Issue 87 – Regulatory and Tax Developments in December 2011 potx

1

FUND NEWS
December 2011
Investment Fund Regulatory and Tax developments in
selected jurisdictions
Issue 87 – Regulatory and Tax
Developments in December 2011

Regulatory News

European Union

Proposal for a Regulation on
European Venture Capital Funds

On 7 December 2011 the European
Commission released a proposal for a
regulation on European Venture Capital
Funds. This regulation will introduce a
common framework of rules for a new
fund designation, the “European
Venture Capital Fund” and conditions for
the marketing of this type of fund to
eligible investors across the European
Union. The regulation would apply to
AIFMD managers managing non-UCITS
funds only, with assets under
management in qualifying venture
capital funds that do not exceed the
threshold of €500 million. The
"European Venture Capital Fund" would
be restricted to those funds that:
 invest 70% of the capital committed
by its sponsors in small and
medium size enterprises (SMEs);

Regulatory Content
European Union
Proposal for a Regulation on European
Venture Capital Funds Page 1
Proposal for a Regulation on Social
Entrepreneurship Funds Page 2
ESMA consultations on MiFID Page 2

France
AMF policy updates on collective
investment schemes Page 3
UCITS IV transposition finalized Page 3

UK
Introducing the Protected Cell Regime
(“PCR”) for UK OEICs Page 4
FSA proposal to permit non-UCITS retail
schemes to be feeder funds Page 4

Tax Content
Italy
New Italian tax withholding calculation
for investors in funds investing in
eligible bonds Page 6

Luxembourg
Aberdeen Case E-Alerts Page 6

UK
Tax Transparent Fund and Property
Authorised Investment Funds Page 7



Accounting Content
KPMG’s IFRS for Investment Funds Page 7

Fund News – December 2011

2


 invest in equity or quasi-equity
instruments; and
 do not use borrowings or any form
of leverage.

The Regulation will provide all managers

of qualifying venture capital funds with a
European marketing passport allowing
access to eligible investors across the
EU. Eligible investors will be
professional investors as defined under
MiFID and certain other sophisticated
venture capital investors.
Managers will need to register in the
country where they are established and
will need to comply with rules regarding
conduct of business, the management
of conflicts of interest, valuation of
assets and the production of annual
financial reports.
The proposed regulation now passes to
the European Parliament and the Council
for negotiation and adoption under the
co-decision procedure. The Regulation
is expected to apply from the 22 July
2013.
A provisional version of the proposal is
currently available at the following web
link:
/>tment/venture_capital_en.htm

Proposal for a Regulation on Social
Entrepreneurship Funds

On 7 December 2011 the European
Commission also issued a second
proposal for a “European Social
Entrepreneurship Fund” (EuSEF) label.
The proposal lays down uniform
requirements for those managers that
wish to use the label, and conditions
regarding the marketing of funds under
this label across the European Union.
The regulation will apply to AIFMD
registered managers managing non-
UCITS funds only, whose assets under
management in EuSEFs do not exceed a
threshold of €500 million.
An EuSEF will be required to:
 invest at least 70% of its assets in
qualifying investments which
include equities, debt, fund units,
loans and other type of
participations in unlisted social
enterprises.
 not employ any means of leverage

apart from short term borrowings
for liquidity purposes.
EuSEF managers will be subject to
conduct of business rules, requirements
regarding conflicts of interest
management, pre-sale disclosure rules
and requirements to produce audited











annual reports for their EuSEFs. The
manager will benefit from a passport to
market EuSEFs across the European
Union by simple notification to their
home regulator.
The proposed regulation now passes to
the European Parliament and the Council
for negotiation and adoption under the
co-decision procedure. The Regulation
is expected to apply from the 22 July
2013. A provisional version of the
proposal is currently available at the

following web link:
/>tment/social_investment_funds_en.htm#
proposal

ESMA consultations on MiFID

On 22 December the European
Securities and Markets Authority
(ESMA) issued two MiFID related
consultation papers (CPs) containing
Guidelines on suitability and the
Compliance function.
The Guidelines on suitability focus on
the need for firms to have in place
appropriate policies and procedures in
order to know their clients when
recommending suitable investment
choices.
The Guidelines on the Compliance
function cover the responsibilities of the
function, specifically compliance risk
assessment, monitoring, reporting and
advisory obligations. They also cover
the organizational requirements for the
function and guidelines for the review of
the function by the competent authority.
The consultation period closes on 24
February 2012 and the consultation
paper is available via the following web
link:

