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FINANCIAL SERVICES

EvolvingInvestment

ManagementRegulation

A clear path ahead?

June 2012

kpmg.com


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Lead Editors

Charles Muller

Partner, Financial ServicesRegulatory Center oExcellence, EMA regionKPMG in Luxembourg

James Suglia

Head o KPMGsInvestmentManagement Sector,Global Advisory

2012 KPMG International. KPMG International is a Swiss cooperative. Member f rms o the KPMG network o independent frms are afliated with K PMG International. KPMG International provides no client services. N omember frm has any authority to obligate or bind KPMG International or any other member frm vis- -vis third parties, nor does KPMG International have any such authority to obligate or bind any member frm. All rights reserved.

Bonn Liu

Head o InvestmentManagement,KPMGs ASPAC region

Financial Services Regulatory

Centers of Excellence

Giles Williams

Partner, Financial ServicesRegulatory Center oExcellence, EMA regionKPMG in the UKT: +44 20 7311 5354E: [email protected]

Jim Low

Partner, Financial ServicesRegulatory Center oExcellence, Americas regionKPMG in the UST: +1 21 2872 3205E: [email protected]

Simon Topping

Principal, Financial ServicesRegulatory Center oExcellence, ASPAC regionKPMG in ChinaT: +852 2826 7283E: [email protected]

About this report

This report was developed by KPMGs network o regulatory

experts. The insights are based on discussion with our frmsclients, our proessionals assessment o key regulatorydevelopments and through our links with policy bodies.We would like to thank all members o the editorial and projectteams who have helped develop this report.

Editorial and project teams

Weronika Anasz

KPMG in China

Aggie AnthimidouKPMG in the UK

Tom BrownKPMG in the UK

Rachael Kinsella

KPMG in the UK

Jonathan Lee

KPMG in China

Meghan Meehan

KPMG in the US

Zo Pope

KPMG in Canada

Heleen RietdijkKPMG in the UK

Dee Ruddy

KPMG in Luxembourg

Cara Scarpino

KPMG in the US

John Schneider

KPMG in the US

Brittany Spriggs

KPMG in the US

Mireille VoysestKPMG in the UK


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Contents

Foreword 2

Executive Summary 4

01

Global overviewGlobal Perspectives: InvestmentManagement faces a regulatoryavalanche

Perspectives:EMA 6Cross-border challenges andopportunities

Perspectives: ASPAC 9A diverse region with multiplechallenges

Perspectives:Americas 11A time for change

02Retail products and distribution Increased transparency andcustomer protection

EMA Investor protection 14comes to the fore

ASPAC The fast pace of change 17

US A seismic shift 19

03Alternative Investments 21Global hedge funds Adapting to change

A view from Offshore 24

04Institutional perspectives

EMA Evolving operations 25and strategy

US The calm after the storm? 28

ASPAC Loosening the reins? 30

05Governance and responsibility More than just compliance...

EMA Compliance also 31

creates opportunitiesASPAC Aligning 33international standards

US New rulings and regulations 34

06Capital Markets The impacts of marketstructure changes

EMA Market transparency 35

and integrityUS Restoring investor 37confidence

ASPAC Growth without 39systemic risk

07Tax goes global Risk management hasto follow...

EMAChallenges 41FATCA, Financial TransactionTax and more

ASPACChallenges 44Cross-border issues

USChallenges 45A unique situation

08Pensions Increased disclosure andreporting requirements

EMA More than just solvency 47requirements...

ASPAC Population growth 51and structural change

US Issues and opportunities 53

09List of Abbreviations 55

10Acknowledgements 56

2012 KPMG International. KPMG International is a Swiss cooperative. Member frms o the KPMG net work o independent frms are af liated with KPMG International. KPMG International provides no client services. Nomember frm has any authority to obligate or bind KPMG International or any other member frm vis- -vis third parties, nor does KPMG International have any such authority to obligate or bind any member frm. All rights reserved.


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ForewordA new regulatory order?

Jeremy Anderson

Global Chairman,KPMGs Financial Services Practice

Wm. David Seymour

Global Head o KPMGs InvestmentManagement Practice

In response to economic andregulatory change, the investmentmanagement industry, like thefnancial sector as a whole, isevolving and re-shaping. Post-

crisis, the banking industry hasbeen at the oreront o the policydebates, with the regulatoryagenda ocused frmly on thepotential lack o capital, the needor more robust liquidity coverage,the opaqueness o the derivativesmarket, the structural and systemicissues being addressed under the

too big to ail agenda and thecontinuing debate on remuneration.The investment managementindustry also has issues, but thepolicy response to the crisis

remains ocused on banks. Sothis raises the question: why dosurveys and other commentaryrom the investment managementindustry show that regulatorypressures, challenges and costsare the most signifcant issuescurrently acing the industry?



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What are the regulatory challenges for the investmentmanagement industry?

This conundrum is solved by lookingback at the G20 communiqus. Thereare common themes running throughthe communiqus rom Seoul and Nice,including: Financial stability Addressing the inter-connectivity

o the inancial system Assessing the policy response to

shadow banking Delivering a air outcome or

consumers.

In the melee o the current regulatory

reorm initiatives across the globe, it iseasy to orget that the G20 agenda isstill the driving orce to undamentallyix the problem, rather than addressthe symptoms and importantly, thereis still a public commitment to meetingthe G20 requirements within theagreed timelines.

For the investment managementindustry, this means putting theregulatory change in the context othe G20, as opposed to looking at the

structural ailings that have been well-documented post-inancial crisis. It isclear that the industry is an importantcomponent o the overall system ater all, considerable amounts o clientassets and unds are held and managedby the industry. Equally, these assetsare oten held by the banks and usedto provide liquidity to the market. Theinvestment management industrycannot be viewed in isolation andwould certainly eel the impact oany major banking deault.

In addition to economic andsystemic pressures, the investmentmanagement industry has its own seto challenges. There has been a lot otalk about the role the industry plays

in shadow banking either throughstock lending, the repurchaseagreement (repo) market or throughmoney market unds.

Customers are the lieblood o theinvestment management industry and there is recognition that someplayers have not dealt with their clientsassets in a balanced, thoughtul andappropriate manner.

At the macro-level, it becomesclear why the pressure rom theregulators is so signiicant. The keychallenge is to maintain perspective

around the macro-issues and not tobe overwhelmed by the day-to-daysupervisory approach.

Lastly and in many respects mostimportantly the key challenge is nowhow to deal with this regulation on apractical level. Certain legislation iscosting substantial amounts o moneyto implement where there is littledirect value creation the most notableexample is the Foreign AccountTax Compliance Act (FATCA).

Other regulations are likely to aectthe costs o executing transactions orclients. The proposed structural changes notably the Volcker provisions in the USDodd-Frank Act; the revised Markets inFinancial Instruments Directive (MiFID 2);and European Market InrastructureRegulation (EMIR) in Europe maywell impact investment returns.

There are also the wider investmentprotection measures, which are eitherbeing implemented, proposed or aredue in the major centers o the world.

These are designed to improve investorprotection and reduce global systemicrisk, but they will come with costs andthere is still the question o what theend user will bear or be prepared to pay.

The investment management

industry cannot be viewed in

isolation and would certainly

eel the impact o any majorbanking deault.

This publication sets out perspectivesrom our experts across KPMGs global

network o irms, as to how we believethese key themes are being addressed;the challenges that we believe will

emerge along the way; and what allo this may mean or the industry.Inevitably, some will disagree with ourpoint o view or perceptions, but thepolicymakers are now addressing the

issues and we think it is importantthat the industry is clear about thelong-term implications o such change.

