Embed Size (px)
Citation preview
Industry SpotlightNews and views from Citco on alternative industry developments
Spring 2016
Today, data transparency is more vital than ever
William Keunen, Head of Citco Fund [email protected]
Welcome to Citco’s Spring edition of Spotlight.
This issue coincides with a sustained period of tumult in the capital
markets, and at times like these both managers and investors need to understand
their financial exposure by relying more than ever on data transparency.
The current twitchy environment will inevitably cause stakeholders to consider their investment options – and this applies equally to service providers, whose interests are so closely aligned to the continued well-being of the industry.
Consequently, we are delighted to demonstrate our continued investment in the sector by presenting CitcoOne. This next generation portal offers our clients a true self-service tool for sourcing
and mining the data and reports we generate as part of our asset servicing responsibilities.
As usual, Spotlight also covers our perspectives on industry trends, such as the emergence of fund governance as a discipline in its own right and the decline of shadow administration for funds of hedge funds, as well as the plethora of rules that continue to flow from our regulators, including FinCEN’s AML rules, UCITS V, MiFID II and the focus on cyber security on both sides of the Atlantic. □
The Citco Group of Companies (“Citco”) is a worldwide group of independent financial service providers, established in over 40 countries and serving the world’s elite hedge funds, private equity and real estate firms, institutional banks, Global 1000 companies and high net worth individuals. Companies of the Citco Group provide global alternative investment fund administration, custody and fund trading, financial products, and corporate and trust planning solutions.
2SPV oversight makes governance a job for specialist firms
3CitcoOne aims to help managers make better decisions
4Timely and accurate NAV figures build trust in administrators
5Shadow capital investors make fund administration harder
6Investors seek lower fees and greater transparency
7Common reporting standard requires extra due diligence
8Citco pushes for clarity in anti-money laundering rules
10Regulatory round-up: AIFMD to UCITS V plus local updates
11Citco assets: flows and performance for July to December
12 Australia’s IMR offers tax breaks
We welcome any feedback you may have on Industry Spotlight. Please get in touch with us at [email protected]
N E
N E
Radically simpleThe portal that delivers answerspage 3
Spring 2016
Governance set to become a specialist disciplineFunds are finding that only independent specialists can deliver the necessary oversight of complex SPV structures
Changing regulations and tax legis-lation are giving Chief Financial Officers and General Counsels a virtually impossible task. The private equity (PE) and real estate
(RE) funds they oversee typically have large numbers of underlying special purpose vehi-cles (SPVs). Keeping track of shifting rules and laws is in danger of overwhelming the resources of some in-house teams.
According to Citco analysis, each of our RE investment fund clients has an average of 25 SPVs, organised in eight or more jurisdic-tions. The biggest RE funds may have more than 100. PE funds typically have fewer SPVs than RE funds but face similar challenges.
Over time, the larger PE and RE funds have grown extensive webs of SPVs as their international portfolios have grown. Managing the different entities, including corporate secretarial activities, has become a significant burden. Now multi-country reporting for tax purposes is increasing, as are other regulatory requirements. Just keeping abreast of changing require-ments across many different jurisdictions is extremely challenging.
As if this were not enough, institutional investors and regulatory authorities are shining a light on corporate governance. They want transparency in governance, often down to SPV level. Ideally, this is delivered by an independent specialist firm that has governance skills and can administer the SPVs.
Such is the difficulty of maintaining fault-less governance that it’s likely to become a specialist discipline in its own right. Indeed, having a single firm administer a fund and its underlying holding companies and SPVs should serve to give investors and regulators alike comfort.
Reconciling accounting formatsIn most cases, a fund selects a single global accounting standard, such as US, Luxem-bourg or Irish GAAP, or IFRS, for reporting to its management, investors and other stakeholders. It commits to this standard in
its offering documents. For local statutory filing purposes, however, such reports may need to be translated to a local accounting standard that is applicable in an SPV’s juris-diction. This may require complex conversion processes.
Besides the challenges associated with different reporting formats for manage-ment/investors and statutory accounts, intercompany accounts (IC accounts) and consolidations create additional complexi-ties. Intercompany relationships are created both between funds and their lower-tier SPVs, as well as between lower-tier SPVs directly. As these SPVs are domiciled in many different countries, reconciliation of these intercompany accounts through communica-tion between different offices is inefficient.
Centralising SPV administrationIn order to give investors and regulators the transparency they require, while also simplifying the challenges of SPV accounting, there is much to be gained from appointing a
single independent service provider.The Citco group of companies has SPV
servicing centres in Lithuania and the Philip-pines, where more than 300 staff members are fluent in 20 different local accounting standards in addition to US GAAP and IFRS. Teams of qualified accounting staff convert management accounts into formats that can be used for local statutory filing purposes. They also process consolidations and intercompany account reconciliations in real time. This is all done on a single system, which supports administration of all PE or RE entities.
