fund news - issue 104 - june 2013

fund news

financial services / Regulatory and Tax / Issue 104

developments in June 2013 Investment Fund Regulatoryand Tax developments in selected jurisdictions

2 / Fund News / Issue 104 / Developments in June 2013

Regulatory Content

european union 3 ESMA advice on short selling 3 ESMA Q&A on EMIR 4 ESMA/EBA final principles on benchmarks 5 ESMA remuneration guidelines as part of

enhanced MiFID 7 ESMA guidelines on scope of CRA Regulation 8 EC proposed regulation on European Long-Term

Investment Funds

france 9 AMF consultation on modification of

General Regulation Book III

Germany 10 KAGB voted 10 BaFin guidelines on KAGB

Luxembourg 11 CSSF FAQ on Master-Feeders 11 CSSF guidance on AIFMD

Malta 11 Investment Services Rules for Alternative

Investment Funds 11 Retail Non-UCITS Regime

switzerland 12 Revised CISA provision in force since 1 June 2013 12 Outlook 1 January 2014: Duty to prepare records

us 13 SEC issues proposal on Money Market Fund

reform

International 14 IOSCO issues Principles for CIS Valuation

Contents

Tax Content

european union 15 EC issues proposal for European “FATCA”

Germany 15 AIFM-StAnpG delayed

netherlands 16 Income tax treaty with Norway

uK 17 VAT – modified treatment for certain portfolio

management fees following ECJ ruling 17 UK Reporting Fund regime: technical amendments

Fund News / Issue 104 / Developments in June 2013 / 3

Regulatory news

european union

• In terms of restrictions on uncovered short sales in shares and sovereign debt, ESMA considers that internal locate arrangements within the same legal entity should be allowed. ESMA also recommends that the term “liquid shares” is redefined.

• In relation to the ban on uncovered sovereign CDS transactions, the following concepts should be redefined:

– Use of sovereign CDS indices for hedging purposes;

– Cross-border hedging under certain liquidity and correlation circumstances;

– Group hedging by a particular and dedicated entity.

• The exemption for market making activities should be reviewed to define more precisely the scope of the exemption.

• Temporary bans should be reconsidered to simplify the regime and ensure more consistency.

Considering the short period of time since implementation of the Regulation (November 2012) ESMA recommends to re-assess the regime at a future date, when more data and experience have been accumulated.

The full text of the report is available via the following web link.

http://www.esma.europa.eu/news/Press-release%E2%80%94ESMA-publishes-review-impact-short-selling-regulation?t=326&o=home

esMA issues Q&A on eMIR implementation

On 4 June 2013 ESMA published an updated “Questions & Answers – Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR)” (ESMA/2013/685).

A first version had already been published on 20 March 2013, aiming at a consistent application of EMIR throughout Member States and promoting a common supervisory approach and practice. It responds to questions raised by market participants, competent authorities and the general public and covers the following four areas:

1. OTC Derivatives

2. Central Counterparties (CCPs)

3. Trade repositories (TRs)

4. Reporting to TRs – Transaction scenarios

The Q&A document will support competent authorities in ensuring that actions taken during their supervisory activities are converging along the answers adopted by ESMA. It should further provide clarity on EMIR requirements to market participants and also investors.

esMA publishes technical advice on short selling

On 3 June 2013 the European Securities and Markets Authority (ESMA) published technical advice evaluating the impact of the Regulation on short selling and certain aspects of credit default swaps (ESMA/2013/614). The report, which was prepared on request from the

Commission, aims at evaluating the appropriateness, impact and operation of the Regulation.

The main findings are as follows:

• Effects on liquidity of EU equities are mixed – with a slight decline in volatility, a decrease in bid-ask spreads and no significant impact on traded volumes;

• Settlement discipline has improved;

• Liquidity in European sovereign CDS indices has somewhat reduced.

Based on its findings, ESMA made key recommendations including:

• In relation to transparency and reporting, the method for calculating net short positions in sovereign debt should be revisited and thresholds for notifications reviewed. ESMA considers the calculation method for shares appropriate and recommends some technical improvements.


It supplements the Frequently Asked Questions (FAQ) on EMIR the European Commission had issued and updated on 8 February 2013 to clarify the timing and scope of EMIR as well as dealing with certain issues regarding third country CCPs and trade repositories.