Sometimes the day-to-day challengesrom individual supervisors within theregulatory bodies across the dierentjurisdictions create so much work and

incur so much cost, that the originalintention o the G20 communiqus isoverlooked and orgotten. It is importantor investment managers to keep thisin mind, not only or the day-to-dayoperations o the business, but in utureand strategic planning.


Evolving Investment Management Regulation | June 2012 | 3


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ExecutiveSummary

Investment managers ace achallenging new regulatorylandscape. The direction o travel towards implementation oregulatory proposals is clear,

but the path to implementationis still raught with unansweredquestions...

The vast, ast-paced regulatoryreorm agenda on a national andglobal level and subsequentresponses rom industryparticipants will decide the utureshape and success o the sector.

Key industry challenges

1. Cross-border implications o global,regional and national regulatorychange

2. Increased reporting andaccountability to improvetransparency

3. Consumer conduct to increaseinvestor protection and industry trust

4. Additional risk managementrequirements

But with this rat o change,

opportunities should ollow...

Global regulators continue to developregulatory policy and implementingstrategies to meet the existing G20commitments, while consulting on any

urther measures. The current ocus is

irmly on inancial stability, investorprotection and transparency o productsand markets.

Work is underway to improve thetransparency o and inormation on retailproducts. Remuneration controls arebeing called into question and increased

sanctions considered. At the same time,governments are looking to maximize taxrevenue and the industry inds itsel a

less than enthusiastic agent in this process.From an EMA perspective, new

regulation consists o updated existinglegislation and new directives and

regulations. A number o countrieswithin the region, such as South Arica,ace new regulations based on eitherexisting EU or older local rules; or

example Treating Customers Fairly (TCF) based on the UK regulatory structurealready in place and revisions to thePension Funds Act (Regulation 28).

Global emphasis is being placed onincreasing market inrastructure andtransparency as well as registration and

reporting requirements to better assessglobal inancial stability. In Europe, theseissues have led to key regulations such asthe European Market Inrastructure

Regulation (EMIR), Markets in FinancialInstruments Directive (MIFID 2) and

Alternative Investment Fund ManagersDirective (AIFMD), which will aect capitalmarkets and the inancial sector as a whole.

From an Americas perspective,

most issues have been packed into a

single piece o law the Wall StreetReorm and Consumer Protection Act(Dodd-Frank). Capital markets reorm,

in particular derivatives trading, is a keycomponent.

Dodd-Frank does not just aect irms inthe US. Impacts o this all-encompassing

regulation will reach ar beyond the US throughout the Americas and beyond, toEurope and ASPAC. In addition, non-UScountries in the Americas also have

stringent local regulatory standards withwhich to comply. Territories such asCanada are likely to eel the eects not

just o Dodd-Frank, but key Europeanlegislation such as AIFMD.

Extra-territorial effects will be eltin response to a number o regulations

rom multiple regulatory centers. TheEU AIFMD reorms that mean non-EUbased asset managers will only beallowed to market products in the EU

that broadly comply with EU rules.Countries outside the EU (such asSwitzerland or the Channel Islands) will

thereore have to decide whether toreorm their own rules. South Arica isanother good example, with its ownseries o national and global regulations.

From an ASPAC perspective, the

diversity o the region and its rulemaking



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processes, alongside demographic

change and rapid growth, createchallenges or pan-regional marketparticipants. There is a broad ocus

on investor protection, improvedtransparency and best practice, withreviews o existing regimes alreadyunderway. These include the FinancialAdvisory Industry Review (FAIR) in

Singapore; the Future o Financial Advice(FOFA) in Australia; and additionaldisclosure requirements in Japan.

Investor information and protection

Globally, attention is also ocused oninstitutional investors and certain

products, such as hedge unds, that wereinitially blamed or the crisis. Especiallyin Europe, this has led to measures that

critics say go ar beyond the amount oprotection institutional investors actuallyneed. For example, the requirement inAIFMD o a depositary with liability or

all unds is the subject o heated debate.In ASPAC, investor protection

initiatives are rolling out in Hong Kong,Singapore, Australia, India and Taiwan.

With the growing marketplace andchanging demographics in China, theyare working to widen asset classes,aiming to attract greater numbers o

external unds and reduce marketvolatility.

The US Dodd-Frank Act also brings amore rigorous and wide-ranging

approach to conduct rules.

Financial Stability

The global ocus on market transparencyand stability pervades the regulatoryagenda. Additional capital is also an

important part o the puzzle andwill aect managers returns. It will beinteresting to see i the Living Willsdebate extends into the investment

management sector. Many may thinkthis unnecessary, arguing that the

The global ocus on market

transparency and stability

pervades the regulatory agenda.Additional capital is also an

important part o this overall

puzzle which will in turn have

an impact on managers returns.

investment management industry,although large, will not bring down the

inancial system. But experience showsthat just saying no is not enough orregulators they want evidence tosupport the industrys view.

Alternative investments are underthe spotlight in light o inancial stabilityand market transparency, with increasedscrutiny o hedge unds and alternative

investment vehicles. The ocus oregulation in this area improved duediligence, compliance and clarity means

irms are reviewing and reining businessmodels and operating structures. The

global hedge und industry is becomingincreasingly institutionalized, throughnew institutional capital and thecontinuous evolution o inrastructureand operational processes.

From a managers or institutionalperspective, a number o regulationswill change the landscape. In Europe and

beyond, the AIFMD will require additionalcapital; improved risk and portoliomanagement; changes to delegationrequirements; and increased reporting

and transparency requirements withimportant third-country implications.In the Americas, a large body believes

that the systemic risk reporting in the

US will lead to greater (ull) transparencyor institutional investors. Newdevelopments rom the CommodityFutures Trading Commission (CFTC)

are imminent, increasing reportingand regulatory responsibilities. Insidertrading remains a cloud over the sector

likely to lead to even urther reportingand risk controls. The US institutionalmarketplace is likely to see diversiicationand consolidation. In Europe and ASPAC,

institutional regulatory ocus remainson exchange-traded unds (ETFs).

Offshore irms have their own speciicset o challenges. Key developments

include diversiication o investmentbusiness across geographies andexploration niche specialisms. Regulationrom Europe (eg. AIFMD) and America

(eg. Dodd-Frank, FATCA), will havenotable implications or oshore centers.

Pensions are also under increasedscrutiny, with requirements being set

globally to improve transparency andconsumer protection. Population growthand emerging demographic trends

continue to re-shape pensions markets.



Governance, remuneration and taxes

The inancial sector should pay or the

crisis it created seems to be part o thethinking o politicians and regulators.In Europe, rules on asset managerremuneration have been introduced in

AIFMD and Undertaking or CollectiveInvestments in Transerable Securities(UCITS), with harsh sanctions oreseenin UCITS 5 and Packaged Retail

Investment Products (PRIPS).Taxhas been particularly prominent

where authorities are acingunprecedented deicits. The avoidance o

tax raud has led to the ominous FATCA

regulation in the US, which has potentialimplications or all global irms, not justthose based in the US. It will be interesting

to view which o the jurisdictions imposetheir own legislation globally.

Europe will see a revision o the

Savings Directive and new exchange oinormation clauses in a wide range obilateral double-tax treaties. At the sametime, additional taxation o the inancial

sector is being debated or example,the proposed Financial Transaction Tax

(FTT) is a controversial political issuethroughout Europe and South Arica

aces additional national tax challengesin the guise o a new Dividends Tax (DT).

The volume, variety and complexityo tax regimes throughout Asia-Paciic

continues to prove challenging orirms across the region, with a ocuson additional taxation o non-resident

investors and companies.