Additionally, Citco’s Global Subsidiary Governance Services (GSGS) works closely with PE, RE and multinational companies. A team of lawyers makes sure that all client entities are in good legal standing in their relevant jurisdictions.
Such is the pressure on RE and PE managers to ensure solid fund governance that we believe services such as these will become increasingly sought after. □
Tim van Dijk, Division Management, Citco Corporate & [email protected]
“ Having a single firm administer a fund, its underlying holding companies and SPVs should give investors and regulators comfort”
Spring 2016
Like many things, CitcoOne began with an innocuous question. It was time to refresh the web portal and universal opinion within Citco was that the next version needed
to deliver more data. But when we talked to clients about what they wanted, they talked more about outcomes, such as transparency, insight and user experience. All these discus-sions coalesced into one when a client asked: “But how can you make it simple?”
While the web has proved an efficient way to deliver statements to a large and constantly changing group of stakeholders, operational platforms and offline commu-nication have still done much of the heavy lifting. Excel, emails and static reports even now perform a lot of the work.
Making the complex simpleThe trouble is that administrators’ web portals take the complex and keep it complex. What makes CitcoOne radically different is that it borrows the best practices emerging in Silicon Valley to improve the user experience. It achieves the difficult goal behind many successful technology products of making the complex simple.
The CitcoOne project began in late 2013. Approximately 15 clients were interviewed about their needs. But then we also spoke to a number of next-generation financial technology firms in Silicon Valley. Financial services’ technology often lags best practice and we wanted to get ahead of the curve.
With big data technologies, it has never been easier to provide data. However, firms are drowning in data, and making sense of it is highly complex. Everyone involved in CitcoOne became convinced that we would need to rethink the web experience, and with that came the tacit acceptance that simplicity could only be achieved through building something radically different.
CitcoOne has evolved into a simple way to monitor, survey and explore the information that is important to the user. It leverages new technology frameworks to intelligently expose different levels of content. This allows
users to find answers with minimal time and effort. Whether you keep the platform open all day for real-time reconciliation updates, or just log in late afternoon to review daily service level agreements, CitcoOne consoli-dates the underlying data across all key operational platforms and workflows.
By itself, that’s quite an achievement, but there was another challenge: could CitcoOne help you make sense of that data? To achieve this goal, we incorporated a full suite of dynamic visualisations designed for data mining. Instead of simply capturing data,
this allows you to frame questions about the data in an intuitive, visual way, while jumping across different lenses of information. It’s not just self-service to your data, it’s self-service to the answers important to your business.
When someone asks for simplicity in tech-nology, it’s easy to mistake that for simplistic technology. But the real question is: “Can technology give me exactly what I need to make better decisions?” That is the accom-plishment of CitcoOne. □
CitcoOne will be available to clients from the second quarter of 2016.
CitcoOne: introducing radical simplicityCitco’s innovative web portal makes it easy for clients to make better decisions. It doesn’t just deliver data – it delivers answers
Nick Eisenlau, Director, Citco Fund [email protected]
CitcoOne: key features
§§ Interactive dashboards§§ Interactive workflows§§ Order placement
§§ Enhanced document management§§ Enhanced fund details
§§ Dynamic reporting§§ Capital activity
monitoring
Spring 2016
Transparency and control builds trustAccurate, timely NAV figures and clear processes are enabling administrators to work increasingly closely with funds of funds
It’s no secret that because of declining assets and pressure on fees from insti-tutional investors, fund of hedge fund managers’ margins are being squeezed. But as they respond by seeking to cut
operating costs, they’re being forced to rely on third-party administrators far more than before, putting trust at a premium.
The fund of hedge fund industry received some long awaited good news over the winter holiday season, with assets under manage-ment within this strategy increasing by 3.7% to $1.23 trillion in the 12-months to October 2015*. Fund of hedge funds also contributed to 3% of all new hedge fund launches during the same period†.
However this should not obscure the fact that fund of hedge fund assets have fallen steadily since 2008. Fund managers in this space continue to suffer from redemptions as pension funds and other institutional inves-tors move the task of allocating to hedge funds in-house, or hire hedge fund consult-ants to do the job for much lower fees than a fund of hedge fund manager.
In order to remain competitive within this changing industry landscape, an area that hedge fund managers look to for generating greater efficiency is eliminating the practice of shadowing the administrator’s NAV calcu-lation, and the in-house pricing of underlying fund of hedge fund portfolios. This trend is set to continue, as a recent survey by PWC revealed that at least 50% of hedge fund managers now outsource these middle office tasks to third-party administrators.
Reducing the size of the middle officeOne of the world’s largest multi-strategy hedge fund managers, which recently outsourced its fund administration services and increased oversight tolerance thresholds on third-party administrators, was able to reduce its middle office workforce by 80% by adopting this approach.
