Session V: Developments in
International Fund Regulation
Christian Büche, Partner, K&L Gates Frankfurt
Elizabeth Gray, Partner, K&L Gates Sydney
Betsy-Ann Howe, Partner, K&L Gates Sydney
Michael Wong, Partner, K&L Gates Hong Kong
© Copyright 2015 by K&L Gates LLP. All rights reserved.
Developments in International
Fund Regulation
Christian Büche, Partner, K&L Gates Frankfurt
© Copyright 2015 by K&L Gates LLP. All rights reserved.
Third-Country Access to the EU
Current Regulation under MiFID (i)
Third-Country
Firm

MiFID does not provide for a
harmonized regime for third-country
firms within EU

Up to 28 different local laws may
have to be observed

Usually license requirements apply in
each member state

Many third-country investment firms
rely on "reverse solicitation"
123
“Source: www.europa.eu"
Current Regulation under MiFID (ii)
Third-Country
Firm
100%
 Common practice:

Establish subsidiary in one Member
State

Obtain license from local supervisory
authority to provide investment services

Outsource activities from subsidiary to
TCF

Passport into other member states
 Passport available for
branches or cross-border
business
124
Subsidiary
“Source: www.europa.eu"
New Regulation under MiFIR
Third-Country
Firm

Available from 3 January 2017

No branches or subsidiaries required
in the EU

Available only for specific client
categories: eligible counterparties
and professional investors

Registration with register of thirdcountry firms kept with ESMA

equivalence decision by European
Commission

TCF is licensed and effectively
supervised

cooperation agreement

Transitional period of three years

"Reverse Solicitation" A46 (5) MiFIR
125
"source: www.europa.eu"
How can we obtain registration?
• Equivalence decision is adopted
by European Commission;
otherwise local laws continue to
be applicable
• Submission of application with
information in accordance with
[RTS 5]
Application
126
Pre-Assessment
by ESMA
• Assessment within 30 working
days whether application is
complete
• Deadline to provide additional
information
• Within 180 working days after
submission of complete
application
Decision by ESMA
regarding
Registration
Provision of
Investment
Services
• Information of clients in writing
regarding registration and
supervisory authority
• Offer to clients to submit disputes
to jurisdiction of court in member
state
• Comply with MiFID II and MiFIR
New Regulation under MiFID II
Third-Country
Firm




Available from 3 January 2017
Branch authorisation required at discretion
of each member state
Client categories: retail clients and
professional clients section II of annex II
Harmonised requirements for branches:








