FUND NEWS

Financial Services / Regulatory and Tax / Issue 118

Developments in August 2014 Investment Fund Regulatoryand Tax developments in selected jurisdictions

2 / Fund News / Issue 118 / Developments in August 2014

Regulatory Content

European Union 3 WUCITS V and CDS officially published 3 ESMA opinion on CESR guidelines on a Common

Definition of European Money Market Funds 4 ESMA updated Guidelines for UCITS management

companies on ETFs and other UCITS issues 4 ESMA officially published Guidelines on reporting

obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the AIFMD in all EU languages

5 Final Report on guidelines for complaintshandling for the securities (ESMA) and banking (EBA) sectors

Ireland 7 Central Bank Reporting Guidance for Alternative

Investment Fund Managers 7 Central Bank Guidance on Minimum Capital

Reporting for AIFMs & UCITS Management Companies

7 Amendment to the Irish AIFMD Regulations 8 Central Bank FAQ on EMIR 8 IFIA Fund Service Providers Corporate

Governance Code 9 Central Bank Guidelines on Variable Remuneration

Arrangements for Sales Staff 9 Central Bank Handbook for Investment

Intermediaries 9 Central Bank Report on Fitness and Probity

Performance Service Standards for January 2014 to June 2014

Contents

Luxembourg 10 Entry into force of Luxembourg law amending the

bearer shares’ regime 12 CSSF issues Circular to clarify Regulation n°13-02

relating to out-of-court resolution of complaints

Switzerland 13 Guidelines on the Distribution of Collective

Investment Schemes

France 14 French market authority issues guidelines for

fund managers on the internal organisation of risk management and compliance

UK 14 Authorised Funds: FCA Fund Supervision

proposal – Information collected by Depositaries 14 FCA Thematic Review of Best Execution and

Payment for Order Flow 16 Temporary product intervention

International 16 Singapore, Malaysia and Thailand launch ASEAN

CIS framework for retail investors 17 U.S. SEC adopts new rule on securitization and

credit rating agency

Fund News / Issue 118 / Developments in August 2014 / 3

Regulatory News

6 February 2014. This report has been issued by the ESA committee (composed of ESMA, EBA and EIOPA representatives) and requires modifications in particular in relation to the assessment of credit quality of money market instruments by managers of Money Market Funds (MMFs).

Background

In March 2010, CESR adopted its guidelines on a Common Definition of European Money Markets Funds that entered into force on 1 July 2011. These guidelines inter alia set out criteria for money market instruments to be considered as eligible investments, requiring them in particular to be of high quality. A money market instrument should be considered being of high quality when it has been awarded one of the two highest available short-term credit ratings by each recognized credit agency rating the instrument.

After having reviewed the CESR guidelines ESMA concluded that the rules had the potential to trigger a sole or mechanistic reliance on credit ratings when considering “high quality”. As a result, on 6 February 2014 ESMA, EBA and EIOPA issued their joint final report on Mechanist Reference to Credit Ratings contained in the ESA’s Guidelines and Recommendations (JC 2014 004).

ESMA’s opinion now aims at better explaining how NCAs should apply the modifications set out in that report when monitoring the application of the guidelines to MMFs.

Modification of the provisions on the assessment of credit quality of money market instruments

The changes require a Management Company to implement its own internal assessment process to evaluate the credit quality of a money market instrument and to adequately document its outcome. However, where provided, external credit ratings issued by one or more recognized rating agencies shall also be taken into account. While there should be no mechanistic reliance on such external rating(s), a downgrade below the two highest short term credit ratings by the rating agency should be reflected in the internal process and lead the manager to re-assess the credit quality of the money market instrument. As an exception, MMF not qualifying as short-term MMF may also invest in sovereign issuances of a lower internally-assigned credit rating. Apart from that, sovereign issuances are nonetheless subject to the same rules as outlined before.

ESMA is not intending to re-issue the CESR guidelines. In this respect, NCAs are not obliged to notify compliance or non-compliance with the new version. ESMA nevertheless intends to monitor the application of its opinion by NCAs.

The ESMA opinion is available at the following web link.

http://www.esma.europa.eu/system/files/2014-esma-1103_esma_opinion_on_cesr_guidelines_on_mmfs.pdf

UCITS V and CDS officially published

On 28 August 2014 the UCITS V Directive and the CSD (Central Securities Depositary) Regulation have been officially published in the Official Journal of the EU. The Directive and the Regulation will come into force 20 days after publication and in the case of UCITS V Member States will have 18 months after entry into force, i.e. until 18 March 2016, to transpose the provisions into national law.

The final text for UCITS V is available via the following web link.

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.257.01.0186.01.ENG

The final text for CSD can be found via the following web link.