The Q&A is available via the following web link.

http://www.esma.europa.eu/news/ESMA-publishes-updated-QA-EMIR-Implementation?t=326&o=home

esMA & eBA issue final principles on benchmarks

On 6 June 2013 ESMA & the European Banking Authority (EBA) published their coordinated final report “ESMA-EBA Principles for Benchmark-Setting Processes in the EU” (ESMA/2013/658).

The principles provide benchmark users, administrators, calculation agents, publishers and data submitters with a common EU framework for benchmarks. The framework covers all stages of the benchmark setting process including data submission, administration, calculation, publication, the use of benchmarks and the continuity of benchmarks.

The final principles aim to clarify and strengthen the procedures, to ensure transparency and reliability to the public and to create a level-playing field for all market participants, including supervisory authorities and their prudential practice.

Considering current initiatives on benchmarks discussed on an International and European level, the principles shall further support the transition to any future potential European framework for benchmarks, and have been set up aligning with the principles already developed by the International Organisation of Securities Commissions (IOSCO).

The general framework for benchmark setting includes at least the following principles:

• Methodology: the methodologies for the calculation of a benchmark, including information on the way in which contributions are determined and corroborated, should be documented and be subject to regular scrutiny and controls to verify their reliability;

• Governance structure: the process of setting a benchmark needs to be governed by clear and independent procedures, with detailed information on the process made available publicly, in order to avoid and manage conflicts of interest and limit its susceptibility to manipulation, discretionary decision making or price distortion;

• Supervision and oversight: confidence in a benchmark is enhanced through regulation and oversight and an appropriate sanctioning regime that allows sanctions for improper conduct, as will be the case in accordance with future EU legislation on market abuse; and

• Transparency: a benchmark should be transparent and accessible to the public, with fair and open access to the rules governing its establishment, operation, calculation, and publication. The fact that a benchmark is (or may be) published first to certain stakeholders before others should be disclosed.

It is followed by more specific principles for different market participants that all contain some “general principles”, followed by “supporting principles” relating – where applicable – to methodology, record keeping, due diligence, governance, oversight and control and transparency.

The document also contains the feedback received in response to the consultation paper ESMA and EBA issued on 11 January 2013 (ESMA/2013/12) as well as the opinion of the Securities and Markets Stakeholder Group (SMSG) on the consultation paper.

The principles are to be reviewed by ESMA and EBA after an application period of 18 months.


The principles are not to replace any existing national or EU regulation in place on this topic. They are further applicable independently from the ESMA Guidelines on ETF and other UCITS issues.

The full text is available via the following web link.

http://www.eba.europa.eu/-/esma-and-the-eba-publish-final-principles-on-benchmarks

esMA publishes final remuneration guidelines as part of enhanced MifId

On 11 June 2013 the ESMA published their final remuneration guidelines as part of the enhanced Markets in Financial Instruments Directive (“MiFID”). These provisions, designed to strengthen investor protection, apply to investment firms including credit institutions and fund managers that provide MiFID investment services. The key obligation on firms is to ensure that throughout the design and governance process their remuneration policies and practices are aligned with the effective management of conflicts of interests and business conduct risk and managed with their clients best interests in mind. The rules could potentially come into force in October 2013, subject to ESMA’s “comply or explain” mechanism for national regulators not being held-up.

These conduct based rules apply to staff who engage directly (e.g. sales, front of house) or indirectly (e.g. managers of the sales force, financial analysts whose work is provided to clients) with clients in the provision of investment services.

Which firms do the rules apply to?

These rules apply to investment firms and credit institutions that provide MiFID investment services (e.g. portfolio management, investment advice, taking and placing orders in relation to one or more financial instruments) or MiFID ancillary services (e.g. safekeeping and administration of financial instruments in a client account).

The rules will also apply to UCITS management companies and Alternative Investment Fund Managers (“AIFM’s”) that provide individual portfolio management, investment advice, undertake the safe-keeping and administration of shares or units in collective investment schemes and take and place orders for financial instruments on behalf of clients.

Tied agents and entities which have had the provision of investment services outsourced to them are also in scope. Firms will need to ensure that these outsourced entities and tied agents have remuneration policies and practices that are also MiFID compliant.