Numerous cross-border challenges

Investment managers today ace

multiple challenges and regulatoryreorms across jurisdictions in additionto urther demands rom both local and

international regulators. Firms mustadapt to survive and thrive in this re-shaped industry. To stay on top othe ull regulatory change agenda,

irms must ensure that their businessmodels and compliance unctions takeinto consideration the ull suite oregulatory requirements and the

associated strategic implications,

both or their business and the industryas a whole.


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01Global Perspectives Investment Management facesa regulatory avalanche

Perspectives: Europe, MiddleEast and Africa (EMA)Cross-border challengesand opportunities

The volume and complexity o

the regulatory change beingimplemented means the comingyears will see an untraveledroad ahead or the investmentmanagement industry. Over 20international regulatory proposalswill aect this industry at thecrossroads between bankingand insurance either directlyor indirectly.

The key drivers behind the agenda

are the commitments made atthe G20. In addition, consumerconidence in the inancial servicessector remains low and thesustainability o the market hasbeen called into question. I thereare generally only two certaintiesin lie or most, or investmentmanagers there are now three:death, taxes and additionalregulation.

Charles Muller

Partner, Financial ServicesRegulatory Center o Excellence,EMA regionKPMG in Luxembourg



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1. European Fund and Asset Management Association (EFAMA) AssetManagement in Europe Facts & Figures, May 2011

2. Speech by Adair Turner, FSA Chairman, Financial risk and regulation:do we need more Europe or less?May 2012

While European regulation or mutualunds UCITS has just celebrated its 25th

anniversary, the inancial crisis and thesubsequent all out exposed weaknessesin the existing regulatory ramework as

well as missing harmonized rules orother types o unds. Regulation maynot be popular, but establishing anappropriate ramework in which irmscan operate is vital to the sectors

survival and should be in its interests.The industry should engage closely overthe coming months as crucial policyareas evolve, to ensure that the inal

provisions do not place unnecessaryburdens on their business.

Where does investment managementsit within the financial services sector?

Asset managers play a key role in theunctioning o the economy. They oer

investors vehicles through which todiversiy risk in a cost-eicient way,through large-scale operations. Theyalso provide an essential link between

those investors and the borrowers whoneed unds to inance their activitiesand developments.

Overall, there are more than 3,100asset management companiesregistered in Europe, collectivelyemploying approximately 80,000

individuals (without taking into accountother related services such asaccounting, auditing, custodianship,marketing, research, order processing

and distribution some o whichtake place outside Europe.1). WhileLuxembourg and Ireland are the maindomiciles or regulated investment

unds, asset management itsel takesplace in big European inancial centers

especially in the UK, but also inGermany, France and Switzerland.

While it is reasonable to assume thatthe size and scale o the UK sector wouldmean it holds signiicant inluence over

the European regulatory agenda, thewave o reorms comes at a time whenbig questions are being raised over the

UKs position within the EU. The useo a veto to protect the UKs inancial

services industry has potentially ledto a view that the UK is becoming

increasingly isolated in Europe and indsit hard to inluence the agenda. Indeed,the UK Financial Services Authority (FSA)is itsel asking whether we need more or

less Europe2. Consequently, the ability

and/or willingness o the UK to negotiatethe wider EU regulatory reorms in apersuasive manner will be an area towatch with interest during the course

o 2012.

Other regulatory trends in the

investment management industry

EU authorities have shited their ocustowards enhancing investor protectionmeasures, including improved sales

practices through the review oMiFID 2 and new harmonized productdisclosures in a document similar to aKey Investor Inormation Document

(KIID) or packaged retail investmentsproducts in the upcoming PRIPs initiative.

Market inrastructure is alsoundergoing a wave o legislative

changes, in particular EMIR and MiFID 2,which will have implications orinvestment managers. It is important tostart planning now or these new

operating models.The links between investment

management and inancial stability

are also under close scrutiny byauthorities. With this in mind, shadowbanking has been designated as a mainpriority or the European Commission

in 2012. This review is likely to lead toundamental new rules or constantNet Asset Value (NAV) money marketunds and more restrictions on

securities lending by unds.

These new regulatory initiatives

triggered by the 2008 crisis are now

beginning to reshape the investment

management industry players should

have a thorough understanding of

this rapidly evolving environmentfor optimal business decision-making

in the years to come.

The links between investment

management and nancial

stability are also under closescrutiny by authorities. With this

in mind, shadow banking has

been designated as a main

priority or the European

Commission in 2012.




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Key Regulatory Developments

UCITS: Cross-border implicationsand extraterritorial effects

The implementation o UCITS 4introduced a management companypassport or investment managers inthe EU. While its impact is not yet ullyclear largely due to the ocus on theproduction o the required KIID thereis already evidence o consolidation oexisting practices to take advantage ocost eiciencies in economies o scale.These also relate to other eiciency

measures included in UCITS 4, namelythe possibility or cross-border undmergers and master-eeder structures.The lack o a harmonized tax rameworkaround these topics constitutes a majorhindrance. However, even withoutthese new eiciency gains, UCITS istoday recognized as a success story orEurope and beyond. UCITS unds aretoday distributed throughout the world,rom Asia to Latin America; rom theMiddle East to South Arica; and thesegrowing emerging markets continue

to oer signiicant distributionopportunities or UCITS.

Alternative Funds: the controversy

The AIFMD is possibly the mostcontroversial o the Europeanregulatory measures. While theDirective seeks to remove some othe barriers to a single EU market orinvestment products, there is no doubtthat, or those it removes, it also putsothers in place. While generally thought

o as a hedge und and private equitybased Directive, in reality, all non-UCITS unds are in scope.

OpportunitiesThe AIFMD does present someopportunities. The harmonization orequirements should enable someirms to rethink their business modelsto take advantage o cost eicienciesthrough centralized operations. Newmarkets are likely to open up in whichto oer products and services toproessional investors across the EU.

Barriers

The reporting and liquidity requirementsare likely to mean that some managersmay no longer be able to operate cost-eectively due to the regulatory cost which may result in a reduction oboutique style irms. In addition,the third country provisions and therequirements or non-EU irms to meetequivalent standards may mean thatsome existing markets are let out in thecold. In the current drat, it is or ESMAto decide whether a third country undmeets the equivalence provisions or

not. As a result, there is a risk that theequivalence test becomes anotherregulatory hostage to political ortune.

The impact o the Directive on undmanagers will largely be dictated by thesubordinate measures (implementingmeasures and technical standards)yet to come. It is thereore vital thatinvestment managers remain engagedin the debate so that the uturelandscape is one in which they areable to successully operate.

Extraterritorial opportunities andchallenges key regional

developments

The AIFMD will undoubtedly havesubstantial eects on third countrieswishing to distribute their unds intoEurope or wishing to provide servicesto European alternative investment undmanagers. For example, the Directiverequires asset managers or collectiveinvestment products classed asAlternative Investments in the EU to

be supervised. As a result, Switzerland,or example, is currently altering itsregulation in order to be compliant withEU requirements.

The partial revision o the SwissCollective Investment Schemes Act(CISA) is mainly geared towardharmonizing the applicable provisions oSwiss law with international standards,particularly the AIFMD. This should thuscreate the preconditions necessaryto enable asset managers whonow require appropriate prudential

supervision under the AIFMD to applyor approval o this kind in Switzerlandor the irst time. In addition, therequirements on depositaries are likelyto be increased and the conditions ondistribution to qualiied investors andpublic investors are to be strengthened.As a result, this should saeguard accessor Swiss inancial services providersand their products to the Europeanmarkets.

Implications for offshore centersOshore inancial centers, or examplethe Channel Islands, are expected tohave a dual regime or institutional/alternative investments going orward one ully AIFMD compliant as aqualiying third country and a secondnon-AIFMD regime or those unds

that use private placement or are ornon-EU investors.