/>view/10
Fund News – December 2011

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France

AMF policy updates on collective
investment schemes

On 23 December 2011 the Autorité des
Marchés Financiers (AMF) published
updates to the following collective
investment schemes guides.
 The guide to regulatory documents
for collective investment schemes
(“OPCVM”) and real-estate
collective investment schemes
(“OPCI”).
 The good practice guide to drafting
commercial documents and
distributing collective investment
undertakings, illustrating appropriate
behaviour and bad practice to be
proscribed.
 The good practice guide to
monitoring collective investment
undertakings. The purpose of this
document is to inform asset

management companies,
depositaries and statutory auditors
of the way certain aspects of the
regulations should be interpreted.
These guides contain recommendations
which market players are asked to
comply with, and also positions setting
out the binding provisions of the General
Regulation.
The guides are available at
www.amf-
france.org.











UCITS IV transposition finalised


On 21 December the AMF published
amended instructions governing the
authorisation and operation of UCITS,
non-UCITS and real estate collective

investment schemes that now
incorporate all the new UCITS IV
measures introduced into French law.
The AMF has also simplified the
presentation of the instructions, so there
is now only one for each major category
of collective investment scheme
targeting retail investors:
 for UCITS: Instruction 2011-19 on
authorisation procedures,
establishment of a KIID and a
prospectus, and the periodic
reporting requirements of French
UCITS and foreign UCITS marketed
in France (previously Instructions
2005-01 and 2005-02).
 for non-UCITS: Instruction 2011-20
on authorisation procedures,
establishment of a KIID and a
prospectus, and the periodic
reporting requirements of non-
UCITS (previously Instructions 2005-
01 and 2005-02).
 for collective investment schemes
for employees: Instruction 2011-21
on authorization procedures,
establishment of a KIID and a
prospectus, and the periodic
reporting requirements of collective
investment schemes for employees

(previously Instruction 2005-05).
 for approved venture capital
collective investment schemes:







Instruction 2011-22 on authorisation
procedures, establishment of a KIID
and bylaws, and the periodic
reporting requirements of approved
venture capital funds, innovation
funds and local investment funds
(previously Instructions 2009-03 and
2009-05).
 for real estate collective investment
schemes: Instruction 2011-23 on
authorization procedures,
establishment of a KIID and a
prospectus, and the periodic
reporting requirements of real
estate collective investment
schemes (previously Instructions
2009-01 and 2009-02).
The AMF has also published Instruction
2011-15 on procedures for calculating
the global exposure of UCITS, in order to

implement CESR’s Guidelines on Risk
Measurement and the Calculation of
Global Exposure and Counterparty Risk
for UCITS, published on 28 July 2010,
and ESMA’s Guidelines to competent
authorities and UCITS management
companies on risk measurement and the
calculation of global exposure for certain
types of structured UCITS, issued on 14
April 2011. This instruction replaces
Instruction 2006-04 of 24 January 2006
on the procedures for calculating the
exposure of UCITS to derivative financial
instruments.

The Instructions are available at
www.amf-france.org.



Fund News – December 2011

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UK

Introducing the Protected Cell Regime
(“PCR”) for UK OEICs
As discussed in Fund News issue 86, on

20 December the Statutory Instrument
(“SI”) was laid before Parliament and
became “made” legislation coming into
force on 21 December 2011. This
commences the up to two year
transition during which existing umbrella
OEICs will need to become protected
cell OEICs. The result is that the assets
of each sub-fund are ring-fenced and
cannot be called upon to meet an
excess of liabilities of another sub-fund
of the umbrella. All new umbrella OEICs
must be established from the outset
with protected cells.
In parallel, on 21 December, to introduce
the protected cell regime the Financial
Services Authority (“FSA”) has
published its Instrument 2011-76. This
came into force immediately and
amends the FSA’s Collective Investment
Schemes sourcebook (“COLL”) to
include rules and guidance on the PCR.
The FSA’s Instrument has been
supported by an information note to
Authorised Corporate Directors
(“ACDs”) explaining what is required,
and its January Handbook Notice will
provide the feedback and comments on
the changes made to bring in the PCR.
The FSA requires umbrella schemes to

make a statement regarding the
“principle of limited recourse”, that is
that the assets of a sub-fund belong
exclusively to that sub-fund and shall not
be used to settle, directly or indirectly,
the liabilities or claims against the
umbrella or any other sub-fund.
There is a caveat to the introduction of
the PCR with respect to a potential
uncertainty as to how foreign courts will
react to claims by creditors under


