documented by contract between the depositary and the delegate. Delegation within the depositary group is allowed. With prior approval by the

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14 / Fund News / Issue 117 / Developments in July 2014

CSSF, tasks related to the execution of one or more essential functions can be delegated to an entity within the group or under the control of the depositary. Nevertheless, such delegation should not include the delegation of all tasks to one single entity.

Reference is made to Circular 12/552 as amended by CSSF Circular 13/563 for any questions regarding the IT outsourcing by the credit institution.

Delegation is limited to the safekeeping of the assets. It is possible that tasks concerning the day-to-day management of assets can be delegated to entities linked to the depositary under the control of the depositary. If the depositary cannot himself or through service providers undertake the necessary preliminary checks, it – together with the administrative agent – has to put in place supervision procedures to ensure the compliance of the transactions initiated by the management companies with national regulations.

6. Entry into force

All parties to which this circular is addressed have to comply with the

requirements by 31 December 2015. The chapter E of the circular IML 91/75 will no longer be applicable to UCITS from this date. The CSSF will take into account the entry into force of UCITS V on the transitional period for depositaries.

The Circular 14/587 (only in French) is available at the following web link.

http://www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf14_587.pdf

CSSF circular on material changes to open-ended funds

On 22 July 2014 the Commission de Surveillance du Secteur Financier (CSSF) issued Circular 14/591 explaining the administrative practice in the case of material changes to a fund open-ended fund.

In case of a material change that modifies the fund’s structure, organization and operations the fund shall submit the proposed change, together with appropriate

explanations, to the CSSF. After review of the information received, the CSSF reserves the right to request notification to investors. The notification period should be no less than one month during which time the investors have the right to request, without any repurchase or redemption charges, the repurchase or redemption of their fund units. Furthermore the UCI may offer the option to investors to convert their units into units in another UCI, without additional costs.

In some specific cases, the CSSF may give a derogation and not impose any notification period to investors. Equally, the CSSF may agree to impose a notification before the change becomes effective, without the ability for the investors to redeem or convert their holdings free of charge.

This circular is applicable as from the date of its publication and the text is available at the following web link.

http://www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf14_591.pdf

Regulatory News

Fund News / Issue 117 / Developments in July 2014 / 15

CSSF updated FAQ on AIFMD

On 18 July 2014 the CSSF updated their Frequently Asked Questions (version 7) on the AIFM Law that clarified the following points:

• The CSSF provides the timeframe for the start of the reporting in line with the ESMA reporting guidelines which aligns the reporting periods to the calendar years. An AIFM that has been authorized or registered, which received confirmation from the CSSF but has no information to report at the first reporting date needs to submit a reporting file using a special field indicating it has nothing to report;

• The initial capital and own funds requirements to cover potential professional liability risks applicable to a dual licensed UCITS ManCo/AIFM are explicitly described in the FAQ as are the requirements for external AIFMs. Additional own funds or a professional indemnity insurance shall cover the risks of damage caused by negligence for which the AIFM has legal responsibility. The CSSF clarifies

that the AIFM of a master or feeder AIF has to cover potential professional liability risks arising from activities for which the AIFM has legal responsibility;

• Non-EU AIFMs marketing an AIF to professional investors in Luxembourg without a passport need to fulfill the minimum conditions as set out under article 45 of the Law of 2013 and need to inform the CSSF prior to any marketing activity. Non-EU AIFMs need to fill out an information form, indicating the start and end date of their marketing activities in Luxembourg. All AIFs marketed in Luxembourg by a non-EU AIFM shall be reported to the CSSF as long as the passport is not available. After the marketing passport becomes available, the information should be provided to the Member State of Reference. Any information relating to marketing activity by non-EU AIFMs of regulated or non-regulated Luxembourg AIFs need to be transmitted to the CSSF. Non-EU AIFMs, which marketed AIFs to professional investors under the Luxembourgish private

placement regime before 22 July 2013 or marketed regulated or non-regulated Luxembourg AIFs to such investors, need to send the information form to the CSSF if they wish to continue their activities in Luxembourg;

• ESMA and the CSSF highlight the fact that the authorities from India, Kenya, Korea and Vietnam and have not yet signed MoUs and are expected to sign these soon.

