Issue 88 – Regulatory and Tax Developments in January 2012

FUND NEWS January 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Regulatory Content Issue 88 – Regulatory and Tax Developments in January 2012 European Union ESMA consults on Guidelines on ETFs and other UCITS issues Page 1 ESMA consults on draft technical standards for the EU Short-Selling regulatory regime Page 2 ESMA work programme 2012 Page 2 Ireland Amendments to UCITS Notices, NU Notices and Guidance Notes Page 3 Voluntary Corporate Governance Code Page 3 Spain Fund law amended Page 3 International IOSCO report on principles on suspension of fund redemptions Page 4 Regulatory News European Union ESMA Consultation Paper on Guidelines on ETFs and other UCITS issues On 30 January 2012 the European Securities and Markets Authority (ESMA) published a Consultation Paper (CP) setting out ESMA’s proposal for guidelines on ETFs and other UCITS issues. This consultation follows on from a Discussion Paper issued in July 2011 on possible policy orientations on guidelines for exchanged traded UCITS and Structured UCITS. The 77 page consultation paper sets out detailed proposals in the following areas:  UCITS Exchange Traded Funds (ETFs); definition of a UCITS ETF, the use of an identifier, specific disclosure requirements for actively managed ETFs and rules for protecting investors on secondary Tax Content European Union Public Hearing on the Financial Transaction Tax (FTT) Page 5  Luxembourg Aberdeen Case E-Alerts Page 5  UK HMT consults on introducing tax transparent authorised schemes for asset pooling Page 6 Spain Non-residents income tax changes Page 7  Accounting Content UK 1 ASB issues revised proposals for future of financial reporting standards in the UK Page 8 Fund News – January 2012 markets. Two options are proposed regarding investors on secondary markets. 1) The UCITS Management Company will have to ensure that the market maker continues to offer redemption facilities to investors, and to replace the market maker if it is no longer willing or able to act in this capacity. 2) The UCITS will have to provide for investors to be able to redeem their shares from the UCITS directly at any time.  Index tracking UCITS; guidelines on the disclosure required in the Prospectus and financial reports which will include the size of the tracking error and an explanation of any divergence from the target.  Index tracking leveraged UCITS; guidelines on disclosure required in the Prospectus on the leverage policy and associated costs and risks. The Prospectus and Key Investor Information Document (KIID) would need to disclose the impact of any reverse leverage.  Guidelines on the employment of efficient portfolio management (EPM) techniques and on related disclosure requirements. As a general principle fees from EPM techniques should be returned to the UCITS. Any fee sharing arrangements should be disclosed in the Prospectus together with the maximum % fees payable to the third party. A UCITS should have a clear haircut policy for each class of collateral.  Rules and related disclosures for the full disclosure of the calculation methodology.  Transitional provisions; any new investment by a UCITS or any new collateral received after the date of coming into effect of the guidelines must immediately respect the guidelines. Any updates to the Prospectus or the KIID will have to be done within 12 months. The consultation contains 41 questions for whic ESMA is seeking feedback from market participants, a cost-benefit analysis and a feedback statement on the July 2011 Discussion Paper. The consultation is open until 30 March 2012 and ESMA indicates that they expect the guidelines to be adopted in Q2 2012. The CP is available via the following web link: http://www.esma.europa.eu/content/ES MA%E2%80%99s-guidelines-ETFs-and- other-UCITS-issues ESMA consultations on draft technical standards for the EU Short-Selling regulatory regime On 24 January 2012 ESMA published for consultation the draft technical standards to accompany the Regulation on short selling and certain aspects of credit default swaps that will apply from 1 November 2012. The consultation covers the following main topics:  agreements to borrow that ensure that the share or debt will be available for settlement  details of information to be reported to authorities and public on net short positions, and means of disclosure to public  exemption where principal trading venue is located outside the EU The consultation is open for comments until 13 February 2012. Following the close of the consultation, ESMA expects to publish a final report and submission of the draft technical standards to the European Commission by 31 March 2012 for endorsement. The consultation paper is available at the following web link: http://www.esma.europa.eu/page/Short-selling ESMA work programme 2012 ESMA issued a detailed work programme for 2012 and has indicated the following areas as key priorities for the year: UCITS that enter into total return swaps;  Guidelines on gaining exposure to strategy indices by UCITS, including  European Markets and Infrastructure Regulation  Financial consumer protection  Harmonisation of supervisory practices 2 Fund News – January 2012  Credit Rating Agencies Regulation and Supervision  MiFID and Market Abuse Directive review  Alternative Investment Fund reference to funds with limited liquidity.  