session i: the future of retail funds in the eu and u.s. · 2020. 4. 14. · european retail fund...
TRANSCRIPT
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© Copyright 2015 by K&L Gates LLP. All rights reserved.
Session I: The Future of Retail Funds in the EU and U.S. Mark Amorosi, Partner, K&L Gates Washington. D.C. Sean Donovan-Smith, Partner, K&L Gates London Andrew Massey, Special Counsel, K&L Gates LondonRodney Smyth, Consultant, K&L Gates London
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OVERVIEW Retail fund landscape Product developments Distribution issues Specific initiatives Future of the industry
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European Retail Fund Landscape
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European AUM in UCITS exceeding €9 trillion for first time everNet assets (EUR bn)
Category End 2014 March 2015 % change on previous month
UCITS 7,955 9,004 2.5%
Non-UCITS 3,347 3,547 2.3%
Total 11,302 12,551 2.4%
Source: EFAMA March 2015 Data
Breakdown of UCITS by Category
UCITS types
31/12/2014 Change from 31/12/2013
No. Share in % in No.
Equity 12,117 37% 0.0% 0
Balanced 8,740 27% 3.1% 265
Total Equity and Balanced 20,857 64% 1.3% 265
Bond 7,290 22% 1.8% 132
Money Market (MM) 1,037 3% -11.2% -131
Funds of funds 882 3% 0.8% 7
Other 2,517 8% -6.2% -165
TOTAL 36,148 1.2% 440
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European Retail Fund Landscape
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Location of Firm Headquarters
Top five countries
Source: Prequin Hedge Fund Analyst Source: EFAMA June 2015 Data
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U.S. Mutual Fund Market
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Closed-end Mutual funds funds ETFs UITs Total
1997 $4,468 $152 $7 $85 $4,7111998 5,525 156 16 94 5,7901999 6,846 147 34 92 7,1192000 6,965 143 66 74 7,2472001 6,975 141 83 49 7,2482002 6,383 159 102 36 6,6802003 7,402 214 151 36 7,8032004 8,096 253 228 37 8,6142005 8,891 276 301 41 9,5092006 10,398 297 423 50 11,1682007 12,000 312 608 53 12,9742008 9,603 184 531 29 10,3472009 11,113 223 777 38 12,1512010 11,833 238 992 51 13,1132011 11,632 242 1,048 60 12,9822012 13,052 264 1,337 72 14,7252013 15,035 279 1,675 87 17,0752014 15,852 289 1,974 101 18,217
Source: Investment Company Institute
Investment Company Total Net Assets by Type (1997 – 2014) (in billions)
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Product Developments – Rise of Alternative Funds
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Collective Investment Scheme (“CIS”)(UK definition)
Regulated CIS Unregulated CIS
Other AIFs
Alternative Investment Fund (“AIF”)(AIFMD definition)
NURS
Other recognised schemes(s.272 FSMA)
E.g. Limited partnerships, exempt unauthorised unit trusts
E.g. closed-ended investment companies
Regulated CIS
Recognised UCITS(s.264 FSMA)
UK UCITS
QIS
Convergence of Retail and Alternative Funds
NURS: Non-UCITS Retail SchemeQIS: Qualified Investor SchemePAIF: Property Authorised Investment Funds
FAIF PAIF
Glossary:ELTIF: European Long-Term Investment FundEuSEF: European Social Entrepreneurship FundEuVECA: European Venture Capital FundFAIF: Funds of Alternative Investment Funds
EuVECA, EuSEF
ELTIF
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Rise of Alternative UCITS in Europe
2014 2013
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Commodities
CTA
Emerging Markets
Equity Market Neutral
Event-Driven
Fixed Income
Index FX
Long/Short Equity
Macro
Multi-Strategy
Volatility
2014 Total Funds: 720 2014 Total AUM: €260.031 billion
2013 Total Funds: 724 2013 Total AUM: €190.071 billion
Source: UCITS Alternative Index
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Can my hedge fund strategy be used in a UCITS?
Certain investment strategies can fit within a UCITS fund structure Traditional equity long/short or market neutral Absolute return Multi-strategy/multi-manager Merger arbitrage/event-driven/special situation Global tactical allocation Global macro strategies Credit strategies/convertible arbitrage/senior debt Managed futures
Some hedge fund strategies are not a fit for a UCITS fund Illiquid strategies Highly concentrated portfolios Nonfinancial investments
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Growth of Alternative Funds in U.S.
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Cumulative flows to alternative strategies mutual funds (2007 –2014) (in billions)
Source: Investment Company Institute
Total assets under management in alternative strategies funds were $311 billion at the end of 2014. (Source: Morningstar)
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Alt Funds – Regulatory developments Intense SEC Focus on Liquidity, Valuation, Leverage and
Disclosure SEC Alt Funds Sweep Exams Derivatives Review Enforcement Activity
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Product Developments – Rise of Exchange Traded Funds (ETFs)
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The Rise of ETF UCITS in the UK
Why?