foreign law contracts with the OEIC,
which are brought in foreign courts.
Where there are such contracts this is to
be made clear by the OEIC. The COLL
rules require the ACD to take
appropriate actions to resolve where a
foreign law contract may be inconsistent
with the principle of limited recourse.
The introduction of the PCR has enabled
the FSA to amend COLL rule 5.2.30 so
that a sub-fund of an umbrella may
invest in units of other sub-funds of the
same umbrella provided the scheme
documentation permits this and
conditions are met. Permitted cross
investment within OEIC umbrellas may
provide opportunities to consolidate

OEICs and reduce the costs of operating
several umbrella OEICs.
The same rules apply to Non-UCITS
umbrella OEICs as to UCITS umbrella
OEICs but, of course, the UCITS
Directive requirement prevails in that
UCITS and Non-UCITS schemes cannot
be mixed in the same umbrella.
With the introduction of the PCR the
FSA COLL rules now make it clear that
when terminating a sub-fund it is the
solvency of the sub-fund that is to be
assessed and reported to the FSA not
that of the OEIC.
The statutory instrument (2011 No.
3049) (7 pages) is available via this link:
/>3049/contents/made

The FSA’s Instrument amending COLL
(18 pages) is available via this link:
o/Legislatio
n/2011/2011_76.pdf




FSA proposal to permit non-UCITS
retail schemes to be feeder funds
On 6 December the Financial Services
Authority (“FSA”) issued its quarterly

consultation paper (“CP 11/27”) which
includes, in Chapter 8 and Appendix 8,
the FSA’s proposals to permit non-
UCITS retail schemes (“NURSs”) to
operate as feeder funds and minor
consequential changes for its rules for
UCITS feeder funds.
The UCITS IV rule amendments allow
UCITS funds to operate as feeder funds
to a master UCITS and the FSA has
already amended its Collective
Investment Schemes sourcebook
(“COLL Rules”) in this respect. In CP
11/27 it proposes to allow NURSs in
general to operate as feeder funds. A
NURS can already be a feeder fund in
specific limited circumstances which
are: a pension scheme feeder; a
property authorised investment fund
(“PAIF”) feeder; and a fund of
alternative investment funds (“FAIF”)
feeder. The proposals will leave these
existing arrangements unchanged but
will provide a set of framework rules to
allow the feeder-master structure for
NURSs in general.
The proposed new rules for the COLL
sourcebook, which will apply to
schemes operating under COLL 5.6, are
dispersed to the relevant sections of

COLL rather than being contained in
COLL 5.6.
The proposals require the master fund to
provide at least the equivalent level of
protection as if the feeder fund had been
a NURS. Therefore the permitted
master fund is limited to funds that
could have been sold to retail investors
in the UK and this will restrict the master
fund to being:
Fund News – December 2011

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 a UCITS scheme authorised in the
UK or another member state;
 a NURS; or
 a UK recognised scheme.
The feeder NURS must be dedicated to
investment in the units of a single
master scheme, however a NURS
feeder will not be constrained to invest
at least 85% of the scheme property in
the units of the master scheme as is the
case for UCITS feeder funds. The
proposal is that there is no hard limit on
the minimum proportion of the feeder’s
assets that must be held in units of the
master; however, the balance of the

property of the feeder must be invested
in cash; near cash or derivatives held
and used for efficient portfolio
management.
The master fund must not invest more
than 15% of its assets in other funds, so
the master fund cannot be a fund of
funds or itself a feeder fund. However,
if a feeder NURS wishes to invest in a
master fund that is a fund of funds it can
set up as a NURS managed as a FAIF.
In addition, to prevent circularity, the
master should not invest, within its 15%
limit, in units of the feeder NURS.
However, as the master may be outside
the UK, a rule on the master scheme
could not be effective in all cases so it
will be the responsibility of the manager
of the feeder NURS to prevent circularity
by taking reasonable care to ensure its
units are not beneficially, directly or
indirectly, owned by its master fund.
The proposals include a range of
disclosures to the investors in the feeder
NURS including:
 naming the specific master fund in
the feeder’s prospectus, and
explaining the investment objective
and policy, and the risk profile of the
master fund;