Guidance Note 2/99 (Money Market Funds) Spain Collective Investment Fund Law amended Manager Directive  Short Selling Regulation The 28 page work programme is available via the following web link: www.esma.europa.eu/system/files/esm-2011-330.pdf Ireland Amendments to UCITS Notices, NU Notices and related Guidance Notes Just before Christmas, the Central Bank made amendments to its rule book for UCITS and non-UCITS. Many of these amendments are minor. However, the following policy changes have been made:- The ECB issued a new definition of a money market fund for statistical purposes and the note has been amended to reflect this. The Statistical Division in the Central Bank required this change be put in place before the end of the year for end December 2011 balance sheet reporting. The revised Notices and Guidance Notes take effect from 23 December. Note some prospectuses will need to be amended before a fund can avail of these changes. Voluntary Corporate Governance Code The Corporate Governance Code for Collective Investment Schemes and On 5 October 2011 the Spanish Official Gazette published Law 31/2011, amending Law 35/2003 on Collective Investment Schemes. The Law 31/2011 has the following objectives: (a) to start the transposition into Spanish Law of the UCITS IV Directive 2009/65/EC and Directive 2010/78/EU amending the former Directive. This transposition will be completed when the Regulations of Law 31/2011 are approved; (b) to amend the current Law to reinforce the competitiveness of the Spanish industry; and (c) to strengthen the supervision of Collective Investment Schemes (CIV) and management companies by the Spanish regulator (the CNMV). Extending the possibility to use  Notice UCITS 11 & Notice NU 13 (Borrowing Powers) The off-setting deposit to a back-to-back loan is not required to be held in the base currency of the fund.  Guidance Note 2/07 (UCITS Financial Indices) The note has been amended to clarify the position where a financial index no longer meets with the 5/10/40 rule but remains an eligible index subject to the 20/35 rule.  Guidance Note 2/97 (Closed ended funds) The note has been amended to clarify the Central Bank’s policy on changes to duration, objectives and Management Companies (the Code) which was developed by the Irish Funds Industry Association (IFIA) became effective from 1 January. The Code has a 12 month transitional period. Although the Code is voluntary, its adoption is highly recommended by the IFIA. global accounts for the domestic commercialization of funds Of the most relevant changes introduced by the 31/2011 Law is the possibility of using global accounts for the domestic commercialization of funds domiciled in Spain. To understand the far-reaching effects of this new rule, it should be borne in mind that foreign CIVs normally operate through global/omnibus accounts. This means that the management entities may not know the identity of the investors in the CIV, as they are allowed to only record the identification of the distributors, which inherit the obligation of identifying investors or, where appropriate, the successive sub- policy or fees and to include distributors. This modus operandi has 3 Fund News – January 2012 been routine for some time in electronic securities markets, but could not be implemented for CIVs in Spain, where CIV managers were obliged to record the full identify of the unitholders or participants in the CIVs they managed, and commercializing and distributing entities were obliged to supply this information to the managers, with the resulting operational complexity and more than a few commercial qualms. This strict operational procedure was first made more flexible in the case of commercializing Spanish CIVs abroad through global/omnibus accounts, that is, joint positions of a number of All of this was aimed at obtaining adequate tax data about the final non-resident investors and avoiding the off-shoring of residents’ investments using these formulas. This tax framework for the cross-border commercialization of Spanish CIVs continues to be in force after enactment of Law 31/2011, and continues to place a fiscal burden on the distribution of CIVs outside of Spain. Its rigidity can be criticized, it undoubtedly places Spanish managers in a worse situation than operators in other EU countries, and it fails to properly understand how accordance with the FIFO rule for PIT taxpayers) and apply the withholding on account, paying the marketing company the amount redeemed net of withholding and giving it the fiscal information to be provided to the participant.  