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.257.01.0001.01.ENG

ESMA opinion on CESR guidelines on a Common Definition of European Money Market Funds

On 22 August 2014 the European Securities and Market Authority (ESMA) published its opinion resulting from a review of the “CESR guidelines on a Common Definition of European Money Market Funds”. In this opinion ESMA outlines how national competent authorities (NCAs) should apply modifications to the CESR guidelines in fulfilling their supervisory function, as set out in the report “Mechanistic Reference to Credit Ratings”, dated

European Union

4 / Fund News / Issue 118 / Developments in August 2014

ESMA updated Guidelines for UCITS management companies on ETFs and other UCITS issues

On 1 August 2014, ESMA published an update of its guidelines (ESMA/2014/937) originally issued in 2012, complementing these with new rules regarding the management of collateral for OTC financial derivative transactions and efficient portfolio management (EPM) techniques. The main changes refer to the collateral diversification criteria requiring a basket of collateral, with a maximum exposure to a single issuer being only 20% of the UCITS’ net asset value. This criteria has been extended so that a UCITS may be fully collateralised in different transferable securities and money market instruments issued or guaranteed by a Member State. Such a UCITS should receive securities from at least six different issues, but securities from any single issue should not account for more than 30% of the

UCITS’ net asset value. UCITS that intend to be fully collateralised in securities issued or guaranteed by a Member State should disclose this fact in the prospectus of the UCITS and in the annual report. UCITS should also identify the collateral received from a single issuer or body guaranteeing securities, where the value has exceeded 20% of their net asset value.

The revised guidelines apply from two months after the publication on the ESMA website. Existing UCITS may have up to 12 months to comply with the provision related to the prospectus transparency, given that the relevant prospectus is neither revised nor replaced for another purpose before that date.

The text of the revised guidelines is available at the following web link.

http://www.esma.europa.eu/system/files/esma-2014-0011-01-00_en.pdf

ESMA officially published Guidelines on reporting obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the AIFMD in all EU languages

On 8 August 2014, the European Securities and Markets Authority (ESMA) officially published the “AIFMD reporting guidelines” in all EU languages on its website, after a “final ESMA report on reporting guidelines“ was published in October 2013 following a consultation period in 2013. Some regulators, such as the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg, already announced its intention to comply with these guidelines earlier this year (CSSF Circular 12/581). The publication now makes the “draft” guidelines in the final ESMA report official and gives

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national competent authorities up to two months to indicate whether they are going to comply with them or not. As the CSSF already requires adherence to the reporting guidelines of ESMA, plus 5 additional criteria on systematic risk reporting outlined in the CSSF “FAQ on AIFM” (Version 7 as of 18 July 2014), there are no major impacts on AIFs or AIFMs in Luxembourg, given that they implemented the reporting standards from earlier publications from ESMA and the CSSF.

The text of the guidelines in all official EU languages is available at the following web link.

http://www.esma.europa.eu/content/Guidelines-reporting-obligations-under-Articles-33d-and-241-2-and-4-AIFMD-0

Regulatory News

Final Report on guidelines for complaints-handling for the securities (ESMA) and banking (EBA) sectors

On 25 August 2014 the European Securities and Market Authority (ESMA) and the European Banking Authority (EBA) published their “Joint Committee Final Report on guidelines for complaints-handling in the securities (ESMA) and banking (EBA) sectors. The document intends to increase market confidence for both consumers and firms and to ensure harmonized arrangements for firms handling complaints within all EU Member States and across all financial services sectors.

Already the G20 “High-level principles on financial consumer protection” issued in October 2011 outlined the necessity to have “adequate complaints handling and redress mechanisms” to better protect consumers. The new guidelines have been developed on the basis of the existing complaints-handling guidelines established by EIOPA (the European Insurance and Occupational Pensions Authority) for the insurance sector in June 2012. They also summarize the feedback received in response to a public consultation on “draft guidelines for complaints-handling for securities (ESMA) and banking (EBA) sectors” that had been published on 6 November 2013 and closed on 7 February 2014.

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Regulatory News

Taking into account the different provisions for complaints-handling across financial sectors, ESMA and EBA consider the new guidelines an important step in order to establish a common approach to complaints-handling within the EU. Consumers can now purchase financial services and products from the investment, banking and insurance sectors across the EU Single Market and refer to a single set of complaints-handling arrangements. In other words, EU consumers will be able to rely on the same approach irrespective of what type of product they have purchased and where they have purchased it.

The guidelines specifically seek to:

• clarify expectations relating to firms’ organisation relating to complaints-handling;

• provide guidance on the provision of information to complainants;

• provide guidance on procedures for responding to complaints;

• harmonise the arrangements of firms for the handling of all complaints they receive;

• ensure that firms’ arrangements for complaints-handling are subject to a minimum level of supervisory convergence across the EU.

The new guidelines will allow firms, some of which sell products from more than one sector across the EU, to standardize their own complaints-handling arrangements. At the same time national regulators will be able to supervise the same harmonized requirements across all sectors of financial services in their own jurisdictions.

The next step will be the translation of the guidelines into the official languages of the EU. They will become applicable two months after the date of publication of their translations.