The AIFMD will undoubtedly

have substantial eects on

third countries wishing to

distribute their unds into

Europe or wishing to provide

services to European

alternative investment und

managers.


8 | Evolving Investment Management Regulation | June 2012


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Perspectives: Asia-Pacific

(ASPAC)A diverse region with multiplechallenges

Bonn Liu

Head o Investment Management,KPMGs ASPAC region

The speed o evolution in the

requirements around product

distribution, disclosure and

investor protection suggest

that these hurdles are unlikely

to decline in the short term.



The diverse legislative, regulatoryand taxation requirements acrossAsia continue to generate a numbero challenges or the investmentmanagement industry. Driven bythe diering priorities o regulatorsin the region and the existing levelo sophistication in their localmarkets, there remains a widevariety o speciic regulatoryrequirements. These conditionscreate sizeable barriers to pan-regional market participants, asincremental compliance, productdesign and administration costsneed to be incorporated into their

business models.The speed o evolution in the

requirements around productdistribution, disclosure and investorprotection suggests that thesehurdles are unlikely to decline inthe short term. While there is ageneral consistency aroundenhanced consumer protectionand air dealing, the lack o a singlecoherent ramework and increasingocus on enorcement only serveto heighten this challenge.

An Asian Regional Funds Passport?

Given these commonly understoodchallenges, resh momentum has

gathered behind the hotly debatedAsian Regional Funds Passport (ARFP)

since the November 2011 Asia-PaciicEconomic Cooperation (APEC) Finance

Ministerial Meeting. In the meeting,exploration into such a mechanism wasnoted in order to develop a sound undsindustry and better integrate inancial

markets with due regard to investorprotection, with an expectation ourther development o this work and

the possibility o the establishment oa pilot ARFP in the uture.

Proponents o such a passport

highlight the opportunities it wouldprovide to acilitate greater cross-borderinvestment within the region, withbeneits to the economies, investmentmanagement industry and consumers.

Not least, the potential to access thesubstantial savings pools in the regionand allow or greater economies oscale point to improved eiciency and

cost reduction.While UCITS ramework can be

drawn upon as a starting point, given

the increasing presence o UCITScompliant unds across Asia, signiicantchallenges in establishing such a modelin the region exist. These vary rom the

diering languages and cultures, throughthe level o industry and regulatorysophistication and maturity, to thepossible desire o greater protectionism

o the domestic industry through themaintenance o barriers to entry.Furthermore, local resistance mightbe anticipated where dierences in

regulatory and taxation regimes in

dierent jurisdictions distort competition.Such complex challenges are likely tocontinue to test the implementation o

a truly region-wide scheme.

An Asian Regional Funds Passportis a vehicle whereby countries withinthe region would recognize oneanothers securities laws. Conceptuallysimilar to UCITS in the EuropeanUnion, an ARFP would make possiblethe distribution across nationalborders o unds created, distributedand administered within the region.However, the lack o a regionalrulemaking body or common currencyin the region and the geographical,political and economic diversity

make the development o this much-discussed mechanism a diicultchallenge.


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Common ground

Irrespective o the uture success o

an ARFP initiative, there is notablecommonality in the driving orces behinda signiicant number o reviews o the

inancial services industries in Asia. Inretail distribution, the desire to enhanceconsumer protection, prospectusdisclosures, air dealing and Know YourCustomer (KYC) standards in a number

o jurisdictions indicates an increasingawareness o regional best practiceand the need to closely ollow theregulations emanating rom Europe

and the United States.In Singapore, the Financial Advisory

Industry Review (FAIR) represents a

comprehensive review o the inancialadvisory industry in this market, whichremains an attractive regional hub or anumber o investment management

companies.The impact o the AIJ scandal in

Japan has placed uncertainty overthe uture regulatory landscape or

investment management business,custody rules and pension undgovernance. At the time o writing, it isunderstood that the Japanese Financial

Services Agency (FSA) is considering awide range o uture regulatory optionswith clariications anticipated during the

course o the year. The outcome romthese considerations has the potentialto aect a large proportion o industryparticipants in the region.

Eorts to address the lack otransparency in the over the counter(OTC) derivatives market have alsogathered pace in a number o the most

sophisticated capital markets in region.In Hong Kong, Japan, Korea, Australia

and Singapore, eorts to align with therequirements o the G20 communiqu

on September 29, 2009 are apparent inorder to improve transparency in thederivatives markets, mitigate systemicrisk, and protect against market abuse.

The anticipated growth rates and

demographic trends in a number

of markets continue to attract the

attention of investors and fund

management organizations. Increasing

numbers of industry participants arenow focusing on the region as a

key component of their future

growth strategy. The continued rapid

pace of regulatory developments

demonstrates that an enhanced

regulatory threshold is here to stay for

the regions investment management

industry. Participants who accept this

reality and assess their operating

models accordingly will be the best

placed to take advantage of the

regions full potential.

Increasing numbers o industry

participants are now ocusing on

the region as a key component

o their uture growth strategy.



The AIJ Scandal

On February 24, 2012, the Japanese

inancial regulators suspended AIJ

Investment Advisors Co. (AIJ), aTokyo-based asset manager, or onemonth ater reports it could not explain

the whereabouts o up to YEN 185.3billion (GBP 1.4 billion). Subsequentreporting by the welare ministry said

that as many as 52 o the 84 pensionunds which AIJ was managing wererunning deicits or will do so soon i AIJcould not return the missing money.

In response to the AIJ scandal, theJapanese FSA required additionalreporting rom industry participants.The FSA is also expected to reorm

some regulations including FinancialInstruments and Exchange Law (FIEL)in due course.


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Perspectives: Americas

A time or change

John Schneider

US Head o Investment ManagementRegulatory Practice, KPMG in the US



Despite the bueting and poundingthat the industry is taking today,there is reason or hope and orplanning. There will most certainlybe plenty o opportunity or growth.

Many actors are driving change:the outrage o individual investorsis an important element, but alsothe inluence o institutionalinvestors who are pressing orgreater transparency, along withthose government oicials aroundthe world who are grasping ornew sources o revenue to balancetheir lopsided budgets. Disorientedby so many changes, investment

managers will initially eelsqueezed between new rulesand requirements on one side,and the needs o investors on theother. There will be considerablechange, and much o it is likelyto be painul. With change andchallenge, however, oten comesopportunity...

Change and challenge...

Change and challenge will not be long

in coming. New regulations will createor signiicantly expand requirementsor registration, reporting and disclosure.

Much o this scrutiny is likely to bedirected at increased transparency andconsumer protection with a ocus onprivate unds, money market unds andnew instruments. Clearly, no regulator

wants to preside over a period o inancialtumult similar to what occurred in 2008.The underlying message rom regulatorsis likely to remain Not on my watch.

Firms may thereore expect morerigorous reviews rom governmentagencies. From now on, the Securities

and Exchange Commissions (SEC)National Examination Program willschedule the requency and intensity oits examinations based on the perceived

level o risk that a irms businessactivities pose to its investors, clientsand shareholders. In the past, suchexaminations were held at regularly

scheduled and expected intervals.Those days are gone.

Retail challenges

Retail distribution also aces a challengingroad ahead. Recently, the Investment

Company Institute (ICI) challenged

government proposals that woulddramatically change the ground rules orselling money market unds. Meanwhile,

the debate continues between regulatoryagencies and retail distributors overissues such as point-o-sale disclosureand iduciary responsibility.


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New rules for OTC derivatives

At the same time, new regulations

are set to transorm the OTC derivativesindustry rom one that was based onbilateral contracts to a more transparent

central clearing market similar to themarket or utures. Because o theadded costs o moving to dailymargining, dealers may choose to stopselling products that currently generate

only marginal proits. Some dealers maychoose to leave the OTC derivativesbusiness altogether.

