Issue 91 – Regulatory and Tax Developments in April 2012 pptx

1 FUND NEWS April 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 91 – Regulatory and Tax Developments in April 2012 Regulatory News European Un

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FUND NEWS April 2012

Investment Fund Regulatory and Tax developments in

selected jurisdictions

Issue 91 – Regulatory and Tax

Developments in April 2012

Regulatory News

European Union

ESMA begins AIFMD co-operation

discussions with non-EU supervisors

On 26 April 2012 the European

Securities and Markets Authority

(ESMA) announced that it will begin

discussions with non-EU supervisors of

entities subject to requirements of the

Alternative Investment Fund Managers Directive (AIFMD) about supervisory co-operation issues ESMA will lead on the negotiation of co-operation

arrangements with non-EU authorities

on behalf of EU supervisors This will be done through a common Memorandum

of Understanding (MoU), which will

Regulatory Content European Union

ESMA begins AIFMD co-operation discussions with non-EU authorities

Page 1

ESMA final advice on possible delegated acts concerning the Short-Selling

Reports on Implementation of the third

Anti-Money Laundering Directive Page 2

Ireland

Industry Guidance on Global Exposure Disclosure in Annual Report Page 3

Central Bank consults on Market Abuse

Page 3

Luxembourg

SIF requirements for Risk and Conflicts of Interest Management Page 3

UK

FSA augments its rules regarding the circumstances when an OEIC is wound up

or a sub-fund terminated Page 3

International

IOSCO consults on MMF Systemic Risk Analysis and Reform Options Page 4

IOSCO consults on Principles for Liquidity Risk Management for CIS Page 5

Tax Content

UK

HMRC issues draft guidance on the new

UK ITC tax regime Page 6

Venture Capital Trusts – Finance Bill 2012

Fund News – April 2012

2

facilitate the cross-border supervision of

those entities subject to AIFMD such as

managers of alternative investment

funds, depositaries and entities

performing tasks under delegation by

the manager

The MoU will be based on IOSCO’s

Principles Regarding Cross-Border

Supervisory Co-operation

www.esma.europa.eu/AIFMD

ESMA published final advice on

possible delegated acts concerning

the Short-Selling Regulation

On 19 April 2012 ESMA published its

final advice on possible delegated acts

concerning the Regulation on

Short-Selling and certain aspects of Credit

Default Swaps (CDS) (EU No 236/2012)

that will enter into force on 1 November

2012

Section I of the advice specifies the

definition of when a natural or legal

person is considered to own a financial

instrument for the purposes of the

definition of short sale

Section II relates to the net position in

shares or sovereign debt covering the

concept of holding a position, the case

when a person has a net short position

and the method of calculation of such a

position including when different entities

in a group have long or short positions or

for fund management activities related

to separate funds

Section III sets out the advice on the

cases in which a CDS is considered to

be hedging against a default risk or the

risk of a decline of the value of the sovereign debt and the method of calculation of an uncovered position in a CDS

Section IV defines the initial and incremental levels of the notification thresholds to apply for the reporting of net short positions in sovereign debt

Section V specifies the parameters and methods for calculating the threshold of liquidity on sovereign debt for

suspending restrictions on short sales of sovereign debt

Section VI sets out what constitutes a significant fall in value for various financial instruments and also specifies the method of calculation of such falls

Section VII specifies the criteria and factors to be taken into account by competent authorities and ESMA in determining when adverse events or developments arise

ESMA’s final advice is available via the following web link:

www.esma.europa.eu/Short Selling

Reports on Implementation of the third Anti-Money Laundering Directive

During the month of April 2012 the Joint Committee of the three European Supervisory Authorities (EBA, ESMA and EIOPA) published two reports on the implementation of the third Money Laundering Directive The “Report on the legal, regulatory and supervisory implementation across EU Member States in relation to the Beneficial Owners Customer Due Diligence requirements” (here) analyses EU Member States’ current legal, regulatory and supervisory implementation of the anti-money laundering/counter terrorist financing (AML/CTF) frameworks related

to the application by different credit and financial institutions of Customer Due Diligence (CDD) measures on their customers’ beneficial owners The