The text of Joint Committee Final Report is available at the following web link.

http://www.esma.europa.eu/system/files/jc_2014_43_-_joint_commit-tee_-_final_report_complaints-han-dling_guidelines.pdf

Fund News / Issue 118 / Developments in August 2014 / 7

Central Bank Reporting Guidance for Alternative Investment Fund Managers

The Central Bank has issued practical guidance for all AIFMs (including internally managed AIFs) who are authorised or registered by the Central Bank or who manage or market AIFs in Ireland, on the reporting requirements for the Central Bank’s Online Reporting System.

The guidance covers the AIFM’s (and its AIF’s) reporting obligations under Article 3(3)(d) & 24(1),(2) and (4) of the AIFMD and the prudential reporting requirements imposed on AIFM by the Central Bank under the AIF Rulebook.

The guidance is available here:

http://www.centralbank.ie/regula-tion/industry-sectors/funds/aifmd/Documents/AIFMD%20Report-ing%20Guidance%20v1.0.pdf

AIF and AIFM reporting templates are available from the Central Bank’s website.

Central Bank Guidance on Minimum Capital Reporting for AIFMs & UCITS Management Companies

The Central Bank has published guidance and a template for AIFMs and UCITS management companies on minimum capital requirements reporting which includes a Minimum Capital Requirements Report to be submitted with the half yearly and annual audited accounts at the relevant reporting period specified by the UCITS Notices and the AIF Rulebook.

Ireland

The Minimum Capital Requirements Report must be signed by a director or a senior manager of the firm.

The guidance is available here:

http://www.centralbank.ie/regula-tion/industry-sectors/funds/aifmd/Documents/UCITS-AIFM%20MCR%20Guidance%20v1.0.pdf

Amendment to the Irish AIFMD Regulations

On 12 August 2014 the European Union (Alternative Investment Fund Managers) (Amendment) Regulations 2014 were published in the Irish Government’s Official Gazette, Iris Oifigiúil. These regulations:

• amend the European Union (Alternative Investment Fund Managers) Regulations 2013 (SI 257 of 2013) (the “principal AIFMD regulations”) and the UCITS regulations to transpose the requirements of the Credit Ratings Agencies Directive restricting Irish AIFM, UCITs investment companies and management companies from relying solely on credit ratings provided by credit rating agencies when assessing investment risks. The effective date of these amendments coincides with the transposition deadline of the Credit Ratings Agencies Directive i.e. 15 December 2014. The Central Bank will monitor the adequacy of the credit assessment processes of firms and encourage alternatives to credit ratings references in firm’s investment policies;

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• clarify that AIFMs authorised to provide MiFID like services such as “individual portfolio management” services must comply with the client asset requirements from the Irish regulations which implemented MiFID in Ireland, and that AIFMs may maintain client asset accounts for processing “subscriptions and salesperson moneys” which must also comply with MiFID client asset requirements;

• clarify that non-EU AIFMs must apply to the Central Bank for approval before marketing to retail investors in Ireland;

• correct minor errors in the principal AIFMD regulations; and

• clarify that the Investor Compensation Company Limited may levy AIFMs who are covered by the Investor Compensation fund.

The amendment regulations are available here:

http://www.irishstatutebook.ie/pdf/2014/en.si.2014.0379.pdf

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counterparty to inform it that there is a requirement in their jurisdiction;

• all FX transactions between two Irish counterparties with settlement between the spot date and seven days (inclusive) are not required to be reported, but the counterparties should have the capacity to make such reports; and

• all FX transactions with settlement beyond seven days should be reported.  

The Central Bank has indicated that further guidance regarding the treatment of FX forwards may be forthcoming once it is appointed as the National Competent Authority for Ireland.

The Central Bank’s updated EMIR FAQ is available here:

http://www.centralbank.ie/REGULA-TION/EMIR/Pages/FAQs.aspx

IFIA Fund Service Providers Corporate Governance Code

The Irish Funds Industry Association has published a voluntary industry corporate governance code specifically for fund service providers in addition to the corporate governance code for funds and their management companies that it published in 2012. The Central Bank supports the adoption of the code so its adoption is recommended. 

The new code provides directors of administrators, custodians and depositaries authorised by the Central Bank with a framework of good practice in corporate governance and oversight and provides a clear set of responsibilities for the board of fund service providers including oversight, risk and compliance, key appointments and the prevention of conflicts of interest.

The code’s provisions on independent non-executive directors and on the time commitments of directors are of particular note. For those adopting the code, compliance/non-compliance with the code should be disclosed in the service provider’s annual report or website etc for the years commencing on or after 1 January 2015.

The code is available here:

http://www.irishfunds.ie/fs/doc/publications/corporate-governace-booklet-8page-web-2.pdf

Regulatory News

Central Bank FAQ on EMIR

It is expected that the Central Bank will soon be appointed as the National Competent Authority for Ireland for EMIR purposes. In expectation of this appointment the Central Bank has updated its EMIR FAQ with new guidance regarding the reporting of FX forwards.