In relation to MiFID services and activities provided through a branch of an investment firm based in another EU Member State, the supervisory responsibility will be split between the home Member State (where the MiFID entity is authorized) and the Member State the branch is established in.

The MiFID II Directive, which is expected to be implemented in 2015/16, contains proposals which would require any non-EU firm wanting to provide investment services and activities to EU retail clients, to establish an EU branch authorised as a MiFID entity subject to the provisions, including remuneration.

Which employees do the rules apply to?

The rules apply to the remuneration of individuals who have a material impact on the service provided or corporate behavior of the firm (“Relevant Persons”).

The staff categories, identified in addition to sales, include:

• client facing, front of house;• line managers of the sales force;• financial analysts;• complaints handling;• claims processing;• client retention;• product design and development;

and• tied agents.


Regulatory news

– Having different remuneration policies and practices for individual product sales, where the Relevant Person’s remuneration is dependent on the type of product they sell.

– Having a reduction made to a bonus already earned due to a secondary sales target not being met, e.g. sales for optional “add-on” product features.

– Bonus schemes with in-built accelerators increasing the proportion of bonus earned as different sales thresholds are met.

Next steps for firms

The MiFID remuneration rules are due to come into force 60 days after the EU regulators have confirmed to ESMA whether they intend to comply with these guidelines. Given regulators have two months following the translation of the guidelines into all the official EU languages to respond, the requirements might come into force as early as October 2013.

Firms should as part of their compliance strategy, start reviewing their population to assess who will be a Relevant Person under these rules, cross referencing with their current Identified Staff list under CRD; or AIFMD; or provisionally under UCITS V. Once an initial list of roles has been identified, firms can review the relevant remuneration structures and processes against the guidelines to identify any compliance gaps.

ESMA is clear that the MiFID guidelines are intended to be supplementary to those remuneration guidelines already in place, e.g. CRD IV.

What are the new rules?

The guidelines provide a broad, principles based outline and are not prescriptive in nature. They do however prohibit remuneration directly linked to sales (e.g. “all or nothing” targets, large bonuses linked to a specific product’s sales or even having a sales quota threshold for receiving a bonus). The aim is to lessen the risk of mis-selling via the use of inappropriate sales target and performance based incentives for sales staff that are not deemed to take into account the clients best interests.

The guidelines also state that:

• The design and implementation of remuneration policies and practices should be approved by senior management or the supervisory function with input from the control function.

• The control functions must be independent with those individuals’ remuneration not based on the performance of the business units it oversees.

• The role performed by the Relevant Person, the type of products offered, the methods of distribution (e.g. face to face, advised or non-advised) should be taken into account when designing remuneration policies and practices.

• The firm has discretion as to the “appropriate balance” between fixed and variable remuneration but the interests of the client must be taken into account (there is no variable pay cap as seen under CRD IV proposals).

• Performance criteria must be developed which encourages the Relevant Person to act in the best interests of the client.

• Appropriate governance controls should be put in place to prevent actions detrimental to the client from occurring as a result of the firms’ remuneration policies and practices, e.g. have regular reviews of client documentation, monitor telephone sales and sampling client advice.

• As good practice, the payment of variable remuneration should be aligned with the investment term or timeframe of the product to avoid excessive risk taking by the Relevant Person.

• Variable remuneration cannot be assessed purely on quantitative criteria (e.g. sales volumes, value of instruments sold and new client targets). Qualitative criteria such as client satisfaction through low number of complaints over a prolonged time period should also be considered. Examples of poor practice given in this respect include:

– Additional remuneration for encouraging a client to apply for new fund products the firm has a particular interest in “pushing” (e.g. launch of new product, “product of the month” etc).


Regulatory news

For those firms looking to vary their MiFID permission by applying for an AIFM license during the transitional AIFMD period (up to 21 July 2014), which do not intend to perform MiFID services following AIFM authorisation, will still need to be compliant with the MiFID remuneration rules once they take effect during this transitional period.

Given the number of EU remuneration guidelines taking effect in the immediate future it is vital that firms keep on top of each set of domestic regulations applicable in each jurisdiction in which their business operates.