 stating whether the performance of
the feeder and master will be
identical or how and why they will
differ;
 past performance data must be of
the feeder fund;
 providing the aggregate charges of
the feeder and the master in the
annual short and long reports;
 provision, on request, of the
prospectus and annual and half-
yearly long reports of the master
fund, free of charge;
 the FSA cannot specify that there
may be no charge for the
subscription and redemption of
units in the master but it will require
that where a charge arises to the
feeder NURS the manager will be
required to reimburse the feeder
NURS. This requirement does not
extend to charges related to dilution
levy or stamp duty reserve tax;
 the FSA will preclude a UK master
making information available in
priority to a feeder NURS that could
be prejudicial to the interests of
other investors in the master fund;
and,
 unlike for UCITS, there will not be

imposed an obligation on the
depositaries and auditors of the
feeder and master funds to enter
into information sharing
agreements. However the
depositary of a feeder NURS should
be consulted by the manager prior
to investment in the master fund to
confirm whether it is satisfied it can
obtain all the necessary information
to comply with its general duties.
The manager will need to ensure that
the feeder NURS’s valuation, pricing and
dealing can be co-ordinated with the
master fund to prevent arbitrage.
In proposing these COLL Rules the FSA
is taking the opportunity to amend COLL
to make it clear that:
 a UCITS umbrella may contain both
standard UCITS sub-funds and
feeder UCITS sub-funds provided
that where this is the case it clear
which sub-funds are feeder UCITS;
and
 it will not be a requirement of the
half-yearly short report of a feeder
UCITS to disclose the aggregated
charges of the master and feeder
funds as this is not a requirement of
the half-yearly long report of a

UCITS.
NURS and UCITS feeders will be the
same in these respects.
The FSA’s consultation paper is available
via the link below, CP 11/27 is 155
pages – the relevant sections are
Chapter 8 (page numbers 47 to 57) and
Appendix 8 (pages 131 to 147).
/>pdf
Responses to this aspect of the CP are
required by 6 February 2012.














Tax News
Fund News – December 2011

6

Italy

New Italian tax withholding
calculation for investors in funds
investing in eligible bonds
In its decree dated 13 December 2011
the Italian tax authorities have revised
the reporting regime with effect from 1
January 2012. The new regulations
change the rate at which tax should be
withheld on certain bonds and
investment funds. The result,
introduces a complex calculation to
determine the amount of tax on
distributions to Italian investors in
investment funds where the fund, and
therefore the investor indirectly, holds a
composite of bonds eligible to be taxed
at the lower rate of 12.5% and securities
taxed at the new standard rate of 20%.
This will require calculations to be made
and information to be provided to paying
agents for distributions from 1 January
2012.
From 1 January 2012, Italian investors
will be subject to tax at 20% on income
from investments, including distributions
from UCITS and non-UCITS funds where
the rate had previously been 12.5%.

The new 20% rate replaces the rates of
12.5% and 27%. However, income
from Italian government bonds, public
securities and other government bonds
that have a sufficient exchange of
information continue to be taxed at
12.5%. This would mean that holding
such securities through an investment
fund (e.g. a UCITS or non-UCITS) could
be a disadvantage for investors.
The solution advised in the Decree of 13
December (Ref 11A16232) is that an
investment fund which holds a
combination of bonds eligible for the
lower rate (12.5%) taxation and new



standard rate (20%) taxation will reflect
the proportion of each to equate to a
composite tax rate for investors. The
manager must determine the proportion
by value of bonds taxed at 12.5% and
20% every six months, the dates of
calculation are to coincide with semi-
annual and annual reporting dates.
As an example a fund with a calendar
year end, will with respect to its
distributions for the period commencing
1 January 2012 look back to the

proportion by value of bonds at the
semi-annual report of 30 June 2011 and
the annual report of 31 December 2010.
The simple average of the proportion by
value of eligible bonds on these two
dates will determine the proportion of
the distribution on which tax is levied at
12.5% and the proportion which now
must be taxed at 20%.
The proportion of bonds to be taxed at
12.5% is multiplied by 0.625 and added
to the proportion to be taxed at 20% to
determine an aggregate percentage of
the distribution that will then be taxed at
20%. (E.g. if the average invested at the
two dates in 12.5% eligible bonds was
30%; this is multiplied by 0.625 to equal
18.75%; and is added to the 70% in
assets to be taxed at 20%; so that the
total of 88.75% is the proportion of the
distribution which is taxed at 20%.)
For a new fund, until financial
statements are published the 20% tax
rate applies to the whole distribution.
When financial statements are published
then the taxable proportion of the
distribution can reflect the information in
that report.
Paying agents will require the proportion
of the distribution which is to be taxed at