As a temporary measure, pending clarification by ESMA, the Central Bank has stated;

• all FX transactions, between an Irish and a non-Irish counterparty, with settlement between the spot date and seven days (inclusive) need only be reported if, in the jurisdiction where a counterparty to the trade is located, local laws, rules or guidance deem the transaction reportable and where this is the case, the Irish counterparty should rely on documentation from that

Fund News / Issue 118 / Developments in August 2014 / 9

Central Bank Guidelines on Variable Remuneration Arrangements for Sales Staff

The Central Bank has issued Guidelines on Variable Remuneration Arrangements for Sales Staff which sets out the Central Bank’s findings from the “Sales Incentive Review” regarding credit institutions, insurance companies and investment firms. The Central Bank will require all banking, insurance and investment firms to review and restructure their remuneration arrangements in light of these Guidelines.

Chairperson of each entity subject to the review are required to report their compliance with the variable remuneration rules to the Central Bank in advance of the remuneration period commencing on 1 January 2015.

A copy of the guidelines is available here:

http://www.centralbank.ie/press-ar-ea/press-releases/Documents/Guide-lines%20on%20Variable%20Re-muneration%20Arrangements%20for%20Sales%20Staff%20July%202014.pdf

Central Bank Handbook for Investment Intermediaries  

The Central Bank has published a new Handbook on requirements for certain investment business firms (i.e. investment intermediaries) subject to the Investment Intermediaries Act 1995.

The Handbook is effective from 1 October 2014 and replaces the Handbook of Prudential Requirements for Authorised Advisors and Restricted Intermediaries.

The Handbook covers:

• General supervisory requirements

• Financial position and reporting requirements

• Books and records

• Organisation & management

• Professional indemnity insurance

The Handbook is available here:

http://www.centralbank.ie/regulation/industry-sectors/retailintermediaries/Documents/Handbook%20of%20Pru-dential%20Requirements%20for%20Investment%20Intermediaries.pdf

Central Bank Report on Fitness and Probity Performance Service Standards for January 2014 to June 2014

The report details the Central Bank’s performance against the service standards for the processing of “Individual Questionnaires” in respect of persons proposed to hold “Pre-Approval Controlled Functions” within regulated financial service providers and can be viewed here:

http://www.centralbank.ie/regula-tion/processes/fandp/Documents/Service%20Standards%20Perfor-mance%20Report%20July%202014.pdf

Regulatory News

Key Dates Reminder

• 1 September 2014 – Closing of the Central Bank’s Discussion Paper on Risk Appetite. See Issue 116 of Fund News (June 2014).

• 12 September 2014 – Closing of the Central Bank’s Consultation (CP 81) on the possible exemption from capital buffers for SME investment firms from CRD IV/CRR. See Issue 117 of Fund News (July 2014).

• 1 October 2014 – Effective date of the new Central Bank Handbook for certain investment intermediaries.  

• 17 October 2014 – Closing of the Central Bank’s Consultation (CP84) on the adoption of ESMA’s revised guidelines on ETFs and other UCITS issues. See Issue 117 of Fund News (July 2014).

• 15 December 2014 – Effective date of the Credit Ratings Agencies Directive which will restrict Irish AIFM, UCITs investment companies and management companies from relying solely on credit ratings provided by credit rating agencies when assessing investment risks.

• 1 January 2015 – Fund service providers adopting the IFIA’s voluntary industry corporate governance code to disclose compliance with the code in their annual report or on their website etc.

• 1 January 2015 – Reporting of compliance with the variable remuneration rules to the Central Bank in advance of the remuneration period commencing on 1 January 2015.

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Entry into force of Luxembourg law amending the bearer shares’ regime

In the wake of recommendations by the Financial Action Task Force (“FATF”) and the Global Forum on Transparency and Exchange of Information for Tax Purposes, Luxembourg has implemented into national law measures requiring the compulsory deposit and immobilisation of bearer shares and units. The Law of 28 July 2014 introduces a new regime for the compulsory deposit and immobilization of bearer shares and units at an authorized depositary, and entered into force on 18 August 2014. This law modifies the Luxembourg commercial Law of 10 August 1915 and the Law of 5 August 2005 on Financial Collateral Arrangements.

1. Scope

The new law applies to Luxembourg commercial companies created either in form of a S.A. or S.C.A. including investment companies in the form a SICAV or SICAF as well as contractual funds. UCITS, part II funds, SIF and SICAR are in scope of the new law. The law requires them to deposit their bearer shares or units with a depositary appointed by the issuer. Contrary to what was foreseen in the first draft law, bearer shares issued by a listed company are now included in the scope of instruments to be deposited.

Luxembourg

2. Entities eligible as depositary

Shareholders of the issuing company are excluded from the outset from the list of eligible entities. The law authorises the following list of professionals listed to be appointed as depositary of bearer shares or units by the management body of the issuers, provided they are established in Luxembourg:

• credit institutions;

• private portfolio managers;

• distributors of units/shares in UCIs;

• specialised professionals of the financial sector (PSF) approved as Family Office, corporate domiciliation agents, professionals providing company formation and management services, registrar agents or as professional depositaries of financial instruments;

• qualified lawyers (lists I and IV);

• notaries;

• statutory auditors and approved statuary auditors;

• chartered accountants (experts-comptables).

