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The Changing Landscape of European Investment Fund Law: UCITS, AIFM and the like...

The Changing Landscape of European Investment Fund Law: UCITS, AIFM and the like. Dr. Armin J. KAMMEL, LL.M. (London) (VÖIG) Challenges of Collective Investment Business in CEE Kyiv Workshop, 27.10.2011. It is all about regulation... Specific regulation for the fund business

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The Changing Landscape of European Investment Fund Law: UCITS, AIFM and the like...

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  1. The Changing Landscape of European Investment Fund Law: UCITS, AIFM and the like... Dr. Armin J. KAMMEL, LL.M. (London) (VÖIG) Challenges of Collective Investment Business in CEE Kyiv Workshop, 27.10.2011

  2. It is all about regulation... Specific regulation for the fund business “Radiating” regulation for the fund business Regulatory “spill-over” effects for the fund business Foreign legislation and national initiatives Outlook Agenda

  3. It is all about regulation...

  4. It is all about regulation...(I) Source: www.confusedbytheworld.com

  5. It is all about regulation...(II) Source: www.jklossner.com

  6. Specific regulation for the fund business

  7. UCITS framework UCITS IV UCITS V AIFM framework Specific regulation for the fund business (I)

  8. UCITS framework

  9. Specific regulation for the fund business(II) UCITS = Undertakings For Collective Investment in Transferable Securities (OGAW) European framework for investment funds Structure of the Framework: Directive 85/611/EEC (UCITS I) [Eligible Assets Directive 2007/16/EC] Directive 2001/107/EC and Directive 2001/108/EC (UCITS III) Directive 2009/65/EC (UCITS IV)

  10. Specific regulation for the fund business(III) Types of UCITS: UCITS: open-ended investment fund contractual type funds (Sondervermögen) corporate type funds (SICAV) trust UCITS is a successful European frameworkforfunds UCITS so fardid not haveanysignificantcrisis UCITS isconsideredas „international goldstandard“ forinvestmentfunds – also ofinterest in AsiaandLatinAmerica Nevertheless: industrycallfor „Economies of Scale“

  11. Specific regulation for the fund business(IV) Green Paper on the enhancement of the EU framework for investment funds (12 July 2005) Implementationoftwo Expert Groups (30 January 2006) thatdelivered so-calledExpert Group Reports (4 July 2006) White Paper on Enhancing the Single Market Framework for Investment Funds (16 November 2006) Initial OrientationsofPossibleAdjustmentstothe UCITS Directive(June 2007) Improved European frameworkforinvestmentfunds(16 July 2008) EP and EC adopted UCITS IV in spring 2009

  12. Specific regulation for the fund business(V) Key Features of UCITS IV NotificationProcedure Management Company Passport Cross-Border Fund Mergers Master-Feeder Strukturen Key Investor Information (KID) Supervisory Cooperation

  13. Specific regulation for the fund business(VI) UCITS IV tobeimplementedinto national lawby 1 July 2011. Variousmemberstates, amongthose Austria, implemented UCITS IV with a delay: Austria i.e. 1 September 2011 ESMA opinion: Practicalarrangementsforthelatetranspositionofthe UCITS IV Directive(13 October 2011)

  14. Specific regulation for the fund business(VII) In parallel to UCITS IV, draftingof a „UCITS V“ packageas a regulatoryreactiontothefinancialcrisis: Material Implicationsof UCITS V: Remuneration RoleoftheDepositarywithinthe UCITS framework furtherorganizationalrequirements? More sanctions? Schedule: likely Q1 2012

  15. AIFM framework

  16. Specific regulation for the fund business(VIII) Trigger: financial crisis bailout of banks, speculation, role of hedge funds, Lehman Brothers, Madoff G-20 summit in London on 2 April 2009 30 April 2009 – Commission: Draft AIFM Directive Main Problem: draft itself 3 council presidencies 1 Rapporteur, >1600 amendments 27 October 2010 – finalization of Trilogs Compromise: complex review process until 2018!

  17. Specific regulation for the fund business(IX) General Principles: no product directive but manager directive  hybrid construction AIFM is regulatory contact: external manager internal management AIF = non-UCITS: no matter if open-ended oder closed-ended no matter what legal structure no matter if exchange-traded, what capital invested, number of investors AIFMD: focus on institutional investors but retail option Introduction of a “European AIF passport”

  18. Specific regulation for the fund business(X) 3 main categories covered: all EU-AIFM, that manage either one or more EU-AIF or non-EU-AIF all non-EU-AIFM, that manage EU-AIF, no matter if they are distributed within the EU all non-EU-AIFM, that distribute either EU- or non-EU-AIF in the EU few exemptions: holding companies, IORP institutions, supranational institutions, institutions for social insurance and pension systems thresholds: AIFM < EUR 100 Mio as well as AIFM with FC and no redemption within 5 years < EUR 500 Mio

  19. Specific regulation for the fund business(XI) Principles: full authorization, if main activity is the management of investment portfolios facilitation for credit institutions with investment services and UCITS management companies competent authorities information to ESMA capital stock: AIFM with internal nanagement: EUR 300.000,-- [+ value of portfolio] AIFM mit external manager: EUR 125.000,-- [+ value of portfolio] Operating conditions: codes of conduct, conflict of interest principles remuneration, risk management, liquidity manafement, organizational aspects, valuation, role and function of the depository for each AIF, transparency,...