Shadowing duplicates the work performed by the administrator, but managers have historically been reluctant to trust admin-istrators entirely with such a critical task.
Instead, they have performed it in parallel, checking the administrator’s calculations.
But this is changing, and not just because margins are being squeezed. As the fund administration industry continues to mature, a few of the top-tier administrators have perfected the art of striking an accurate and timely NAV. They are also developing more detailed service level agreements and workflow technology that give hedge fund managers the required level of transpar-ency and control to effectively monitor their outsourced activities.
As the growing number of fund of hedge fund managers have cut back on shadowing in order to reduce costs, they have had to overcome their inherent lack of trust of third-party fund administrators. Arguably, only a few administrators have the people and technology that can deliver a quality NAV to gain that trust.
The more client-service focused fund administrators are also now providing greater insight into their management of books and records than ever before, making it easier for their clients to trust what is being delivered.
To hold themselves accountable, the best third-party administrators have also intro-duced more relevant key performance indica-tors with delivery thresholds embedded in service level agreements. The distribution of management reports has also become far more transparent and efficient.
Real time reporting is keyAt the heart of this lies management reporting technology solutions, such as CitcoOne. It will publish KPIs and SLAs, as well as exceptions, and has the ability for users to query data on a real-time basis.
Citco has seen a number of its clients trust it to administer their funds of hedge funds without the need for shadowing. Experienced people and advanced proprietary technology have helped it to grow assets under admin-istration whilst the sector has plateaued. At the end of October 2015, Citco’s fund of hedge fund assets under administration grew to US$153 billion, ranking it the largest global administrator in this area*. □
* HFW: 25th Biannual Assets Under Administration Survey, 2015. † Preqin Quarterly Update: Hedge Funds Q3 2015.
Gio Maso, Head of Product and Business Development, Citco Alternative Investor Services, North America [email protected]
“ Administrators are providing greater insight into their management of books and records than ever before”
Spring 2016
Rise of shadow capital challenges administratorsOver a quarter of private equity funding is now shadow capital, which requires an array of bespoke terms and share structures
The dramatic shift in the private equity industry towards ‘shadow capital’ raises fresh challenges for administrators because it requires a level of flexibility that
some may find difficult to deliver.Many co-investments, direct investments
and managed accounts can be considered shadow capital. Instead of allocating to a blind pool, shadow capital investors nego-tiate bespoke terms and lower fees – and they can have a say in what investments a fund makes.
These kinds of investments were previ-ously the domain of a handful of deep-pocketed limited partners (LPs), but they are now much more widespread – placing greater demands on fund administrators.
For example, each shadow capital investor will require different terms and a standard limited partnership agreement isn’t sufficient. This requires sophistication, accuracy and attention to detail from the administrator.
Rapid rise of shadow capitalIn 2015, shadow capital totalled an estimated US$161bn or 26% of all private equity fund raising, according to Triago. By comparison, in 2010 it totalled just US$24bn, equating to 11% of fund raising.
Shadow capital is becoming more popular as large investors seek more control of their investments and find that they earn better returns from having it. The largest investors, such as pension funds, can put more money to work in private equity without diluting returns by spreading their investments across a large number of managers. They can also negotiate lower fees than the standard 2% for management and 20% for performance.
Driving higher returns for LPsThere’s growing evidence that shadow investing yields higher returns. As recently as 2012, only 13% of the LPs interviewed for a Preqin survey believed that returns from co-investment were significantly better than those of a typical fund. But in Preqin’s latest
round of interviews in March 2014, 52% of LPs reported that their co-investment returns were far higher than the returns their funds generated – and none said they were lower. With that proven track record, 77% of the LPs said they were now co-investing and more than half said they planned to do more of it in the future.
Vital role for administratorsAdministrators play a vital part in making this more bespoke form of investing work. They need flexible systems that can handle the different investment terms, as well as additional share classes and structures. They must have people with sufficient experience to set up customised solutions. And they often must have a global reach that can bring together investors, managers and invest-ments based in different parts of the world.
Taking the shadow capital trend to its logical conclusion, the biggest pension funds and sovereign wealth funds are likely to build more in-house private equity teams that select and invest in deals. But to account for their investments they are likely to require external administrators that can provide both professionalism and transparency. □
Andrew Stewart, Director, Citco Fund Services (London)[email protected]
“Shadow capital is becoming more popular as large investors seek more control over their investments”
Spring 2016
In the dynamic and ever-changing hedge fund industry, it is important for hedge fund managers to be aware of the current trends regarding fund structures and terms to give them-
selves the best opportunity to effectively market and raise capital from investors. In this article, we highlight some recent trends, as well as terms managers are negotiating with investors to help make fund launches successful.