proper authorisation and supervision in home
state
cooperation agreements in place
sufficient initial capital
at least one manager appointed for branch
agreement in place in accordance with Art. 26
OECD Model Tax Convention on Income and on
Capital
membership in investor-compensation scheme
recognized by Directive 97/9/EC
Authorisation to be granted within six
months
"Reverse Solicitation" A42 MiFID II
127
“Source: www.europa.eu"
Developments in International
Fund Regulations (Germany)
Loan Originating Funds (i)
The Past
• Loan Purchasing Funds (LPF) vs. Loan Originating Funds (LOF)
• Not allowed: origination, prolongation, or restructuring of loans
• In practice: use of fronting banks, subordinated loans
• For third-country AIF: Reverse Solicitation
The Present
• BaFin permitted LOF by 12/05/2015
• EU Regulation: UCITS, AIF, EuVECA, EuSEF, ELTIF
• Various member states have permitted LOF, e.g. Italy, Ireland, Malta
• ESMA takes the view that LOF are permissible as AIFMD does not provide for product
rules
• Applies explicitly only to AIF established in Germany
The Future
• Minimum requirements for LOF in the EU – upcoming discussion paper by ESMA
129
Loan Originating Funds (ii)
Scope
• AIF only – UCITS not permitted
• Sub-Threshold AIF
• EU or Third-Country AIF?
Specific Requirements intended to be introduced in Germany
• Member states remain competent for product rules under AIFMD
• Consumer protection
• Shadow banking
130
Loan Originating Funds (iii)
Non-binding "recommendations" by BaFin
• Only closed-ended special-AIF; i.e. with only professional or semi-professional
investors
• No consumer loans
• No conflicts of interest; e.g. loans to the AIFM, the depositary or delegees
• Limited leverage (ELTIF: 30%; Malta: no leverage; Italy: 150%; Ireland: 200%)
• No deposits from investors because of CRR
• Risk management, in particular MaRisk
• No maturity transformation
• Risk spreading
• Minimum liquidity requirements
• Less strict requirements for shareholder loans
Impact on LPF
• Prolongations or restructurings are permitted
• Open-ended special-AIF: less than 50% of assets can be invested in loans
• Closed-ended special-AIF: adequate risk management
131
Update on Marketing
Update on Marketing of AIF
Segregated
Mandates
Investor
Information
Notifications
for SubThreshold
EU-AIFMs
133
Amended
Marketing
FAQ as of
20 March
2015
Funds of
One
Marketing
by Portfolio
Managers
Developments in International
Fund Regulations
Elizabeth Gray, Partner, K&L Gates Sydney
Betsy-Ann Howe, Partner, K&L Gates Sydney
© Copyright 2015 by K&L Gates LLP. All rights reserved.
Trends in the Australian IM industry 2014/15
Continued
growth –
consolidated
AUM AUD2.1
Trillion
Signing of
FTAs –
China, Korea,
Japan
Foreign sourced
AUM predominantly
from Japan, NZ, USA
and UK
Growing asset
classes
Equities
Bipartisan support for
significant reform to support
the growth of the IM Industry
Small increase in foreign
AUM managed in Australia
4%-5% of total AUM
Fixed-income
Most things
global
Increased M&A activity
Henderson buys
Perennial fund
managers
Westpac sells majority
holding in BTIM
JPMAM acquires
AVIVA IGS
135
Key regulatory developments
 Foreshadowing of the development of multiple fund
structures (May 2015)
 Financial system enquiry – David Murray Report
(December 2014)
 Asia Region Funds Passport (Draft rules released
February 2015)
136
Multiple fund structures
 Current CIV structure – managed investment
schemes only
 Government has foreshadowed the development of
multiple fund structures
 Corporate CIVs and LP CIVs expected
 Government Options Paper to be issued third or
fourth quarter 2015
137
Financial System Inquiry
 Some key recommendations:
 Introduction of a product design and distribution
obligation;
 Introduction of a proactive product intervention power;
 Removing regulatory impediments to innovative
product disclosure and communication with
consumers;
 Giving priority to removing regulatory architecture
impeding cross-border transactions and mutual
recognition arrangements.
138
Figure 12: Recommendations to improve consumer outcomes
139
Asia Region Funds Passport
 Draft rules released on 27 February 2015
 Members of the Passport Working Group: Australia,
New Zealand, Korea, Singapore, Thailand and the
Phillippines [Japan involved in discussions]
 Multilateral framework intended to facilitate crossborder marketing of managed funds
 Pilot scheme expected to start in 2016
140
Regulatory arrangements
MOU
between
Passport
Members
MOU between
Regulators
Common Regulatory
Arrangements
Host
Economy
Laws &
Regulations
Passport
Rules
Home
Economy
Laws and
Regulations
141
Eligibility
Test
Requirement
FUM
Responsible for the operation of collective investment schemes with a total value of at
least USD 500 million
Financial resources test
Net equity of over USD 1 million plus additional capital of 0.001 x AUM in excess of
USD 500 million, capped at USD 20 million
Track record
Five years’ experience
Qualifications of officers
Officers with the relevant qualifications
Organisational
arrangements test
Meets certain organisational requirements in relation to reporting lines, internal control
mechanisms for asset management, records and registers of members and adequate
risk monitoring, compliance framework and procedures to manage conflicts of interest
Good standing
Be deemed to have good standing
Principal place of business