Perhaps the most contentious issue

or trading proessionals is the proposedVolcker Rule issued late last year.Despite the clamor it has aroused,

KPMG believes it will ultimately beenacted in some orm, that inancialinstitutions will be restricted romproprietary trading, and that they will

have to monitor their trading activitiesto prove they are complying.

Investment managers will initially

eel squeezed between new

rules and requirements on one

side, and the needs o anxious

investors on the other.



With change comes opportunity

Perhaps slowly at irst, but inevitably,opportunities will emerge or newbusiness models; or new eestructures and product lines; and, orthe consolidation and regrouping thatwill result in more stable and diversiiedrevenue streams or many irms.As they identiy opportunities andcapitalise on them, smart managers willind new ways to grow their businessesas they begin to restore conidenceamong policymakers and investors inthe strength and more importantly,the enduring value o the investmentmanagement industry. Some o the

many opportunities that may emergerom the sweeping transitions that lieahead include: As the costs o operating an asset

management irm increase, manyirms will revise their business andoperating models. For example, theymay start targeting more high networth individuals and institutions,who tend to maintain assets withinvestment advisors over longerperiods. To improve their product

oerings, irms may create pooledprivate vehicles or institutionalmanaged accounts that have a eestructure closer to that o a hedgeund, with higher margins and greaterpotential revenue. They may alsochoose to start outsourcing certainmiddle and back-oice unctions, suchas airmation, conirmation, portolioaccounting and investor reporting.

In retail distribution, i broker-dealersare going to be held to a higheriduciary standard, many discount

brokerage houses which oncetargeted the sel-directed investor will move into the role o oering ee-based services and investmentadvice to middle-class investors.

More advisors will be using smartphones, mobile tablets and socialmedia to invite customers and theirriends to join the continual interactiveconversation and get in on the action.

Policymakers who make the rulesgoverning pensions have recognizedthat todays customers will most likelylive longer than their parents andshould not be allowed to outlive theirassets. With this act in mind, the USTreasury recently issued proposalsthat will permit a new orm o annuitycontract that would represent a seachange in distributions or anyone

holding plan assets. Once approved,this annuity will create a slew o newplanning opportunities or investmentproessionals.

In the US, centralized clearing or OTCderivatives and new requirements orreporting trades will add transparencythat should remove some o the riskthat investors encountered in the2008 meltdown. Certain uturescommission merchants may actuallybeneit rom the new environment

as niche markets or some OTCderivatives become more attractive. In the alternative investments

industry, diversiication andconsolidation are inevitable. Havingexperienced the dangers o relyingon a narrow range o products, manyirms are now expanding into newasset classes. This strategy has beenespecially pronounced among irmslooking to make their irst stockoerings to the public. Opportunitiesto consolidate will also come rom

smaller irms that are struggling tosurvive under increased regulatoryand cost pressures and are lookingto consolidate with larger andstronger irms.


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A time for hope...

I am not saying that change will be easy

or painless, or that the current businessenvironment will somehow transormitsel into a garden paradise o sweetness

and light. But with change no matterhow dramatic or painul smartmanagers can ind opportunities.That is why this report ocuses on bothchange and opportunity. In recognizing

that one cannot have the ormer withoutthe latter, investment managers shouldbe able to prepare themselves to doeverything possible to control the

damage while making the most o everyopportunity and in so doing, maintainand grow their businesses as they

begin to restore conidence amongpolicymakers and the public at large inthe investment management industry.

Key regional developments

Canada and Latin America

Canada

To date, the inancial system in Canadahas weathered the global inancial crisisrelatively well. The asset managementindustry, including the hedge und

segment, has always been heavilyregulated, and most Canadian managersare accustomed to regulation. Manymanagers are preparing to handle any

increased burden by hiring in thecompliance area.

Since the global crisis began,regulatory scrutiny has increased,

especially in relation to counterparty

exposure and leverage. However, therehave been no bank collapses or bailouts.

The amount o regulation itsel has notsigniicantly increased, although therehave been some amendments to the

regulation o asset managers.The amendments cover enhancedregistration requirements and a currentreview o the high net worth/accredit

investor thresholds. Overall, one might

say that the change in regulation inCanada has been evolutionary ratherthan revolutionary.

The asset management industryin Canada will likely be aected bysweeping regulatory changes amongits neighbors, primarily Dodd-Frank

and AIFMD. The eects will depend,o course, on how much business isdirected to Canada.

Latin America Spotlight on Brazil

In Brazil, the regulatory environmentor the und industry is airly stable,

considering that regulation is maturingand has been widely viewed as eective.Local regulatory standards are high, and

even those hedge-und-type unds arehighly transparent to the CVM (BrazilsSEC). At the same time, monitoring andreporting are reasonably stringent.

However, two categories o unds both o which ocus on speciic assetclasses have received increasedattention recently. These are the Fundos

de Direitos Creditrios ReceivableFunds (FDICs), and the Fundos deInvestmento Imobilirios Real EstateFunds (FIIs).

Recent und blow-ups in the FDICsindicate the potential need or strictercontrols on underlying assets. In addition,concerns have become apparent on the

existence o basic documentation orFDICs and on eectively controllingliquidation o the receivables. This

movement is currently underway, andKPMG in Brazil has been involved in

Firms may expect more

rigorous reviews rom

government agencies.



helping clients pre-empt potential controlweaknesses, which may subsequently

be reviewed by the CVM. KPMG is alsohelping clients drat suggestions to thework groups that are being coordinated

by joint teams o regulators and inancialinstitutions.

The recent regulatory drive on FIIshas been to improve the valuation o theassets. Regulators insist that real estate

assets ollow the air value principles,which have been in place or some timewith more established unds.

New rules for the investment

management industry and the uphill

battle to restore its reputation among

investors has changed the world ofinvestment management but the

direction of onward travel is becoming

clearer...


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02Retail products anddistribution Increasedtransparency andcustomer protection

EMAInvestor protection comesto the ore

2012 KPMG International. KPMG International is a Swiss cooperative. Member frms o the KPMG network o independent frms are afliated with KPMG International. KPMG International provides no client services. Nomember frm has any authority to obligate or bind KPMG International or any other member frm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member frm. All rights reserved.

The 2011 Year-end igures rom the especially to long-term investments

International Investment Funds in the US. However, these positive

Association (IIFA) show that assets results did not mask the act that

under management in mutual retail investor trust in inancial

unds have peaked at an all-time products remains low, especially

high at almost 20 trillion. Net in Europe.

sales were largely positive, thanks

Investor information and protectionThe European Union has built on

common G20 decisions to implement

an ambitious program relating to the

monitoring o systemic risk and the

improvement o investor inormation

and protection. The pre-crisis UCITS 4

had already created a new inormation

tool the KIID, with very detailed

requirements regarding length and

language as well as a harmonized

presentation o past perormance, ees

and a controversial synthetic risk/reward

indicator. UCITS unds are generally set

up in order to create a distribution

opportunity across Europe. These types

o unds are open to both retail and

proessional Investors. Under UCITS 4,

the rules around cross-border activities

such as distribution and mergers have

been improved. The notiication

procedure has been adjusted in order

to enable better cross-border marketing.

In order to create a level playing ield,

a new regulation is likely to extend the

KIID to all inancial products that areoered to retail investors and where the

return luctuates according to the

perormance o the underlying assets.


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This new regulation, Packaged RetailInvestment Products (PRIPs) targets

lie insurance products, certiicates andnotes, as well as alternative investmentproducts (in as ar as they can be sold to

retail investors according to their homecountry rules).