On 22 July 2014, the end of the transitional period, the CSSF published a press release with statistics on the number of AIFM applications, authorizations and registrations. The CSSF received a total number of 773 applications with 215 requests for authorization of which 151 entities have been approved by 22 July, and 558 requests for registration of which 487 entities have been granted the status of registered AIFM.

The text of the FAQ is available at the following web link.

http://www.cssf.lu/en/supervision/ivm/aifm/faq/

Regulatory News

16 / Fund News / Issue 117 / Developments in July 2014

Federal Council launches consultation on Federal Financial Services Act and Financial Institutions Act

On 27 June 2014, the Swiss Federal Council has initiated the consultation on the Federal Financial Services Act (FFSA) and on the Financial Institutions Act (FinIA). The FFSA governs the prerequisites for providing financial services and offering financial instruments. The scope of the FinIA is to provide a differentiated supervisory regime for financial institutions. The consultation phase will run until 17 October 2014.

In order to create uniform competitive conditions for financial intermediaries, the FFSA and the FinIA are set to replace several financial market regulations, that are in force right now, as a whole or partially (i.e. Banking Act, SR 952.0).

The key targets of the FFSA are particularly to improve client protection and to create a level playing field for the financial intermediaries. With the FinIA, supervision of all financial service providers who operate an asset management business in any form, is to be governed in a one law.

Switzerland

From a substantive point of view, the rules are mainly based on the EU’s MiFID regulations. With the FFSA there will be a standardisation of fiduciary duty, the duty of care and duty of information of financial services providers towards their clients. Conflict of interests and inadequate advice at the provision of financial services are set to be controlled by the implemented duty of documentation and the duty of accountability in addition to organisational measures. Furthermore, the FFSA provides for a strengthening of the institution of the ombudsman service. Although it is set to act exclusively as a conciliation body and will not get any decision-making powers.

Managers of collective investment schemes and those who manage the assets of Swiss occupational benefits schemes (Qualified Asset Managers) are to be supervised by FINMA. Regarding the supervision of other asset managers, two variants are put up for discussion during the consultation period: supervision by FINMA or by a supervisory organisation – or by several supervisory organisations under certain conditions.

After the consultation deadline on 17 October 2014, the following steps will be the dispatch by the Federal Council (estimated in late Q4/2014, early Q1/2015) and enactment by the Swiss Parliament (Fall or Winter Session 2015). From today’s point of view, the earliest possible entry into force is 1 January 2017.

Regulatory News

Fund News / Issue 117 / Developments in July 2014 / 17

U.S. SEC approves Money Market Fund Reform

On 23 July the U.S. Securities Exchange Commission (SEC) voted a package of amendments to the regulatory framework regulating money market funds which followed a long debate on what the new framework should look like. The SEC had already reformed the rules in 2010 (2a-7) after the 2008 financial crisis. However since 2010, several significant market events have allowed to the SEC to evaluate the effectiveness of those reforms, such as the Eurozone sovereign debt crisis and impasses over the U.S. government’s debt ceiling. In 2013, the SEC issued its alternatives reform proposal that further amend the rules governing money market funds that was finally adopted on 23 July.

The new measures build upon the existing money market funds system in order to reduce the interest rate, credit and liquidity risk of the fund, while preserving its benefits. The aim of this regulation is to minimize the risk of “mass withdrawal” from the funds during periods of stress such as during the financial crisis in 2008.

International

The main aspects of the package’s reform include:

• Floating NAV: institutional, non-government (prime and municipal) money market funds will be required to value their securities portfolio on the base of market assessment data and sell or redeem their shares based on floating net asset values (NAVs). These funds will no longer be permitted to maintain a constant share price of $1.00. However, other funds, such as retail and government money market funds will be permitted to continue using the amortized cost method in order to maintain a stable NAV;

• Liquidity Fees and Redemption Gates: non-government money market funds (whether institutional or retail) will be subject to liquidity fees and redemption “gates” (i.e., suspension of redemptions) under specific conditions. In particular, the fund’s Board of Directors will be allowed to impose a liquidity fee or suspend a redemption in case of the level of weekly liquid assets falls below a certain threshold (30% or in a worst situation 10%);

• Portfolio diversification, Disclosure and Stress Testing: money market funds and private funds which operate as money market funds will be required to enhance the diversification of their portfolio, to disclose the information (on a daily basis on their website) as well as to conduct stress testing, in order to provide regularly updated reports to investors;

• Tax and accounting: a new simplified tax accounting regulation will be introduced for institutional, non-governmental (prime and municipal) money market funds. The new regulation will eliminate the encumbrance to track individual purchase and sale transactions for tax reporting purposes and put in place new revenue procedures.