Home economy
142
Fund criteria
 Flexibility around permissible fund structures
 Custody and independent oversight requirements
 Investment management delegation permitted
 Fund liquidity requirements will need to be satisfied
 Investment restrictions will apply
143
Distribution
 Host economy laws will apply
 Local distributor will be required
 Local distribution document (or wrapper) will be
required
 Local translation will be required
144
Application process
Establish a new
registered
managed
investment scheme
or consider
passporting an
existing registered
managed
investment scheme
Consider:
• FUM
• Financial resources
• Track record
• Qualifications of
officers
• Organisational
arrangements
• Portfolio allocation
restrictions
• Fee structure
Lodge Passport
Application with
ASIC
Application to
contain:
• RE details
and custodian
• Name and
Passport Fund
objectives
• Details of key
officers
• Constitution
• Consent to the
disclosure of
information
between
regulators and
others
• Consent to the
publication of
the application
(or part of)
Unique
Passport Fund
code
Lodge application
to offer interests
in Host Economy
with Host
Regulator
Consider:
• Host laws and
regulations that
may apply, for
example,
disclosure
documentation,
communication
with members and
any advertising
requirements
• Translation of
documents
• Marketing strategy
• Engaging a local
distributor
Public Register
Target
Investors
Twenty-oneday
assessment
or exposure
period
145
Timetable
Approximate Timing
Milestone
April 2015
Public consultations on Passport MOU annexes conclude
Working Group continues to engage with other economies to encourage their
participation
May 2015
Working Group considers public submissions
July 2015
Further public consultation
August 2015
Working Group finalise MOU and annexes
September 2015
Willing and ready economies will become party to the Passport MOU
+ 12 months from
economies becoming party
to the Passport MOU
Economies which are party to the MOU (Passport member economies) will endeavour
to implement changes to legislation and regulation where necessary to give effect to the
Passport arrangements within 12 months after becoming party to the MOU
When at least economies give effect to the Passport arrangements, eligible Collective
Investment Schemes in these economies can access the Passport arrangements
146
Australian Taxation Issues for Funds and Fund
Managers
Outbound Investment
 The tax treatment of outbound investments by Australian residents, including resident
companies and unit trusts, varies depending on the nature of the outbound investment,
the character of the resident entity and the underlying investors.
 In Australia, the most significant form of collective investment vehicle is managed funds
(largely unit trusts and superannuation funds) because these are tax transparent
 Income from offshore investment is generally subject to tax either when earned
(including under the anti-tax-deferral rules) or on repatriation, with a credit provided for
certain foreign taxes paid (such as dividend withholding taxes).
 Limited partnerships (LP) are deemed to be companies for Australian tax purposes
unless they are established in a jurisdiction which imposes tax on the limited partners in
respect of the income or profits for the year.
 The significance of the characterisation of a LP as a company is that Australia’s
controlled foreign company rules can apply to investments in foreign LPs depending
upon the level of Australian ownership in the LP.
 Foreign Income Tax Offset (FITO) rules apply to allow investors who pay foreign tax on
income that is also taxable in Australia to obtain a tax offset for the amount of foreign
tax paid.
148
Outbound Investment — Tax nirvana
 No tax return lodgement requirements in foreign
jurisdictions
 No tax leakage – full credit / offset for any foreign tax paid
– ie any foreign tax paid must be available for a foreign
tax credit or offset and the rate of that foreign tax should
not be more than the rate of tax payable in Australia
 No taxation by attribution of undistributed income for
Australian tax purposes – only want to be taxed on actual
income received
 Capital gains tax discount (Super Funds and individuals)
on disposal of investment
149
Outbound Investment – Investment via Cayman LP
Australian Institutional
Investor — Super
Fund/Corporate
Aust
Cayman Islands
Cayman Fund
(Limited
Partnership)
U.S.
US Blocker
Co
US
Assets
US Blocker
Co
Australian Tax Considerations
Australian investor
 Is Cayman fund treated as a foreign hybrid (tax
transparent) or a company? If a foreign hybrid,
CFC rules do not apply.
 If CFC rules apply, determine the level of
Australian ownership in Cayman Fund – if a
CFC, then income is taxed on an attribution
basis rather than a realisation basis
 Tax rate for Super Funds is 15% and Corporates
30%
 FITO – are Australian investors entitled to FITO
in relation to US withholding tax paid by Cayman
Fund on distributions from US Blocker?
 Disposal – Capital Gains Tax discount
US Blockers
 US Blockers pays tax in US on US investments
and file tax returns
 US WHT – only on non-portfolio interest and
dividends
US
Assets
150
Outbound Investment – Investment via Australian
feeder
Australian Institutional
Investor – Super
Fund/Corporate
Tax Issues
 Australian institutional investor
 Taxed in Australia on distributions from AUT at
relevant tax rate – 15% or 30%