Pricing vs non-ETF UCITS (e.g. index funds)? Real-time – not forward Throughout the trading day – not just once a day
Cost vs non-ETF UCITS? Both have low annual charges – e.g. 0.30% p.a. S&P
500 and 0.50% p.a. FTSE-100 passive ETFs(including transaction costs) and 0.09% / 0.35% (excluding transaction costs)
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Choice vs non-ETF UCITS? One ETF UCITS manager in the market offers single-
country funds for Brazil, Indonesia, Mexico, South Africa and Taiwan Although compare non-UCITS ETFs: – where another
manager offers funds for coal mining, coffee, lean hogs, live cattle and shipping indices – and spot palladium
“UCITS” label vs non-UCITS ETFs? – “UCITS” suggests the fund is a safe investment (fit for “widows and orphans”)
Transparency vs non-ETF UCITS? – not really, at least for passive stock market index ETFs – although most ETFUCITS disclose holdings daily (unlike other UCITS), the index is the index
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Why not?
Brokers’ commission on all ETF sales and purchases – typically, £5/£12.50 flat fee per trade – vs £0 for non-ETF UCITS
Temptation to “day-trade” ETFs – because priced continuously
Flat brokerage fees and small day trades don’t mix!
European ETF statistics: 5.5% of total investment fund AUM = EU 362 billion (30 September 2014)
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ETFs – Growing Popularity in U.S.
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Source: Investment Company Institute
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ETFs – Increasing Market Coveragepercent of US ETF Total Net Assets
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Source: Investment Company Institute
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ETFs — More Strategies
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Source: Investment Company Institute
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ETFs – Regulatory Developments
Less Transparent Actively Managed ETFs Systemic Regulatory Impact and SEC Request for
Comment Derivatives Review SEC ETF Rule Custom/Non-Pro Rata Creation and Redemption Baskets
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Product Developments – European Long-Term Investment Fund (ELTIF)
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ELTIFs Vehicle to encourage investment in long-term assets (energy,
infrastructure, education and research, etc.) European passport enabling retail investment Composite regulatory regime, including:
AIFMD ELTIF authorisation requirement and prescribed rules Prospectus Directive
ELTIF prescribed rules: Investment policy
At least 70% of capital in eligible assets Other investments limited
Closed-ended? Redemption restrictions… Transparency requirements
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Distribution Issues
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MiFID II – Investor Protection Provisions Execution-only exemption for noncomplex
instruments from appropriateness assessments Changes to list of exempt instruments Effect on distribution?
Product and distribution governance Manufacturers Distributors Extension to UCITS managers and AIFMs?
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MiFID II – Intermediary Services and Payments
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UK RetailDistribution Review (RDR)
MiFID II Investor Protection
Mandatory categorisation of advisory services
• Independent advice – based on comprehensive and fair analysis of relevant market
• Independent advice – assess a sufficient range of financial instruments available on the market that must be sufficiently diverse with regard to their type and issuers or product providers
• Restricted advice – not independent; subject to prescribed disclosures
• Restricted advice – not independent; subject to disclosure requirements
Scope of prohibition on inducements/commission payments
• Services:• Advice • Platform services
• Retail investment products• Limited to retail clients• For platform services, unit
rebates permitted
• Services:• Independent advice• Portfolio management
• MiFID financial instruments• Not limited to retail clients• No exception for unit rebates
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SEC Focus on Distribution Payments SEC has attempted to adopt rule changes over the last 10 years to
enhance regulation of distribution payments with respect to funds, but has been largely unsuccessful (e.g. point of sale proposal in 2005 and Rule 12b-2 proposal in 2010)
2013 and 2014 OCIE Exam Priority: “The IA-IC Program is focusing on the wide variety of payments made by advisers and funds
to distributors and intermediaries, the adequacy of disclosure made to fund boards about these payments, and boards’ oversight of the same. These payments go by many names…most commonly revenue sharing, sub-TA, shareholder servicing, and conference support. The staff will assess whether such payments are made in compliance with….Rule 12b-1, or whether they are…payments for distribution and preferential treatment.”
OCIE Sweep Exams in 2014-2015 Speech by Julie Riewe, co-chief, Asset Management Unit on
February 26, 2015: “We…anticipate enforcement action from the Distribution in Guise Initiative, where we are
axamining, among other things, conflicts presented by registered fund advisers using the fund’s assets to grow the fund and, consequently, the adviser’s own fee.”