Management feesThe standard 2% management fee has been on the decline for a number of years and, according to a 2015 Walkers study, the average management fee for new funds launched in 2015 was between 1.5% and 1.8%. Another reflection of the downward fee pressure managers are facing is the rise in sliding scale management fees, where managers are required to reduce the fee once the AUM of the fund reaches a certain size. The most extreme but, as yet, relatively uncommon example of the changing envi-ronment is a hard dollar cap on fees.
Performance fees The 20% performance fee remains the industry norm for hedge funds but perfor-mance fee breaks are increasingly offered in the early stage for large investors. The convergence between hedge funds and private equity funds has also seen hedge fund managers introduce fee terms that have been common in the private equity sector, particularly in funds that invest in less liquid opportunities. These terms include multi-year performance periods, clawbacks and fees paid on realised appreciation.
Liquidity Investor-level redemption gates continue to be more popular than fund level gates, especially with institutional investors. This is not surprising because if an institutional investor is a large investor in a fund, a fund-wide gate could often be triggered by that investor’s redemption request while smaller
investors may be able to fully redeem if no other redemption requests are made.
Consequently, the market prefers to have investor-level gates, usually at the 25% level, so that all investors are treated equally when making redemption requests. Lock-up periods are becoming increasingly popular, with the typical lock-up lasting one year. Some managers have used lock-ups to offset pressure on other fund terms: for example, a manager may offer an investor a lower fee structure in exchange for that investor agreeing to a longer lock-up.
Fund expensesBecause of increased pressure on fees, managers have a greater incentive to pass certain expenses to the fund. However, both investors and regulators are scrutinising what expenses are charged.
This heightened scrutiny has resulted in more requests from investors for a detailed breakdown of expenses charged to the fund. A recent survey of 175 managers revealed that 76% of them were providing investors with a detailed breakdown of expenses.
Investors and regulators are particularly focused on compliance expenses, marketing expenses, investment-related travel costs, shadow accounting and research expenses. Accordingly, when launching a fund, mangers
need to have a clear expense allocation policy in place and ensure that the fund’s confi-dential memorandum provides a detailed description of the expenses which will be charged to the fund. Regulators and inves-tors will no longer accept the old practice where expense disclosures were crafted generally and interpretational issues were decided solely by the fund manager.
Side pocketsSide pockets are making a comeback due to managers’ renewed interest in less liquid investments. Because of the way some managers applied side pockets to hold their worst performing or illiquid assets during the financial crisis, some investors have a particular distaste for side pockets. As a result, some managers have offered an opt-in/opt-out feature in connection with side pockets, which allows an investor to elect to opt out of all (but not less than all) of the fund’s side-pocket investments at the time of its initial subscription to the fund.
While such an opt-out is a useful tool to address the concerns of those investors wary of side pockets, it does not provide a solution to deal with an existing investment held by the fund that is subsequently deemed to be illiquid.
Monitoring proprietary capitalExternal investors are focusing on the differ-ence between the liquidity terms granted to internal investors employed within the manager and external investors.
Larger institutional investors are now demanding that they have the same liquidity terms as internal investors. Additionally, larger institutional clients want to be noti-fied when (or before) the general partner/principal redeems a certain percentage of its investment. In a further effort to demon-strate alignment with the interests of inves-tors, some managers have offered a propor-tional redemption right. This allows an investor to redeem a proportionate amount from the fund when the general partner/principal makes a redemption. □
Funds forced to reduce fees and increase transparencyFor a new hedge fund to attract investors, it will have to match competitors on fees, expenses and visibility of internal investors
Michael Regan, General Counsel, Citco Fund [email protected]
“ Institutional investors demand the same liquidity as internal investors”
Spring 2016
The first question most managers ask us about the common reporting standard (CRS) at Citco’s Central FATCA Team is: “Is this just more FATCA?”
The answer in a nutshell is… well, yes. But, as the older moniker GATCA implied, this is FATCA on a global scale, with almost 100 countries pledged to participate and agreeing to share tax information on account holders within their jurisdiction with other participating countries. We refer to these regulations – US FATCA, UK CDOT and CRS – collectively as automatic exchange of information (AEOI) regimes.
In many ways, the objectives for partici-pating tax authorities are similar: they want to receive information about accounts with financial institutions in foreign jurisdictions held by, or controlled by, persons taxable in their own jurisdiction. That much, most will agree, is understandable. It is a global attempt to remove the ability to conceal assets in accounts held outside one’s country of tax residence.
However, that is where the simplicity ends.
No harmonisation on types of entityAll three sets of regulations and agree-ments require financial institutions (FIs) to perform due diligence and account opening procedures to determine ‘reportable’ account holders under one or more of the regimes.
The definitions of what types of entity classify as FIs are not harmonised across the regulations, making it possible for an entity to have a different classification under FATCA than under CRS.