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Fund News / Issue 118 / Developments in August 2014 / 11

3. Role of the depositary

The depositary will have to keep a register in which all bearer shares or units of the issuer will be recorded. The following information must be recorded:

• The identification of each shareholder, with the number of bearer shares or units held;

• The date of deposit;

• Each transfer with its date or, where applicable, each conversion of the bearer shares into registered shares.

Shareholders will only be entitled to access information regarding their own shares or units.

4. Shareholder’s ownership and rights

The title to ownership on bearer shares or units is established by inscription of the shareholder of these instruments in the register of the depositary. It is the registration that proves the ownership and no longer the possession of shares or units certificate. Transfer of ownership is valid when a transfer declaration is inscribed in the same register.

Further, shareholders will only be able to exercise their rights relating to the bearer shares or units if those have been deposited as required by this law.

5. Pledge of shares/units: amendment of the law of 5 August 2005 on Financial Collateral Arrangements

Where shares or units are pledged, an inscription of the pledge in the register of the depositary will ensure the transfer of possession of the instruments and the enforceability of the pledge against third parties.

6. Criminal sanctions

The depositary and the management body may incur criminal sanctions for non-compliance with their obligations.

The issuers’ management body incurs a fine of EUR 5000 to 125 000 if it knowingly:

• does not maintain a register of registered shares or units at the registered office of the issuer;

• does not appoint a depositary or deposit the bearer shares or units by the deadlines laid down;

• recognise the rights relating to the bearer shares or units when those have not been deposited and the required information has not been inscribed.

The appointed depositary, or its managements body in case the depositary is a legal person, incurs a fine of EUR 500 to EUR 25 000 if it knowingly does not performs its duties as required by the law.

7. Transitional period

Companies who were already issuing bearer shares or units before the entry into force of the law will have to appoint a depositary within 6 months (18 February 2015) of the entry into force of the law and the bearer shares or units will have to be registered within 18 months (18 February 2016) of the entry into force of the law. But if they are not deposited within the first 6 months of the entry into force of the law, the voting rights and dividends attached will be suspended until they are finally deposited. Distribution of dividends will be postponed until deposit of the instruments. After expiration of the 18 months period, the instruments which have not been deposited will be cancelled and the subscribed capital reduced of the same amount.

The final text is available at the following link.

http://www.legilux.public.lu/leg/a/archives/2014/0161/a161.pdf

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12 / Fund News / Issue 118 / Developments in August 2014

CSSF issues Circular to clarify Regulation n°13-02 relating to out-of-court resolution of complaints

On 27 June 2014, the CSSF issued Circular 14/589, repealing IML Circular 95/118, and providing guidance on the provisions contained in Regulation n°13-02 on the out-of-court resolution of complaints.

Complaints handling procedure

Regulation 13-02 requires professionals to maintain records of each complaint. The circular leaves professionals free to decide on the precise form of record-keeping but specifies that records should be computerized, secured and appropriate to the volume of complaints received.

The CSSF insists that the complaint should be answered in an appropriate manner and within a reasonable time period, depending on the issue raised by the client. The CSSF also outlines that the measures described in the Regulation are not exhaustive in nature. Professionals must tailor their procedures to the volume and complexity of the complaints, and hotlines or call centers may be used as part of the complaints handling process.

Member of management in charge of complaints handling

The member of management who is responsible for complaints handling is required to: inform all staff involved in complaints handling of the policy and procedures; determine the human and technical resources necessary for the implementation of the policy and procedures; ensure that compliance and the internal audit review the effectiveness of the controls and process; receive a reporting on all complaints that should include the identified issues, the corrective actions undertaken and their follow up.

Where the volume or complexity of the complaints require the appointment of staff, the member of management may internally delegate the management of complaints provided prior notification is made to the CSSF. The professionals must ensure that the name and contact details of the staff member in charge of the complaint is communicated to the complainant. If possible, this staff member shall be the contact person of the complainant during the entire process.

Communication of information to the CSSF

In the Circular, the CSSF highlights the difference between a complaint and a request for information or explanation. They also provide a template of the reporting form that needs to be submitted to the CSSF on an annual basis. Professionals are free to use any other template which would be more appropriate to their situation.

The first reporting to the CSSF is due at the latest on 1 March 2015 and covers the period form 1 July 2014 to 31 December 2014. Subsequently, the documents will have to be submitted every year at the latest on 1 March and cover the previous calendar year. UCITS Management companies can submit the required documentation at the latest one month after the ordinary general meeting.

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

http://www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf14_589.pdf

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Fund News / Issue 118 / Developments in August 2014 / 13

Guidelines on the Distribution of Collective Investment Schemes

The Distribution Guidelines have been recognized as a minimum standard by the Swiss Financial Market Supervisory Authority (“FINMA”). This means that the guidelines are of general application, regardless of a SFAMA membership. They entered into force on 1 July 2014.