The final rules provide a two-year transition period.

The SEC press release is available at the following web link.

http://www.sec.gov/News/PressRelease/Detail/PressRe-lease/1370542347679

Regulatory News

18 / Fund News / Issue 117 / Developments in July 2014

There are two main SDLT issues impacting PAIFs and CoACSs:

• The charge on introduction of property (“seeding”) into PAIFs; and

• The potential charge on transactions in CoACSs.

The key proposals aimed at addressing these issues are:

• A seeding relief on the initial introduction of portfolios into PAIFs. This is likely to have a number of qualifying conditions. The seeding relief for PAIFs is therefore likely to apply to transfers of portfolios of property, possibly with a minimum value or number of properties to prevent it being used to mitigate SDLT on individual purchases. The consultation also proposes a clawback of the SDLT

that would otherwise have arisen if the seeder sells their interest in the fund within a 3 year period. Any liability for SDLT under the clawback will be the responsibility of the seeder; and

• For CoACSs the main proposal is to introduce a new exemption from SDLT for transactions in CoACSs units and making the Scheme Manager responsible for the tax as well as introducing a seeding relief for CoACSs fulfilling certain criteria.

The consultation exercise invites views from the Industry on whether the current SDLT rules are limiting growth and the potential value of assets that may be transferred into collective investment schemes, as well as the possible negative effect of taking no action. The consultation period will last for 8 weeks and will close on 12 September 2014.

Tax News

Consultation on SDLT for Property Investment Funds

HM Treasury and HM Revenue & Customs have published a joint consultation paper on stamp duty land tax (SDLT) for property investment funds. The consultation exercise will focus on the SDLT treatment of transferring real estate into Property Authorised Investment Funds (PAIFs) and the wider treatment of co-ownership authorised contractual schemes (CoACSs). The proposals are likely to be particularly relevant for both asset managers and life insurance companies looking to transfer real estate into fund vehicles.

The consultation can be found here:

https://www.gov.uk/government/consultations/stamp-duty-land-tax-rules-for-property-investment-funds

UK

Fund News / Issue 117 / Developments in July 2014 / 19

Changes to UK offshore fund rules with regards to AIFMD deferred remuneration

Regulations have been released concerning when AIFMs structured as UK LLPs invest Members’ AIFMD deferred remuneration into non-UK funds.

The Offshore Funds (Tax) (Amendment) Regulations 2014 have been published and come into force on 12 August 2014. These Regulations affect alternative investment fund managers (AIFM) that operate as a partnership and have partners who elect to allocate their profit share to the AIFM under the deferred remuneration provisions (section 863I Income Tax (Trading and Other Income Act) 2005). Where this deferred remuneration is invested by the AIFM in an offshore fund investment, these new regulations operate to clarify the

impact of that investment being a non-reporting fund for the purposes of the UK Offshore Fund regime. Where a participant holds an investment in an offshore fund that was a non-reporting fund during the “material period” they will have an offshore income gain on disposal of the investment.

These regulations confirm that the “material period” commences from the date the variable remuneration was awarded to the participant not from when it is vested. Where an offshore fund changes from a non-reporting fund to a reporting fund, a participant can generally make a deemed disposal election to crystallise any offshore income gain up to the date of the change and then have an investment in a reporting fund going forward. These regulations state that in the circumstances above, such an election cannot be made by a participant where the offshore fund changes from a non-reporting fund to a reporting fund before the vesting take place.

The regulations can be found via the following link.

http://www.legislation.gov.uk/uksi/2014/1931/contents/made

Tax News

Publications

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Swiss FinancialServices Newsletter: Special Edition Banking

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SWISS FINANCIAL SERVICES

NEWSLETTER

Special Edition

Banking

July 2014

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Frontiers in FinanceFor decision-makers in financial servicesApril 2014

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Swiss FinancialServices Newsletter: Special Edition Investment Management

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 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 and logo are registered trademarks.

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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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