In addition, account holders that are active non-financial entities are reportable under CRS unless they fall into one of a number of prescribed low risk categories. Many entities will also fall into the passive non-financial entity category due to differences in the regimes, requiring a look-through to control-ling persons. All of this classification must be achieved alongside the continuing need to clarify US-specified and UK-specified account holders, as defined by the current regimes.
Classifications and data collected to determine account status must pass reason-ability checks, and must be monitored on an ongoing basis for any change in account holders’ circumstances that may require a re-review of documentation and of previous determinations held. With the advent of CRS, this so-called ‘change in circumstance’ monitoring takes on a new level of required attention, with any address change of an account holder within participating countries requiring a case review.
For your pre-existing investor base, a review of the collected documents for US FATCA and UK CDOT would need to be revisited. There could be circumstances where Citco would need to ask the investors for additional information to classify them appropriately for CRS purposes.
Citco covers due diligence and reportingCitco offers a consolidated approach to all three regimes, which includes investor due diligence and annual regulatory reporting. This benefits our clients by ensuring all data is maintained in a central data repository, allowing for consistency and accuracy when preparing regulatory filings and identifying reportable accounts.
Separating the due diligence and regula-tory reporting between Citco and the client, or using other service providers and public accounting firms may result in information being overlooked. This could lead to missed deadlines or inaccurate interpretation of the information.
The 2014 FATCA reporting season was in a transitional period where the respec-tive jurisdictions and the IRS took a soft approach on the reporting deadlines. As everyone has now been given a year to famil-iarise themselves with the portals and the technology requirements, these deadlines will in future be much more firm, and late filings could result in penalties.
Citco is currently contacting clients to ensure their needs under the various AEOI regimes are met in 2016 and beyond. □
Automatic exchange of information timelineAEOI regimes US FATCA UK CDOT CRSExisting accounts for DD* (the ‘population for review’) 30 Jun 2014 30 Jun 2014 31 Dec 2015New account onboarding start date 1 Jul 2014 1 Jul 2014 1 Jan 2016First regulatory filing 2015 2016 2017Existing account DD complete – high value individuals 30 Jun 2015 30 Jun 2015 31 Dec 2016Existing account DD complete – remaining account types 30 Jun 2016 30 Jun 2016 31 Dec 2017
Smoothing the move to common reporting It’s basically a global version of FATCA, but the CRS adds a few new wrinkles to due diligence and reporting requirements
Greg Fenlon, Global Head of Investor [email protected]
“ These deadlines will in future be much more firm, and late filings could result in penalties”
* DD:
due
dilig
ence
Spring 2016
FinCEN proposes anti-money laundering rules for SEC-registered investment advisersCitco and industry bodies seek clarification on key issues
In August 2015, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking (the “proposed rule”) which, if enacted,
will require all SEC-registered investment advisers to establish anti-money laundering (AML) programs and report suspicious activity to FinCEN.
This article summarises the high level impact of the proposed rule and high-lights some of the key issues and current AML practices which industry bodies have requested be clarified and/or adopted in the final rule. Citco provided input into the comment letters submitted to FinCEN by both the Managed Funds Association (MFA) and Alternative Investment Management Association (AIMA).
Issues to be addressed Delegation The proposed rule requires SEC registered investment advisers (RIAs) to establish an AML program and allows RIAs to contrac-tually delegate the implementation and operation of certain aspects of its AML program to “agents or third-party service providers, such as broker-dealers in securities (including prime brokers), custodians, and transfer agents”. Such delegation is broadly consistent with current industry practice where RIAs typically procure fund adminis-trators to perform the AML work for their privately managed funds. Citco has provided investor AML services for our client funds for many years and has built up dedicated, specialist staff trained and experienced in implementing AML controls, identifying red flags and conducting due diligence on inves-tors in funds.
Whilst the proposed rule refers to “transfer agents” as a permitted delegate, MFA has requested that, when issuing its final rule, FinCEN specifically refer to “administrators” as another example of permitted delegate, in order to dispel any possible doubt that delegation of these AML responsibilities to administrators is
permissible. The MFA has also requested FinCEN confirm the permissibility of the delegation of the AML program to offshore administrators located outside the United States, noting that offshore administrators, like Citco, are generally located in jurisdic-tions with long-standing AML laws (for example, Cayman Islands and Ireland), and are regulated entities required to have their own AML policies, procedures and controls under the AML laws and regulations of their home country.
Risk-based approach The proposed rule expressly endorses a “risk-based approach” to the AML program requirement and notes that an RIA AML program should take into account factors
such as the source of investor funds and the jurisdictions where investors are located. Citco’s AML policies and procedures follow a risk-based approach which is consistent with the risk factors outlined in the proposed rule.