ESMA’s final guidelines (28 pages) are available via this web link.

http://www.esma.europa.eu/content/Guidelines-remuneration-policies-MiFID

esMA issues guidelines on scope of CRA Regulation

On 17 June 2013 ESMA published its final report “Guidelines and Recommendations on the Scope of the CRA Regulation” (ESMA/2013/720).

The guidelines and recommendations aim at clarifying the scope of the Regulation for registered CRAs, other market participants and supervisory authorities, and cover the following areas:

• obligation for CRAs to register with ESMA;

• credit rating activities and exemptions from registration;

• establishment of branches outside the EU by registered CRAs;

• specific disclosure recommendations for best practice; and

• enforcement of the scope of the CRA Regulation.

The document also contains the feedback received in response to the consultation paper ESMA issued on 20 December 2012 (ESMA/2012/841) as well as the opinion of the Securities and Markets Stakeholder Group (SMSG).

The guidelines and recommendations will now have to be translated into the official EU languages and published on the ESMA website and will become applicable 2 months after publication date.

The full text is available via the following web link.

http://www.esma.europa.eu/news/Press-release-%E2%80%94-ESMA-clarifies-boundary-CRA-Regulation?t=326&o=home


4. Target Investors & redemption policy

Pension funds and insurance companies as well as retail investors are targeted. ELTIFs will be permitted to distribute income to investors, but will not redeem units or shares before the end of the product life cycle. Trading of the ELTIF on a secondary market would be permitted.

Transparency requirements

The ELTIF will be required to produce a prospectus and if marketed to retail investors will also need to produce a key information document (KID).

Next steps

The proposal was presented to the European Council in late June 2013 and will start going through the legislative process. The Commission estimates that the Regulation would enter into force in 2015. The full text of the proposal Regulation can be found via the following web link.

http://ec.europa.eu/internal_market/investment/long-term/index_en.htm

2. Eligible Investments

An ELTIF has a period of 5 years to build up its investment portfolio which can consist of debt/equity instruments issued by qualifying portfolio undertakings that are not traded on regulated markets; loans granted to qualifying portfolio undertakings; investments in other ELTIFs, EuVECAs or EuSEFs or direct holdings of real assets. A qualifying portfolio undertaking is defined as a portfolio undertaking other than a fund or a financial undertaking, and may be established in a Member State or in third countries that comply with specific conditions. No short selling of assets is permitted, nor is any exposure to commodities. Derivatives are limited for hedging currency or interest rate risks and no securities lending/repo activities are allowed.

3. Investment Limits

The portfolio diversification rules require that at least 70% of capital is invested in eligible assets with a maximum of 10% in any single qualifying portfolio undertaking, ELTIF, EuVECA, EuSEF or individual real asset. Investment in target funds is capped at 20% and an ELTIF may only acquire 25% of the shares of any fund. Cash borrowings are permitted up to 30% of capital.

european Commission proposal on european Long-term Investment funds

On 26 June 2013 the European Commission published a proposal for a new collective investment vehicle, the EU Long Term Investment Funds (ELTIF), which will invest in long-term illiquid assets such as unlisted companies, real estate and infrastructure projects. The ELTIF will be available to professional and retail investors and has specific rules on eligible assets and portfolio diversification, manager licensing requirements and rules on redemptions. The majority of Member States have no long-term fund framework and the ELTIF proposal aims to tackle this gap as well as provide more capital for long-term investment to the EU economy.

The main aspects of the proposed Regulation include:

1. Authorisation

EU AIFs will have to be authorized in accordance with the Regulation to use the ELTIF designation. An ELTIF must be managed by an authorised AIFM that must comply at all times with the AIFMD. Only EU AIFs are eligible for authorisation as an ELTIF. In the case of marketing to retail investors an ELTIF must not be structured as a partnership and retail investors must be able to cancel their subscription without penalty during a period of 2 weeks.

Regulatory news


AMf launches public consultation on modification of Book III of the General Regulation

After having opened its AIFM pre-authorisation desk and published a Q&A in April 2013, the Autorité des Marchés Financiers (AMF) makes a step further to transpose the AIFMD. On 12 June 2013 the AMF launched a public consultation on modifications to Book III of its General Regulation on service providers.

The main modifications refer to the following:

• the creation of Title 1a on AIF management companies compliant with the AIFM Directive;

• the procedure for fund manager resignation;

• the inclusion of the specific requirements concerning non-EU AIFMs;

• the delegation of AIFM functions;

• remuneration policies.