Australian Unit Trust
 Pass through (trust) for Australian tax purposes
 Taxed as a corporation for US tax purposes
 Subject to tax in US and file US tax return on
distributions from USLP (query using a blocker)
 Branch profits/withholding at 30% may apply to
certain distributions (DTA may reduce rate)
 FITO available for US tax paid
 CGT discount may apply on disposal of
underlying assets if USLP a foreign hybrid
 CFC rules will not apply to USLP unless AUT
controls USLP

USLP
 Tax transparent entity for US and Australian
(foreign hybrid) tax purposes
Australian
unit trust
Aust
U.S.
US Limited
Partnership
(USLP)
US
Assets
151
Inbound Investment – Managed Investment
Trusts (MIT)
 Investments in MIT offer significant tax concessions
compared to investments in Australian companies and
non-MIT trusts.
 Concessions are available for both foreign residents and
Australian residents and allow:
 foreign residents to access a reduced rate of
withholding tax on most distributions (currently 15%
and in some limited cases, 10%); and
 Australian residents to access the capital gains tax
("CGT") discount on capital gain distributions
152
What is an MIT?
 Broadly, a trust will be considered an MIT if the following
requirements are met:
 the trustee of the trust is an Australian resident, or the central management and
control of the trust is in Australia;
 the trust carries out most of its investment management activities in relation to
Australian assets in Australia;
 the trust does not carry on or control an active trading business, ie must carry on
passive investment activities (eg investing in Australian rental property);
 the trust is a ‘managed investment scheme’ (within the meaning of the
Corporations Act 2001 (Cth));
 the trust is sufficiently 'widely-held' and not 'closely-held'; and
 the trust is operated or managed by an appropriately regulated entity.
 Payments from a MIT are called ‘fund payments’
153
MIT withholding rates
 The withholding tax rate for fund payments (except to the extent that
they are, or are attributable to fund payments from, a ‘clean building
managed investment trust’) is 15% if the recipient is resident in a
jurisdiction with which Australia has effective exchange of information
(EOI) arrangements for tax matters – for example, the UK, Belgium,
British Virgin Islands, Denmark, France, Germany, Gibraltar, Ireland,
Isle of Man, Jersey, Malta, Netherlands and the USA are EOI
countries).
 If the recipient is not resident in such a jurisdiction, the withholding tax
rate is 30%.
 A reduced withholding tax rate of 10% applies to the extent that the
fund payments are from, or are attributable to, a ‘clean building
managed investment trust’ if the recipient is resident in a jurisdiction
with which Australia has effective EOI arrangements for tax matters.
154
A-MIT – Proposals
 On 9 April 2015 draft legislation was released which proposed a new
tax system for certain trusts.
 The new rules will apply to ‘attribution managed investment trusts’
(AMITs)
 The purpose of this legislation is to modernise the tax rules for eligible
trusts and enhance the international competitiveness of Australian
managed funds.
 A trust will qualify as an A-MIT if, generally:
 the trust is a MIT; and
 its members have 'clearly defined interests'.
155
Taxation of A-MITS
 Attribution regime: for income tax purposes, A-MITs will be able to
attribute amounts of income, exempt income, tax offsets and credits
to members on a fair and reasonable basis.
 Attribution for multiple classes of members: if the interests in the
income and capital of an A-MIT are divided into classes, an A-MIT will
be able to apply the attribution regime separately to each class of
interests
 Character flow through: amounts derived or received by an A-MIT,
that are attributed to members, retain the character they had in the
hands of the trustee for income tax purposes
 Treatment of 'unders and overs': provision will be made to reconcile
any variances in amounts attributed by using the ‘unders and overs’
regime.
156
Eligibility of Existing Trusts to be Treated as AMITs
 Trustees of existing MITs will need to embark on due
diligence activities to determine whether changes are
required to be made to trust deeds, other constituent
documents, product disclosures and other investor
material in order to apply the new A-MIT tax system.
 As part of the 2015 Budget, the Australian government
announced that the start date of the proposed regime for
A-MITs will be deferred to 1 July 2016. However, ability to
elect to opt in from 1 July 2015 will be available.
157
Australian Investment Manager Regime
Investment Manager Regime
 New rules are designed to remove tax impediments to investing in
Australia, with the intention of attracting foreign investment and
promoting the use of Australian fund managers.
 The IMR Regime operates as follows:
 Gains and losses from portfolio and passive investments into Australia investments
in a widely held foreign fund would be disregarded. Under the current law, certain
gains and losses from portfolio and passive investments into Australia, when
pooled in a widely held foreign fund, may be subject to Australian income tax.
 Foreign entities that engage an independent Australian fund manager to invest into
Australia will disregard Australian income tax consequences arising in respect of
certain gains and losses from those investments (including portfolio and nonportfolio foreign investments and portfolio Australian investments) to the extent that
the returns or gains are not attributable to Australian real property.
159
Mutual Recognition of Funds
Scheme
Updates on Shanghai-Hong Kong Stock Connect
Michael P. Wong, Partner, K&L Gates Hong Kong
© Copyright 2015 by K&L Gates LLP. All rights reserved.
Mutual Recognition of Funds Scheme
What is the Mutual Recognition of Funds
Scheme
 A memorandum of understanding between the SFC and
the PRC signed on 22 May 2015
 Enables distribution of Hong Kong funds and Mainland
China funds to be distributed in each other’s markets
 Streamlined vetting process
 Quota of RMB300 million each way
 Effective on 1 July 2015
162
Benefits of the Mutual Recognition of Funds
Scheme
 Provide access to the US$2 trillion PRC retail funds
market
 Allow international investors access to PRC investments
through investments in PRC funds
 Hong Kong economy – creation of jobs in the Hong Kong
asset management industry
 Global economy – increase capital inflows to overseas
markets
163
General Principles
 Streamlined Vetting Process
 Hong Kong funds that are authorised by the SFC are deemed to
have complied with CSRC requirements for authorisation
 Hong Kong funds are required to comply with the CSRC eligibility
requirements before they can be distributed in Mainland China
 Operation
 Hong Kong funds must operate and be managed in accordance
with Hong Kong law and its constitutive documents
164
General Principles (cont.)
 Sale and Distribution
 The sale and distribution of Hong Kong funds in Mainland China
must comply with Chinese laws and regulations
 Equal Treatment
 Chinese investors in Hong Kong funds must receive fair and the
same treatment as Hong Kong investors
165
Eligibility – Type of Funds
 Equity funds
 Bond funds
 Mixed bond and equity funds
 Index tracking funds (ETFs to be confirmed)
166
Eligibility – Specific Fund Requirements