“Report on the legal and regulatory provisions and supervisory expectations across EU Member States of Simplified Due Diligence requirements where the customers are credit and financial institutions” (here) provides an overview of EU Member States’ legal and regulatory provisions and supervisory expectations in relation to the application of Simplified Due Diligence (SDD) requirements

Fund News – April 2012

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Ireland

Industry Guidance on Global

Exposure Disclosure in Annual

Reports

The Irish Fund Industry Association

(IFIA) has issued a technical paper on

“Annual Financial Reporting

requirements around the disclosure of

Global Exposure under UCITS IV.” The

paper gives practical guidance on issues

such as how to find the required

information for the disclosure and on

whether global exposure should be

disclosed as part of the FRS 29 note

The paper is available in the members’

area of the IFIA website –

www.irishfunds.ie

Central Bank consultation on Market

Abuse

The Irish regulator, the Central Bank of

Ireland, has issued Consultation Paper

58 on “The Handling of Inside

Information under the Market Abuse

(Directive 2003/6/EC) Regulations

2005.” The consultation paper deals

with three issues:-

1 Determining what information is

sufficiently significant for it to be

deemed inside information

2 Types of insider list

3 Director and personal account

dealing and the definition of persons

discharging managerial

responsibility

The consultation closes on 14 June

2012

Luxembourg

Specialised Investment Funds (SIF) requirements regarding Risk Management and Conflicts of Interest

On 20 April 2012 the Commission de Surveillance du Secteur Financier (CCSF)

issued a Press Release providing further information on the new requirements in relation to risk management and conflicts of interest management for Specialised Investments Funds (SIF)

These new requirements were contained in the amendments to the SIF law that came into force on 1 April 2012

Pending the release of a Regulation on these areas, the CSSF has clarified that all new application files submitted to the CSSF must contain a brief description of the risk management process and systems to identify, measure, manage and control all material risks Each SIF must also submit a document that describes how potential conflicts of interest are managed

These documents must have been approved by the governing body of the SIF Those SIFs in existence prior to 1 April 2012 will have to submit these documents before 30 June 2012

The full text of the press Release is available via the following web link:

http://www.cssf.lu/en/

UK

FSA augments its rules regarding the circumstances when an OEIC is wound up or a sub-fund terminated

In March the Financial Services Authority (“FSA”) adopted extended rules for Open-Ended Investment Companies (“OEICs”) and OEIC sub-funds which require that a sub-fund termination or the winding up of an OEIC is required to commence following either: an OEIC’s

or sub-fund’s scheme of arrangement or merger; or, for an umbrella OEIC, where there are schemes of arrangement for all the remaining sub-funds then the umbrella OEIC must be wound up The augmentation of COLL Rule 7.3.4(4) affirms that the expectation of the FSA, set out in CP11/18, is that when all sub-funds are terminated and an umbrella OEIC has become an “empty shell” it must be wound up and that it is not possible or permissible to populate that OEIC with new sub-funds

The change in the COLL Rule 7.3.4 (4) through the addition of paragraphs d), e) and f) took effect from 22 March Accordingly, it will generally be the case that as part of the project to undertake schemes to merge funds the Authorised Corporate Director (“ACD”) should consider the timing of the discontinuing fund’s termination Sub-fund

termination remains a separate process

as set out in FSA COLL Rules and continues to require: the assessment of solvency of the sub-fund or the OEIC; preparation of the solvency statement; obtaining the auditor’s opinion on the enquiry made by the ACD into solvency; and the completion and submission of

Fund News – April 2012

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Form 21 (Notification of certain changes

for an OEIC) The FSA assess that it

should no longer be appropriate to

complete a scheme and then defer for

an extended period the application to

terminate a sub-fund or wind up an

OEIC

Schemes of arrangement will generally

result in the sub-fund, or OEIC, being in

the position of ceasing to hold scheme

property, and this is the assessed

circumstance after a scheme: even if

cash is retained to meet accrued

liabilities and creditors; and including

where, after collecting outstanding

debts and settling liabilities, there is a

residual amount that is paid to or

received from the successor fund in

accordance with the scheme of

arrangement

While in many cases the logical date to

start the termination is immediately after

the scheme has been completed the

FSA has said this is not a condition of

the new rule ACDs should, including

for schemes in progress that will be

executed after 22 March, plan to comply

with revised COLL as part of the fund

merger plans However, the timelines

for solvency assessment and reporting

to FSA are very specific the FSA have

said the new rule does not mean that

the termination must become part of the

scheme As the other termination rules

have not changed, if the ACD plans to

commence the termination immediately

after the scheme is executed then the

ACD must deliver the solvency

statement to the FSA and sufficiently

ahead of the scheme date so that the

FSA is able to approve the termination

on or before the scheme date This may

be before the scheme is approved by unitholders as the two processes have different time lines