The consultation will end on 7 July 2013 and the full text (in French) is available via the following web link.

http://www.amf-france.org/documents/general/10872_1.pdf

Regulatory news

france

Regulatory news

KAGB voted

On 16 May 2013 the German Federal Parliament (“Bundestag”) voted the law transposing Directive 2011/61/EC on Alternative Investment Fund Managers (“AIFM-Umsetzungsgesetz”) which will come into force on 22 July 2013. During its session held on 7 June 2013, the Federal Council (“Bundesrat”) decided not to convene the Mediation Committee (“Vermittlungsausschuss”) and as such agreed to the new law. It is now awaiting publication in the Official Journal.

The main and most extensive part forms the so-called “Kapitalanlagegesetzbuch” (KAGB) which aims at being a single rulebook for Undertakings in Collective Investment. It will regulate UCITS and AIF (open and closed-ended) and their managers and will be applicable to marketing activities to retail, professional and institutional investors.

The “AIFM-Umsetzungsgesetz” will further modify or repeal some other laws, inter alia the “Investmentgesetz” which will be integrated into the KAGB and repealed in due course.

The text of the KAGB (only in German) can be found via the following web link.

http://dipbt.bundestag.de/dip21/brd/2013/0375-13.pdf

Bafin issues guidelines on KAGB

On 14 June 2013 the “Bundesanstalt für Finanzdienstleistungsaufsicht” (BaFin) issued on his webpage some Frequently Asked Questions (FAQ) on the transitional provisions of the “Kapitalanlagegesetzbuch” (KAGB). The FAQ currently comprises eight questions, but should be updated regularly.

The BaFin also issued an interpretation document regarding the scope of the KAGB and the interpretation of the term “Investmentvermögen” (investment fund), referring also the ESMA Guidelines recently issued on key concepts of the AIFMD.

The texts of the FAQ and the interpretation are available (only in German) via the following web link.

http://www.bafin.de/EN/Homepage/homepage_node.html;jsessionid=3C98E382FC2A9A88AA98AF6955110F95.1_cid363

Germany


Regulatory news

Luxembourg Malta

Cssf issues fAQ on Master-feeder structures

On 24 June 2013 the Commission de Surveillance du Secteur Financier (“CSSF”) issued a Frequently Asked Questions (FAQ) document on Master-Feeder Structures.

The FAQ, was developed upon request by the Luxembourg audit professionals represented by the “Institut des Réviseurs d’Entreprises” (IRE), in particular to deal with the reports that have to be issued relating to Master-Feeder structures.

The FAQ is to be updated on an ongoing basis and is available via the following web link.

http://www.cssf.lu/en/investment-funds

Cssf issues guidance on AIfMd

On 18 June 2013 the CSSF published a Frequently Asked Questions (FAQ) highlighting some of the key aspects of the AIFMD regulation. The FAQ is primarily addressed to managers of alternative investment funds (AIFM) and alternative investment funds (AIF) established in Luxembourg.

Applications for authorisation or registration as an AIFM can be submitted to the CSSF before the entry into force of the AIFM law. All the information on the content of the submission file (questionnaires/form) is available on the CSSF website via the following link:

http://www.cssf.lu/aifm/

Investment services Rules for Alternative Investment funds

The Malta Financial Services Authority (MFSA) has published the final AIFMD (the “Directive”) implementing measures, making it one of the first jurisdictions to transpose the Directive. This also means that applications for new hedge fund managers are now being accepted. Existing Fund managers and self-managed funds can avail themselves of the full transitional period to 22 July 2014. Malta is party to 34 cooperation agreements with regards to AIFMD compliance with non-EU countries.

The MFSA mentions the possibility to passport MiFID services to into other EU Member States, though this will also depend on the rules effective in these Member States.

With regards to the AIFM remuneration policies, the MFSA has decided not to impose this on sub-managers.

The full set of Investment Services handbooks can be found here.

http://www.mfsa.com.mt/pages/viewcontent.aspx?id=509

Retail non-uCITs Regime

A consultation paper has been issued by the MFSA regarding proposed amendments to the Retail Non-UCITS Rules to further implement the AIFMD. Feedback can be sent until 1 July 2013.