The upcoming UCITS 5 will primarilyocus on lessons learned rom thecrisis especially the Mado raud,

where UCITS unds were also hit.The EU Commissions drat regulationrecognizes that the depositary unctionshould be harmonized and depositary

liability should be increased. In addition,the rules or delegating to sub-custodianswill be stricter especially the rules or

third country (non-EU) sub-custodians,which may prove a real challenge.Identiying the need to increaseconsumer conidence, other UCITS 5

topics include rules on remuneration.

Has UCITS gone too far?

Not currently included in UCITS 5 revisionplans, but subject to intensive debate,is the question o the current UCITSramework not going beyond what could

be reasonably considered products orretail distribution. In particular, productslaunched under the new powers grantedin the context o UCITS 3 (also called

newcits products) have come underscrutiny, or being either too risky or toodiicult to understand or the averageretail investor. This has triggered several

initiatives: the newly created EuropeanSecurities Markets Authority (ESMA) isworking on speciic rules or structured

products, while the drat revision oMiFID is creating a categorization oUCITS with so-called complex UCITS no

longer being accessible to execution-onlydistribution. This categorization is viewedwith mixed eelings by some assetmanagers, who want to preserve the

integrity o the UCITS brand, whileothers envisage additional categories(or example, socially responsible or

ethical UCITS, green UCITS, low-riskUCITS and long-term savings UCITS).

Shadow banking

This year has also seen a growingconcern o regulators towards certainund products in the context o a bigger

shadow banking discussion. In a GreenPaper, the EU Commission ocused(among others) on Exchange TradedFunds (ETFs) and money market unds,

especially those with constant Net AssetValue (NAV). This debate is relectedat a global level by the work o the

International Organisation o SecuritiesCommissions (IOSCO) or the FinancialStability Board (FSB) and ongoingdiscussions in the US. In its recent paper

on money market unds, IOSCO listspotential measures to be introduced toavoid a run on money market unds likethat at the end o 2008. On February 21,

2012, IOSCO also issued a consultationcontaining proposed principles on thedistribution o complex inancial productsto retail and non-retail investors.

Implications of MiFID 2

MiFID 2 will require und distributorsto have a greater level o knowledge

o their investors in order to be ableto sell the UCITS product to retailinvestors. The same MiFID 2proposals also address the issue

o inducements, which have beenincreasingly regulated on a nationalbasis such as the Retail DistributionReview (RDR) in the UK, and similar

initiatives in The Netherlands andDenmark. According to EuropeanCommission views, independentadvisors should be banned rom

receiving inducements rom productmanuacturers a view not necessarilyshared at European Parliament level.

The requirements only apply to

independent advisors. Entities thatdo not call themselves independent,such as banks or insurers, should stillbe entitled to receive initial sales and/

or annual retrocession ees. This mayresult in a disturbance o the levelplaying ield in the sale o investment

products to retail investors.The MiFID proposals create

concerns regarding third countryirms operating in the European

Union. These irms will have to set upat least a branch in the EU i they wantto oer their services to retail clients.For services to proessional clients,

stricter operating rules will apply.MiFID 2 is still a drat and thereoresubject to alteration, but will have aconsiderable impact on the industry.




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South Africas new consumer agenda Treating Customers Fairly (TCF)



On March 31, 2011, the FinancialServices Board (FSB) published a

roadmap or its Treating CustomersFairly initiative (a regulatory agenda thatis already well-established in the UK).The TCF objective is to achieve six key

outcomes or consumers at all stageso the product lie cycle, including: Product design Marketing and promotion Advice Point o sale Ater the sale Complaints handling

The ultimate payment o beneits atclaims (or withdrawal) stage

TCF is a programme that will apply tothe regulation and market conduct oinancial services irms. It seeks to

ensure that air treatment o customersis embedded within the culture oregulated irms. TCF will use acombination o market conduct

principles and explicit rules to drive thedelivery o clear and measurable airnessoutcomes. The FSB aims to developa rigorous supervisory approach with

both positive and negative incentivesto encourage commitment to TCF.Supervision will be more intensiveand intrusive than in the past.

TCF urther seeks to ensure thatspeciic, clearly articulated airnessoutcomes or inancial servicescustomers are demonstrably delivered

by regulated inancial institutions.The six airness outcomes are:Outcome 1: Customers are conident

that they are dealing with irms wherethe air treatment o customers is

central to the irms culture.Outcome 2: Products and services

marketed and sold in the retail market

are designed to meet the needs oidentiied customer groups and are

targeted accordingly.Outcome 3: Customers are given

clear inormation and are keptappropriately inormed beore, duringand ater the time o contracting.

Outcome 4: Where customersreceive advice, the advice is suitableand takes account o their

circumstances.Outcome 5: Customers are provided

with products that perorm as irms

have led them to expect, and the

associated service is both o anacceptable standard and what theyhave been led to expect.

Outcome 6: Customers do not aceunreasonable post-sale barriers tochange product, switch provider,

submit a claim or make a complaint.

TCF Implications for firms

Firms who are able to map the six keyTCF outcomes to managementinormation, address those outcomes,identiy the remedial action taken and

then demonstrate appropriate controlsand actions, should be well placed tosatisy the supervisory initiatives o theFSB. In other words, TCF management

inormation must measure the extentto which the process is delivering airtreatment and not necessarily whetherthe process is taking place. In this

way, TCF becomes ingrained into anorganizations culture as envisagedby regulators.

Firms should start their TCF journey

by identiying where in the businessTCF practices are applicable, particularlywhere a irm makes use o external

intermediaries, internally-based clientrelationship managers and call centers.

This initial scope analysis should beollowed by a gap analysis o the

available management inormation.It is clear that the regulatory

landscape or inancial services irms

including investment managers will be aected by TCF legislation.Firms should: Evaluate where the TCF proposals

will inluence the product liecycle and

identiy the business implications.Firms will need to consider the eectso linking their strategies to their TCF

culture through visible leadership and

deining what airness means at allpoints o the liecycle o each product. Design a governance structure or

TCF characterized by seniormanagement oversight and proactiveissue identiication and correction.

Determine the impact o establishingmechanisms to prove that airoutcomes are being delivered throughqualitative management inormation.

Implement a process so cross-linkagesbetween TCF and other marketconduct legislation are lagged.

TCF will require regulated irms toconsider their treatment o customersand to demonstrate through

management behaviors, measures andmonitoring that they are consistentlytreating customers airly throughoutthe various stages o the product

liecycle. Ultimately, successuldelivery o the six airness outcomesshould ensure that customers inancial

services needs are suitably met through

a sustainable industry.


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Australia

e

n

Japan

ASPAC

The ast pace o change

2012 KPMG International. KPMG International is a Swiss cooperative. Member fr ms o the KPMG network o indep endent frms are afliated with KPMG International. KPMG International provides no client services. Nomember frm has any authority to obligate or bind KPMG International or any other member frm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member frm. All rights reserved.


The ast pace o change in productdistribution, disclosure and investorprotection continues acrossASPAC. A number o regulatorshave commenced broad reviewso the inancial services industryand regulatory environment, drivenby both local market events andemerging standards arisingelsewhere in the world. While thestages o reviews vary betweenjurisdictions, the commonality inthe themes o the proposals isclear: with consumer protectionand air dealing coming to theore, enhancements to investor

protection and product disclosureremain high priorities or a numbero regulators across the region.

Singapore

The comprehensive review o theinancial advisory industry by the

Monetary Authority o Singapore (MAS),

the Financial Advisory Industry Review

(FAIR), is expected to have a signiicant

impact on the industry and on the public.