For purposes of assessing risk, MFA has requested that FinCEN acknowledge, in the adopting release or other guidance, the current industry practice that allows admin-istrators (and RIAs) to take into consid-eration the AML procedures performed by financial institutions from which investor funds originate, including those located in Financial Action Task Force (FATF)-member jurisdictions. Such financial institutions are subject to significant AML controls and conduct customer identification verification and due diligence on account holders.
Michael Regan, General Counsel, Citco Fund [email protected]
Continues on next page ▻
Spring 2016
Accordingly, where an investor has already been approved from an AML perspective by a regulated financial institution located in a FATF-member jurisdiction under its own AML requirements and the subscription funds are wired from an account in the inves-tor’s name at the institution, it is reasonable to categorise such an investor as low risk for money laundering and not require an RIA to carry out additional AML due diligence in the absence of any other facts suggesting that the investor presents a heightened risk for money laundering.
Investor intermediariesThe proposed rule states that if any of the investors in a fund are themselves private funds or other unregistered pools (for example, fund of funds) the RIA “will need to assess the money laundering or terrorist financing risks associated with these investing pooled entities using a risk-based approach”.
One of the issues for FinCEN to clarify, which reflects current industry practice, is whether to permit the “investor interme-diary” to be viewed as the RIA’s customer for AML purposes so the RIA is not be required to look through the investor intermediary to the underlying investors and conduct due diligence on such underlying investors. MFA has suggested that FinCEN permit RIAs to rely on AML procedures performed by investor intermediaries in determining whether to accept an investment from an intermediary investor. The intermediaries, and not the RIAs, are in direct contact with the underlying investors and consequently are in the best position to “know the investor”.
This reflects the industry practice today where administrators typically rely on written representations by the investor intermediary regarding their AML proce-dures. It is to be hoped that FinCEN will recognize that permitting the RIA to treat the intermediary as its customer and rely on the intermediary’s own AML due diligence procedures is consistent with the proposed rule’s risk-based approach.
Extraterritorial concerns The proposed rule extends to non-US RIAs notwithstanding where such non-US managers are already subject to AML rules in their country of origin. AIMA has requested that non-US RIAs which are located in FATF member countries should only have to comply with that country’s local AML laws and should not be subject to additional and/or different AML rules proposed by FinCEN. In the event FinCEN refuses to exempt non-US RIAs in such manner, AIMA has requested that the requirements under the proposed rule should only apply to the extent the non-US RIA’s transactions involve US persons and/or US domiciled financial institutions.
Grandfathering of existing investors Another matter to be confirmed by FinCEN is whether RIAs will be required to re-eval-uate the adequacy of their existing investor on-boarding process and reassess the due diligence conducted on investors which invested in a fund prior to the effective date of the proposed rule. MFA has requested that the risk assessment and due diligence requirements of the adopting release should apply to new investors in a fund after the effective date of the final rule and the application of the final rule to pre-existing investors in a fund could be adopted on an event-driven basis (i.e., additional subscrip-tions), as appropriate.
Scope of proposed rule Another matter which various industry bodies have requested FinCEN clarify is that the intent of the proposed rule is to cover activities involving investors, and not
other aspects of an RIA’s operations, such as investment activity.
TimingThe public comment period has closed and the proposed rule will be subject to addi-tional review and revision before it is final-ized by FinCEN. FinCEN is proposing that RIAs must develop and implement an AML program that complies with the require-ments of the proposed rule no later than six months from the effective date of the regula-tion. In light of the fact that the new rule will require RIAs to, inter alia, designate an AML compliance officer, train relevant personnel on the final rule’s requirements and liaise closely with fund administrators or any other party engaged to implement an RIA AML program, various industry bodies have requested that the proposed implementation date be extended to eighteen (18) months after issuance of the final rule.
However, FinCEN has previously required financial institutions (for example, banks, broker dealers etc.) to comply with rules within a six month period so all stakeholders should be ready and prepared to implement the final rule within six months.
Conclusion As noted herein, there are certain provisions of the proposed rule which require clarifica-tion and/or modification before it is possible to fully evaluate the impact FinCEN’s proposal will have on an RIA’s business and the wider alternative asset industry. Citco is staffed with qualified AML professionals experienced in both assessing money laun-dering risks presented by investors in funds and implementing risk-based AML compli-ance programs on behalf of funds.
Accordingly, assuming FinCEN provides the requested clarifications highlighted in this article and endorses the current risk-based industry practices, Citco is in a strong position to help our clients comply with the FinCEN proposals. We will continue to monitor developments and provide further updates in due course. □
“ Citco is in a strong position to help our clients comply with the FinCEN proposals”
▻ From previous page
Spring 2016
CRD IVCiting resource shortages, on 18 December 2015 the European Banking Authority wrote to the EU Commission to request revised deadlines for the delivery of a number CRD IV draft technical standards. The standards were due by the end of December 2015 and the delays requested, if approved, will push their delivery out to mid-late 2016 in most cases. By contrast, also on 28 January 2016, a number of CRD IV Level 2 measures were published in the Official Journal and will take effect on 17 February 2016.
