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 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 Regulation Page 2 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IOSCO consults on Principles for Liquidity Risk Management for CIS Page 5 Tax Content UK 2012 Budget Page 6 HMRC issues draft guidance on the new UK ITC tax regime Page 6 Venture Capital Trusts – Finance Bill 2012 changes Page 6 Fund News – April 2012 2 facilitate the cross-border supervision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 3 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 4 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 5 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 6 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 7 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 8 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 KPMG’s annual surveys Funds and Fund Management and Hedge Funds – now online KPMG International has collaborated across our member firms to provide you with the annual International Funds and Fund Management Survey and the annual International Hedge Funds Survey that can help you navigate the changing environments in which we work. Country by country, you can read about the latest accounting, tax, and regulatory issues to gain the accurate and relevant information you need. The 2012 version of our International Funds and Fund Management Survey survey is available via the following web link: Funds The 2012 version of our International hedge funds survey is available via the following web link: Hedge Funds Fund News – April 2012 9 Contact us Dee Ruddy Senior Manager T: + 352 22 5151 7369 E: dee.ruddy@kpmg.lu Audit Nathalie Dogniez Partner T: + 352 22 5151 6253 E: nathalie.dogniez@kpmg.lu www.kpmg.lu Publications Tax Georges Bock Partner T: + 352 22 5151 5522 E: georges.bock@kpmg.lu Advisory Vincent Heymans Partner T: +352 22 5151 7917 E: vincent.heymans@kpmg.lu The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2012 KPMG Luxembourg S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. A Disputed Proposal: An Overview of the Financial Industry's Response to the Volcker Rule here: UCITS IV - Fill the glass to the brim II: have we broken through? An update on the tax implications of UCITS IV here Charles Muller Partner T: +352 22 5151 7950 E: charles.muller@kpmg.lu The value of the hedge fund industry, to investors, markets, and the broader economy here: . 1 FUND NEWS April 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 91 – Regulatory and Tax Developments in April 2012 . 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,. 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