The MAS has announced that as part

o its consultative approach to engage

all stakeholders, a Review Panel will

be ormed, with representation rom

industry associations, the investment

community, academia, media and

consumer bodies. The Review Panel willreview and propose recommendations

on the ive key thrusts, namely:

1.Raise the competence of financial

advisory (FA) representatives

2.Raise the quality of FA firms

3.Make financial advice a dedicated

service

4.Lower distribution costs

5.Promote a culture of fair dealing

The wide-reaching aim o FAIR is to

bring about a higher quality o inancial

advisory services and better outcomes

or customers and by enhancing

customer trust, promote sustained

growth o the inancial advisory industry.

On July 28, 2011, MAS also

announced new regulations aecting

the sale o Investment Products. These

requirements clariy the responsibility o

intermediaries to assess the investment

knowledge and experience o retail

customers beore selling certain

investment products to the customer.The new requirements will apply to

Speciied Investment Products (SIPs)

which are all investment products other

than those deined as less complex

and generally well understood by retail

investors and are likely to have a

signiicant impact on broking irms,

banks, insurers and inancial advisers.

Changes have been proposed to the

similarly themed Future o Financial Advic

(FOFA) reorms in Australia, introduced i

2011. Following considerable pressure

and debate rom the industry, the

mandatory implementation date or the

FOFA reorms has been deerred rom

July 1, 2012 to July 1, 2013. Although theindustry has welcomed the delayed

implementation, there are still concerns

around the shiting nature o the

requirements and the huge technological

changes required. Such changes also

provide evidence o the challenges that

such important industry reorms in the

region can potentially expect to ace.

Additional disclosure requirements or

distributing prospectus and investment

management reports in Japan were

introduced in order to improve

transparency and investor protection.

The requirements include enhanced

details o the und structures and source

o earnings, and greater breakdown o

the source o dividends. As a result o the

recent market scandals, the Japanese

FSAs working group is understood tobe evaluating the uture o investment

trusts, investment corporations and

trustees (trust banks), with an eye to

international regulatory best practice.


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India

Similarly, the Securities and ExchangeBoard o India (SEBI) has been at theoreront o investor protection in India,which has a large number o not-so-well

inancially educated small investors.Removing entry load and capping exitload, in addition to simpliying theinvestment process, have been key

reorms to protect investor interests.Although these reorms have impactedthe growth and proitability o the sectorin recent years, they have also helped

players become more competitive andcost-eicient which should help thelong-term growth o the sector.

Work has also commenced in India to

widen the class o investors and attractmore oreign unds aimed at reducingmarket volatility and deepening capital

markets. The Indian Government andregulator announced that QualiiedForeign Investors who meet prescribedKYC requirements would be allowed to

directly invest in equity shares listed onthe recognized stock exchanges and inequity shares oered to public in India,and in equity and debt schemes o

Mutual Funds.

Taiwan

To enhance inancial consumersprotection in Taiwan, the FinancialOmbudsman Institution (FOI)

commenced operation in January 2012.The FOI has the remit to actively conducteducation and awareness programs orinancial services enterprises andinancial consumers and to establish

an eicient, air, and reasonableombudsman mechanism or the hearingo inancial consumer disputes. The FOI

is designed to avoid protracted andonerous procedures o court litigation,

and provide a reliable and trustworthymechanism or claim resolution.

Hong Kong

Consumer protection remains a ocusin Hong Kong, while memories o themis-selling allegations during the inancial

crisis remain strong. To acilitate the

establishment o the Financial DisputeResolution Centre (FDRC) in Hong Kong,the Securities and Futures Commission

(SFC) has proposed amendments to theCode o Conduct or Persons Licensedby or registered with the SFC. One keyproposal requires persons regulated

by the SFC or the Hong Kong MonetaryAuthority to comply with the FDRCScheme and be bound by its process.

Other areas impacted by theamendments include the handling ocomplaints, recording o client orders,reporting o suspicious activities and

provision o expert evidence.

China

Like India, as one o the regions mostpopulous nations, China has taken steps

to widen investor classes, attract moreoreign unds, reduce market volatility

and urther enhance capital markets.The Renminbi Qualiied Foreign

Institutional Investor (RQFII) pilotscheme was announced enablingHong Kong subsidiaries o qualiied

und managers and securities companiesto use Renminbi raised in Hong Kongto invest in the Mainland securities

markets. In the same month, the irstour RQFII unds were authorised,

allowing Hong Kong retail investors toinvest using Renminbi directly into the

Mainland equity and bond markets andhave access to daily liquidity.

Greater distribution was also aocus in China where the regulator

granted und distribution licenses toseveral independent und distributors.Traditionally, the majority o mutual unds

in China are distributed via bank outletseach year, with the remainder sold viabrokerages and by the und managers

themselves. While this position isunlikely to be challenged in the shortterm, the introduction o new players isdesigned to create greater competitivepressure on the ee structures in the

marketplace. Additionally, a number olocally incorporated oreign banks arein the process o applying or the unddistribution license irst announced in

the May 2011 Sino-US Strategic andEconomic Dialogue meetings.

The extent of regulation over retail

distribution increasing in a number

of countries and further increases

anticipated at the conclusion of this

ongoing industry-wide review leave

many pan-regional operators facing

the challenge of ensuring that their

internal compliance function is able

to maintain focus on several moving

targets concurrently. However,

with the ultimate goal of consumer

protection remaining at the top of the

agendas of many regional regulators,

the likely future direction is clear.

With the ultimate goal o

consumer protection remaining

at the top o the agendas omany regional regulators, the

likely uture direction is clear.




21/60

US

A seismic shit

The call or more transparencyin the marketing o investmentproducts to individual customersmay continue to grab the headlinesand the attention o the public.Transparency remains only oneo the major issues that investmentproessionals have grappled withover the past year. At all levels oretail distribution, a great deal ochange is taking place. Everywherewe look, the ground is shiting...

A major trade group or investmentproessionals recently challenged

government proposals that woulddramatically change the ground rules orselling money market unds. At the same

time, the debate continues betweenregulatory agencies and retail distributorsover issues such as point-o-saledisclosure and iduciary responsibility.

I broker-dealers are ultimately going

to be held to a higher iduciary standard,many discount brokerage houses which once targeted the sel-directedinvestor want to move into the role

o oering ee-based services andinvestment advice. These brokerages aretargeting middle-class investors who ind

themselves being dropped by the big,traditional wealth managers.

The power of new technology

Over the past ew years, investmentproessionals have also made greatstrides in utilizing the transormative

power o technology. The use o smartphones and mobile tablets or accessingsocial media content has jumpeddramatically among advisors and broker

dealers over the past year, according toAmerican Centurys third annual surveyo inancial proessionals. While the

potential or reaching customers through

social media is exciting, early adopterscaution that success will mean morethan just convincing customers to hit thelike button on Facebook. Firms should

develop strategies that will help potentialcustomers absorb the messages advisorsare trying to communicate, and thenmotivate customers to share messages

with their riends and persuade them tojoin the interactive party. The speed atwhich technology is introduced may beaccelerated by the JOBS act (see page 28,

The calm ater the storm?)

Changing investor behavior

In the meantime, customers are acting

on their need or greater lexibility inmaking investment decisions. Accordingto a recent report in the Financial Times1,aluent investors have been cutting backtheir allocations to traditional mutualunds and stepping up their interest in

exchange-traded unds (ETFs). Advisorspredict that, while a quarter o any newinvestment lows will be allocated to

mutual unds by 2013, another ith othese investments will go to ETFs.

To keep up with all the changes takingplace in the halls o government and

among colleagues and customers,

1. FTm Financial Times Special Report Investing in ForeignExchange, April 2012




22/60

investment proessionals would do wellto have a good pair o eyes in the backs

o their heads or, ailing that, a groupo advisors who should be trusted tokeep their eyes and ears ocused in

several directions at once.