The threshold of €100 million or €500 million if not leveraged, will also apply to the Retail AIFs.

Other amendments include the possibility to appoint a foreign administrator, as well as including the derogation that the Retail AIF can appoint either a local or foreign custodian until July 2017.

The full consultation document can be found here.

http://mfsa.com.mt/pages/announcement.aspx?id=5579


Regulatory news

switzerland

Revised CIsA provisions in force since 1 June 2013

In the course of the revision of the Federal Act on Collective Investment Schemes (CISA) and of the Ordinance on Collective Investment Schemes (CISO) – which both came into effect on 1 March 2013 – additional revised provisions entered into force on 1 June 2013.The following new provisions on qualified investors entered into force on 1 June 2013:

1.1. High-net-worth individuals

According to the new provision in Art. 10 para. 3bis CISA high-net-worth individuals may declare in writing that they wish to be deemed qualified investors (so called “opting-in”) if they meet one of the following conditions:

They provide evidence that they (i) have the knowledge required to comprehend the risks of the investments based on their individual education and professional experience or based on comparable experience in the financial sector and (ii) hold assets of at least five hundred thousand Swiss francs; or

they confirm in writing that they hold assets of at least five million Swiss francs.

1.2. Investors with written discretionary management agreement

Furthermore, according to Art. 10 para. 3ter CISA, investors who have concluded a written discretionary management agreement are still deemed qualified investors unless they have declared in writing that they do not wish to be deemed as such. (so called “opting-out).

1.3. Key investor information document’ (“KIID”)

New provision on the “key investor information document” (“KIID”) entered into force (Art. 76 and77 CISA). This key element of the UCITS IV Directive aims improved information towards the investors. The provision has already been implemented in CISO and was now transferred into the formal Act.

With this deferral the financial intermediaries gained precious time to amend their complex systems to ensure a smooth implementation of these new provisions. Such procedure shall be deemed to be significant with regard to the protection of the investors.

Outlook 1 January 2014: duty to prepare records

A new provision within the scope of code of conduct will enter into force by 1 January 2014: Licensees and third parties involved in distribution will have to keep a written record of the client’s objectives, as well as the reasons why a subscription of a specific collective investment scheme was recommended. These written records must also be given to the client (art. 24 para. 3 revCISA).

The duty to prepare records will apply to distribution actions defined in art. 3 CISA. The form and content of the records will be based on the code of conduct of a system of self-regulation that is recognised by FINMA as the minimum standard (art. 34a revCISO).


Regulatory news

us

seC issues proposal on Money Market fund reform

On 5 June 2013 the U.S. Securities and Exchange Commission (SEC) issued its proposal to reform the Money Market Funds (MMF) sector. The reform aims to make MMFs less susceptible to abrupt withdrawals that could harm investors, to mitigate potential contagion from high levels of such redemptions, to preserve the MMFs benefits and to increase the transparency of risk in the sector.

The SEC proposal contains two principal alternative reforms that could be either adopted on a stand-alone basis or in combination.

The two alternatives can be summarised as follows:

• Floating Net Asset Value (NAV): The first alternative would require portfolios of prime institutional MMFs to be valued at fair value, as such eliminating the possibility of using the amortised cost method. The NAV per share of MMFs would vary accordingly and not remain stable at a $1.00 share price. MMFs would be further required to “basis point round” their share price to the nearest 1/100th of one

percent (the fourth decimal place in the case of a fund with a $1.0000 share price). Government and Retail MMFs as defined would be out of scope of this provision.

• Liquidity Fees and Redemption Gates: Under the second alternative, a liquidation fee of 2% on all redemptions would have to be imposed where a MMF’s level of “weekly liquid assets” would fall below 15% of its total NAV. A temporary suspension of redemptions (“Redemption Gate”) could be further applied by the Board of Directors for MMFs breaching the 15% threshold. A breach of the 15% threshold and the introduction of both measures would have to be promptly and publicly disclosed. Government MMFs would be out of scope of the reform but with the possibility to opt in.

The SEC proposal further contains requirements regarding disclosure, reporting, diversification and stress testing as follows:

• Disclosure/Reporting: MMFs would have to publish any liquidation fee or redemption gate temporarily applied, their level of

daily and weekly liquid assets, material events as well as any sponsor support, detailed information about their portfolio holdings and improved Private Liquidity Fund information.