  20. Specific regulation for the fund business(XII) Level I 21 July 2011: entry into force of Level 1 Level II and III August / September 2011: consultations by ESMA on Implementing Measures (general one and one on third countries) Early 2012: Commission proposal on Implementing Measures to the EP and the EC Mid 2012: adoption of Level II and partly Level III Deadlines: 22 July 2013: national implementationof AIFMD 22 July 2013: new AIFM and AIF havetocomplywith AIFMD 22 July 2014: existing AIFM must submitapplicationforauthorizationandcomplywith AIFMD

  21. Specific regulation for the fund business(XIII) AIFMD and national law: some countries anticipated AIFMD: AIF broad range of “national” funds covered ... AIFMD: a framework full of challenges clarifications/guidance on Level II Which and how many fund structures are in scope? crucial role for ESMA the unknown: European politics – third country issue ...

  22. “Radiating” regulation for the fund business

  23. PRIPs / MiFID EMIR Financial Transaction Tax “Radiating” regulation for the fund business(I)

  24. PRIPs / MiFID

  25. “Radiating” regulation for the fund business(II) Commission initiative “Packaged Retail Investment Products” (PRIPs) Idea: Creation of a Level Playing Fields at the point of sale in terms of transparency support for the initiative but highly diverging views and feedback to the Commission re-scheduled to Q1 2012 PRIPs is seen in the context of the MiFID review: MiFID II MiFID Review: (independent) advice, periodic communication with clients, complex vs. non-complex financial instruments (structured UCITS!), transparency requirements for ETFs as well as issues on corporate governance. fund business at least indirectly affected!

  26. EMIR

  27. “Radiating” regulation for the fund business(III) Proposal for a European Market Infrastructure Regulation (EMIR) in September 2010 reporting requirements for OTC derivatives clearing obligation for OTC derivatives measures to reduce the counterparty risk as well as the operational risk general rules for the functioning of CCPs Challenges for the fund business at a very technical level; buy-side vs. sell-side etc.

  28. Financial Transaction Tax

  29. “Radiating” regulation for the fund business(IV) Commission consultation for a FTT (April 2011) Commission proposal for a FTT (September 2011) budgetary constraints, “contribution” of the financial industry,... split between EU and MS? tax: 0.01% on derivatives, units and bonds 0.1% Revenue: EUR 57 bn Fund business directly affected – danger of double taxation!

  30. Regulatory “spill-over” effects for the fund business

  31. Basel III Solvency II Regulatory “spill-over”effects for the fund business (I)

  32. Basel III

  33. Regulatory “spill-over” effects for the fund business (II) Basel III – reform package to the already existing banking regulation Basel II and direct reaction to the financial crisis Implementation of Basel III in the EU with CRD in 2013 CRD III - Remuneration CRD IV deals with: increase of quality, consistency and transparency of own capital strengthening of risk coverage introduction of Leverage-Ratio, Liquidity Cover Ratio, Net Stable Funding Ratio reduction of pro-cyclicality monitoring of systemic risks Basel III heavily criticized from both sides.. Fund business affected either through national banking legislation but also indirectly in terms of remuneration (UCITS V, AIFMD).

  34. Solvency II

  35. Regulatory “spill-over” effects for the fund business (III) Solvency II – structural reform of the European insurance law with a specific focus on the capital requirements for insurance companies Implementation: Q1 2013 Structural analogy to Basel II increased requirements for the risk management of insurance companies Fund business affected at various levels, being there is a necessity to understand Solvency II, more reporting and calculations for insurance companies to ensure that investment funds remain attractive as well as technical challenges in terms of data exchange

  36. Foreign legislation and national initiatives

  37. Foreign legislation i.e. FATCA National initiatives i.e. short-selling restrictions / bans Foreign legislation and national initiatives(I)

  38. FATCA

  39. Foreign Account Tax Compliance Act (FATCA) Idea: minimize tax avoidance of US citizens through foreign financial institutions foreign FI have to sign a contract with IRS identification of Non-US citizens in case of US tax obligations Investments have to be reported to IRS (also non-exchange-traded ones) term “taxable revenue” widened fund specific issues: deemed compliant category, indirectly affected through bank distribution etc. Foreign legislation and national initiatives(II)

  40. Short-selling restrictions / bans

  41. Short-selling restrictions / bans totally uncoordinated approaches FRA/ITA/ESP/BEL caused irritations in August 2011 some MS such as CZE, LAT, LIT, SVK have no restrictions at all others continuously extend/amend them Role of CESR/ESMA unfortunate Practical implications: additional requirements by brokers; not possible to have a clear overview and assess the implications Foreign legislation and national initiatives(III)

  42. Outlook

  43. Outlook (I) – General Considerations Regulatorychallengesaresignificant AIFM frameworkasthenewregimeforinvestmentfunds? How will theintendedharmonization / compatibilitybetween UCITS and AIFM turn out? Will PRIPs ensurethedesiredlevel-playing-field? What will betheconsequencesof a futurefinancialtransaction tax? Why not working on a harmonized tax system? Whataboutthecostsofregulation? Basicallytherearenocost-benefit-analyisanymore!

  44. Outlook(II) – CEE Challengesforthe CEE region lack ofconsistency different implementations / interpretationsoflegislation national initiatives: i.e. taxation in HUN not regardedas „a region“ …

  45. Outlook(II) – Conclusions EU andcertainmemberstatesas (fund) domicilesfacesignificantchallenges. Whataretheincentivestoremain in the EU? Outflows in AuMandincreasedconcentrationtendenciestospecificmarkets… Regulation per se cannotbetheanswer! Danger, thatregulationitselfbecomes a „systemicrisk“, meaning a riskforspecificmarkets but also the Single Market...

  46. Thank you very much for your attention!

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