Improving transparency

In the past year, the Investment

Company Institute (ICI) has taken aleading role in shaping the debate overtransparency and improving the rulesor point-o-sale disclosure by broker-

dealers. Stating that broker-dealersoten perorm substantially the sameunction as investment advisors, the ICIhas stated that the SEC should move

orward to establish new uniormstandards or broker-dealers, but notin a way that willchill legitimatepractices.3 For example, according tothe ICI, simply selling an investmentproduct should not be considered a

iduciary act. Nor, in most instances,should oering inancial calculationsor similar investment tools or general

inormation purposes.In the same statement, ICI also

challenged the need or FinancialIndustry Regulatory Authority (FINRA)

to impose new revenue-sharingdisclosure rules on broker dealers whosell registered unds. Helping investorsassess their choices and make inormed

decisions, says ICI, means advisorsshould be required to provide relevantdisclosure or all retail investmentproducts, not just registered unds.

Still stirring the waters amonginvestment proessionals are the FTCsproposals to change the rules or sellingmoney market unds. A recent survey

o 203 corporate, government andinstitutional investors, released thisyear by the ICI4, addressed three majorconcerns among proessionals. One

proposal ocuses on changing money

market unds rom a constant US$1NAVto a loating net asset value. I the loating

value were enacted, nearly threequarters o survey respondents statedthey would either decrease or stop using

money market unds.In the same survey, opponents to the

FTCs redemption holdback provisionsay it would deeat the liquidity eatureo money market unds and make

them less attractive as tools or cashmanagement. Finally, respondents tothe ICI survey stated that requiring non-government money market unds to

build up a modest loss reserve wouldincrease costs to investors and decreaseyields. I the loss reserve proposal

became a requirement, a third o surveyrespondents who now use moneymarket unds would either decreasetheir use or stop using them.

KPMG believes that enacting inalrequirements on these and other issueswill require considerably more interactionbetween regulatory agencies and the

investment community. As thesedebates continue, regulatory agencieswill still need astute guidance and whenappropriate, support rom the

investment community. So, o course,will customers.

As these debates continue,

regulatory agencies still need

astute guidance and when

appropriate, support rom the

investment community.

3. US House o Representatives Statement September 20114. Money Market Fund Regulations ICI, April 2012




23/60

03Alternative InvestmentsGlobal hedge funds Adapting to change

The credit crisis continues torecede in the industrys rearviewmirror. Managers are busy refningbusiness models. Investorscontinue to review allocations andoperational requirements. Theworlds hedge und managershave also been extremely busyover the past our years, adaptingto the many changes that continueto take place on the fnancial andregulatory landscapes.

The institutionalization of theglobal hedge fund industry

The single most compelling andpersistent theme emerging rom therecent KPMG hedge und survey5

results relates to the continued orceand momentum with which the globalhedge und industry is becomingincreasingly institutionalized. The term

institutionalization reers to not onlythe continuing inlux o new institutionalcapital into hedge unds, but also thecontinued evolution and advancement

o hedge unds inrastructure andoperational processes, with respectto transparency, compliance anddue diligence.

The days when hedge unds cateredalmost exclusively to high net worthindividuals and amily oices are longgone. The hedge und industry is

witnessing a marked shit in typeso investors. Today, investors inhedge unds are much more likely

to be institutions, such as charitable

oundations, public and private sectorpension unds, insurance companiesor university endowments.

The continued divergence ofthe industry

A growing tendency or larger institutionalinvestors to gravitate toward largermanagers with more institutionalized

operations and brand names with a higherlevel o recognition within the industryis emerging. A perhaps related but

inverse phenomenon is evident withrespect to high net worth individuals andamily oices, which appear more likelyto allocate assets with the industrys

smaller managers. This division o theindustry has been taking place or anumber o years now, but is becomingeven more pronounced in the years

ollowing the inancial crisis.While this appears to be a growing

trend, it does not mean that institutionalinvestors are completely ignoring the

smaller players. At the boutique end othe market, there is also a new breed ocollaboration reerred to as co-opetition,in which managers using dierent

strategies and who would otherwise be

competitors, are coming together toorm a mutually-beneicial, collaborative

working relationship. The emergence



24/60

o this trend is just one o the manyexamples o how the smaller players

are successully adapting to the ongoingchanges in the marketplace in order tosurvive and thrive in a rapidly changing

environment.

A trend toward increased transparency

Since the inancial crisis investors have

become more demanding regardingtransparency. At least part o the reasonor this increase in demand ortransparency among the largest hedge

unds could be traced back to its newinvestors large institutional investorssuch as pension unds, which requirehighly comprehensive reporting and

due diligence.As investors have demanded moretransparency, hedge unds particularlythe industrys larger ones have begun

adapting their philosophies, policiesand sta headcounts in order to deliverit to them.

The shit toward increasedtransparency represents one o themost striking ways that the industryhas changed since the inancial crisis.

This shit demonstrates that, althoughreluctantly, the hedge und industryneeds to adapt not only its operationalpolicies, but also its very culture. Some

irms are clearly becoming more openand orthcoming with key inormation(including details around positions,compositions o portolio assets and in

order to appeal to institutional investorswho are injecting billions o new capitalinto hedge unds around the world.

Just as hedge unds are adapting toaccommodate the more stringentrequirements o institutional investors,

those institutional investors are, at thesame time, beneiting rom an enhanceddegree o transparency.

Implications for the hedge fund

industry

These growing trends toward increased

transparency and renewed ocus on duediligence are not without associated

growing pains or the hedge undindustry, including growing headcounts

and costly investments in inrastructure.The continually growing demand orinormation rom investors has led to anincrease in the size o the management

teams o the irms themselves. Mosthedge und managers do not see thistrend abating anytime soon. However,

these changes are not inexpensive toimplement.

While boutique irms with small stas

and individual investors continueto start up and even thrive in their chosenniches, many hedge und irms today arebecoming truly institutionalized by wayo the inrastructure they have built up

and the demands o the investors theyserve. However, the increased scrutinyand demands rom investors (not tomention the dramatic changes taking

place in the regulatory environment)continue to drive notable operationalchanges in the worlds hedge unds.

This all underscores the act that

operational transparency and duediligence are much more important toinvestors today than they were even a

ew years ago.

Adapting to a changing regulatory

landscape

While the global hedge und industry ismaking big changes both operationallyand culturally the related impacts

appear to be dwared by those requiredas part o the industrys dramatically

changing regulatory environment.

Increased scrutiny and demands

rom investors... continue to drive

big operational changes in the

worlds hedge unds, particularly

with respect to due diligence,transparency and governance.




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Globally, regulators have been workingtoward a G20 agenda o introducing new

registration and reporting rules or hedgeund managers, with the AIFMD in theEuropean Union and the Dodd-Frank Act

in the United States, both seeking toincrease the low o inormation rommanagers to supervisors. Changes to theregulations around short-selling and over-the-counter derivatives clearing have

also dramatically aected hedge undmanagers. The wide-reaching FATCA inthe United States is also likely to poseparticular problems.

The hedge und industry is nowaced with multiple inancial regulatorsaround the world who all are setting up

regulations aimed at bringing hedge undmanagers and their unds into scope.They are also becoming increasinglyrequired to report to regulators within

tight deadlines. When looking at hedgeunds and the increased regulatoryscrutiny, it becomes clear that they arelikely to remain on the regulators

agenda. The managers and unds arethereore likely to ace increased

compliance overhead costs. Such costswill have an impact on start-ups and onsmaller und managers due to the

increased regulatory and administrativerequirements.

Alongside the increased regulatory

scrutiny, there is also increased

demand for regulatory compliance

by investors. The increased demands

placed on hedge fund managers may

result in a wave of consolidation in

the industry going forward. While the

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