• Diversification Requirements: MMFs would not be allowed to invest more than 5% of its assets in any one issuer and to invest more that 10% in asset-backed securities sponsored by the same entity (10% guarantor diversification limit). Moreover, the 25% single guarantor basket threshold would be removed.

• Stress testing: Stress testing of MMFs would be enhanced. For instance, they would be required to stress test against the fund’s level of weekly liquid assets falling below 15% of total assets.

The proposal is open to public comment for a period of 90 days after its publication in the Federal Register.

The full text of the proposal is available via the following web link.

http://www.sec.gov/news/press/2013/2013-101.htm


Regulatory news

IOsCO issues Principles for Regulation of eTf

On 24 June 2013 IOSCO published its final report on “Principles for the Regulation of Exchange Traded Funds (ETFs)”. The principles aim at making ETFs more consumer-friendly, guiding their regulation and improving industry best practice. They specifically address ETFs organised as Collective Investment Schemes (CIS) and do not apply to non-CIS Exchange-Traded Products (ETPs).

After providing for definitions of relevant terms, the principles are outlined in two sections:

1. Principles related to ETF Classification and Disclosure:

• Disclosure of ETF classification: Regulators should encourage appropriate disclosure to clearly differentiate ETFs from other ETPs, and seek to ensure a clear differentiation between ETFs and other CIS as well as for index- and non-index-based ETFs.

• Disclosure of ETF portfolios: Regulators should require appropriate disclosure of the manner in which an index-based ETF will track its reference index, and should consider requirements for the transparency of an ETF’s portfolio and/or other measures, to provide adequate information of the reference index and its composition as well as the operation of performance tracking.

• Disclosure of ETF costs, expenses and offsets: A proper disclosure of fees and expenses should be encouraged by regulators to allow investors to make informed decisions, including measures to enhance the transparency of information on material lending and borrowing of securities (e.g. related costs).

• Disclosure of ETF strategies: ETFs, especially those using more complex strategies, should be encouraged by regulators to assess the accuracy and completeness of information, with regards to understandability and risk addressing.

2. Principles related to the Structuring of EFTs (i.e. physical vs. synthetic replication):

• Conflicts of interest: Existing securities laws and rules of securities exchanges should be assessed by regulators in the respective jurisdiction in light of properly addressing conflicts of interest.

• Managing counterparty risks: Regulators should consider requirements to ensure that risks arising from counterparty exposure and collateral management are properly addressed by the ETF.

The report also contains the feedback statement on the public comments that have been received in response to the consultation report.

The principles should be regarded as a common approach and practical guide against which industry and regulators can assess the quality of regulation and industry practices regarding ETFs. Depending on local conditions and circumstances, their implementation may vary between jurisdictions.

The full text is available via the following web link. A summary list of the principles can be found in Appendix I of the report.

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD414.pdf

Inernational


european Commission issues proposal for european “fATCA”

On 12 June 2013 the European Commission issued a proposal for a Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (COM(2013)348 final).

Background

The automatic exchange of information is provided for under two key pieces of EU legislation.

It was first introduced in 2005, via the EU Savings Directive (“EUSD”), which applies to interest paid to individuals resident in a Member State other than the one where the interest is paid.

It was then enhanced by the Administrative Cooperation Directive (“EUACD”). The first part of the EUACD (concerning exchange of information upon request and spontaneous exchange of information) was transposed in Luxembourg by the law of 29 March 2013. Its second and last part foreseeing the automatic exchange of information on certain income streams is to be transposed prior to 1 January 2015.

Tax news

european union Germany

Proposal

The proposal widens the scope of automatic exchange of information within the EU to information on dividends, capital gains and any other financial income and account balances secured or held by a financial institution for the direct or indirect benefit of a beneficial owner who is a natural person resident in that other Member State. Information would be exchanged as of 1 January 2015 in respect to taxable periods as from 1 January 2014.

While the five categories of income already covered by the EUACD will only be subject to the automatic exchange if the information is “available”, this exception would not apply to the new items listed in the proposal. Automatic exchange would thus be mandatory for these new categories. The possibility of extending the scope of the EUACD was envisaged under the current Directive, but not before 2017. The proposal therefore accelerates this process.