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Some Specific Initiatives
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UCITS V
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Area UCITS V requirement AIFMRemuneration • Remuneration policies and practices promote sound and effective
risk management• Staff whose activities have material effect on risk profile of UCITS or
management company• Remuneration committee (if proportionate)• Fixed and variable remuneration appropriately balanced with fixed
component sufficient for variable component to be fully flexible• For variable component, at least 50% to consist of units of
UCITS/equivalent ownership interest; at least 40% to be deferred.• Disclosure in prospectus and annual report
(in part)
Depositary • Depositary eligibility• Single depositary expressly required• Written agreement with prescribed contents• Specification of functions:
• cash monitoring • custody • oversight
• Delegation restricted to custody function only• Strict liability for financial instruments held in custody
(in part)
Sanctions • Prescription of administrative sanctions and processes, categories of UCITS breaches, publication, and reporting to ESMA
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Packaged Retail and Insurance-Based Investment Products – Key Investor Information
PRIIPs KID UCITS KIIDFor PRIIP available to retail investors For all UCITS
Pre-contractual; stand-alone Pre-contractual; stand-alone
Max three sides Max two sides (three for structured fund)
Prescribed statements and sections• What is this product?• Risk-reward profile• Compensation scheme• Costs• Term/minimum holding period• Complaints• Other relevant information
Prescribed statement and sections• Objectives and investment policy• Risk-reward profile
• Charges• Past performance
• Practical information29
PRIIPs Not PRIIPsInvestment funds (incl. UCITS) Shares and bonds held directly
Insurance investment products General insurance and life insurance
Structured products (deposits; securities) Pensions
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EU Money Market Fund Reform – Current Proposals
Status: In “trilogue” – European Parliament, Commission and Council (i.e. Member States)
Latest published proposals Three types of MMF re. NAV CNAV (< 10% of CNAV and LVNAV) – divided into:
“retail” – but this means only charities, non-profit organisations, public authorities and public foundations
“public debt” – 99.5% invested in public debt instruments (i.e. sovereign debt) – so, no derivatives, securitisations or bank paper
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LVNAV (> 90% of CNAV and LVNAV) May be redeemed at CNAV if actual NAV within 0.20% of CNAV
Authorisation for only five years at a time Neither CNAV nor LVNAV Two types of MMF re. residual maturity
Short-term – maximum 397 days Standard – maximum two years
Daily valuation No external support (such as guarantees) – to avoid investor uncertainty
and financial contagion Weekly investor reporting – liquidity, credit, portfolio, WAM (interest),
WAL (principal), proportion held by top five “investors” Will extend to EEA EU MMF statistics: c.15% of total investment fund AUM =
approximately EU 1 trillion (September 2013)
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U.S. Money Market Fund Reform – Key Changes
Floating NAV Institutional MMFs will be required to price their shares based on a “floating” NAV Government and retail MMFs may continue to maintain a stable NAV of
$1.00/share Liquidity Fees and Gates
All MMFs will be permitted to impose liquidity fees and temporarily suspend redemptions (impose “redemption gates”) during periods of market stress
In certain cases, MMFs (except govt MMFs) will be required to impose liquidity fees Diversification: MMFs must meet enhanced diversification requirements
Stress Testing: MMFs must satisfy enhanced stress test requirements, including ability to maintain liquid assets of at least 10% and to “minimize principal volatility” in response to certain events
Disclosure: MMFs must satisfy new disclosure requirements, including new Form N-CR and website disclosure and amended registration statement and Form N-MFP disclosure
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Pressure on Costs
FCA identified that UK fund charges higher than overseas equivalents
FCA thematic review (TR14/7): Findings (cause?): Investors lack of clarity regarding costs of
investment Solution: Consistent use of ongoing charges figure (“OCF”) in all
marketing materials
Investment Association paper on disclosure of costs and charges: Advocate consistent approach based on OCF But grappling with how to fairly represent funds that are expensive
to operate?
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Mutual Fund Fee Litigation Developments
Extraordinary wave of Section 36(b) cases challenging mutual fund advisory, administration and other fees in the US
Common attribute of most of the cases is sub-advisory relationships Cases fall into two categories: defendants either employ a sub-adviser, or serve as
a sub-adviser to other funds employing a similar investment strategy Premise of the complaints is that sub-advisers ostensibly perform all
substantial services for a fraction of the advisory fees, assertedly rendering the advisory fees “excessive” in relation to the purportedly inconsequential additional services performed by advisers
Focus on sub-advisory relationships can be traced to Curran v. Principal Management Corp. (S.D. Iowa 2010), holding that allegations that an adviser charged far more in fees than it paid its sub-adviser gave rise to a reasonable inference that advisory fees were excessive
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Future of the Industry
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Future Legal Trends for European Fund Industry Continued product innovation fueled by investor demand Constraints on UCITS fracturing of AIF categories Enhancing liquidity toolkit Increased operation and compliance costs Increased market and regulator fee pressure More enforcement action; bigger penalties
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Consolidation
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Future Legal Trends for US Fund Industry Continued innovation and regulatory developments
impacting product development, including exchange-traded products and alternative and other specialized products
Increasing focus on risk management Challenging regulatory environment, with focus coming
from multiple regulators and from multiple areas within the SEC
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