AIFMDThe EU Commission has written to ESMA requesting its opinion and advice on the AIFMD passport. In this letter, dated 17 December 2015, the Commission supports ESMA’s approach of granting the non-EU passport on a country-by-country basis. ESMA is asked to assess the USA, Hong Kong, Singapore, Japan, Canada, Isle of Man, Cayman Islands, Bermuda and Australia by 30 June 2016. The Commission also requests ESMA’s advice on third country regulators and inflows of third country funds, in addition to another opinion on the current passporting regime.
Cyber security FINRA in the USA published its annual Priorities Letter on 5 January 2016, in which cyber security is listed as a priority for 2016. Concerns regarding cyber threats continue at the SEC, with its examination priorities for 2016 again reflecting a focus on this area. In the EU, an agreement was reached on 7 December 2015 on the Commission’s proposed measures to increase online secu-rity. The Network and Information Security Directive is the first piece of European legislation on cyber security and will take effect 21 months after its publication.
Local updates – LuxembourgOn 27 November 2015, the bill of law regarding reserved alternative investment funds (RAIF) was approved by the Council of Government. The RAIF regime will allow AIFMs to set up a new type of AIF, which combines features of the SIF and SICAR fund regimes but without the regulatory oversight of the CSSF. The time to market for the launch of the RAIF will rest with the governing body and service providers of the RAIF as the CSSF will not be involved in its authori-sation or supervision.
Data protectionThe invalidation of the US-EU Safe Harbor Rule in October 2015, combined with agreement on a new General Data Protection Regulation (GDPR) in the EU on 15 December 2015, have triggered animated debate on the question of data protection. On 2 February 2016, the European Commission announced that it had reached agreement with the United States on the Safe Harbor Rule’s successor, the EU-US Privacy Shield. The GDPR was first proposed in 2012. It is expected to be published in early 2016 and should become applicable in Member States in 2018.
UCITS VThe delayed UCITS V Level 2 measures were published on 17 December 2015. With the directive transposition date of 18 March 2016 looming, these measures must still be approved before they can be final-ised. Uncertainties consequently surround the timing of UCITS V’s full application with the directive coming into force on 18 March 2016. The insolvency protection moni-toring obligations imposed on a UCITS depositary, in addition to the absence of a contractual discharge provision in the ‘strict liability’ standard, are significant departures from existing require-ments and equivalent provisions in AIFMD.
Local updates – IrelandOn 4 November 2015, the Central Bank issued a consultation (CP97) on the publishing of an investment firms rule book, which will consolidate into one document all of the requirements imposed on investment firms. Investment firms are typically authorised in Ireland as MiFID firms or under the Investment Intermediaries Act 1995 as invest-ment business firms. On 22 December 2015, an additional consultation (CP100) was published on the introduction of a risk assessment and capital planning requirement for fund administrators authorised under the Investment Intermediaries Act 1995.
MiFID IIWith many of the MiFID II Level 2 rules outstanding, a lot of work remains for both the firms impacted and the regulators to ensure readiness in advance of the effective date of 3 January 2017. This led to ESMA requesting in October 2015 that the MiFID II implementation be delayed by one year to January 2018. However, concerns have been raised at ESMA and industry level that even a one year delay may be insufficient if the remaining MiFID II rules are not promptly finalised and endorsed.
Regulatory round-upOur list of the latest advice, rulings and technical standards from regulators across the globe
Spring 2016
Citco assets under administration 2015The charts below show details of performance and capital flows across Citco Fund Services through December 2015
Inflows & outflows 2015($bn)
Performance by strategy vs industry indices(%) Through December 2015 for funds administered by Citco
Growth
Strategies Indices
Inflows by strategy ($bn)
Outflows by strategy($bn)
Total inflows $76.9bn
Total outflows $94.7bn
Multi Strategy 29.2
Equities 20.7
Fund of Funds 9.4
Global Macro 7.6
Private Equity & Real Estate 5.7
Arbitrage 1.5 Emerging Markets 1.0Event Driven 1.8
Event Driven -1.9
Equities -19.1
Multi Strategy -39.1
Fund of Funds -16.0
Global Macro -8.3
Private Equity & Real Estate -3.9
Abritrage -3.4Emerging Markets -3.0
Barc
lay
Hed
geFu
nd In
dex
Cre
dit S
uiss
eH
edge
Fun
d In
dex
Dow
Jon
es
Indu
stria
l Ave
rage
MSC
I Wor
ld
S&P
500
-4.00
-2.00
0.00
2.00
4.00
Arbi
trage
Equi
ties
Emer
ging
Mar
kets
Even
t Driv
en
Fund
of F
unds
Glo
bal M
acro
Mul
ti St
rate
gy
Priv
ate
Equi
ty/R
eal
0
-20
-10
10
20
July
Augu
st
Sept
embe
r
Oct
ober
Nov
embe
r
Dece
mbe
r
Inflows Outflows Net flow
Equities were top in 2015Total Citco Fund Services assets under administration reached almost $850bn at the end of December 2015.Performance in the second half of 2015 was highly challenging for Citco clients. Many strategies outperformed key indices over the year in total, whilst still only achieving low single digit returns. Our equities strategy was the lead performer at 3.30%, whilst emerging markets lost 1.5% over the year. All other strategies straddled this range, albeit with each earning positive returns save for our event driven strategies, which joined emerging markets in the red.The second half of 2015 largely continued investor allocation trends observed in the first half of the year. Achieving positive capital flows proved difficult in the second half of the year, with more than $17bn in aggregate exiting Citco. Multi-strategy and funds of funds saw the largest outflows, whereas equities saw marginal net inflows.