Objectives and scope

The aim of the guidelines is to ensure high quality standards on the Swiss market for collective investment schemes with regard to the information and advice provided to investors. They are part of the self-regulation regime of the Swiss fund industry, supplementing and defining in more detail the provisions on the distribution of collective investment schemes set down in the Code of Conduct for the Swiss Fund Industry issued by the SFAMA.

The Distribution Guidelines are applicable to fund management companies, SICAVs, SICAFs and Swiss representatives of foreign funds distributed in Switzerland.

The Provisions for Distributors contained in the Appendix to the Distribution Guidelines are applicable to all distributors, including distributors domiciled outside Switzerland and must be incorporated in the distribution agreements between promoters and distributors in Switzerland. These provisions apply to both distribution to non-qualified investors and to qualified investors.

Switzerland

Relevant provisions for providers

• Select distributors carefully;

• Conclude distribution agreements on the basis of the model agreements issued by the SFAMA;

• Verify whether the distributors have the necessary personal and professional resources;

• Monitor the distributors.

Relevant provisions for distributors

• Have an internal directive on organizational measures and requirements for professional training and experience regarding the distribution of collective schemes;

• Conclude distribution agreements on the basis of the model agreements issued by the SFAMA;

• Inform the non qualified investors about characteristics, opportunities and risks of the collective investment schemes;

• Respect the Swiss Bankers Association guidelines on the duty to keep documentary record set in Art. 24 para. 3 CISA;

• Select and monitor the sub-distributors;

• Have their compliance with the Provisions for Distributors audited by an audit firm (in case they are Distributors Requiring Authorization or Exempt Distributors);

• Confirm each year the compliance with the applicable provisions to the provider (in case they are Distributors Not Requiring Authorization or Foreign Distributors).

Necessary actions

Fund management companies, SICAFs, SICAVs and representatives of foreign collective investment schemes must:

• classify distributors based on the categories set out in the Distribution Guidelines;

• amend the distribution agreements before 30 June 2015;

• amend the existing internal directives.

Distributors must:

• amend the existing internal directives;

• amend the distribution and/or sub-distribution agreements before 30 June 2015.

The complete text of the Guidelines on the Distribution of Collective Investment Schemes can be found via the following web link:

https://www.sfama.ch/self-regula-tion/distribution

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14 / Fund News / Issue 118 / Developments in August 2014

French market authority issues guidelines for fund managers on the internal organisation of risk management and compliance

On 1 August, the Autorité des Marchés Financiers (AMF) released guidelines providing their understanding of the permanent risk and compliance functions’ responsibilities and organisation. This documents targets UCITS managing companies and AIFMs.

The French authority seized the opportunity to recall the definition of the potential risks that fund managers might face: financial risks (incl. operational, counterparty and liquidity risks), non-compliance risk, and operational risk.

Further, regarding risk management, the guidelines:

• Define the minimal content of the risk management policy and the role of the permanent risk management function which shall be independent from the hierarchy and the operational units;

• Recall the independence regime of the permanent risk management function and the human resources it requires;

• Precise the mission of the permanent risk management function (identification and management of risks, mapping of the risks, develop indices to measure risks and systems that mitigate risks and warning systems, …);

• Recalls the requirement for ongoing monitoring of the

France

suitability and effectiveness of the risk management systems in place.

The guidelines also stress out the key role of the compliance function which shall assist and advise operational units and the managing body but also controls the compliance arrangements put in place. For this purpose, the compliance function must be independent. The internal organisation must secure its independence and authority.

Finally, the guidelines provide details on the arrangements the company shall take to put in place internal and periodical controls to ensure that decisions and procedures are followed at all levels.

The guidelines are available at the following link.

http://www.amf-france.org/Regle-mentation/Doctrine/Doctrine-list/Doctrine.html?category=III+-+Prestataires&docVersion=1.0&docId=workspace%3A%2F%2FSpacesStore%2F8be6d64a-e78e-4487-90ad-8ac0d832d636

Authorised Funds: FCA Fund Supervision proposal – Information collected by Depositaries

In a letter sent to the IMA in July the FCA Fund Supervision team invited DATA (Depositaries and Trustees Association) and the IMA to participate in a working group on how the industry can assist the FCA in enhancing its fund supervision capability. As part of this work the FCA is looking to review the information collected by depositaries and trustees. In the interests of transparency the FCA has permitted to share the contents of its letter (please see copy attached).

The working group will be looking at information already held by depositaries and trustees, for example breach registers and monitoring reports. The FCA does not anticipate the collection of new information not currently held by depositaries and trustees at this stage in the process. Currently there is no requirement for depositaries or trustees to submit copies of their monitoring visit reports to the FCA.

Existing reporting obligations applicable to depositaries and trustees are contained in SUP 16.6.7. and relate to the quarterly reporting to the FCA of pricing errors and negative boxes.

FCA Thematic Review of Best Execution and Payment for Order Flow

The FCA has described its Thematic Review of Best Execution as an opportunity to review and refresh asset managers’ arrangements with sell-side counterparties with a view to ensuring that best execution is being provided by the sell-side, where relevant.