Established in Hong Kong
Operated in accordance with Hong Kong law
Authorised and regulated by the SFC
Trust structure
Trustee and custodian comply with SFC requirements
Established for more than one year
Minimum fund size of not less than RMB200 million
Must not primarily invest in the PRC markets
Amount invested by PRC investors must not exceed 50%
of the NAV of the Fund
167
Eligibility – Fund Manager
 Operated in Hong Kong
 Holder of a Type 9 (Asset Management) licence issued by
the SFC
 Have not been subject to major disciplinary action from
the SFC during the past three years
 Restriction on delegation of management duties to a nonHong Kong entity or institution
168
Distribution in the PRC – Operational
Requirements
 Appointment of the mainland agent:
 Must be duly licensed by the CSRC to manage a publicly offered
fund or to provide fund custodian services in Mainland China
 Duties and responsibilities include:
 Registration of the fund with the CSRC and regulatory reporting
 Ensure compliance with rules and regulations
 Publication of information of the fund
 Sale and distribution of the fund
 Settlement of payments
169
Distribution in the PRC – Operational
Requirements (cont.)
 Appointment of a qualified distribution agent:
 Either the investment manager or the mainland agent of the fund
may enter into the distribution agreement with the distribution
agent
 Publication of fund documents in approved newspapers and
website
 Documentation
 Compliance with certain disclosure and documentation
requirements
 All documents distributed must be in simplified Chinese
 English source documents must be translated into Simplified
Chinese
170
Quota
 Initial aggregate quota of RMB300 million
 Individual quota will be allocated to each fund will
based on the set percentage of the amount of
assets under management
 Approximately 100 funds in Hong Kong are
currently eligible for the MRF
171
Updates on
Shanghai-Hong Kong Stock Connect
Recent Trends — Northbound




Hedge funds
Approval by Luxembourg regulators
Quota underutilised
Preferred over QFII and RQFII for investment in
A-Shares
 Shenzhen-Hong Kong Stock Connect
173
Beneficial Ownership Issue
 Technical issue
 PRC law does not recognise legal and beneficial
ownership
 HK law does not recognise a trust over SSE Shares
where PRC law does not provide for such a trust
 HKSCC as beneficial owner, not the investors
 Rights to take direct legal action – Chinese law
does not approve or prohibit a beneficial owner to
take legal action to enforce rights
174
Beneficial Ownership Issue
 FAQs clarification by CSRC and HKSCC
 Certification of ownership as proof of beneficial
ownership
 CCASS General Rules provide that HKSCC will
assist CCASS participant or its client in bringing
legal action in Mainland China
 FAQs and CCASS General Rules are not law in
the PRC and HK
175
Pre-Trade Delivery

Seller of A-shares in Hong Kong must “pre-deliver” the stocks to their
broker a day prior to the actual trade

Counterparty risks between investors and brokers

Special Segregated Accounts (SPSA)
 Remove the risks of delivery of shares to brokers. This differs
from the trading processes familiar to many institutional
investors, and there are concerns it may create additional
counterparty risk between investors and brokers.
 Ability to select multiple brokers.
176