Spring 2016
AMERICACitco Fund Services (USA) Inc.Tel: +1 201 793 6177 [email protected]
EUROPECitco Fund Services (London) LimitedTel: +44 207 290 1350 [email protected]
ASIACitco Fund Services (Singapore) Pte LimitedTel: +65 6571 1298 [email protected]
Citco DISCLAIMER: None of Citco Fund Services (Cayman Islands) Limited, its affiliates and/or their officers or employees (collectively “Citco” or “CFS”) makes any representation or warranty, express or implied, as to the adequacy, completeness or accuracy of the information contained in the document or other information provided to you and/or to your representatives, whether orally or in writing. No liability whatsoever is accepted by Citco for any loss howsoever arising from any use or reliance by you, your representatives and/or your clients of the information contained in this document or other information provided to you and/or to your representatives in connection therewith, whether orally or in writing. For the avoidance of doubt, Citco is not promoting, endorsing or otherwise recommending investment in any fund to which it provides services by the provision of the information in this document or arising in connection therewith. © The Citco Group Limited 2016
On 25 June 2015, legislation containing the third and final element of Australia’s Investment
Manager Regime (IMR 3) was enacted into law.
The object of the IMR is to encourage particular kinds of investment made into or through Australia by certain foreign entities that have wide membership* or that use Australian fund managers. This is achieved by providing non-Australian entities such as hedge funds with an Australian income tax exemption for returns or gains crystal-lised on disposal of their investments.
Non-Australian residents qualify for the IMR exemption for an income year either by investing directly in Australia (direct IMR concession), or by investing in Australia via an Australian fund manager (indirect IMR concession).
While the concessions are aimed at foreign funds, the indirect IMR concession also provides significant opportunities for Australian fund managers.
Consequences of IMR concessions If a fund is entitled to the IMR concessions, returns or gains it makes from the disposal of shares, or returns or gains from loans or derivatives, will be exempt from Australian income tax.
Amounts that are subject to withholding tax, such as dividends or interest, are not entitled to the IMR concessions. These amounts would continue to be subject to the regular Australian withholding tax law.
IMR example §§ A US limited partnership (LP) invests in
listed Australian shares. §§ It receives unfranked dividends of
A$100,000 on those shares and, for the year ended 30 June 2016, makes a gain of A$500,000 on the disposal of some of those shares. §§ Assuming it satisfies the requirements
for either or both of the direct and indirect IMR concessions, the gain of A$500,000 should be exempt from Australian income tax. §§ However, the dividends could still be
subject to Australian dividend with-holding tax. §§ The domestic rate of withholding tax on
unfranked dividends is typically 30% but this could be reduced under Australia’s tax treaties (if applicable).
Relevance for foreign fundsThe IMR concessions are clearly relevant to foreign funds investing in Australia. Such funds should be undertaking an IMR review to assess historical exposures to Australian tax and to determine whether the various conditions associated with the concessions are met.
Looking forward, there is also an oppor-tunity for foreign funds to consider whether they should engage an Australian resident fund manager with a view to relying on the indirect IMR concession.
The above is a simplified overview of the new regime. We would welcome the oppor-tunity to discuss further how this could benefit your fund. □* Widely held entities include large pension funds and funds where no member supplies more than 20% of the assets.Source: Excerpts taken from Deloitte’s summary to AIMA Australia members.
Australia offers tax exemptions for some foreign funds
The Citco Group of Companies (“Citco”) is a worldwide group of independent financial service providers, established in over 40 countries and serving the world’s elite hedge funds, private equity and real estate firms, institutional banks, Global 1000 companies and high net worth individuals. Companies of the Citco Group provide global alternative investment fund administration, custody and fund trading, financial products, and corporate and trust planning solutions.
For questions about these articles contact your relationship manager or Spotlight editor Diana Arakelyan at [email protected]
Mark Bennett, Managing Director, Citco Fund Services (Australia)[email protected]