The subsequent timeframe for completing the sub-fund termination remains flexible, there can be no prescription as to how long the termination might take, reflecting that it

is uncertain how long it will take to collect debts and agree and settle creditors That said, completing the termination and the termination account efficiently can minimise the costs and reduce unnecessary future financial reporting for sub-funds with no unitholders

Additional to this amendment to COLL, the FSA Handbook Notice 118 has also provided: additional guidance to determine the eligibility of interests in syndicated loans; made minor amendments consequent on implementing UCITS IV, and corrections

of cross reference errors that arose when UCITS IV was reflected in COLL

Details are contained in Handbook Notice 118 (91 pages) and can be found

on pages 16 and 17; and 23 to 29 of the document which is available via this web link:

http://www.fsa.gov.uk/static/pubs/handb ook/hb-notice118.pdf

International

UK

International

IOSCO consults on Money Market Fund (MMF) Systemic Risk Analysis and Reform Options

The International Organisation of Securities Commissions (IOSCO) released a consultation report outlining the possible risks that MMFs could pose

to systemic stability, and consulting on a range of policy options to address these risks MMFs account for 20% of the assets of Collective Investment Schemes worldwide and are a significant source of credit and liquidity The systemic importance of the MMF sector is described in terms of their importance and interconnectedness with the rest of the financial system,

susceptibility to runs, the importance in short-term funding and contagion effects, links with sponsors, importance for investors as a cash management tool

The policy options considered in the paper include:

• A mandatory move to variable NAV funds and other structural

alternatives such as NAV buffers, insurance or conversion to special purpose banks;

• Capital and liquidity requirements for constant NAV MMF;

• Reserving constant NAV MMF either for retail or institutional investors;

• General principle of mark-to-market

Fund News – April 2012

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valuation and restricted use of

amortised cost;

• Liquidity management including

portfolio liquidity requirements,

know your shareholder to better

anticipate cash outflows,

redemption restrictions, liquidity

fees, minimum balance

requirements, valuation at bid,

redemption-in-kind, gates and

private emergency liquidity facility;

• Reduce the reliance on ratings by

removing reference to ratings from

regulation, and encourage greater

differentiation in ratings in the MMF

population;

Comments on the consultation report

are due by 28 May 2012 IOSCO is

expected to elaborate its policy

recommendations by July 2012

The 74 page report is available via the

following web link:

www.iosco.org

IOSCO consults on Principles for Liquidity Risk Management for Collective investment Schemes

On 26 April 2012 the IOSCO issued a consultation on principles of liquidity risk management for Collective Investment Schemes (CIS) The aim of this consultation is to outline principles against which both the industry and regulators can assess the quality of regulation and industry practices concerning liquidity risk management

The report differentiates between principles applicable to the pre-launch and the post-launch phases of a CIS

In the pre-launch phase a CIS should:

• draw up an effective liquidity risk management process;

• set appropriate liquidity limits which are proportionate to the redemption obligations and liabilities of the CIS;

determine a suitable dealing frequency for units in the CIS;

• include the ability to use specific tools or exceptional measures which could affect redemption rights in the CIS’s constitutional documents such

as exit charges, limited redemption restrictions, gates, dilution levies, in specie transfers, lock-up periods, side letters which limit redemption rights or notice periods;

• consider liquidity aspects related to its proposed distribution channels;

• have access to, or can effectively estimate, relevant information for

liquidity management;

• ensure that liquidity risk and its liquidity risk management process are effectively disclosed to prospective investors

In the post-launch day-to-day liquidity risk management the CIS should

• effectively perform and maintain its liquidity risk management process, which should be supported by strong and effective governance;

• regularly assess the liquidity of the assets held in the portfolio;