The contracts to be subscribed between the manager and the marketing companies should establish the latter’s obligation to provide the former with at least the tax identification number of each participant, otherwise committing a tax infraction in case of non- compliance. investors in the foreign commercializing or intermediary entities. This measure was authorized by the Single Additional Provision of Non-resident Income Tax Regulations (Royal Decree 1776/2004 of 30 July). However, at the same time it imposed severe tax reporting obligations on the foreign marketing companies who were held directly responsible by the Spanish Tax Administration (identity and residence of non-resident unitholders or participants), the obligation to provide the management entities with tax residence certificates attesting to the non-resident status of the investors receiving income from the CIV, the impossibility of including Spanish resident investors in the global accounts, the prohibition of registering positions of a sub-distributor’s other global sub-account in a global account, an outline of the responsibilities in case of non-compliance by the management entity, and penalization of the cancellation of the commercialization contract when the marketing company does not comply with its obligations. international financial markets work and their need for agility and the least number of administrative hurdles possible as well as their position against the regulations imposed on them. For this reason, we can assume that the model should be adapted in the near future. The first final Provision of Law 31/2011 describes the mechanism for commercializing in Spain investment funds authorized in Spain (please note that this does not affect other types of CIVs, such as SICAVs) when it mentions the existence of the new domestic global accounts, as follows:  The marketing company should notify the manager of each subscription, identifying the participant with its tax identification number.  The marketing company should notify the manager of all redemptions, identifying the participant with its tax identification number, so that the manager can calculate the income obtained (in The “Centralizing Agent” However, the main tax amendment introduced by Law 31/2001 is the need to appoint an entity in charge of a centralized registry of unit-holders/shareholders in connection with CIVs to be distributed in Spain through more than one distributor/marketer. This entity in charge of the centralized registry is named in the Spanish market/industry as “the centralizing agent”. According to the new rule established by Law 31/2011, when a CIV is distributed/marketed in Spain through different distributors (i.e. more than one), said distributor/marketer shall report to the “centralizing agent”, prior to the execution, any subscription, acquisition, redemption or transfer transaction, in order for the this “centralizing agent” to be in a position to determine the result of each transaction and notify the result to the distributor. 4 Fund News – January 2012 The “centralizing agent” shall be in International Tax charge of the following;  To apply the relevant withholding tax or make the relevant payment on account derived from the transactions referred above; IOSCO publishes report on principles on suspension of fund redemptions On 29 January 2012 the IOSCO European Union Public Hearing on the Financial Transaction Tax (FTT)  To comply with all the relevant tax reporting obligations before the Spanish tax authorities. The main purpose of creating this “centralizing agent” role is to place the withholding and tax reporting obligations in one particular entity resident in Spain which could properly apply the so-called FIFO (First In – First Out) method to determine the withholding tax due on capital gains derived from the transfer/redemption of units/shares in published its final report “Principles on Suspensions of Redemptions in Collective Investment Schemes” covering funds offered to both retail and institutional investors. The main principles are as follows:  Management of liquidity risk. A requirement to put in place a liquidity risk management policy and process and to assess the liquidity of each investment to ensure consistency with the overall liquidity profile of the fund. On 6 February 2012 the European Parliament ECON Committee is holding a public hearing on the Financial Transaction Tax (FTT) in the context of the Commission`s recent proposal. The hearing will address the following topics:  design of the FTT, tax base, tax rate, tax payers, definitions  tax collection and practical implementation  economic and financial impact. CIVs. Finally, it should be noted that Law 31/2011 entered into force on 6 October 2011.  Ex-ante disclosure to investors. A requirement to clearly disclose the ability to suspend redemptions prior to the investors investing in the fund.  Criteria/reasons for the suspension. Only if permitted by law under exceptional circumstances or if required by law, regulation or regulators.  Decision to suspend should be properly documented, communicated to competent authorities and communicated to unit-holders.  During the period of suspension no new subscriptions should be accepted. The fund should also take all possible steps to resume normal operations as soon as possible having regard to the best interests of investors and should keep both the authorities and the Luxembourg Aberdeen Case E-Alerts The latest Aberdeen E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) describes the recent increases in withholding tax rates on income in France and Spain. The e-alert is available via the following web link: http://www.kpmg.com/LU/en/IssuesAnd Insights/Articlespublications/Pages/Aber deene-alerts-Issue2012-01.aspx UK HMT consults on the UK introducing tax transparent authorised schemes for asset pooling investors informed. The full report is available on the IOSCO website at www.iosco.org On 9 January HM Treasury (“HMT”) issued its planned consultation regarding the introduction of a UK tax transparent 5 ... - --nqh--