UK

Regulatory News

Fund News / Issue 118 / Developments in August 2014 / 15

Authorised Funds: FCA Fund Supervision proposal – Information collected by Depositaries

In a letter sent to the IMA in July the FCA Fund Supervision team invited DATA (Depositaries and Trustees Association) and the IMA to participate in a working group on how the industry can assist the FCA in enhancing its fund supervision capability. As part of this work the FCA is looking to review the information collected by depositaries and trustees. In the interests of transparency the FCA has permitted to share the contents of its letter (please see copy attached).

The working group will be looking at information already held by depositaries and trustees, for example breach registers and monitoring reports. The FCA does not anticipate the collection of new information not currently held by depositaries and trustees at this stage in the process. Currently there is no requirement for depositaries or trustees to submit copies of their monitoring visit reports to the FCA.

Existing reporting obligations applicable to depositaries and trustees are contained in SUP 16.6.7. and relate to the quarterly reporting to the FCA of pricing errors and negative boxes.

FCA Thematic Review of Best Execution and Payment for Order Flow

The FCA has described its Thematic Review of Best Execution as an opportunity to review and refresh asset managers’ arrangements with sell-side counterparties with a view to ensuring that best execution is being provided by the sell-side, where relevant.

UK

The FCA report outlines standards and failings observed in the sell-side when delivering best execution to clients, including asset managers. The FCA’s findings were that a large number of the current arrangements in firms fell below expected standards.

By way of an outcome of the Thematic Review and the reported findings the FCA expects all investment firms to review their arrangements in relation to best execution delivery and ensure no payments are received for order flow – which it believes are in direct contravention of its rules on inducements and acting in the best interests of customers.

Observations made by the FCA included a lack of or incomplete systems and controls surrounding best execution within the sample of firms in scope of the review. It stated that such systems and controls should to be proportionate to the nature scale and complexity of the business in line with the requirements in SYSC. Further that firms also need to ensure senior management take ownership of embedding best practices in all trading activities in their drive to provide best execution consistently and in accordance with their fiduciary duties as the client’s agent.

The FCA continued that, sell-side Firms cannot circumvent best execution requirements by placing reliance on specific instructions, the riskless principle or the Request For Quote. In its view, sell-side Firms should also perform sample monitoring and maintain adequate records of such best execution delivery monitoring. Finally, the regulator raised concerns about the appropriateness of client categorisation by the sell-side (in the

context of MiFID and the rules in COBS 3) where it believe there were failings in firm’s processes in correctly categorising clients. .

The review of Firms’ systems and controls will need to take account of upcoming regulatory developments, specifically MiFID 2; which will address some of the observations made by the FCA in its report, for example the adequate monitoring of best execution delivery. Accordingly, and in addition to improving current systems and controls, Firms should anticipate and prepare for future regulatory policy changes.

Below follows a summary of report findings regarding Best Execution and Payment for Order Flow (PFOF).

Best execution

The FCA found that a broad assumption exists in the industry – that clients would switch to a competitor if they were not satisfied that the (best) execution was consistently delivered. This may in reality not be accurate and to address this, the FCA expects Firms to focus on meeting its requirements and exercising their own reasonable judgement when acting in their clients’ best interests.

The FCA also highlighted failings within other specific areas:

1. Scope: Poor level of understanding in firms of which activities are covered by the best execution obligation. Firms inappropriately attempted to rely on carve-outs and exceptions to limit the scope of the obligation.

2. Monitoring: Firms did not undertake effective monitoring to

identify best execution failures or poor client outcomes. Where monitoring took place, it often was not recorded or translated into relevant Management Information (MI). Further, monitoring did not cover all relevant asset classes as required by MiFID, and did not reflect all of the execution factors or include adequate transaction samples.

3. Internalisation and connected parties: Firms which relied on internalisation or on executing orders through connected parties could not evidence whether such arrangements delivered best execution and how potential conflicts of interest were managed. Separation of external costs incurred on behalf of clients from internal costs or commission structures was not sufficiently evident.

4. Accountability: More clarity was required as to who within the Firm’s management had responsibility, and ultimate accountability, for ensuring best execution delivery. Firms only conducted cursory reviews of policy documents. Such documents did not address the entire scope of best execution obligations. Moreover, these were largely focused on process rather delivery of outcomes.

Payment For Order Flow (PFOF)

The FCA’s best execution review described above also looked at firms arrangements in relation to Payment for Order Flow (PFOF). This took into account the findings of an earlier review that took place in 2012. The

Regulatory News

16 / Fund News / Issue 118 / Developments in August 2014

Temporary product intervention

The FCA has restricted the distribution of CoCos to retail customers starting from 1 October 2014. The restriction will be in place for a year and applies to the retail distribution of new issues and of investments on the secondary market. It will also apply to securities issued abroad where UK firms seek to market them. It has said that CoCos should not be distributed to retail investors, that is, individuals who are neither sophisticated nor high net worth. The FCA has also recently issued important considerations for consumers who have, or who are planning to, invest in corporate bond funds.

