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Citicorp Trustee Company Limited; February 2002

NEWS & VIEWS

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Welcome to the first edition of News & Views for 2002

Most readers of this newsletter are employed by an organisation that is now a member of the newly formed Investment Management Association (IMA). We are confident that the IMA will serve the industry well, having recently taken over the 'mantle' from its predecessor organisations, AUTIF and the FMA.

Citicorp Trustee Company Ltd. and all other members of the Depositary and Trustee Association (DATA) have transferred their affiliate membership from AUTIF to the IMA.

This edition of News & Views provides an update on the following industry matters:

Post N2 Trustee/Depositary Reports
Rollover CGT Relief for Investors in Fund Mergers
OEIC Conversions
Argentina
Japanese Government Bond Interest Withholding Tax
Electronic News & Views
Bond Pricing

TRUSTEE/DEPOSITARY REPORTS

As a result of the regulatory changes applicable from N2, the trustee's report to unitholders and the depositary's report to shareholders, that are included in a fund's year-end report and accounts, will need to be revised.

In addition any statement of trustee's or depositary's responsibilities in respect of the scheme will also require updating to reflect N2 changes. CTCL and most other trustees/ depositaries have, where relevant, already issued their own revised form of wording to their clients.

While the content of reports issued by most trustees and depositaries are similar, DATA are nevertheless currently working towards a standard form of words that will be recommended for use by all DATA's members.

ROLLOVER CGT RELIEF ON RECONSTRUCTIONS

Last year's High Court decision in Fallon and Kersley V Fellows which involved reconstruction of companies could prove problematic for the funds industry and in particular to AFMs who are contemplating rationalising their funds under management, perhaps ahead of, or as part of a general conversion to OEICs. It is particularly relevant where mergers or fund reconstructions are involved.

With schemes of amalgamations or reconstructions the authorised fund manager should request confirmation from the Inland Revenue that the transactions to be effected under the Scheme will be such that:

there will be no liability to capital gains tax on the part of unitholders in respect of their holding of units in the discontinuing fund (s135–s138 Taxation of Chargeable Gains Act 1992).
that no notice under Section 703(3) of the Income and Corporation Taxes Act 1988 (which provides for the cancellation of tax advantages from certain transactions in securities) ought to be given in respect of the transactions to be effected under the Scheme of Amalgamation.

The first point above seeks confirmation from the Inland Revenue that the transaction is one that will not be treated as a disposal of units in the unit trust. The possibility of such a disposal giving rise to a capital gains charge on unitholders is thereby avoided, and investors will therefore be able to receive their units or shares in the new vehicle with base cost rollover relief.

Additionally the second point above seeks confirmation from the Inland Revenue that it is satisfied that the transaction is allowable for corporation tax purposes and that the basis for the transaction is not tax avoidance.

For the transaction to be classed as one that allows investors CGT rollover relief the Scheme of Arrangement is usually required to have the same shareholders/unitholders before and after the reconstruction and fundamentally to be in the 'same business'.

In practice the Inland Revenue had, by concession, widened these rather narrow qualification criteria. They included circumstances where a fund (or company) divides into two or more new funds (or companies) where each new entity consequently ends up with different sets or subsets of shareholders from/of the original fund or company. Inland Revenue Statement of Practice 5/85 refers.

The High Court judgement found that a reconstruction involving a division or partition resulting in the new vehicle having a different set of shareholders from the original vehicle could not meet the qualifying criteria for CGT rollover relief, seemingly ignoring the Inland Revenue Statement of Practice.

The judgement could also cause problems for a merger of funds where a cash exit is offered to unitholders. If significant numbers of investors accept the cash option, CGT rollover relief could be invalidated for all investors.

The Inland Revenue has therefore tried to clarify the situation by requiring that at least 90% of the original investors should remain with one or other of the new entities. Furthermore the transaction must show that there are commercial benefits accruing to the fund or its investors (and not merely accruing to the fund manager), before CGT rollover relief will be granted in future.

OEIC CONVERSIONS – UPDATE

The momentum for conversions of AUTs into OEICs continues to gather pace with the recent introduction of the OEICs II enabling legislation that took effect on N2.

For the period 1/01/97 to 31/12/01 there have been 169 newly launched OEIC sub-funds and 460 OEIC sub-funds have been converted from Authorised Unit Trusts.

The table below shows the number of OEIC sub-fund conversions per annum.

1997 35

1998 57

1999 125

2000 117

2001 126

The 629 OEIC sub-funds now in existence (conversions and new launches) represent £82.6bn of funds under management or 35% of an industry total for authorised funds of £236bn For comparative purposes as at end December 2000 the figures were 535 OEIC sub-funds, £75.05bn, 29%, and £261bn respectively. Also at the end of year 2000 334 AUTS had been converted into OEICs.

We expect further impetus to be given to the rate of conversion before the moratorium on stamp duty ends one year after N2.

ARGENTINA

Emergency measures introduced by the Argentine authorities include a repatriation restriction for all payments not related to foreign imports and exports.

While this restriction remains in place, CTCL as depositary would not wish authorised fund managers to increase their direct holdings in Argentina.

Care should also be taken over assessing the underlying liquidity of indirect holdings e.g. ADRs etc.

The FSA have also been monitoring the position in Argentina and through DATA have already assessed the industry's exposure to Argentina.

Presently the authorised funds industry's exposure to Argentina is estimated at 0.012% of funds under management. Therefore the relevant issues for the industry associated with this crisis, although similar to the Malaysian crisis in nature, are clearly not of the same scale or impact.

JAPANESE GOVERNMENT BOND INTEREST

The Japanese Government have now said that it is their intention to treat publicly marketed foreign collective investment schemes (defined as not marketed in Japan and having no Japan resident investors on the register) as exempt from withholding tax. The change is intended to be effective from 1^st April 2002.

The requirement for no residents in Japan to be on the register may prove to be a difficulty for some funds, however when full details of how the system is to work for overseas CIS emerge, it may be that some significant % level or 'deminimus' can be applied. If that is not included in the fine print then some further lobbying could be required.

It is expected that the situation for unauthorised trusts will require the identification of the names of the investors before the exemption from the withholding tax can be granted.

OEICs, because of their corporate structure, are recognised as eligible for exempt status, on submission of the appropriate documentation.

The Japanese Ministry of Finance has already stated that exemption from the withholding tax will be granted to approved UK occupational pension schemes.

ELECTRONIC NEWS & VIEWS

We wish to remind all readers who have access to '3d' the electronic handbook for investment regulation, that they may access, in addition to the FSA Handbook and IMA circulars, the latest and historical editions of News & Views. This can be achieved by clicking on the Citicorp button on the toolbar at the top or by clicking on CTCL in the 'general information' section of the index.

BOND PRICING

Some of our clients have recently expressed concerns regarding the difficulties involved in valuing infrequently traded bonds. In addition to addressing this matter directly with those clients, we will also be covering this topic in the next edition of News & Views.

The material in this communication is for information purposes only. At the time of publication, this information was believed to be accurate, but neither Citibank nor Citicorp Trustee Company Limited makes any representation or warranty to any person as to the accuracy or completeness of the material contained herein. The material contained herein does not constitute in any way investment or legal advice or a recommendation reference or endorsement by Citibank or Citicorp Trustee Company Limited or any person or entity named herein.

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Citicorp Trustee Company Limited; February 2002 NEWS & VIEWS

Citicorp Trustee Company Limited; February 2002

NEWS & VIEWS