20% for Italian investors by the end of
December 2011 for distributions from 1
January 2012.
The Decree of 13 December (Ref
11A16232) is available in Italian via this
web link:
/>11/20110292/11A16232.htm
















Luxembourg

Aberdeen Case E-Alerts
The latest Aberdeen E-Alerts (tax

newsletter focusing on withholding tax
reclaims based on the Aberdeen case
law) that outlines the positive impact of
new Italian legislation on Aberdeen tax
reclaims is available via the following
web link:
/>Insights/Articlespublications/Pages/Aber
deene-alerts-Issue2011-13.aspx

Fund News – December 2011

7


UK

Tax Transparent Fund and Property
Authorised Investment Funds
In relation to the publication of the
Finance Bill 2012 on 6 December, HM
Treasury (“HMT”) announced proposals
for the establishment of an authorised
tax transparent fund in 2012, and to
facilitate conversion of authorised funds
to the Property Authorised Investment
Fund (PAIF) tax regime.

New tax transparent fund as a pooled
investment vehicle
Further details have been announced

regarding the proposed new tax
transparent fund (“TTF”), which will be a
new form of pooled investment vehicle
that could significantly facilitate asset
pooling in the UK by investment
managers and institutional investors
such as insurance companies and
pension funds.
HMT will be given powers in the Finance
Act 2012 to make regulations for two
categories of a regulated asset pooling
vehicle: a contractually based co-
ownership fund transparent for income
but opaque for chargeable gains; and a
partnership-based fund transparent for
both income and gains.
Regulations are also proposed to provide
that assets of the new class held within
the long term fund of an insurance
company will be deemed annually
disposed of and reacquired (Section 212
TCGA), in order to give relief to
insurance companies on the transfer of
assets into the new tax transparent
schemes and to simplify the application
of the current chargeable gains rules on
the merger and reconstruction of both
new and existing types of collective
investment schemes.
The continued development of the UK’s

TTF is welcome news as it will provide
investment managers with a UK
alternative when considering pooling
structures. The delivery by HMT of the
TTF in 2012 is important as managers
assess optimal structures in the light of
opportunities made available under
UCITS IV and with the increased focus
on withholding taxes and wider cost
pressures on managing portfolio
investments.
A regulatory consultation document will
be published later this month or in early
2012. HMT’s announcement is available
via this web link:
www.hm-
treasury.gov.uk/d/tax_transparent_funds.
pdf

Exchange of units between Property
Authorised Investment Funds (PAIFs)
and feeder funds
HM Revenue & Customs has announced
proposals to assist the managers of
authorised investment funds wishing to
convert funds into Property Authorised
Investment Funds (“PAIFs”).
The Government intends to allow
investors to exchange their units in a
dedicated PAIF feeder fund for units in

the PAIF itself and vice versa in
specified circumstances without
triggering a capital gains charge.
After undertaking informal consultation
with interested parties, a statutory
instrument to make the required
changes is expected in the late spring or
early summer of 2012.
This change has been sought by the
industry to facilitate the process of
converting authorised property unit
trusts into PAIFs. It would allow
investors who invest via a funds
platform that is currently unable to
support income streaming to initially
invest via an authorised unit trust feeder,
and then subsequently switch to the
PAIF when these administrative
streaming issues have been resolved.
By allowing switching without suffering
capital gains, it will also allow managers
greater flexibility in managing the
corporate ownership condition which
limits corporate investors from holding
more than 10% of the PAIF.
HMRC’s announcement is available via
this web link:

www.hmrc.gov.uk/budget-
updates/06dec11/paif-hmrc-stat.pdf

Accounting News


IFRS for Investment Funds
Our series of IFRS for Investment Funds
publications addresses practical
application issues that investment funds
may encounter when applying IFRS. It
discusses the key requirements and
includes interpretative guidance and
illustrative examples. The first issue
covers the presentation and
measurement of the financial assets
carried at fair value subsequent to initial
recognition and classified as fair value
through profit or loss and available for
sale. The second issue covers segment
reporting as applicable funds.
The second issue in the series is
available at:
/>Insights/Articlespublications/Pages/IFRSf
orInvestmentFundsIssue2.aspx
Fund News – December 2011

8

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T: +352 22 5151 7917
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