• integrate liquidity management in investment decisions:

• identify an emerging liquidity shortage before it occurs;

• incorporate relevant data and factors into its liquidity risk management process in order to create a robust and holistic view of the possible risks;

• conduct assessments of liquidity in different scenarios, including stressed situations

• ensure appropriate records are kept, and relevant disclosures made, relating to the performance of its liquidity risk management process

Comments on the consultation report are due by 2 August 2012

Fund News – April 2012

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Tax

UK

2012 Budget

On 21 March, the Chancellor announced

the 2012 Budget The announced

measures included a reduction in the

main rate of UK corporation tax, a

reduction in the highest rate of income

tax and a carve out of the UK controlled

foreign company rules for certain

offshore funds

The Chancellor announced a reduction in

the main rate of corporation tax to 24%

from 1 April 2012 rather than the

expected 25% The originally proposed

1 percent reductions until 2014 will then

continue so that the rate is 23% from 1

April 2013 and 22% from 1 April 2014

For individuals, the top rate of income

tax will fall from 50% to 45% from April

2013

On 29 March the Government published

the Finance Bill 2012 which contains

amended controlled foreign companies

(CFC) legislation There are carve outs

for companies providing seed capital to

certain offshore funds Under the

proposed legislation, an offshore fund

will not be a CFC provided that the

following conditions are met:

• The genuine diversity of ownership

condition (i.e that the fund is not a

private fund)

• Taxable profits that would otherwise

be attributable to the UK company

are less than £500,000

• The UK company in question is the investment manager (or associated

to the investment manager) and receives management fees from the offshore fund

HMRC issues draft guidance on the new UK ITC tax regime

HM Revenue & Customs (“HMRC”) published draft guidance on 20 March

2012 in connection with the new UK Investment Trust Company (“ITC”) tax regime that has effect for accounting periods beginning on or after 1 January

2012 The guidance provides additional detail regarding how the new regime will operate in practice The rules of the new regime are contained in both the revised section 1158 of the Corporation Tax Act 2010 and The Investment Trust (Approved Company) (Tax) Regulations

2011 (“the Regulations”) Comments

on the draft guidance should be provided

to HMRC by 1 June

The main points of interest arising from the draft guidance are:

• There will be a pro-forma application form for those companies that wish

to make an application to enter the new regime

• As anticipated, HMRC has provided explicit confirmation that an investment trust listed under Chapter 15 of the UK Listing Rules will be treated as compliant with condition A outlined in section 1158

of CTA 2010 (the “spread of risk”

test) Only in exceptional cases will

a company so listed be treated

otherwise (the draft guidance gives the example of a regulatory enquiry) For investment trusts that are not Chapter 15 listed, the draft guidance states that HMRC will apply a similar approach to that outlined in the listing rules to ensure there is a level playing field across the sector Non-Chapter 15 listed companies should consider whether their published investment policies would meet the requirements of the Chapter 15 rules when making an application to enter the regime

• It is confirmed that, for the purposes

of the income distribution requirement, income will generally

be taken to be the gross statutory income computed in accordance with tax principles and before the deduction of income tax, corporation tax and management expenses subject to a few specific rules detailed in regulation 20 of the Regulations

• The draft guidance provides a helpful example of the additional distribution that an investment trust may be required to pay in the situation where it has accounted for

an amount of reported income from

an offshore fund in capital but has insufficient current year revenue profits to pay the additional dividend that might be required to be paid under regulation 21 of the Regulations The guidance states that the investment trust would be required to pay a dividend from reserves HMRC should provide clarification of whether it would be permissible to pay that dividend

Fund News – April 2012

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from either a brought forward

revenue reserve, a brought forward

capital reserve or a current year

realised capital profit (or a

combination thereof)