FCA’s main findings from the recent review were:

1. PFOF arrangements create a tangible conflict of interest between the firm and its clients. The FCA further states that such arrangements are unlikely to be compatible with the inducements rule and further risk breaching best execution rules. Please note that following the FCA’s publication of FG12/13 and a review of PFOF in 2012, some firms ceased to receive commission from market makers in respect of their London International Financial Futures and Options Exchange (LIFFE) business.

2. A small number of market participants continue to receive PFOF by changing the description of the service they provided to clients. Such descriptions redefined PFOF to describe commercial relationships in terms not reflecting the economic realities of their activities. Notwithstanding the relabeling this still constitutes a PFOF arrangement and is in breach of FCA rules. Please note that firms in the FCA report sample have confirmed they are no longer receiving PFOF.

3. PFOF is under active review by the regulator. Moreover the FCA is looking to take action, including enforcement, against any remaining firms which continue to circumvent rules and requirements on PFOF.

Singapore, Malaysia and Thailand launch ASEAN CIS framework for retail investors

On 25 August 2014 the national supervisory authority of Singapore, Malaysia and Thailand have launched the ASEAN CIS (collective investment scheme) framework which will streamline the authorisation process for cross-border sale of retail funds to retail investors. The new framework has been initiated by the ASEAN Capital Market Forum to boost the regional capital market integration plan started in 2009. The framework will apply to fund managers established in any of the three participating countries who intend to sell their domestically licensed retail funds to retail investors in the other participating countries.

Fund qualification standards have been issued that prescribe elements such as the qualifications and experience of the Fund Manager, the Trustee, eligible assets and portfolio diversification rules, valuation and operational matters.

A handbook has also been released by the three authorities to guide managers through the different steps to obtain the necessary approvals. The handbook includes the content of the application file to the home and host regulators, the factors that the regulators will consider when assessing applications, the requirement to appoint local distributors and the on-going notification and disclosure regulatory requirements.

More ASEAN countries are expected to join in the coming years. Retail investors will be offered more investment opportunities and benefit

International

Regulatory News

Fund News / Issue 118 / Developments in August 2014 / 17

Singapore, Malaysia and Thailand launch ASEAN CIS framework for retail investors

On 25 August 2014 the national supervisory authority of Singapore, Malaysia and Thailand have launched the ASEAN CIS (collective investment scheme) framework which will streamline the authorisation process for cross-border sale of retail funds to retail investors. The new framework has been initiated by the ASEAN Capital Market Forum to boost the regional capital market integration plan started in 2009. The framework will apply to fund managers established in any of the three participating countries who intend to sell their domestically licensed retail funds to retail investors in the other participating countries.

Fund qualification standards have been issued that prescribe elements such as the qualifications and experience of the Fund Manager, the Trustee, eligible assets and portfolio diversification rules, valuation and operational matters.

A handbook has also been released by the three authorities to guide managers through the different steps to obtain the necessary approvals. The handbook includes the content of the application file to the home and host regulators, the factors that the regulators will consider when assessing applications, the requirement to appoint local distributors and the on-going notification and disclosure regulatory requirements.

More ASEAN countries are expected to join in the coming years. Retail investors will be offered more investment opportunities and benefit

International

from cost savings since managers will no longer need to create fund feeder structures which are bearing too many additional costs for retail investors.

The qualification standards for CIS are available at the following link.

http://www.theacmf.org/ACMF/up-load/standards_of_qualifying_cis.pdf

The handbook is available at the following link.

http://www.theacmf.org/ACMF/up-load/asean_cis_handbook.pdf

U.S. SEC adopts new rule on securitization and credit rating agency

On 27 August 2014, the U.S. Securities and Exchange Commission (SEC) adopted new rules on asset-backed securities (ABS) and credit rating agencies. The new rules aims to enhance governance, increase transparency and better protect investors.

Both topics were at the core of the 2007-2009 financial crisis. In this respect, the financial crisis revealed that many investors were not so aware of the risks hidden in the securitization market. The first SEC proposal on securitization came four years ago, but the sensitive issue on loan-data for investors postponed the adoption of those rules.

The new ABS requirements, adopted unanimously by the Commission, foresee loan-level disclosure for assets such as residential and commercial

mortgages. They also provide a pool of information to investors in term of credit quality and collateral and cash flows for certain assets.

In addition to the securitization reform, SEC voted the Credit Agency Reform, with the aim of protecting investors against conflicts of interest and increase transparency in order to improve the quality of credit rating and increase credit rating agency accountability.

The revised rules will become effective 60 days after publication in the Federal Register. Issuers must comply with new requirements and disclosures other than the asset-level disclosure requirements no later than one year after the rules are published in the Federal Register.  Offerings of ABS backed by residential and commercial mortgages, and debt securities (including re-securitizations) must comply with the asset-level disclosure requirements no later than two years after the rules are published in the Federal Register.

The details of Securitization Reform are available at the following link.

http://www.sec.gov/nb/reg-ab-adopt-ing-release-draft.pdf

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