The full text of the proposal Directive is available via the following web link.

http://www.europarl.europa.eu/registre/docs_autres_institutions/commission_europeenne/com/2013/0348/COM_COM%282013%290348_EN.pdf

“AIfM-steueranpassungsgesetz” (Investment fund Tax Law) delayed

The “AIFM-Steueranpassungsgesetz” (AIFM-StAnpG) will probably not come into force on 22 July 2013. Whilst it has been agreed by the “Bundestag”, the “Bundesrat” objected to it, and the “Mediation Committee”, having discussed the draft on 26 June 2013, has deferred its decision on it.

To avoid legal uncertainty, the Ministry of Finance “Bundesministerium der Finanzen” (BMF) is expected to issue a decree keeping the “Investmentsteuergesetz” (InvStG) in force until the AIFM-StAnpG is finally voted and becoming effective.


Tax news

netherlands

Income tax treaty with norway

A protocol to update the income tax treaty between the Netherlands and Norway is signed.

A 0% rate of withholding tax on dividends will apply for:

• substantial holdings (a holding of at least 10% of the capital)

• pension funds

• governmental entities.

Previously, the Netherlands and Norway have concluded a special agreement (“Competent Authority Agreement” or “CAA”) regarding the tax treatment of a closed FGR (“besloten fonds voor gemene rekening”). In this agreement the Norwegian tax authorities confirm that a closed FGR will also be regarded as tax transparent for the application of the income tax treaty concluded between the Netherlands and Norway. FGRs are frequently used for asset pooling by pension funds and other investors. With the new protocol lowering withholding tax rates and the CAA, the closed FGR is a tax efficient asset pooling vehicle for pension funds investing in Norway.

The protocol (Dutch text only) is available via the following link.

http://www.rijksoverheid.nl/ministeries/fin/documenten-en-publicaties/besluiten/2013/05/02/protocol-wijziging-overeenkomst-koninkrijk-nederlanden-en-koninkrijk-noo.html


Tax news

uK

VAT – modified treatment for certain portfolio management fees following the eCJ ruling

Following the European Court of Justice (“ECJ”) decision in Deutsche Bank (Case C-44/11) (“the Deutsche Bank decision”), on 26 July HM Revenue & Customs (“HMRC”) released Business Brief 11/13 to clarify HMRC’s policy on the treatment of portfolio management fees. The ECJ decision held that it would be artificial to split the advisory and execution services charged by discretionary portfolio managers, meaning that there is a single supply for VAT purposes. These portfolio management services clearly do not fall within any exemptions and, as execution services are only a part of the overall service, the overall supply was found to be taxable.

Business Brief 11/13 (“the Briefing”) explains the reasoning and sets out the modified VAT treatment applicable from 1 December 2013. Fees charged by portfolio managers on an annual or periodic basis which also include the purchase and sale of securities can no

longer be exempt supplies with respect to the part of the service that relates to transactions in securities, regardless of whether or not a separate charge is made. However, the Briefing explains that the Deutsche Bank decision only considered periodic charges with no direct link to the transactions being executed, where fees are charged on a transaction by transaction basis the Briefing states that exemption can continue to apply if transaction charges are separately identified on the VAT invoice.

This applies to full discretionary management and advisory based management. HMRC reconfirm that this modification is distinguished from exempt investment fund management services where the VAT exemption depends on the nature of the fund being managed.

Business Brief 11/13 (two pages) is available at this web link.

http://www.hmrc.gov.uk/briefs/vat/brief1113.htm

uK Reporting fund Regime: Technical amendmentsOn 14 June 2013 the final version of amendments to the Offshore Funds Regulations was released. These were published in draft on 3 May 2013 and summarised in last month’s edition of Fund News. The main change since the draft version is that for investors in funds operating full equalisation it is now possible to choose the order of offset (i.e. first against excess income and then distributions or vice versa). Previously it was necessary first to offset against excess income, and the draft Regulations proposed making it mandatory to offset first against distributions. The Regulations came into force on 28 June 2013.

Publications

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

© 2013 KPMG Holding AG/SA, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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Contacts

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fund news - issue 104 - june 2013

Documents

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issues qa

uk reporting fund regime

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