• The new regime does not prohibit

the distribution of gains realised on

the disposal of investments as

dividend

• The Regulations are clear that any

breach for which there was no

reasonable excuse; or which was

not inadvertent; or which was not

corrected as soon as reasonably

practicable, would be a serious

breach The draft guidance states

that such a breach would normally

require some deliberate action (or

deliberate non-action) or neglect and

confirms that a failure to notify a

breach to HMRC would be viewed

as a serious breach, even if action

had been taken to remedy the

breach in question It is a

requirement of the Regulations that

all breaches must be notified in

writing to HMRC as soon as

reasonably practicable

• The draft guidance confirms that

there is no time limit for HMRC to

issue a notice to an investment trust

that it has committed a serious

breach of the requirements of the

new regime This could result in a

loss of investment trust approval

from the start of the accounting

period in which the breach occurred

as well as all subsequent accounting

periods Therefore it is crucial that

investment trusts establish

appropriate systems and controls to:

prevent any occurrences of a breach

of the requirements of the new regime (especially serious breaches); and identify any breaches

as soon as they occur so that they can be remedied without delay and notified to HMRC

Link to the draft guidance (33 pages):

http://www.hmrc.gov.uk/drafts/inv-trust-guidance.pdf

Venture Capital Trusts – Finance Bill

2012 changes

The Finance Bill 2012 makes a number

of changes to the Venture Capital Trusts (“VCTs”) tax regime in the UK, some of which were trailed during 2011

However, certain additional significant changes were announced in the Finance Bill itself, including a change which creates a new risk that VCTs could potentially lose their tax-favoured status

The loss of such status could have serious consequences for investors

The new measures

VCTs will be subject to a new condition prohibiting them from making an investment in a company which breaches the annual investment limit applicable to funds raised through venture capital schemes (including other VCTs; the Enterprise Investment Scheme (“EIS”); and other similar schemes)

If the limit is exceeded, the VCT would lose its overall status as a VCT (regardless of the size of its holding in the investee company in question, or the extent to which the limit was breached), this is at variance to the current position where only the qualifying status of the

investee company in question would be jeopardised

This new condition will apply in respect

of investments made by the VCT on or after the date of Royal Assent of the Finance Bill However, funding obtained

by an investee company from other venture capital schemes in the previous

12 months will still be taken into account

in determining whether an investment made after that date breaches the investment limits condition (even if the previous 12 months includes a period of time before the date of Royal Assent) It significantly increases the risk of VCTs investing in companies, and highlights the need for due diligence prior to any investment The consequences of a breach (potentially through no fault of the investing VCT itself) could result in the VCT losing its tax-favoured status, as well as investors in the VCT having their initial income tax reliefs clawed back by HMRC

In addition, there is no concept of

‘protected money’ in the context of the new condition Under the previous rules, VCT money raised prior to 6 April

2007 could be invested in a company without risk of breaching the £2million investment limit

The annual investment limit is being raised from £2million to £5million, subject to obtaining State Aid approval

Previously announced changes

The gross assets limit for investee companies is raised to £15million from

£7million (immediately before investment), and the permitted number

of employees is raised to 250 from 50 These increases are subject to State Aid approval

The maximum qualifying investment restriction (£1million annually) has been

Fund News – April 2012

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removed, unless there are certain joint

venture or partnership arrangements in

place These changes broaden the

scope for potential investee companies

to raise finance from VCTs

There is a new excluded activity for

investee companies, which will no

longer be able to raise VCT funds if they

receive feed-in tariffs in connection with

the subsidised generation or export of

electricity (although there are some

exceptions to this) Shares issued by an

investee company before 23 March

2011 will not be affected by this change;

nor will shares issued after that date

where the generation or export of

electricity began before 6 April 2012

Anti-avoidance measures

Investee companies will no longer be

able to use VCT funds to acquire shares

There is also a new ‘no disqualifying

arrangements’ requirement, which will

apply if either:

the “whole or the majority” of the

funding raised is paid to, or for the

benefit of, a party to the arrangements

(or a person connected with such a

party); or

in the absence of the arrangements it

would have been reasonable to expect

that the qualifying business activity

would have been carried on as part of

another business by a person party to

the arrangements (or a person

connected with such a party)

Arrangements can be disqualified even if

the investee company is not party to the

arrangements

Schedule 8 of the Finance Bill, which

contains the VCT provisions, is available

via this web link (scroll to the bottom of

the page for Schedule 8 and then use

the continue button for subsequent paragraphs):

http://www.publications.parliament.uk/p a/bills/cbill/2010-2012/0325/12325.262-268.html

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The 2012 version of our International Funds and Fund Management Survey

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following web link: Hedge Funds

Fund News – April 2012

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